2017 Annual Report
to Stockholders
To Our Stockholders,
For Brighthouse Financial, Inc., 2017 was a year of transformation and progress.
In March, we began offering annuity and life insurance products under the Brighthouse Financial
name. Over the course of the year, we rolled out a focused set of advertising campaigns designed to
introduce our brand and showcase our flagship Shield annuities. These campaigns have helped
generate brand awareness in the market and allowed us to hit the ground running as an independent,
publicly-traded company.
In June, we established the foundation of the company’s long-term capital structure with a successful
inaugural debt offering. Specifically, we issued $3 billion of bonds, equally split between 10- and 30-year
maturities, at attractive coupon rates.
Of course, the highlight of 2017—a year with many important milestones—was our separation from
MetLife on August 4 and our listing on the Nasdaq stock market on August 7.
As an independent company, we are focused on executing the key elements of our strategy, namely:
• To offer a tailored set of annuity and life insurance solutions that are simpler, more transparent
and provide value to advisors, clients and our stockholders;
• To sell our products to clients through a broad network of independent distribution partners; and
• To leverage our strong expense management discipline to become a cost-competitive
manufacturer over time.
Our top priorities in 2018 reflect these three goals.
First, we are focused on exiting our Transition Service Agreements. This supports our goal of reducing
our overall cost structure as a standalone company. We are also leveraging the expertise of industry-
leading service providers, where appropriate, which we believe will help us migrate to a more variable
cost structure and reduce operating expenses over time.
Second, we are enhancing our distribution platform and network, and developing new products
that respond to the needs of our advisors, and the clients they serve. Our product strategy for 2018
is focused on growing overall sales of our annuity products while we continue to revamp our life
insurance business.
Third, we plan to continue making targeted investments in our businesses throughout the year. Our
focus for these investments is on building out our technology infrastructure to support our needs
as a standalone company and expanding our branding initiatives to make Brighthouse Financial a
recognized and respected name throughout the United States.
In short, we have clear objectives for 2018 and strong momentum as an organization. We are encouraged
by the progress we made over the past year and expect 2018 to be equally transformative. We look forward
to updating you in the future.
Thank you for your support of Brighthouse Financial.
C. Edward Chaplin
Chairman of the Board of Directors
Eric T. Steigerwalt
President and CEO
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 001-37905
Brighthouse Financial, Inc.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Delaware
81-3846992
11225 North Community House Road, Charlotte, North Carolina
(Address of principal executive offices)
28277
(Zip Code)
(980) 365-7100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, par value $0.01 per share
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Emerging growth company
Accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
As of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, the registrant’s common stock was not publicly traded.
As of March 15, 2018, 119,773,106 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement to be filed with the U.S. Securities and Exchange Commission in connection with the registrant’s 2018 annual meeting of
stockholders (the “Proxy Statement”) are incorporated by reference into Part III of this Annual Report on Form 10-K. Such Proxy Statement will be filed within 120 days
of the registrant’s fiscal year ended December 31, 2017.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Table of Contents
Part I
Part II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Part III
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Person Transactions
Principal Accountant Fees and Services
Part IV
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Exhibits and Financial Statement Schedules
Exhibit Index
Signatures
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As used in this Annual Report on Form 10-K, “Brighthouse,” the “Company,” “we,” “us” and “our” refer to Brighthouse
Financial, Inc. a corporation incorporated in Delaware in 2016, and its subsidiaries. Brighthouse Financial, Inc. was formerly
a wholly-owned subsidiary of MetLife, Inc. (MetLife, Inc., together with its subsidiaries and affiliates, “MetLife”). The term
“Separation” refers to the separation of MetLife, Inc.’s former Brighthouse Financial segment from MetLife’s other businesses
and the creation of a separate, publicly traded company, Brighthouse Financial, Inc., to hold the assets (including the equity
interests of certain MetLife, Inc. subsidiaries) and liabilities associated with MetLife, Inc.’s former Brighthouse Financial
segment from and after the Distribution; the term “Distribution” refers to the distribution on August 4, 2017 of 96,776,670
shares, or 80.8%, of the 119,773,106 shares of Brighthouse Financial, Inc. common stock outstanding immediately prior to the
Distribution date by MetLife, Inc. to shareholders of MetLife, Inc. as of the record date for the Distribution.
Note Regarding Forward-Looking Statements
This report and other written or oral statements that we make from time to time may contain information that includes or
is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve substantial risks and uncertainties. We have tried, wherever possible, to identify such
statements using words such as “anticipate,” “estimate,” “expect,” “project,” “may,” “will,” “could,” “intend,” “goal,” “target,”
“forecast,” “objective,” “continue,” “aim,” “plan,” “believe” and other words and terms of similar meaning, or are tied to future
periods, in connection with a discussion of future operating or financial performance. In particular, these include, without
limitation, statements relating to future actions, prospective services or products, future performance or results of current and
anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends in
operating and financial results, as well as statements regarding the expected benefits of the Separation and the recapitalization
actions.
Any or all forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by
known or unknown risks and uncertainties. Many such factors will be important in determining the actual future results of
Brighthouse. These statements are based on current expectations and the current economic environment and involve a number
of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance. Actual results
could differ materially from those expressed or implied in the forward-looking statements due to a variety of known and unknown
risks, uncertainties and other factors. Although it is not possible to identify all of these risks and factors, they include, among
others:
•
•
•
•
•
•
•
•
•
•
•
•
•
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differences between actual experience and actuarial assumptions and the effectiveness of our actuarial models;
higher risk management costs and exposure to increased counterparty risk due to guarantees within certain of our
products;
the effectiveness of our exposure management strategy and the impact of such strategy on net income volatility and
negative effects on our statutory capital;
the additional reserves we will be required to hold against our variable annuities as a result of actuarial guidelines;
a sustained period of low equity market prices and interest rates that are lower than those we assumed when we issued
our variable annuity products;
our degree of leverage due to indebtedness incurred in connection with the Separation;
the effect adverse capital and credit market conditions may have on our ability to meet liquidity needs and our access
to capital;
the impact of changes in regulation and in supervisory and enforcement policies on our insurance business or other
operations;
the effectiveness of our risk management policies and procedures;
the availability of reinsurance and the ability of our counterparties to our reinsurance or indemnification arrangements
to perform their obligations thereunder;
heightened competition, including with respect to service, product features, scale, price, actual or perceived financial
strength, claims-paying ratings, credit ratings, e-business capabilities and name recognition;
changes in accounting standards, practices and/or policies applicable to us;
the ability of our insurance subsidiaries to pay dividends to us, and our ability to pay dividends to our shareholders;
our ability to market and distribute our products through distribution channels;
2
•
the impact of the Separation on our business and profitability due to MetLife’s strong brand and reputation, the increased
costs related to replacing arrangements with MetLife with those of third parties and incremental costs as a public
company;
• whether the operational, strategic and other benefits of the Separation can be achieved, and our ability to implement
our business strategy;
• whether all or any portion of the Separation tax consequences are not as expected, leading to material additional taxes
or material adverse consequences to tax attributes that impact us;
•
•
•
the uncertainty of the outcome of any disputes with MetLife over tax-related matters and agreements including the
potential of outcomes adverse to us that could cause us to owe MetLife material tax reimbursements or payments;
the impact on our business structure, profitability, cost of capital and flexibility due to restrictions we have agreed to
that preserve the tax-free treatment of certain parts of the Separation;
the potential material negative tax impact of the Tax Cuts and Jobs Act (the “Tax Act”) and other potential future tax
legislation that could decrease the value of our tax attributes, lead to increased RBC requirements and cause other cash
expenses, such as reserves, to increase materially and make some of our products less attractive to consumers;
• whether the Distribution will qualify for non-recognition treatment for U.S. federal income tax purposes and potential
indemnification to MetLife if the Distribution does not so qualify;
our ability to attract and retain key personnel; and
other factors described in this report and from time to time in documents that we file with the U.S. Securities and
Exchange Commission (“SEC”).
•
•
For the reasons described above, we caution you against relying on any forward-looking statements, which should also be
read in conjunction with the other cautionary statements included and the risks, uncertainties and other factors identified elsewhere
in this Annual Report on Form 10-K, particularly in “Risk Factors” and “Quantitative and Qualitative Disclosures About Market
Risk,” as well as in our quarterly reports on Form 10-Q, current reports on Form 8-K and other documents we file from time to
time with the SEC. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no
obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the
statement is made or to reflect the occurrence of unanticipated events, except as otherwise may be required by law. Please consult
any further disclosures Brighthouse makes on related subjects in reports to the SEC.
Corporate Information
We announce financial and other information about Brighthouse to our investors through the Brighthouse Investor Relations
web page at www.brighthousefinancial.com, as well as SEC filings, news releases, public conference calls and webcasts.
Brighthouse encourages investors to visit the Investor Relations web page from time to time, as information is updated and new
information is posted. The information found on our website is not incorporated by reference into this Annual Report on Form
10-K or in any other report or document we file with the SEC, and any references to our website are intended to be inactive
textual references only.
Note Regarding Reliance on Statements in Our Contracts
See “Exhibit Index — Note Regarding Reliance on Statements in Our Contracts” for information regarding agreements
included as exhibits to this Annual Report on Form 10-K.
3
PART I
Index to Business
Item 1. Business
Overview
Segments and Corporate & Other
Risk Management Strategies
Reinsurance Activity
Sales Distribution
Regulation
Company Ratings
Competition
Employees
Our Executive Officers
Trademarks
Available Information and the Brighthouse Website
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4
Overview
Our Company
We are a major provider of annuity products and life insurance in the United States through multiple independent distribution
channels and marketing arrangements with a diverse network of distribution partners. Our in-force book of products consists of
approximately 2.7 million insurance policies and annuity contracts at December 31, 2017, which are organized into three reporting
segments:
(i)
(ii)
(iii)
Annuities, which includes variable, fixed, index-linked and income annuities;
Life, which includes variable, term, universal and whole life policies; and
Run-off, which consists of operations related to products which we are not actively selling and which are separately
managed.
In addition, the Company reports certain of its results of operations not included in the segments in Corporate & Other.
At December 31, 2017, we had $224.2 billion of total assets with total stockholders’ equity of $14.5 billion, including
accumulated other comprehensive income (“AOCI”); approximately $629.4 billion of life insurance face amount in-force and
$147.5 billion of annuity assets under management (“AUM”), which we define as our general account investments and our
separate account assets.
Prior to the Distribution, the companies that became our subsidiaries were wholly owned by MetLife. Brighthouse Life
Insurance Company (together with its subsidiaries and affiliates, “BLIC”), which is our largest operating subsidiary, was formed
in November 2014 through the merger of three affiliated life insurance companies and a former offshore, internal reinsurance
subsidiary that mainly reinsured guarantees associated with variable annuity products issued by MetLife affiliates. The principal
purpose of the merger was to provide increased transparency relative to capital allocation and variable annuity risk management.
In order to further our capabilities to market and distribute our products, prior to the Distribution, MetLife contributed to us
(i) several entities including Brighthouse Life Insurance Company, New England Life Insurance Company (“NELICO”) and
Brighthouse Life Insurance Company of NY (“BHNY”); (ii) a licensed broker-dealer; (iii) a licensed investment advisor; and
(iv) other entities necessary for the execution of our strategy.
We seek to be a financially disciplined and, over time, cost-competitive product manufacturer with an emphasis on
independent distribution. We aim to leverage our large block of in-force life insurance policies and annuity contracts to operate
more efficiently. We believe that our strategy of offering a targeted set of products to serve our customers and distribution
partners, each of which is intended to produce positive statutory distributable cash flows on an accelerated basis compared to
our legacy products, will enhance our ability to invest in our business and distribute cash to our shareholders over time. We also
believe that our product strategy of offering a more tailored set of new products and our agreement to outsource a significant
portion of our client administration and service processes, is consistent with our focus on reducing our expense structure over
time.
Risk management of both our in-force book and our new business to enhance sustained, long-term shareholder value is
fundamental to our strategy. Consequently, in writing new business we prioritize the value of the new business we write over
sales volumes. We assess the value of new products by taking into account the amount and timing of cash flows, the use and
cost of capital required to support our financial strength ratings and the cost of risk mitigation. We remain focused on maintaining
our strong capital base and we have established a risk management approach that seeks to mitigate the effects of severe market
disruptions and other economic events on our business. See “Risk Factors — Risks Related to Our Business — Our variable
annuity exposure management strategy may not be effective, may result in net income volatility and may negatively affect our
statutory capital,” “— Segments and Corporate & Other — Annuities” and “— Risk Management Strategies — ULSG Market
Risk Exposure Management.”
We believe that general demographic trends in the U.S. population, the increase in under-insured individuals, the potential
risk to governmental social safety net programs and the shifting of responsibility for retirement planning and financial security
from employers and other institutions to individuals will create opportunities to generate significant demand for our products.
We also believe our transition to an independent distribution system will enhance our ability to operate most effectively within
the emerging requirements of the April 6, 2016 Department of Labor (“DOL”) fiduciary rule (“Fiduciary Rule”) which became
effective on June 9, 2017, and sets forth a new regulatory framework for the sale of insurance and annuity products to individual
retirement accounts and individual retirement annuities (collectively, “IRAs”) and Employee Retirement Income Security Act
(“ERISA”) qualified plans, which is a significant market for annuity products. See “—Regulation — Department of Labor and
ERISA Considerations” for a discussion of further developments with respect to the Fiduciary Rule.
5
Market Environment and Opportunities
We believe the shift away from defined benefit plans and the concern over government social safety net programs, occurring
at a time of significant demographic change in the United States, as baby boomers transition to retirement, present an opportunity
to assist individuals in planning for their long-term financial security. We believe we are well positioned to benefit from this
environment and the changes and trends affecting it, including the following:
•
•
Largest individual insurance market in the world. As noted in the Insurance Retirement Institute (“IRI”) 2017 fact book,
the U.S. life insurance market has $2.8 trillion net assets in annuities and approximately $12.0 trillion of individual life
insurance face amount in-force. This represents a large opportunity pool for us from which we expect to benefit because of
the scale and scope of our life and annuity products, risk management and distribution capabilities, and our ability to operate
nationally.
Shifting of responsibility for retirement planning and life time income security from employers and other institutions to
individuals. The shift away from traditional defined benefit plans, together with increased life expectancy, has increased
the burden on individuals for retirement planning and financial security and created a significant risk that many people will
outlive their retirement assets. The Employee Benefit Research Institute estimates that participation in an employment-
based defined benefit plan among private sector workers declined from 38% in 1979 to 13% in 2013. Fifty-one percent of
households have no retirement savings in a defined contribution plan or IRA, and Social Security provides an average of
40% of the retirement income of retired households. According to the U.S. Government Accountability Office, among the
48% of households age 55 and older with some retirement savings, the median amount is approximately $109,000. The
individual life insurance and retirement industry has traditionally offered solutions that address this underserved need among
consumers, such as annuities, which represent an alternative means of generating pension-like income to permit contract
holders to secure guaranteed income for life. We believe our simplified suite of annuity products will be attractive to
consumers as a supplement to Social Security or employer provided pension income.
• Favorable demographic trends. There are several demographic trends that we believe we can take advantage of, including:
•
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The ongoing transition of baby boomers into retirement offers opportunities for the accumulation of wealth, as well as
its distribution and transfer. According to the Insured Retirement Institute, each day 10,000 Americans reach the age
of 65 and this is expected to continue through at least 2030. One of the market segments we target, the Secure Seniors,
includes individuals from the baby boomer demographic and is projected to grow by 15% between 2015 and 2025. See
“— Our Business Strategy — Focus on target market segments.”
The emergence of Generation X and Millennials as a larger and fast growing, potentially ethnically diverse segment
of the U.S. population. Many of these individuals are in their prime earning years and we believe they will increase
their focus on savings for wealth and protection products. As Generation X and Millennials continue to age into the
Middle Aged Strivers and Diverse and Protected segments that we target, we believe we have an opportunity to increase
our share of the industry profit pool represented by these groups. See “— Our Business Strategy — Focus on target
market segments.”
• Underinsured and underserved population is growing. According to LIMRA International Inc.’s (Life Insurance
Marketing and Research Association) Facts of Life and Annuities 2016 Update and 2017 Insurance Barometer Study,
41% of U.S. households believe that they need more life insurance. Seven in 10 Americans have life insurance, but
ownership of individual coverage has declined over a 50-year period. We believe the products and solutions we offer
will address the financial security needs of the under-insured portion of the U.S. population, which are our target
segments.
• Regulatory changes. Regulatory and compliance requirements in the insurance and financial services industries have
increased over the past several years and resulted in new and proposed regulation and enhanced supervision. For example,
the DOL issued new rules on April 6, 2016 that raise the standards for sales of variable and index-linked annuities into
retirement accounts to a fiduciary standard, meaning that sales must consider the customer’s interest above all factors. These
rules became applicable on June 9, 2017. On November 29, 2017, the DOL finalized an 18-month delay, from January 1,
2018 to July 1, 2019, of the applicability of significant portions of exemptions proposed under the fiduciary rule (including
Best Interest Contract Exemption (“BIC”) and prohibited transaction exemption 84-24), to afford sufficient time to review
further the previously adopted rules and such exemptions. These rules and their implications are undergoing a further review
by the DOL and the scope and ramifications of these rules could be modified as a result of such review. See “— Regulation —
Department of Labor and ERISA Considerations.” As currently adopted, these rules are expected to require meaningful
changes to distribution practices and disclosures and affect sales of annuity products from providers with proprietary
distribution. In addition, the National Association of Insurance Commissioners (the “NAIC”), as well as certain state
regulators are currently considering implementing regulations that would apply an impartial conduct standard similar to the
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DOL rules to recommendations made in connection with certain annuities and, in the case of New York, life insurance
policies. In particular, on December 27, 2017, the New York State Department of Financial Services (the “NYDFS”) proposed
regulations that would adopt a “best interest” standard for the sale of life insurance and annuity products in New York. The
likelihood of enactment of these regulations is uncertain at this time, but if implemented, these regulations could have
significant adverse effects on our business and consolidated results of operations. We believe our history of navigating a
changing regulatory environment and our transition to independent distribution may present us with an opportunity to
capture market share from those who are less able to adapt to changing regulatory requirements.
We believe these trends, together with our competitive strengths and strategy discussed below, provide us a unique
opportunity to increase the value of our business.
Our Competitive Strengths
We believe that our large in-force book of business, strong balance sheet, risk management strategy, experienced management
team and focus on expense reduction allow us to capitalize on the attractive market environment and opportunities as we develop
and grow our business on an independent basis.
•
Large in-force book of business. We are a major provider of life insurance and annuity products in the United States, with
approximately 2.7 million insurance policies and annuity contracts at December 31, 2017. We believe our size and long-
standing market presence position us well for potential future growth and margin expansion.
• Our size provides opportunities to achieve economies of scale, permitting us to spread our fixed general and
administrative costs, including expenditures on branding, over a large revenue base, resulting in a competitive expense
ratio.
• Our large policyholder base provides us with an opportunity to leverage underlying data to develop risk and policyholder
insights, as well as, implement operational best practices, permitting us to effectively differentiate ourselves from our
competitors with the design and management of our products.
• Our in-force book of business was sold by a wide range of distribution partners to whom we continue to pay trail and
renewal commissions on the policies and contracts sold by them. For the year ended December 31, 2017, over 1,000
distribution firms or general agencies of our distributors received trail and renewal commissions. We believe this
enhances our ability to maintain connectivity and relevance to those distributors.
•
Strong balance sheet. At December 31, 2017, we had total assets of $224.2 billion; total policyholder liabilities and other
policy-related balances, including separate accounts, of $209.6 billion; and total stockholders’ equity of $14.5 billion,
including AOCI. We intend to maintain and improve the strong statutory capitalization and financial strength ratings of our
insurance subsidiaries, as well as the diversity of invested asset classes.
• Our insurance subsidiaries had combined statutory total adjusted capital (“Combined TAC”) of $6.6 billion resulting
in a combined action level risk based capital (“Combined RBC ratio”) in excess of 600% at December 31, 2017. We
intend to support our variable annuity business with assets consistent with those required at the CTE95 standard (defined
as the amount of assets required to satisfy contract holder obligations across market environments in the average of the
worst five percent of 1,000 capital market scenarios over the life of the contracts (“CTE95”), consistent with guidelines
promulgated by the NAIC”). We held approximately $2.6 billion of assets in excess of CTE95 at December 31, 2017
to support our variable annuity book, which would be equivalent to holding assets at greater than a CTE98 standard as
of such date (defined as the amount of assets required to satisfy contract holder obligations across market environments
in the average of the worst two percent of 1,000 capital market scenarios over the life of the contracts (“CTE98”),
consistent with guidelines promulgated by the NAIC).
• We have strong financial strength ratings from the rating agencies that rate us. Financial strength ratings represent the
opinions of the rating agencies regarding the ability of our insurance subsidiaries to meet their financial obligations to
policyholders and contract holders and are not designed or intended for use by investors in evaluating our securities.
• We have a diversified, high quality investment portfolio with $82.3 billion of general account assets at December 31,
2017, comprised of over 79% fixed maturity securities, of which over 95% were investment grade and 60% were U.S.
corporate, government and agency securities.
• Proven risk management and capital management expertise. We have brought to Brighthouse a strong risk management
culture as demonstrated by our product decisions in recent years and our focused risk and capital management strategies
for our existing book of business. We believe our insurance subsidiaries are capitalized at a level which is sufficient to
maintain our financial strength ratings notwithstanding modest fluctuations in equity markets and interest rates in any given
period. Further, over time by increasing the proportion of non-derivative, income-generating invested assets compared to
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derivative instruments supporting our variable annuity book of business, we believe our capital profile will be stronger and
more able to mitigate a broader range of risk exposures.
• Experienced senior management team with a proven track record of execution including producing cost savings. Our senior
management team has an average of over 20 years of insurance industry experience. They have worked together to manage
our business and reduce the cost base prior to the Distribution and continue to manage our business as a separate and focused
individual life insurance and annuity company. The senior management team has taken significant actions over the last five
years, including the following:
•
In 2012, MetLife announced a multi-year $1.0 billion gross expense savings initiative, which was substantially
completed in 2015. This management team delivered approximately $200 million of expense savings with respect to
MetLife’s former Retail segment under that initiative.
• The merger of three affiliated life insurance companies and a former offshore, reinsurance company affiliate that mainly
reinsured guarantees associated with variable annuity products issued by MetLife affiliates to form our largest operating
subsidiary, Brighthouse Life Insurance Company.
• The consolidation of MetLife’s former Retail segment in Charlotte, North Carolina, which, in addition to generating
expense savings noted above, permitted our management to work together collaboratively at the same geographic
location.
• The sale of MetLife’s former Retail segment’s proprietary distribution channel, MetLife Premier Client Group
(“MPCG”), to Massachusetts Mutual Life Insurance Company (“MassMutual”), completing our transition to a more
efficient acquisition cost distribution model through independent, third-party channel partners. As part of the sale,
MetLife reduced its former Retail segment employee base by approximately 3,900 advisors and over 2,000 support
employees. The sale of the proprietary distribution channel has enabled us to pursue a simplified, capital efficient
product suite and reduce our fixed expense structure.
• On July 31, 2016, MetLife entered into a multi-year outsourcing arrangement with Computer Sciences Corporation
(now DXC Technology Company (“DXC”)) for the administration of certain in-force policies currently housed on up
to 20 systems. Pursuant to this arrangement, at least 13 of such systems will be consolidated down to one. The
arrangement provides administrative support for certain MetLife and Brighthouse policies, resulting in a phased net
reduction in our overall expenses for maintenance over the next three to five years. Despite the separation of Brighthouse
from MetLife, MetLife continues to oversee the transition of the administration of this business to DXC.
•
In December 2017, Brighthouse formalized a second arrangement with DXC for the administration of life and annuities
new business and approximately 1.3 million in-force life and annuities contracts. Brighthouse is responsible for
overseeing the transition of the administration of this business to DXC. Similar to the first contract, Brighthouse expects
to achieve a variable expense structure and a phased net reduction in overall expenses for sales and administration
maintenance of these contracts over the next three to five years.
Our Business Strategy
Our objective is to leverage our competitive strengths, to distinguish ourselves in the individual life insurance and annuity
markets and over time increase the amount of statutory distributable cash generated by our business. We seek to achieve this by
being a focused product manufacturer with an emphasis on independent distribution, while having a competitive expense ratio
relative to our competitors. We intend to achieve our goals by executing on the following strategies:
• Focus on target market segments. We intend to focus our sales and marketing efforts on those specific market segments
where we believe we will best be able to sell products capable of producing attractive long-term value to our shareholders.
In 2015, we conducted a survey of 7,000 U.S. customers with the goal of understanding our different market segments.
Ultimately, the study revealed seven distinct segments based on both traditional demographic information including socio-
economic information and an analysis of customer needs, attitudes and behaviors. Our review of the customer segmentation
data resulted in our focusing product design and marketing on the following target customer segments:
•
Secure Seniors. This segment represents approximately 15% of the current U.S. population. Because the customer
segments are designed to reflect attitudes and behaviors, in addition to other factors, this segment includes a broad
range in age, but is composed primarily of individuals between the ages of 55 to 70 about to retire or already in
retirement, of which a majority have investible assets of greater than $500,000. Secure Seniors have higher net
worth relative to the other customer segments and exhibit a strong desire to work with financial advisors. The
larger share of assets, relative to the other segments, may make Secure Seniors an attractive market for financial
security products and solutions.
8
• Middle Aged Strivers. This segment represents approximately 23% of the current U.S. population and is the largest
customer segment of those identified by our survey. There is more diversity in this segment compared to the Secure
Seniors in terms of amount of investible assets, age, life stage and potential lifetime value to us. The study indicates
that these individuals tend to be in the early to later stages of family formation. Almost half of the population in
this segment is between the ages of 40 and 55. They are focused on certain core needs, such as paying bills, reducing
debt and protecting family wealth. We believe Middle Aged Strivers are an attractive market for protection products
and many of these individuals will graduate to wealth and retirement products in their later years.
• Diverse and Protected. This is the most diverse segment of the population, but is also the smallest constituting
only 8% of the current U.S. population. While this segment has lower income and investible assets than Secure
Seniors and Middle Aged Strivers, our study indicates that they are active purchasers of insurance products. We
believe that a portion of this segment, as they become older and more affluent, may purchase our annuity products
in addition to our insurance products.
We believe that these three customer segments represent a significant portion of the market opportunity, and by
focusing our product development and marketing efforts to meeting the needs of these segments we will be able to offer
a targeted set of products which will benefit our expense ratio thereby increasing our profitability. Our study also indicates
that Secure Seniors, Middle Aged Strivers and Diverse and Protected customer segments are open to financial guidance
and, accordingly, will be receptive to the products we intend to sell and we can share our insights about these segments
to our distribution partners to increase the targeting efficiency of our sales efforts with them.
• Focused manufacturer, with a simpler product suite designed to meet our customers’ and distributors’ needs. We intend to
be financially disciplined in terms of the number of products which we offer and their risk-adjusted return profile, while
being responsive to the needs of our customers and distribution partners.
• We seek to manage our existing book of annuity business to mitigate the effects of severe market downturns and other
economic effects on our statutory capital while preserving the ability to benefit from positive changes in equity markets
and interest rates through our selection of derivative instruments.
• We intend to offer products designed to produce statutory distributable cash flows on a more accelerated basis than
those of some of our legacy in-force products. We will also focus on offering products which are more capital efficient
than our pre-2013 generation of products. Our product design and sales strategies will focus on achieving long-term
risk-adjusted distributable cash flows, rather than generating sales volumes or purchasing market share. We believe
this approach aligns well with long-term value creation for our shareholders.
• Our suite of structured annuities consists of products marketed under various names (collectively, “Shield Annuities”)
and were introduced to respond to market downturns and consumer demands without compromising our risk-adjusted
return hurdles. Shield Annuities provide contract holders with a specified level of market downside protection, sharing
the balance of market downside risk with the contract holder, along with offering the contract holder tax-deferred
accumulation.
•
Independent distribution with enhanced support and collaboration with key distributors. We believe that the completion of
our transition from having both a captive sales force and third-party distributors to that of exclusively leveraging a diverse
network of independent distributors will focus our distribution efforts and improve our profitability and capital efficiency.
• We have proactively chosen to focus on independent distribution, which we believe aligns with our focus on product
manufacturing. We believe distributing our products through only the independent distribution channel will enhance
our ability to control our fixed costs, target our resources more appropriately and increase our profitability because we
will be better able to leverage our product development and wholesale distribution capabilities.
•
Since 2001, we have successfully built third-party distribution relationships. Following the sale of MPCG to
MassMutual, we are dedicated to supporting and expanding these relationships. We seek to become a leading provider
of insurance and annuity products for our leading distribution partners by leveraging our marketing strengths which
include customer segmentation, distribution servicing and sales support, as well as, our product management
competencies. We believe that our distribution strategy will result in deeper relationships with these distribution partners.
• As part of our collaborative approach with key distributors to leverage our product design expertise through tailored
product arrangements, we launched a fixed index annuity (“FIA”) with MassMutual in July 2017. As part of our
relationship with MassMutual, we’ve entered into a joint wholesaling agreement, aimed at providing MassMutual’s
distribution channels, primarily career agency advisors, with easy access to product knowledge coverage.
9
• Maintain strong statutory capitalization through an exposure management program intended to be effective across market
environments.
• The principal objective of our exposure management programs is to manage the risk to our statutory capitalization
resulting from changes to equity markets and interest rates. This permits us to focus on the management of the long-
term statutory distributable cash flow profile of our business and the underlying long-term returns of our product
guarantees. See “— Risk Management Strategies.”
• Our variable annuity exposure management program has four components:
• We intend to support our variable annuities with assets consistent with those required at a CTE95 standard. At
December 31, 2017, we held approximately $2.6 billion of assets in excess of CTE95, which would be equivalent
to holding assets at greater than a CTE98 standard as of such date. We believe these excess assets will permit us
to absorb modest losses, which may be temporary, from changes in equity markets and interest rates without
adversely affecting our financial strength ratings.
• We will continue to enter into derivative instruments to offset the impact on our statutory capital from more
significant changes to equity markets and interest rates.
• We believe the earnings from our large and seasoned block of in-force business will provide an additional means
of increasing and regenerating our statutory capital organically to the extent it may have been eroded due to periodic
changes in equity markets and interest rates.
• We intend to invest a portion of the assets supporting our variable annuity asset requirements in income-generating
investments, which we believe will provide an additional means to increase or regenerate our statutory capital.
• We have a large in-force block of life insurance policies and annuity contracts that we actively manage to improve
profitability, prudently minimize exposures, grow cash margins and release capital for shareholders in the medium
to long-term.
• Focus on operating cost and flexibility. A key element of our strategy is to leverage our infrastructure over time to be a lean,
flexible, cost-competitive operator.
• We will continue our focus on reducing our cost base while maintaining strong service levels for our policyholders and
contract holders. As part of separating our business processes and systems from MetLife, we are taking a phased
approach to re-engineering our processes and systems across all functional areas. This phased transition is expected to
occur over the coming few years. We are planning on run-rate operating cost reductions as part of this initiative.
• We have identified and are actively pursuing several initiatives that we expect will make our business less complex,
more flexible and better able to adapt to changing market conditions. Consistent with this strategy, MetLife sold MPCG
to MassMutual, completing our transition to a more efficient acquisition cost distribution model and reducing its former
Retail segment employee base by approximately 5,900 employees.
• We intend to leverage emerging technology and outsourcing arrangements to become more profitable. Examples of
this include our decision to outsource the administration of new business and certain in-force policies to DXC.
Segments and Corporate & Other
The Company is organized into three segments: two ongoing business segments, Annuities and Life, and the Run-off segment.
In addition, the Company reports certain of its results of operations in Corporate & Other.
10
The following table presents the relevant contributions of each of our segments to our net income (loss) and adjusted
earnings, for our ongoing business and for the total Company:
Annuities
Life
Total ongoing business
Run-off
Corporate & Other
Total adjusted earnings
Adjustments:
Net investment gains (losses)
Net derivative gains (losses)
Other adjustments
Provision for income tax (expense) benefit
Net income (loss)
Years Ended December 31,
2017
2016
2015
(In millions)
$
1,017
$
1,152
$
1,089
16
1,033
104
(217)
920
26
1,178
(539)
47
686
(28)
(78)
(1,620)
(5,851)
(564)
914
357
1,947
20
1,109
468
(36)
1,541
7
(326)
(332)
229
$
(378) $
(2,939) $
1,119
The following table presents the total assets for each of our segments and Corporate & Other:
Annuities
Life
Run-off
Corporate & Other
December 31,
2017
2016
(In millions)
$ 154,667
$ 152,146
$
$
$
18,049
36,824
14,652
$
$
$
17,150
40,007
12,627
The following table presents our assets under management by segment and Corporate & Other, which we define as our
general account investments and our separate account assets.
December 31, 2017
December 31, 2016
Investments
Separate
Accounts
Total
Investments
(In millions)
Separate
Accounts
Total
$
37,606
$ 109,888
$ 147,494
$
38,716
$ 104,855
$ 143,571
9,216
29,595
5,921
5,250
3,119
—
14,466
32,714
5,921
7,303
33,098
1,516
4,704
3,483
—
12,007
36,581
1,516
$
82,338
$ 118,257
$ 200,595
$
80,633
$ 113,042
$ 193,675
Annuities
Life
Run-off
Corporate & Other
Total
Annuities
Overview
Annuities are used by consumers for pre-retirement wealth accumulation and post-retirement income management. The
“fixed” and “variable” classifications describe generally whether we or the contract holders bear the investment risk of the assets
supporting the contract, and determine the manner in which we earn profits from these products, as investment spreads for fixed
products or as asset-based fees charged to variable products. Index-linked annuities allow the contract holder to participate in
returns from equity indices and, in the case of Shield Annuities, provide a specified level of market downside protection. Income
annuities provide a guaranteed monthly income for a specified period of years and/or for the life of the annuitant.
11
The following table presents the insurance liabilities of our annuity products.
Variable
Fixed Deferred
Shield Annuities
Income
Total
_______________
December 31, 2017
December 31, 2016
General
Account (1)
Separate
Account
Total
General
Account (1)
Separate
Account
Total
(In millions)
$
5,111
$ 109,795
$ 114,906
$
5,444
$ 104,784
$ 110,228
13,067
5,428
4,451
—
—
93
13,067
5,428
4,544
13,523
3,043
4,450
—
—
71
13,523
3,043
4,521
$
28,057
$ 109,888
$ 137,945
$
26,460
$ 104,855
$ 131,315
(1) Excludes liabilities for guaranteed minimum benefits (“GMxBs”) and Shield Annuity embedded derivatives.
The following table presents the relevant contributions of our annuity products to our annualized new premium (“ANP”):
Variable
Fixed (1)
Shield Annuities
Total
_______________
Years Ended December 31,
2017
2016
2015
(In millions)
231
$
61
166
458
$
$
$
137
49
248
434
$
$
397
105
91
593
(1) Includes deferred, income and indexed annuities as described below.
We seek to meet our risk-adjusted return objectives in our Annuities segment through a disciplined risk-selection approach
and innovative product design, balancing bottom line profitability with top line growth, while remaining focused on margin
preservation. Our underwriting approach and product design take into account numerous criteria, including evolving consumer
demographics and macroeconomic market conditions, offering a suite of products tailored to respond to external factors without
compromising internal constraints. As an example, between 2011 and 2016 we reduced our ANP of our variable annuity contracts
by approximately 90%. Beginning in 2013, we began to shift our new annuity business towards products with diversifying
market and contract holder behavioral risk attributes and improved risk-adjusted cash returns. Examples of this include
transitioning from the sale of variable annuities with guaranteed minimum income benefits (“GMIB”) to the sale of variable
annuities with guaranteed minimum withdrawal benefits (“GMWB”), and our increased emphasis on our Shield Annuities, for
which we had new deposits of approximately $2.5 billion and $1.7 billion for the years ended December 31, 2017 and 2016.
We believe we have the product design capabilities and distribution relationships to permit us to design and offer new products
meeting our risk-adjusted return requirements. We believe these capabilities will enhance our ability to maintain market presence
and relevance over the long-term. We intend to meet our risk management objectives by continuing to hedge market risks
associated with our existing annuity products, as well as new business. See “— Risk Management Strategies — Variable Annuity
Statutory Reserving Requirements and Exposure Management.”
Current Products
Our Annuities segment product offerings include fixed, variable, structured and income annuities (each as described
below) and are designed to address customer needs for tax-deferred asset accumulation and retirement income and their wealth-
protection concerns. Under our variable annuities, the contract holder can choose to invest his or her purchase payments in
either the separate account or general account investment options under the contract. For the separate account options, the
contract holder can elect among several internally and externally managed subaccounts offered at that time. For the general
account options, Brighthouse credits the contract’s account value with the net purchase payment and credits interest to the
contract holder at rates declared periodically, subject to a guaranteed minimum crediting rate. Some of our annuity products
are immediate income annuities, for which the contract holder can choose to receive periodic income payments beginning
within 13 months after the first purchase payment is received. Our other annuities are known as deferred annuities, for which
the contract holder may defer beginning periodic income payments until a later date. In 2013, we began a shift in our business
towards products with lower guaranteed minimum crediting rates, variable annuity products with less risky living benefits
12
and increased emphasis on index-linked annuity products. Since 2014, our new sales have primarily focused on variable
annuities with simplified living benefits and Shield Annuities. As a separate, publicly traded company, we believe we can
continue to innovate in response to customer and distributer needs and market conditions.
Fixed Deferred Annuities
In contrast to variable annuities, where contract holders can invest in both equity and debt instruments and bear risk
of loss of their investment, fixed annuities address asset accumulation needs by offering an interest crediting rate that we
declare from time to time, subject to a guaranteed minimum rate, and providing a guarantee related to the preservation of
principal and interest credited. Purchase payments under deferred fixed annuity contracts are allocated to our general account
and are credited with interest at rates we determine, subject to specified guaranteed minimums. Credited interest rates are
guaranteed for at least one year. To protect from premature withdrawals, we impose surrender charges. Surrender charges
are typically applicable during the early years of the annuity contract, with a declining level of surrender charges over time.
We expect to earn a spread between what we earn on the underlying general account investments supporting the fixed
annuity product line and what we credit to our fixed annuity contract holders’ accounts. Surrender charges allow us to recoup
amounts we expended to initially market and sell such annuities. Approximately 90% of our fixed annuities have a remaining
surrender charge of 2% or less.
We launched a FIA with MassMutual in July 2017. The FIA is a single premium fixed indexed annuity designed for
growth that credits interest based on the annual performance of an index. Additionally, an optional living benefit rider is
available for an additional charge, designed to provide guaranteed lifetime withdrawals.
Structured Annuities
This family of structured annuities combines certain features similar to variable and fixed annuities. Shield Annuities
are a suite of single premium deferred annuity contracts that provides for accumulation of retirement savings and is intended
for retirement or other long-term investment purposes. These index-linked annuities we currently offer provide the ability
for the contract holder to participate in the appreciation of certain financial markets up to a stated level (i.e., a “cap”), while
offering protection from a portion of declines in the applicable indices or benchmark (i.e., a “shield” or “protection level”)
unlike a variable annuity, which typically passes through the performance of the relevant separate account assets. Rather
than allocating purchase payments directly into the equity market, the customer has an opportunity to participate in the
returns of a particular market index, such as the Standard & Poor’s Global Ratings (“S&P”) 500, for a specified term. The
contract is credited interest based on the performance of that index over a period of time, with certain parameters on the
maximum level of performance as of the end of the selected term, as well as protection from losses up to a specified level.
The reserve assets are held in a book value non-unitized separate account, but the issuing insurance company is obligated
to pay distributions and benefits irrespective of the value of the separate account assets. Interest is calculated based on
parameters that are periodically declared by us for both the initial and subsequent periods. Shield Annuities offer account
value and return of premium death benefits. Shield Annuities are included with variable annuities in our statutory reserve
requirements and CTE estimates.
Income Annuities
Income annuities are annuity contracts under which the contract holder contributes a portion of their retirement assets
in exchange for a steady stream of retirement income, lasting either for a specified period of time or as long as the life of
the annuitant.
We offer two types of income annuities: immediate income annuities, referred to as “single premium immediate
annuities” (“SPIAs”) and deferred income annuities (“DIAs”). Both products provide guaranteed lifetime income that can
be used to supplement other retirement income sources. SPIAs are single premium annuity products that provide a guaranteed
level of income to the contract holder for a specified number of years or the duration of the life of the annuitant(s) beginning
during the first 13 months (in certain products longer) from the SPIA’s start date. DIAs differ from SPIAs in that they require
the contract holder to wait at least 15 months before starting income payments. If a contract holder makes multiple purchase
payments on the DIA to build pension-like income over time, each payment will restart the waiting period. SPIAs and DIAs
are priced based on considerations consistent with the annuitant’s age, gender and, in the case of DIAs, the deferral period.
DIAs provide a pension-like stream of income payments after a specified deferral period. DIAs are flexible premium payment
products that guarantee a specified amount of income, based on the contract holder’s age, gender and deferral period. Income
annuities offered currently allow level or increasing income payments, as well as optional guaranteed death benefits.
Variable Annuities
We issue variable annuity contracts that offer contract holders a tax-deferred basis for wealth accumulation and rights
to receive a future stream of payments. The contract holder can choose to invest his or her purchase payments in the separate
13
account or, if available, the general account investment options under the contract. For the separate account options, the
contract holder can elect among several subaccounts that invest in internally and externally managed investment portfolios
offered at that time, and unless the contract holder has elected to pay additional amounts for guaranteed minimum living
or death benefits, as discussed below, the contract holder bears the entire risk and receives all of the net returns resulting
from the variable investment option chosen. For the general account options, Brighthouse credits the contract’s account
value with the net purchase payment and credits interest to the contract holder at rates declared periodically, subject to a
guaranteed minimum crediting rate. The account value of most types of general account options is guaranteed and is not
exposed to market risk, because the insurance company rather than the contract holder directly bears the risk that the value
of the underlying general account investments of the insurance companies may decline. At December 31, 2017, our variable
annuity total account value was $114.9 billion, consisting of $109.8 billion of contract holder separate account assets and
$5.1 billion of contract holder general account assets.
The majority of the variable annuities we have issued have GMxBs, which we believe make these products attractive
to our customers in periods of economic uncertainty. These GMxBs must be chosen by the contract holder no later than at
the issuance of the contract. The primary types of GMxBs are those that guarantee death benefits payable upon the death
of a contract holder (“GMDBs”) and those that guarantee benefits payable while the contract holder or annuitant is alive
(“GMLBs”). There are three primary types of GMLBs: GMIBs, GMWBs, and guaranteed minimum accumulation benefits
(“GMABs”). We ceased issuing GMIBs for new purchase in February 2016.
In addition to our directly written business, we also previously assumed from MetLife certain GMxBs pursuant to a
coinsurance agreement that was fully recaptured by MetLife in January 2017. For comparative purposes, the tables below
do not reflect historical balances for GMxB business recaptured by MetLife.
The guaranteed benefit received by a contract holder pursuant to the GMxBs is calculated based on the benefit base
(“Benefit Base”). The calculation of the Benefit Base varies by benefit type and may differ in value from the contract holder’s
account value for the following reasons:
• The Benefit Base is defined to exclude the effect of a decline in the market value of the contract holder’s account
value. By excluding market declines, actual claim payments to be made in the future to the contract holder will be
determined without giving effect to equity market declines.
• The terms of the Benefit Base may allow it to increase at a guaranteed rate irrespective of the rate of return on the
contract holder’s account value.
• The Benefit Base may also increase with subsequent purchase payments, after the initial purchase payment made
by the contract holder at the issuance of the contract, or at the contract holder’s election with an increase in the
account value due to market performance.
GMxBs provide the contract holder with protection against the possibility that a downturn in the markets will reduce
the certain specified benefits that can be claimed under the contract. The principal features of our in-force block of variable
annuity contracts with GMxBs are as follows:
• GMDBs, a contract holder’s beneficiaries are entitled to the greater of (a) the account value or (b) the Benefit Base
upon the death of the annuitant;
• GMIBs, a contract holder is entitled to annuitize the policy after a specified period of time and receive a minimum
amount of lifetime income based on pre-determined payout factors and the Benefit Base, which could be greater
than the account value;
• GMWBs, a contract holder is entitled to withdraw each year a maximum amount of their Benefit Base, which
could be greater than the underlying account value; and
• GMABs, a contract holder is entitled to a percentage of the Benefit Base, which could be greater than the account
value, after the specified accumulation period, regardless of actual investment performance.
Variable annuities may have more than one GMxB. Variable annuities with a GMLB may also have a GMDB. Additional
detail concerning our GMxBs is provided in “— Risk Management Strategies — Variable Annuity Statutory Reserving
Requirements and Exposure Management.”
14
Variable Annuity Fees
The following table presents the fees and charges we earn on our variable annuity contracts invested in separate accounts,
by type of fee:
Mortality & Expense Fees and Administrative Fees
Surrender Charges
Investment Management Fees (1)
12b-1 Fees and Other Revenue (1)
Death Benefit Rider Fees
Living Benefit Riders Fees
Total
_______________
(1) These fees are net of pass through amounts.
Years Ended December 31,
2017
2016
(In millions)
$
1,532
$
1,495
27
247
271
213
937
29
244
284
214
947
$
3,227
$
3,213
For the account value on contracts that invest through a separate account, we earn various types of fee revenue based on
account value, fund assets and Benefit Base. In general, GMxB fees calculated based on the Benefit Base are more stable in
market downturns compared to fees based on the account value.
Mortality & Expense Fees and Administrative Fees. We earn mortality and expense fees (“M&E Fees”), as well as
administrative fees on variable annuity contracts. The M&E Fees are calculated based on the portion of the contract holder’s
account value allocated to the separate accounts and are expressed as an annual percentage deducted daily. These fees are
used to offset the insurance and operational expenses relating to our variable annuity contracts. Additionally, the administrative
fees are charged either based on the daily average of the net asset values in the subaccounts or when contracts fall below
minimum values based on a flat annual fee per contract.
Surrender Charges. Most, but not all, variable annuity contracts depending on their share class may also impose surrender
charges on withdrawals for a period of time after the purchase and in certain products for a period of time after each subsequent
deposit, also known as the surrender charge period. A surrender charge is a deduction of a percentage of the contract holder’s
account value prior to distribution to him or her. Surrender charges generally decline gradually over the surrender charge
period, which can range from zero to 10 years. Our variable annuity contracts typically permit contract holders to withdraw
up to 10% of their account value each year without any surrender charge, although their guarantees may be significantly
impacted by such withdrawals. Contracts may also specify circumstances when no surrender charges apply, for example, upon
payment of a death benefit.
The following table presents account value by remaining surrender charge:
0%
>0 to 2%
>2% to 4%
>4% to 6%
>6%
Total
_______________
Variable Annuities (1)
2017
2016
(In billions)
$
65.3
29.6
14.2
4.8
6.7
120.6
$
55.8
23.3
22.7
6.2
5.1
113.1
$
$
(1) Shield Annuities are included with variable annuities.
Investment Management Fees. We charge investment management fees for managing the proprietary mutual funds
managed by our subsidiary Brighthouse Investment Advisers, LLC (“Brighthouse Advisers”) that are offered as investments
under the variable annuities. Investment management fees are also paid on the non-proprietary funds managed by investment
advisors unaffiliated with us, to the unaffiliated investment advisors. Investment management fees differ by fund. A portion
15
of the investment management fees charged on proprietary funds managed by subadvisors unaffiliated with us are paid by us
to the subadvisors. Investment management fees reduce the net returns on the variable annuity investments.
12b-1 Fees and Other Revenue. 12b-1 fees are paid by the mutual funds which our contract holders chose to invest in
and are calculated based on the net assets of the funds allocated to our subaccounts. These fees reduce the returns contract
holders earn from these funds. Additionally, mutual fund companies with funds which are available to contract holders through
the variable annuity subaccounts pay us fees consistent with the terms of administrative service agreements. These fees are
funded from the fund companies’ net revenues.
Death Benefit Rider Fees. We may earn fees in addition to the base mortality and expense fees for promising to pay
GMDBs. The fees earned vary by generation and rider type. For some death benefits, the fees are calculated based on account
value, but for enhanced death benefits (“EDBs”), the fees are normally calculated based on the Benefit Base. In general, these
fees were set at a level intended to be sufficient to cover the anticipated expenses of covering claim payments and hedge costs
associated with these benefits. These fees are deducted from the account value.
Living Benefit Riders Fees. We earn these fees for promising to pay guaranteed benefits while the contract holder is alive,
such as for any type of GMLB (including GMIBs, GMWBs and GMABs). The fees earned vary by generation and rider type
and are calculated based on the Benefit Base and deducted from account value. Generally, these fees are set at a level intended
to be sufficient to cover the anticipated expenses of covering claim payments and hedge costs associated with these benefits.
In addition to fees, we also earn a spread on the portion of the account value allocated to the general account.
Pricing and Risk Selection
Product pricing reflects our pricing standards and guidelines. Annuities are priced based on various factors, which may
include investment returns, expenses, persistency, longevity, policyholder behavior, equity market returns, and interest rate
scenarios.
Rates for annuity products are highly regulated and generally the forms of which must be approved by the regulators of
the jurisdictions in which the product is sold. The offer and sale of variable annuity products are regulated by the SEC.
Generally, these products include pricing terms that are guaranteed for a certain period of time. Such products generally include
surrender charges for early withdrawals and fees for guaranteed benefits. We periodically reevaluate the costs associated with
such guarantees and may adjust pricing levels accordingly. Further, from time to time, we may also reevaluate the type and
level of guarantee features being offered. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Summary of Critical Accounting Estimates.”
We continually review our pricing guidelines in light of applicable regulations and to ensure that our policies remain
competitive and supportive of our marketing strategies and profitability goals.
Evolution of our Variable Annuity Business
Our in-force variable annuity block reflects a wide variety of product offerings within each type of guarantee, reflecting
the changing nature of these products over the past two decades. The changes in product features and terms over time are
driven partially by customer demand but also reflect our continually refined evaluation of the guarantees, their expected long-
term claims costs and the most effective market risk management strategies in the prevailing market conditions.
We introduced our variable annuity product over 50 years ago and began offering GMIBs, which were our first living
benefit riders, in 2001. The design of our more recent generations of GMIBs have been modified to reduce payouts in certain
circumstances. Beginning in 2009, we reduced the minimum payments we guaranteed if the contract holder were to annuitize;
in 2012 we began to reduce the guaranteed portion of account value up to a percentage of the Benefit Base (“roll-up rates”);
and, after first reducing the maximum equity allocation in separate accounts, in 2011 we introduced managed volatility funds
for all our GMLBs. We ceased offering GMIBs for new purchase in February 2016 and to the extent permitted, we have
suspended subsequent premium payments on all but our final generation of GMIBs.
While we added GMWBs to our variable annuity product suite in 2003, we shifted our marketing focus from GMIBs to
GMWBs in 2015 with the release of FlexChoiceSM, a GMWB with lifetime payments (“GMWB4L”). In the first quarter of
2018, we launched an updated version of FlexChoiceSM, “Flex Choice Access” to provide financial advisors and their clients
more investment flexibility.
In 2013, we introduced Shield Annuities, which generated approximately $2.5 billion, $1.7 billion and $0.9 billion of
new deposits for the years ended December 31, 2017, 2016 and 2015, respectively, representing 64%, 41% and 19% of our
annuity deposits for the years ended December 31, 2017, 2016 and 2015, respectively. We intend to increase sales of Shield
Annuities due to growing consumer demand for the products. In addition, we believe that Shield Annuities may provide us
16
with risk offset to the GMxBs offered in our traditional variable annuity products. As of December 31, 2017, there was $5.4
billion of policyholder account balances for Shield Annuities.
With the goal of continuing to diversify and better manage our in-force block, in the future we intend to focus on selling
the following products:
•
•
•
variable annuities with GMWBs;
variable annuities without GMLBs; and
Shield Annuities.
The table below presents our variable and Shield Annuity deposits and ANP.
Deposits
Annual New Premium
Years Ended December 31,
Years Ended December 31,
2017
2016
2015
2017
2016
2015
GMIB
GMWB (1)
GMAB (1)
GMDB only
Shield Annuities
Total
_______________
$
155
812
—
408
2,475
(In millions)
$
356
$
859
$
1,317
54
574
1,655
1,869
509
705
905
$
3,850
$
3,956
$
4,847
$
15
81
—
41
248
385
$
$
36
$
86
187
51
73
91
$
488
132
5
58
166
397
(1) The decline in sales of GMWBs and GMABs is driven by the suspension of sales by Fidelity in 2016.
We describe below in more detail the product features and relative account values, Benefit Base and net amount at risk
(“NAR”) for our death benefit and living benefit guarantees.
Guaranteed Death Benefits
Since 2001, we have offered a variety of GMDBs to our contract holders, which include the following (with no additional
charge unless noted):
• Account Value Death Benefit. The Account Value Death Benefit returns the account value at the time of the claim
with no imposition of surrender charges at the time of the claim.
• Return of Premium Death Benefit. The Return of Premium Death Benefit, also referred to as Principal Protection,
comes standard with many of our base contracts and pays the greater of the contract holder’s account value at the
time of the claim or their total purchase payments, adjusted proportionately for any withdrawals.
•
Interval Reset. The Reset Death Benefit enables the contract holder to lock in their guaranteed death benefit on
the interval anniversary date with this level of death benefit being reset (either up or down) on the next interval
anniversary date. This may only be available through a maximum age. This death benefit pays the greater of the
contract holder’s account value at the time of the claim, their total purchase payments, adjusted proportionately
for any withdrawals, or the interval reset value, adjusted proportionally for any withdrawals. We no longer offer
this guarantee.
• Annual Step-Up Death Benefit. Contract holders may elect, for an additional fee, the option to step up their
guaranteed death benefit on any contract anniversary through age 80. The Annual Step-Up Death Benefit allows
for the contract holder to lock in the high water mark on their death benefit adjusted proportionally for any
withdrawals. This death benefit may only be elected at issue through age 79. Fees charged for this benefit are
usually based on account value. This death benefit pays the greater of the contract holder’s account value at the
time of the claim, their total purchase payments, adjusted proportionately for any withdrawals, or the highest
anniversary value, adjusted proportionally for any withdrawals.
• Combination Death Benefit. Contract holders may elect, for an additional fee, a combination death benefit that, in
addition to the Annual Step-Up Death Benefit as described above, includes a roll-up feature which accumulates
aggregate purchase payments at a predetermined roll-up rate, as adjusted for withdrawals. Descriptions of the two
principal versions of this guaranteed death benefit are as follows:
17
• Compounded-Plus Death Benefit. The death benefit is the greater of (i) the account value at time of the claim,
(ii) the highest anniversary value (highest anniversary value/high water mark through age 80, adjusted
proportionately for any withdrawals) or (iii) a roll-up Benefit Base, which rolls up through age 80, and is
adjusted proportionally for withdrawals. Fees for this benefit are calculated and charged against the account
value. We stopped offering this rider in 2013.
• Enhanced Death Benefit. The death benefit is equal to the Benefit Base which is defined as the greater of (i)
the highest anniversary value Benefit Base (highest anniversary value/high water mark through age 80, adjusted
proportionately for any withdrawals) or (ii) a roll-up benefit, which may apply to the step-up (rollup applies
through age 90), which allows for dollar-for-dollar withdrawals up to the permitted amount for that contract
year and proportional adjustments for withdrawals in excess of the permitted amount. The fee may be increased
upon step-up of the roll-up Benefit Base. Fees charged for this benefit are calculated based on the Benefit
Base and charged annually against the account value. We stopped offering this rider on a stand-alone basis in
2011.
In addition, we currently also offer an optional death benefit for an additional fee with our FlexChoiceSM GMWB4L
riders, available at issue through age 65, which has a similar level of death benefit protection as the Benefit Base for the
living benefit rider. However, the Benefit Base for this death benefit is adjusted for all withdrawals.
The table below presents the breakdown of variable annuity guarantee account value and Benefit Base for the above
described GMDBs at:
Account value / other
Return of premium
Interval reset
Annual step-up
Combination Death Benefit (2)
Total
_______________
December 31, 2017 (1)
December 31, 2016 (1)
Account Value
Benefit Base
Account Value
Benefit Base
$
3,320
$
2,757
$
3,180
$
(In millions)
50,892
5,917
23,835
31,184
51,333
6,133
24,211
35,371
49,018
5,598
22,863
29,859
3,194
49,137
5,643
23,200
35,179
$
115,148
$
119,805
$
110,518
$
116,353
(1) Many of our annuity contracts offer more than one type of guarantee such that death benefit guarantee amounts listed above
are not mutually exclusive to the amounts in the GMLBs table below.
(2) Combination Death Benefit includes Compounded-Plus Death Benefit, Enhanced Death Benefit, and FlexChoiceSM death
benefit.
Guaranteed Living Benefits
Our in-force block of variable annuities consists of three varieties of GMLBs, including variable annuities with GMIBs,
GMWBs and GMABs. Since 2001, we have offered a variety of guaranteed living benefit riders to our contract holders.
Based on total account value, approximately 80% of our variable annuity block included living benefit guarantees at
December 31, 2017 and 2016, respectively.
GMIBs. GMIBs are our largest block of living benefit guarantees based on in-force account value. Contract holders
must wait for a defined period, usually 10 years, before they can elect to receive income through guaranteed annuity payments.
This initial period when the contract holder invests their account value in the separate and/or general account to grow on a
tax-deferred basis is often referred to as the accumulation phase. The contract holder may elect to continue the accumulation
phase beyond the waiting period in order to maintain access to their account value or continue to participate in the potential
growth of both the account value and Benefit Base pursuant to the contract terms. During the accumulation phase, the
contract holder still has access to his or her account value through the following choices, although their Benefit Base may
be adjusted downward consistent with these choices:
•
Partial surrender or withdrawal to a maximum specified amount each year (typically 10% of account value). This
action does not trigger surrender charges, but the Benefit Base is adjusted downward depending on the contract
terms;
18
•
Full surrender or lapse of the contract, with the net proceeds paid to the contract holder being the then prevailing
account value less surrender charges defined in the contract; or
• Limited “Dollar-for-Dollar Withdrawal” from the account value as described in the paragraph below.
The second phase of the contract starts upon annuitization. The occurrence and timing of annuitization depends on how
contract holders choose to utilize the multiple benefit options available to them in their annuity contract. Below are examples
of contract holder benefit utilization choices that can affect benefit payment patterns and reserves:
•
Lapse. The contract holder may lapse or exit the contract at which time all GMxB guarantees are canceled. If he
or she partially exits, the GMxB Benefit Base may be reduced in accordance with the contract terms.
• Use of Guaranteed Principal Option after waiting period. For certain GMIB contracts issued since 2005, the
contract holder has the option to receive a lump sum return of initial premium less withdrawals (the Benefit
Base does not apply) in exchange for cancellation of the GMIB optional benefit.
• Dollar-for-Dollar Withdrawal. The contract holder may, in any year, withdraw, without penalty and regardless
of the underlying account value, a portion of his or her account value up to a percentage of the Benefit Base
(“roll-up rate”). The withdrawal reduces the contract holder’s Benefit Base “dollar-for-dollar.” If making such
withdrawals in combination with market movements reduces the account value to zero, the contract may have
an automatic annuitization feature, which entitles the contract holder to receive a stream of lifetime (with period
certain) annuity payments based on a variety of factors, including the Benefit Base, the age and gender of the
annuitant, and predetermined annuity interest rates and mortality rates. The Benefit Base depends on the
contract terms, but the majority of our in-force has a greater of roll-up or step-up combination Benefit Base
similar to the roll-up and step-up Benefit Base described above in “— Guaranteed Death Benefits.” Any
withdrawal greater than the roll-up rate would result in a penalty which may be a proportional reduction in the
Benefit Base.
• Elective Annuitization. The contract holder may elect to annuitize the account value or exercise the guaranteed
annuitization under the GMIB. The guaranteed annuitization entitles the contract holder to receive a stream of
lifetime (with period certain) annuity payments based on the same factors that would be used as if the contract
holder elected to annuitize.
• Do nothing. If the contract holder elects to continue to remain in the accumulation phase past the maximum age
for electing annuitization under the GMIB and the account value has not depleted to zero, then the contract will
continue as a variable annuity with a death benefit. The Benefit Base for the death benefit may be the same as
the Benefit Base for the GMIB.
Contract holder behaviors around choosing a particular option cannot be predicted with certainty at the time of contract
issuance or thereafter. The incidents and timing of benefit elections and the resulting benefit payments may materially differ
from those we anticipate at the time we issue a variable annuity contract. As we observe actual contract holder behavior,
we periodically update our assumptions with respect to contract holder behavior and take appropriate action with respect
to the amount of the reserves we establish for the future payment of such benefits. See “Risk Factors — Risks Related to
Our Business — Guarantees within certain of our products may decrease our earnings, decrease our capitalization, increase
the volatility of our results, result in higher risk management costs and expose us to increased counterparty risk” and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical
Accounting Estimates.”
We have employed several risk exposure reduction strategies at the product level. These include reducing the interest
rates used to determine annuity payout rates on GMIBs from 2.5% to 0.5% over time, partially in response to the low interest
rate environment. In addition, we increased the setback period used to determine the annuity payout rates for contract holders
from seven years to 10 years. For example, a 10 year age setback would determine actual annuitization monthly payout
rates for a contract holder assuming they were 10 years younger than their actual age at the time of annuitization, thereby
reducing the monthly guaranteed annuity claim payments. We have also reduced the guarantee roll-up rates from 6% to
4%.
Additionally, we introduced limitations on fund selections inside variable annuity contracts. In 2005, we reduced the
maximum equity allocation in the separate accounts. Further, in 2011 we introduced managed volatility funds to our fund
offerings in conjunction with the introduction of our last generation GMIB product “Max.” Approximately 33% of the $67.1
billion and $64.5 billion of GMIB total account value as of both December 31, 2017 and 2016, was invested in managed
volatility funds. The managers of these funds seek to reduce the risk of large, sudden declines in account value during market
19
downturns by managing the volatility or draw-down risk of the underlying fund holdings by re-balancing the fund holdings
within certain guidelines or overlaying hedging strategies at the fund level. We believe that these risk mitigation actions at
the fund level reduce the amount of hedging or reinsurance we require to manage our risks arising from guarantees we
provide on the underlying variable annuity separate accounts.
GMWBs. GMWBs have a Benefit Base that contract holders may roll up for up to 10 years. If contract holders take
withdrawals early, the roll-up may be less than 10 years. This is in contrast to GMIBs, in which roll ups may continue
beyond 10 years. Therefore, the roll-up period for the Benefit Base on GMWBs is typically less uncertain and is shorter
than those on GMIBs. Additionally, the contract holder may receive income only through withdrawal of his or her Benefit
Base. These withdrawal percentages are defined in the contract and differ by the age when contract holders start to take
withdrawals. Withdrawal rates may differ if they are offered on a single contract holder or a couple (joint life). GMWBs
primarily come in two versions depending on if they are period certain or if they are lifetime payments, GMWB4L. Our
latest generation of GMWB4L, FlexChoiceSM, includes the additional option to take the remaining lifetime payments in an
actuarially calculated lump sum when the account value reaches zero.
GMABs. GMABs guarantee a minimum amount of account value to the contract holder after a set period of time, which
can also include locking in capital market gains. This protects the value of the annuity from market fluctuations.
The table below presents the breakdown of our variable annuity account value and Benefit Base by type of GMLBs as
of December 31, 2017 and 2016.
GMIB
GMWB
GMWB4L
GMAB
Total
_______________
December 31, 2017 (1)(2)
December 31, 2016 (1)(2)
Account Value
Benefit Base
Account Value
Benefit Base
$
67,110
$
77,460
$
64,505
$
(In millions)
3,357
20,379
737
2,564
19,998
603
3,374
19,208
697
78,797
2,858
20,302
634
$
91,583
$
100,625
$
87,784
$
102,591
(1) Many of our annuity contracts offer more than one type of guarantee such that living benefit guarantee amounts listed above
are not mutually exclusive to the amounts in the GMDBs table above.
(2) As of December 31, 2017 and 2016, the total account value includes investments in the general account totaling $5.1 billion
and $5.5 billion, respectively.
Net Amount at Risk
The NAR for the GMDB is the amount of death benefit in excess of the account value (if any) as of the balance sheet
date. It represents the amount of the claim we would incur if death claims were made on all contracts on the balance sheet
date and includes any additional contractual claims associated with riders purchased to assist with covering income taxes
payable upon death.
The NAR for the GMWB and GMAB is the amount of guaranteed benefit in excess of the account values (if any) as of
the balance sheet date. The NAR assumes utilization of benefits by all contract holders as of the balance sheet date. For the
GMWB benefits, only a small portion of the Benefit Base is available for withdrawal on an annual basis. For the GMAB, the
NAR would not be available until the GMAB maturity date.
The NAR for the GMWB4L is the amount (if any) that would be required to be added to the total account value to purchase
a lifetime income stream, based on current annuity rates, equal to the lifetime amount provided under the guaranteed benefit.
For contracts where the GMWB4L provides for a guaranteed cumulative dollar amount of payments, the NAR is based on
the purchase of a lifetime with period certain income stream where the period certain ensures payment of this cumulative
dollar amount. The NAR represents our potential economic exposure to such guarantees in the event all contract holders were
to begin lifetime withdrawals on the balance sheet date regardless of age. Only a small portion of the Benefit Base is available
for withdrawal on an annual basis.
The NAR for the GMIB is the amount (if any) that would be required to be added to the total account value to purchase
a lifetime income stream, based on current annuity rates, equal to the minimum amount provided under the guaranteed benefit.
This amount represents our potential economic exposure to such guarantees in the event all contract holders were to annuitize
20
on the balance sheet date, even though the guaranteed amount under the contracts may not be annuitized until after the waiting
period of the contract.
The account values and NAR of contract holders by type of guaranteed minimum benefit for variable annuity contracts
are summarized below.
December 31, 2017 (1)
December 31, 2016 (1)
Account
Value
Death
Benefit
NAR (1)
Living
Benefit
NAR (1)
% of
Account
Value In-the-
Money (2)
Account
Value
Death
Benefit
NAR (1)
Living
Benefit
NAR (1)
% of
Account
Value In-the-
Money (2)
GMIB
GMIB Max w/ Enhanced DB
GMIB Max w/o Enhanced DB
GMWB4L (FlexChoiceSM)
GMAB
GMWB
GMWB4L
EDB Only
GMDB Only (Other than EDB)
Total
_______________
$ 46,585
13,035
7,490
2,351
695
3,355
18,026
4,020
19,587
$115,144
$
$
1,796
1,850
3
—
2
46
73
453
1,038
5,261
$
$
2,641
1
—
1
1
13
267
—
—
2,924
(Dollars in millions)
25.0% $ 44,945
12,461
0.1%
7,098
<0.1%
1,519
1.0%
697
0.3%
3,373
2.0%
17,689
13.5%
3,814
N/A
18,922
N/A
$110,518
$
$
2,527
2,407
37
9
7
63
126
656
1,106
6,938
$
$
3,006
—
—
3
6
29
524
—
—
3,568
31.0%
<0.1%
<0.1%
5.0%
42.6%
15.0%
24.0%
N/A
N/A
(1) The “Death Benefit NAR” and “Living Benefit NAR” are not additive at the contract level.
(2) In-The-Money is defined as any contract with a living benefit NAR in excess of zero.
Reserves
Under accounting principles generally accepted in the United States of America (“GAAP”), certain of our variable annuity
guarantee features are accounted for as insurance liabilities and recorded on the balance sheet in Future Policy Benefits with
changes reported in policyholder benefits and claims. These liabilities are accounted for using long term assumptions of equity
and bond market returns and the level of interest rates. Therefore, these liabilities, valued at $4.1 billion as of December 31,
2017, are less sensitive than derivative instruments to periodic changes to equity and fixed income market returns and the
level of interest rates. Guarantees accounted for in this manner include GMDBs, as well as the life contingent portion of
GMIBs and certain GMWBs. All other variable annuity guarantee features are accounted for as embedded derivatives and
recorded on the balance sheet in Policyholder Account Balances with changes reported in net derivative gains (losses). These
liabilities, valued at $1.2 billion as of December 31, 2017, are accounted for at fair value. Guarantees accounted for in this
manner include GMABs, GMWBs and the non-life contingent portions of GMIBs. In some cases, a guarantee will have
multiple features or options that require separate accounting such that the guarantee is not fully accounted for under only one
of the accounting models (known as “split accounting”). Additionally, the index protection and accumulation features of Shield
Annuities are accounted for as embedded derivatives, recorded on the balance sheet in policyholder account balances with
changes reported in net derivative gains (losses) and valued at $727 million as of December 31, 2017. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates.”
The table below presents the GAAP variable annuity reserve balances by guarantee type and accounting model.
21
December 31, 2017
December 31, 2016
Future
Policy
Benefits
Policyholder
Account
Balances
Total
Reserves
Future
Policy
Benefits (1)
Policyholder
Account
Balances (2)
Total
Reserves
GMDB
GMIB
GMIB Max
GMAB
GMWB
GMWB4L
GMWB4L (FlexChoiceSM)
Total
_______________
$
$
1,163
2,310
399
—
—
277
—
4,149
$
— $
1,416
(243)
(15)
18
30
5
1,211
$
$
$
(In millions)
1,163
3,726
156
(15)
18
307
5
5,360
$
987
2,041
294
—
—
138
—
3,460
$
— $
2,026
(2)
1
50
268
15
2,358
$
$
987
4,067
292
1
50
406
15
5,818
(1) Excludes $102 million of insurance liabilities assumed from a former affiliate, which were recaptured as of January 1, 2017.
(2) Excludes $460 million of embedded derivatives assumed from a former affiliate, which were recaptured as of January 1,
2017.
The carrying values of these guarantees can change significantly during periods of sizable and sustained shifts in equity
market performance, equity market volatility, or interest rates. Carrying values are also affected by our assumptions around
mortality, separate account returns and policyholder behavior, including lapse, annuitization and withdrawal rates. See “Risk
Factors — Risks Related to Our Business — Guarantees within certain of our products may decrease our earnings, decrease
our capitalization, increase the volatility of our results, result in higher risk management costs and expose us to increased
counterparty risk.” Furthermore, changes in policyholder behavior assumptions can result in additional changes in accounting
estimates.
Life
Overview
Our Life segment manufactures products to serve our target segments through a broad independent distribution network.
While our in-force book reflects a broad range of life products, we have focused on term life and universal life, consistent with
our financial objectives, with a concentration on design and profitability over volume. By managing our in-force book of business,
we expect to generate future revenue and profits for the Company. The Life segment generates profits from premiums, investment
margins, expense margins, mortality margins, morbidity margins and surrender fees. We aim to maximize our profits by focusing
on operational excellence and cost optimization in order to continue to reduce the cost basis and underwriting expenses. Our
life insurance in-force book provides natural diversification to our Annuity segment and a source of future profits.
The following table presents the insurance liabilities of our life insurance products.
Term
Whole
Universal
Variable
Total
December 31, 2017
December 31, 2016
General
Account
Separate
Account
Total
General
Account
Separate
Account
Total
(In millions)
$
2,444
$
— $
2,444
$
2,343
$
— $
2,192
2,052
1,124
—
—
5,250
2,192
2,052
6,374
1,917
2,136
1,296
—
—
4,704
2,343
1,917
2,136
6,000
$
7,812
$
5,250
$
13,062
$
7,692
$
4,704
$
12,396
22
The following table presents the relevant contributions of our life insurance products, excluding universal life with secondary
guarantees (“ULSG”), to our ANP:
Term
Whole
Total Traditional
Universal
Variable
Total Universal and Variable
Total Life (Excluding ULSG)
$
$
2017
2015
$
Years Ended December 31,
2016
(In millions)
53
$
75
128
19
11
30
158
12
15
27
6
3
9
36
$
$
79
115
194
3
23
26
220
The following table presents our in-force face amount and direct premiums received, respectively, for the life insurance
products that we offer:
Term
Whole (1)
Universal
Variable
_______________
In-Force Face Amount
December 31,
Premiums
December 31,
2017
2016
2017
2016
(In millions)
$
$
$
$
453,804
23,204
15,617
44,897
$
$
$
$
471,857
24,280
16,102
47,607
$
$
$
$
750
508
234
292
$
$
$
$
785
549
281
331
(1) All new business written since 2013 is 90% coinsured to a former affiliate.
Products
We currently offer term life and universal life products.
Term Life
Term life products are designed to provide a fixed death benefit in exchange for a guaranteed level premium to be paid
over a specified period of time, usually 10 to 30 years. A one-year term option is also offered. Our term life product does
not include any cash value, accumulation or investment components. As a result, it is our most basic life insurance product
offering and generally has lower premiums than other forms of life insurance. Term life products may allow the policyholder
to continue coverage beyond the guaranteed level premium period, generally at an elevated cost. Some of our term life
policies allow the policyholder to convert the policy during the conversion period to a permanent policy. Such conversion
does not require additional medical or financial underwriting. Term life products allow us to spread expenses over a large
number of policies while gaining mortality insights that come from high policy volumes.
Universal Life
Universal life products provide a death benefit in return for payment of specified annual policy charges that are generally
related to specific costs, which may change over time. To the extent that the policyholder chooses to pay more than the
charges required in any given year to keep the policy in-force, the excess premium will be added to the cash value of the
policy and credited with a stated interest rate on a monthly basis. This structure gives policyholders flexibility in the amount
and timing of premium payments, subject to tax guidelines. Consequently, universal life policies can be used in a variety
of different ways. We may market universal life policies focused on cash accumulation within the policy; this can be accessed
later via surrender, withdrawals, loans or ultimate payment of the death benefit. Our policies may feature limited surrender
charges and low initial compensation related to policy expenses, compared to our competitors.
Our current universal life offering has no surrender charges; advisor compensation is based mostly on accumulated
cash value instead of a “target premium” set by us. We believe this universal life offering provides greater flexibility for
the policyholder in the form of a higher cash surrender value in the early contract years given its levelized commission over
time structure and an appeal to different types of advisors with the compensation aligning to asset based business models.
23
Advisors have incentive to service these policies based on this compensation model. These product features allow our
universal life product to be a differentiated product as compared to other universal life contracts offered in the industry and
we believe it demonstrates our ability to create new products that appeal to both consumers and advisors.
Whole Life
Although we have a significant in-force book of whole life policies, we suspended new sales of participating whole
life and conversions into participating whole life beginning with the first quarter of 2017. Whole life products provide a
guaranteed death benefit in exchange for a guaranteed level premium for a specified period of time in order to maintain
coverage for the life of the insured. Whole life products also have guaranteed minimum cash surrender values. Our in-force
whole life products provide for participation in the returns generated by the business, delivered to the policyholder in the
form of non-guaranteed dividend payments. The policyholder can elect to receive the dividends in cash or to use them to
increase the paid-up policy death benefit or pay the required premium. They can also be used for other purposes, including
payment of loans and loan interest. The versatility of whole life allows it to be used for a variety of different purposes
beyond just the primary purpose of death benefit protection. With our in-force policies, the policyholder can withdraw or
borrow against the policy (sometimes on a tax favored basis), in order to provide anything from education costs to emergency
funds to systematic income for retirement. In November 2017, we launched a non-participating conversion whole life
product that is available for term and group conversions and to satisfy other contractual obligations. This product received
Insurance Department approvals in 49 states, the District of Columbia, Puerto Rico, the Bahamas, Guam, the British Virgin
Islands and the U.S. Virgin Islands.
Variable Life
Although we have a significant in-force book of variable life policies, we suspended new sales of certain variable life
policies and conversions into certain variable life policies beginning with the first quarter of 2017. We may choose to issue
additional variable life products in the future. Variable life products operate similarly to universal life products, with the
additional feature that the excess amount paid over policy charges can be directed by the policyholder into a variety of
separate account investment options. In the separate account investment options, the policyholder bears the entire risk of
the investment results. We collect specified fees for the management of the investment options in addition to the base policy
charges. In some instances, third-party asset management firms manage these investment options. The policyholder’s cash
value reflects the investment return of the selected investment options, net of management fees and insurance-related charges.
With some products, by maintaining a certain premium level, policyholders may also have the advantage of various
guarantees designed to protect the death benefit from adverse investment experience.
Pricing and Underwriting
Pricing
Life insurance pricing at issuance is based on the expected payout of benefits calculated using our assumptions for
mortality, morbidity, premium payment patterns, sales mix, expenses, persistency and investment returns, as well as certain
macroeconomic factors, such as inflation. Our product pricing models consider additional factors, such as hedging costs,
reinsurance programs, and capital requirements. We have historically leveraged the actuarial capabilities and long history
of MetLife. Our product pricing reflects our pricing standards and guidelines. We continually review our pricing guidelines
in light of applicable regulations and to ensure that our policies remain competitive and supportive of our marketing strategies
and profitability goals.
We have a dedicated unit, the primary responsibility of which is the development of product pricing standards and
independent pricing and underwriting oversight for our insurance business. Further important controls around management
of underwriting and pricing processes include regular experience studies to monitor assumptions against expectations,
formal new product approval processes, periodic updates to product profitability studies and the use of reinsurance to manage
our exposures, as appropriate. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations
— Summary of Critical Accounting Estimates — Reinsurance.”
Underwriting
Underwriting generally involves an evaluation of applications by a professional staff of underwriters and actuaries,
who determine the type and the amount of insurance risk that we are willing to accept. We employ detailed underwriting
policies, guidelines and procedures designed to assist the underwriters to properly assess and quantify such risks before
issuing policies to qualified applicants or groups.
Insurance underwriting may consider not only an insured’s medical history, but also other factors such as the insured’s
foreign travel, vocations, alcohol, drug and tobacco use, and the policyholder’s financial profile. We generally perform our
24
own underwriting; however, certain policies are reviewed by intermediaries under guidelines established by us. Requests
for coverage are reviewed on their merits and a policy is not issued unless the particular risk has been examined and approved
in accordance with our underwriting guidelines.
The underwriting conducted by our corporate underwriting office and intermediaries is subject to periodic quality
assurance reviews to maintain high standards of underwriting and consistency. The office is also subject to periodic external
audits by reinsurers with whom we do business.
We have established oversight of the underwriting process that facilitates quality sales and serves the needs of our
customers, while supporting our financial strength and business objectives. Our goal is to achieve the underwriting, mortality
and morbidity levels reflected in the assumptions in our product pricing. This is accomplished by determining and establishing
underwriting policies, guidelines, philosophies and strategies that are competitive and suitable for the customer, the agent
and us.
We continually review our underwriting guidelines (i) in light of applicable regulations and (ii) to ensure that our
practices remain competitive and supportive of our marketing strategies, emerging industry trends and profitability goals.
Run-off
This segment consists of operations related to products which we are not actively selling and which are separately managed,
including structured settlements, pension risk transfer contracts, company-owned life insurance (“COLI”) policies, funding
agreements and ULSG. With the exception of ULSG, these legacy business lines were not part of MetLife’s former Retail
segment, but were issued by certain of the legal entities that are now part of Brighthouse. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Executive Summary — Overview.”
The following table presents the insurance liabilities of our annuity contracts and life insurance policies which are reported
in our Run-off segment:
Annuities (1)
Life (2)
Total
_______________
December 31, 2017
December 31, 2016
General
Account
Separate
Account
Total
General
Account
Separate
Account
Total
(In millions)
$
$
11,908
15,118
27,026
$
$
18
3,100
3,118
$
$
11,926
18,218
30,144
$
$
11,213
13,606
24,819
$
$
15
3,469
3,484
$
$
11,228
17,075
28,303
(1) Includes $3.9 billion and $4.1 billion of pension risk transfer general account liabilities at December 31, 2017 and 2016,
respectively.
(2) Includes $14.1 billion and $12.6 billion of general account liabilities associated with the ULSG business at December 31,
2017 and 2016, respectively.
Corporate & Other
Corporate & Other contains the excess capital not allocated to the segments and interest expense related to the majority of
our outstanding debt, as well as expenses associated with certain legal proceedings and income tax audit issues. Corporate &
Other also includes the elimination of intersegment amounts, long term care and workers compensation business reinsured
through 100% quota share reinsurance agreements, and term life insurance sold direct to customers, which is no longer being
offered for new sales.
Risk Management Strategies
Variable Annuity Statutory Reserving Requirements and Exposure Management
We are required to calculate the statutory reserves which support our variable annuity products in conformity with Actuarial
Guideline 43 (“AG 43”) issued by the NAIC. The principal components of AG 43 are a deterministic calculation based on a
single standard scenario (“Standard Scenario”) and a calculation utilizing stochastic scenario analysis across 1,000 capital market
scenarios, referred to as the conditional tail expectations (“CTE”). AG 43 requires that we carry reserves for our variable annuity
contracts that include the greater of the amount determined under the Standard Scenario or CTE.
The Standard Scenario reflects an instantaneous drop in account values followed by a recovery in each case using returns
specified in AG 43. Unlike CTE, which is calculated on an aggregate basis, the Standard Scenario is a seriatim (policy-by-
25
policy) calculation which does not permit deficiencies for certain contracts to be offset by redundancies in other contracts. In
addition, the Standard Scenario has prescribed assumptions, including those for policyholder behavior, which we believe to be
conservative when applied to GMIB products.
CTE is a statistical tail risk measure used to assess the adequacy of assets supporting variable annuity contract liabilities
by averaging the worst “x” percent of the 1,000 stochastic capital market scenarios used, which is commonly described as
CTE100 less “x”. The CTE calculation under AG 43 represents the result derived from the worst 30% of these stochastic scenarios,
or “CTE70”. Although the NAIC does not specify the exact scenarios used, it has issued guidelines that must be complied with
when selecting the scenarios used.
The results of the Standard Scenario and CTE70 calculations under AG 43 may differ materially. We held $4.3 billion of
statutory reserves, including voluntary reserves, to support our variable annuity products at December 31, 2017.
The calculation of total assets (reserves plus capital) required to be held to support variable annuity contracts is referred to
as a total asset requirement (“TAR”). The NAIC has issued separate guidelines, pursuant to Life Risk Based Capital Phase II
Instructions (“RBC C3 Phase II”), regarding the calculation of TAR for purposes of determining risked based capital (“RBC”).
We refer to this as “Statutory TAR”. Under these guidelines, Statutory TAR must be at least equal to the greater of (a) the average
amount of assets needed to satisfy policyholder obligations in the worst 10% of the 1,000 scenarios, or CTE90, and (b) the total
amount of assets required under a deterministic calculation based on a standard scenario prescribed in these RBC guidelines
(“RBC Standard Scenario”). Our Statutory TAR was $3.7 billion at December 31, 2017.
Our internal target TAR, consistent with rating agency criteria for our target credit ratings, is based on the worst 5% of
scenarios, or CTE 95, which we refer to as our “Variable Annuity Target Funding Level”. We intend to maintain across markets
over the life of the book of business our Variable Annuity Target Funding Level, which was $5.7 billion at December 31, 2017.
Our exposure risk management program seeks to mitigate the potential adverse effects of changes in capital markets,
specifically equity markets and interest rates, on our Variable Annuity Target Funding Level and hence our view of statutory
distributable cash flows. We seek to accomplish this by using derivative instruments together with holding $2.0 billion to
$3.0 billion of assets in excess of the CTE95 requirement to fund the first dollar increase in CTE95 requirements under stressed
capital market conditions. We utilize a combination of short-term and longer-term derivative instruments to have a laddered
maturity of protection and reduce roll over risk during periods of market disruption or higher volatility. We continually monitor
the capital markets for opportunities to adjust our derivative positions to manage our variable annuity exposure, as appropriate.
The table below presents the gross notional amount and estimated fair value of the derivatives in our variable annuity
hedging program.
Primary Underlying Risk
Exposure
Instrument Type
December 31, 2017
December 31, 2016
Gross
Notional
Amount
Estimated Fair Value
Assets
Liabilities
Gross
Notional
Amount
Estimated Fair Value
Assets
Liabilities
(In millions)
Interest rate
Interest rate swaps
$
14,586
$
899
$
378
$
16,551
$
1,180
$
787
Interest rate futures
Interest rate options
Equity market
Equity futures
Equity index options
Equity variance swaps
Equity total return swaps
282
20,800
2,713
47,066
8,998
1,767
1
68
15
793
128
—
—
27
—
1,663
430
79
1,288
15,520
8,037
37,215
14,894
2,855
9
136
38
895
140
1
—
—
—
934
517
117
Total
$
96,212
$
1,904
$
2,577
$
96,360
$
2,399
$
2,355
Period to period changes in the estimated fair value of these hedges affect our net income, as well as stockholders’ equity
and these effects can be material in any given period. See “Risk Factors — Risks Related to Our Business — Our variable
annuity exposure management strategy may not be effective, may result in net income volatility and may negatively affect our
statutory capital” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary
of Critical Accounting Estimates.”
The principal components of our exposure risk management strategy are described in further detail below:
26
• Variable Annuity Assets - This includes both derivative assets and non-derivative assets. We intend to continue to
hold non-derivative assets supporting our variable annuity contracts to sustain asset adequacy during modest market
downturns without substantial reliance on gains on derivative instruments and accordingly, reduce the need for
hedging the daily or weekly fluctuations from small movements in capital markets. At December 31, 2017, we held
approximately $2.6 billion of assets in excess of those required under CTE95, which would be equivalent to holding
assets greater than a CTE98 standard at December 31, 2017.
• Hedge Target - We focus our hedging activities primarily on mitigating the risk from larger movements in capital
markets, which may deplete variable annuity contract holder account values, and may increase long-term variable
annuity guarantee claims. When we determine hedges to hold for this risk, we consider the fact that our obligations
under Shield Annuity contracts decrease in falling equity markets when variable annuity guarantee obligations increase,
and increase in rising equity markets when variable annuity guarantee obligations decrease. Additionally, we believe
that holding longer dated assets including derivative instruments to support our Variable Annuity Target Funding Level
is consistent with the long-term nature of our variable annuity contract guarantees. We believe this will result in our
being less exposed to the risk that we will be unable to roll-over expiring derivative instruments into new derivative
instruments consistent with our hedge strategy on economically attractive terms and conditions. Over time, we expect
our variable annuity exposure management strategy will allow us to reduce net hedge costs and increase long-term
value for our shareholders for various reasons, including:
• Protect against more significant market risks. Protecting against larger market movements can be achieved at a
lower cost through the use of derivatives with strike levels that are below the current market level, referred to as
“out of the money.” These derivatives, typically, require a lower premium outlay than those with strike levels at
the current market level, known as “at the money.” However, they may result in higher bid-ask spread or trading
cost, if frequently re-balanced. Additionally, we believe a strategy using primarily options will produce fewer
losses from extreme realized volatility over a compressed time period, with potentially multiple up and down
market movements, referred to as “gamma losses.”
• Reduce transaction costs associated with hedge execution. Less frequent rebalancing of derivative positions can
reduce trading costs. This approach is commonly described as a “semi-static hedging” approach. With a greater
emphasis on semi-static hedging, we generally favor using longer-term option instruments.
•
Improve statutory results in rising markets. First dollar dynamic hedging strategies, for example using futures or
swaps, have similar symmetrical impacts in both rising and falling markets. Therefore, while protecting for
market downside situations, first dollar dynamic hedging strategies also incur first dollar losses in rising
markets, which is what we refer to as selling upside. We have reduced the use of futures and swaps (as reflected
in the preceding table), which should improve statutory earnings for the Company in the event markets
outperform our baseline expectations.
We believe the higher statutory earnings that our strategy may generate can be used to increase financial flexibility and
support deploying capital for growing long-term, sustainable shareholder value. However, because this hedge strategy places a
lower priority on offsetting changes to GAAP liabilities and moderate market movement impacts to statutory capital, some
GAAP net income and statutory capital volatility could result when markets are volatile.
Further, by holding more non-derivative, income bearing assets in addition to derivative instruments to support our Variable
Annuity Target Funding Level, we should benefit from earning additional investment income over time. This increases the
sufficiency of assets supporting our Variable Annuity Target Funding Level and increases the possibility of generating excess
capital over time, depending on market conditions. We believe this will enhance our financial condition across more market
scenarios than an approach that relies purely on derivative instruments for protecting against market downside.
Variable Annuity Sensitivities
Set forth below are two tables that analyze the sensitivity of our Variable Annuity Assets, CTE95 and Statutory TAR to
instantaneous changes in equity markets and interest rates. The next two tables present the change in our Variable Annuity Target
Funding Level and analyze the sensitivity. We then set forth below several tables which show the present value of our cash flows
under certain economic scenarios. Lastly, we set forth a table which analyzes the sensitivity of our variable annuity GAAP net
income to changes in equity markets and interest rates. All of these tables reflect the risk offset impact of Shield Annuities.
Sensitivity of Variable Annuity Targets
The following table estimates the impact of various instantaneous changes in equity markets and interest rates, assuming
implied volatility is held constant with respect to market levels at December 31, 2017 on the estimated Variable Annuity Assets
27
supporting our variable annuity contracts. It does not reflect an increase in total asset requirements as the block of business
seasons over time. For purposes of the table we have estimated the impacts of these equity market and interest rate changes on
our (i) variable annuity contract liabilities as of December 31, 2017; and (ii) Variable Annuity Assets consisting of derivative
instruments as of December 31, 2017. The impacts presented below are not representative of the aggregate changes that could
result if a combination of such changes to equity markets and interest rates occurred.
Estimated at December 31, 2017
Equity Market (S&P 500)
Interest Rates
(40)% (25)% (10)% (5)%
Base
5%
10%
25%
40%
(1)%
1%
(In billions)
Variable Annuity Assets (1)
$ 15.8
$ 12.0
$ 9.3
$ 8.8
$ 8.3
$ 7.9
$ 7.5
$ 6.7
$ 6.1
$ 10.3
$ 7.3
CTE95
13.7
10.3
7.4
6.5
5.7
5.0
4.3
2.6
1.7
7.6
4.2
Variable Annuity Assets above
CTE95 (2)(3)(4)
Change in Variable Annuity Assets
above CTE95 (5)
_______________
$ 2.1
$ 1.7
$ 1.9
$ 2.3
$ 2.6
$ 2.9
$ 3.2
$ 4.1
$ 4.4
$ 2.7
$ 3.1
$ (0.5) $ (0.9) $ (0.7) $ (0.3) $ — $ 0.3
$ 0.6
$ 1.5
$ 1.8
$ 0.1
$ 0.5
(1) Variable Annuity Assets for purposes of this sensitivity analysis is the total amount of assets we hold to support our variable
annuity contracts. Under the base case scenario, our Variable Annuity Assets exceeded our Variable Annuity Target Funding
Level by $2.6 billion. The sensitivities of Variable Annuity Assets only reflect fair value changes of the variable annuity
hedging program (non-derivative assets are not held at fair value).
(2) Variable Annuity Assets above CTE95 is the difference between the amount of assets necessary to support our variable
annuities at a CTE95 standard and Variable Annuity Assets.
(3) Our risk management program is designed to protect against larger equity market movements through the use of out of the
money derivative instruments. The rate of change in the fair value of these derivative instruments increases as the level of
equity markets approaches and goes below the strike level on these derivative instruments.
(4) We hold assets in excess of our Variable Annuity Target Funding Level in order to mitigate the effect of adverse market
scenarios on the adequacy of the assets supporting our variable annuity contracts. This table shows sensitivities under
instantaneous changes and does not reflect multiple effects across equity markets and interest rates, a failure of markets to
recover following such change or the impact the passage of time may have.
(5) Change of Variable Annuity Assets above CTE95 is the difference between the Variable Annuity Assets above CTE95 and
the base amount.
The Company is subject to regulatory minimum capital requirements, as expressed by the Statutory TAR. Statutory TAR
may respond differently than CTE95 to equity market and interest rates. The following table estimates the impact of various
instantaneous changes in equity markets and interest rates, assuming implied volatility is held constant with respect to market
levels at December 31, 2017 on the estimated Variable Annuity Assets supporting our variable annuity contracts. It does not
reflect an increase in total asset requirements as the block of business seasons over time. For purposes of the table we have
estimated the impacts of these equity market and interest rate changes on our (i) variable annuity contract liabilities as of
December 31, 2017; and (ii) Variable Annuity Assets consisting of derivative instruments as of December 31, 2017. The impacts
presented below are not representative of the aggregate changes that could result if a combination of such changes to equity
markets and interest rates occurred.
Estimated at December 31, 2017
Equity Market (S&P 500)
Interest Rates
(40)% (25)% (10)% (5)%
Base
5%
10%
25%
40%
(1)%
1%
(In billions)
Variable Annuity Assets (1)
$ 15.8
$ 12.0
$ 9.3
$ 8.8
$ 8.3
$ 7.9
$ 7.5
$ 6.7
$ 6.1
$ 10.3
$ 7.3
Statutory TAR
12.1
8.6
5.5
4.5
3.7
3.0
2.4
1.5
1.0
5.5
3.6
Variable Annuity Assets above
Statutory TAR (2)
Change in Variable Annuity Assets
above Statutory TAR (3)
$ 3.7
$ 3.4
$ 3.8
$ 4.3
$ 4.6
$ 4.9
$ 5.1
$ 5.2
$ 5.1
$ 4.8
$ 3.7
$ (0.9) $ (1.2) $ (0.8) $ (0.3) $ — $ 0.3
$ 0.5
$ 0.6
$ 0.5
$ 0.2
$ (0.9)
28
_______________
(1) Variable Annuity Assets for purposes of this sensitivity analysis is the total amount of assets we hold to support our variable
annuity contracts. The sensitivities of Variable Annuity Assets only reflect fair value changes of the variable annuity hedging
program (non-derivative assets are not held at fair value).
(2) Variable Annuity Assets above Statutory TAR is the difference between the Statutory TAR and Variable Annuity Assets.
(3) Change of Variable Annuity Assets above Statutory TAR is the difference between the Variable Annuity Assets above TAR
and the base amount.
Growth of or Decline in Our Variable Annuity Target Funding Level and Sensitivities
Based on our Base Case Scenario (as defined below), we believe the Variable Annuity Target Funding Level for our
variable annuity in-force book (“VA In-Force”) will continue to increase over time until it peaks in approximately 2024. We
believe this to be typical of most insurance liabilities, where reserves or reserves and required capital, combined as total asset
requirements, increase as the block of business seasons over time until it reaches maturity. After maturity, total asset
requirements decline, thereby permitting a release of assets and an increase to retained capital and surplus. Assuming our Base
Case Scenario, as of December 31, 2017, our Variable Annuity Target Funding Level was approximately 90% of the estimated
peak level of our total variable annuity asset requirements in approximately 2024. By December 31, 2022, we believe that we
will be holding approximately 98% of the expected peak Variable Annuity Target Funding Level as shown in the following
table:
Variable Annuity Target Funding Level
Percent of peak Variable Annuity Target Funding Level
2017
2022
2024
(Dollars in billions)
$
5.7
$
90%
6.2
$
98%
6.3
100%
We anticipate that our increasing total asset requirements will be funded with revenues from our VA In-Force, net of
expenses, exposure management impacts and commitments for the Variable Annuity business. We expect the residual cash
flows will be available for investment in new business, as well as other corporate purposes. Additionally, after the business
is past the peak level, we expect the Variable Annuity Target Funding Level to decline and increase distributable earnings to
provide a source of cash flow to shareholders.
The following table is based on Scenario 4 (as defined below). We believe this helps represent the impact that aging has
on the Variable Annuity Target Funding Level, which is growth that occurs in the CTE95 requirement assuming separate
account funds earn modest premium to risk-free rates and interest rates follow the forward curve. We estimate this to be
approximately $800 million per year through 2022, declining to approximately $450 million per year through 2027.
Variable Annuity Target Funding Level
Percent of peak Variable Annuity Target Funding Level
Sensitivity of Cash Flows
2017
2022
2027
(Dollars in billions)
$
5.7
$
47%
9.9
$
82%
12.1
100%
In addition, the following tables illustrate the impact on variable annuity business cash flows across five capital market
scenarios, outlined below, which reflect simultaneous changes in equity markets and interest rates as outlined below, reflecting
our current hedging program as of December 31, 2017. Contract holder behavior in these five scenarios is based on current
best estimate assumptions which include dynamic variables to reflect the impact of change in market levels.
29
Base Case Scenario
Separate Account Returns: 6.5%
Interest Rate Yields: mean reversion of 10 Year UST to 4.25% over 10 years
Assumptions
Scenario 2
Scenario 3
Scenario 4
Scenario 5
Separate Account Returns: 9.0%
Interest Rate Yields: mean reversion of 10 Year UST to 4.25% over 10 years
Separate Account Returns: 4.0%
Interest Rate Yields: mean reversion of 10 Year UST to 4.25% over 10 years
Separate Account Returns: 4.0%
Interest Rate Yields: follows the forward U.S. Treasury and swap interest rate curve as of December 31, 2017
Separate Account Returns: (25)% shock to equities, then 6.5% separate account return
Interest Rate Yields: 10-year U.S. Treasury interest rates drop to 1.0%, and then follows the implied forward rate
The tables below estimate the impact of distributable statutory cash flow from our variable annuity business for both the
three and five annual periods beginning December 31, 2017, under the above defined five capital market scenarios. These
values are presented on a pre-tax basis. Effective December 31, 2017, we made certain tax elections related to our variable
annuity hedging program to better align recognition of taxes on hedge gain (loss) with the longer term nature of the hedges
and reduce any potential tax friction impacts due to the difference in the amount of tax reserves and the hedge target based
on CTE95. As a result of these elections, we believe that statutory pre-tax and post-tax results will be similar for the next few
years. Additionally, the tables do not reflect any potential impact of variable annuity capital reform or change in tax rates on
the CTE requirements.
For the Three Years Ending
December 31, 2018 to December 31, 2020
Base Case
Scenario
Scenario 2
Scenario 3
Scenario 4
Scenario 5
Fees
Rider fees
Surrender charges
Hedge gains (losses) (including Shield net impact)
Benefits and expenses
Investment income
Increase (decrease) in Commissioners Annuity Reserve Valuation
Method (“CARVM”) allowance
Impact of (increase) decrease in CTE95
Subtotal
(Increase) decrease in assets to fund hedge target
$
$
5.5
3.6
0.1
(4.6)
(3.0)
0.9
(0.8)
(0.2)
1.5
(0.4)
(In billions)
$
5.7
3.6
0.1
(5.7)
(3.0)
0.9
(0.8)
1.4
2.2
(0.4)
$
5.4
3.6
0.1
(3.3)
(3.1)
1.0
(0.8)
(2.1)
0.8
(0.4)
$
5.4
3.6
0.1
(3.3)
(3.1)
1.0
(0.8)
(2.5)
0.4
(0.4)
Variable annuity distributable earnings
$
1.1
$
1.8
$
0.4
$
— $
4.6
3.5
0.1
3.5
(3.3)
1.0
(0.7)
(9.6)
(0.9)
0.9
—
30
For the Five Years Ending
December 31, 2018 to December 31, 2022
Base Case
Scenario
Scenario 2
Scenario 3
Scenario 4
Scenario 5
Fees
Rider fees
Surrender charges
Hedge gains (losses) (including Shield net impact)
Benefits and expenses
Investment income
Increase (decrease) in CARVM allowance
Impact of (increase) decrease in CTE95
Subtotal
(Increase) decrease in assets to fund hedge target
$
(In billions)
$
8.6
5.7
0.1
(6.3)
(5.0)
1.7
(1.0)
(0.5)
3.3
(0.4)
$
9.1
5.8
0.1
(8.0)
(5.0)
1.5
(1.0)
2.1
4.6
(0.4)
$
8.1
5.7
0.1
(4.3)
(5.0)
1.9
(1.0)
(3.4)
2.1
(0.4)
$
8.1
5.7
0.1
(4.4)
(5.1)
1.9
(1.0)
(4.3)
1.0
(0.4)
Variable annuity distributable earnings
$
2.9
$
4.2
$
1.7
$
0.6
$
7.0
5.6
0.1
1.4
(5.6)
1.8
(0.8)
(10.3)
(0.8)
0.8
—
With the successful transition to our variable annuity hedging strategy in 2017, distributable earnings reflect lower hedge
costs than under the legacy strategy. Lower hedge costs also resulted from growth in Shield Annuity balances, which provides
a risk offset to variable annuity in-force, and favorable equity markets have resulted in lower in-the-moneyness for client
guarantees.
The table below presents, under these five scenarios, the present value over the lifetime of the existing variable annuity
block at a 4% discount rate of anticipated revenues net of all expenses and hedge costs, without reflecting the effect of capital
and reserving requirements on the cash flows of this business.
Estimated at December 31, 2017
Base Case
Scenario
Scenario 2
Scenario 3
Scenario 4
Scenario 5
(In billions)
Present value of cash flows
$
9.0
$
16.2
$
1.7
$
0.3
$
Present value of hedge gains (losses) (including Shield net impact)
(7.5)
(11.1)
Total present value pre-tax
Variable Annuity Assets
Total (including Variable Annuity Assets) (1)
$
_______________
1.5
8.3
9.8
5.1
8.3
$
13.4
$
(4.1)
(2.4)
8.3
5.9
$
(5.7)
(5.4)
8.3
2.9
$
(2.2)
(2.9)
(5.1)
8.3
3.2
(1) Only represents cash flows and value from variable annuity in-force business and does not reflect any value or cost from
other businesses, which includes value of non-variable annuity businesses (any future profits and approximately $3.4 billion
of non-variable annuity capital), value of future new business, taxes, debt and other holding company costs.
Sensitivity of GAAP Net Income
The following table estimates the GAAP net income impact of various instantaneous changes in equity markets and
interest rates, assuming implied volatility is held constant with respect to market levels at December 31, 2017 on the estimated
Variable Annuity Assets supporting our variable annuity contracts. For purposes of the table we have estimated the impacts
of these equity market and interest rate changes on our (i) variable annuity contract liabilities as of December 31, 2017; and
(ii) Variable Annuity Assets consisting of derivative instruments at December 31, 2017. The impacts presented below are not
representative of the aggregate changes that could result if a combination of such changes to equity markets and interest rates
occurred. The changes do not include a deferred policy acquisition cost (“DAC”) offset and are net of the statutory tax rate
of 21%.
31
Estimated at December 31, 2017
Equity Market (S&P 500)
Interest Rates
(40)% (25)% (10)% (5)%
Base
5%
10%
25%
40%
(1)%
1%
(In billions)
Change in Variable Annuity Assets
$ 5.9
$ 2.9
$ 0.8
$ 0.4
$ — $ (0.3) $ (0.5) $ (1.3) $ (1.7) $ 1.5
$ (0.8)
Change in Variable Annuity GAAP
Reserves (1)
Impact on Variable Annuity GAAP
2.5
1.3
0.4
0.2
—
(0.2)
(0.3)
(0.8)
(1.1)
1.3
(1.0)
Net Income (Loss)
$ 3.4
$ 1.6
$ 0.4
$ 0.2
$ — $ (0.1) $ (0.2) $ (0.5) $ (0.6) $ 0.2
$ 0.2
_______________
(1) Change in Variable Annuity GAAP Reserves represents only those variable annuity guarantees accounted for at fair value
as embedded derivatives and does not include adjustments for nonperformance or risk margins.
Risks in Sensitivities for Variable Annuities
The preceding sensitivities and scenarios discussed in this sensitivities section (the “Analyses”) are estimates and are not
intended to predict the future financial performance of our variable annuity hedging program or to represent an opinion of market
value. They were selected for illustrative purposes only and they do not purport to encompass all of the many factors that may
bear upon a market value and are based on a series of assumptions as to the future. It should be recognized that actual future
results may differ from those shown, on account of changes in the operating and economic environments and natural variations
in experience. The results shown are presented as of December 31, 2017 and no assurance can be given that future experience
will be in line with the assumptions made.
The Analyses use inputs which are difficult to approximate and may result in material differences in actual outcomes
compared to the information shown above. These inputs include the following estimates:
• Basis risk - fund allocations are mapped to different equity or fixed income indices and the projected returns which we
attribute to these indices may be materially different from estimates we used in our modeling. A material portion of
our separate account asset value is also included in target volatility funds and our modeling is unable to capture the
continuous equity and fixed income re-allocations within these types of funds;
• Actuarial assumptions - policyholder behavior and life expectancy may vary compared to our actuarial assumptions
and much of the data that is used in formulating our actuarial assumptions is still developing, so we may have insufficient
information on which to base the actuarial assumptions used in our modeling, which could result in material differences
in actual outcomes compared to our modeling results; and
• Management actions - the Analyses assume no actions by management in response to developing facts, circumstances
and experience, which is unlikely to be the case and could result in material deviations from our modeling results.
In the modeling supporting our Analyses, we use seriatim calculations, that is, each individual annuity contract is considered.
Although the NAIC has promulgated guidelines on the total amount of assets required to support statutory reserves and
capital relating to variable annuities, neither the NAIC nor any state insurance department specifies the particular 1,000 stochastic
capital market scenarios that an insurance company must use in its CTE calculation or whether or not those scenarios can be
changed or need be held constant going forward. Therefore, each insurance company runs scenarios which it believes are
appropriate to it at a particular time, and the CTE95 of one company may be materially different than the CTE95 of another
company. The NAIC is currently considering modifying its prescribed methodologies and assumptions. There is no guarantee
it will implement these modifications or that it will not implement different modifications in the future, any of which may have
a material impact on our statutory capitalization and our variable annuity hedging strategy, its implementation and timing.
In addition, the Analyses do not take into account simultaneous shocks to equity markets, interest rates and market volatility.
The actual effect of changes in equity markets and interest rates on the assets supporting our variable annuity contracts may
vary depending on a number of factors which include but are not limited to (i) the Analyses are only valid as of the measurement
date and (ii) changes in our hedging program, policyholder behavior and underlying fund performance could materially affect
the liabilities our assets support. In addition, the foregoing Analyses illustrate the estimated impact of the indicated shocks
occurring instantaneously, and therefore give no effect to rebalancing over the course of the shock event. The estimates of equity
market shocks reflect a shock to all equity markets, domestic and global, of the same magnitude. The estimates of interest rate
shocks reflect a shock to rates at all durations (a parallel shift in the yield curve).
32
Management of non-market risks
Our product guarantees are subject to uncertainty associated with the future behavior of contract holders with respect to the
exercise of contractual options (e.g., annuitization for GMIBs), lapse, timing and extent of withdrawals and underlying mortality
experience. We are required to make assumptions about these uncertainties when valuing the liabilities and update such
assumptions annually. Because assumptions may not reflect the actual behaviors and patterns we experience in the future, they
are subject to change, potentially resulting in significant increases or decreases to the carrying value of liabilities impacting
earnings in the period of the change. On an annual basis, we review these assumptions and make updates to the extent emerging
and actual experience deviates from prior assumptions. It is possible that future assumption changes could produce reserve or
CTE95 TAR hedge target changes in a magnitude that could require us to contribute a significant amount of additional capital
to one or more of our insurance subsidiaries, or could otherwise be material and adverse to the results of operations or financial
condition of the Company. For additional information regarding the actuarial assumption reviews for all periods presented, see
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Actuarial
Assumption Review.”
ULSG Market Risk Exposure Management
The ULSG block includes the business ceded to Brighthouse Reinsurance Company of Delaware (“BRCD”), providing
reserve financing support and business that remains in our operating companies. The primary market risk associated with our
ULSG block is future levels of U.S. interest rates and bond yields. To help ensure Brighthouse has sufficient assets to meet
future ULSG policyholder obligations, we have employed our NY Regulation 126 Cash Flow Testing (“ULSG CFT”) modeling
approach as the basis for setting our ULSG asset requirement target for BRCD. For the business that remains in the operating
companies, we set our ULSG asset requirement target to equal the actuarially determined statutory reserves, which, taken together
with our ULSG asset requirement target of BRCD, comprises our total ULSG asset requirement target (“ULSG Target”). Under
the ULSG CFT approach, we assume that interest rates remain flat or lower than current levels and our actuarial assumptions
include a provision for adverse deviation. These underlying assumptions used in ULSG CFT are more conservative than those
required under GAAP, which assumes a long-term upward mean reversion of interest rates and less conservative actuarial
assumptions.
We seek to mitigate interest rate exposures associated with these liabilities by holding ULSG Assets to closely match our
ULSG Target under different interest rate environments. “ULSG Assets” are defined as (i) total general account assets in the
operating companies and affiliated reinsurance companies supporting statutory reserves and capital and (ii) interest rate derivative
instruments dedicated to mitigate ULSG interest rate exposures. As of December 31, 2017, both ULSG Assets and the ULSG
Target were estimated to be $16.9 billion. At December 31, 2017, the statutory reserves for the ULSG business (in our operating
companies and affiliated reinsurers) were $21.0 billion and GAAP reserves were $12.2 billion.
Our ULSG Target is sensitive to the actual and future expected level of long-term U.S. interest rates. If interest rates fall,
our ULSG Target increases. Likewise, if interest rates rise, our ULSG Target declines. Given this profile, we maintain a dedicated
interest rate risk mitigation program, composed of interest rate derivatives (the “ULSG Hedge Program”), which we may
rebalance periodically to preserve a risk mitigation profile consistent with our objectives. The ULSG Hedge Program prioritizes
the ULSG Target (comprised of ULSG CFT and statutory considerations), with less emphasis on mitigating GAAP net income
volatility. This could increase the period-to-period volatility of net income and equity due to differences in the sensitivity of the
ULSG Target and GAAP liabilities to the changes in interest rates. This mitigation strategy enables us to better protect statutory
capitalization from potential losses due to an increase in our ULSG Target under lower interest rate conditions. Conversely, we
may allow for lower realization of gains as the ULSG Target declines in moderately rising interest rate environments, in order
to limit the cost of this risk mitigation strategy. We intend to maintain an adequate amount of liquid investments in our investment
portfolio supporting our ULSG book to support any contingent collateral posting requirements from our ULSG Hedge Program.
ULSG Sensitivities
The following tables analyze the sensitivity of our ULSG Assets, ULSG Target and ULSG GAAP net income to instantaneous
changes in interest rates.
The following table summarizes the sensitivity of our estimated ULSG Assets and ULSG Target to changes in interest rates,
and assumes rebalancing of our ULSG Hedge Program during the first quarter of 2018 was in place as of December 31, 2017.
The resulting changes in the ULSG Target and ULSG Assets for the instantaneous interest rate changes only reflect changes for
the business in BRCD. The changes are net of a statutory tax rate of 35%.
33
ULSG Assets (1)
ULSG Target
Surplus (deficit) (2)
_______________
Estimated at December 31, 2017
Interest Rates
(2.0)% (1.5)% (1.0)% (0.5)% Base
0.5%
1.0%
1.5%
2.0%
$ 19.1
19.1
$ 18.3
18.4
$ 16.7
16.4
$ — $ (0.1) $ (0.1) $ (0.2) $ — $ 0.3
$ 17.7
17.8
$ 17.2
17.4
(In billions)
$ 16.9
16.9
$ 16.5
16.0
$ 0.5
$ 16.3
15.4
$ 0.9
$ 16.3
14.8
$ 1.5
(1) ULSG Assets are the general account assets of the operating companies and BRCD and changes in ULSG Assets only reflect
fair value changes of the ULSG Hedge Program.
(2) Surplus (deficit) represents the difference between the ULSG Assets and the ULSG Target.
With respect to GAAP, ULSG policy reserves are relatively insensitive to interest rate movements. As a result, the sensitivity
of ULSG GAAP net income largely consists of changes in the fair value of the ULSG Hedge Program, as depicted in the following
table, which represents our ULSG Hedge Program as of December 31, 2017. The changes are net of a statutory tax rate of 21%.
Estimated at December 31, 2017
Interest Rates
(2.0)% (1.5)% (1.0)% (0.5)% Base
0.5%
1.0%
1.5%
2.0%
(In billions)
Change in ULSG Hedge Program (1)
$ 3.5
$ 2.3
$ 1.3
$ 0.6
$ — $ (0.4) $ (0.8) $ (1.1) $ (1.2)
As previously mentioned, we periodically rebalance our ULSG Hedge Program to preserve a risk mitigation profile consistent
with our objectives. During the first quarter of 2018, we executed some rebalancing that maintained downside protection against
increases in the ULSG Target if interest rates decline while affording upside if interest rates rise. The following table summarizes
the ULSG GAAP net income sensitivity assuming the rebalancing of our ULSG Hedge Program during the first quarter of 2018
was in place as of December 31, 2017. The changes are net of a statutory tax rate of 21%.
Estimated at December 31, 2017
Interest Rates
(2.0)% (1.5)% (1.0)% (0.5)% Base
0.5%
1.0%
1.5%
2.0%
(In billions)
Change in ULSG Hedge Program (1)
$ 2.7
$ 1.7
$ 1.0
$ 0.4
$ — $ (0.3) $ (0.5) $ (0.7) $ (0.7)
The preceding sensitivities discussed in this section are estimates and are not intended to predict the future financial
performance of our ULSG Hedge Program or to represent an opinion of market value. They were selected for illustrative purposes
only and they do not purport to encompass all of the many factors that may bear upon a market value and are based on a series
of assumptions as to the future. It should be recognized that actual future results may differ from those shown, on account of
changes in the operating and economic environments and natural variations in experience. The results shown are presented as
of December 31, 2017 and no assurance can be given that future experience will be in line with the assumptions made.
Reinsurance Activity
In connection with our risk management efforts and in order to provide opportunities for growth and capital management,
we enter into reinsurance arrangements pursuant to which we cede certain insurance risks to unaffiliated reinsurers (“Unaffiliated
Third-party Reinsurance”). We discuss below our use of Unaffiliated Third-party Reinsurance, as well as the cession of a block
of legacy insurance liabilities to a third party and related indemnification and assignment arrangements.
Unaffiliated Third-Party Reinsurance
We cede risks to third parties in order to limit losses, minimize exposure to significant risks and provide capacity for future
growth. We enter into various agreements with reinsurers that cover groups of risks, as well as individual risks. Our ceded
reinsurance to third parties is primarily structured on a treaty basis as coinsurance, yearly renewable term, excess or catastrophe
excess of retention insurance. These reinsurance arrangements are an important part of our risk management strategy because
they permit us to spread risk and minimize the effect of losses. The extent of each risk retained by us depends on our evaluation
of the specific risk, subject, in certain circumstances, to maximum retention limits based on the characteristics and relative cost
of reinsurance. We also cede first dollar mortality risk under certain contracts. In addition to reinsuring mortality risk, we cede
other risks, as well as specific coverages.
34
Under the terms of the reinsurance agreements, the reinsurer agrees to reimburse us for the ceded amount in the event that
we pay a claim. Cessions under reinsurance agreements do not discharge our obligations as the primary insurer. In the event the
reinsurers do not meet their obligations under the terms of the reinsurance agreements, reinsurance recoverable balances could
become uncollectible.
We have historically reinsured the mortality risk on our life insurance policies primarily on an excess of retention basis or
on a quota share basis. When we cede risks to a reinsurer on an excess of retention basis we retain the liability up to a contractually
specified amount and the reinsurer is responsible for indemnifying us for amounts in excess of the liability we retain, subject
sometimes to a cap. When we cede risks on a quota share basis we share a portion of the risk within a contractually specified
layer of reinsurance coverage. We reinsure on a facultative basis for risks with specified characteristics. On a case by case basis,
we may retain up to $20 million per life and reinsure 100% of the risk in excess of $20 million. We also reinsure portions of the
risk associated with certain whole life policies to a former affiliate and we assume certain term life policies and universal life
policies with secondary death benefit guarantees issued by a former affiliate. We routinely evaluate our reinsurance program
and may increase or decrease our retention at any time.
We also reinsure portions of the living and death benefit guarantees issued in connection with variable annuities to unaffiliated
reinsurers. Under these arrangements, we typically pay a reinsurance premium based on fees associated with the guarantees
collected from contract holders, and receive reimbursement for benefits paid or accrued in excess of account values, subject to
certain limitations. We reinsure 100% of certain variable annuity risks to a former affiliate.
Our reinsurance is diversified with a group of well-capitalized, highly rated reinsurers. We analyze recent trends in arbitration
and litigation outcomes in disputes, if any, with our reinsurers. We monitor ratings and evaluate the financial strength of our
reinsurers by analyzing their financial statements. In addition, the reinsurance recoverable balance due from each reinsurer is
evaluated as part of the overall monitoring process. Recoverability of reinsurance recoverable balances is evaluated based on
these analyses. We generally secure large reinsurance recoverable balances with various forms of collateral, including secured
trusts, funds withheld accounts and irrevocable letters of credit.
We reinsure, through 100% quota share reinsurance agreements, certain run-off long-term care and workers’ compensation
business that we have originally written. For products in our Run-off segment other than ULSG, we have periodically engaged
in reinsurance activities on an opportunistic basis.
The following table presents our ordinary course net reinsurance recoverables from unaffiliated third-party reinsurers as of
December 31, 2017.
The Travelers Co (2)
RGA
AXA
Munich Re
Swiss Re
Scor
Voya Financial, Inc.
Aegon NV
Optimum Re
Other
Total
_______________
Reinsurance
Recoverables
(In millions)
A.M. Best
Financial
Strength Rating (1)
$
677
299
243
227
214
207
162
148
77
327
A++
A+
B+
A+
A+
A+
A
A+
A_
$
2,581
(1) These financial strength ratings are the most currently available for our reinsurance counterparties, while the companies
listed are the parent companies to such counterparties, as there may be numerous subsidiary counterparties to each listed
parent.
(2) Relates to a block of workers compensation insurance policies reinsured in connection with MetLife’s acquisition of Travelers
from Citigroup.
In addition, in 2000, a block of long-term care policies was sold to Genworth Life Insurance Company and Genworth Life
Insurance Company of New York in an indemnity reinsurance transaction with a reinsurance recoverable of $6.5 billion at
35
December 31, 2017. See “— Long-Term Care Reinsurance and Indemnity.” The most currently available financial strength
rating is B- for both of these Genworth insurance companies.
Affiliated Reinsurance
We are required to calculate reserves for term life products and ULSG products pursuant to Regulation XXX and Guideline
AXXX, respectively. Affiliated reinsurance companies are affiliated insurance companies licensed under specific provisions of
insurance law of their respective jurisdictions, such as the Special Purpose Financial Captive law adopted by several states
including Delaware, and have a very narrow business plan that specifically restricts the majority or all of their activity to reinsuring
business from their affiliates. We are party to reinsurance agreements with a former affiliate in order to mitigate risk, as well as
free up capital, which can be used for diverse corporate purposes. Additionally, our reinsurance subsidiary, BRCD, was formed
to manage our capital and risk exposures and to support our various operations, through the use of affiliated reinsurance
arrangements and related reserve financing. See “Risk Factors — Risks Related to Our Business — We may not be able to take
credit for reinsurance, our statutory life insurance reserve financings may be subject to cost increases and new financings may
be subject to limited market capacity” and “Regulation — Insurance Regulation.”
Catastrophe Coverage
We have exposure to catastrophes which could contribute to significant fluctuations in our results of operations. We use
excess reinsurance agreements, under which the direct writing company reinsures risk in excess of a specific dollar value for
each policy within a class of policies, to provide greater diversification of risk and minimize exposure to larger risks. Such excess
reinsurance agreements include retention reinsurance agreements and quota share reinsurance agreements. Retention reinsurance
agreements provide for a portion of a risk to remain with the direct writing company, and quota share reinsurance agreements
provide for the direct writing company to transfer a fixed percentage of all risks of a class of policies. Our life insurance products
subject us to catastrophe risk which we do not reinsure other than through our ongoing mortality reinsurance program which
transfers risk at the individual policy level.
Long-Term Care Reinsurance and Indemnity
In 2005, our former parent, MetLife acquired Travelers from Citigroup. Travelers was redomesticated to Delaware in 2014,
merged with two affiliated life insurance companies and a former offshore, reinsurance subsidiary and renamed MetLife USA,
now BLIC. Prior to this acquisition, Travelers agreed to reinsure a 90% quota share of its long-term care insurance business to
certain affiliates of General Electric Company, which following a spin-off became part of Genworth Financial, Inc. (“Genworth”)
and subsequently agreed to reinsure the remaining 10% quota share of such long-term care insurance business to what became
Genworth. The applicable Genworth reinsurers, Genworth Life Insurance Company and Genworth Life Insurance Company of
New York, established trust accounts for our benefit to secure their obligations under such arrangements with qualifying collateral.
Although the Genworth reinsurers are primarily obligated for the liabilities of the long-term care insurance business, such
reinsurance arrangements do not relieve BLIC of its direct liability under the ceded long-term care insurance policies. In
connection with the acquisition of Travelers by MetLife, Citigroup agreed to indemnify MetLife for any losses and certain other
payment obligations MetLife might incur with respect to the long-term care insurance business reinsured by Genworth. Prior
to the Separation from MetLife, MetLife assigned its indemnification rights to us with the consent of Citigroup and, together
with MetLife, we agreed to comply with certain obligations relating to these indemnification rights in connection with the long-
term care insurance business. The long-term care insurance business of Travelers had reserves of $6.5 billion at December 31,
2017 and BLIC had reinsurance recoverables of $6.5 billion associated with the reinsurance transaction with Genworth at
December 31, 2017.
Sales Distribution
We distribute our annuity and life insurance products through a diverse network of independent distribution partners. Our
partners include over 400 national and regional brokerage firms, banks, other financial institutions and financial planners, in
connection with the sale of our annuity products, and general agencies, financial advisors, brokerage general agencies and
financial intermediaries, in connection with the distribution of our life insurance products. We believe this strategy will permit
us to maximize penetration of our target markets and distribution partners without incurring the fixed costs of maintaining a
proprietary distribution channel and will facilitate our ability to quickly comply with evolving regulatory requirements applicable
to the sale of our products. We discuss below the execution of our strategy, certain key strategic distribution relationships and
data with respect to the relative importance of our distribution channels.
Execution of our Strategy - Increasing Penetration
It is fundamental to our distribution strategy that we be among the most important manufacturers to each of our most
productive distribution partners. Our objective is to be one of the top annuity and life insurance product manufacturers for those
distributors who collectively produce 70%-80% of our annuity and life insurance deposits and premiums. In furtherance of our
36
strategy, we seek to differentiate ourselves from our competitors by providing our most productive distributors with focused
product, sales and technology support through our approximately 20 strategic relationship managers (“SRMs”) and our excess
of 200 internal and external wholesalers.
Strategic Relationship Managers
Our SRMs serve as the principal contact for our largest annuity and life insurance distributors and coordinate the
relationship between our wholesalers and the distributor. SRMs provide an enhanced level of service to partners that require
more resources to support their larger distribution network. SRMs are responsible for tracking and providing our key distributors
with sales and activity data. They participate in business planning sessions with our distributors and are critical in providing
us with insights into the product design, education and other support requirements of our principal distributors. They are also
responsible for addressing proactively relationship issues with our distributors. They work closely with our wholesalers.
Wholesalers
Our wholesalers are licensed sales representatives who are responsible for providing our distributors with product support
and facilitating the ease with which our distributors and customers do business with us. Our wholesalers are organized into
internal wholesalers and external wholesalers. Approximately 100 of our wholesalers, which we refer to as internal wholesalers,
support our distributors from our Charlotte, North Carolina corporate center where they are responsible for providing telephonic
call center and online support functions. Our approximately 100 field sales representatives, which we refer to as external
wholesalers, are responsible for providing on site face-to-face product and sales support to our distributors. The external
wholesalers have responsibility for a specific geographic region. In addition, we also have external wholesalers dedicated to
Primerica and MassMutual.
Strategic Distribution Relationships
We distribute our annuity products through a broad geographic network of over 400 independent distribution partners
including wire houses, which we group into distribution channels including national brokerage firms, regional brokerage
firms, banks and other financial institutions and independent financial planners. Our annuity distribution relationships have
an average tenure in excess of 10 years.
New Distribution Initiatives
In May 2017, we announced an expansion of our suite of Shield Annuities with the availability of our Shield Level 10SM
annuity. Shield Level 10SM was the first new product introduction following the launch of the Brighthouse Financial brand in
March 2017. Wells Fargo Advisors serves as the initial distributor for Shield Level 10SM.
In connection with the sale of MPCG to MassMutual, we entered into an agreement which would permit us to serve as the
exclusive manufacturer for certain proprietary products which would be offered through MassMutual’s career agent channel.
We partnered with MassMutual to develop the initial product distributed under this arrangement, the Index Horizons fixed
indexed annuity, and agreed on the terms of the related reinsurance.
Relative Channel Importance and Related Data
Our annuity and life insurance products are distributed through a diverse network of distribution relationships. In the tables
below we show the relative percentage of new premium production by our principal distribution channels for our annuity and
life insurance products.
The table below presents the percentage of ANP of our annuity products by distribution channel.
Channel
Banks/financial institutions
National brokerage firms
Regional brokerage firms
Independent financial planners
Other
Year Ended December 31, 2017
Percentage of ANP
Variable
Fixed
Shield
Annuities
Fixed Indexed
Annuity
Total
3%
1%
1%
24%
2%
—%
1%
1%
3%
—%
16%
4%
2%
36%
—%
—%
—%
—%
6%
—%
19%
6%
4%
69%
2%
The table below presents the percentage of ANP of our life insurance policies by distribution channel.
37
Channel
Brokerage general agencies
Financial intermediaries
General agencies
Financial advisors
Year Ended
December 31,
2017
Percentage of
ANP
80%
7%
11%
2%
Our top five distributors of variable annuity products produced 35%, 16%, 5%, 4% and 4% of our ANP of annuity products
for the year ended December 31, 2017.
Our top five distributors of life insurance policies produced 36%, 12%, 9%, 8% and 7% of our LIMRA (Life Insurance
Marketing and Research Association) production of life insurance policies for the year ended December 31, 2017. Revenues
derived from any customer did not exceed 10% of premiums, universal life and investment-type product policy fees and other
revenues for the years ended December 31, 2017, 2016 and 2015. Substantially all of our premiums, universal life and investment-
type product policy fees and other revenues originated in the U.S. Financial information, including revenues, expenses, adjusted
earnings, and total assets by segment, as well as premiums, universal life and investment-type product policy fees and other
revenues by major product groups, is provided in Note 2 of the Notes to the Consolidated and Combined Financial Statements.
Adjusted earnings is a performance measure that is not based on GAAP. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Non-GAAP and Other Financial Disclosures” for a definition of such measure.
Regulation
Index to Regulation
Overview
Insurance Regulation
Department of Labor and ERISA Considerations
Federal Tax Reform
Consumer Protection Laws
Regulation of Over-the-Counter Derivatives
Securities, Broker-Dealer and Investment Advisor Regulation
Environmental Considerations
Unclaimed Property
Page
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46
47
48
48
48
49
49
38
Overview
Our life insurance companies are regulated primarily at the state level, with some products and services also subject to
federal regulation. In addition, Brighthouse Financial, Inc. and our insurance subsidiaries are subject to regulation under the
insurance holding company laws of various U.S. jurisdictions. Furthermore, some of our operations, products and services are
subject to ERISA, consumer protection laws, securities, broker-dealer and investment advisor regulations, and environmental
and unclaimed property laws and regulations. See “Risk Factors — Regulatory and Legal Risks — Our insurance business is
highly regulated, and changes in regulation and in supervisory and enforcement policies may materially impact our capitalization
or cash flows, reduce our profitability and limit our growth.”
Insurance Regulation
State insurance regulation generally aims at supervising and regulating insurers, with the goal of protecting policyholders
and ensuring that insurance companies remain solvent. Insurance regulators have increasingly sought information about the
potential impact of activities in holding company systems as a whole and have adopted laws and regulations enhancing “group-
wide” supervision. See “— Holding Company Regulation” for information regarding an enterprise risk report.
Each of our insurance subsidiaries is licensed and regulated in each U.S. jurisdiction where it conducts insurance business.
BLIC is licensed to issue insurance products in all U.S. states (except New York), the District of Columbia, the Bahamas, Guam,
Puerto Rico, the British Virgin Islands and the U.S. Virgin Islands. BHNY is only licensed to issue insurance products in New
York, and NELICO is licensed in all U.S. states and the District of Columbia. The primary regulator of an insurance company,
however, is the insurance regulator in its state of domicile. Our insurance subsidiaries, Brighthouse Life Insurance Company,
BHNY and NELICO, are domiciled in Delaware, New York and Massachusetts, respectively, and regulated by the Delaware
Department of Insurance, the NYDFS and the Massachusetts Division of Insurance, respectively. In addition, BRCD, which
provides reinsurance to our insurance subsidiaries, is domiciled in Delaware and regulated by the Delaware Department of
Insurance.
The extent of such regulation varies, but most jurisdictions have laws and regulations governing the financial aspects and
business conduct of insurers. State laws in the U.S. grant insurance regulatory authorities broad administrative powers with
respect to, among other things:
•
•
licensing companies and agents to transact business;
calculating the value of assets to determine compliance with statutory requirements;
• mandating certain insurance benefits;
•
•
•
•
•
•
•
•
•
•
•
•
regulating certain premium rates;
reviewing and approving certain policy forms and rates;
regulating unfair trade and claims practices, including through the imposition of restrictions on marketing and sales
practices, distribution arrangements and payment of inducements, and identifying and paying to the states benefits and
other property that are not claimed by the owners;
regulating advertising and marketing of insurance products;
protecting privacy;
establishing statutory capital (including RBC) and reserve requirements and solvency standards;
specifying the conditions under which a ceding company can take credit for reinsurance in its statutory financial
statements (i.e., reduce its reserves by the amount of reserves ceded to a reinsurer);
fixing maximum interest rates on insurance policy loans and minimum rates for guaranteed crediting rates on life
insurance policies and annuity contracts;
adopting and enforcing suitability standards with respect to the sale of annuities and other insurance products;
approving changes in control of insurance companies;
restricting the payment of dividends and other transactions between affiliates; and
regulating the types, amounts and valuation of investments.
39
Each insurance subsidiary is required to file reports, generally including detailed annual financial statements, with insurance
regulatory authorities in each of the jurisdictions in which it does business, and its operations and accounts are subject to periodic
examination by such authorities. These subsidiaries must also file, and in many jurisdictions and in some lines of insurance
obtain regulatory approval for, rules, rates and forms relating to the insurance written in the jurisdictions in which they operate.
State and federal insurance and securities regulatory authorities and other state law enforcement agencies and attorneys
general from time to time may make inquiries regarding our compliance with insurance, securities and other laws and regulations
regarding the conduct of our insurance and securities businesses. We cooperate with such inquiries and take corrective action
when warranted. See Note 15 of the Notes to the Consolidated and Combined Financial Statements.
Holding Company Regulation
Insurance holding company laws and regulations vary from jurisdiction to jurisdiction, but generally require a controlled
insurance company (i.e., insurers that are subsidiaries of insurance holding companies) to register with state regulatory
authorities and to file with those authorities certain reports, including information concerning its capital structure, ownership,
financial condition, certain intercompany transactions and general business operations. The NAIC adopted revisions to the
NAIC Insurance Holding Company System Model Act (“Model Holding Company Act”) and the Insurance Holding Company
System Model Regulation (“Model Holding Company Regulation”) in December 2010 and December 2014. Certain of the
states, including Delaware, have adopted insurance holding company laws and regulations in a substantially similar manner
to the model law and regulation. Other states, including New York and Massachusetts, have adopted modified versions,
although their supporting regulation is substantially similar to the model regulation.
Insurance holding company regulations generally provide that no person, corporation or other entity may acquire control
of an insurance company, or a controlling interest in any parent company of an insurance company, without the prior approval
of such insurance company’s domiciliary state insurance regulator. Under the laws of each of the domiciliary states of our
insurance subsidiaries, any person acquiring, directly or indirectly, 10% or more of the voting securities of an insurance
company is presumed to have acquired “control” of the company. This statutory presumption of control may be rebutted by
a showing that control does not exist in fact. The state insurance regulators, however, may find that “control” exists in
circumstances in which a person owns or controls less than 10% of voting securities.
The laws and regulations regarding acquisition of control transactions may discourage potential acquisition proposals
and may delay, deter or prevent a change of control involving us, including through unsolicited transactions that some of our
shareholders might consider desirable.
The insurance company laws and regulations include a requirement that the ultimate controlling person of a U.S. insurer
file an annual enterprise risk report with the lead state of the insurance holding company system identifying risks likely to
have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system
as a whole. To date, all of the states where Brighthouse has domestic insurers have enacted this enterprise risk reporting
requirement.
State insurance statutes also typically place restrictions and limitations on the amount of dividends or other distributions
payable by insurance subsidiaries to their parent companies, as well as on transactions between an insurer and its affiliates.
Dividends in excess of prescribed limits and transactions above a specified size between an insurer and its affiliates require
the approval of the insurance regulator in the insurer’s state of domicile.
Under the Delaware Insurance Code, Brighthouse Life Insurance Company is permitted, without prior insurance regulatory
clearance, to pay a stockholder dividend as long as the amount of the dividend when aggregated with all other dividends in
the preceding 12 months does not exceed the greater of: (i) 10% of its surplus to policyholders as of the end of the immediately
preceding calendar year; or (ii) its net statutory gain from operations for the immediately preceding calendar year (excluding
realized capital gains), not including pro rata distributions of Brighthouse Life Insurance Company’s own securities.
Brighthouse Life Insurance Company will be permitted to pay a stockholder dividend in excess of the greater of such two
amounts only if it files notice of the declaration of such a dividend and the amount thereof with the Delaware Commissioner
and the Delaware Commissioner either approves the distribution of the dividend or does not disapprove the distribution within
30 days of its filing. In addition, any dividend that exceeds earned surplus (defined as “unassigned funds (surplus)”) as of the
immediately preceding calendar year requires insurance regulatory approval. Under the Delaware Insurance Code, the
Delaware Commissioner has broad discretion in determining whether the financial condition of a stock life insurance company
would support the payment of such dividends to its stockholders.
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Under the Massachusetts State Insurance Law, NELICO is permitted, without prior insurance regulatory clearance, to
pay a stockholder dividend as long as the aggregate amount of the dividend, when aggregated with all other dividends paid
in the preceding 12 months, does not exceed the greater of: (i) 10% of its surplus to policyholders as of the end of the
immediately preceding calendar year; or (ii) its statutory net gain from operations for the immediately preceding calendar
year, not including pro rata distributions of NELICO’s own securities. NELICO will be permitted to pay a dividend in excess
of the greater of such two amounts only if it files notice of the declaration of such a dividend and the amount thereof with the
Massachusetts Commissioner of Insurance (the “Massachusetts Commissioner”) and the Massachusetts Commissioner either
approves the distribution of the dividend or does not disapprove the distribution within 30 days of its filing. In addition, any
dividend that exceeds earned surplus (defined as “unassigned funds (surplus)”) as of the last filed annual statutory statement
requires insurance regulatory approval. Under the Massachusetts State Insurance Law, the Massachusetts Commissioner has
broad discretion in determining whether the financial condition of a stock life insurance company would support the payment
of such dividends to its stockholders.
Effective for dividends paid during 2016 and going forward, the New York Insurance Law was amended permitting
BHNY, without prior insurance regulatory clearance, to pay stockholder dividends to its parent in any calendar year based on
either of two standards. Under one standard, BHNY is permitted, without prior insurance regulatory clearance, to pay dividends
out of earned surplus (defined as positive “unassigned funds (surplus)”), excluding 85% of the change in net unrealized capital
gains or losses (less capital gains tax), for the immediately preceding calendar year), in an amount up to the greater of: (i)
10% of its surplus to policyholders as of the end of the immediately preceding calendar year, or (ii) its statutory net gain from
operations for the immediately preceding calendar year (excluding realized capital gains), not to exceed 30% of surplus to
policyholders as of the end of the immediately preceding calendar year. In addition, under this standard, BHNY may not,
without prior insurance regulatory clearance, pay any dividends in any calendar year immediately following a calendar year
for which its net gain from operations, excluding realized capital gains, was negative. Under the second standard, if dividends
are paid out of other than earned surplus, BHNY may, without prior insurance regulatory clearance, pay an amount up to the
lesser of: (i) 10% of its surplus to policyholders as of the end of the immediately preceding calendar year, or (ii) its statutory
net gain from operations for the immediately preceding calendar year (excluding realized capital gains). In addition, BHNY
will be permitted to pay a dividend to its parent in excess of the amounts allowed under both standards only if it files notice
of its intention to declare such a dividend and the amount thereof with the New York Superintendent of Financial Services
(the “Superintendent”) and the Superintendent either approves the distribution of the dividend or does not disapprove the
dividend within 30 days of its filing. Under New York Insurance Law, the Superintendent has broad discretion in determining
whether the financial condition of a stock life insurance company would support the payment of such dividends to its
stockholders.
Under BRCD’s plan of operations, no dividend or distribution may be made by BRCD without the prior approval of the
Delaware Commissioner. During the year ended December 31, 2017, BRCD paid an extraordinary cash dividend of
$535 million to Brighthouse Life Insurance Company.
See “Risk Factors — Capital-Related Risks — As a holding company, Brighthouse Financial, Inc. depends on the ability
of its subsidiaries to pay dividends.” See also “Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities — Dividend Policy” and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Liquidity and Capital Resources — The Company — Capital — Restrictions on Dividends and
Returns of Capital from Insurance Subsidiaries” for further information regarding such limitations.
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Own Risk and Solvency Assessment Model Act
In September 2012, the NAIC adopted the Risk Management and Own Risk and Solvency Assessment Model Act
(“ORSA”), which has been enacted by our insurance subsidiaries’ domiciliary states. ORSA requires that insurers maintain a
risk management framework and conduct an internal own risk and solvency assessment of the insurer’s material risks in normal
and stressed environments. The assessment must be documented in a confidential annual summary report, a copy of which
must be made available to regulators as required or upon request. To date, all of the states where Brighthouse has domestic
insurers have enacted ORSA.
Federal Initiatives
Although the insurance business in the United States is primarily regulated by the states, federal initiatives often have an
impact on our business in a variety of ways. From time to time, federal measures are proposed which may significantly and
adversely affect the insurance business. These areas include financial services regulation, securities regulation, derivatives
regulation, pension regulation, privacy, tort reform legislation and taxation. In addition, various forms of direct and indirect
federal regulation of insurance have been proposed from time to time, including proposals for the establishment of an optional
federal charter for insurance companies. See “Risk Factors — Regulatory and Legal Risks — Our insurance business is highly
regulated, and changes in regulation and in supervisory and enforcement policies may materially impact our capitalization or
cash flows, reduce our profitability and limit our growth.”
Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) effected the most far-reaching overhaul
of financial regulation in the U.S. in decades. The full impact of Dodd-Frank on us will depend on the numerous rulemaking
initiatives required or permitted by Dodd-Frank and the various studies mandated by Dodd-Frank, a number of which remain
to be completed.
Dodd-Frank established the Federal Insurance Office (“FIO”) within the Department of the Treasury, which has the
authority to participate in the negotiations of international insurance agreements with foreign regulators for the United States,
as well as to collect information about the insurance industry, negotiate covered agreements with one or more foreign
governments and recommend prudential standards. While not having a general supervisory or regulatory authority over the
business of insurance, the director of this office performs various functions with respect to insurance, including serving as a
non-voting member of the Financial Stability Oversight Council (“FSOC”) and making recommendations to the FSOC
regarding insurers to be designated for more stringent regulation. On December 12, 2013, the FIO issued a report, mandated
by Dodd-Frank, which, among other things, urged the states to modernize and promote greater uniformity in insurance
regulation. However, the report also discussed potential federal solutions if states fail to modernize and improve regulation
and some of the report’s recommendations, for instance, favored a greater federal role in monitoring financial stability and
identifying issues or gaps in the regulation of large national and internationally active insurers.
Under the provisions of Dodd-Frank relating to the resolution or liquidation of certain types of financial institutions, if
Brighthouse or another financial institution were to become insolvent or were in danger of defaulting on its obligations, it
could be compelled to undergo liquidation with the Federal Deposit Insurance Corporation (“FDIC”) as receiver. For this new
regime to be applicable, a number of determinations would have to be made, including that a default by the affected company
would have serious adverse effects on financial stability in the U.S. Under this new regime an insurance company such as
Brighthouse Life Insurance Company, BHNY or NELICO would be resolved in accordance with state insurance law. If the
FDIC were to be appointed as the receiver for another type of company (including an insurance holding company such as
Brighthouse Financial, Inc.), the liquidation of that company would occur under the provisions of the new liquidation authority,
and not under the Bankruptcy Code, which ordinarily governs liquidations. The FDIC’s purpose under the liquidation regime
is to mitigate the systemic risks the institution’s failure poses, which is different from that of a bankruptcy trustee under the
Bankruptcy Code. In an FDIC-managed liquidation, the holders of such company’s debt could in certain respects be treated
differently than under the Bankruptcy Code. As required by Dodd-Frank, the FDIC has established rules relating to the priority
of creditors’ claims and the potentially dissimilar treatment of similarly situated creditors. These provisions could apply to
some financial institutions whose outstanding debt securities we hold in our investment portfolios.
The Trump administration has released a memorandum that generally delayed all pending regulations from publication
in the Federal Register pending their review and approval by a department or agency head appointed or designated by President
Trump. President Trump has also issued an executive order that calls for a comprehensive review of Dodd-Frank and requires
the Secretary of the Treasury to consult with the heads of the member agencies of FSOC to identify any laws, regulations or
requirements that inhibit federal regulation of the financial system in a manner consistent with the core principles identified
in the executive order. On June 8, 2017, the U.S. House of Representatives passed the Financial CHOICE Act of 2017, which
proposes to amend or repeal various sections of Dodd-Frank. This proposed legislation will now be considered by the U.S.
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Senate. We cannot predict what other proposals may be made or what legislation may be introduced or enacted, or what impact
any such legislation may have on our business, results of operations and financial condition.
On September 22, 2017, the U.S. Department of the Treasury and the Office of the U.S. Trade Representative entered
into a bilateral covered agreement on insurance and reinsurance with the European Union (the “Covered Agreement”), which
addresses, among other things, reinsurance collateral requirements and insurance group supervision. In connection with the
announcement of its signature, the U.S. Department of the Treasury and the Office of the U.S. Trade Representative released
a “Statement of the United States on the Covered Agreement with the European Union” (the “Policy Statement”). To comply
with the terms of the Covered Agreement, the Policy Statement encourages each U.S. state to adopt applicable credit for
reinsurance laws and regulations and to phase out the amount of collateral required for full credit for reinsurance cessions to
European Union reinsurers. It also states that the U.S. expects that the group capital calculation under development by the
NAIC will satisfy the Covered Agreement’s group capital assessment requirement. The Covered Agreement is to be fully
applicable to the U.S. and the European Union 60 months after signature. However, some parts of the agreement are subject
to further procedural requirements, and so full implementation of the Covered Agreement may occur, if at all, only after a
significant period of time.
Guaranty Associations and Similar Arrangements
Most of the jurisdictions in which we are admitted to transact business require life insurers doing business within the
jurisdiction to participate in guaranty associations, which are organized to pay contractual benefits owed pursuant to insurance
policies issued by impaired, insolvent or failed insurers, or those that may become impaired, insolvent or fail, for example,
following the occurrence of one or more catastrophic events. These associations levy assessments, up to prescribed limits, on
all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers
in the lines of business in which the impaired, insolvent or failed insurer is engaged. Some states permit member insurers to
recover assessments paid through full or partial premium tax offsets.
In December of 2017, the NAIC approved revisions to its Life and Health Insurance Guaranty Association Model Act
governing assessments for long-term care insurance. The revisions include a 50/50 split between life and health carriers for
future long term care insolvencies, the inclusion of HMOs in the assessment base, and no change to the premium tax offset.
Several states are now considering legislation to codify these changes into law, and more states are expected to propose
legislation in their 2018 legislative sessions.
In the past five years, the aggregate assessments levied against us have not been material. We have established liabilities
for guaranty fund assessments that we consider adequate. See “Risk Factors — Regulatory and Legal Risks — State insurance
guaranty associations” and Note 15 of the Notes to the Consolidated and Combined Financial Statements for additional
information on the guaranty association assessments.
Insurance Regulatory Examinations and Other Activities
As part of their regulatory oversight process, state insurance departments conduct periodic detailed examinations of the
books, records, accounts, and business practices of insurers domiciled in their states. State insurance departments also have
the authority to conduct examinations of non-domiciliary insurers that are licensed in their states. During the years ended
December 31, 2017, 2016 and 2015, Brighthouse Life Insurance Company, BHNY and NELICO did not receive any material
adverse findings resulting from state insurance department examinations of them or their respective insurance subsidiaries.
Regulatory authorities in a small number of states, Financial Industry Regulatory Authority, Inc. (“FINRA”) and,
occasionally, the SEC, have had investigations or inquiries relating to sales of individual life insurance policies, annuities or
other products by Brighthouse Life Insurance Company, BHNY and NELICO. These investigations have focused on the
conduct of particular financial services representatives, the sale of unregistered or unsuitable products, the misuse of client
assets, and sales and replacements of annuities and certain riders on such annuities. Over the past several years, these and a
number of investigations by other regulatory authorities were resolved for monetary payments and certain other relief, including
restitution payments. We may continue to receive, and may resolve, further investigations and actions on these matters in a
similar manner.
In addition, claims payment practices by insurance companies have received increased scrutiny from regulators. See
Note 15 of the Notes to the Consolidated and Combined Financial Statements for further information regarding unclaimed
property inquiries and related litigation and sales practices claims.
Policy and Contract Reserve Adequacy Analysis
Annually, our insurance subsidiaries, including BRCD, are required to conduct an analysis of the adequacy of all statutory
reserves. In each case, a qualified actuary must submit an opinion which states that the statutory reserves make adequate
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provision, according to accepted actuarial standards of practice, for the anticipated cash flows required by the contractual
obligations and related expenses of the insurance subsidiary. The adequacy of the statutory reserves is considered in light of
the assets held by the insurer with respect to such reserves and related actuarial items including, but not limited to, the investment
earnings on such assets, and the consideration anticipated to be received and retained under the related policies and contracts.
An insurance company may increase reserves in order to submit an opinion without qualification. Since the inception of this
requirement, our insurance subsidiaries, which are required by their states of domicile to provide these opinions, have provided
such opinions without qualifications.
NAIC
The NAIC is an organization, whose mission is to assist state insurance regulatory authorities in serving the public interest
and achieving the insurance regulatory goals of its members, the state insurance regulatory officials. Through the NAIC, state
insurance regulators establish standards and best practices, conduct peer reviews, and coordinate their regulatory oversight.
The NAIC provides standardized insurance industry accounting and reporting guidance through its Accounting Practices and
Procedures Manual (the “Manual”), which states have largely adopted by regulation. However, statutory accounting principles
continue to be established by individual state laws, regulations and permitted practices, which may differ from the Manual.
Changes to the Manual or modifications by the various state insurance departments may impact our statutory capital and
surplus.
In 2015, the NAIC commissioned an initiative to identify changes to the statutory framework for variable annuities that
can remove or mitigate the motivation for insurers to engage in captive reinsurance transactions. In September 2015, a third-
party consultant engaged by the NAIC provided the NAIC with a preliminary report covering several sets of recommendations
regarding AG 43 and RBC C3 Phase II reserve requirements. These recommendations generally focus on (i) mitigating the
asset-liability accounting mismatch between hedge instruments and statutory instruments and statutory liabilities, (ii) removing
the non-economic volatility in statutory capital charges and the resulting solvency ratios and (iii) facilitating greater
harmonization across insurers and products for greater comparability. An updated variable annuity reserve and capital
framework proposal was presented at the August 2016 NAIC meeting, followed by a 90-day comment period on the proposal.
This updated proposal included the initial recommendations from 2015, but also some new aspects. The standard scenario
floor for reserves may incorporate multiple paths. The stochastic calculations may include alternative calibration criteria for
equities and other market risk factors, and the RBC C3 Phase II component may reflect a new level of capitalization. The
NAIC is continuing its consideration of these recommendations. These recommendations, if adopted, would likely apply to
all existing business and may materially change the sensitivity of reserve and capital requirements to capital markets including
interest rate, equity markets and volatility, as well as prescribed assumptions for policyholder behavior. It is not possible at
this time to predict whether the amount of reserves or capital required to support our variable annuity contracts would increase
or decrease if the NAIC adopts any new model laws, regulations and/or other standards applicable to variable annuity business
after considering such recommendations, nor is it possible to predict the materiality of any such increase or decrease. It is also
not possible to predict the extent to which any such model laws, regulations and/or other standards would affect the effectiveness
and design of our risk mitigation and hedging programs. Furthermore, no assurances can be given to whether any such model
laws, regulations and/or other standards will be adopted or to the timing of any such adoption.
The NAIC has adopted a new approach for the calculation of life insurance reserves, known as principle-based reserving
(“PBR”). PBR became operative on January 1, 2017 in those states where it has been adopted, to be followed by a three-year
phase-in period for business issued on or after this date. With respect to the states in which our insurance subsidiaries are
domiciled, the Delaware Department of Insurance implemented PBR on January 1, 2017, and the NYDFS has publicly stated
its intention to implement this approach, subject to a working group of the NYDFS establishing the necessary reserves
safeguards and the adopting of enabling legislation by the New York legislature. Massachusetts has not yet adopted PBR.
The NAIC as well as certain state regulators are currently considering implementing regulations that would apply an
impartial conduct standard similar to the Fiduciary Rule to recommendations made in connection with certain annuities and,
in the case of New York, life insurance policies. In particular, on December 27, 2017, the NYDFS proposed regulations that
would adopt a “best interest” standard for the sale of life insurance and annuity products in New York. The likelihood of
enactment of these regulations is uncertain at this time, but if implemented, these regulations could have significant adverse
effects on our business and consolidated results of operations.
The NAIC is considering revisions to RBC factors for bonds, real estate, common stock and collateral pledged to support
Federal Home Loan Bank (“FHLB”) advances, as well as developing RBC charges for operational and longevity risk. We
cannot predict the impact of any potential proposals that may result from these studies.
We cannot predict the capital and reserve impacts or compliance costs, if any, that may result from the above initiatives.
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Surplus and Capital; Risk-Based Capital
The NAIC has established regulations that provide minimum capitalization requirements based on RBC formulas for
insurance companies. Insurers are required to maintain their capital and surplus at or above minimum levels. Regulators have
discretionary authority, in connection with the continued licensing of an insurer, to limit or prohibit the insurer’s sales to
policyholders if, in their judgment, the regulators determine that such insurer has not maintained the minimum surplus or
capital or that the further transaction of business will be hazardous to policyholders. Each of our insurance subsidiaries are
subject to RBC requirements and other minimum statutory capital and surplus requirements imposed under the laws of its
respective jurisdiction of domicile. RBC is based on a formula calculated by applying factors to various asset, premium, claim,
expense and statutory reserve items. The formula takes into account the risk characteristics of the insurer and is calculated on
an annual basis. The major categories of risk involved are asset risk, insurance risk, interest rate risk, market risk and business
risk, including equity, interest rate and expense recovery risks associated with variable annuities that contain guaranteed
minimum death and living benefits. The formula is used as an early warning regulatory tool to identify possible inadequately
capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. State insurance
laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose
total adjusted capital does not meet or exceed certain RBC levels. As of the date of the most recent annual statutory financial
statements filed with insurance regulators, the total adjusted capital of each of our insurance subsidiaries was in excess of
each of those RBC levels. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations —
Liquidity and Capital Resources” and “Risk Factors — Regulatory and Legal Risks — A decrease in the RBC ratio (as a result
of a reduction in statutory surplus and/or increase in RBC requirements) of our insurance subsidiaries could result in increased
scrutiny by insurance regulators and rating agencies and have a material adverse effect on our results of operations and financial
condition.”
Regulation of Investments
Each of our insurance subsidiaries is subject to state laws and regulations that require diversification of investment
portfolios and limit the amount of investments that an insurer may have in certain asset categories, such as below investment
grade fixed income securities, real estate equity, other equity investments, and derivatives. Failure to comply with these laws
and regulations would cause investments exceeding regulatory limitations to be treated as non-admitted assets for purposes
of measuring surplus and, in some instances, would require divestiture of such non-qualifying investments. We believe that
the investments made by each of our insurance subsidiaries complied, in all material respects, with such regulations at
December 31, 2017.
Cybersecurity Regulation
On February 16, 2017, the NYDFS announced the adoption of a new cybersecurity regulation for financial services
institutions, including banking and insurance entities, under its jurisdiction. The new regulation became effective on March
1, 2017 and will be implemented in stages commencing 180 days later. Among other things, this new regulation requires these
entities to establish and maintain a cybersecurity program designed to protect the consumers’ private data. The new regulation
specifically provides for: (i) implementation and maintenance of, and a governance framework for overseeing, the cybersecurity
program and a cybersecurity policy based on a risk assessment to be periodically conducted; (ii) development of access controls
and other technology standards for data protection, and the monitoring and testing of the cybersecurity program, in accordance
with the entity’s risk assessment; (iii) implementation of policies and procedures designed to ensure the security of private
data accessible to or held by third-party service providers; (iv) minimum standards for cyber breach responses, including an
incident response plan, preservation of data to respond to such breaches, and notice to NYDFS of material events; and (v)
annual certifications of regulatory compliance to the NYDFS. In addition to New York’s cybersecurity regulation, the NAIC
adopted the Insurance Data Security Model Law in October 2017. Under the model law, companies that are compliant with
the NYDFS cybersecurity regulation are deemed also to be in compliance with the model law. The purpose of the model law
is to establish standards for data security and for the investigation and notification of insurance commissioners of cybersecurity
events involving unauthorized access to, or the misuse of, certain nonpublic information.
NYDFS Insurance Regulation 210
On March 19, 2018, NYDFS Insurance Regulation 210: Life Insurance and Annuity Non-Guaranteed Elements, will take
effect. The regulation establishes standards for the determination and readjustment of non-guaranteed elements (“NGEs”) that
may vary at the insurer’s discretion for life insurance policies and annuity contracts delivered or issued in New York. In
addition, the regulation establishes guidelines for related disclosure to NYDFS and policy owners. The regulation applies to
all individual life insurance policies, individual annuity contracts and certain group life insurance and group annuity certificates.
NGEs include such policy elements as expense rates and interest crediting rates.
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Department of Labor and ERISA Considerations
We manufacture annuities for third parties to sell to tax-qualified pension plans, retirement plans and IRAs, as well as
individual retirement annuities sold to individuals that are subject to ERISA or the Internal Revenue Code of 1986, as amended
(the “Code”). Also, a portion of our in-force life insurance products are held by tax-qualified pension and retirement plans. While
we currently believe manufacturers do not have as much exposure to ERISA and the Code as distributors, certain activities are
subject to the restrictions imposed by ERISA and the Code, including the requirement under ERISA that fiduciaries of a Plan
subject to Title I of ERISA (an “ERISA Plan”) must perform their duties solely in the interests of the ERISA plan participants
and beneficiaries, and those fiduciaries may not cause a covered plan to engage in certain prohibited transactions. The applicable
provisions of ERISA and the Code are subject to enforcement by the DOL, the Internal Revenue Service (“IRS”) and the Pension
Benefit Guaranty Corporation (“PBGC”).
In addition, the prohibited transaction rules of ERISA and the Code generally restrict the provision of investment advice to
ERISA qualified plans, plan participants and IRAs if the investment recommendation results in fees paid to an individual advisor,
the firm that employs the advisor or their affiliates that vary according to the investment recommendation chosen.
The DOL issued new regulations on April 6, 2016 that became applicable on June 9, 2017 (the “Fiduciary Rule”). As initially
adopted, these rules substantially expand the definition of “investment advice,” thereby broadening the circumstances under
which distributors and manufacturers can be considered fiduciaries under ERISA or the Code and subject to an impartial or “best
interests” standard in providing such advice. Pursuant to the final rule, certain communications with plans, plan participants and
IRA holders, including the marketing of products, and marketing of investment management or advisory services, could be
deemed fiduciary investment advice, thus, causing increased exposure to fiduciary liability if the distributor does not recommend
what is in the client’s best interests.
In connection with the promulgation of the Fiduciary Rule, the DOL also issued amendments to certain of its prohibited
transaction exemptions, and issued BIC, a new prohibited transaction exemption that imposes more significant disclosure and
contract requirements to certain transactions involving ERISA plans, plan participants and IRAs. The new and amended
exemptions increase fiduciary requirements and fiduciary liability exposure for transactions involving ERISA plans, plan
participants and IRAs. The application of the BIC contract and point of sale disclosures required under BIC and the changes
made to prohibited transaction exemption 84-24 were delayed until July 1, 2019, except for the impartial conduct standards (i.e.,
compliance with the “best interest” standard, reasonable compensation, and no misleading statements), which are applicable as
of June 9, 2017. Contracts entered into prior to June 9, 2017 are generally “grandfathered” and, as such, are not subject to the
requirements of the rule and related exemptions. To retain “grandfathered” status for annuity products, no investment
recommendations may be made after the applicability date of the final regulation with respect to such annuity products that were
sold to ERISA plans or IRAs.
MetLife sold MPCG, its former Retail segment’s proprietary distribution channel, in July 2016 to MassMutual to complete
a transition to an independent third-party distribution model. We will not be engaging in direct distribution of retail products,
including IRA products and retail annuities sold into ERISA plans and IRAs, and therefore we anticipate that we will have
limited exposure to the new DOL regulations, as the application of the vast majority of the provisions of the new DOL regulations
are targeted at such retail products. Specifically, the most onerous of the requirements under the DOL Fiduciary Rule, as currently
adopted, relate to BIC. The DOL guidance makes clear that distributors, not manufacturers, are primarily responsible for BIC
compliance. However, we will be asked by our distributors, to assist them with preparing the voluminous disclosures required
under BIC. Furthermore, if we want to retain the “grandfathered” status described above of current contracts, we will be limited
in the interactions we can have directly with customers and the information that can be provided. We also anticipate that we will
need to undertake certain additional tasks in order to comply with certain of the exemptions provided in the DOL regulations,
including additional compliance reviews of material shared with distributors, wholesaler and call center training and product
reporting and analysis. See “Risk Factors — Regulatory and Legal Risks — Our insurance business is highly regulated, and
changes in regulation and in supervisory and enforcement policies may materially impact our capitalization or cash flows, reduce
our profitability and limit our growth.”
On February 3, 2017, President Trump, in a memorandum to the Secretary of Labor, requested that the DOL prepare an
updated economic and legal analysis concerning the likely impact of the new rules, and possible revisions to the rules. In response
to President Trump’s request, on June 29, 2017, the DOL issued a request for information related to the Fiduciary Rule and also
the DOL’s new and amended exemptions that were published in conjunction with the final rule. The request for information
sought public input that could lead to new exemptions or changes and revisions to the final rule. On November 29, 2017, the
DOL finalized an 18 month delay, from January 1, 2018 to July 1, 2019, of the applicability of significant portions of the
previously proposed exemptions (including BIC and prohibited transaction exemption 84-24), to afford sufficient time to review
further the previously adopted rules and such exemptions. The DOL also updated its enforcement policy to indicate that the
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DOL and IRS will not pursue claims, until July 1, 2019, against fiduciaries who are working diligently and in good faith to
comply with the final Fiduciary Rule or treat those fiduciaries as being in violation of the final rule.
While we continue to analyze the impact of the final regulations on our business and work diligently to comply with the
final rule, we anticipate that we will need to undertake certain additional tasks in order to comply with certain of the exemptions
provided in the DOL regulations, including additional compliance reviews of material shared with distributors, wholesaler and
call center training and product reporting and analysis.
The change of administration, the DOL’s June 29, 2017 request for information related to the Fiduciary Rule and related
exemptions, and the November 29, 2017 extension of the applicability of many of the conditions of the proposed and revised
exemptions leaves uncertainty over whether the regulations will be substantially modified or repealed. This uncertainty could
create confusion among our distribution partners, which could negatively impact product sales. We cannot predict what other
proposals may be made, what legislation or regulations may be introduced or enacted, or what impact any such legislation or
regulations may have on our business, results of operations and financial condition.
On July 11, 2016, the DOL, the IRS and the PBGC proposed revisions to the Form 5500, the form used for ERISA annual
reporting. The DOL included the proposed revisions in its Fall 2017 regulatory agenda released December 14, 2017. The revisions
affect employee pension and welfare benefit plans, including our ERISA plans and require audits of information, self-directed
brokerage account disclosure requirements and additional extensive disclosure. We cannot predict the effect these proposals, if
enacted, will have on our business, or what other proposals may be made, what legislation, regulations or exemptions may be
introduced or enacted or the impact of any such legislation, regulations or exemptions on our results of operations and financial
condition.
In addition, the DOL has issued a number of regulations that increase the level of disclosure that must be provided to plan
sponsors and participants. The participant disclosure regulations and the regulations which require service providers to disclose
fee and other information to plan sponsors took effect in 2012. In John Hancock Mutual Life Insurance Company v. Harris Trust
and Savings Bank (1993), the U.S. Supreme Court held that certain assets in excess of amounts necessary to satisfy guaranteed
obligations under a participating group annuity general account contract are “plan assets.” Therefore, these assets are subject to
certain fiduciary obligations under ERISA, which requires fiduciaries to perform their duties solely in the interest of ERISA
plan participants and beneficiaries. On January 5, 2000, the Secretary of Labor issued final regulations indicating, in cases where
an insurer has issued a policy backed by the insurer’s general account to or for an employee benefit plan, the extent to which
assets of the insurer constitute plan assets for purposes of ERISA and the Code. The regulations apply only with respect to a
policy issued by an insurer on or before December 31, 1998 (“Transition Policy”). No person will generally be liable under
ERISA or the Code for conduct occurring prior to July 5, 2001, where the basis of a claim is that insurance company general
account assets constitute plan assets. An insurer issuing a new policy that is backed by its general account and is issued to or
for an employee benefit plan after December 31, 1998 will generally be subject to fiduciary obligations under ERISA, unless
the policy is a guaranteed benefit policy.
The regulations indicate the requirements that must be met so that assets supporting a Transition Policy will not be considered
plan assets for purposes of ERISA and the Code. These requirements include detailed disclosures to be made to the employee
benefits plan and the requirement that the insurer must permit the policyholder to terminate the policy on 90 days’ notice and
receive without penalty, at the policyholder’s option, either (i) the unallocated accumulated fund balance (which may be subject
to market value adjustment), or (ii) a book value payment of such amount in annual installments with interest. We have taken
and continue to take steps designed to ensure compliance with these regulations.
Federal Tax Reform
On December 22, 2017, President Trump signed the Tax Act into law, resulting in sweeping changes to the tax code. The
Tax Act reduced the corporate tax rate to 21%, reduced interest expense deductibility, increased capitalization amounts for
deferred acquisition costs, eliminated the corporate alternative minimum tax, provided for determining reserve deductions as
92.81% of statutory reserves, and reduced the dividend received deduction. Most of the changes in the Tax Act are effective as
of January 1, 2018. We expect our adjusted earnings effective tax rate to be in the high teens going forward.
The reduction in the corporate rate will require a one-time remeasurement of certain deferred tax items, as well as our
liability to MetLife under the Tax Receivables Agreement. For the estimated impact of the Tax Act on our financial statements,
including the estimated impact resulting from the remeasurement of our deferred tax assets and liabilities, and the impact of the
Tax Act on our liability to MetLife under the Tax Receivables Agreement. See Note 13 of the Notes to the Consolidated and
Combined Financial Statements for additional information. Our actual results may materially differ from our current estimate
due to, among other things, further guidance that may be issued by U.S. tax authorities or regulatory bodies and/or changes in
interpretations and assumptions we have preliminarily made. We will continue to analyze the Tax Act to finalize its financial
statement impact.
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Consumer Protection Laws
Numerous federal and state laws affect our earnings and activities, including federal and state consumer protection laws.
As part of Dodd-Frank, Congress established the Consumer Financial Protection Bureau (“CFPB”) to supervise and regulate
institutions that provide certain financial products and services to consumers. Although the consumer financial services subject
to the CFPB’s jurisdiction generally exclude insurance business of the kind in which we engage, the CFPB does have authority
to regulate non-insurance consumer services we may provide.
Regulation of Over-the-Counter Derivatives
Dodd-Frank includes a framework of regulation of the over-the-counter (“OTC”) derivatives markets which requires clearing
of certain types of currently traded OTC derivatives and imposes additional costs, including new reporting and margin
requirements, and will likely impose additional regulation on us. Our costs of risk mitigation are increasing under Dodd-Frank.
For example, Dodd-Frank imposes requirements, including the requirement to pledge initial margin (i) for “OTC-cleared”
transactions (OTC derivatives that are cleared and settled through central clearing counterparties), and (ii) for “OTC-bilateral”
transactions (OTC derivatives that are bilateral contracts between two counterparties) entered into after the phase-in period. The
initial margin requirements for OTC-bilateral transactions will likely be applicable to us in September 2020. The increased
margin requirements, combined with increased capital charges for our counterparties and central clearinghouses with respect to
non-cash collateral, will likely require increased holdings of cash and highly liquid securities with lower yields causing a reduction
in income and less favorable pricing for OTC-cleared and OTC-bilateral transactions. Centralized clearing of certain OTC
derivatives exposes us to the risk of a default by a clearing member or clearinghouse with respect to our cleared derivative
transactions. We use derivatives to mitigate a wide range of risks in connection with our businesses, including the impact of
increased benefit exposures from certain of our annuity products that offer guaranteed benefits. We have always been subject
to the risk that hedging and other management procedures might prove ineffective in reducing the risks to which insurance
policies expose us or that unanticipated policyholder behavior or mortality, combined with adverse market events, could produce
economic losses beyond the scope of the risk management techniques employed. Any such losses could be increased by higher
costs of writing derivatives (including customized derivatives) and the reduced availability of customized derivatives that might
result from the implementation of Dodd-Frank and comparable international derivatives regulations.
Dodd-Frank also expanded the definition of “swap” and mandated the SEC and the U.S. Commodity Futures Trading
Commission (“CFTC”) study whether “stable value contracts” should be treated as swaps. Pursuant to the new definition and
the Commissions’ interpretive regulations, products offered by our insurance subsidiaries other than stable value contracts might
also be treated as swaps, even though we believe otherwise. Should such products become regulated as swaps, we cannot predict
how the rules would be applied to them or the effect on such products’ profitability or attractiveness to our clients. Federal
banking regulators have recently adopted new rules that will apply to certain qualified financial contracts, including many
derivatives contracts, securities lending agreements and repurchase agreements, with certain banking institutions and certain of
their affiliates. These new rules, which will begin to go into effect in 2019, will generally require the banking institutions and
their applicable affiliates to include contractual provisions in their qualified financial contracts that limit or delay certain rights
of their counterparties including counterparties’ default rights (such as the right to terminate the contracts or foreclose on
collateral) and restrictions on assignments and transfers of credit enhancements (such as guarantees) arising in connection with
the banking institution or an applicable affiliate becoming subject to a bankruptcy, insolvency, resolution or similar proceeding.
To the extent that any of the derivatives, securities lending agreements or repurchase agreements that we enter into are subject
to these new rules, it could limit our recovery in the event of a default and increase our counterparty risk.
Securities, Broker-Dealer and Investment Advisor Regulation
Some of our activities in offering and selling variable insurance products, as well as certain fixed interest rate contracts, are
subject to extensive regulation under the federal securities laws administered by the SEC. We issue variable annuity contracts
and variable life insurance policies through separate accounts that are registered with the SEC as investment companies under
the Investment Company Act. Each registered separate account is generally divided into sub-accounts, each of which invests in
an underlying mutual fund which is itself a registered investment company under the Investment Company Act. In addition, the
variable annuity contracts and variable life insurance policies issued by these registered separate accounts are registered with
the SEC under the Securities Act of 1933, as amended (the “Securities Act”). We also issue fixed interest rate or index-linked
contracts with features that require them to be registered as securities under the Securities Act. Brighthouse Securities, LLC
(“Brighthouse Securities”) is registered with the SEC as a broker-dealer under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) and approved as a member of, and subject to regulation by, FINRA, and is registered as a broker-dealer
in all applicable U.S. states. Its business will be to serve as the principal underwriter and exclusive distributor of the SEC-
registered life insurance policies and annuity contracts issued by its affiliates, and the principal underwriter of the registered
mutual funds advised by its affiliated investment advisor and used to fund variable annuity contracts and variable life insurance
policies. Another one of our subsidiaries is registered as an investment advisor with the SEC under the Investment Advisers Act
48
of 1940, and its primary business is to serve as investment advisor to the registered mutual funds that underlie our variable
annuity contracts and variable life insurance policies. Certain variable contract separate accounts sponsored by our subsidiaries
are exempt from registration under the Securities Act and the Investment Company Act, but may be subject to other provisions
of the federal securities laws. In addition, because our variable contracts are required to be sold by broker-dealers that are FINRA
members, sales of our variable contracts also are subject to the requirements of FINRA rules.
Federal, state and other securities regulatory authorities, including the SEC and FINRA, may from time to time make
inquiries and conduct examinations regarding our compliance with securities and other laws and regulations. We will cooperate
with such inquiries and examinations and take corrective action when warranted. See “— Insurance Regulation — Insurance
Regulatory Examinations and Other Activities.”
Federal and state securities laws and regulations are primarily intended to ensure the integrity of the financial markets, to
protect investors in the securities markets, and to protect investment advisory or brokerage clients, and generally grant regulatory
agencies broad rulemaking and enforcement powers, including the power to limit or restrict the conduct of business for failure
to comply with such laws and regulations.
Environmental Considerations
As an owner and operator of real property, we are subject to extensive federal, state and local environmental laws and
regulations. Inherent in such ownership and operation is also the risk that there may be potential environmental liabilities and
costs in connection with any required remediation of such properties. In addition, we hold equity interests in companies that
could potentially be subject to environmental liabilities. We routinely have environmental assessments performed with respect
to real estate being acquired for investment and real property to be acquired through foreclosure. We cannot provide assurance
that unexpected environmental liabilities will not arise. However, based on information currently available to us, we believe
that any costs associated with compliance with environmental laws and regulations or any remediation of such properties will
not have a material adverse effect on our results of operations or financial condition.
Unclaimed Property
We are subject to the laws and regulations of states and other jurisdictions concerning identification, reporting and
escheatment of unclaimed or abandoned funds, and are subject to audit and examination for compliance with these requirements.
Company Ratings
Financial strength ratings represent the opinion of rating agencies regarding the ability of an insurance company to pay
obligations under insurance policies and contracts in accordance with their terms. Credit ratings indicate the rating agency’s
opinion regarding a debt issuer’s ability to meet the terms of debt obligations in a timely manner. They are important factors in
our overall funding profile and ability to access certain types of liquidity and capital. The level and composition of regulatory
capital at the subsidiary level and our equity capital are among the many factors considered in determining our financial strength
ratings and credit ratings. Each agency has its own capital adequacy evaluation methodology, and assessments are generally
based on a combination of factors. Rating agencies may increase the frequency and scope of their credit reviews, may request
additional information from the companies that they rate and may adjust upward the capital and other requirements employed
in the rating agency models for maintenance of certain ratings levels. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and Capital Resources — The Company — Rating Agencies” and “Risk
Factors — Risks Related to Our Business — A downgrade or a potential downgrade in our financial strength or credit ratings
could result in a loss of business and materially adversely affect our financial condition and results of operations.”
Competition
Both the annuities and the life insurance markets are very competitive, with many participants and no one company
dominating the market for all products. According to the American Council of Life Insurers (November 2016), the U.S. life
insurance industry is made up of 814 companies with sales and operations across the country. We compete with major, well-
established stock and mutual life insurance companies in all of our product offerings. Our Annuities segment also faces
competition from other financial service providers that focus on retirement products and advice. Our competitive positioning
overall is focused on access to distribution channels, product features and financial strength.
Principal competitive factors in the annuities business include product features, distribution channel relationships, ease of
doing business, annual fees, investment performance, speed to market, brand recognition and the financial strength ratings of
the insurance company. In particular for the variable annuity business, our living benefit rider product features and the quality
of our relationship management and wholesaling support are key drivers in our competitive position. In the fixed annuity business,
the crediting rates and guaranteed payout product features are the primary competitive factors, while for index-linked annuities
49
the competitiveness of the crediting methodology is the primary driver. For income annuities, the competitiveness of the lifetime
income payment amount is generally the principal factor.
Principal competitive factors in the life insurance business include customer service and distribution channel relationships,
price, the financial strength ratings of our insurance subsidiaries and financial stability. For term life, we also focus on our
relatively low pricing compared to our competitors, high internal death benefit risk retention and policy conversion guidelines.
Employees
At December 31, 2017, we had approximately 1,260 employees. We believe that our relations with our employees are
satisfactory.
Our Executive Officers
The following table presents certain information regarding our executive officers.
Name
Eric T. Steigerwalt
Anant Bhalla
Peter M. Carlson
Christine M. DeBiase
Myles J. Lambert
Conor Murphy
John L. Rosenthal
Age
Position
56
39
53
50
43
49
57
President and Chief Executive Officer
Executive Vice President and Chief Financial Officer
Executive Vice President and Chief Operating Officer
Executive Vice President, Chief Administrative Officer and General Counsel
Executive Vice President and Chief Distribution and Marketing Officer
Executive Vice President and Chief Product and Strategy Officer
Executive Vice President and Chief Investment Officer
Set forth below is biographical information about each of the executive officers named in the table above.
Eric T. Steigerwalt
Business Experience:
•
President and Chief Executive Officer; Director, Brighthouse Financial, Inc. (August 2016 - present)
• MetLife (May 1998 - August 2017)
• Executive Vice President, U.S. Retail (September 2012 - August 2017)
• Executive Vice President and interim Chief Financial Officer (November 2011 - September 2012)
• Executive Vice President, Chief Financial Officer of U.S. Business (January 2010 - November 2011)
•
•
•
Senior Vice President and Chief Financial Officer of U.S. Business (September 2009 - January 2010)
Senior Vice President and Treasurer (May 2007 - September 2009)
Senior Vice President and Chief Financial Officer of Individual Business (July 2003 - May 2007)
• Vice President, AXA S.A., a financial services and insurance company (May 1993 - May 1998)
Anant Bhalla
Business Experience:
• Executive Vice President and Chief Financial Officer, Brighthouse Financial, Inc. (August 2016 - present)
• MetLife (April 2014 - August 2017)
•
Senior Vice President and Chief Financial Officer of Retail business (July 2014 - August 2017)
• Chief Financial Officer of Retail business (April 2014 - July 2014)
• American International Group, a financial services and insurance company (October 2012 - April 2014)
•
•
Senior Managing Director, Global Strategy (January 2014 - April 2014)
Senior Vice President and Chief Risk Officer, Global Consumer business (October 2012 - January 2014)
50
•
Founding Partner, Bhalla Capital Partners, an investment management and strategic advisory firm (January 2012 -
September 2012)
• Lincoln Financial Group (October 2009 - December 2011)
•
•
Senior Vice President, Chief Risk Officer and Treasurer (January 2011 - December 2011)
Senior Vice President, Treasurer (October 2009 - December 2010)
Peter M. Carlson
Business Experience:
• Executive Vice President and Chief Operating Officer, Brighthouse Financial, Inc. (June 2017 - present)
• Executive Vice President and Chief Accounting Officer, MetLife (May 2009 - August 2017)
• Wells Fargo & Company/Wachovia Corporation, a financial services company (August 2002 - April 2009)
• Executive Vice President and Deputy Controller, Wells Fargo (January 2009 - April 2009)
• Executive Vice President, Corporate Controller and Principal Accounting Officer, Wachovia (June 2007 - December
2008)
•
•
Senior Vice President, Interim Corporate Controller and Principal Accounting Officer, Wachovia (October 2006 -
May 2007)
Senior Vice President, Accounting and Finance, Wachovia (August 2002 - September 2006)
Christine M. DeBiase
Business Experience:
• Brighthouse Financial, Inc. (August 2016 - present)
• Executive Vice President, Chief Administrative Officer and General Counsel (February 2018 - present)
• Executive Vice President, General Counsel, Corporate Secretary and Interim Head of Human Resources (May
2017 - November 2017)
• Executive Vice President, General Counsel and Corporate Secretary (August 2016 - February 2018)
• MetLife (December 1996 - August 2017)
•
Senior Vice President and Associate General Counsel, U.S. Retail (August 2014 - August 2017)
• Associate General Counsel, Retail (October 2013 - August 2014)
• Vice President and Secretary (November 2010 - September 2013)
• Associate General Counsel, Regulatory Affairs (November 2009 - November 2010)
• Vice President, Compliance (May 2006 - November 2009)
Myles J. Lambert
Business Experience:
• Executive Vice President and Chief Marketing and Distribution Officer, Brighthouse Financial, Inc. (August 2016 -
present)
• MetLife (July 2012 - August 2017)
•
•
Senior Vice President, U.S. Retail Distribution and Marketing (April 2016 - August 2017)
Senior Vice President, Head of MPCG Northeast Region (August 2014 - April 2016)
• Vice President, MPCG Northeast Region (July 2012 - August 2014)
• Executive Director and head of insurance and annuity business, Morgan Stanley, a financial services company (June
2011 - July 2012)
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Conor Murphy
Business Experience:
• Executive Vice President and Head of Client Solutions and Strategy, Brighthouse Financial, Inc. (September 2017 -
present)
• MetLife (September 2000 - August 2017)
• Chief Financial Officer, Latin America region (January 2012 - August 2017)
• Head of International Strategy and M&A (January 2011 - December 2011)
• Chief Financial Officer, Europe, Middle East and Africa (EMEA) region (January 2011 - June 2011)
• Head of Investor Relations (January 2008 - December 2010)
• Chief Financial Officer, MetLife Investments (June 2002 - December 2007)
• VP - Investments Audit (December 2000 - June 2002)
John L. Rosenthal
Business Experience:
• Executive Vice President and Chief Investment Officer, Brighthouse Financial, Inc. (September 2016 - present)
• MetLife (1984 - August 2017)
•
•
Senior Managing Director, head of global portfolio management (2011 - August 2017)
Senior Managing Director, head of core securities (2004 - 2011)
• Managing Director, co-head of fixed income and equity investments (2000 - 2004)
Trademarks
We have established a portfolio of trademarks in the United States that we consider important in the marketing of our
products and services, including for our name, "Brighthouse Financial." We have also filed other trademark applications in the
United States, including for our logo design and potential taglines.
Available Information and the Brighthouse Website
Our website is located at www.brighthousefinancial.com. We use our website as a routine channel for distribution of important
information, including news releases, analyst presentations, financial information and corporate governance information. We
post filings on our website as soon as practicable after they are electronically filed with, or furnished to, the SEC, including our
annual and quarterly reports on Forms 10-K and 10-Q and current reports on Form 8-K; our proxy statements; and any amendments
to those reports or statements. All such postings and filings are available on the “Investor Relations” portion of our website free
of charge. The SEC’s website, www.sec.gov, contains reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC.
We may use our website as a means of disclosing material information and for complying with our disclosure obligations
under Regulation Fair Disclosure promulgated by the SEC. These disclosures are included on our website in the “Investor
Relations” or “Newsroom” sections. Accordingly, investors should monitor these portions of our website, in addition to following
Brighthouse’s press releases, SEC filings, public conference calls and webcasts.
Information contained on or connected to any website referenced in this Annual Report on Form 10-K is not incorporated
by reference in this Annual Report on Form 10-K unless expressly noted.
Item 1A. Risk Factors
You should carefully consider the factors described below, in addition to the other information set forth in this Annual Report
on Form 10-K. These risk factors are important to understanding the contents of this Form 10-K and our other reports. If any
of the following events occur, our business, financial condition and operating results may be materially adversely affected. In
that event, the trading price of our securities could decline, and you could lose all or part of your investment.
The materialization of any risks and uncertainties set forth below or identified in “Note Regarding Forward-Looking
Statements” contained in this Annual Report on Form 10-K and our other filings with the SEC or those that are presently
52
unforeseen or that we currently believe to be immaterial could result in significant adverse effects on our financial condition,
results of operations and cash flows. See “Note Regarding Forward-Looking Statements.”
Risks Related to Our Business
Differences between actual experience and actuarial assumptions and the effectiveness of our actuarial models may adversely
affect our financial results, capitalization and financial condition
Our earnings significantly depend upon the extent to which our actual claims experience and benefit payments on our
products are consistent with the assumptions we use in setting prices for our products and establishing liabilities for future policy
benefits and claims. Such amounts are established based on estimates by actuaries of how much we will need to pay for future
benefits and claims. To the extent that actual claims and benefits experience is less favorable than the underlying assumptions
we used in establishing such liabilities, we could be required to increase our liabilities. We make assumptions regarding
policyholder behavior at the time of pricing and in selecting and utilizing the guaranteed options inherent within our products
based in part upon expected persistency of the products, which change the probability that a policy or contract will remain in
force from one period to the next. Persistency within our annuities business may be significantly affected by the value of GMxBs
contained in many of our variable annuities being higher than current account values in light of poor equity market performance
or extended periods of low interest rates, as well as other factors. Persistency could be adversely affected generally by
developments affecting policyholder perception of us, including perceptions arising from adverse publicity. The pricing of certain
of our variable annuity products that contain certain living benefit guarantees is also based on assumptions about utilization
rates, or the percentage of contracts that will utilize the benefit during the contract duration, including the timing of the first
lifetime income withdrawal. Results may vary based on differences between actual and expected benefit utilization. A material
increase in the valuation of the liability could result to the extent emerging and actual experience deviates from these policyholder
option utilization assumptions, and in certain circumstances this deviation may impair our solvency.
We use actuarial models to assist us in establishing reserves for liabilities arising from our insurance policies and annuity
contracts. We periodically review the effectiveness of these models, their underlying logic and assumptions and, from time to
time, implement refinements to our models based on these reviews. We only implement refinements after rigorous testing and
validation and, even after such validation and testing our models remain subject to inherent limitations. Accordingly, no assurances
can be given as to whether or when we will implement refinements to our actuarial models, and, if implemented, the extent of
such refinements. Furthermore, if implemented, any such refinements could cause us to increase the reserves we hold for our
insurance policy and annuity contract liabilities which would adversely affect our risk-based capital ratio and the amount of
variable annuity assets we hold in excess of CTE95 and, in the case of any material model refinements, could materially adversely
affect our financial condition and results of operations.
Due to the nature of the underlying risks and the uncertainty associated with the determination of liabilities for future policy
benefits and claims, we cannot determine precisely the amounts which we will ultimately pay to settle our liabilities. Such
amounts may vary materially from the estimated amounts, particularly when those payments may not occur until well into the
future. We evaluate our liabilities periodically based on accounting requirements, which change from time to time, the assumptions
and models used to establish the liabilities, as well as our actual experience. If the liabilities originally established for future
benefit payments and claims prove inadequate, we must increase them. Such increases would adversely affect our earnings and
could have a material adverse effect on our results of operations and financial condition, including our capitalization and our
ability to receive statutory dividends from our operating insurance companies, as well as a material adverse effect on the financial
strength ratings which are necessary to support our product sales. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Policyholder Liabilities.”
Guarantees within certain of our products may decrease our earnings, decrease our capitalization, increase the volatility of
our results, result in higher risk management costs and expose us to increased counterparty risk
Certain of the variable annuity products we offer include guaranteed benefits, including GMDBs, GMWBs and GMABs.
While we continue to have GMIBs in force with respect to which we are obligated to perform, we no longer offer GMIBs. We
also offer index-linked annuities with guarantees against a defined floor on losses. These guarantees are designed to protect
contract holders against significant changes in equity markets and interest rates. Any such periods of significant and sustained
negative or low separate account returns, increased equity volatility, or reduced interest rates could result in an increase in the
valuation of our liabilities associated with those products. In addition, if the separate account assets consisting of fixed income
securities, which support the guaranteed index-linked return feature are insufficient to reflect a period of sustained growth in
the equity-index on which the product is based, we may be required to support such separate accounts with assets from our
general account and increase our liabilities. An increase in these liabilities would result in a decrease in our net income and could
materially and adversely affect our financial condition, including our capitalization and our ability to receive statutory dividends
from our operating insurance companies, as well as the financial strength ratings which are necessary to support our product
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sales. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations
— Actuarial Assumption Review.”
Additionally, we make assumptions regarding policyholder behavior at the time of pricing and in selecting and utilizing the
guaranteed options inherent within our products (e.g., utilization of option to annuitize within a GMIB product). An increase in
the valuation of the liability could result to the extent emerging and actual experience deviates from these policyholder option
utilization assumptions. On an annual basis we review key actuarial assumptions used to record our variable annuity liabilities,
including those assumptions regarding policyholder behavior. Changes to assumptions based on our annual actuarial assumption
review in future years could result in an increase in the liabilities we record for future policy benefits and claims to a level that
may materially and adversely affect our results of operations and financial condition which, in certain circumstances, could
impair our solvency. See “Business — Risk Management Strategies” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Results of Operations — Actuarial Assumption Review.”
We also use hedging and other risk management strategies to mitigate the liability exposure primarily related to capital
market risks. These strategies involve the use of reinsurance and derivatives, which may not be completely effective. For example,
in the event that reinsurers, derivative counterparties or central clearinghouses are unable or unwilling to pay, we remain liable
for the guaranteed benefits. See “— Our variable annuity exposure management strategy may not be effective, may result in net
income volatility and may negatively affect our statutory capital.”
In addition, capital markets hedging instruments may not effectively offset the costs of guarantees or may otherwise be
insufficient in relation to our obligations. Furthermore, we are subject to the risk that changes in policyholder behavior or
mortality, combined with adverse market events, could produce economic losses not addressed by the risk management techniques
employed. These, individually or collectively, may have a material adverse effect on our results of operations, including net
income, capitalization, financial condition or liquidity including our ability to receive dividends from our insurance operating
companies. See “Business — Segments and Corporate & Other — Annuities — Current Products — Variable Annuities” for
further consideration of the risks associated with guaranteed benefits.
Our variable annuity exposure management strategy may not be effective, may result in net income volatility and may
negatively affect our statutory capital
We have recently completed the process of modifying our variable annuity exposure management strategy to emphasize as
an objective the mitigation of the potential adverse effects of changes in equity markets and interest rates on our statutory
capitalization and statutory distributable cash flows. The principal focus of our exposure risk management program is to maintain
assets supporting our variable annuity contract guarantees at the Variable Annuity Target Funding Level, which we intend to be
CTE95.
We intend to hold assets supporting our variable annuity contracts at our Variable Annuity Target Funding Level to sustain
asset adequacy during modest market downturns without the use of derivative instruments and, accordingly, reduce the need for
hedging the daily or weekly fluctuations from small movements in capital markets. We focus our hedging activities primarily
on mitigating the risk from larger movements in capital markets, which may deplete contract holder account values and may
increase long-term guarantee claims. We also intend to make greater use of longer dated derivative instruments. However, our
hedging strategy may not be fully effective. In connection with our exposure risk management program we may determine to
seek the approval of applicable regulatory authorities to permit us to increase our hedge limits consistent with those contemplated
by the program. No assurance can be given that the approvals we request, if any, will be obtained and whether any such approvals
would be subject to qualifications, limitations or conditions. In addition, the hedging instruments we enter into may not effectively
offset the costs of variable annuity contract guarantees or may otherwise be insufficient in relation to our obligations. If our
capital is depleted in the event of persistent market downturns, we will need to replenish it by holding additional capital, which
we may have allocated for other uses, or purchasing additional hedging protection through the use of more expensive derivatives
with strike levels at the current market level. Under our hedging strategy, changes from period to period in the valuation of our
policyholder benefits and claims and net derivative gains (losses) may result in more significant volatility, which in certain
circumstances could be material, to our results of operations and financial condition under GAAP and our statutory capital levels
than has been the case historically.
In addition, estimates and assumptions we make in connection with hedging activities may fail to reflect or correspond to
our actual long-term exposure in respect of our guarantees. Further, the risk of increases in the costs of our guarantees not covered
by our hedging and other capital and risk management strategies may become more significant due to changes in policyholder
behavior driven by market conditions or other factors. The use of assets and derivative instruments may not effectively mitigate
the effect of changes in policyholder behavior.
Finally, the cost of our hedging program may be greater than anticipated because adverse market conditions can limit the
availability and increase the costs of the derivatives we intend to employ and such costs may not be recovered in the pricing of
54
the underlying products we offer. The above factors, individually or collectively, may have a material adverse effect on our
results of operations, financial condition, capitalization and liquidity. See “— Guarantees within certain of our products may
decrease our earnings, decrease our capitalization, increase the volatility of our results, result in higher risk management costs
and expose us to increased counterparty risk.” See also “Business — Risk Management Strategies” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Actuarial Assumption
Review.”
Our ULSG asset requirement target may not ensure we have sufficient assets to meet our future ULSG policyholder obligations
and may result in net income volatility
We actively manage the market risk sensitivity related to our in-force ULSG exposure specifically to adapt to changes in
interest rates.
We have utilized our NY Regulation 126 Cash Flow Testing (“ULSG CFT”) modeling approach as the basis for setting our
ULSG asset requirement target for our affiliated reinsurance companies. For the business that remains in the operating companies,
we set our ULSG asset requirement target to equal the actuarially determined statutory reserves under stressed conditions, which,
taken together with our ULSG asset requirement target of our affiliated reinsurers, comprises our total ULSG asset requirement
target (“ULSG Target”). Under this approach we assume that interest rates remain flat or decline as compared to current levels
and our actuarial assumptions include a provision for adverse deviation.
We seek to mitigate exposure to interest rate risk associated with these liabilities by maintaining ULSG Assets at or in excess
of our ULSG Target in different interest rate environments. We define “ULSG Assets” as (i) total general account assets supporting
statutory reserves and capital, and (ii) interest rate derivative instruments dedicated to mitigate ULSG interest rate exposures.
Our ULSG Target is sensitive to the actual and future expected level of long-term U.S. interest rates. If interest rates fall,
our ULSG Target increases, and if interest rates rise, our ULSG Target declines. We primarily use interest rate swaps to better
protect statutory capitalization from potential losses due to an increase in reserves to achieve our ULSG Target in lower interest
rate environments. We have implemented a dedicated interest rate risk mitigation program for our ULSG business. This risk
mitigation strategy may negatively impact our GAAP equity and net income in circumstances in which interest rates are rising.
Under rising interest rates, our ULSG Target will likely decline, whereas our reported ULSG GAAP liabilities are predominately
insensitive to market conditions.
This risk mitigation strategy will likely result in higher net income volatility due to the insensitivity of GAAP liabilities to
changes in interest rates. Our interest rate derivative instruments may not effectively offset the costs of our ULSG policyholder
obligations or may otherwise be insufficient in relation to our objectives. In addition, the assumptions we make in connection
with our risk mitigation strategy may fail to reflect or correspond to actual long-term exposure to our ULSG policyholder
obligations. If our liquid investments are depleted we will need to replenish our liquid portfolio by selling higher-yielding less
liquid assets, which we may have allocated for other uses. The above factors, individually or collectively, may have a material
adverse effect on our results of operations, financial condition, capitalization or liquidity. See “Business — Risk Management
Strategies — ULSG Market Risk Exposure Management.”
We may be required to hold additional statutory reserves against our variable annuities as a result of AG 43, which could
impair our ability to make distributions to our shareholders
We are required to calculate the statutory reserves which support our variable annuity products in conformity with AG 43.
The principal components of the AG 43 reserve calculation are a calculation referred to as CTE utilizing stochastic analysis
across 1,000 capital market scenarios and a deterministic calculation based on a single standard scenario (“Standard Scenario”).
The reserves we carry for our variable annuity contracts are required under AG 43 to include the greater of the CTE or the
Standard Scenario. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity
and Capital Resources — Parent Company — Constraints on Parent Company Liquidity.”
We intend to support our variable annuity contracts with assets which are $2.0 billion to $3.0 billion in excess of the average
amount of assets required under CTE95. Under our Base Case Scenario (which, although we believe reasonable, does not
incorporate all capital markets and other scenarios relevant to asset adequacy and reserving) in the near term we anticipate the
assets we hold to support our variable annuity contracts at CTE95 will exceed the amount required by AG 43. Under this scenario,
we anticipate that beginning in approximately 2021 under AG 43 as currently in effect the Standard Scenario Reserve Amount
will exceed the amount that would be required to be held consistent with CTE95 (although still less than CTE95 plus $2.0 billion
to $3.0 billion), and that the amount of such excess will increase materially in subsequent years.
During the period that the Standard Scenario Reserve Amount materially exceeds CTE95, our insurance subsidiaries’ RBC
ratios and surplus will be adversely affected to the extent we make distributions to our shareholders. Notwithstanding this impact,
and although no assurances can be given, under our Base Case Scenario we believe that during this period our excess reserving
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requirements under the standard scenario will allow us to maintain our Combined RBC ratio, surplus and financial strength
ratings at levels necessary to market and sell our products in accordance with our business plan. If anticipated regulatory reform
fails to bring AG 43 calculations in line with the NAIC’s current RBC C3 Phase II requirements, which require us to hold assets
to support our variable annuity contracts at a CTE90 standard, we may be required to pay extraordinary dividends from
Brighthouse Life Insurance Company, which would be subject to regulatory approval, in order to make distributions to our
shareholders. Furthermore, absent such regulatory reform, we may seek regulatory relief or engage in transactions, including
restructuring or financing transactions, to mitigate the effect of the standard scenario on the surplus and RBC ratios of our
insurance subsidiaries.
The primary objective of our variable annuity exposure management program is to mitigate the impact on our statutory
balance sheet from any increase in CTE95 total asset requirements under capital market stress conditions. We seek to accomplish
this by using derivatives instruments together with holding $2.0 billion to $3.0 billion in excess of the CTE95 requirement to
fund the first dollar increase in CTE95 requirements under stressed capital market conditions. We do not currently intend our
exposure management program to address any potential increase in excess standard scenario requirements above CTE95 under
stressed market conditions. Under moderate to extreme market conditions, this may result in deterioration in the RBC ratio of
our insurance subsidiaries, until capital markets recover, although under these conditions we still expect to maintain the RBC
ratio of our insurance subsidiaries in excess of minimum regulatory requirements. Our current intentions notwithstanding, we
may, in the future, opportunistically consider adding incremental hedge protection to mitigate the impact of capital market stress
conditions on standard scenario reserve funding requirements in excess of CTE95.
No assurances can be given that the assumptions underlying our Base Case Scenario can or will be realized. In addition,
our liquidity, statutory capitalization, results of operations and financial condition may be affected by a broad range of capital
market scenarios, which, depending on whether they positively or adversely affect account values, could materially positively
or adversely affect our reserving requirements under AG 43. See “Business — Risk Management Strategies” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Actuarial Assumption
Review.”
A sustained period of low equity market prices and interest rates that are lower than those we assumed when we issued our
variable annuity products could have a material adverse effect on our results of operations, capitalization and financial
condition
Future policy benefit liabilities for GMDBs and GMLBs under our variable annuity contracts are based on the value of the
benefits we expect to be payable under such contracts in excess of the contract holders’ projected account balances. We determine
the fees we charge for providing these guarantees in substantial part on the basis of assumptions we make with respect to the
growth of the account values relating to these contracts, including assumptions with respect to investment performance. If the
actual growth in account values differs from our initial assumptions we may need to increase or decrease the amount of future
benefit liabilities we record to the extent that other factors we consider in estimating the expected value of benefits payable,
including policyholder behavior, do not offset the impact of changes in our assumptions with respect to investment performance.
Although extreme declines or shocks in equity markets and interest rates can increase the level of reserves we need to hold to
fund guarantees, other types of economic scenarios can also impact the adequacy of our reserves. For example, certain scenarios
involving sustained stagnation in equity markets and low interest rates would adversely affect growth in account values and
could require us to materially increase our benefit liabilities. As a result, in the absence of incremental management actions and
not taking into account the effects of new business, our ability to retain the ratings necessary to market and sell our products,
as well as our ability to repay or refinance indebtedness for borrowed money, could be materially adversely affected and our
solvency could be impaired.
Elements of our business strategy are new and may not be effective in accomplishing our objectives
Our objective is to leverage our competitive strengths to distinguish ourselves in the individual life insurance and annuity
markets and, over the longer term, to generate more distributable cash from our business. We seek to achieve this by being a
focused product manufacturer with an emphasis on independent distribution, while having the goal of achieving a competitive
expense ratio through financial discipline. We intend to achieve our goals by focusing on target market segments, concentrating
on product manufacturing, maintaining a strong balance sheet and using the scale of our seasoned in-force business to support
the effectiveness of our risk management program, and focusing on operating cost and flexibility. See “Business — Overview
— Our Business Strategy.”
There can be no assurance that our strategy will be successful as it may not adequately alleviate the risks relating to less
diverse product offerings; volatility of, and capital requirements with respect to, variable annuities; risk of loss with respect to
use of derivatives in hedging transactions; and greater dependence on a relatively small number of independent distributors to
market our products and generate most of our sales. Furthermore, such distributions may be subject to differing commission
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structures depending on the product sold and there can be no assurance that these new commission structures will be acceptable.
See “— General Risks — We may experience difficulty in marketing and distributing products through our distribution channels.”
We may also be unable to reduce operating costs and enhance efficiencies, at least initially, due to the increased costs as a result
of our Separation from MetLife, as well as the cost and duration of transitional services agreements. See “Certain Relationships
and Related Person Transactions.” For these reasons, no assurances can be given that we will be able to execute our strategy or
that our strategy will achieve our objectives.
We incurred significant indebtedness in connection with the Separation and have incurred other indebtedness that for a
period of time will not provide us with liquidity or interest-expense tax deductions and the terms of which could restrict our
operations and use of funds that may result in a material adverse effect on our results of operations and financial condition
We incurred substantial indebtedness in connection with the Separation in the form of debt securities issued to investors
and bank debt from third-party lenders. These initial borrowings, and any further borrowings, may reduce our capacity to access
credit markets for additional liquidity until such time as our equity and credit position are strengthened. We used a significant
portion of the proceeds of these initial borrowings to make a distribution to MetLife as partial consideration for MetLife’s transfer
of assets to Brighthouse and, accordingly, we are required to service the initial borrowings with cash at Brighthouse and dividends
from our insurance subsidiaries and other operating subsidiaries. The funds needed to service these initial borrowings will not
be available to meet any short-term liquidity needs we may have, invest in our business or pay dividends on our common stock.
Furthermore, Brighthouse Financial, Inc. was incorporated in 2016 and our life insurance subsidiaries were transferred to it on
July 28, 2017. Pursuant to current IRS regulations, Brighthouse Financial, Inc. will not be permitted to join in the filing of a
U.S. consolidated federal income tax return with our insurance subsidiaries for a period of five taxable years following the
Distribution. Additionally, the Tax Act generally limits the deductibility of interest payments to a percentage of a taxpayer’s
taxable income (except to the extent of the taxpayer’s interest income). As a result, we may not initially be able to fully deduct
the interest payments on certain indebtedness we incurred at the Brighthouse Financial, Inc. level in connection with the Separation
or certain other borrowings from the taxable income of our insurance subsidiaries.
On December 2, 2016, we entered into a $2.0 billion five-year senior unsecured revolving credit facility that matures on
December 2, 2021 (the “Revolving Credit Facility”) and, on July 21, 2017, we entered into a $600 million senior unsecured
term loan facility that matures on December 2, 2019 (the “2017 Term Loan Facility” and, together with the Revolving Credit
Facility, the “Brighthouse Credit Facilities”). In August 2017, we borrowed the full $600 million under the 2017 Term Loan
Facility and, on June 22, 2017, we issued $1.5 billion aggregate principal amount of 3.700% senior notes due 2027 (the “2027
Senior Notes”) and $1.5 billion aggregate principal amount of 4.700% senior notes due 2047 (the “2047 Senior Notes” and,
together with the 2027 Senior Notes, the “Senior Notes”) to third-party investors.
We have historically relied upon MetLife for working capital requirements on a short-term basis and for other financial
support functions. We are no longer able to rely on MetLife’s earnings, assets or cash flow, and we are responsible for servicing
our own debt, obtaining and maintaining sufficient working capital and paying dividends. We may not generate sufficient funds
to service our debt and meet our business needs, such as funding working capital or the expansion of our operations. In addition,
our substantial leverage could put us at a competitive disadvantage compared to our competitors that are less leveraged. Our
substantial leverage could also impede our ability to withstand downturns in our industry or the economy in general.
Our failure to comply with the agreements relating to our outstanding indebtedness, including as a result of events beyond
our control, could result in an event of default that could materially and adversely affect our business, financial condition,
results of operations or cash flows.
If there were an event of default under any of the agreements relating to our outstanding indebtedness, including the Revolving
Credit Facility, the 2017 Term Loan Facility, the Senior Notes and a new $10.0 billion financing arrangement which consists of
credit-linked notes each with a term of 20 years entered into in April 2017 by BRCD and a pool of highly rated third-party
reinsurers (the “Reinsurance Financing Arrangement”) we may not be able to incur additional indebtedness under the Revolving
Credit Facility and the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and
payable immediately.
The Brighthouse Credit Facilities and the Reinsurance Financing Arrangement contain certain administrative, reporting,
legal and financial covenants, including in certain cases requirements to maintain a specified minimum consolidated net worth
and to maintain a ratio of indebtedness to total capitalization not in excess of a specified percentage, and limitations on the dollar
amount of indebtedness that may be incurred by our subsidiaries, which could restrict our operations and use of funds. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources
— Parent Company — Capital.” Failure to comply with the covenants in the Revolving Credit Facility or fulfill the conditions
to borrowings, or the failure of lenders to fund their lending commitments (whether due to insolvency, illiquidity or other reasons)
in the amounts provided for under the terms of the Revolving Credit Facility, would restrict the ability to access the Revolving
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Credit Facility when needed and, consequently, could have a material adverse effect on our liquidity, results of operations and
financial condition.
Our ability to make payments on and to refinance our indebtedness, including the debt retained or incurred in connection
with the Separation, as well as any future indebtedness that we may incur, will depend on our ability to generate cash in the
future from operations, financings or asset sales. Our ability to generate cash to meet our debt obligations in the future is sensitive
to capital market returns, primarily due to our variable annuity business. Overall, our ability to generate cash is subject to general
economic, financial market, competitive, legislative, regulatory, client behavioral, and other factors that are beyond our control.
The lenders who hold our debt could also accelerate amounts due in the event that we default, which could potentially
trigger a default or acceleration of the maturity of our other debt. We cannot assure you that our assets or cash flow would be
sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default, which could
have a material adverse effect on our ability to continue to operate as a going concern. If we are not able to repay or refinance
our debt as it becomes due, we may be forced to take disadvantageous actions, including significant business and legal entity
restructuring, limited new business investment, selling assets or dedicating an unsustainable level of our cash flow from operations
to the payment of principal and interest on our indebtedness. In addition, our ability to withstand competitive pressures and to
react to changes in the insurance industry could be impaired. Further, if we are unable to repay, refinance or restructure our
secured indebtedness, the holders of such indebtedness could proceed against any collateral securing that indebtedness.
A downgrade or a potential downgrade in our financial strength or credit ratings could result in a loss of business and
materially adversely affect our financial condition and results of operations
Financial strength ratings are published by various nationally recognized statistical rating organizations (“NRSROs”) and
similar entities not formally recognized as NRSROs. They indicate the NRSROs’ opinions regarding an insurance company’s
ability to meet contract holder and policyholder obligations, and are important to maintaining public confidence in our products
and our competitive position. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations
— Liquidity and Capital Resources — The Company — Rating Agencies” for additional information regarding our financial
strength ratings, including current rating agency ratings and outlooks.
Downgrades in our financial strength ratings or changes to our ratings outlooks could have a material adverse effect on our
financial condition and results of operations in many ways, including:
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reducing new sales of insurance products and annuity products;
adversely affecting our relationships with independent sales intermediaries;
increasing the number or amount of policy surrenders and withdrawals by contract holders and policyholders;
requiring us to reduce prices for many of our products and services to remain competitive;
providing termination rights for the benefit of our derivative instrument counterparties;
providing termination rights to cedents under assumed reinsurance contracts;
adversely affecting our ability to obtain reinsurance at reasonable prices, if at all; and
subjecting us to potentially increased regulatory scrutiny.
Certain rating agencies took initial rating actions in response to the initial filing with the SEC on October 5, 2016 of our
registration statement on Form 10 in connection with the then proposed Separation (as amended, the “Form 10”), and certain
rating agencies took additional rating actions during 2017.
Credit ratings are opinions of each agency with respect to specific securities and contractual financial obligations and the
issuer’s ability and willingness to meet those obligations when due, and are important factors in our overall financial profile,
including funding profiles, and our ability to access certain types of liquidity. Downgrades in our credit or financial strength
ratings or changes to our rating outlook could have a material adverse effect on our financial condition and results of operations
in many ways, including limiting our access to distributors, restricting our ability to generate new sales because our products
depend on strong financial strength ratings to compete effectively, limiting our access to capital markets, and potentially increasing
the cost of debt, which could adversely affect our liquidity.
In view of the difficulties experienced by many financial institutions as a result of the financial crisis and ensuing global
recession, including our competitors in the insurance industry, we believe it is possible that the NRSROs will continue to heighten
the level of scrutiny that they apply to insurance companies, will continue to increase the frequency and scope of their credit
reviews, will continue to request additional information from the companies that they rate, and may adjust upward the capital
and other requirements employed in the models for maintenance of certain ratings levels. Our ratings could be downgraded at
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any time and without notice by any NRSRO. Any such downgrade could result in a reduction in new sales of our insurance
products, which could have a material adverse effect on our results of operations.
Reinsurance may not be available, affordable or adequate to protect us against losses
As part of our overall risk management strategy, our insurance subsidiaries purchase reinsurance from third-party reinsurers
for certain risks we underwrite. While reinsurance agreements generally bind the reinsurer for the life of the business reinsured
at generally fixed pricing, market conditions beyond our control determine the availability and cost of the reinsurance protection
for new business. In certain circumstances, the price of reinsurance for business already reinsured may also increase. Also, under
certain of our reinsurance arrangements, it is common for the reinsurer to have a right to increase reinsurance rates on in-force
business if there is a systematic deterioration of mortality in the market as a whole. Any decrease in the amount of reinsurance
will increase our risk of loss and any increase in the cost of reinsurance will, absent a decrease in the amount of reinsurance,
reduce our earnings. Accordingly, we may be forced to incur additional expenses for reinsurance or may not be able to obtain
sufficient reinsurance on acceptable terms, which could adversely affect our ability to write future business or result in the
assumption of more risk with respect to those policies we issue. See “Business — Reinsurance Activity.”
If the counterparties to our reinsurance or indemnification arrangements or to the derivatives we use to hedge our business
risks default or fail to perform, we may be exposed to risks we had sought to mitigate, which could materially adversely affect
our financial condition and results of operations
We use reinsurance, indemnification and derivatives to mitigate our risks in various circumstances. In general, reinsurance,
indemnification and derivatives do not relieve us of our direct liability to our policyholders, even when the reinsurer is liable to
us. Accordingly, we bear credit risk with respect to our reinsurers, indemnitors, counterparties and central clearinghouses. A
reinsurer’s, indemnitor’s, counterparty’s or central clearinghouse’s insolvency, inability or unwillingness to make payments
under the terms of reinsurance agreements, indemnity agreements or derivatives agreements with us or inability or unwillingness
to return collateral could have a material adverse effect on our financial condition and results of operations. See “Business —
Reinsurance Activity.”
In addition, we use derivatives to hedge various business risks. We enter into a variety of derivatives, including options,
forwards, interest rate, credit default and currency swaps with a number of counterparties on a bilateral basis for uncleared OTC
derivatives and with clearing brokers and central clearinghouses for OTC-cleared derivatives (OTC derivatives that are cleared
and settled through central clearing counterparties). See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Derivatives.” If our counterparties, clearing brokers or central clearinghouses fail or refuse to honor
their obligations under these derivatives, our hedges of the related risk will be ineffective. Such failure could have a material
adverse effect on our financial condition and results of operations.
Extreme mortality events resulting from catastrophes may adversely impact liabilities for policyholder claims and reinsurance
availability
Our life insurance operations are exposed to the risk of catastrophic mortality, such as a pandemic or other event that causes
a large number of deaths. For example, significant influenza pandemics have occurred three times in the last century. The
likelihood, timing, and severity of a future pandemic cannot be predicted. A significant pandemic could have a major impact on
the global economy or the economies of particular countries or regions, including travel, trade, tourism, the health system, food
supply, consumption, overall economic output, as well as on the financial markets. 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 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. These events could cause
a material adverse effect on our results of operations in any period and, depending on their severity, could also materially and
adversely affect our financial condition.
Consistent with industry practice and accounting standards, we establish liabilities for claims arising from a catastrophe
only after assessing the probable losses arising from the event. We cannot be certain that the liabilities we have established will
be adequate to cover actual claim liabilities. A catastrophic event or multiple catastrophic events could have a material adverse
effect on our results of operations and financial condition. Conversely, improvements in medical care and other developments
which positively affect life expectancy can cause our assumptions with respect to longevity, which we use when we price our
products, to become incorrect and, accordingly, can adversely affect our results of operations and financial condition.
We may not be able to take credit for reinsurance, our statutory life insurance reserve financings may be subject to cost
increases and new financings may be subject to limited market capacity
We currently utilize capital markets solutions to finance a portion of our statutory reserve requirements for several products,
including, but not limited to, our level premium term life products subject to the NAIC Valuation of Life Insurance Policies
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Model Regulation (“Regulation XXX”), and ULSG subject to NAIC Actuarial Guideline 38 (“Guideline AXXX”). Following
the receipt of all approvals from applicable regulators, effective April 28, 2017, we merged certain of our affiliate reinsurance
companies into BRCD, a licensed reinsurance subsidiary of Brighthouse Life Insurance Company. This single, larger reinsurance
subsidiary provides certain benefits to Brighthouse, including (i) enhancing the ability to hedge the interest rate risk of the
reinsured liabilities, (ii) allowing increased allocation flexibility in managing an investment portfolio, and (iii) improving
operating flexibility and administrative cost efficiency, but there can be no assurance that such benefits will materialize. BRCD
obtained statutory reserve financing through a funding structure involving a single financing arrangement supported by a pool
of highly rated third-party reinsurers, with financing at a lower cost than previous financing arrangements, which were terminated
effective April 28, 2017. The restructured financing facility has a term of 20 years, but the liabilities being supported by such
facility have a duration, in some cases, of more than 30 years. Therefore, we may need to refinance this facility in the future
and any such refinancing may not be at costs attractive to us or may not be available at all. If such financing cannot be obtained
on favorable terms, our statutory capitalization, results of operations and financial condition, as well as our competitiveness,
could be adversely affected.
Future capacity for these statutory reserve funding structures in the marketplace is not guaranteed. During 2014, the NAIC
approved a new regulatory framework applicable to the use of captive insurers in connection with Regulation XXX and Guideline
AXXX transactions. Among other things, the framework called for more disclosure of an insurer’s use of captives in its statutory
financial statements, and narrows the types of assets permitted to back statutory reserves that are required to support the insurer’s
future obligations. In 2014, the NAIC implemented the framework through an actuarial guideline (“AG 48”), which requires
the actuary of the ceding insurer that opines on the insurer’s reserves to issue a qualified opinion if the framework is not followed.
The requirements of AG 48 became effective as of January 1, 2015 in all states, without any further action necessary by state
legislatures or insurance regulators to implement them, and apply prospectively to new policies issued and new reinsurance
transactions entered into on or after January 1, 2015. AG 48 does not apply to policies included under captive reinsurance and
certain other agreements that were in existence prior to January 1, 2015.
In December 2016, the NAIC adopted a new model regulation containing similar substantive requirements as AG 48. The
model regulation will generally replace AG 48 in a state upon the state’s adoption of the model regulation. To the extent the
types of assets permitted under AG 48 or under the new model regulation to back statutory reserves relating to these captive
transactions are not available in future statutory reserve funding structures, we would not be able to take some or all statutory
reserve credit for such transactions and could consequently be required to materially affect the statutory capitalization of
Brighthouse Life Insurance Company, which would materially and adversely affect our financial condition.
Factors affecting our competitiveness may adversely affect our market share and profitability
We believe competition among insurance companies is based on a number of factors, including service, product features,
scale, price, actual or perceived financial strength, claims-paying ratings, credit ratings, e-business capabilities and name
recognition. We compete with a large number of other insurance companies, as well as non-insurance financial services
companies, such as banks, broker-dealers and asset managers. Some of these companies offer a broader array of products, have
more competitive pricing or, with respect to other insurance companies, have higher claims paying ability and financial strength
ratings. Some may also have greater financial resources with which to compete. In some circumstances, national banks that sell
annuity products of life insurers may also have a pre-existing customer base for financial services products. These competitive
pressures may adversely affect the persistency of our products, as well as our ability to sell our products in the future. If, as a
result of competitive factors or otherwise, we are unable to generate a sufficient return on insurance policies and annuity products
we sell in the future, we may stop selling such policies and products, which could have a material adverse effect on our financial
condition and results of operations. See “Business — Competition.”
We have limited control over many of our costs. For example, we have limited control over the cost of Unaffiliated Third-
party Reinsurance, the cost of meeting changing regulatory requirements, and our cost to access capital or financing. There can
be no assurance that we will be able to achieve or maintain a cost advantage over our competitors. If our cost structure increases
and we are not able to achieve or maintain a cost advantage over our competitors, it could have a material adverse effect on our
ability to execute our strategy, as well as on our results of operations and financial condition. If we hold substantially more
capital than is needed to support credit ratings that are commensurate with our business strategy, over time, our competitive
position could be adversely affected.
In addition, since numerous aspects of our business are subject to regulation, legislative and other changes affecting the
regulatory environment for our business may have, over time, the effect of supporting or burdening some aspects of the financial
services industry. This can affect our competitive position within the life insurance industry and within the broader financial
services industry. See “Business — Regulation.”
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The failure of third parties to provide various services, or any failure of the practices and procedures that these third parties
use to provide services to us, could have a material adverse effect on our business
A key part of our operating strategy is to outsource certain services important to our business. In July 2016, we entered into
a multi-year outsourcing arrangement for the administration of certain in-force policies currently housed on up to 20 systems.
Pursuant to this arrangement, at least 13 of such systems will be consolidated down to one. In December 2017, we formalized
an arrangement for the administration of life and annuities new business and approximately 1.3 million in-force life and annuities
contracts. We intend to focus on further outsourcing opportunities with third-party vendors, including after the Transition Services
Agreement, Investment Management Agreement and other agreements with MetLife companies expire. See “— Risks Related
to Our Separation from, and Continuing Relationship with, MetLife— Our contractual arrangements with MetLife may not be
adequate to meet our operational and business needs. The terms of our arrangements with MetLife may be more favorable than
we would be able to obtain from an unaffiliated third party, and we may be unable to replace those services in a timely manner
or on comparable terms” for information regarding the potential effect that the Separation from MetLife will have on the pricing
of such services. It may be difficult and disruptive for us to replace some of our third-party vendors in a timely manner if they
were unwilling or unable to provide us with these services in the future (as a result of their financial or business conditions or
otherwise), and our business and operations likely could be materially adversely affected.
In addition, if a third-party provider fails to provide the administrative, operational, financial, and actuarial services we
require, fails to meet contractual requirements, such as compliance with applicable laws and regulations, or suffers a cyberattack
or other security breach, our business could suffer economic and reputational harm that could have a material adverse effect on
our business and results of operations. See “— Operational Risks — The failure in cyber- or other information security systems,
as well as the occurrence of events unanticipated in Brighthouse’s and MetLife’s disaster recovery systems and business continuity
planning could result in a loss or disclosure of confidential information, damage to our reputation and impairment of our ability
to conduct business effectively.”
Similarly, if any third-party provider experiences any deficiency in internal controls, determines that its practices and
procedures used in administering our policies require review or otherwise fails to administer our policies in accordance with
acceptable standards, we could incur expenses and experience other adverse effects as a result. In these situations, we may be
unable to resolve any issues on our own without assistance from the third-party provider, and we may have limited ability to
influence the speed and effectiveness of that resolution. In December 2017, for example, MetLife announced that it was
undertaking a review of practices and procedures used to estimate its reserves related to certain group annuitants that have been
unresponsive or missing over time. As a result of this review, MetLife identified a material weakness in its internal control over
financial reporting relating to certain group annuity reserves and announced that it was recording charges to reinstate reserves
previously released. As a result of that review and based on information provided by MetLife, we have identified approximately
14,000 group annuitants across Brighthouse entities who may be owed annuity payments now or in the future. We announced
a related increase in reserves of $38 million after tax during the fourth quarter of 2017 relating to legacy non-retail group annuity
contracts that are pension risk transfers included in our Run-off segment. These group annuity contracts are administered by
MetLife under the Transition Services Agreement, and we depend on MetLife for the information and modifications to
administrative practices and procedures necessary to resolve this matter. If similar issues were to arise in the future, whether
involving MetLife or another third-party provider, any resulting expenses or other economic or reputational harm could have a
material adverse effect on our business and results of operations, particularly if they involved our core annuity and life insurance
businesses. In addition, we could be subject to litigation or regulatory investigations and actions resulting from any such issues,
which could have a material adverse effect on our financial condition and results of operations.
We may be required to establish a valuation allowance against our deferred income tax assets, which could adversely affect
our results of operations or financial condition
Deferred income tax represents the tax effect of the differences between the book and tax bases of assets and liabilities.
Deferred tax assets are assessed periodically by management to determine whether they are realizable. Factors in management’s
determination include the performance of the business including the ability to generate future taxable income. If, based on
available information, it is more likely than not that the deferred income tax asset will not be realized, then a valuation allowance
must be established with a corresponding charge to net income. Such charges could have a material adverse effect on our results
of operations or financial position. In addition, changes in the corporate tax rates could affect the value of our deferred tax assets
and may require a write-off of some of those assets. See Note 13 of the Notes to the Consolidated and Combined Financial
Statements for the impact of the Tax Act on our financial statements. Also, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Summary of Critical Accounting Estimates.”
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If our business does not perform well or if actual experience versus estimates used in valuing and amortizing DAC and VOBA
vary significantly, we may be required to accelerate the amortization and/or impair the DAC and VOBA, which could adversely
affect our results of operations or financial condition
We incur significant costs in connection with acquiring new and renewal insurance business. Costs that are related directly
to the successful acquisition of new and renewal insurance business are deferred and referred to as DAC. Value of business
acquired (“VOBA”) represents the excess of book value over the estimated fair value of acquired insurance and annuity contracts
in-force at the acquisition date. The estimated fair value of the acquired liabilities is based on actuarially determined projections,
by each block of business, of future policy and contract charges, premiums, mortality and morbidity, separate account
performance, surrenders, operating expenses, investment returns, nonperformance risk adjustment and other factors. DAC and
VOBA related to fixed and variable life and deferred annuity contracts are amortized in proportion to actual and expected future
gross profits. The amount of future gross profit is dependent principally on investment returns in excess of the amounts credited
to policyholders, mortality, morbidity, persistency, interest crediting rates, dividends paid to policyholders, expenses to administer
the business, creditworthiness of reinsurance counterparties and certain economic variables, such as inflation.
If actual gross profits are less than originally expected, then the amortization of such costs would be accelerated in the
period the actual experience is known and would result in a charge to net income. Significant or sustained equity market declines
could result in an acceleration of amortization of DAC and VOBA related to variable annuity and variable life contracts, resulting
in a charge to net income. Such adjustments could have a material adverse effect on our results of operations or financial condition.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical
Accounting Estimates — Deferred Policy Acquisition Costs and Value of Business Acquired” for a discussion of how significantly
lower net investment spreads may cause us to accelerate amortization, thereby reducing net income in the affected reporting
period.
Economic Environment and Capital Markets-Related Risks
If difficult conditions in the capital markets and the U.S. economy generally persist or are perceived to persist, they may
materially adversely affect our business and results of operations
Our business and results of operations are materially affected by conditions in the capital markets and the U.S. economy
generally, as well as by the global economy to the extent it affects the U.S. economy. In addition, while our operations are entirely
in the United States, we have foreign investments in our general and separate accounts and, accordingly, conditions in the global
capital markets can affect the value of our general account and separate account assets, as well as our financial results. Stressed
conditions, volatility and disruptions in financial asset classes or various capital markets can have an adverse effect on us, both
because we have a large investment portfolio and our benefit and claim liabilities are sensitive to changing market factors. In
addition, perceived difficult conditions in the capital markets may discourage individuals from making investment decisions
and purchasing our products. Market factors include interest rates, credit spreads, equity and commodity prices, derivative prices
and availability, real estate markets, foreign exchange rates and the volatility and the returns of capital markets. Our business
operations and results may also be affected by the level of economic activity, such as the level of employment, business investment
and spending, consumer spending and savings; monetary and fiscal policies and their resulting impact on economic activity and
conditions like inflation and credit formation. Accordingly, both market and economic factors may affect our business results
by adversely affecting our business volumes, profitability, cash flow, capitalization and overall financial condition, our ability
to receive dividends from our insurance subsidiaries and meet our obligations at our holding company. Disruptions in one market
or asset class can also spread to other markets or asset classes. Upheavals and stagnation in the financial markets can also affect
our financial condition (including our liquidity and capital levels) as a result of the impact of such events on our assets and
liabilities.
At times throughout the past several years, volatile conditions have characterized financial markets. Significant market
volatility in reaction to geopolitical risks, changing monetary policy and uncertain fiscal policy may exacerbate some of the
risks we face. The Federal Reserve may reduce the size of its balance sheet and continue to raise interest rates as it unwinds the
monetary accommodation put in place after the global financial crisis in 2008-2009, while other major central banks may continue
to pursue accommodative, unconventional monetary policies. Uncertainties associated with the United Kingdom’s potential
withdrawal from the European Union (“EU”) and concerns about the political and/or economic stability of Puerto Rico and
certain countries outside the EU have also contributed to market volatility in the U.S. This market volatility has affected, and
may continue to affect the performance of the various asset classes in which we invest, as well as separate account values. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Investments — Current
Environment” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends
and Uncertainties — Financial and Economic Environment.”
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To the extent these uncertain financial market conditions persist, our revenues, reserves and net investment income, as well
as the demand for certain of our products, are likely to come under pressure. Similarly, sustained periods of low interest rates
and risk asset returns could reduce income from our investment portfolio, increase our liabilities for claims and future benefits,
and increase the cost of risk transfer measures such as hedging, causing our profit margins to erode as a result of reduced income
from our investment portfolio and increase in insurance liabilities. Extreme declines in equity markets could cause us to incur
significant capital and/or operating losses due to, among other reasons, the impact on us of guarantees related to our annuity
products, including increases in liabilities, increased capital requirements, and/or collateral requirements associated with our
risk transfer arrangements. Even in the absence of a financial market downturn, sustained periods of low market returns and/or
low level of U.S. interest rates and/or heightened market volatility may increase the cost of our insurance liabilities, which could
have a material adverse effect on our statutory capital and earnings, as well as impair our financial strength ratings.
Variable annuity products issued through separate accounts are a significant portion of our in-force business. The account
values of these products decrease as a result of declining equity markets. Lower interest rates may result in lower returns in the
future due to lower returns on our investments. Decreases in account values reduce certain fees generated by these products,
cause the amortization of DAC to accelerate, could increase the level of insurance liabilities we must carry to support such
products issued with any associated guarantees and could require us to provide additional funding to our affiliated reinsurer.
Even absent declining equity and bond markets, periods of sustained stagnation in these markets, which are characterized by
multiple years of low annualized total returns impacting the growth in separate accounts and/or low level of U.S. interest rates,
may materially increase our liabilities for claims and future benefits due to inherent market return guarantees in these liabilities.
In an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business
investment and lower consumer spending, the demand for our annuity and insurance products could be adversely affected as
customers are unwilling or unable to purchase our products. In addition, we may experience an elevated incidence of claims,
adverse utilization of benefits relative to our best estimate expectations and lapses or surrenders of policies. Furthermore, our
policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. Such adverse
changes in the economy could negatively affect our earnings and capitalization and have a material adverse effect on our results
of operations and financial condition.
Difficult conditions in the U.S. capital markets and the economy generally may also continue to raise the possibility of
legislative, judicial, regulatory and other governmental actions. The Trump administration has released a memorandum that
generally delayed all pending regulations from publication in the Federal Register pending their review and approval by a
department or agency head appointed or designated by President Trump, and has issued an executive order that calls for a
comprehensive review of Dodd-Frank. Also, on June 8, 2017, the U.S. House of Representatives passed the Financial CHOICE
Act of 2017, which proposes to amend or repeal various sections of Dodd-Frank. We cannot predict what other proposals may
be made or what legislation may be introduced or enacted, or what impact any such legislation may have on our business, results
of operations and financial condition. See “— Regulatory and Legal Risks — Our insurance business is highly regulated, and
changes in regulation and in supervisory and enforcement policies may materially impact our capitalization or cash flows, reduce
our profitability and limit our growth” and “— Risks Related to Our Business — Factors affecting our competitiveness may
adversely affect our market share and profitability.”
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs and our access to
capital
The capital and credit markets may be subject to periods of extreme volatility. Disruptions in capital markets could adversely
affect our liquidity and credit capacity or limit our access to capital which may in the future be needed to operate our business
and meet policyholder obligations.
We need liquidity at our holding company to pay our operating expenses, pay interest on indebtedness we may incur and
any potential dividends on our common stock, provide our subsidiaries with cash or collateral, maintain our securities lending
activities and replace certain maturing liabilities. Without sufficient liquidity, we could be forced to curtail our operations and
limit the investments necessary to grow our business.
For our insurance subsidiaries, the principal sources of liquidity are insurance premiums and fees paid in connection with
annuity products, and cash flow from our investment portfolio to the extent consisting of cash and readily marketable securities.
In the event capital market or other conditions have an adverse impact on our capital and liquidity, or our stress-testing
indicates that such conditions could have such an impact beyond expectations and our current resources do not satisfy our needs
or regulatory requirements, we may have to seek additional financing to enhance our capital and liquidity position. The availability
of additional financing will depend on a variety of factors such as the then current market conditions, regulatory capital
requirements, availability of credit to us and the financial services industry generally, our credit ratings and credit capacity, and
the perception of our customers and lenders regarding our long- or short-term financial prospects if we incur large operating or
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investment losses or if the level of our business activity decreases due to a market downturn. Similarly, our access to funds may
be impaired if regulatory authorities or rating agencies take negative actions against us. Our internal sources of liquidity may
prove to be insufficient and, in such case, we may not be able to successfully obtain additional financing on favorable terms, or
at all.
In addition, our liquidity requirements may change if, among other things, we are required to return significant amounts of
cash collateral on short notice under securities lending agreements or other collateral requirements. See “Investments-Related
Risks — Should the need arise, we may have difficulty selling certain holdings in our investment portfolio or in our securities
lending program in a timely manner and realizing full value given that not all assets are liquid,” “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Off-Balance Sheet Arrangements — Collateral for Securities
Lending, Repurchase Programs and Derivatives” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Liquidity and Capital Resources — The Company — Liquidity.”
Such conditions may limit our ability to replace, in a timely manner, maturing liabilities, satisfy regulatory capital
requirements, and access the capital necessary to grow our business. See “— Regulatory and Legal Risks — Our insurance
business is highly regulated, and changes in regulation and in supervisory and enforcement policies may materially impact our
capitalization or cash flows, reduce our profitability and limit our growth.” As a result, we may be forced to delay raising capital,
issue different types of securities than we would have otherwise, less effectively deploy such capital, issue shorter tenor securities
than we prefer, or bear an unattractive cost of capital, which could decrease our profitability and significantly reduce our financial
flexibility. Our results of operations, financial condition, cash flows and statutory capital position could be materially adversely
affected by disruptions in the financial markets.
We are exposed to significant financial and capital markets risks which may adversely affect our results of operations,
financial condition and liquidity, and may cause our net investment income and net income to vary from period to period
We are exposed to significant financial and capital markets risks both in the United States and in global markets generally
to the extent they influence U.S. financial and capital markets, including changes in interest rates, credit spreads, equity markets,
real estate markets, the performance of specific obligors, including governments, included in our investment portfolio, derivatives
and other factors outside our control. From time to time we may also have exposure through our investment portfolio to foreign
currency and commodity price volatility.
Interest rate risk
Some of our current or anticipated future products, principally traditional life, universal life and fixed annuities, as well as
funding agreements and structured settlements, expose us to the risk that changes in interest rates will reduce our investment
margin or “net investment spread,” or the difference between the amounts that we are required to pay under the contracts in our
general account and the rate of return we earn on general account investments intended to support obligations under such
contracts. Our net investment spread is a key component of our net income.
We are affected by the monetary policies of the Board of Governors of the Federal Reserve System (“Federal Reserve
Board”) and the Federal Reserve Bank of New York (collectively, with the Federal Reserve Board, the “Federal Reserve”) and
other major central banks, as such policies may adversely impact the level of interest rates and, as discussed below, the income
we earn on our investments or the level of product sales.
In a low interest rate environment, we may be forced to reinvest proceeds from investments that have matured or have been
prepaid or sold at lower yields, which will reduce our net investment spread. Moreover, borrowers may prepay or redeem the
fixed income securities and commercial, agricultural or residential mortgage loans in our investment portfolio with greater
frequency in order to borrow at lower market rates, thereby exacerbating this risk. Although reducing interest crediting rates
can help offset decreases in net investment spreads on some products, our ability to reduce these rates is limited to the portion
of our in-force product portfolio that has adjustable interest crediting rates, and could be limited by the actions of our competitors
or contractually guaranteed minimum rates and may not match the timing or magnitude of changes in asset yields. As a result,
our net investment spread would decrease or potentially become negative, which could have a material adverse effect on our
results of operations and financial condition. See “Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Policyholder Liabilities.”
Our estimation of future net investment spreads is an important component in the amortization of DAC and VOBA.
Significantly lower than anticipated net investment spreads reduce our net income and may cause us to accelerate amortization,
thereby reducing net income in the affected reporting period and thereby potentially negatively affecting our credit instrument
covenants or rating agency assessment of our financial condition.
During periods of declining interest rates, our return on investments that do not support particular policy obligations may
decrease. During periods of sustained lower interest rates, our reserves for policy liabilities may not be sufficient to meet future
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policy obligations and may need to be strengthened. Accordingly, declining and sustained lower interest rates may materially
adversely affect our results of operations and financial condition, ability to take dividends from operating insurance companies
and significantly reduce our profitability.
Increases in interest rates could also negatively affect our profitability. In periods of rapidly increasing interest rates, we
may not be able to replace, in a timely manner, the investments in our general account with higher yielding investments needed
to fund the higher crediting rates necessary to keep interest rate sensitive products competitive. We, therefore, may have to accept
a lower credit spread and, thus, lower profitability or face a decline in sales and greater loss of existing contracts and related
assets. In addition, policy loans, surrenders and withdrawals may tend to increase as policyholders seek investments with higher
perceived returns as interest rates rise. This process may result in cash outflows requiring that we sell investments at a time when
the prices of those investments are adversely affected by the increase in interest rates, which may result in realized investment
losses. Unanticipated withdrawals, terminations and substantial policy amendments may cause us to accelerate the amortization
of DAC and VOBA, which reduces net income and potentially negatively affects our credit instrument covenants and rating
agency assessments of our financial condition. An increase in interest rates could also have a material adverse effect on the value
of our investment portfolio, for example, by decreasing the estimated fair values of the fixed income securities and mortgage
loans that comprise a significant portion of our investment portfolio. Finally, an increase in interest rates could result in decreased
fee revenue associated with a decline in the value of variable annuity account balances invested in fixed income funds.
We manage interest rate risk as part of our asset and liability management strategies, which include (i) maintaining an
investment portfolio with diversified maturities that has a weighted average duration that is approximately equal to the duration
of our estimated liability cash flow profile, and (ii) a hedging program. For certain of our liability portfolios, it is not possible
to invest assets to the full liability duration, thereby creating some asset/liability mismatch. Where a liability cash flow may
exceed the maturity of available assets, as is the case with certain retirement products, we may support such liabilities with
equity investments, derivatives or interest rate mismatch strategies. Although we take measures to manage the economic risks
of investing in a changing interest rate environment, we may not be able to mitigate the interest rate risk of our fixed income
investments relative to our interest sensitive liabilities. The level of interest rates also affects our liabilities for benefits under
our annuity contracts. As interest rates decline we may need to increase our reserves for future benefits under our annuity
contracts, which would adversely affect our results of operations and financial condition. See “Quantitative and Qualitative
Disclosures About Market Risk — Market Risk Fair Value Exposures — Interest Rates.”
In addition, while we use a risk mitigation strategy relating to our ULSG portfolio intended to reduce our risk to statutory
capitalization and long-term economic exposures from sustained low levels of interest rates, this strategy will likely result in
higher net income volatility due to the insensitivity of GAAP liabilities to the change in interest rate levels. This strategy may
adversely affect our results of operations and financial condition. See “— Risks Related to Our Business — Our ULSG asset
requirement target may not ensure we have sufficient assets to meet our future ULSG policyholder obligations and may result
in net income volatility” and “Business — Risk Management Strategies — ULSG Market Risk Exposure Management.”
Significant volatility in the markets could cause changes in the risks described above which, individually or in tandem,
could have a material adverse effect on our results of operations, financial condition, liquidity or cash flows through realized
investment losses, derivative losses, change in insurance liabilities, impairments, increased valuation allowances, increases in
reserves for future policyholder benefits, reduced net investment income and changes in unrealized gain or loss positions.
Credit spread risk
Our exposure to credit spreads primarily relates to market price volatility. Market price volatility can make it difficult to
value certain of our securities if trading becomes less frequent, as was the case, for example, during the financial crisis commencing
in 2008. In such case, valuations may include assumptions or estimates that may have significant period-to-period changes,
which could have a material adverse effect on our results of operations or financial condition and may require additional reserves.
If there is a resumption of significant volatility in the markets, it could cause changes in credit spreads and defaults and a lack
of pricing transparency which, individually or in tandem, could have a material adverse effect on our results of operations,
financial condition or liquidity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations
— Investments — Investment Risks.” An increase in credit spreads relative to U.S. Treasury benchmarks can also adversely
affect the cost of our borrowing if we need to access credit markets.
Equity risk
Our primary exposure to equity relates to the potential for lower earnings associated with certain of our businesses where
fee income is earned based upon the estimated market value of the separate account assets and other assets related to our variable
annuity business. Because these products generate fees related primarily to the value of separate account assets and other assets
under management, a decline in the equity markets could reduce our revenues as a result of the reduction in the value of the
investments supporting those products and services. The variable annuity business in particular is highly sensitive to equity
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markets, and a sustained weakness or stagnation in the equity markets could decrease revenues and earnings with respect to
those products. Furthermore, certain of our variable annuity products offer guaranteed benefits which increase our potential
benefit exposure should equity markets decline or stagnate. We seek to mitigate the impact of such increased potential benefit
exposures from market declines through the use of derivatives, reinsurance and capital management. However, such derivatives
and reinsurance may become less available and, to the extent available, their price could materially increase in a period
characterized by volatile equity markets. The risk of stagnation in equity market returns cannot be addressed by hedging. See
“Business — Segments and Corporate & Other — Annuities — Current Products — Variable Annuities” for details regarding
sensitivity of our variable annuity business to capital markets.
In addition, a portion of our investments are in leveraged buy-out funds, hedge funds and other private equity funds. The
amount and timing of net investment income from such funds tends to be uneven as a result of the performance of the underlying
investments. The timing of distributions from such funds, which depends on particular events relating to the underlying
investments, as well as the funds’ schedules for making distributions and their needs for cash, can be difficult to predict. As a
result, the amount of net investment income from these investments can vary substantially from period to period. Significant
volatility could adversely impact returns and net investment income on these alternative investments. In addition, the estimated
fair value of such investments may be impacted by downturns or volatility in equity markets. See “— Investments-Related Risks
— Our valuation of securities and investments and the determination of the amount of allowances and impairments taken on
our investments are subjective and, if changed, could materially adversely affect our results of operations or financial condition.”
In addition, we rely, and expect to continue to rely, on MetLife Investment Advisors, LLC (“MLIA”), a related party investment
manager, for a period to provide the services required to manage the portfolio.
Real estate risk
A portion of our investment portfolio consists of mortgage loans on commercial, agricultural and residential real estate. Our
exposure to this risk stems from various factors, including the supply and demand of leasable commercial space, creditworthiness
of tenants and partners, capital markets volatility, interest rate fluctuations, agricultural prices and farm incomes. Although we
manage credit risk and market valuation risk for our commercial, agricultural and residential real estate assets through geographic,
property type and product type diversification and asset allocation, general economic conditions in the commercial, agricultural
and residential real estate sectors will continue to influence the performance of these investments. These factors, which are
beyond our control, could have a material adverse effect on our results of operations, financial condition, liquidity or cash flows.
In addition, we rely, and expect to continue to rely, on MLIA for a period to provide the services required to manage the portfolio.
Obligor-related risk
Fixed income securities and mortgage loans represent a significant portion of our investment portfolio. We are subject to
the risk that the issuers, or guarantors, of fixed income securities and mortgage loans we own may default on principal and
interest payments they owe us. We are also subject to the risk that the underlying collateral within asset-backed securities
(“ABS”), including mortgage-backed securities, may default on principal and interest payments causing an adverse change in
cash flows. The occurrence of a major economic downturn, acts of corporate malfeasance, widening mortgage or credit spreads,
or other events that adversely affect the issuers, guarantors or underlying collateral of these securities and mortgage loans could
cause the estimated fair value of our portfolio of fixed income securities and mortgage loans and our earnings to decline and
the default rate of the fixed income securities and mortgage loans in our investment portfolio to increase.
Derivatives risk
We use the payments we receive from counterparties pursuant to derivative instruments we have entered into to offset future
changes in the fair value of our assets and liabilities and current or future changes in cash flows. We enter into a variety of
derivative instruments, including options, futures, forwards, and interest rate and credit default swaps with a number of
counterparties. Amounts that we expect to collect under current and future derivatives are subject to counterparty risk. Our
obligations under our products are not changed by our hedging activities and we are liable for our obligations even if our derivative
counterparties do not pay us. Such defaults could have a material adverse effect on our financial condition and results of operations.
Substantially all of our derivatives require us to pledge or receive collateral or make payments related to any decline in the net
estimated fair value of such derivatives executed through a specific broker at a clearinghouse or entered into with a specific
counterparty on a bilateral basis. In addition, ratings downgrades or financial difficulties of derivative counterparties may require
us to utilize additional capital with respect to the impacted businesses. Furthermore, the valuation of our derivatives could change
based on changes to our valuation methodology or the discovery of errors.
Federal banking regulators have recently adopted new rules that will apply to certain qualified financial contracts, including
many derivatives contracts, securities lending agreements and repurchase agreements, with certain banking institutions and
certain of their affiliates. These new rules, which will be applicable beginning in 2019, will generally require the banking
institutions and their applicable affiliates to include contractual provisions in their qualified financial contracts that limit or delay
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certain rights of their counterparties including counterparties’ default rights (such as the right to terminate the contracts or
foreclose on collateral) and restrictions on assignments and transfers of credit enhancements (such as guarantees) arising in
connection with the banking institution or an applicable affiliate becoming subject to a bankruptcy, insolvency, resolution or
similar proceeding. To the extent that any of the derivatives, securities lending agreements or repurchase agreements that we
enter into are subject to these new rules, it could increase our counterparty risk or limit our recovery in the event of a default.
Summary
In addition to the economic or counterparty risks described above which, individually or in tandem, could have a material
adverse effect on our results of operations, financial condition, liquidity or cash flows through realized investment losses,
derivative losses, change in insurance liabilities, impairments, increased valuation allowances, increases in reserves for future
policyholder benefits, reduced net investment income and changes in unrealized gain or loss positions, we are also exposed to
volatility risk with respect to any one or more of these economic risks. Significant volatility in the markets could cause changes
in the risks set forth above which, individually or in tandem, could have a material adverse effect on our results of operations,
financial condition, liquidity or cash flows through realized investment losses, derivative losses, change in insurance liabilities,
impairments, increased valuation allowances, increases in reserves for future policyholder benefits, reduced net investment
income and changes in unrealized gain or loss positions.
Regulatory and Legal Risks
Our insurance business is highly regulated, and changes in regulation and in supervisory and enforcement policies may
materially impact our capitalization or cash flows, reduce our profitability and limit our growth
Our insurance operations are subject to a wide variety of insurance and other laws and regulations. Our insurance company
operating subsidiaries are domiciled in Delaware, Massachusetts and New York. Each entity is subject to regulation by its primary
state regulator, and is also subject to other regulation in states in which it operates. See “Business — Regulation.” as supplemented
by discussions of regulatory developments in our subsequently filed Quarterly Reports on Form 10-Q under the caption
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends — Regulatory
Developments.”
NAIC - Existing and proposed insurance regulation
The NAIC is an organization whose mission is to assist state insurance regulatory authorities in serving the public interest
and achieving the insurance regulatory goals of its members, the state insurance regulatory officials. State insurance regulators
may act independently or adopt regulations proposed by the NAIC. State insurance regulators and the NAIC regularly re-examine
existing laws and regulations applicable to insurance companies and their products. Some NAIC pronouncements take effect
automatically in the various states, particularly with respect to accounting issues. Statutes, regulations and interpretations may
be applied with retroactive impact, particularly in areas such as accounting and reserve requirements. Changes in existing laws
and regulations, or in interpretations thereof, can sometimes lead to additional expense for the insurer and, thus, could have a
material adverse effect on our financial condition and results of operations.
From time to time, regulators raise issues during examinations or audits of us that could, if determined adversely, have a
material adverse effect on us. In addition, the interpretations of regulations by regulators may change and statutes may be enacted
with retroactive impact, particularly in areas such as accounting or statutory reserve requirements. Compliance with applicable
laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations may materially
increase our direct and indirect compliance and other expenses of doing business, thus having a material adverse effect on our
financial condition and results of operations.
During 2014, the NAIC approved a new regulatory framework applicable to the use of captive insurers in connection with
Regulation XXX and Guideline AXXX transactions. This could impact our competitiveness and have a material adverse effect
on our results of operations and financial condition. See “— Risks Related to Our Business — We may not be able to take credit
for reinsurance, our statutory life insurance reserve financings may be subject to cost increases and new financings may be
subject to limited market capacity.”
In 2015, the NAIC commissioned an initiative to identify changes to the statutory framework for variable annuities that can
remove or mitigate the motivation for insurers to engage in captive reinsurance transactions. In September 2015, a third-party
consultant engaged by the NAIC provided the NAIC with a preliminary report covering several sets of recommendations regarding
AG 43 and RBC C3 Phase II reserve requirements. These recommendations generally focus on (1) addressing inconsistencies
between the statutory reserve and RBC regimes, (2) mitigating the asset-liability accounting mismatch between hedge instruments
and statutory instruments and statutory liabilities, (3) removing the non-economic volatility in statutory total asset requirements
and the resulting solvency ratios and (4) facilitating greater harmonization across insurers and products for greater comparability.
An updated variable annuity reserve and capital framework proposal was presented at the August 2016 NAIC meeting, followed
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by a 90-day comment period on the proposal. This updated proposal included the initial recommendations from 2015, but also
some new aspects. The standard scenario floor for reserves may incorporate multiple paths instead of the current single
deterministic scenario, also known as the standard scenario. The stochastic calculations may include alternative calibration
criteria for equities and other market risk factors, and the RBC C3 Phase II component may reflect a new level of capitalization.
The NAIC is continuing its consideration of these recommendations. These recommendations, if adopted, would likely apply
to all existing business and may materially change the sensitivity of reserve and capital requirements to capital markets including
interest rate, equity markets and volatility, as well as prescribed assumptions for policyholder behavior. It is not possible at this
time to predict whether the amount of reserves or capital required to support our variable annuity contracts would increase or
decrease if the NAIC adopts any new model laws, regulations and/or other standards applicable to variable annuity business
after considering such recommendations, nor is it possible to predict the materiality of any such increase or decrease. It is also
not possible to predict the extent to which any such model laws, regulations and/or other standards would affect the effectiveness
and design of our risk mitigation and hedging programs. Furthermore, no assurances can be given to whether any such model
laws, regulations and/or other standards will be adopted or to the timing of any such adoption.
The NAIC has adopted a new approach for the calculation of life insurance reserves, known as principle-based reserving
(“PBR”). PBR became operative on January 1, 2017 in those states where it has been adopted, to be followed by a three-year
phase-in period for business issued on or after this date. With respect to the states in which our insurance subsidiaries are
domiciled: in Delaware, the Delaware Department of Insurance implemented PBR on January 1, 2017; in New York, the NYDFS
has publicly stated its intention to implement this approach, subject to a working group of the NYDFS establishing the necessary
reserves safeguards and the adopting of enabling legislation by the New York legislature. Massachusetts has not yet adopted
PBR. We cannot predict how PBR will impact our reserves or compliance costs, if any, of our insurance subsidiaries. See
“Business — Regulation — Insurance Regulation — NAIC.”
The NAIC, as well as certain state regulators are currently considering implementing regulations that would apply an
impartial conduct standard similar to the Fiduciary Rule to recommendations made in connection with certain annuities, and in
the case of New York, life insurance policies. In particular, on December 27, 2017, the NYDFS proposed regulations that would
adopt a “best interest” standard for the sale of life insurance and annuity products in New York. The likelihood of enactment of
these regulations is uncertain at this time, but if implemented, these regulations could have significant adverse effects on our
business and consolidated results of operations. Generally, changes in laws and regulations, or in interpretations thereof, including
potentially rescinding prior product approvals, are often made for the benefit of the consumer at the expense of the insurer and
could materially and adversely affect our business, results of operations or financial condition.
The NAIC is developing a U.S. group capital calculation using an RBC aggregation methodology. We cannot predict with
any certainty when the group capital calculation might be implemented or the impact (if any) that such implementation may
have on our capital requirements, compliance costs or other aspects of our business.
In addition, following the reduction in the federal corporate income tax rate pursuant to federal tax reform, the NAIC may
revise the methodology or factors used to calculate RBC, which is the denominator of the RBC ratio. If such potential revisions
to the NAIC’s RBC calculation would result in a reduction in the RBC ratio for one or more of our insurance subsidiaries below
certain prescribed levels, we may be required to hold additional capital in such subsidiary or subsidiaries. Any reduction in the
RBC ratios of our insurance subsidiaries could adversely affect their financial strength ratings. For more information regarding
federal tax reform, see “See “Business — Regulation — Federal Tax Reform.”
The NAIC has started work related to macro-prudential initiatives. Currently, the NAIC is focused on liquidity, but other
macro-prudential topics of focus are expected to include recovery and resolution, capital stress testing and exposure
concentrations.
State insurance guaranty associations
Most of the jurisdictions in which we transact business require life insurers doing business within the jurisdiction to participate
in guaranty associations. These associations are organized to pay contractual benefits owed pursuant to insurance policies issued
by impaired, insolvent or failed insurers, or those that may become impaired, insolvent or fail, for example, following the
occurrence of one or more catastrophic events. These associations levy assessments, up to prescribed limits, on all member
insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of
business in which the impaired, insolvent or failed insurer is engaged. In addition, certain states have government owned or
controlled organizations providing life insurance to their citizens. The activities of such organizations could also place additional
stress on the adequacy of guaranty fund assessments. Many of these organizations also have the power to levy assessments
similar to those of the guaranty associations described above. Some states permit member insurers to recover assessments paid
through full or partial premium tax offsets. See “Business — Regulation — Insurance Regulation — Guaranty Associations and
Similar Arrangements.”
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In December of 2017, the NAIC approved revisions to its Life and Health Insurance Guaranty Association Model Act
governing assessments for long-term care insurance. The revisions include a 50/50 split between life and health carriers for
future long term care insolvencies, the inclusion of HMOs in the assessment base, and no change to the premium tax offset.
Several states are now considering legislation to codify these changes into law, and more states are expected to propose legislation
in their 2018 legislative sessions.
It is possible that additional insurance company insolvencies or failures could render the guaranty funds from assessments
previously levied against us inadequate and we may be called upon to contribute additional amounts, which may have a material
impact on our financial condition or results of operations in a particular period. We have established liabilities for guaranty fund
assessments that we consider adequate, but additional liabilities may be necessary. See “Business — Regulation — Insurance
Regulation — Guaranty Associations and Similar Arrangements.”
Federal - Insurance regulation
Currently, the U.S. federal government does not directly regulate the business of insurance. However, Dodd-Frank established
the FIO within the Department of the Treasury, which has the authority to, among other things, collect information about the
insurance industry, negotiate covered agreements with one or more foreign governments and recommend prudential standards.
On December 12, 2013, the FIO issued a report, mandated by Dodd-Frank, which, among other things, urged the states to
modernize and promote greater uniformity in insurance regulation. The report raised the possibility of a greater role for the
federal government if states do not achieve greater uniformity in their laws and regulations. Following the transition occurring
in the federal government and the priorities of the Trump administration, we cannot predict whether any such legislation or
regulatory changes will be adopted, or what impact they will have on our business, financial condition or results of operations.
The Trump administration and the Republican party have expressed goals to dismantle or roll back Dodd-Frank and President
Trump has issued an executive order that calls for a comprehensive review of Dodd-Frank in light of certain enumerated core
principles of financial system regulation. On June 8, 2017, the U.S. House of Representatives passed the Financial CHOICE
Act of 2017, which proposed to amend or repeal various sections of Dodd-Frank. This proposed legislation will now be considered
by the U.S. Senate. We are not able to predict whether any such proposal to roll back Dodd-Frank would have a material effect
on our business operations and cannot currently identify the risks, if any, that may be posed to our businesses as a result of
changes to, or legislative replacements for, Dodd-Frank.
Federal legislation and administrative policies can significantly and adversely affect insurance companies, including policies
regarding financial services regulation, securities regulation, derivatives regulation, pension regulation, privacy, tort reform
legislation and taxation. In addition, various forms of direct and indirect federal regulation of insurance have been proposed
from time to time, including proposals for the establishment of an optional federal charter for insurance companies.
Department of Labor and ERISA considerations
We manufacture annuities for third parties to sell to tax-qualified pension plans, retirement plans and IRAs, as well as
individual retirement annuities sold to individuals that are subject to ERISA or the Code. Also, a portion of our in-force life
insurance products are held by tax-qualified pension and retirement plans. While we currently believe manufacturers do not
have as much exposure to ERISA and the 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.
The prohibited transaction rules of ERISA and the Code generally restrict the provision of investment advice to ERISA qualified
plans and participants and IRAs if the investment recommendation results in fees paid to the individual advisor, the firm that
employs the advisor or their affiliates that vary according to the investment recommendation chosen. Similarly, without an
exemption, fiduciary advisors are prohibited from receiving compensation from third parties in connection with their advice.
ERISA also affects certain of our in-force insurance policies and annuity contracts, as well as insurance policies and annuity
contracts we may sell in the future.
The DOL issued the Fiduciary Rule on April 6, 2016, which became applicable on June 9, 2017. As initially adopted, the
Fiduciary Rule substantially expands the definition of “investment advice” and requires that an impartial or “best interests”
standard be met in providing such advice, thereby broadening the circumstances under which we or our representatives, in
providing investment advice with respect to ERISA plans, plan participants or IRAs, could be deemed a fiduciary under ERISA
or the Code. Pursuant to the Fiduciary Rule, certain communications with plans, plan participants and IRA owners, including
the marketing of products, and marketing of investment management or advisory services, could be deemed fiduciary investment
advice, thus causing increased exposure to fiduciary liability if the distributor does not recommend what is in the client’s best
interests.
In connection with the promulgation of the Fiduciary Rule, the DOL also issued amendments to certain of its prohibited
transaction exemptions, and issued BIC, a new prohibited transaction exemption that imposes more significant disclosure and
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contract requirements to certain transactions involving ERISA plans, plan participants and IRAs. The new and amended
exemptions increase fiduciary requirements and fiduciary liability exposure for transactions involving ERISA plans, plan
participants and IRAs. The application of the BIC contract and point of sale disclosures required under BIC and the changes
made to prohibited transaction exemption 84-24 were delayed until July 1, 2019, except for the impartial conduct standards (i.e.,
compliance with the “best interest” standard, reasonable compensation, and no misleading statements), which are applicable as
of June 9, 2017.
On February 3, 2017, President Trump, in a memorandum to the Secretary of Labor, requested that the DOL prepare an
updated economic and legal analysis concerning the likely impact of the new rules, and possible revisions to the rules. In response
to President Trump’s request, on June 29, 2017, the DOL issued a request for information related to the Fiduciary Rule and the
DOL’s new and amended exemptions that were published in conjunction with the final rule. The request for information sought
public input that could lead to new exemptions or changes and revisions to the final rule. On November 29, 2017, the DOL
finalized an 18-month delay from January 1, 2018 to July 1, 2019, of the applicability of significant portions of the previously
proposed exemptions (including BIC and prohibited transaction exemption 84-24), to afford sufficient time to review further
the previously adopted rules and such exemptions. The DOL also updated its enforcement policy to indicate that the DOL and
IRS will not pursue claims, until July 1, 2019, against fiduciaries who are working diligently and in good faith to comply with
the final Fiduciary Rule or treat those fiduciaries as being in violation of the final rule.
While we continue to analyze the impact of the final regulations on our business and work diligently to comply with the
final rule, we anticipate that we will need to undertake certain additional tasks in order to comply with certain of the exemptions
provided in the DOL regulations, including additional compliance reviews of material shared with distributors, wholesaler and
call center training, and product reporting and analysis. The change of administration, the DOL’s June 29, 2017 request for
information related to the Fiduciary Rule and related exemptions, and the November 29, 2017 extension of the applicability of
many of the conditions of the proposed and revised exemptions leaves uncertainty over whether the regulations will be
substantially modified or repealed. This uncertainty could create confusion among our distribution partners, which could
negatively impact product sales. We cannot predict what other proposals may be made, what legislation or regulations may be
introduced or enacted, or what impact any such legislation or regulations may have on our business, results of operations and
financial condition.
While the Fiduciary Rule also provides that, to a limited extent, contracts sold and advice provided prior to the applicable
date would not have to be modified to comply with the new investment advice regulations, there is lack of clarity surrounding
some of the conditions for qualifying for this limited exception. There can be no assurance that the DOL will agree with our
interpretation of these provisions, in which case the DOL and IRS could assess significant penalties against a portion of products
sold prior to the applicable date of the new regulations. The assessment of such penalties could also trigger substantial litigation
risk. Any such penalties and related litigation could adversely affect our results of operations and financial condition.
While we continue to analyze the impact of the final regulation on our business, we believe it could have an adverse effect
on sales of annuity products to ERISA qualified plans and IRAs through our independent distribution partners. A significant
portion of our annuity sales are to IRAs. The new regulation deems advisors, including independent distributors, who sell fixed
index-linked annuities to IRAs, IRA rollovers or 401(k) plans, to be fiduciaries and prohibits them from receiving compensation
unless they comply with a prohibited transaction exemption. The relevant exemption requires advisors to comply with impartial
conduct standards and may require us to exercise additional oversight of the sales process. Compliance with the prohibited
transaction exemptions will likely result in increased regulatory burdens on us and our independent distribution partners, changes
to our compensation practices and product offerings and increased litigation risk, which could adversely affect our results of
operations and financial condition. See “Business — Regulation — Department of Labor and ERISA Considerations.”
The NAIC and certain regulators, including the NYDFS, have proposed a “best interest” standard become part of their
suitability requirements. These new rules could increase the amount of training and documentation of sales practices required
between us, our distributors and their advisors. Depending on the final version of these rules, we could be exposed to regulatory
penalties if and when the best interest standard is not met.
A decrease in the RBC ratio (as a result of a reduction in statutory surplus and/or increase in RBC requirements) of our
insurance subsidiaries could result in increased scrutiny by insurance regulators and rating agencies and have a material
adverse effect on our results of operations and financial condition
The NAIC has established model regulations that provide minimum capitalization requirements based on RBC formulas
for insurance companies. The RBC formula for life insurance companies establishes capital requirements relating to asset,
insurance, interest rate, market and business risks, including equity, interest rate and expense recovery risks associated with
variable annuities that contain certain guaranteed minimum death and living benefits. Each of our insurance subsidiaries is
subject to RBC standards and/or other minimum statutory capital and surplus requirements imposed under the laws of its
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respective jurisdiction of domicile. See “Business — Regulation — Insurance Regulation — Surplus and Capital; Risk-Based
Capital.”
In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending on a variety of factors,
including the amount of statutory income or losses generated by the insurance subsidiary (which itself is sensitive to equity
market and credit market conditions), the amount of additional capital such insurer must hold to support business growth, changes
in equity market levels, the value and credit ratings of certain fixed-income and equity securities in its investment portfolio, the
value of certain derivative instruments that do not receive hedge accounting and changes in interest rates, as well as changes to
the RBC formulas and the interpretation of the NAIC’s instructions with respect to RBC calculation methodologies. Our financial
strength and credit ratings are significantly influenced by statutory surplus amounts and RBC ratios. In addition, rating agencies
may implement changes to their own internal models, which differ from the RBC capital model, that have the effect of increasing
or decreasing the amount of statutory capital we or our insurance subsidiaries should hold relative to the rating agencies’
expectations. Under stressed or stagnant capital market conditions and with the aging of existing insurance liabilities, without
offsets from new business, the amount of additional statutory reserves that an insurance subsidiary is required to hold may
materially increase. This increase in reserves would decrease the statutory surplus available for use in calculating the subsidiary’s
RBC ratios. To the extent that an insurance subsidiary’s RBC ratio is deemed to be insufficient, we may seek to take actions
either to increase the capitalization of the insurer or to reduce the capitalization requirements. If we were unable to accomplish
such actions, the rating agencies may view this as a reason for a ratings downgrade.
The failure of any of our insurance subsidiaries to meet its applicable RBC requirements or minimum capital and surplus
requirements could subject it to further examination or corrective action imposed by insurance regulators, including limitations
on its ability to write additional business, supervision by regulators or seizure or liquidation. Any corrective action imposed
could have a material adverse effect on our business, results of operations and financial condition. A decline in RBC ratios,
whether or not it results in a failure to meet applicable RBC requirements, may limit the ability of an insurance subsidiary to
make dividends or distributions to us, could result in a loss of customers or new business, and could be a factor in causing ratings
agencies to downgrade financial strength ratings, each of which could have a material adverse effect on our business, results of
operations and financial condition.
The Dodd-Frank provisions compelling the liquidation of certain types of financial institutions could materially and adversely
affect us, as such a financial institution and as an investor in or counterparty to other such financial institutions, as well as
our respective investors
Under provisions of Dodd-Frank, if we or another financial institution were to become insolvent or were in danger of
defaulting on our or its respective obligations and it was determined that such default would have serious effects on financial
stability in the United States, we or such other financial institution could be compelled to undergo liquidation with the FDIC as
receiver. Under this new regime an insurance company such as Brighthouse Life Insurance Company, BHNY or NELICO would
be resolved in accordance with state insurance law. If the FDIC were to be appointed as the receiver for another type of company
(including an insurance holding company such as Brighthouse Financial, Inc.), the liquidation of that company would occur
under the provisions of the new liquidation authority, and not under the Bankruptcy Code, which ordinarily governs liquidations.
In an FDIC-managed liquidation, holders of a company’s debt could in certain respects be treated differently than they would
be under the Bankruptcy Code and similarly situated creditors could be treated differently. In particular, unsecured creditors and
shareholders are intended to bear the losses of the company being liquidated. These provisions could apply to some financial
institutions whose debt securities Brighthouse holds in its investment portfolios and could adversely affect the respective positions
of creditors and the value of their respective holdings.
Dodd-Frank also provides for the assessment of charges against certain financial institutions, including non-bank
systemically important financial institutions and bank holding companies, to cover the costs of liquidating any financial company
subject to the new liquidation authority. The liquidation authority could increase the funding charges assessed against Brighthouse.
We are subject to U.S. federal, state and other securities and state insurance laws and regulations which, among other things,
require that we distribute certain of our products through a registered broker-dealer; failure to comply with these laws or
changes to these laws may have a material adverse effect on our operations and our profitability
Federal and state securities laws and regulations apply to insurance products that are also “securities,” including variable
annuity contracts and variable life insurance policies, to the separate accounts that issue them, and to certain fixed interest rate
or index-linked contracts (“registered fixed annuity contracts”). Such laws and regulations require that we distribute these
products through a broker-dealer that is registered with the SEC and certain state securities regulators and is a member of the
FINRA. Accordingly, by offering and selling of variable annuity contracts, variable life insurance policies and registered fixed
annuity contracts, and in managing certain proprietary mutual funds associated with those products, we are subject to, and bear
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the costs of compliance with, extensive regulation under federal and state securities laws, as well as FINRA rules. Due to the
increased operating and compliance costs, the profitability of issuing these products is uncertain.
While prior to the Separation we relied on a MetLife-affiliated broker-dealer to distribute our variable and registered fixed
products, we currently and in the future will utilize Brighthouse Securities, a subsidiary we acquired from MetLife in the
Separation. Brighthouse Securities is a FINRA member and a broker-dealer registered with the SEC and applicable state
regulators.
Federal and state securities laws and regulations are primarily intended to ensure the integrity of the financial markets, to
protect investors in the securities markets, and to protect investment advisory or brokerage clients. These laws and regulations
generally grant regulatory and self-regulatory agencies broad rulemaking and enforcement powers, including the power to adopt
new rules impacting new and/or existing products, regulate the issuance, sale and distribution of our products and limit or restrict
the conduct of business for failure to comply with securities laws and regulations.
As a result of Dodd-Frank and the Fiduciary Rule, there have been a number of proposed or adopted changes to the laws
and regulations that govern the conduct of our variable and registered fixed insurance products business and the firms that
distribute these products. The future impact of recently adopted revisions to laws and regulations, as well as revisions that are
still in the proposal stage, on the way we conduct our business and the products we sell is unclear. Such impact could adversely
affect our operations and profitability, including increasing the regulatory and compliance burden upon us, resulting in increased
costs, or limiting the type, amount or structure of compensation arrangements into which we may enter with certain of our
employees, negatively impacting our ability to compete with other companies in recruiting and maintaining key personnel. See
“Business — Regulation — Insurance Regulation — Federal Initiatives.” However, following the change of administration, we
cannot predict with certainty whether any such proposals will be adopted, or what impact adopted revisions will have on our
business, financial condition or results of operations. See “— Our insurance business is highly regulated, and changes in regulation
and in supervisory and enforcement policies may materially impact our capitalization or cash flows, reduce our profitability and
limit our growth.”
The global financial crisis has led to significant changes in economic and financial markets that have, in turn, led to a
dynamic competitive landscape for variable and registered fixed annuity contract issuers. Our ability to react to rapidly changing
market and economic conditions will depend on the continued efficacy of provisions we have incorporated into our product
design allowing frequent and contemporaneous revisions of key pricing elements and our ability to work collaboratively with
federal securities regulators. Changes in regulatory approval processes, rules and other dynamics in the regulatory process could
adversely impact our ability to react to such changing conditions.
Changes in tax laws or interpretations of such laws could reduce our earnings and materially impact our operations by
increasing our corporate taxes and making some of our products less attractive to consumers
Changes in tax laws could have a material adverse effect on our profitability and financial condition, and could result in
our incurring materially higher corporate taxes. Higher tax rates may adversely affect our business, financial condition, results
of operations and liquidity. Conversely, if tax rates decline it could adversely affect the desirability of our products.
On December 22, 2017, President Trump signed into law sweeping changes to the tax code (the “Tax Act”). The Tax Act
reduced the corporate tax rate to 21%, reduced interest expense deductibility, increased capitalization amounts for deferred
acquisition costs, eliminated the corporate alternative minimum tax, provided for determining reserve deductions as 92.81% of
statutory reserves, and reduced the dividend received deduction. Most of the changes in the Tax Act are effective as of January
1, 2018.
The reduction in the corporate rate will require a one-time remeasurement of certain deferred tax items. For additional
information on the estimated impact of the Tax Act on our financial statements, including the estimated impact resulting from
the remeasurement of our deferred tax assets and liabilities, see Note 13 of the Notes to the Consolidated and Combined Financial
Statements. Our actual results may materially differ from our current estimate due to, among other things, further guidance that
may be issued by U.S. tax authorities or regulatory bodies and/or changes in interpretations and assumptions we have preliminarily
made. We will continue to analyze the Tax Act to finalize its financial statement impact.
Litigation and regulatory investigations are increasingly common in our businesses and may result in significant financial
losses and/or harm to our reputation
We face a significant risk of litigation and regulatory investigations and actions in the ordinary course of operating our
businesses, including the risk of class action lawsuits. Our pending legal and regulatory actions include proceedings specific to
us, as well as other proceedings that raise issues that are generally applicable to business practices in the industries in which we
operate. In connection with our insurance operations, plaintiffs’ lawyers may bring or are bringing class actions and individual
suits alleging, among other things, issues relating to sales or underwriting practices, claims payments and procedures, product
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design, disclosure, administration, investments, denial or delay of benefits and breaches of fiduciary or other duties to customers.
Plaintiffs in class action and other lawsuits against us may seek very large and/or indeterminate amounts, including punitive and
treble damages. Due to the vagaries of litigation, the outcome of a litigation matter and the amount or range of potential loss at
particular points in time may be difficult to ascertain. Uncertainties can include how fact finders will evaluate documentary
evidence and the credibility and effectiveness of witness testimony, and how trial and appellate courts will apply the law in the
context of the pleadings or evidence presented, whether by motion practice, at trial, or on appeal. Disposition valuations are also
subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable
law. Material pending litigation and regulatory matters affecting us and risks to our business presented by these proceedings, if
any, are discussed in Note 15 of the Notes to the Consolidated and Combined Financial Statements.
A substantial legal liability or a significant federal, state or other regulatory action against us, as well as regulatory inquiries
or investigations, could harm our reputation, result in material fines or penalties, result in significant legal costs and otherwise
have a material adverse effect on our business, financial condition and results of operations. Even if we ultimately prevail in the
litigation, regulatory action or investigation, our ability to attract new customers, retain our current customers and recruit and
retain employees could be materially and adversely impacted. Regulatory inquiries and litigation may also cause volatility in
the price of stocks of companies in our industry.
Current claims, litigation, unasserted claims probable of assertion, investigations and other proceedings against us could
have a material adverse effect on our business, financial condition or results of operations. It is also possible that related or
unrelated claims, litigation, unasserted claims probable of assertion, investigations and proceedings may be commenced in the
future, and we could become subject to further investigations and have lawsuits filed or enforcement actions initiated against
us. Increased regulatory scrutiny and any resulting investigations or proceedings in any of the jurisdictions where we operate
could result in new legal actions and precedents or changes in regulations that could adversely affect our business, financial
condition and results of operations.
Investments-Related Risks
Should the need arise, we may have difficulty selling certain holdings in our investment portfolio or in our securities lending
program in a timely manner and realizing full value given that not all assets are liquid
There may be a limited market for certain investments we hold in our investment portfolio, making them relatively illiquid.
These include privately-placed fixed maturity securities, derivative instruments such as options, mortgage loans, policy loans,
leveraged leases, other limited partnership interests, and real estate equity, such as real estate joint ventures and funds. In the
past, even some of our very high quality investments experienced reduced liquidity during periods of market volatility or
disruption. If we were forced to sell certain of our investments during periods of market volatility or disruption, market prices
may be lower than our carrying value in such investments. This could result in realized losses which could have a material
adverse effect on our results of operations and financial condition, as well as our financial ratios, which could affect compliance
with our credit instruments and rating agency capital adequacy measures.
Similarly, we loan blocks of our securities to third parties (primarily brokerage firms and commercial banks) through our
securities lending program, including fixed maturity securities and short-term investments. Under this program, we obtain
collateral, usually cash, at the inception of a loan and typically purchase securities with the cash collateral. Upon the return to
us of these loaned securities, we must return to the third-party the cash collateral we received. If the cash collateral has been
invested in securities, we need to sell the securities. However, in some cases, the maturity of those securities may exceed the
term of the related securities on loan and the estimated fair value of the securities we need to sell may fall below the amount of
cash received.
If we are required to return significant amounts of cash collateral in connection with our securities lending or otherwise
need significant amounts of cash on short notice and we are forced to sell securities, we may have difficulty selling such collateral
that is invested in securities in a timely manner, be forced to sell securities in a volatile or illiquid market for less than we
otherwise would have been able to realize under normal market conditions, or both. In the event of a forced sale, accounting
guidance requires the recognition of a loss for securities in an unrealized loss position and may require the impairment of other
securities based on our ability to hold those securities, which would negatively impact our financial condition, as well as our
financial ratios, which could affect compliance with our credit instruments and rating agency capital adequacy measures. In
addition, under stressful capital market and economic conditions, liquidity broadly deteriorates, which may further restrict our
ability to sell securities. Furthermore, if we decrease the amount of our securities lending activities over time, the amount of net
investment income generated by these activities will also likely decline. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Investments — Securities Lending.”
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Our requirements to pledge collateral or make payments related to declines in estimated fair value of derivatives transactions
or specified assets in connection with OTC-cleared, OTC-bilateral transactions and exchange traded derivatives may adversely
affect our liquidity, expose us to central clearinghouse and counterparty credit risk, and increase our costs of hedging
Many of our derivatives transactions require us to pledge collateral related to any decline in the net estimated fair value of
such derivatives transactions executed through a specific broker at a clearinghouse or entered into with a specific counterparty
on a bilateral basis. The amount of collateral we may be required to pledge and the payments we may be required to make under
our derivatives transactions may increase under certain circumstances and will increase as a result of the requirement to pledge
initial margin for OTC-cleared transactions entered into after June 10, 2013 and for OTC-bilateral transactions entered into after
the phase-in period, which would be applicable to us in 2020 as a result of the adoption by the Office of the Comptroller of the
Currency, the Federal Reserve Board, FDIC, Farm Credit Administration and Federal Housing Finance Agency (collectively,
the “Prudential Regulators”) and the CFTC of final margin requirements for non-centrally cleared derivatives. Although the
final rules allow us to pledge a broad range of non-cash collateral as initial and variation margin, the Prudential Regulators,
CFTC, central clearinghouses and counterparties may restrict or eliminate certain types of previously eligible collateral, or
charge us to pledge such non-cash collateral, which would increase our costs and could adversely affect our liquidity and the
composition of our investment portfolio. See “Business — Regulation — Regulation of Over-the-Counter Derivatives.”
Gross unrealized losses on fixed maturity and equity securities and defaults, downgrades or other events may result in future
impairments to the carrying value of such securities, resulting in a reduction in our net income
Fixed maturity and equity securities classified as available-for-sale (“AFS”) securities are reported at their estimated fair
value. Unrealized gains or losses on AFS securities are recognized as a component of other comprehensive income (loss) (“OCI”)
and are, therefore, excluded from net income. In recent periods, as a result of low interest rates, the unrealized gains on our fixed
maturity securities have exceeded the unrealized losses. However, if interest rates rise, our unrealized gains would decrease and
our unrealized losses would increase, perhaps substantially. The accumulated change in estimated fair value of these AFS
securities is recognized in net income when the gain or loss is realized upon the sale of the security or in the event that the decline
in estimated fair value is determined to be other-than-temporary and impairment charges to earnings are taken. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Investments — Fixed Maturity and Equity Securities
Available-for-Sale.”
The occurrence of a major economic downturn, acts of corporate malfeasance, widening credit risk spreads, or other events
that adversely affect the issuers or guarantors of securities or the underlying collateral of structured securities could cause the
estimated fair value of our fixed maturity securities portfolio and corresponding earnings to decline and cause the default rate
of the fixed maturity securities in our investment portfolio to increase. A ratings downgrade affecting issuers or guarantors of
particular securities, or similar trends that could worsen the credit quality of issuers, such as the corporate issuers of securities
in our investment portfolio, could also have a similar effect. With economic uncertainty, credit quality of issuers or guarantors
could be adversely affected. Similarly, a ratings downgrade affecting a security we hold could indicate the credit quality of that
security has deteriorated and could increase the capital we must hold to support that security to maintain our RBC levels. Levels
of write-downs or impairments are impacted by intent to sell, or our assessment of the likelihood that we will be required to
sell, fixed maturity securities, as well as our intent and ability to hold equity securities which have declined in value until recovery.
Realized losses or impairments on these securities may have a material adverse effect on our results of operations and financial
condition in, or at the end of, any quarterly or annual period.
Our valuation of securities and investments and the determination of the amount of allowances and impairments taken on
our investments are subjective and, if changed, could materially adversely affect our results of operations or financial condition
Fixed maturity and equity securities, as well as short-term investments that are reported at estimated fair value, represent
the majority of our total cash and investments. We define fair value generally as the price that would be received to sell an asset
or paid to transfer a liability. Considerable judgment is often required in interpreting market data to develop estimates of fair
value, and the use of different assumptions or valuation methodologies may have a material effect of the estimated fair value
amounts. During periods of market disruption, including periods of significantly rising or high interest rates, rapidly widening
credit spreads or illiquidity, it may be difficult to value certain of our securities if trading becomes less frequent and/or market
data becomes less observable. In addition, in times of financial market disruption, certain asset classes that were in active markets
with significant observable data may become illiquid. In those cases, the valuation process includes inputs that are less observable
and require more subjectivity and management judgment. Valuations may result in estimated fair values which vary significantly
from the amount at which the investments may ultimately be sold. Further, rapidly changing and unprecedented credit and equity
market conditions could materially impact the valuation of securities as reported within our consolidated and combined financial
statements and the period-to-period changes in estimated fair value could vary significantly. Decreases in the estimated fair
value of securities we hold may have a material adverse effect on our financial condition. See “Management’s Discussion and
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Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates — Estimated Fair
Value of Investments.”
The determination of the amount of allowances and impairments varies by investment type and is based upon our periodic
evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and
assessments are revised as conditions change and new information becomes available. We reflect any changes in allowances
and impairments in earnings as such evaluations are revised. However, historical trends may not be indicative of future
impairments or allowances. In addition, any such future impairments or allowances could have a materially adverse effect on
our earnings and financial position. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations
— Summary of Critical Accounting Estimates — Investment Impairments.”
Defaults on our mortgage loans and volatility in performance may adversely affect our profitability
Our mortgage loans face default risk and are principally collateralized by commercial, agricultural and residential properties.
We establish valuation allowances for estimated impairments, which are based on loan risk characteristics, historical default
rates and loss severities, real estate market fundamentals, such as housing prices and unemployment, and outlooks, as well as
other relevant factors (for example, local economic conditions). In addition, substantially all of our commercial and agricultural
mortgage loans held-for-investment have balloon payment maturities. An increase in the default rate of our mortgage loan
investments or fluctuations in their performance could have a material adverse effect on our results of operations and financial
condition.
Further, any geographic or property type concentration of our mortgage loans may have adverse effects on our investment
portfolio and consequently on our results of operations or financial condition. Events or developments that have a negative effect
on any particular geographic region or sector may have a greater adverse effect on our investment portfolio to the extent that
the portfolio is concentrated. Moreover, our ability to sell assets relating to a group of related assets may be limited if other
market participants are seeking to sell at the same time. In addition, scrutiny of the mortgage industry continues and there may
be legislative proposals that would allow or require modifications to the terms of mortgage loans could be enacted. We cannot
predict whether any such proposals will be adopted, or what impact, if any, such proposals or, if enacted, such laws, could have
on our business or investments. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations
— Investments — Mortgage Loans.”
The defaults or deteriorating credit of other financial institutions could adversely affect us
We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties
in the financial services industry, including brokers and dealers, central clearinghouses, commercial banks, investment banks,
hedge funds and investment funds and other financial institutions. Many of these transactions expose us to credit risk in the
event of the default of our counterparty. In addition, with respect to secured transactions, our credit risk may be exacerbated
when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan
or derivative exposure due to us. We also have exposure to these financial institutions in the form of unsecured debt instruments,
non-redeemable and redeemable preferred securities, derivatives and joint venture, hedge fund and equity investments. Further,
potential action by governments and regulatory bodies in response to the financial crisis affecting the global banking system
and financial markets, such as investment, nationalization, conservatorship, receivership and other intervention, whether under
existing legal authority or any new authority that may be created, or lack of action by governments and central banks, as well
as deterioration in the banks’ credit standing, could negatively impact these instruments, securities, transactions and investments
or limit our ability to trade with them. Any such losses or impairments to the carrying value of these investments or other changes
may materially and adversely affect our results of operations and financial condition.
The continued threat of terrorism and ongoing military actions may adversely affect the value of our investment portfolio
and the level of claim losses we incur
The continued threat of terrorism, both within the United States and abroad, ongoing military and other actions and heightened
security measures in response to these types of threats may cause significant volatility in global financial markets and result in
loss of life, property damage, additional disruptions to commerce and reduced economic activity. The value of assets in our
investment portfolio may be adversely affected by declines in the credit and equity markets and reduced economic activity
caused by the continued threat of terrorism. Companies in which we maintain investments may suffer losses as a result of
financial, commercial or economic disruptions and such disruptions might affect the ability of those companies to pay interest
or principal on their securities or mortgage loans. Terrorist actions also could disrupt our operations centers in the U.S. and result
in higher than anticipated claims under our insurance policies. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Policyholder Liabilities.”
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Capital-Related Risks
As a holding company, Brighthouse Financial, Inc. depends on the ability of its subsidiaries to pay dividends
Brighthouse Financial, Inc. is a holding company for its insurance subsidiaries and does not have any significant operations
of its own. We depend on the cash at the holding company plus dividends from our subsidiaries to meet our obligations and to
pay common stock dividends, if any. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital Resources — The Company — Capital — Restrictions on Dividends and Returns of Capital
from Insurance Subsidiaries.”
If the cash Brighthouse Financial, Inc. receives from its subsidiaries is insufficient for it to fund its debt service and other
holding company obligations, Brighthouse Financial, Inc. may be required to raise cash through the incurrence of indebtedness,
the issuance of additional equity or the sale of assets. Our ability to access funds through such methods is subject to prevailing
market conditions and there can be no assurance that we will be able to do so. In addition, the terms of a tax separation agreement
that we entered into with MetLife immediately prior to the Distribution contain restrictions that may restrict or limit our ability
to issue additional equity or sell assets. See “— Economic Environment and Capital Markets-Related Risks — Adverse capital
and credit market conditions may significantly affect our ability to meet liquidity needs and our access to capital” and “Certain
Relationships and Related Party Transactions—Agreements Between Us and MetLife—Tax Separation Agreement.”
The payment of dividends and other distributions to Brighthouse Financial, Inc. by its insurance subsidiaries is regulated
by insurance laws and regulations. In general, dividends in excess of prescribed limits require insurance regulatory approval.
In addition, insurance regulators may prohibit the payment of dividends or other payments to Brighthouse Financial, Inc. by its
insurance subsidiaries if they determine that the payment could be adverse to the interests of our policyholders or contract
holders. In connection with our affiliated reinsurance company restructuring, the Delaware Department of Insurance approved
the payment of a dividend from BRCD to its parent, Brighthouse Life Insurance Company, which we completed in May 2017.
Any additional dividends by BRCD are subject to the approval of the Delaware Department of Insurance. Any requested payment
of dividends by Brighthouse Life Insurance Company and NELICO to Brighthouse Financial, Inc., or by BHNY to Brighthouse
Life Insurance Company, in excess of their respective 2018 ordinary dividend capacity would be considered an extraordinary
dividend subject to prior approval by the Delaware Department of Insurance and the Massachusetts Division of Insurance, and
the New York State Department of Financial Services, respectively. The payment of dividends and other distributions by insurance
companies is also influenced by business conditions including those described in the Risk Factors above and rating agency
considerations. See “— Regulatory and Legal Risks — A decrease in the RBC ratio (as a result of a reduction in statutory surplus
and/or increase in RBC requirements) of our insurance subsidiaries could result in increased scrutiny by insurance regulators
and rating agencies and have a material adverse effect on our results of operations and financial condition.” See also “Business
— Regulation — Insurance Regulation” and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital Resources — The Company — Capital — Restrictions on Dividends and Returns of Capital
from Insurance Subsidiaries.”
Operational Risks
Gaps in our risk management policies and procedures may leave us exposed to unidentified or unanticipated risk, which
could negatively affect our business
We have developed and continue to develop risk management policies and procedures to reflect the ongoing review of our
risks and expect to continue to do so in the future. Nonetheless, our policies and procedures may not be comprehensive and may
not identify every risk to which we are exposed. Many of our methods for managing risk and exposures are based upon the use
of observed historical market behavior to model or project potential future exposure. Models used by our business are based on
assumptions and projections which may be inaccurate. Business decisions based on incorrect or misused model output and
reports could have a material adverse impact on our results of operations. Model risk may be the result of a model being
misspecified for its intended purpose, being misused or producing incorrect or inappropriate results. Models used by our business
may not operate properly and could contain errors related to model inputs, data, assumptions, calculations, or output which could
give rise to adjustments to models that may adversely impact our results of operations. As a result, these methods may not fully
predict future exposures, which can be significantly greater than our historical measures indicate. Other risk management methods
depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that are publicly
available or otherwise accessible to us. This information may not always be accurate, complete, up-to-date or properly evaluated.
Furthermore, there can be no assurance that we can effectively review and monitor all risks or that all of our employees will
follow our risk management policies and procedures, nor can there be any assurance that our risk management policies and
procedures will enable us to accurately identify all risks and limit our exposures based on our assessments. In addition, we may
have to implement more extensive and perhaps different risk management policies and procedures under pending regulations.
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See “— Risks Related to Our Business — Our variable annuity exposure management strategy may not be effective, may result
in net income volatility and may negatively affect our statutory capital.”
The failure in cyber- or other information security systems, as well as the occurrence of events unanticipated in Brighthouse’s
and MetLife’s disaster recovery systems and business continuity planning could result in a loss or disclosure of confidential
information, damage to our reputation and impairment of our ability to conduct business effectively
Our business is highly dependent upon the effective operation of our computer systems and, for the duration of the Transition
Services Agreement and other agreements with MetLife companies, MetLife’s computer systems. We rely on these systems
throughout our business for a variety of functions, including processing new business, claims, and post-issue transactions,
providing information to customers and distributors, performing actuarial analyses and maintaining financial records. We also
retain confidential and proprietary information on such computer systems and we rely on sophisticated technologies to maintain
the security of that information. Such computer systems have been, and will likely continue to be, subject to a variety of forms
of cyberattacks with the objective of gaining unauthorized access to Brighthouse systems and data or disrupting Brighthouse
operations. These include, but are not limited to, phishing attacks, malware, ransomware, denial of service attacks, and other
computer-related penetrations. Administrative and technical controls and other preventive actions taken to reduce the risk of
cyber-incidents and protect our information technology may be insufficient to prevent physical and electronic break-ins,
cyberattacks or other security breaches to such computer systems. In some cases, such physical and electronic break-ins,
cyberattacks or other security breaches may not be immediately detected. This may impede or interrupt our business operations
and could adversely affect our business, financial condition and results of operations. In addition, the availability and cost of
insurance for operational and other risks relating to our business and systems may change and any such change may affect our
results of operations.
In the event of a disaster such as a natural catastrophe, epidemic, industrial accident, blackout, computer virus, terrorist
attack, cyberattack or war, unanticipated problems with our disaster recovery systems or, for the duration of the Transition
Services Agreement and other agreements with MetLife companies, MetLife’s disaster recovery systems, could have a material
adverse impact on our ability to conduct business and on our results of operations and financial position, particularly if those
problems affect our computer-based data processing, transmission, storage and retrieval systems and destroy valuable data. In
addition, in the event that a significant number of our or MetLife’s managers were unavailable following a disaster, our ability
to effectively conduct business could be severely compromised. These interruptions also may interfere with our suppliers’ ability
to provide goods and services and our employees’ ability to perform their job responsibilities.
The failure of our computer systems or, for the duration of the Transition Services Agreement and other agreements with
MetLife companies, MetLife’s systems, and/or our respective disaster recovery plans for any reason could 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. Such a failure could harm our reputation, subject us to regulatory sanctions and
legal claims, lead to a loss of customers and revenues and otherwise adversely affect our business and financial results. Vendors,
distributors, and other third parties, including MetLife, provide operational or information technology services to us. 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. Such a failure could harm our reputation, subject us to regulatory sanctions and
legal claims, lead to a loss of customers and revenues and otherwise adversely affect our business and financial results. While
we maintain cyber liability insurance that provides both third-party liability and first-party liability coverages, this insurance
may not be sufficient to protect us against all losses. There can be no assurance that our information security policies and systems
in place can prevent unauthorized use or disclosure of confidential information, including nonpublic personal information. Any
failure to protect the confidentiality of customer information could adversely affect our reputation and have a material adverse
effect on our business, financial condition and results of operations.
Our associates and those of MetLife may take excessive risks which could negatively affect our financial condition and
business
As an insurance enterprise, we are in the business of accepting certain risks. The associates who conduct our business,
including executive officers and other members of management, sales intermediaries, investment professionals, product
managers, and other associates, as well as associates of MetLife who provide services to Brighthouse in connection with the
Transition Services Agreement, the Third-Party Administrative Services Agreement or the Investment Management Agreements
do so in part by making decisions and choices that involve exposing us to risk. See “Certain Relationships and Related Person
Transactions — Agreements Between Us and MetLife” for information regarding such agreements. These include decisions
such as setting underwriting guidelines and standards, product design and pricing, determining what assets to purchase for
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investment and when to sell them, which business opportunities to pursue, and other decisions. Associates may take excessive
risks regardless of the structure of our compensation programs and practices. Similarly, our controls and procedures designed
to monitor associates’ business decisions and prevent them from taking excessive risks, and to prevent employee misconduct,
may not be effective. If our associates take excessive risks, the impact of those risks could harm our reputation and have a
material adverse effect on our financial condition and business operations.
General Risks
Changes in accounting standards issued by the Financial Accounting Standards Board may adversely affect our financial
statements
Our financial statements are subject to the application of GAAP, which is periodically revised by the Financial Accounting
Standards Board (“FASB”), a recognized authoritative body. Accordingly, from time to time we are required to adopt new or
revised accounting standards or interpretations issued by the FASB. The impact of accounting pronouncements that have been
issued but not yet implemented are disclosed in our reports filed with the SEC. See Note 1 of the Notes to the Consolidated and
Combined Financial Statements. The FASB issued several proposed amendments to the accounting for long duration insurance
contracts on September 29, 2016. One of the proposed amendments, in particular, would require all guarantees associated with
our variable annuity business to be accounted for at fair value, with changes in fair value reported in net income (excluding the
change in fair value attributable to nonperformance risk, which would be reported in OCI). Any of the proposed amendments
to the accounting for long duration insurance contracts, if adopted, would not be expected to be effective for several years after
issuance of a final standard. An assessment of the potential impact of proposed FASB standards, including the proposed changes
to long duration insurance accounting, is not provided as such proposals are subject to change through the exposure process and
official positions of the FASB are determined only after extensive due process and deliberations. The required adoption of these
proposed and other future accounting standards could have a material adverse effect on our GAAP basis equity and results of
operations, including on our net income.
We may not be able to protect our intellectual property and may be subject to infringement claims
We rely on a combination of contractual rights with third parties and copyright, trademark, patent and trade secret laws to
establish and protect our intellectual property. Third parties may infringe or misappropriate our intellectual property. We may
have to litigate to enforce and protect our copyrights, trademarks, patents, trade secrets and know-how or to determine their
scope, validity or enforceability. This would represent a diversion of resources that may be significant and our efforts may not
prove successful. The inability to secure or protect our intellectual property assets could harm our reputation and have a material
adverse effect on our business and our ability to compete with other insurance companies and financial institutions. See “—
Risks Related to Our Separation from, and Continuing Relationship with, MetLife — Our separation from MetLife could
adversely affect our business and profitability due to MetLife’s strong brand and reputation.”
In addition, we may be subject to claims by third parties for (i) patent, trademark or copyright infringement, (ii) breach of
patent, trademark or copyright license usage rights, or (iii) misappropriation of trade secrets. Any such claims or resulting
litigation could result in significant expense and liability for damages. If we were found to have infringed or misappropriated a
third-party patent or other intellectual property right, we could in some circumstances be enjoined from providing certain products
or services to our customers or from utilizing and benefiting from certain patents, copyrights, trademarks, trade secrets or licenses.
Alternatively, we could be required to enter into costly licensing arrangements with third parties or implement a costly alternative.
Any of these scenarios could harm our reputation and have a material adverse effect on our business and results of operations.
We may experience difficulty in marketing and distributing products through our distribution channels
We distribute our products exclusively through a variety of third-party distribution channels. We may periodically negotiate
the terms of these relationships, and there can be no assurance that such terms will remain acceptable to us or such third parties.
Such distributors will be subject to differing commission structures, depending on the product sold, one of which is a level/
asset-based commission structure; other products are subject to a more traditional commission structure. If a particular
commission structure is not acceptable to these distributors, or if we are unsuccessful in attracting and retaining key associates
who conduct our business, including wholesalers and financial advisors, our sales of individual insurance, annuities and
investment products could decline and our results of operations and financial condition could be materially adversely affected.
See “— Risks Related to Our Business — Elements of our business strategy are new and may not be effective in accomplishing
our objectives.”
Furthermore, an interruption in certain key relationships could materially affect our ability to market our products and could
have a material adverse effect on our results of operations and financial condition. Our Separation from MetLife prompted some
third parties to re-price, modify or terminate their distribution or vendor relationships with us. An interruption or significant
change in certain key relationships could materially affect our ability to market our products and could have a material adverse
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effect on our results of operations and financial condition. In February 2016, Fidelity elected to suspend its distribution relationship
with us following the announcement of the planned separation from MetLife; the suspension was the primary cause of a significant
reduction in our sales of variable annuities year-over-year for the year ended December 31, 2016. Other distributors may elect
to suspend, alter, reduce or terminate their distribution relationships with us for various reasons, changes in our distribution
strategy, adverse developments in our business, adverse rating agency actions, or concerns about market-related risks. We are
also at risk that key distribution partners may merge, change their business models in ways that affect how our products are sold,
or terminate their distribution contracts with us, or that new distribution channels could emerge and adversely impact the
effectiveness of our distribution efforts. In addition, we rely on a core number of our distributors to produce the majority of our
sales. If any one such distributor were to terminate its relationship with us or reduce the amount of sales which it produces for
us our results of operations could be adversely affected. An increase in bank and broker-dealer consolidation activity could
increase competition for access to distributors, result in greater distribution expenses and impair our ability to market products
through these channels. Consolidation of distributors and/or other industry changes may also increase the likelihood that
distributors will try to renegotiate the terms of any existing selling agreements to terms less favorable to us.
Because our products are distributed through unaffiliated firms, we may not be able to monitor or control the manner of
their distribution despite our training and compliance programs. If our products are distributed by such firms in an inappropriate
manner, or to customers for whom they are unsuitable, we may suffer reputational and other harm to our business.
In addition, our distributors may also sell our competitors’ products. If our competitors offer products that are more attractive
than ours, or pay higher commission rates to the sales representatives than we do, these representatives may concentrate their
efforts in selling our competitors’ products instead of ours. Prior to the sale of MPCG to MassMutual we distributed a significant
portion of our annuity products and insurance policies through MPCG. In connection with the sale we entered into an agreement
which permits us to serve as the exclusive manufacturer for certain proprietary products which are offered through MassMutual’s
career agent channel. We partnered with MassMutual to develop the initial product distributed under this arrangement, the Index
Horizons fixed indexed annuity, and agreed on the terms of the related reinsurance. While the agreement has a term of 10 years,
it is possible that MassMutual may terminate our exclusivity or the agreement itself in specified circumstances, such as our
inability or failure to provide product designs that reasonably meet MassMutual requirements. Although we expect MassMutual
to be an important distribution partner with respect to certain of our products, we believe that the level of sales, if any, produced
through this channel will be materially less than the levels produced historically through MPCG.
We may be unable to attract and retain key personnel to support our business
Our success depends, in large part, on our ability to attract and retain key personnel. We compete with other financial services
companies for personnel primarily on the basis of compensation, support services and financial position. Intense competition
exists for key personnel with demonstrated ability, and we may be unable to hire or retain such personnel. The unexpected loss
of services of one or more of our key personnel could have a material adverse effect on our business due to loss of their skills,
knowledge of our business, their years of industry experience and the potential difficulty of promptly finding qualified replacement
personnel in North Carolina or elsewhere who are prepared to relocate. We may not be able to attract and retain qualified personnel
to fill open positions or replace or succeed members of our senior management team or other key personnel. Proposed rules
implementing the executive compensation provisions of Dodd-Frank may limit the type and structure of compensation
arrangements into which we may enter with certain of our employees and officers. In addition, proposed rules under Dodd-
Frank would prohibit the payment of “excessive compensation” to our executives. These restrictions could negatively impact
our ability to compete with other companies in recruiting and retaining key personnel.
Our ability to attract and retain highly qualified independent sales intermediaries for our products may also be negatively
affected by our Separation from MetLife. We may be required to lower the prices of our products, increase our sales commissions
and fees, change long-term selling and marketing agreements and take other actions to maintain our relationship with our sales
intermediaries and distribution partners, all of which could have an adverse effect on our financial condition and results of
operations. We cannot accurately predict the long-term effect that our Separation from MetLife will have on our business, sales
intermediaries, customers, distributors or associates who conduct our business. In addition, we agreed in the Master Separation
Agreement with MetLife that for a certain period following the date of the Master Separation Agreement, subject to customary
exceptions regarding prior associates who conduct our business, general solicitation and employees who contact us without
being solicited, we will not solicit for employment certain current employees of MetLife or any of its affiliates. We cannot predict
how this potential agreement not to solicit employees will impact our ability to attract and recruit associates necessary to the
operation of our business.
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Any failure to protect the confidentiality of client information could adversely affect our reputation and have a material
adverse effect on our business, financial condition and results of operations
Pursuant to federal and state laws, various government agencies have established rules protecting the privacy and security
of personal information. In addition, most states have enacted laws, which vary significantly from jurisdiction to jurisdiction,
to safeguard the privacy and security of personal information. Many of the associates who conduct our business have access to,
and routinely process, personal information of clients through a variety of media, including information technology systems.
We rely on various internal processes and controls to protect the confidentiality of client information that is accessible to us, or
in our possession or the possession of our associates. It is possible that an associate could, intentionally or unintentionally,
disclose or misappropriate confidential client information and our data has been the subject of cyberattacks and could be subject
to additional attacks. If we fail to maintain adequate internal controls or if our associates fail to comply with our policies and
procedures, misappropriation or intentional or unintentional inappropriate disclosure or misuse of client information could occur.
Such internal control inadequacies or non-compliance could materially damage our reputation or lead to civil or criminal penalties,
which, in turn, could have a material adverse effect on our business, financial condition and results of operations. In addition,
we analyze customer data to better manage our business. There has been increased scrutiny, including from state regulators,
regarding the use of “big data” techniques such as price optimization. We cannot predict what, if any, actions may be taken with
regard to “big data,” but any inquiry in connection with our “big data” business practices could cause reputational harm and any
limitations could have a material impact on our business, financial condition and results of operations. See “— The failure in
cyber- or other information security systems, as well as the occurrence of events unanticipated in Brighthouse’s and MetLife’s
disaster recovery systems and business continuity planning could result in a loss or disclosure of confidential information,
damage to our reputation and impairment of our ability to conduct business effectively.”
We could face difficulties, unforeseen liabilities, asset impairments or rating actions arising from business acquisitions or
dispositions
We may engage in dispositions and acquisitions of businesses. Such activity exposes us to a number of risks arising from
(i) potential difficulties achieving projected financial results including the costs and benefits of integration or deconsolidation;
(ii) unforeseen liabilities or asset impairments; (iii) the scope and duration of rights to indemnification for losses; (iv) the use
of capital which could be used for other purposes; (v) rating agency reactions; (vi) regulatory requirements that could impact
our operations or capital requirements; (vii) changes in statutory accounting principles or GAAP, practices or policies; and (viii)
certain other risks specifically arising from activities relating to a legal entity reorganization.
Our ability to achieve certain financial benefits we anticipate from any acquisitions of businesses will depend in part upon
our ability to successfully integrate such businesses in an efficient and effective manner. There may be liabilities or asset
impairments that we fail, or are unable, to discover in the course of performing acquisition-related due diligence investigations.
Furthermore, even for obligations and liabilities that we do discover during the due diligence process, neither the valuation
adjustment nor the contractual protections we negotiate may be sufficient to fully protect us from losses.
We may from time to time dispose of business or blocks of in-force business through outright sales, reinsurance transactions
or by alternate means. After a disposition, we may remain liable to the acquirer or to third parties for certain losses or costs
arising from the divested business or on other bases. We may also not realize the anticipated profit on a disposition or incur a
loss on the disposition. In anticipation of any disposition, we may need to restructure our operations, which could disrupt such
operations and affect our ability to recruit key personnel needed to operate and grow such business pending the completion of
such transaction. In addition, the actions of key employees of the business to be divested could adversely affect the success of
such disposition as they may be more focused on obtaining employment, or the terms of their employment, than on maximizing
the value of the business to be divested. Furthermore, transition services or tax arrangements related to any such separation
could further disrupt our operations and may impose restrictions, liabilities, losses or indemnification obligations on us.
Depending on its particulars, a separation could increase our exposure to certain risks, such as by decreasing the diversification
of our sources of revenue. Moreover, we may be unable to timely dissolve all contractual relationships with the divested business
in the course of the proposed transaction, which may materially adversely affect our ability to realize value from the disposition.
Such restructuring could also adversely affect our internal controls and procedures and impair our relationships with key
customers, distributors and suppliers. An interruption or significant change in certain key relationships could materially affect
our ability to market our products and could have a material adverse effect on our business, operating results and financial
condition.
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Risks Related to Our Separation from, and Continuing Relationship with, MetLife
Our Separation from MetLife could adversely affect our business and profitability due to MetLife’s strong brand and
reputation
Prior to the Distribution, as a wholly-owned subsidiary of MetLife, we marketed our products and services using the
“MetLife” brand name and logo. We have also benefited from trademarks licensed in connection with the MetLife brand. We
believe the association with MetLife provided us with preferred status among our customers, vendors and other persons due to
MetLife’s globally recognized brand, reputation for high quality products and services and strong capital base and financial
strength.
Our Separation from MetLife could adversely affect our ability to attract and retain customers, which could result in reduced
sales of our products. In connection with the Distribution, we entered into the Intellectual Property License Agreement and
Master Separation Agreement with MetLife, pursuant to which we have a license to use certain trademarks and the “MetLife”
name in certain limited circumstances, including as part of a marketing tag line, for a transition period or otherwise to refer to
our historic affiliation with MetLife on selected materials for a limited period of time following the Distribution. See “Certain
Relationships and Related Person Transactions — Agreements Between Us and MetLife — Master Separation Agreement —
The separation of our business.” We have undergone operational and legal work to rebrand to “Brighthouse.”
We have established a portfolio of trademarks in the United States that we consider important in the marketing of our
products and services, including for our name, “Brighthouse Financial.” We have also filed other trademark applications in the
United States, including for our logo design and potential taglines. However, the registration of some of these trademarks is not
complete and they may not all ultimately become registered. Our use of the Brighthouse Financial name for the Company or
for our existing or any new products in the United States has been challenged by third parties, and we were involved in legal
proceedings to protect or defend our rights with respect to the Brighthouse Financial name and trademarks. Although the parties
to these proceedings have resolved this matter and dismissed the action, it is possible that other challenges to our trademarks
could arise in the future.
As a result of our Separation from MetLife, some of our existing policyholders, contract owners and other customers have
chosen, and some may in the future choose to stop doing business with us, which could increase the rate of surrenders and
withdrawals in our policies and contracts. In addition, other potential policyholders and contract owners may decide not to
purchase our products because we no longer are a part of MetLife.
Our contractual arrangements with MetLife may not be adequate to meet our operational and business needs. The terms of
our arrangements with MetLife may be more favorable than we would be able to obtain from an unaffiliated third party, and
we may be unable to replace those services in a timely manner or on comparable terms
We have contractual arrangements, such as the Transition Services Agreement, Investment Management Agreements, the
Intellectual Property License Agreement, the Investment Finance Services Agreements entered into in connection with the
Investment Management Agreements and other agreements that require MetLife affiliates to provide certain services to us,
including the receipt of certain IT services pursuant to software license agreements that MetLife affiliates have with certain
third-party software vendors, and the provision of investment management and related accounting, reporting, actuarial and other
administrative services by MLIA with respect to Brighthouse’s general and separate account investment portfolios. See “Certain
Relationships and Related Person Transactions.” There can be no assurance that the services to be provided by the MetLife
affiliates will be sufficient to meet our operational and business needs, that the MetLife affiliates will be able to perform such
functions in a manner satisfactory to us, that MetLife’s practices and procedures will enable it to adequately administer the
policies it handles or that any remedies available under these arrangements will be sufficient to us in the event of a dispute or
nonperformance. See “— Risks Related to Our Business — The failure of third parties to provide various services that are
important to our operations, or any failure of the practices and procedures that these third parties use to provide services to us,
could have a material adverse effect on our business.”
Upon termination or expiration of any agreement between us and MetLife affiliates, there can be no assurance that these
services will be sustained at the same levels as they were when we were receiving such services from MetLife or that we will
be able to obtain the same benefits from another provider or our indemnity rights from such third parties will not be limited. We
may not be able to replace services and arrangements in a timely manner or on terms and conditions, including cost, as favorable
as those we have previously received from MetLife. The agreements with the MetLife affiliates were entered into in the context
of intercompany relationships that arose from enterprise-wide agreements with vendors, and we may have to pay higher prices
for similar services from MetLife or unaffiliated third parties in the future.
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The Brighthouse Board and its directors and officers may have limited liability to us and you for breach of fiduciary duty
Our amended and restated certificate of incorporation provides that none of our directors and officers will be personally
liable to us or our shareholders for monetary damages for breach of fiduciary duty, except for liability for breach of their duty
of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, dividend
payments or stock repurchases that are unlawful under Delaware law or any transaction in which a director has derived an
improper personal benefit.
There are incremental costs as a separate, public company
As a result of the Separation, we needed to replicate or replace certain functions, systems and infrastructure. We have begun
to make infrastructure investments in order to operate without MetLife’s existing operational and administrative infrastructure.
These initiatives involve substantial costs, the hiring and integration of a large number of new employees, and integration of
the new and expanded operations and infrastructure with our existing operations and infrastructure and, in some cases, the
operations and infrastructure of our partners and other third parties. They also require significant time and attention from our
senior management and others throughout the Company, in addition to their day-to-day responsibilities running the business.
There can be no assurance that we will be able to establish and expand the operations and infrastructure to the extent required,
in the time, or at the costs anticipated, and without disrupting our ongoing business operations in a material way, all of which
could have a material adverse effect on our business and results of operations.
Our business has benefited from MetLife’s purchasing power when procuring goods and services. As a standalone company,
we may be unable to obtain such goods and services at comparable prices or on terms as favorable as those obtained prior to
the Distribution, which could decrease our overall profitability. See “— Our contractual arrangements with MetLife may not be
adequate to meet our operational and business needs. The terms of our arrangements with MetLife may be more favorable than
we would be able to obtain from an unaffiliated third party, and we may be unable to replace those services in a timely manner
or on comparable terms.”
We have a very large number of shareholders which may impact the efficacy of shareholder votes and will result in increased
costs
Under the plan of reorganization of Metropolitan Life Insurance Company (“MLIC”), the MetLife Policyholder Trust was
established to hold the shares of MetLife common stock allocated to eligible policyholders not receiving cash or policy credits
under the plan. As of February 16, 2018, 154,420,615, or 14.9%, of the outstanding shares of MetLife common stock were held
in the MetLife Policyholder Trust for the benefit of approximately three million trust beneficiaries. These trust beneficiaries are
eligible to vote only on certain fundamental corporate actions of MetLife. The trustee of the MetLife Policyholder Trust votes
on their behalf on all other matters in accordance with the recommendation of the MetLife Board of Directors.
Brighthouse does not have such a trust structure and, therefore a large number of trust beneficiaries became shareholders
of Brighthouse. The addition of this large number of additional shareholders with full voting rights to our shareholder base may
have a significant impact on matters brought to a shareholder vote and other aspects of our corporate governance. We will also
incur increased costs in connection with a larger shareholder base. These costs may include mailing costs and vendor fees related
to servicing the needs of these shareholders.
As a separate, public company, we expend additional time and resources to comply with rules and regulations that did not
apply to us prior to the Separation
As a separate, public company, the various rules and regulations of the SEC, as well as the rules of Nasdaq Stock Market
LLC (“Nasdaq”), on which our common stock is listed, require us to implement additional corporate governance practices and
adhere to a variety of reporting requirements. Compliance with these public company obligations has increased our legal and
financial compliance costs and could place additional demands on our finance, legal and accounting staff and on our financial,
accounting and information systems.
In particular, as a separate, public company, our management will be required to conduct an annual evaluation of our internal
controls over financial reporting and include a report of management on our internal controls in our Annual Reports on Form
10-K. In addition, we will be required to have our independent registered public accounting firm attest to the effectiveness of
our internal controls over financial reporting pursuant to Auditing Standard No. 5. If we are unable to conclude that we have
effective internal controls over financial reporting, investors could lose confidence in the reliability of our financial statements,
which could result in a decrease in the value of our common stock.
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Our historical combined financial data are not necessarily representative of the results we would have achieved as a separate
company and may not be a reliable indicator of our future results
Our historical combined financial data included in this Annual Report on Form 10-K and in our other filings with the SEC
do not necessarily reflect the financial condition, results of operations or cash flows we would have achieved as a standalone
company during the periods presented or those we will achieve in the future. For example, we are in the process of adjusting
our capital structure to more closely align with U.S. public companies. As a result, financial metrics that are influenced by our
capital structure, such as interest expense and return on equity, will not necessarily be indicative for historical periods of the
performance we may achieve as a separate company. In addition, significant increases may occur in our cost structure as a result
of the Distribution, including costs related to public company reporting, investor relations and compliance with the Sarbanes-
Oxley Act of 2002. Also, we have incurred and anticipate incurring substantial expenses in connection with rebranding our
business.
As a result of these matters, among others, it may be difficult for investors to compare our future results to historical results
or to evaluate our relative performance or trends in our business.
We have agreed under the Master Separation Agreement with MetLife to indemnify MetLife, its directors, officers and
employees and certain of its agents for liabilities relating to, arising out of or resulting from certain events relating to our
business
The Master Separation Agreement provides that, subject to certain exceptions, we will indemnify, hold harmless and defend
MetLife and certain related individuals (generally including MetLife’s directors, officers and employees and certain agents),
from and against all liabilities relating to, arising out of or resulting from certain events relating to our business. We cannot
predict whether any event triggering this indemnity will occur or the extent to which we may be obligated to indemnify MetLife
or such related individuals. In addition, the Master Separation Agreement provides that, subject to certain exceptions, MetLife
will indemnify, hold harmless and defend us and certain related individuals (generally including our directors, officers and
employees and certain agents), from and against all liabilities relating to, arising out of or resulting from certain events relating
to its business. There can be no assurance that MetLife will be able to satisfy its indemnification obligation to us or that such
indemnification will be sufficient to us in the event of a dispute or nonperformance by MetLife. See “Certain Relationships and
Related Person Transactions — Agreements Between Us and MetLife — Master Separation Agreement — Provisions relating
to indemnification and liability insurance.”
Risks Relating to the Distribution
If the Distribution were to fail to qualify for non-recognition treatment for U.S. federal income tax purposes, then we
could be subject to significant tax liabilities
The Distribution was conditioned on the continued validity as of the Distribution date of the private letter ruling that MetLife
has received from the IRS regarding certain significant issues under the Code, and the receipt and continued validity as of the
Distribution date of an opinion from MetLife’s tax advisor that the Distribution qualifies for non-recognition of gain or loss to
MetLife and MetLife’s shareholders pursuant to Sections 355 and 361 of the Code, except to the extent of cash received in lieu
of fractional shares, each subject to the accuracy of and compliance with certain representations, assumptions and covenants
therein.
Notwithstanding the receipt of the private letter ruling and the tax opinion, the IRS could determine that the Distribution
should be treated as a taxable transaction if it determines that any of the representations, assumptions or covenants on which
the private letter ruling is based are untrue or have been violated. Furthermore, as part of the IRS’s policy, the IRS did not
determine whether the Distribution satisfies certain conditions that are necessary to qualify for non-recognition treatment. Rather,
the private letter ruling is based on representations by MetLife and us that these conditions have been satisfied. The tax opinion
addresses the satisfaction of these conditions.
The tax opinion is not binding on the IRS or the courts, and there can be no assurance that the IRS or a court will not take
a contrary position. In addition, the tax advisor relied on certain representations and covenants that have been delivered by
MetLife and us.
If the IRS ultimately determines that the Distribution is taxable, we could incur significant U.S. federal income tax liabilities,
and we could have an indemnification obligation to MetLife. For a more detailed discussion, see “— Potential indemnification
obligations if the Distribution does not qualify for non-recognition treatment or if certain other steps that are part of the Separation
do not qualify for their intended tax treatment could materially adversely affect our financial condition.”
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Potential indemnification obligations if the Distribution does not qualify for non-recognition treatment or if certain other
steps that are part of the Separation do not qualify for their intended tax treatment could materially adversely affect our
financial condition
Generally, taxes resulting from the failure of the Distribution to qualify for non-recognition treatment for U.S. federal income
tax purposes would be imposed on MetLife or MetLife’s shareholders and, under the Tax Separation Agreement, MetLife is
generally obligated to indemnify us against such taxes if the failure to qualify for tax-free treatment results from any action or
inaction that is within MetLife’s control or if the failure results from any direct or indirect transfer of MetLife’s stock. MetLife
may have an adverse interpretation of or object to its indemnification obligations to us under the Tax Separation Agreement,
and there can be no assurance that MetLife will be able to satisfy its indemnification obligation to us or that such indemnification
will be sufficient to us in the event of a dispute or nonperformance by MetLife. The failure of MetLife to fully indemnify us
could have a material adverse effect on our financial condition and results of operations.
In addition, MetLife will generally bear tax-related losses due to the failure of certain steps that were part of the Separation
to qualify for their intended tax treatment. However, the IRS could seek to hold us responsible for such liabilities, and under the
Tax Separation Agreement, we could be required, under certain circumstances, to indemnify MetLife and its affiliates against
certain tax-related liabilities caused by those failures, to the extent those liabilities result from an action we or our affiliates take
or from any breach of our or our affiliates’ representations, covenants or obligations under the Tax Separation Agreement. Events
triggering an indemnification obligation under the Tax Separation Agreement include ceasing to actively conduct our business
and events occurring after the Distribution that cause MetLife to recognize a gain under Section 355(e) of the Code. If the
Distribution does not qualify for non-recognition treatment or if certain other steps that are part of the Separation do not qualify
for their intended tax treatment, we could be required to pay material additional taxes or an indemnification obligation to MetLife,
which could materially and adversely affect our financial condition. See “Certain Relationships and Related Person Transactions
— Agreements Between Us and MetLife — Tax Agreements — Tax Separation Agreement.”
We could be required to pay material additional taxes or suffer other material adverse tax consequences if the tax consequences
of the Separation to us are not as expected
The Separation is expected to have certain federal income tax consequences to MetLife and to us, as set forth in a private
letter ruling issued by the IRS to MetLife and opinions provided by MetLife’s tax advisors. These opinions are not binding on
the IRS or the courts, and the tax opinions and the private letter ruling do not address all of the tax consequences of the Separation
to us. The Separation is a complex transaction subject to numerous tax rules, including rules that could require us to reduce our
tax attributes (such as the basis in our assets) in certain circumstances, and the application of these various rules to the Separation
is not entirely clear. The ultimate tax consequences to us of the Separation may not be finally determined for many years and
may differ from the tax consequences that we and MetLife currently expect and intend to report. As a result, we could be required
to pay material additional taxes and to materially reduce the tax assets (or materially increase the tax liabilities) on our consolidated
balance sheet. These changes could impact our available capital, ratings or cost of capital. There can be no assurance that the
Tax Separation Agreement will protect us from any such consequences, or that any issue that may arise will be subject to
indemnification by MetLife under the Tax Separation Agreement. As a result our financial condition and results of operations
could be materially and adversely affected.
Disputes or disagreements with MetLife may affect our financial statements and business operations, and our contractual
remedies may not be sufficient
In connection with the Separation, we entered into certain agreements that provide a framework for our ongoing relationship,
including a Transition Services Agreement, a Tax Separation Agreement and a Tax Receivables Agreement. Our agreements
with MetLife may not reflect terms that would have resulted from negotiation between unaffiliated parties. Such provisions may
include, among other things, indemnification rights and obligations, the allocation of tax liabilities, and other payment obligations
between us and MetLife. Disagreements regarding the obligations of MetLife or us under these agreements or any renegotiation
of their terms could create disputes that may be resolved in a manner unfavorable to us and our shareholders. In addition, there
can be no assurance that any remedies available under these agreements will be sufficient to us in the event of a dispute or
nonperformance by MetLife or that any such remedies will be sufficiently broad to cover any issues that arise under our
arrangements with MetLife. The failure of MetLife to perform its obligations under these agreements (or claims by MetLife that
we have failed to perform our obligations under the agreements) may have a material adverse effect on our financial statements,
and could consume substantial resources and attention thus creating a material adverse impact on our business performance.
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We are required to pay MetLife for certain tax benefits, which amounts are expected to be material
In partial consideration for the assets contributed by MetLife to us, we have entered into a Tax Receivables Agreement with
MetLife that provided for the payment by us to MetLife of 86% of the amount of cash savings, if any, in U.S. federal income
tax that we and our subsidiaries actually realize (or are deemed to realize under certain circumstances, as discussed in more
detail below under the heading “Certain Relationships and Related Person Transactions — Agreements Between Us and MetLife
— Tax Agreements — Tax Receivables Agreement”) as a result of the utilization of our and our subsidiaries’ net operating losses,
capital losses, tax basis and amortization or depreciation deductions in respect of certain tax benefits we may realize as a result
of certain transactions involved in the Separation, together with interest accrued from the date the applicable tax return is due
(without extension) until the date the applicable payment is due. See “Certain Relationships and Related Person Transactions
— Agreements Between Us and MetLife — Tax Agreements — Tax Separation Agreement.”
Estimating the amount of payments that may be made under the Tax Receivables Agreement is by its nature imprecise,
insofar as the calculation of amounts payable depends on a variety of factors. The actual amount and utilization of net operating
losses, tax basis and other tax attributes, as well as the amount and timing of any payments under the Tax Receivables Agreement,
will vary depending upon a number of factors, including the amount, character and timing of our and our subsidiaries’ taxable
income in the future. The Base Case Scenario has not assumed any benefit from the deferred taxes that are subject to the Tax
Receivables Agreement.
If we breach any of our material obligations under the Tax Receivables Agreement or undergo a change of control as defined
in the Tax Receivables Agreement, the Tax Receivables Agreement will terminate and we will be required to make a lump sum
payment equal to the present value of expected future payments under the Tax Receivables Agreement, which payment would
be based on certain assumptions, including those relating to our and our subsidiaries’ future taxable income. Additionally, if we
or a direct or indirect subsidiary transfers any asset to a corporation with which we do not file a consolidated tax return, we will
be treated as having sold that asset for its fair market value in a taxable transaction for purposes of determining the cash savings
in income tax under the Tax Receivables Agreement. If we sell or otherwise dispose of any of our subsidiaries in a transaction
that is not a change of control, we will be required to make a payment equal to the present value of future payments under the
Tax Receivables Agreement attributable to the tax benefits of such subsidiary that is sold or disposed of, applying the assumptions
described above. Any such payment resulting from a breach of material obligations, change of control, asset transfer or subsidiary
disposition could be substantial and could exceed our actual cash tax savings.
We have agreed to numerous restrictions to preserve the non-recognition treatment of the transactions, which may reduce
our strategic and operating flexibility
Even if the Distribution otherwise qualifies for non-recognition of gain or loss under Section 355 of the Code, it may be
taxable to MetLife, but not MetLife’s shareholders, under Section 355(e) of the Code if 50% or more (by vote or value) of our
common stock or MetLife’s common stock is acquired as part of a plan or series of related transactions that include the Distribution.
For this purpose, any acquisitions of MetLife’s or our common stock within two years before or after the Distribution are
presumed to be part of such a plan, although MetLife or we may be able to rebut that presumption based on either applicable
facts and circumstances or a “safe harbor” described in the tax regulations. We have provided numerous covenants not to engage
in certain transactions for two years after the Distribution and have agreed to indemnify MetLife if we do not comply with such
covenants. These covenants and indemnity obligations may limit our ability to pursue strategic transactions or engage in new
business or other transactions, such as a share repurchase program, that may maximize the value of our business, and may
discourage or delay a strategic transaction that our shareholders may consider favorable, including limiting our ability to use
our equity to raise capital or fund acquisitions. Any payments required under these indemnity obligations could be significant
and could materially adversely affect our business, results of operations and financial condition. See “Certain Relationships and
Related Person Transactions — Agreements Between Us and MetLife — Tax Agreements — Tax Separation Agreement.”
We may be unable to achieve some or all of the benefits that we expect to achieve from the Separation and the cost of achieving
such benefits may be more than we estimated
We believe that, as a separate, public company, we will be able to, among other matters, better focus our financial and
operational resources on our specific business, growth profile and strategic priorities, design and implement corporate strategies
and policies targeted to our operational focus and strategic priorities, streamline our processes and infrastructure to focus on our
core manufacturing strengths, implement and maintain a capital structure designed to meet our specific needs and more effectively
respond to industry dynamics. However, we may be unable to achieve some or all of these benefits. For example, in order to
position ourselves for the Distribution, we undertook a series of strategic, structural and process realignment and restructuring
actions within our operations, including significant cost-cutting initiatives. These actions may not provide the cost benefits we
currently expect, may cost more to achieve than we have estimated, and could lead to disruption of our operations, loss of, or
inability to recruit, key personnel needed to operate and grow our businesses following the Distribution. As a result, these actions
85
could cause a weakening of our internal standards, controls or procedures and impairment of our key customer and supplier
relationships. If we fail to achieve some or all of the benefits that we expect to achieve as a separate company, or do not achieve
them in the time we expect, our business, financial condition and results of operations could be materially and adversely affected.
Certain of our directors and officers may have actual or potential conflicts of interest because of their MetLife equity ownership
or their former MetLife positions
Certain of the persons who currently are our executive officers and directors have been MetLife officers, directors or
employees and, thus, will have professional relationships with MetLife’s executive officers, directors or employees. In addition,
because of their former MetLife positions, certain of our directors and executive officers may own MetLife common stock,or
have received equity-based awards from MetLife pursuant to which they may acquire or receive shares of MetLife common
stock, and, for some of these individuals, their individual holdings may be significant compared to their total assets. These
relationships and financial interests may create, or may create the appearance of, conflicts of interest when these directors and
officers are faced with decisions that could have different implications for MetLife and us. For example, potential conflicts of
interest could arise in connection with the resolution of any dispute that may arise between MetLife and us regarding the terms
of the agreements governing the Distribution and the Separation, and the relationship thereafter between the companies.
Risks Relating to Our Common Stock
Our stock price may fluctuate significantly
We cannot predict the prices at which our common stock may trade. The market price of our common stock may fluctuate
widely, depending on many factors, some of which may be beyond our control, including:
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actual or anticipated fluctuations in our operating results due to factors related to our business;
success or failure of our business strategies;
our quarterly or annual earnings, or those of other companies in our industry;
our ability to obtain financing as needed;
our announcements or our competitors’ announcements regarding new products or services, enhancements, significant
contracts, acquisitions or strategic investments;
changes in accounting standards, policies, guidance, interpretations or principles;
the failure of securities analysts to cover our common stock;
changes in earnings estimates by securities analysts;
failure to meet any guidance given by us or any change in any guidance given by us, or changes by us to our guidance
practices;
the operating and stock price performance of other comparable companies;
investor perception of our company and the insurance industry;
speculation in the press or investment community;
our business profile, dividend policy or market capitalization;
actions by institutional stockholders and other large stockholders (including MetLife), including future sales of our
common stock;
overall market fluctuations;
results from any material litigation or government investigation;
changes in laws, rules and regulations, including insurance laws and regulations, affecting our business;
changes in our customers’ preferences;
changes in capital gains taxes and taxes on dividends affecting shareholders;
epidemic disease, “Acts of God,” war and terrorist acts;
additions or departures of key personnel; and
general economic conditions and other external factors.
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Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular
company. These broad market fluctuations could also adversely affect the trading price of our common stock.
We do not anticipate declaring or paying regular dividends or making other distributions on our common stock in the near
term
We do not currently anticipate declaring or paying regular cash dividends or making other distributions on our common
stock in the near term. We currently intend to use our future earnings, if any, to pay debt obligations, to fund our growth, to
develop our business, for working capital needs and for general corporate purposes. Therefore, you are not likely to receive any
dividends or other distributions on your common stock in the near term, and the success of an investment in shares of our common
stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will
appreciate in value or even maintain the price at which the shares currently trade. Any future declaration and payment of dividends
or other distributions of capital will be at the discretion of our Board of Directors and will depend on and be subject to our
financial condition, results of operations, earnings, cash needs, regulatory and other constraints, capital requirements (including
capital requirements of our subsidiaries), contractual restrictions and any other factors that our Board of Directors deems relevant
in making such a determination, including, without limitation, the Company’s continued development as a standalone public
company. Therefore, there can be no assurance that we will pay any dividends or make other distributions on our common stock
or as to the amount of any such dividends or distributions of capital. In addition, indebtedness or financial instruments that we
may incur or issue in the future may limit or prohibit the payment of dividends or other distributions. There can be no assurance
that we will establish a dividend policy or pay dividends in the future or continue to pay any dividend if we do commence paying
dividends pursuant to a dividend policy or otherwise.
Any future sales by us or our existing stockholders may cause our stock price to decline
Any transfer or sales of substantial amounts of our common stock in the public market or the perception that such transfer
or sales might occur may cause the market price of our common stock to decline. As of March 14, 2018, we had an aggregate
of 119,773,106 shares of our common stock issued and outstanding. Shares will generally be freely tradeable without restriction
or further registration under the Securities Act, except for shares owned by one of our “affiliates,” as that term is defined in Rule
405 under the Securities Act. Shares held by “affiliates” may be sold in the public market if registered or if they qualify for an
exemption from registration under Rule 144. Further, we plan to file one or more registration statements to cover the shares
issuable under our equity-based benefit plans
MetLife beneficially owns 23,169,597 shares of our common stock. MetLife has announced that, subject to market conditions
and regulatory approval, it currently intends to divest of this remaining ownership interest through an exchange offer for MetLife
common stock during 2018. Any disposition by MetLife of our common stock in the public market in one or more offerings or
the perception that such dispositions could occur, could adversely affect prevailing market prices for our common stock.
We also have a large shareholder base of former MetLife policyholder trust beneficiaries, and it is not possible to predict
whether or not those shareholders will wish to sell their shares of our common stock. The sales of significant amounts of shares
of our common stock or the perception in the market that this will occur may result in the lowering of the market price of our
common stock.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole
and exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability
to obtain a favorable judicial forum for disputes with us or our current or former directors, officers or stockholders
Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an
alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for any (i) derivative action
or proceeding brought on our behalf, (ii) action asserting a claim of breach of a fiduciary duty owed to us or our stockholders
by any of our current or former directors, officers or stockholders, (iii) action asserting a claim arising out of or pursuant to the
Delaware General Corporation Law (the “DGCL”) or our amended and restated certificate of incorporation or our amended and
restated bylaws, or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware or (iv) action
asserting a claim governed by the internal affairs doctrine. By becoming a stockholder in our company, you will be deemed to
have notice of and have consented to the provisions of our amended and restated certificate of incorporation related to choice
of forum. The choice of forum provision in our amended and restated certificate of incorporation may limit our stockholders’
ability to bring a claim in a judicial forum that they find favorable for disputes with us or any of our current or former directors,
officers or stockholders, which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the
choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable
in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could materially
and adversely affect our results of operations and financial condition.
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Your percentage ownership in Brighthouse may be diluted in the future
Your percentage ownership in Brighthouse may be diluted in the future because of equity awards that we expect to grant
to our directors, officers and employees. We have adopted, subject to shareholder approval, equity incentive plans that will
permit the grant of common stock-based equity awards to our directors, officers and other employees. We have also adopted a
tax-qualified employee stock purchase plan that will permit eligible employees to acquire shares of our common stock at a
discount to fair market value. In addition, we may issue equity as all or part of the consideration paid for acquisitions and strategic
investments we may make in the future or for currently unanticipated future development or unforeseen circumstances, given
uncertainties related to our business.
State insurance laws and Delaware corporate law may prevent or delay an acquisition of us, which could decrease the trading
price of our common stock
State laws may delay, deter, prevent or render more difficult a takeover attempt that our stockholders might consider in their
best interests. For example, such laws may prevent our stockholders from receiving the benefit from any premium to the market
price of our common stock offered by a bidder in a takeover context.
The insurance laws and regulations of the various states in which our insurance subsidiaries are organized may delay or
impede a business combination involving the Company. State insurance laws prohibit an entity from acquiring control of an
insurance company without the prior approval of the domestic insurance regulator. Under most states’ statutes, an entity is
presumed to have control of an insurance company if it owns, directly or indirectly, 10% or more of the voting stock of that
insurance company or its parent company. These regulatory restrictions may delay, deter or prevent a potential merger or sale
of our company, even if our Board of Directors decides that it is in the best interests of stockholders for us to merge or be sold.
These restrictions also may delay sales by us or acquisitions by third parties of our insurance subsidiaries. In addition, the
Investment Company Act may require approval by the contract owners of our variable contracts in order to effectuate a change
of control of any affiliated investment advisor to a mutual fund underlying our variable contracts, including Brighthouse Advisers
(formerly known as MetLife Advisers, LLC). Further, FINRA approval would be necessary for a change of control of any broker-
dealer that is a direct or indirect subsidiary of Brighthouse Financial, Inc.
Section 203 of the DGCL may affect the ability of an “interested stockholder” to engage in certain business combinations,
including, among other things, mergers, consolidations or acquisitions of additional shares of our capital stock, for a period of
three years following the time that the stockholder becomes an “interested stockholder.” An “interested stockholder” is defined
to include persons who, together with affiliates, own, or did own within three years prior to the determination of interested
stockholder status, 15% or more of the outstanding voting stock of a corporation.
Certain provisions in our amended and restated certificate of incorporation and amended and restated bylaws may prevent
or delay an acquisition of us, which could decrease the trading price of our common stock
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that are intended
to deter coercive takeover practices and inadequate takeover bids to encourage prospective acquirers to negotiate with our Board
of Directors rather than to attempt a hostile takeover. These provisions include, among others:
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the inability of our stockholders to act by written consent;
rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;
the right of our Board of Directors to issue preferred stock without stockholder approval;
the ability of our remaining directors to fill vacancies and newly created directorships on our Board;
the division of our Board of Directors into classes of directors until such times as all directors are elected annually
commencing at the Company’s 2020 annual meeting of stockholders;
the inability of our stockholders to remove directors other than for cause while the Board of Directors is classified; and
the requirement that the affirmative vote of holders of at least two-thirds of our outstanding voting stock is required to
amend certain provisions of our amended and restated certificate of incorporation and to amend our amended and
restated bylaws.
These provisions are not intended to make us immune from takeovers. However, these provisions will apply even if the
offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our Board of Directors
determines is not in the best interests of Brighthouse and our stockholders. These provisions may also prevent or discourage
attempts to remove and replace incumbent directors. For additional tax considerations, see “— We have agreed to numerous
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restrictions to preserve the non-recognition treatment of the transactions, which may reduce our strategic and operating
flexibility.”
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our corporate headquarters are located in Charlotte, North Carolina on a site of approximately 285,000 rentable square feet
leased by a MetLife affiliate from a third party. The term of that lease expires in September 2026. In connection with the
Separation, we entered into arms-length sublease agreements with such MetLife affiliate for our Charlotte headquarters, as well
as certain other locations. Our Charlotte facilities are occupied by each of our three segments, as well as Corporate & Other.
Item 3. Legal Proceedings
See Note 15 of the Notes to the Consolidated and Combined Financial Statements.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Common Stock Market Prices
Brighthouse Financial, Inc.’s common stock began “regular-way” trading on the Nasdaq under the symbol “BHF” on
August 7, 2017, following the completion of the Separation.
The following table presents high and low closing prices for our common stock on the Nasdaq for the periods indicated:
Fiscal year ended December 31, 2017
Third Quarter (beginning August 7, 2017)
Fourth Quarter
Holders
High
Low
$
$
62.85
63.66
$
$
52.75
54.61
As of March 6, 2018, there were 2,435,787 registered holders of record of our common stock. The actual number of holders
of our common stock is substantially greater than this number of record holders, and includes stockholders who are beneficial
owners, but whose shares are held in “street name” by banks, brokers, and other financial institutions.
Dividend Policy
Brighthouse Financial, Inc. did not pay dividends in 2017. On August 3, 2017, we made a cash distribution in an aggregate
amount of $1.8 billion to MetLife, Inc., the sole holder of our common stock as of the record date for the Distribution. We do
not currently anticipate declaring or paying regular cash dividends or making other distributions on our common stock in the
near term. Any future declaration and payment of dividends or other distributions of capital will be at the discretion of our Board
of Directors and will depend on and be subject to our financial condition, results of operations, earnings, cash needs, regulatory
and other constraints, capital requirements (including capital requirements of our subsidiaries), contractual restrictions and any
other factors that our Board of Directors deems relevant in making such a determination, including, without limitation, the
Company’s continued development as a standalone public company. Therefore, there can be no assurance that we will pay any
dividends or make other distributions on our common stock, or as to the amount of any such dividends or distributions of capital.
Delaware law requires that dividends be paid only out of statutory surplus, which is defined as the fair market value of our
net assets, minus our stated capital, or out of the current or the immediately preceding year’s earnings. We are a holding company,
and we have no direct operations. All of our business operations are conducted through our subsidiaries. The states in which our
insurance subsidiaries are domiciled impose certain restrictions on our insurance subsidiaries’ ability to pay dividends to us.
These restrictions are based in part on the prior year’s statutory income and surplus. Such restrictions, or any future restrictions
adopted by the states in which our insurance subsidiaries are domiciled, could have the effect, under certain circumstances, of
significantly reducing dividends or other amounts payable to us by our subsidiaries without affirmative approval of state regulatory
authorities. See “Business — Regulation — Insurance Regulation — Holding Company Regulation” in “Risk Factors — Capital-
Related Risks — As a holding company, Brighthouse Financial, Inc. depends on the ability of its subsidiaries to pay dividends.”
and “Risk Factors — Risks Relating to Our Common Stock — We do not anticipate declaring or paying regular dividends on
our common stock in the near term.” See also “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital Resources — The Company — Capital — Restrictions on Dividends and Returns of Capital
from Insurance Subsidiaries.”
90
Stock Performance Graph
The graph and table below present Brighthouse Financial, Inc.’s cumulative total shareholder return relative to the
performance of (1) the Standard & Poor’s 500 Index, (2) the Standard & Poor’s 500 Insurance Index and (3) the Standard &
Poor’s 500 Financials Index, respectively, for the year ended December 31, 2017, commencing August 7, 2017 (our initial day
of “regular-way” trading on the Nasdaq). All values assume a $100 initial investment at the opening price of Brighthouse
Financial, Inc.’s common stock on the Nasdaq and data for each of the Standard & Poor’s 500 Index, the Standard & Poor’s 500
Insurance Index and the Standard & Poor’s 500 Financials Index assume all dividends were reinvested on the date paid. The
points on the graph and the values in the table represent month-end values based on the last trading day of each month. The
comparisons are based on historical data and are not indicative of, nor intended to forecast, the future performance of our common
stock.
Aug 7
Aug 31
Sep 30
Oct 31
Nov 30
Dec 31
Brighthouse Financial, Inc. common stock
$
100.00
$
92.47
$
98.51
$
100.75
$
95.25
$
S&P 500
S&P 500 Financials
S&P 500 Insurance
100.00
100.00
100.00
99.83
97.35
96.01
101.89
102.36
99.36
104.27
105.36
102.10
107.47
109.05
104.26
95.01
108.66
111.19
102.71
Unregistered Sales of Equity Securities
In connection with the Separation, on August 4, 2017, Brighthouse Financial, Inc. issued an additional 119,673,106 shares
of its common stock to MetLife, Inc. in exchange for the transfer by MetLife, Inc. of 100 common units of Brighthouse Holdings,
LLC (“BH Holdings”), representing all of the common units of BH Holdings, to Brighthouse Financial, Inc., pursuant to the
Contribution Agreement, dated as of July 27, 2017, among Brighthouse Financial, Inc., MetLife, Inc. and BH Holdings.
To the extent applicable, the issuance of the shares of common stock by Brighthouse Financial, Inc. to MetLife, Inc. in
connection with the Separation was exempt from registration pursuant to Section 4(a)(2) of the Securities Act. We did not register
the issuance of the issued shares under the Securities Act because such issuance did not constitute a public offering.
Issuer Purchases of Equity Securities
Neither the Company nor any “affiliated purchaser” repurchased any shares of Brighthouse Financial, Inc. common stock
during the quarter ended December 31, 2017.
91
Item 6. Selected Financial Data
The following tables set forth selected historical financial data for Brighthouse Financial, Inc. and its subsidiaries (formerly,
the “MetLife U.S. Retail Separation Business”). The statement of operations data for the years ended December 31, 2017, 2016
and 2015, and the balance sheet data at December 31, 2017 and 2016, have been derived from the audited Consolidated and
Combined Financial Statements of Brighthouse Financial, Inc. included elsewhere herein. The statement of operations data for
the years ended December 31, 2014 and 2013, and the balance sheet data at December 31, 2015 and 2014, have been derived
from the audited Consolidated and Combined Financial Statements of the MetLife U.S. Retail Separation Business not included
herein. The balance sheet data at December 31, 2013 has been derived from the unaudited Consolidated and Combined Financial
Statements of the MetLife U.S. Retail Separation Business not included herein.
The selected historical financial data should be read together with Management’s Discussion and Analysis of Financial
Condition and Results of Operations and the financial statements and the related notes included elsewhere herein. The following
statement of operations and balance sheet data have been prepared in conformity with GAAP. The historical results presented
below are not necessarily indicative of the financial results to be achieved in future periods, or what the financial results would
have been had Brighthouse Financial, Inc. or the MetLife U.S. Retail Separation Business been a separate publicly traded
company during the periods presented.
Statement of Operations Data
Total revenues
Premiums
Universal life and investment-type product policy fees
Net investment income
Other revenue
Net investment gains (losses)
Net derivative gains (losses) (1)
Total expenses
Policyholder benefits and claims
Interest credited to policyholder account balances
Amortization of DAC and VOBA
Other expenses
Income (loss) before provision for income tax
Net income (loss)
Earnings per common share:
Basic
Years Ended December 31,
2017
2016
2015
2014
2013
(In millions, except per share data)
6,842
863
3,898
3,078
651
$
$
$
$
$
3,018
1,222
3,782
3,207
736
$
$
$
$
$
(28) $
(78) $
8,891
1,679
4,010
3,099
422
7
$
$
$
$
$
$
9,448
1,500
4,335
3,090
535
$
$
$
$
$
(435) $
(1,620) $
(5,851) $
(326) $
423
7,457
3,636
1,111
227
2,483
$
$
$
$
$
7,723
3,903
1,165
371
2,284
$
$
$
$
$
(615) $
(4,705) $
(378) $
(2,939) $
7,429
3,269
1,259
781
2,120
1,462
1,119
$
$
$
$
$
$
$
7,920
3,334
1,278
1,109
2,199
1,528
1,159
$
$
$
$
$
$
$
$
8,788
1,018
4,255
3,366
616
7
(474)
7,424
3,647
1,376
123
2,278
1,364
1,031
(3.16) $
(24.54) $
9.34
$
9.68
$
8.61
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
92
Balance Sheet Data
Total assets
Total investments and cash and cash equivalents
Separate account assets
Long-term financing obligations:
Debt (2)
Reserve financing debt (3)
Collateral financing arrangement (4)
Policyholder liabilities (5)
Variable annuities liabilities:
Future policy benefits
Policyholder account balances
Other policy-related balances
Non-variable annuities liabilities:
Future policy benefits
Policyholder account balances
Other policy-related balances
Total Brighthouse Financial, Inc. stockholders’ equity (6)
Noncontrolling interests
Accumulated other comprehensive income (loss)
_______________
2017
2016
2015
2014
2013
December 31,
(In millions)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
226,725
85,199
114,447
836
1,100
2,797
71,881
2,937
7,379
99
28,266
30,142
3,058
16,839
221,930
85,860
113,043
810
1,100
2,797
73,943
3,562
11,517
89
29,810
26,009
2,956
14,862
$
$
$
$
$
$
$
$
$
$
$
$
$
$
231,620
81,141
122,922
928
1,100
2,797
69,992
2,346
5,781
104
27,296
31,645
2,820
17,525
$
$
$
$
$
$
$
$
$
$
$
$
$
$
— $
— $
— $
1,265
$
1,523
$
2,715
$
235,200
84,644
124,438
2,326
1,100
2,797
74,751
1,950
4,358
210
29,711
35,051
3,471
15,436
—
977
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
224,192
84,195
118,257
3,612
$
$
$
$
— $
— $
77,384
4,148
12,479
96
32,468
25,304
2,889
14,515
65
1,676
$
$
$
$
$
$
$
$
$
$
(1) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations”
for a discussion of net derivative gains (losses).
(2) At December 31, 2016 and prior periods, this balance includes surplus notes in aggregate principal amount of $750 million
issued by BLIC to a financing trust. On February 10, 2017, MetLife, Inc. became the sole beneficial owner of the financing
trust. In connection with the Restructuring, (i) the financing trust was terminated in accordance with its terms on March 23,
2017, (ii) MetLife, Inc. became the owner of the surplus notes, and (iii) prior to the Separation, MetLife, Inc. forgave the
obligation of BLIC to pay the principal under the surplus notes. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and Capital Resources — The Company — Outstanding Debt and Collateral
Financing Arrangement — Surplus Notes.”
(3) Includes long-term financing of statutory reserves supporting level premium term life and ULSG policies provided by
surplus notes issued to MetLife. These surplus notes were eliminated in April 2017 in connection with the Restructuring of
existing reserve financing arrangements.
(4) Supports statutory reserves relating to level premium term and ULSG policies pursuant to credit facilities entered into by
MetLife, Inc. and an unaffiliated financial institution. These facilities were replaced in April 2017 in connection with the
Restructuring of existing reserve financing arrangements.
(5) Includes future policy benefits, policyholder account balances and other policy-related balances.
(6) For periods ending prior to the Separation, stockholders’ equity was previously reported as shareholder’s net investment.
93
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Executive Summary
Industry Trends and Uncertainties
Summary of Critical Accounting Estimates
Non-GAAP and Other Financial Disclosures
Economic Capital
Results of Operations
Effects of Inflation
Investments
Derivatives
Off-Balance Sheet Arrangements
Policyholder Liabilities
Liquidity and Capital Resources
Glossary
Page
95
95
97
99
105
107
107
126
127
139
140
141
144
157
94
Introduction
For purposes of this discussion, “Brighthouse,” the “Company,” “we,” “our” and “us” refer to Brighthouse Financial, Inc.
a corporation incorporated in Delaware in 2016, and its subsidiaries. Brighthouse Financial, Inc. was formerly a wholly-owned
subsidiary of MetLife, Inc. (MetLife, Inc., together with its subsidiaries and affiliates, “MetLife”). Following this summary is
a discussion addressing the consolidated results of operations and financial condition of the Company for the periods indicated.
This discussion should be read in conjunction with “Note Regarding Forward-Looking Statements,” “Risk Factors,” “Selected
Financial Data,” “Quantitative and Qualitative Disclosures About Market Risk” and the Company’s consolidated financial
statements included elsewhere herein.
The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual
results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute
to these differences include those factors discussed below and elsewhere in this report, particularly in “Note Regarding Forward-
Looking Statements” and “Risk Factors.”
Presentation
Prior to discussing our Results of Operations, we present background information and definitions that we believe are useful
to understanding the discussion of our financial results. This information precedes the Results of Operations and is most beneficial
when read in the sequence presented. A summary of key informational sections is as follows:
•
“Executive Summary” contains the following sub-sections:
•
•
•
•
•
“Overview” provides information regarding our business, reporting segments and results as discussed in the Results
of Operations.
“Background” presents details of the Company’s legal entity structure and key events that led up to the completion
of the Separation.
“Industry Trends and Uncertainties” discusses updates and changes to a number of trends and uncertainties that we
believe may materially affect our future financial condition, results of operations or cash flows.
“Summary of Critical Accounting Estimates” explains the most critical estimates and judgments applied in determining
our GAAP results.
“Non-GAAP and Other Financial Disclosures” defines key financial measures presented in the Results of Operations
that are not calculated in accordance with GAAP but are used by management in evaluating company and segment
performance. As described in this section, adjusted earnings is presented by key business activities which are derived
from, but different than, the line items presented in the GAAP statement of operations. This section also refers to certain
other terms used to describe our insurance business and financial and operating metrics, but is not intended to be
exhaustive.
• The Results of Operations section begins with two introductory sections to facilitate an understanding of the results
discussion:
•
•
“Significant Business Actions” defines certain actions that had a significant impact to either or both net income
(loss) and adjusted earnings, as defined in “— Non-GAAP and Other Financial Disclosures”, which are not
indicative of performance in the respective periods. Events defined in this section are referred to in the Results of
Operations discussion.
“Actuarial Assumption Review” describes the changes in key assumptions applied in 2017 and 2016, respectively,
resulting in a favorable impact to net income (loss) in the current period.
Executive Summary
Overview
We are a major provider of annuity products and life insurance in the United States through multiple independent distribution
channels and marketing arrangements with a diverse network of distribution partners.
For operating purposes, we have established three reporting segments: (i) Annuities, (ii) Life and (iii) Run-off, which consists
of operations relating to products we are not actively selling and which are separately managed. In addition, we report certain
of our results of operations not included in the segments in Corporate & Other.
95
In the third quarter of 2016, the Company reorganized its businesses in anticipation of the Separation. Also, in the fourth
quarter of 2016, the Company moved the universal life policies with secondary guarantees business from the Life segment to
the Run-off segment (“ULSG Re-segmentation”). These changes were applied retrospectively and did not have an impact on
total consolidated net income (loss) or adjusted earnings in the prior periods.
See “Business — Segments and Corporate & Other” and Note 2 of the Notes to the Consolidated and Combined Financial
Statements for further information on our segments and Corporate & Other.
The following table presents a summary of our net income (loss) and adjusted earnings. For a detailed discussion of our
results see “— Results of Operations.”
Income (loss) before provision for income tax
Provision for income tax expense (benefit)
Net income (loss)
Adjusted earnings before provision for income tax
Provision for income tax expense (benefit)
Adjusted earnings
Years Ended December 31,
Years Ended December 31,
2017
2016
Change
2016
2015
Change
$
$
$
$
(615) $
(237)
(4,705) $
(1,766)
(378) $
(2,939) $
1,597
677
920
$
$
867
181
686
$
$
(In millions)
4,090
1,529
2,561
730
496
234
$
$
$
$
(4,705) $
(1,766)
(2,939) $
867
181
686
$
$
1,462
343
1,119
2,113
572
1,541
$
$
$
$
(6,167)
(2,109)
(4,058)
(1,246)
(391)
(855)
For the year ended December 31, 2017, we had a net loss of $378 million and $920 million of adjusted earnings as compared
to a net loss of $2.9 billion and $686 million of adjusted earnings for the year ended December 31, 2016. Despite higher adjusted
earnings, the net loss for the year ended December 31, 2017 was driven by unfavorable changes in our derivative instruments
resulting from strong equity market performance and rising interest rates. In the third quarter of 2017 we recognized a $1.1
billion tax charge in connection with the Separation which was substantially offset by a benefit of $947 million recorded in the
fourth quarter of 2017 in connection with changes to the federal tax code. The net loss for the year ended December 31, 2016
was driven by reserve strengthening, including the effect of our 2016 annual actuarial review for our variable annuities business,
our second quarter refinement in the actuarial model which we use to calculate the reserves for our in-force book of ULSG
products and the loss recognition, mostly in the form of a write down of deferred acquisition costs, triggered by the move of
our ULSG products into the Run-off segment in the fourth quarter of 2016. In addition to reserve strengthening, derivative losses
on our economic hedges of certain liabilities also contributed to the net loss, primarily due to the impact of the fourth quarter
2016 rise in interest rates without an offset from the liabilities being hedged due to the insensitivity of those accounting principles
generally accepted in the United States (“GAAP”) liabilities to changes in interest rates. See “— Results of Operations.”
Background
Brighthouse Financial, Inc., which until the completion of the Separation on August 4, 2017 was a wholly-owned subsidiary
of MetLife, Inc., is a holding company incorporated in Delaware on August 1, 2016 to own the legal entities that have historically
operated a substantial portion of MetLife’s former Retail segment, as well as certain portions of its former Corporate Benefit
Funding segment, which is included in our Run-off segment.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader
understand the results of operations, financial condition and cash flows of Brighthouse for the periods indicated. In addition to
Brighthouse Financial, Inc., the companies and businesses included in the results of operations, financial condition and cash
flows are:
• Brighthouse Life Insurance Company (together with its subsidiaries and affiliates, “BLIC”), formerly MetLife Insurance
Company USA, our largest insurance operating entity, domiciled in Delaware and licensed to write business in 49
states;
• Brighthouse Life Insurance Company of NY (“BHNY”), formerly First MetLife Investors Insurance Company,
domiciled in New York and licensed to write business in New York, which is a subsidiary of Brighthouse Life Insurance
Company;
• New England Life Insurance Company (“NELICO”), domiciled in Massachusetts and licensed to write business in all
50 states;
• Brighthouse Reinsurance Company of Delaware (“BRCD”), our single reinsurance company licensed in Delaware,
which is a subsidiary of Brighthouse Life Insurance Company;
96
• Brighthouse Investment Advisers, LLC (“Brighthouse Advisers”), formerly MetLife Advisers, LLC, serving as
investment advisor to certain proprietary mutual funds that are underlying investments under our and MetLife’s variable
insurance products;
• Brighthouse Services, LLC (“Brighthouse Services”), an internal services and payroll company;
• Brighthouse Securities, LLC (“Brighthouse Securities”), registered as a broker-dealer with the SEC, approved as a
member of FINRA and registered as a broker-dealer and licensed as an insurance agency in all required states; and
• Brighthouse Holdings, LLC (“BH Holdings”), a wholly-owned holding company subsidiary of Brighthouse Financial,
Inc. domiciled in Delaware.
The Separation
On January 12, 2016, MetLife, Inc. announced its plan to pursue the separation of a substantial portion of its former U.S.
retail business. Additionally, on July 21, 2016, MetLife, Inc. announced that the separated business would be rebranded as
“Brighthouse Financial.”
In July 2016, MetLife, Inc. completed the sale to MassMutual of MetLife’s U.S. retail advisor force and certain assets
associated with MPCG, including all of the issued and outstanding shares of MetLife’s affiliated broker-dealer, MetLife
Securities, Inc., a wholly-owned subsidiary of MetLife, Inc. (the “U.S. Retail Advisor Force Divestiture”). MassMutual
assumed all of the liabilities related to such assets that arise or occur (or have arisen or occurred) after the sale was closed.
As part of the transactions, MetLife, Inc. and MassMutual entered into a product development agreement under which
Brighthouse is the exclusive developer of certain annuity products to be issued by MassMutual. In connection with the
Separation, we entered into an agreement with MetLife, Inc., that among other things, provides for the sharing of certain
liabilities that may arise with respect to this relationship.
On October 5, 2016, Brighthouse Financial, Inc., which until the completion of the Separation on August 4, 2017 was a
wholly-owned subsidiary of MetLife, Inc., filed a registration statement on Form 10 with the SEC that was declared effective
by the SEC on July 6, 2017. The Form 10 disclosed MetLife, Inc.’s plans to undertake several actions, including an internal
reorganization involving its U.S. retail business (the “Restructuring”) and include, among others, Brighthouse Life Insurance
Company, BHNY, NELICO, Brighthouse Advisers and certain affiliated reinsurance companies in the separated business, and
distribute at least 80.1% of the shares of Brighthouse Financial, Inc.’s common stock on a pro rata basis to the holders of
MetLife, Inc. common stock. In connection with the Restructuring, effective April 2017 following receipt of applicable
regulatory approvals, MetLife, Inc. contributed certain affiliated reinsurance companies and BHNY to Brighthouse Life
Insurance Company. The affiliated reinsurance companies were then merged into BRCD, a licensed reinsurance subsidiary
of Brighthouse Life Insurance Company (the “Reinsurance Merger”). On June 20, 2017, BH Holdings issued $50 million
aggregate liquidation preference of fixed rate cumulative preferred units to MetLife, Inc., which MetLife, Inc. subsequently
resold to unaffiliated third parties. These preferred units are reported as noncontrolling interests on the consolidated and
combined balance sheet. Additionally, on June 16, 2017 in connection with the Separation, MetLife, Inc. forgave the $750
million principal amount of 8.595% surplus notes, and on July 28, 2017, MetLife, Inc. contributed BH Holdings to Brighthouse
Financial, Inc. On August 4, 2017, MetLife, Inc. completed the distribution of Brighthouse Financial, Inc. shares to its
shareholders through a distribution of 96,776,670 of the 119,773,106 shares of the Company’s common stock, representing
80.8% of MetLife’s interest in Brighthouse, to holders of MetLife common stock.
Industry Trends and Uncertainties
Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we discuss a
number of trends and uncertainties that we believe may materially affect our future financial condition, results of operations or
cash flows. Where these trends or uncertainties are specific to a particular aspect of our business, we often include such a
discussion under the relevant caption of this Management’s Discussion and Analysis of Financial Condition and Results of
Operations, as part of our broader analysis of that area of our business. In addition, the following factors represent some of the
key general trends and uncertainties that have influenced the development of our business and our historical financial performance
and that we believe will continue to influence our business and results of operations in the future.
Financial and Economic Environment
Our business and results of operations are materially affected by conditions in the capital markets and the economy generally.
Stressed conditions, volatility and disruptions in the capital markets, particular markets, or financial asset classes can have an
adverse effect on us. The impact on capital markets and the economy generally of the priorities and policies of the Trump
administration is uncertain. See “Risk Factors — Economic Environment and Capital Markets-Related Risks — If difficult
conditions in the capital markets and the U.S. economy generally persist or are perceived to persist, they may materially adversely
97
affect our business and results of operations.” Equity market performance can affect our profitability for variable annuities and
other separate account products as a result of the effects it has on product demand, revenues, expenses, reserves and our risk
management effectiveness. The level of long-term interest rates and the shape of the yield curve can have a negative effect on
the demand for, and the profitability of, spread-based products such as fixed annuities, index-linked annuities and universal life
insurance. Low interest rates and risk premium, including credit spread, affect new money rates on invested assets and the cost
of product guarantees. Insurance premium growth and demand for our products is impacted by the general health of U.S. economic
activity.
The above factors affect our expectations regarding future margins, which in turn, affect the amortization of certain of our
intangible assets such as DAC and VOBA. Significantly lower expected margins may cause us to accelerate the amortization
of DAC and VOBA, thereby reducing net income in the affected reporting period. We review our long-term assumptions about
capital market returns and interest rates, along with other assumptions such as contract holder behavior, as part of our actuarial
assumption review. As additional company specific and/or industry information on contract holder behavior becomes available,
related assumptions may change and may potentially have a material impact on liability valuations and net income. In addition,
the change in accounting estimate relating to the liability valuations that occurred in the second quarter of 2016 may result in
greater income statement volatility in the future.
As reported in February 2017, the Federal Reserve indicated that, with gradual adjustments in the stance of monetary policy,
economic activity will expand at a moderate pace, labor market conditions will strengthen and inflation will rise to 2.0% over
the medium term. On March 15, 2017, the Federal Reserve increased the Federal Funds Target Rate by 25 basis points to a target
range of 0.75% to 1.0%. See “— Summary of Critical Accounting Estimates — Deferred Policy Acquisition Costs and Value
of Business Acquired” and “— Results of Operations — Actuarial Assumption Review.”
Demographics
We believe that demographic trends in the U.S. population, the increase in under-insured individuals, the potential risk to
governmental social safety net programs and the shifting of responsibility for retirement planning and financial security from
employers and other institutions to individuals, highlight the need of individuals to plan for their long-term financial security
and will create opportunities to generate significant demand for our products. Moreover, we believe that the Secure Seniors,
Middle Aged Strivers and Diverse and Protected customer segments, the three customer segments we intend to target, represent
a significant portion of the market opportunity. Our research indicates that these segments are open to financial guidance and,
accordingly, we expect that they will be receptive to the products we intend to sell. See “Business — Overview — Our Business
Strategy.”
By focusing our product development and marketing efforts to meeting the needs of these customer segments we will be
able to focus on offering a smaller number of products that we believe are appropriately priced given current economic conditions,
which we believe will benefit our expense ratio thereby increasing our profitability.
Competitive Environment
The life insurance industry remains highly fragmented and competitive. See “Business — Segments and Corporate & Other”
for each of our segments. In particular, we believe that financial strength and financial flexibility are highly relevant differentiators
from the perspective of customers and distributors. We believe we are adequately positioned to compete in this environment.
Regulatory Developments
Our life insurance companies are regulated primarily at the state level, with some products and services also subject to
federal regulation. In addition, Brighthouse Financial, Inc. and its insurance subsidiaries are subject to regulation under the
insurance holding company laws of various U.S. jurisdictions. Furthermore, some of our operations, products and services are
subject to ERISA, consumer protection laws, securities, broker-dealer and investment advisor regulations, and environmental
and unclaimed property laws and regulations. In addition, in marketing certain of Brighthouse’s products and services to tax-
qualified pension plans, retirement plans and IRAs, new rules issued by the DOL on April 6, 2016 that became applicable on
June 8, 2017 raise the standard for recommendations to such plans and IRAs to purchase variable and index-linked annuities to
a fiduciary standard. See “Business — Regulation” and “Risk Factors — Regulatory and Legal Risks.”
98
Summary of Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and
make estimates and assumptions that affect amounts reported on the Consolidated and Combined Financial Statements.
The most critical estimates include those used in determining:
i.
liabilities for future policy benefits;
ii. accounting for reinsurance;
iii. capitalization and amortization of DAC and the establishment and amortization of VOBA;
iv. estimated fair values of investments in the absence of quoted market values;
v.
investment impairments;
vi. estimated fair values of freestanding derivatives and the recognition and estimated fair value of embedded derivatives
requiring bifurcation;
vii. measurement of income taxes and the valuation of deferred tax assets; and
viii. liabilities for litigation and regulatory matters.
In applying our accounting policies, we make subjective and complex judgments that frequently require estimates about
matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and
financial services industries; others are specific to our business and operations. Actual results could differ from these estimates.
The above critical accounting estimates are described below and in Note 1 of the Notes to the Consolidated and Combined
Financial Statements.
Liability for Future Policy Benefits
Generally, future policy benefits are payable over an extended period of time and related liabilities are calculated as the
present value of future expected benefits to be paid, reduced by the present value of future expected premiums. Such liabilities
are established based on methods and underlying assumptions that are in accordance with GAAP and applicable actuarial
standards. The principal assumptions used in the establishment of liabilities for future policy benefits are mortality, morbidity,
benefit utilization and withdrawals, policy lapse, retirement, disability incidence, disability terminations, investment returns,
inflation, expenses and other contingent events as appropriate to the respective product type. These assumptions, intended to
estimate the experience for the period the policy benefits are payable, are established at the time the policy is issued and locked
in. Utilizing these assumptions, liabilities are established on a block of business basis. If experience is less favorable than
assumed, DAC may be reduced and/or additional insurance liabilities established, resulting in a reduction in earnings.
Future policy benefit liabilities for GMDBs and GMIBs relating to certain variable annuity contracts are based on estimates
of the expected value of benefits in excess of the projected account balance, recognizing the excess ratably over the accumulation
period based on total expected assessments. Liabilities for universal and variable life secondary guarantees are determined by
estimating the expected value of death benefits payable when the account balance is projected to be zero and recognizing those
benefits ratably over the contract period based on total expected assessments. The assumptions used in estimating the excess
benefits under variable annuity guarantees and the secondary guarantee liabilities under universal and variable life policies are
consistent with those used for amortizing DAC, and are therefore subject to the same variability and risk. The assumptions of
investment performance and volatility for variable products are consistent with historical experience of the appropriate underlying
equity index, such as the S&P 500 Index.
We regularly review our assumptions supporting our estimates of actuarial liabilities for future policy benefits. For universal
life and annuity product guarantees, assumptions are updated periodically, whereas for traditional life products, such as term
life and non-participating whole life insurance, assumptions are established and locked in at inception but reviewed periodically
to determine whether a premium deficiency exists that would trigger an unlocking of assumptions. We also review our actuarial
liabilities to determine if profits are projected in earlier years followed by losses projected in later years, which could require
us to establish an additional liability. Differences between actual experience and the assumptions used in pricing our policies
and guarantees, as well as adjustments to the related liabilities, result in variances in profit and could result in losses.
In assessing loss recognition and profits followed by losses, product groupings are limited by segment. Historically, all of
our universal life business was grouped together for evaluating loss recognition and profits followed by losses. In the second
quarter of 2016, an actuarial model change reduced expected future gross profits for ULSG and triggered loss recognition
resulting in a loss of $258 million, after tax. Subsequently, in the fourth quarter of 2016, ULSG was moved from our Life segment
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to our Run-off segment, triggering a change in groupings for loss recognition testing that resulted in an additional loss of
$399 million, after tax. See “— Results of Operations — Significant Business Actions — ULSG Re-segmentation.” For an
overview of our products and balance sheet accounts impacted by actuarial assumptions, see “— Results of Operations —
Actuarial Assumption Review.”
See Note 1 of the Notes to the Consolidated and Combined Financial Statements for additional information on our accounting
policy relating to variable annuity guarantees and liability for future policy benefits and Note 3 of the Notes to the Consolidated
and Combined Financial Statements for future policyholder benefit liabilities.
Reinsurance
Accounting for reinsurance requires extensive use of assumptions and estimates, particularly related to the future
performance of the underlying business and the potential impact of counterparty credit risk with respect to reinsurance receivables.
We periodically review actual and anticipated experience compared to the aforementioned assumptions used to establish assets
and liabilities relating to ceded and assumed reinsurance and evaluate the financial strength of counterparties to our reinsurance
agreements using criteria similar to those evaluated in our security impairment process. See “— Investment Impairments.”
Additionally, for each of our reinsurance agreements, we determine whether the agreement provides indemnification against
loss or liability relating to insurance risk, in accordance with applicable accounting standards. We review all contractual features,
including those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely
reimbursement of claims. We evaluate present values of projected future cash flows on blocks of policies subject to new
reinsurance agreements in light of all such contractual features to determine whether our reinsurance counterparties are exposed
to a reasonable possibility of significant loss. Such analysis involves management estimates as to the cash flow projections, as
well as management judgment as to what constitutes a reasonable possibility of significant loss. If we determine that a reinsurance
agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, we record the
agreement using the deposit method of accounting.
See Note 5 of the Notes to the Consolidated and Combined Financial Statements for additional information on our reinsurance
programs.
Deferred Policy Acquisition Costs and Value of Business Acquired
We incur significant costs in connection with acquiring new and renewal insurance business. Costs that relate directly to
the successful acquisition or renewal of insurance contracts are deferred as DAC. In addition to commissions and other direct
costs, deferrable costs include the portion of an employee’s total compensation and benefits related to time spent selling,
underwriting or processing the issuance of new and renewal insurance business only with respect to actual policies acquired or
renewed. We utilize various techniques to estimate the portion of an employee’s time spent on qualifying acquisition activities
that result in actual sales, including surveys, interviews, representative time studies and other methods. These estimates include
assumptions that are reviewed and updated on a periodic basis or more frequently to reflect significant changes in processes or
distribution methods.
VOBA represents the excess of book value over the estimated fair value of acquired insurance, annuity and investment-
type contracts in force at the acquisition date. The estimated fair value of the acquired liabilities is based on projections, by each
block of business, of future policy and contract charges, premiums, mortality and morbidity, separate account performance,
surrenders, operational expenses, investment returns, nonperformance risk adjustment and other factors. Actual experience on
the purchased business may vary from these projections. The recovery of DAC and VOBA is dependent upon the future
profitability of the related business.
Separate account rates of return on variable universal life contracts and variable deferred annuity contracts affect in-force
account balances on such contracts each reporting period, which can result in significant fluctuations in amortization of DAC
and VOBA, which is based on estimated gross profits. Our practice to determine the impact of gross profits resulting from returns
on separate accounts assumes that long-term appreciation in equity markets is not changed by short-term market fluctuations,
but is only changed when sustained interim deviations are expected. We monitor these events and only change the assumption
when our long-term expectation changes. The effect of an increase (decrease) by 100 basis points in the assumed future rate of
return is reasonably likely to result in a decrease (increase) in the DAC and VOBA amortization with an offset to our unearned
revenue liability which nets to approximately $230 million. We use a mean reversion approach to separate account returns where
the mean reversion period is five years with a long-term separate account return after the five-year reversion period is over. The
current long-term rate of return assumption for the variable universal life contracts and variable deferred annuity contracts is in
the mid-6% range.
We also generally review other long-term assumptions underlying the projections of estimated gross profits on an annual
basis. These assumptions primarily relate to investment returns, interest crediting rates, mortality, persistency, benefit elections
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and withdrawals, and expenses to administer business. Assumptions used in the calculation of estimated gross profits which
may have significantly changed are updated annually. If the update of assumptions causes expected future gross profits to
increase, DAC and VOBA amortization will generally decrease, resulting in a current period increase to earnings. The opposite
result occurs when the assumption update causes expected future gross profits to decrease.
Our most significant assumption updates resulting in a change to the expected future gross profits and the amortization of
DAC and VOBA are due to revisions to expenses, in-force or persistency assumptions, benefit elections, withdrawals and
expected future investment returns on annuity contracts and variable and universal life insurance policies. We expect these
assumptions to be the ones most reasonably likely to cause significant changes in the future. Changes in these assumptions can
be offsetting and we are unable to predict their movement or offsetting impact over time.
In addition, we update the estimated gross profits with actual gross profits in each reporting period. When the change in
estimated gross profits principally relates to the difference between actual and estimates in the current period, an increase in
profits will generally result in an increase in amortization and a decrease in profits will generally result in a decrease in
amortization.
See Note 4 of the Notes to the Consolidated and Combined Financial Statements for additional information relating to DAC
and VOBA amortization.
At December 31, 2017, 2016 and 2015, our DAC and VOBA was $6.3 billion, $6.3 billion and $6.4 billion, respectively.
Amortization of DAC and VOBA associated with the variable and universal life policies and the annuity contracts was
significantly impacted by changes including: (i) updating assumptions that impact the future estimated gross profits; and
(ii) updating the estimated gross profits of the most current period for actual experience including market performance. To
illustrate the impact on amortization of DAC and VOBA from these two types of changes, the following highlights the significant
items contributing to the amortization of DAC and VOBA during each of the years ended December 31, 2017, 2016 and 2015.
DAC and VOBA amortization was approximately $430 million lower than expected for the year ended December 31, 2017,
which consisted of:
• A decrease of approximately $250 million related to variable annuity net derivative losses, mainly hedge losses in the
first three quarters of the year, offset by higher amortization related to the impact from the favorable change to
nonperformance risk;
• An increase of approximately $150 million related to changes to the GMIB insurance liabilities; and
• A decrease of approximately $370 million due to assumption updates related to refinements in the amortization horizon.
DAC and VOBA amortization was approximately $380 million lower than expected for the year ended December 31, 2016,
which consisted of:
• A reversal of previous amortization of approximately $1.4 billion related to net derivative losses driven mostly by
assumption updates increasing the variable annuity guarantees accounted for as embedded derivatives and net losses
from the freestanding derivatives hedging these guarantees; partially offset by
• An acceleration of approximately $360 million, mainly resulting from reserve adjustments from modeling
improvements for universal life products;
• An acceleration of approximately $560 million related to loss recognition triggered by the move of ULSG into the Run-
off segment; and
• An increase of amortization of approximately $140 million primarily associated with the variable annuity assumption
updates other than that related to the embedded derivatives described above.
DAC and VOBA amortization was approximately $70 million lower than expected for the year ended December 31, 2015,
which consisted of:
• A reversal of previous amortization of approximately $200 million related to net derivative losses which resulted from
an increase in variable annuity guarantees, partially offset by market-to-market changes from free standing derivatives
hedging these guarantees; and
•
Improvements in persistency related to both adjustments for actual experience and assumption updates which caused
an increase in actual and expected future gross profits resulting in a net decrease of approximately $120 million; partially
offset by
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• An increase of approximately $140 million from a net gain for the period related to the GMIB insurance liabilities and
associated hedges; and
• An increase associated with net investment gains of approximately $70 million.
Our DAC and VOBA balance is also impacted by unrealized investment gains (losses) and the amount of amortization
which would have been recognized if such gains and losses had been realized. The change in unrealized investment gains (losses)
decreased the DAC and VOBA balance by $40 million for the year ended December 31, 2017, decreased the DAC and VOBA
balance by $10 million for the year ended December 31, 2016 and increased the DAC and VOBA balance by $190 million in
2015. See Notes 4 and 6 of the Notes to the Consolidated and Combined Financial Statements for information regarding the
DAC and VOBA offset to unrealized investment losses.
Estimated Fair Value of Investments
In determining the estimated fair value of our investments, fair values are based on unadjusted quoted prices for identical
investments in active markets that are readily and regularly obtainable. When such quoted prices are not available, fair values
are based on quoted prices in markets that are not active, quoted prices for similar but not identical investments, or other observable
inputs. If these inputs are not available, or observable inputs are not determinable, unobservable inputs and/or adjustments to
observable inputs requiring management judgment are used to determine the estimated fair value of investments.
The methodologies, assumptions and inputs utilized are described in Note 8 of the Notes to the Consolidated and Combined
Financial Statements.
Financial markets are susceptible to severe events evidenced by rapid depreciation in asset values accompanied by a reduction
in asset liquidity. Our ability to sell investments, or the price ultimately realized for investments, depends upon the demand and
liquidity in the market and increases the use of judgment in determining the estimated fair value of certain investments.
Investment Impairments
One of the significant estimates related to AFS securities is our impairment evaluation. The assessment of whether an other-
than-temporary impairment (“OTTI”) occurred is based on our case-by-case evaluation of the underlying reasons for the decline
in estimated fair value on a security-by-security basis. Our review of each fixed maturity and equity security for OTTI includes
an analysis of gross unrealized losses by three categories of severity and/or age of gross unrealized loss. An extended and severe
unrealized loss position on a fixed maturity security may not have any impact on the ability of the issuer to service all scheduled
interest and principal payments. Accordingly, such an unrealized loss position may not impact our evaluation of recoverability
of all contractual cash flows or the ability to recover an amount at least equal to its amortized cost based on the present value
of the expected future cash flows to be collected. In contrast, for certain equity securities, greater weight and consideration are
given to a decline in estimated fair value and the likelihood such estimated fair value decline will recover.
Additionally, we consider a wide range of factors about the security issuer and use our best judgment in evaluating the cause
of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in our
evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential.
Factors we consider in the OTTI evaluation process are described in Note 6 of the Notes to the Consolidated and Combined
Financial Statements.
The determination of the amount of allowances and impairments on the remaining invested asset classes is highly subjective
and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class.
Such evaluations and assessments are revised as conditions change and new information becomes available.
See Notes 1 and 6 of the Notes to the Consolidated and Combined Financial Statements for additional information relating
to our determination of the amount of allowances and impairments.
Derivatives
We use freestanding derivative instruments to hedge various capital market risks in our products, including: (i) certain
guarantees, some of which are reported as embedded derivatives; (ii) current or future changes in the fair value of our assets
and liabilities; and (iii) current or future changes in cash flows. All derivatives, whether freestanding or embedded, are required
to be carried on the balance sheet at fair value with changes reflected in either net income (loss) or in OCI, depending on the
type of hedge. Below is a summary of critical accounting estimates by type of derivative.
Freestanding Derivatives
The determination of the estimated fair value of freestanding derivatives, when quoted market values are not available, is
based on market standard valuation methodologies and inputs that management believes are consistent with what other market
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participants would use when pricing such instruments. Derivative valuations can be affected by changes in interest rates, foreign
currency exchange rates, financial indices, credit spreads, default risk, nonperformance risk, volatility, liquidity and changes in
estimates and assumptions used in the pricing models. See Note 7 of the Notes to the Consolidated and Combined Financial
Statements for additional information on significant inputs into the OTC derivative pricing models and credit risk adjustment.
Embedded Derivatives
We issue variable annuity products with guaranteed minimum benefits, some of which are embedded derivatives measured
at estimated fair value separately from the host variable annuity product, with changes in estimated fair value reported in net
derivative gains (losses). The estimated fair values of these embedded derivatives are determined based on the present value of
projected future benefits minus the present value of projected future fees attributable to the guarantee. The projections of future
benefits and future fees require capital markets and actuarial assumptions, including expectations concerning policyholder
behavior. A risk neutral valuation methodology is used under which the cash flows from the guarantees are projected under
multiple capital market scenarios using observable risk-free rates.
Market conditions, including, but not limited to, changes in interest rates, equity indices, market volatility and variations
in actuarial assumptions, including policyholder behavior, mortality and risk margins related to non-capital market inputs, as
well as changes in our nonperformance risk adjustment may result in significant fluctuations in the estimated fair value of the
guarantees that could materially affect net income. Changes to actuarial assumptions, principally related to contract holder
behavior such as annuitization utilization and withdrawals associated with GMIB riders, can result in a change of expected future
cash outflows of a guarantee between the accrual-based model for insurance liabilities and the fair-value based model for
embedded derivatives. See Note 1 of the Notes to the Consolidated and Combined Financial Statements for additional information
relating to the determination of the accounting model. Risk margins are established to capture the non-capital market risks of
the instrument which represent the additional compensation a market participant would require to assume the risks related to
the uncertainties in certain actuarial assumptions. The establishment of risk margins requires the use of significant management
judgment, including assumptions of the amount and cost of capital needed to cover the guarantees.
With respect to assumptions regarding policyholder behavior, we have recorded charges, and in some cases benefits, in
prior years as a result of the availability of sufficient and credible data at the conclusion of each review. During the second
quarter of 2016, MetLife undertook its annual review of actuarial assumptions for its U.S. retail variable annuity business in
light of the availability of updated industry studies and a larger body of cumulative actual experience data than had been previously
available. This data provided greater insight into contract holder behavior for GMIB riders passing the initial 10-year waiting
period before benefits can be fully utilized. As a result of this review, we made changes to contract holder benefit utilization
behavior and long-term economic assumptions, as well as risk margins. These assumption updates resulted in a change in our
estimate of expected future cash flows and moved certain of those cash flows from the accrual-based insurance liabilities model
to the fair value-based embedded derivatives model. This change in accounting estimate and the resulting charge to earnings
were primarily due to an increase in the anticipated level of forced annuitizations where the non-life contingent portion is now
reported as an embedded derivative. With more of the estimated future cash outflows being accounted for as embedded derivatives,
the GMIB rider liabilities are more sensitive to market changes and thus may result in greater income statement volatility. In
addition, in the third quarter of 2016, we performed the annual review of our actuarial assumptions for our remaining annuity
and life businesses.
We ceded the risk associated with certain of the variable annuities with guaranteed minimum benefits described in the
preceding paragraphs. The value of the embedded derivatives on the ceded risk is determined using a methodology consistent
with that described previously for the guarantees directly written by us with the exception of the input for nonperformance risk
that reflects the credit of the reinsurer. However, because certain of the reinsured guarantees do not meet the definition of an
embedded derivative and, thus are not accounted for at fair value, significant fluctuations in net income may occur when the
change in the fair value of the reinsurance recoverable is recorded in net income without a corresponding and offsetting change
in fair value of the directly written guaranteed liability.
See Note 7 of the Notes to the Consolidated and Combined Financial Statements for additional information on our embedded
derivatives.
Nonperformance Risk Adjustment
The valuation of our embedded derivatives includes an adjustment for the risk that we fail to satisfy our obligations, which
we refer to as our nonperformance risk. The nonperformance risk adjustment, which is captured as a spread over the risk-free
rate in determining the discount rate to discount the cash flows of the liability, was previously determined by taking into
consideration publicly available information relating to spreads in the secondary market for MetLife, Inc.’s debt, including
related credit default swaps.
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In the third quarter of 2017, in connection with the Separation, we updated our assumptions for determining the credit spread
underlying the nonperformance risk adjustment to be based on Brighthouse Financial, Inc.’s creditworthiness instead of that of
MetLife, Inc. The credit spread was determined by taking into consideration publicly available information relating to spreads
in the secondary market for Brighthouse Financial, Inc.’s debt. These observable spreads are then adjusted, as necessary, to
reflect the financial strength ratings of the issuing insurance subsidiaries as compared to the credit rating of Brighthouse Financial,
Inc. The impact of this change in methodology resulted in an increase in net income (loss) before provision for income tax of
$521 million ($339 million, net of income tax).
The following table illustrates the impact that a range of reasonably likely variances in credit spreads would have on our
consolidated and combined balance sheet, excluding the effect of income tax, related to the embedded derivative valuation on
certain variable annuity products measured at estimated fair value. Even when credit spreads do not change, the impact of the
nonperformance risk adjustment on fair value will change when the cash flows within the fair value measurement change. The
table only reflects the impact of changes in credit spreads on the balance sheet and not these other potential changes. In determining
the ranges, we have considered current market conditions, as well as the market level of spreads that can reasonably be anticipated
over the near term.
100% increase in our credit spread
As reported
50% decrease in our credit spread
Income Taxes
Balance Sheet Carrying Value At
December 31, 2017
Policyholder
Account
Balances
DAC and VOBA
(In millions)
508
985
1,284
$
$
$
47
276
419
$
$
$
We provide for federal and state income taxes currently payable, as well as those deferred due to temporary differences
between the financial reporting and tax bases of assets and liabilities. Our accounting for income taxes represents our best
estimate of various events and transactions. Tax laws are often complex and may be subject to differing interpretations by the
taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, we must make
judgments and interpretations about the application of tax laws. We must also make estimates about when in the future certain
items will affect taxable income in the various taxing jurisdictions.
In establishing a liability for unrecognized tax benefits, assumptions may be made in determining whether, and to what
extent, a tax position may be sustained. Once established, unrecognized tax benefits are adjusted when there is more information
available or when events occur requiring a change.
Valuation allowances are established against deferred tax assets, particularly those arising from carryforwards, when
management determines, based on available information, that it is more likely than not that deferred income tax assets will not
be realized. The realization of deferred tax assets related to carryforwards depends upon the existence of sufficient taxable
income within the carryforward periods under the tax law in the applicable tax jurisdiction. Significant judgment is required in
projecting future taxable income to determine whether valuation allowances should be established, as well as the amount of
such allowances. See Note 1 of the Notes to the Consolidated and Combined Financial Statements for additional information
relating to our determination of such valuation allowances.
We may be required to change our provision for income taxes when estimates used in determining valuation allowances on
deferred tax assets significantly change, or when new information indicates the need for adjustment in valuation allowances.
Additionally, future events, such as changes in tax laws, tax regulations, or interpretations of such laws or regulations, could
have an impact on the provision for income tax and the effective tax rate. Any such changes could significantly affect the amounts
reported in the financial statements in the year these changes occur.
On December 22, 2017, President Trump signed the Tax Act into law. The Tax Act reduced the corporate tax rate to 21%,
reduced interest expense deductibility, increased capitalization amounts for deferred acquisition costs, eliminated the corporate
alternative minimum tax, provided for determining reserve deductions at 92.81% of statutory reserves, and reduced the dividend
received deduction. Most of the changes in the Tax Act are effective on January 1, 2018.
The reduction in the corporate rate required a one-time remeasurement of certain deferred tax items as of December 31,
2017. For the estimated impact of the Tax Act on the financial statements, including the estimated impact resulting from the
remeasurement of deferred tax assets and liabilities, see Note 13 for more information. Actual results may materially differ from
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the Company’s current estimate due to, among other things, further guidance that may be issued by tax authorities or regulatory
bodies and/or changes in interpretations and assumptions preliminarily made. The Company will continue to analyze the Tax
Act to finalize its financial statement impact.
In December 2017, the SEC issued Staff Accounting Bulletin (“SAB”) 118, addressing the application of GAAP in situations
when a registrant does not have necessary information available to complete the accounting for certain income tax effects of
the Tax Act. SAB 118 provides guidance for registrants under three scenarios: (1) the measurement of certain income tax effects
is complete, (2) the measurement of certain income tax effects can be reasonably estimated, and (3) the measurement of certain
income tax effects cannot be reasonably estimated. SAB 118 provides that the measurement period is complete when a company’s
accounting is complete. The measurement period cannot extend beyond one year from the enactment date. SAB 118 acknowledges
that a company may be able to complete the accounting for some provisions earlier than others. As such, it may need to apply
all three scenarios in determining the accounting for the Tax Act based on information that is available. The Company has not
fully completed its accounting for the tax effects of the Tax Act, and thus certain items relating to accounting for the Tax Act
are provisional, including accounting for reserves. However, it has recorded the effects of the Tax Act as reasonable estimates
due to the need for further analysis of the provisions within the Tax Act and collection, preparation and analysis of relevant data
necessary to complete the accounting.
The corporate rate reduction also left certain tax effects, which were originally booked using the previous corporate rate,
stranded in AOCI. The Company adopted new accounting guidance as of December 31, 2017 that allowed the Company to
reclassify the stranded tax effects from AOCI into retained earnings. The Company elected to reclassify amounts based on the
difference between the previously enacted federal corporate tax rate and the newly enacted rate as applied on an aggregate basis.
See Notes 1 and 13 of the Notes to the Consolidated and Combined Financial Statements for additional information on our
income taxes.
Litigation Contingencies
We are a party to a number of legal actions and are involved in a number of regulatory investigations. Given the inherent
unpredictability of these matters, it is difficult to estimate the impact on our financial position. Liabilities are established when
it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. On a quarterly and annual
basis, we review relevant information with respect to liabilities for litigation, regulatory investigations and litigation-related
contingencies to be reflected in our results of operations and financial condition.
See Note 15 of the Notes to the Consolidated and Combined Financial Statements for additional information regarding our
assessment of litigation contingencies.
Non-GAAP and Other Financial Disclosures
Non-GAAP Financial Disclosures
Adjusted Earnings
In this report, we present adjusted earnings as a measure of our performance that is not calculated in accordance with GAAP.
We believe that this non-GAAP financial measure enhances the understanding of our performance by highlighting the results
of operations and the underlying profitability drivers of our business. However, adjusted earnings should not be viewed as a
substitute for net income (loss), which is the most directly comparable financial measure calculated in accordance with GAAP.
See “— Results of Operations” for a reconciliation of adjusted earnings to net income (loss). A reconciliation of adjusted earnings
to net income (loss) is not accessible on a forward-looking basis because we believe it is not possible without unreasonable
efforts to provide other than a range of net investment gains and losses and net derivative gains and losses, which can fluctuate
significantly within or outside the range and from period to period and may have a material impact on net income (loss).
Our definitions of the non-GAAP and other financial measures discussed in this report may differ from those used by other
companies. For example, as indicated below, we exclude GMIB revenues and related embedded derivatives gains (losses), as
well as GMIB benefits and associated DAC and VOBA offsets from adjusted earnings, thereby excluding substantially all GMLB
activity from adjusted earnings.
Adjusted earnings, which may be positive or negative, is used by management to evaluate performance, allocate resources
and facilitate comparisons to industry results. This financial measure focuses on our primary businesses principally by excluding
the impact of market volatility, which could distort trends, as well as businesses that have been or will be sold or exited by us,
referred to as divested businesses.
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The following are the significant items excluded from total revenues, net of income tax, in calculating adjusted earnings:
• Net investment gains (losses);
• Net derivative gains (losses) except earned income on derivatives and amortization of premium on derivatives that
are hedges of investments or that are used to replicate certain investments, but do not qualify for hedge accounting
treatment (“Investment Hedge Adjustments”); and
• Amortization of unearned revenue related to net investment gains (losses) and net derivative gains (losses) and
certain variable annuity GMIB fees (“GMIB Fees”).
The following are the significant items excluded from total expenses, net of income tax, in calculating adjusted earnings:
• Amounts associated with benefits and hedging costs related to GMIBs (“GMIB Costs”);
• Amounts associated with periodic crediting rate adjustments based on the total return of a contractually referenced
pool of assets and market value adjustments associated with surrenders or terminations of contracts (“Market Value
Adjustments”); and
• Amortization of DAC and VOBA related to (i) net investment gains (losses), (ii) net derivative gains (losses), (iii)
GMIB Fees and GMIB Costs and (iv) Market Value Adjustments.
The tax impact of the adjustments mentioned are calculated net of the U.S. statutory tax rate, which could differ from our
effective tax rate.
We present adjusted earnings in a manner consistent with management’s view of the primary business activities that drive
the profitability of our core businesses. The following table illustrates how each component of adjusted earnings is calculated
from the GAAP statement of operations line items:
Component of Adjusted Earnings
How Derived from GAAP (1)
(i) Fee income
(ii) Net investment spread
(iii) Insurance-related activities
(iv) Amortization of DAC and VOBA
(v) Other expenses, net of DAC capitalization
(i) Universal life and investment-type policy fees (excluding (a) unearned
revenue adjustments related to net investment gains (losses) and net
derivative gains (losses) and (b) GMIB Fees) plus Other revenues
(excluding other revenues associated with related party reinsurance)
and amortization of deferred gain on reinsurance.
(ii) Net investment income (excluding securitization entities income) plus
Investment Hedge Adjustments and interest received on ceded fixed
annuity reinsurance deposit funds reduced by Interest credited to
policyholder account balances and interest on future policy benefits.
(iii) Premiums less Policyholder benefits and claims (excluding (a) GMIB
Costs, (b) Market Value Adjustments, (c) interest on future policy
benefits and (d) amortization of deferred gain on reinsurance) plus the
pass through of performance of ceded separate account assets.
(iv) Amortization of DAC and VOBA (excluding amounts related to (a)
net investment gains (losses), (b) net derivative gains (losses), (c)
GMIB Fees and GMIB Costs and (d) Market Value Adjustments).
(v) Other expenses reduced by capitalization of DAC and securitization
entities expense.
(vi) Provision for income tax expense (benefit)
(vi) Tax impact of the above items.
_______________
(1) Italicized items indicate GAAP statement of operations line items.
Consistent with GAAP guidance for segment reporting, adjusted earnings is also our GAAP measure of segment
performance. Accordingly, we report adjusted earnings by segment in Note 2 of the Notes to the Consolidated and Combined
Financial Statements.
Other Financial Disclosures
The following additional information is relevant to an understanding of our performance results:
• We sometimes refer to sales activity for various products. Statistical sales information for life sales are calculated using
the LIMRA definition of sales for core direct sales, excluding company-sponsored internal exchanges, corporate-owned
life insurance, bank-owned life insurance, and private placement variable universal life insurance. Annuity sales consist
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of 10% of direct statutory premiums, excluding company sponsored internal exchanges. These sales statistics do not
correspond to revenues under GAAP, but are used as relevant measures of business activity.
• Allocated equity is the portion of common stockholders’ equity that management allocates to each of its segments and
sub-segments. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations —
Executive Summary — Overview” and Note 2 of the Notes to the Consolidated and Combined Financial Statements
for further details regarding allocated equity and the use of an internal capital model.
Economic Capital
Economic capital is an internally developed risk capital model, the purpose of which is to measure the risk in the business
and to provide a basis upon which capital is deployed. The economic capital model accounts for the unique and specific nature
of the risks inherent in our business.
Our economic capital model, coupled with considerations of regulatory capital requirements, aligns segment allocated equity
with emerging standards and consistent risk principles. The model applies statistics-based risk evaluation principles to the
material risks to which the Company is exposed. These consistent risk principles include calibrating required economic capital
shock factors to a specific confidence level and time horizon while applying an industry standard method for the inclusion of
diversification benefits among risk types. Segment net investment income is credited or charged based on the level of allocated
equity; however, changes in allocated equity do not impact our consolidated net investment income, adjusted earnings or income
(loss) from continuing operations, net of income tax. Net investment income is based upon the actual results of each segment’s
specifically identifiable investment portfolios adjusted for allocated equity. Other costs are allocated to each of the segments
based upon: (i) a review of the nature of such costs; (ii) time studies analyzing the amount of employee compensation costs
incurred by each segment; and (iii) cost estimates included in the Company’s product pricing. This model was used through
December 31, 2017.
Going forward, for variable annuities, the Company will deploy capital consistent with its Variable Annuity Risk Exposure
Management Strategy, which defines Variable Annuity’s capital target based on statutory capital oriented risk principles. For
businesses other than variable annuity, the allocation will be based on a percentage of statutory risk based capital. The Company’s
management is responsible for the ongoing production and enhancement of the Variable Annuity capital model and reviews its
approach periodically to ensure it remains consistent with emerging industry practice standards.
Economic capital-based risk estimation is an evolving science, and industry best practices have emerged and continue to
evolve. Areas of evolving industry best practices include stochastic liability valuation techniques, alternative methodologies for
the calculation of diversification benefits, and the quantification of appropriate shock levels.
Results of Operations
Significant Business Actions
Actuarial Assumption Review
Index to Results of Operations
Consolidated Results for the Years Ended December 31, 2017, 2016, and 2015
Reconciliation of Net Income (Loss) to Adjusted Earnings
Consolidated Results for the Years Ended December 31, 2017, 2016 and 2015 - Adjusted Earnings
Segments and Corporate & Other - Adjusted Earnings for the Years Ended December 31, 2017, 2016 and 2015
GMLB Riders for the Years Ended December 31, 2017, 2016 and 2015
Page
108
109
110
113
114
116
124
107
Significant Business Actions
The following table presents the effect on income (loss) before provision for income tax and pre-tax adjusted earnings from
certain business actions undertaken by management that resulted in significant earnings impacts but are not indicative of
underlying business performance in the period. These actions do not include the results from the annual review of actuarial
assumptions used in determining our insurance liabilities, which are separately discussed, nor other significant impacts to earnings
from events that may occur as a result of normal business operations, such as market factors or regulatory changes. Items
discussed in this section are referred to in the discussion of our results of operations and are intended to facilitate an understanding
of that discussion.
ULSG Model Change
ULSG Re-segmentation
SPDA Recaptures
VA Recaptures
ULSG Actions
Impact on Income (Loss) Before
Provision for Income Tax
Impact on Pre-tax Adjusted Earnings
Years Ended December 31,
Years Ended December 31,
2017
2016
2015
2017
2016
2015
$
$
$
$
$
— $
— $
— $
(140) $
(82) $
(652) $
(614) $
$
413
— $
— $
(In millions)
— $
— $
— $
— $
— $
— $
— $
— $
$
14
(82) $
(652) $
(614) $
$
413
— $
— $
—
—
—
—
—
ULSG Model Change. In the second quarter of 2016, we refined our actuarial model which calculates the reserves for our
ULSG products (the “ULSG Model Change”). The new model treats projected premiums and death claims differently than the
previous model. This change resulted in a one-time charge to both income (loss) before provision for income tax and pre-tax
adjusted earnings of $652 million for the year ended December 31, 2016. Of this one-time charge, $262 million resulted directly
from the model refinements, as follows:
•
•
•
a $231 million increase in insurance-related liabilities;
a $24 million decrease in amortization of unearned revenue; and
a $7 million increase in amortization of DAC.
The above impacts from the model change also resulted in a reduction of expected future gross profits, which drove our
loss recognition margins negative, resulting in a further DAC write-off of $358 million and an increase in insurance-related
liabilities of $32 million for the year ended December, 31, 2016. In addition to the one-time charges, as a result of the lower
expected future gross profits, we have recognized ongoing increases in insurance-related liabilities of $218 million and $132
million for the years ended December 31, 2017 and 2016, respectively, that are not included in the preceding table. We expect
to recognize similar ongoing increases in future periods.
ULSG Re-segmentation. In the fourth quarter of 2016, we moved the ULSG products out of the Life segment and into
the Run-off segment. The move was triggered by the decision in late 2016 to cease sales of all ULSG products in early 2017
and to manage this business separately from the rest of the Life business. In accordance with our accounting policies, the move
to a different segment required us to separately evaluate and test the ULSG products for loss recognition without being able to
offset losses with future earnings from the variable and universal life products remaining in the Life segment. This re-
segmentation driven loss recognition resulted in a decrease in both income (loss) before provision for income tax and pre-tax
adjusted earnings of $614 million, of which $562 million was from the write-off of DAC and $52 million was from an increase
in insurance-related liabilities.
SPDA Recaptures. In 2016, in contemplation of the Separation, we recaptured certain blocks of single premium deferred
annuities ceded to MLIC, a subsidiary of MetLife, on a 90% coinsurance basis (together, the “SPDA Recaptures”). The SPDA
Recaptures resulted in a benefit to both income (loss) before provision for income tax and pre-tax adjusted earnings of $413
million for the year ended December 31, 2016, comprised of higher fee income of $303 million due to a net favorable settlement
and a recovery of DAC amortization of $110 million. The SPDA Recaptures were primarily settled with market-adjusted assets-
in-kind, which increased the invested asset base but also resulted in lower yields as compared to the yield used in determining
the interest income recognized on the reinsurance receivable balances prior to the recaptures. Together these changes had
additional impacts to net investment spread on a comparative basis which are not reflected in the preceding table.
VA Recaptures. Effective January 1, 2017, certain ceded and assumed variable annuity reinsurance agreements with MLIC
were recaptured (“VA Recaptures”). The initial settlement of these transactions resulted in a charge in the first quarter of 2017
which decreased income (loss) before provision for income tax by $277 million. Of this amount, $265 million was included in
108
GMLB Riders, recognized in net derivative gains (losses). The remaining $12 million was included in pre-tax adjusted earnings,
recognized in other expenses, net of DAC capitalization, partially offset by lower amortization of DAC and VOBA. Upon final
settlement in the second quarter of 2017, we recognized a benefit of $137 million, of which $110 million was included in GMLB
Riders in net derivative gains (losses), and $27 million was included in adjusted earnings in other revenue.
ULSG Actions. In the fourth quarter of 2017, several actions involving our USLG business resulted in a net decrease to both
income (loss) before provision for income tax and pre-tax adjusted earnings of $82 million. These actions included the following:
•
the recapture of certain Unaffiliated Third-party Reinsurance agreements which resulted in net charges totaling $147
million; partially offset by
•
refinements to the actuarial valuation model, resulting in a net favorable impact of $65 million.
Actuarial Assumption Review
As a result of the 2016 actuarial assumption review related to our variable annuity business, we made certain changes to
policyholder behavior and long-term economic assumptions, primarily relating to annuitization utilization, as well as withdrawals
and risk margins. The 2016 review included an analysis of a larger body of actual experience than was previously available
which, when combined with relevant industry-wide data that had recently become available, we believed provided greater insight
into anticipated policyholder behavior for variable annuity contracts that are in the money. This experience included a statistically
significant amount of our GMIB policies passing the ten year waiting period required to allow contract holders to use certain
benefits and a longer period of experience in a low interest rate environment.
For the 2017 variable annuity review, we (i) made certain changes to policyholder behavior; (ii) harmonized models and
assumptions between GAAP and statutory; and (iii) reflected Brighthouse specific variables after the completion of the Separation
from our former parent. The policyholder behavior updates were for lapse assumptions on all variable annuities with living
benefits, and withdrawal assumptions on GMWBs to reflect contract age, in addition to client age over time. This change resulted
in earlier client withdrawals for GMWB contracts. This policyholder behavior update was in part informed by the recent
quantitative impact study (“QIS”) conducted as part of the NAIC variable annuity reserve and capital reform initiative that is
still under development. In the harmonization category of changes, on economic assumptions, we lowered our long-term rate
of return assumption to the mid-6% range for separate account funds, consistent with our base case projections which are the
basis for setting our financial targets. Additionally, in this category, we refined the DAC model time horizon to be harmonized
with the estimated weighted average life of the liabilities. In the third and final category, triggered by the Separation, we updated
our assumptions for determining the credit spread underlying the nonperformance risk adjustment in the valuation of our
embedded derivative liabilities to be based on Brighthouse’s creditworthiness instead of that of MetLife. See “— Summary of
Critical Accounting Estimates — Derivatives — Nonperformance Risk Adjustment.”
Updates to assumptions for our life businesses were related to realized experience in terms of mortality, lapses and premium
payment patterns. Additionally, while we did not revise our long term general account rate setting methodology inherited from
our former parent this year, we did experience positive impacts from differentiating the blended general account earned rates
between the Life and Run-off segments. We may review and update these general account assumptions in future annual actuarial
reviews.
The following table presents the impact on pre-tax adjusted earnings and net income (loss) before provision for income tax
from the actuarial assumption reviews. The impact related to GMLBs is included in net income (loss), but not included in adjusted
earnings. See “— Non-GAAP and Other Financial Disclosures.”
GMLBs
Included in adjusted earnings:
Other annuity business
Life business
Run-off
Total included in adjusted earnings
Total impact on net income (loss)
109
Years Ended December 31,
2017
2016
2015
(In millions)
$
(329) $
(2,348) $
(94)
218
(28)
43
233
(200)
2
—
(198)
(42)
5
(42)
(79)
$
(96) $
(2,546) $
(173)
Consolidated Results for the Years Ended December 31, 2017, 2016, and 2015
Business Overview. We continue to evaluate our product offerings with the goal to provide new products that are simpler,
more transparent and provide value to our advisors, clients and shareholders. New business efforts in 2017 centered on the sale
of Shield Annuities, which increased 50% compared to 2016. In addition, as part of our distribution agreement with MassMutual,
we launched a new fixed indexed annuity product in the second half of 2017. However, overall 2017 sales declined on a
comparative basis due to impacts from Separation-related events that occurred in 2016, including the sale of MPCG to MassMutual
and the suspension of sales by Fidelity, as well as our migration away from participating whole life and certain term life products.
Unless otherwise noted, all amounts in the following discussions of our results of operations are stated before income tax
except for adjusted earnings, which are presented net of income tax.
Revenues
Premiums
Universal life and investment-type product policy fees
Net investment income
Other revenues
Net investment gains (losses)
Net derivative gains (losses)
Total revenues
Expenses
Policyholder benefits and claims
Interest credited to policyholder account balances
Capitalization of DAC
Amortization of DAC and VOBA
Interest expense on debt
Other expenses
Total expenses
Income (loss) before provision for income tax
Provision for income tax expense (benefit)
Net income (loss)
Years Ended December 31,
2017
2016
2015
(In millions)
$
863
$
1,222
$
3,898
3,078
651
(28)
(1,620)
6,842
3,636
1,111
(260)
227
153
2,590
7,457
(615)
(237)
3,782
3,207
736
(78)
(5,851)
3,018
3,903
1,165
(334)
371
175
2,443
7,723
(4,705)
(1,766)
1,679
4,010
3,099
422
7
(326)
8,891
3,269
1,259
(399)
781
168
2,351
7,429
1,462
343
$
(378) $
(2,939) $
1,119
The following table presents the components of net income (loss), in addition to adjusted earnings:
GMLB Riders
Other derivative instruments
Net investment gains (losses)
Other adjustments
Adjusted earnings before provision for income tax
Income (loss) before provision for income tax
Provision for income tax expense (benefit)
Net income (loss)
Years Ended December 31,
2017
2016
2015
(In millions)
$
(1,937) $
(3,221) $
(203)
(28)
(44)
1,597
(615)
(237)
(2,015)
(78)
(258)
867
(4,705)
(1,766)
(500)
(156)
7
(2)
2,113
1,462
343
$
(378) $
(2,939) $
1,119
Year Ended December 31, 2017 Compared with the Year Ended December 31, 2016
Overview. Income (loss) before provision for income tax increased $4.1 billion ($2.6 billion, net of income tax) compared
to 2016. In addition to higher adjusted earnings, this increase was driven primarily by favorable changes from freestanding
derivatives and GMLB Riders. Additionally, after-tax results were impacted by a non-cash charge recognized in the third quarter
110
of 2017 in connection with the Separation of $1.1 billion which was substantially offset by the favorable impact recognized in
the fourth quarter of 2017 of $947 million related to the enactment of the Tax Act. Excluding the impacts from the annual actuarial
assumption review, income (loss) before provision for income tax increased $1.6 billion.
GMLB Riders. The GMLB Riders reflect (i) changes in the carrying value of GMLB liabilities, including GMIBs, GMWBs
and GMABs; (ii) changes in the fair value of the hedges and reinsurance of the GMLB liabilities; (iii) the fees earned from the
GMLB liabilities; and (iv) the effects related to DAC and VOBA amortization offsets to each of the preceding components.
Comparative results from GMLB Riders were favorable by $1.3 billion as benefits recognized from lower liability reserves
were partially offset by unfavorable impacts from the related DAC offsets and market factor impacts on our hedging program.
For a detailed discussion of the GMLB Riders, see “— GMLB Riders for the Years Ended December 31, 2017, 2016 and 2015.”
Other Derivative Instruments. We have other derivative instruments, in addition to the hedges and embedded derivatives
included in the GMLB Riders, for which changes in fair value are recognized in net derivative gains (losses). Changes in the
fair value of our other derivative instruments had a favorable impact on comparative results of $1.8 billion.
Freestanding Derivatives. We have freestanding derivatives that economically hedge certain invested assets and insurance
liabilities. The majority of this hedging activity is focused in the following areas:
•
•
use of interest rate swaps when we have duration mismatches where suitable assets with maturities similar to those
of our long-dated liabilities are not readily available in the market; and
use of foreign currency swaps when we hold fixed maturity securities denominated in foreign currencies that are
matching insurance liabilities denominated in U.S. dollars.
The market impacts on the hedges are accounted for in net income (loss) while the offsetting economic impact on the
items they are hedging are either not recognized or recognized through OCI in equity.
In 2016, in connection with the Separation, we entered into additional interest rate swaps in order to hedge the risk of a
decline in the statutory capital of the Company from further declines in interest rates.
Changes in the fair value of freestanding derivatives had a $1.8 billion favorable impact on comparative results, primarily
due to favorable changes in interest rates on the fair value of our interest rate swaps. This favorable change was partially offset
by unfavorable changes in our foreign currency swaps due to the U.S. dollar weakening against key foreign currencies in the
current period when compared to the prior period.
Embedded Derivatives. Certain ceded reinsurance agreements in our Life and Run-off segments are written on a
coinsurance with funds withheld basis. The funds withheld component is accounted for as an embedded derivative with changes
in the fair value recognized in net income (loss) in the period in which they occur. In addition, the changes in liability values
of our index-linked annuity products that result from changes in the underlying equity index are accounted for as embedded
derivatives. Changes in the fair value of embedded derivatives had a favorable impact on comparative results of $16 million,
primarily due to lower unfavorable impacts recognized in the current period on our Shield Annuities. In connection with the
transition to our new variable annuity hedging program, changes in the fair value of the Shield Annuities are included in the
direct written liabilities component of GMLB Riders beginning in the third quarter of 2017 on a prospective basis.
Other Adjustments. Other adjustments to determine adjusted earnings had a favorable impact on comparative results of
$214 million, primarily due to charges in the prior period for an impairment of goodwill in our Run-off segment and the write-
off of previously capitalized items in Corporate & Other in connection with the sale of MPCG to MassMutual.
Income Tax Expense (Benefit). Income tax benefit for the year ended December 31, 2017 was $237 million, or 39% of
income (loss) before provision for income tax, compared to $1.8 billion, or 38% of income (loss) before provision for income
tax for the year ended December 31, 2016. Our effective tax rate differs from the U.S. statutory rate primarily due to the impacts
of the dividend received deductions and utilization of tax credits. In the current period, we recognized an additional $1.1 billion
non-cash tax charge in connection with the Separation, as well as a $725 million tax benefit related to the enactment of the Tax
Act.
Adjusted Earnings. As more fully described in “— Non-GAAP and Other Financial Disclosures,” we use adjusted earnings,
which does not equate to net income (loss), as determined in accordance with GAAP, to analyze our performance, evaluate
segment performance, and allocate resources. We believe that the presentation of adjusted earnings, as we measure it for
management purposes, enhances the understanding of our performance by highlighting the results of operations and the
underlying profitability drivers of the business. Adjusted earnings and other financial measures based on adjusted earnings allow
analysis of our performance relative to our business plan and facilitate comparisons to industry results. Adjusted earnings should
not be viewed as a substitute for net income (loss). Adjusted earnings before provision for income tax increased $730 million
111
($234 million, net of income tax) for the year ended December 31, 2017, compared to the prior period. Adjusted earnings is
discussed in greater detail below.
Year Ended December 31, 2016 Compared with the Year Ended December 31, 2015
Overview. Income (loss) before provision for income tax decreased $6.2 billion ($4.1 billion, net of income tax) to a loss
in 2016 compared to income in 2015. In addition to lower adjusted earnings, this decrease was primarily due to unfavorable
results from GMLB Riders and unfavorable changes in other derivative instruments. Excluding the impact of the annual actuarial
assumption review, income (loss) before provision for income tax decreased $3.8 billion ($2.5 billion, net of income tax).
GMLB Riders. Comparative results from GMLB Riders were unfavorable by $2.7 billion, as our annual actuarial assumption
review resulted in changes to assumptions regarding policyholder behavior which significantly increased the carrying value of
the liabilities. In addition, market factors resulted in a significant decrease in the fair value of our related hedges. These decreases
were partially offset by the favorable impacts on the GMLB Riders liabilities due to those same market factors, as well as
favorable impacts to DAC amortization. Excluding the impact of the annual actuarial assumption review, comparative results
from GMLB Riders were unfavorable by $466 million.
Other Derivative Instruments. Changes in the fair value of our other derivative instruments had an unfavorable impact on
comparative results of $1.9 billion.
Freestanding Derivatives. Changes in the fair value of freestanding derivatives had an unfavorable impact on comparative
results of $1.7 billion, primarily due to the unfavorable changes in our receive fixed interest rate swaps and interest rate total
return swaps resulting from long-term interest rates increasing in 2016, including a significant increase in the fourth quarter,
compared to decreasing in 2015.
Embedded Derivatives. Changes in the fair value of embedded derivatives, primarily our Shield Annuity liabilities, had
an unfavorable impact on comparative results of $181 million due to increases in equity index levels.
Net Investment Gains (Losses). Net investment gains (losses) had an unfavorable impact on comparative results of $85
million, primarily due to realized gains on real estate and real estate joint ventures recognized in 2015 and higher impairments
on real estate joint ventures in 2016, compared to 2015. These decreases were partially offset by lower impairments of fixed
maturity securities in 2016, compared to 2015.
Other Adjustments. Other adjustments to determine adjusted earnings had an unfavorable impact on comparative results of
$256 million, primarily due to:
•
•
an impairment of goodwill in 2016 in our Run-off segment of $161 million ($109 million, net of income tax); and
higher expenses of $72 million in 2016 in Corporate & Other related to the write-off of previously capitalized items
in connection with the sale of MPCG to MassMutual.
Income Tax Expense (Benefit). Income tax benefit for the year ended December 31, 2016 was $1.8 billion, or 38% of income
(loss) before provision for income tax, compared to income tax expense of $343 million, or 23% of income (loss) before provision
for income tax, for the year ended December 31, 2015. Our effective tax rate differs from the U.S. statutory rates primarily due
to the impacts of the dividend received deductions and utilization of tax credits.
Adjusted earnings. Adjusted earnings before provision for income tax decreased $1.2 billion ($855 million, net of income
tax) for the year ended December 31, 2016, compared to 2015. Adjusted earnings is discussed in greater detail below.
112
Reconciliation of Net Income (Loss) to Adjusted Earnings
The following tables reconcile net income (loss) to adjusted earnings:
Year Ended December 31, 2017
Annuities
Life
Run-off
Corporate
& Other
Total
(In millions)
$
(394) $
(31) $
(391)
(785)
(1,937)
(242)
26
(18)
1,386
369
(35)
(66)
—
(21)
(52)
—
7
(9)
75
25
100
—
(53)
25
(19)
147
43
$
(28) $
164
136
—
113
(27)
(7)
57
274
$
1,017
$
16
$
104
$
(217) $
(378)
(237)
(615)
(1,937)
(203)
(28)
(44)
1,597
677
920
Year Ended December 31, 2016
Annuities
Life
Run-off
Corporate
& Other
Total
(In millions)
$
(1,177) $
(23) $
(770) $
(969) $
(2,939)
(770)
(1,947)
(3,221)
(354)
(8)
—
1,636
484
(27)
(50)
—
(71)
10
(15)
26
—
26
(413)
(1,183)
—
(163)
(15)
(171)
(834)
(295)
(556)
(1,525)
—
(1,427)
(65)
(72)
39
(8)
$
(539) $
47
$
(1,766)
(4,705)
(3,221)
(2,015)
(78)
(258)
867
181
686
Year Ended December 31, 2015
Annuities
Life
Run-off
Corporate
& Other
Total
(In millions)
$
15
$
(1)
14
—
(31)
4
20
21
1
20
$
447
237
684
—
(58)
22
3
717
249
468
$
(94) $
1,119
(74)
(168)
—
3
(93)
(1)
(77)
(41)
343
1,462
(500)
(156)
7
(2)
2,113
572
$
(36) $
1,541
Net income (loss)
Add: Provision for income tax expense (benefit)
Net income (loss) before provision for income tax
Less: GMLB Riders
Less: Other derivative instruments
Less: Net investment gains (losses)
Less: Other adjustments
Adjusted earnings before provision for income tax
Less: Provision for income tax (expense) benefit
Adjusted earnings
Net income (loss)
Add: Provision for income tax expense (benefit)
Net income (loss) before provision for income tax
Less: GMLB Riders
Less: Other derivative instruments
Less: Net investment gains (losses)
Less: Other adjustments
Adjusted earnings before provision for income tax
Less: Provision for income tax (expense) benefit
Adjusted earnings
$
1,152
$
Net income (loss)
Add: Provision for income tax expense (benefit)
Net income (loss) before provision for income tax
Less: GMLB Riders
Less: Other derivative instruments
Less: Net investment gains (losses)
Less: Other adjustments
Adjusted earnings before provision for income tax
Less: Provision for income tax (expense) benefit
$
751
181
932
(500)
(70)
74
(24)
1,452
363
Adjusted earnings
$
1,089
$
113
Consolidated Results for the Years Ended December 31, 2017, 2016 and 2015 - Adjusted Earnings
The following table presents the components of adjusted earnings:
Years Ended December 31,
2017
2016
2015
Fee income
Net investment spread
Insurance-related activities
Amortization of DAC and VOBA
Other expenses, net of DAC capitalization
Adjusted earnings before provision for income tax
Provision for income tax expense (benefit)
Adjusted earnings
(In millions)
$
4,270
$
4,320
$
1,284
(1,147)
(330)
(2,480)
1,597
677
920
$
$
1,546
(1,332)
(1,635)
(2,032)
867
181
686
4,090
1,486
(617)
(735)
(2,111)
2,113
572
$
1,541
Year Ended December 31, 2017 Compared with the Year Ended December 31, 2016
Overview. Adjusted earnings increased $234 million, primarily driven by lower amortization of DAC which was partially
offset by higher expenses and lower net investment income. In addition, we recognized a non-cash tax charge of $1.1 billion in
the third quarter of 2017, which was substantially offset by the favorable impact of $947 million in the fourth quarter of 2017
related to the enactment of the Tax Act. Excluding the impacts from the annual actuarial assumption review, adjusted earnings
decreased $47 million.
Fee Income. Fee income decreased by $50 million, primarily due to a decline in our Annuities segment related to the SPDA
Recaptures which was partially offset by higher asset-based fees and a tax-related increase in Corporate & Other. Excluding the
impact of the annual actuarial assumption review, fee income decreased by $119 million.
Net Investment Spread. Net investment spread decreased $262 million, primarily due to lower net investment income
recognized in our Annuities segment and Corporate & Other, which is discussed in greater detail below.
Insurance-related Activities. Net costs from insurance-related activities decreased by $185 million, primarily due to charges
recognized in the prior period, net of additional charges in the current period, related to the ULSG Model Change and associated
loss recognition in our Run-off segment, as well as a favorable change in the fair value of the underlying ceded separate account
assets related to a related party reinsurance agreement for certain variable annuity contracts. Excluding the impact of the annual
actuarial assumption review, insurance-related costs decreased by $109 million.
Amortization of DAC and VOBA. DAC amortization is affected by estimated future gross profits, as well as differences
between actual gross profits and estimates in the current period. See “— Summary of Critical Accounting Estimates — Deferred
Policy Acquisition Costs and Value of Business Acquired.” Lower amortization of DAC and VOBA had a favorable impact
comparative results of $1.3 billion, primarily due to charges recognized in the prior period from loss recognition triggered by
the ULSG Model Change in our Run-off segment and refinements to the amortization period as a result of the current period
annual actuarial assumption review in our Annuities segment. Excluding the impact of the annual actuarial assumption review,
lower amortization of DAC and VOBA had a favorable impact on comparative results of $1.0 billion.
Other Expenses, Net of DAC Capitalization. Expenses increased by $448 million, primarily due to establishment costs
related to our technology transformation and branding in Corporate & Other, as well as increases in operating expenses as a
result of being a stand-alone company and higher asset-based expenses in our Annuities segment.
Actuarial Assumption Review. The results from the annual actuarial assumption review, which are included in the amounts
discussed above, had a favorable impact on comparative results of $431 million, primarily due to lower amortization of DAC
in our Annuities segment from refinements in the amortization period along with other changes discussed in greater detail below.
Income Tax Expense (Benefit). Income tax expense for the year ended December 31, 2017 was $677 million compared to
$181 million for the year ended December 31, 2016. Our effective tax rate typically differs from the U.S. statutory rate primarily
due to the dividend received deductions and utilization of tax credits. In the current period, we recognized a $1.1 billion non-
cash tax charge in connection with the Separation. We also recognized a tax benefit in the current period of $725 million due to
the Tax Act. These adjustments resulted in effective tax rate percentages that are not meaningful for comparison purposes and
accordingly have not been included.
114
Year Ended December 31, 2016 Compared with the Year Ended December 31, 2015
Overview. The $855 million decrease in adjusted earnings resulted from a decrease in our Run-off segment, partially offset
by increases in our Annuities segment and Corporate & Other. The decrease in our Run-off segment was due primarily to the
ULSG Model Change and ULSG Re-segmentation. The increase in our Annuities segment was primarily due to higher fee
income, lower amortization of DAC and VOBA and higher net investment spread, partially offset by higher GMDB costs. The
increase in Corporate & Other was due primarily to higher net investment spread. Excluding the impact of the annual actuarial
assumption review, adjusted earnings decreased $777 million.
Fee Income. Fee income increased by $230 million, primarily due to the impacts of the SPDA Recaptures and the recapture
of several reinsurance agreements in our Life segment, which was partially offset by lower asset-based fees in our Annuities
segment. Excluding the impact of the annual actuarial assumption review, fee income increased by $218 million.
Net Investment Spread. Net investment spread increased by $60 million, primarily due to higher net investment income
resulting from higher invested asset bases in our Annuities segment and Corporate & Other, partially offset by a lower invested
asset base in our Run-off segment. The overall increase in net investment income was partially offset by lower yields earned on
the reinvestment of fixed maturity securities throughout our portfolios as a result of the low interest rate environment and lower
returns on real estate joint ventures and securities lending in our Run-off segment. Net investment spread was further reduced
by a decrease in income on the reinsurance deposit funds related to the SPDA Recaptures.
Insurance-Related Activities. Net costs from insurance-related activities increased by $715 million primarily due to higher
liabilities in our Run-off segment resulting from the ULSG Model Change and ULSG Re-segmentation and higher GMDB costs
in our Annuities segment. Excluding the impact of the annual actuarial assumption review discussed below, net costs from
insurance-related activities increased by $708 million.
Amortization of DAC and VOBA. Higher amortization of DAC and VOBA had an unfavorable impact on comparative
earnings of $900 million, primarily due to the impacts of the ULSG Re-segmentation and the ULSG Model Change. Excluding
the impact of the annual actuarial assumption review, higher amortization of DAC and VOBA had an unfavorable impact on
comparative results of $775 million.
Other Expenses, Net of DAC Capitalization. Expenses decreased by $79 million, primarily due to the impact of the sale of
MPCG to MassMutual in our Annuities and Life segments and lower asset-based costs in our Annuities segment, partially offset
by higher allocated software amortization in our Annuities and Life segments as a result of certain projects being completed and
placed into service in 2016.
Actuarial Assumption Review. The results of the annual actuarial assumption review, which are included in the amounts
discussed above, had an unfavorable impact on comparative results of $119 million, primarily due to higher DAC amortization
and an increase in insurance-related liabilities in our Annuities segment, partially offset by a decrease in insurance-related
liabilities in our Run-off segment.
Income Tax Expense (Benefit). Income tax expense for the year ended December 31, 2016 was $181 million, or 21% of
adjusted earnings before provision for income tax, compared to income tax expense of $572 million, or 27% of adjusted earnings
before income tax, for the year ended December 31, 2015. Our effective tax rate typically differs from the U.S. statutory rate
primarily due to the impacts of the dividend received deductions and utilization of tax credits.
115
Segments and Corporate & Other - Adjusted Earnings for the Years Ended December 31, 2017, 2016 and 2015
Annuities
The following table presents the components of adjusted earnings for our Annuities segment:
Fee income
Net investment spread
Insurance-related activities
Amortization of DAC and VOBA
Other expenses, net of DAC capitalization
Adjusted earnings before provision for income tax
Provision for income tax expense (benefit)
Adjusted earnings
Years Ended December 31,
2017
2016
2015
(In millions)
$
2,918
$
3,155
$
3,042
501
(388)
(80)
714
(619)
(368)
651
(484)
(456)
(1,565)
(1,246)
(1,301)
1,386
369
1,636
484
1,452
363
$
1,017
$
1,152
$
1,089
A significant portion of our adjusted earnings is driven by separate account balances related to our variable annuity business.
Most directly, these balances determine asset-based fee income but they also impact DAC amortization and asset-based
commissions. Separate account balances are driven by sales, market movements, surrenders, withdrawals, benefit payments,
policy charges and transfers. Below is a rollforward of our variable annuities separate account balances. Variable annuities
separate account balances increased in 2017 driven by the strong equity market performance partially offset by continued negative
net flows.
Balance, beginning of period
Deposits
Surrenders, withdrawals and benefits
Net Flows
Investment performance
Policy charges
Transfers to general account
Balance, end of period
Average balance
Years Ended December 31,
2017
2016
2015
(In millions)
$ 104,857
$ 106,595
$ 115,897
1,259
(9,677)
(8,418)
16,124
(2,649)
(25)
1,934
(8,046)
(6,112)
7,177
3,216
(9,222)
(6,006)
7,094
(2,607)
(10,346)
(196)
(44)
$ 109,889
$ 104,857
$ 106,595
$ 108,007
$ 105,255
$ 113,106
Year Ended December 31, 2017 Compared with the Year Ended December 31, 2016
Overview. Adjusted earnings decreased $135 million, primarily due to higher expenses, lower fee income and lower net
investment spread, partially offset by favorable changes in DAC amortization and insurance-related activities. Excluding the
favorable impact from the annual actuarial assumption review, adjusted earnings decreased $407 million.
Fee Income. Fee income decreased by $237 million, primarily due to:
•
•
•
•
a benefit recorded in the prior period of $303 million in connection with the SPDA Recaptures; and
a deferred gain of $47 million recognized in the prior period related to the reinsurance agreements that were part
of the VA Recaptures; partially offset by
an increase of $82 million from additional revenue sharing fees which were passed through to third parties and
had a corresponding offset in other expenses; and
an increase in asset-based fees in our variable annuity business of $55 million resulting from higher average separate
account balances.
116
Excluding the impact of the annual actuarial assumption review, fee income decreased by $222 million.
Net Investment Spread. Net investment spread decreased by $213 million, primarily due to lower net investment income
driven by (i) lower income on derivatives as a result of the termination of interest rate swaps, (ii) lower yields on fixed maturity
securities and mortgage loans as proceeds from maturing investments were reinvested at rates lower than the portfolio average
and (iii) lower prepayment fees. These decreases were partially offset by the impact from an increase in the average invested
asset base, primarily due to positive net flows in the general account. There was also an increase in average invested assets from
the SPDA Recaptures, however, much of the resulting increase in net investment income was offset by the elimination of interest
credited payments on the related reinsurance receivable, recognized in other revenue. In addition, segment net investment income
decreased due to lower interest on allocated equity resulting from decrease in both the interest credited rate and the allocated
equity base.
Insurance-related Activities. Net costs from insurance-related activities decreased by $231 million, primarily due to:
•
•
a favorable change of $108 million in the fair value of the underlying ceded separate account assets under a related
party reinsurance agreement for certain variable annuity contracts; and
lower amortization of deferred sales inducements (“DSI”) of $106 million mostly from refinements to the
amortization period as part of the annual actuarial assumption review.
Excluding the impact of the annual actuarial assumption review, net costs from insurance-related activities decreased by
$174 million.
Amortization of DAC and VOBA. Lower DAC and VOBA amortization had a favorable impact on comparative results of
$288 million, primarily due to:
•
•
lower amortization of $376 million from refinements to the amortization period in connection with the annual
actuarial assumption review in the current period, partially offset by
higher amortization of $109 million as a result of the recovery recorded in the prior period in connection with the
SPDA Recaptures.
Excluding the impact of the annual actuarial assumption review, DAC and VOBA amortization had an unfavorable impact
on comparative results of $88 million.
Other Expenses, Net of DAC Capitalization. Expenses increased by $319 million, primarily due to increased operating
costs as a result of being a stand-alone company, as well as an increase in pass-through variable annuity expenses. With respect
to the variable annuity pass-through expenses, it is an increase of approximately $140 million driven by Separation related
changes to arrangements with third parties impacting the recognition of pass-through investment management and revenue
sharing fees, most of which is offset by an increase in fee income.
Actuarial Assumption Review. The results of the annual actuarial assumption review, which are included in the amounts
discussed above, had a favorable impact on comparative results of $418 million, primarily due to:
•
•
•
lower DAC amortization of $376 million resulting mostly from refinements to the amortization period; and
lower DSI amortization of $87 million, primarily from refinements to the amortization period; partially offset by
higher policyholder benefits and claims of $32 million resulting from a increase in insurance liabilities from changes
in lapse and withdrawal rates, as well as separate account growth rates; and
•
lower amortization of unearned revenue of $15 million from refinements to the amortization period.
Income Tax Expense (Benefit). Income tax expense for the year ended December 31, 2017 was $369 million, or 27% of
adjusted earnings before provision for income tax, compared to $484 million, or 30% of adjusted earnings before provision for
income tax, for the year ended December 31, 2016. Our effective tax rate typically differs from the U.S. statutory rate primarily
due to the impacts of the dividend received deductions. In the current period, we recognized a tax benefit of $115 million related
to the dividend received deductions.
Year Ended December 31, 2016 Compared with the Year Ended December 31, 2015
Overview. Adjusted earnings increased $63 million, driven by higher fee income, lower DAC and VOBA amortization,
higher net investment spread and lower expenses, partially offset by higher GMDB costs and unfavorable mortality experience.
Excluding the impact of the annual actuarial assumption review, adjusted earnings increased $166 million.
117
Fee Income. Fee income increased by $113 million, primarily due to:
•
•
an increase of $303 million resulting from the SPDA Recaptures; partially offset by
a decrease of $194 million in asset-based fees resulting from the lower average separate account balances noted
above, a portion of which was offset by a decrease in other expenses, net of DAC capitalization, from lower asset-
based commissions.
Net Investment Spread. Net investment spread increased by $63 million, primarily due to higher net investment income and
lower interest credited, partially offset by lower interest earned on the reinsurance deposit funds related to the SPDA Recaptures.
Net investment income increased primarily due to an increase in the average invested asset base and higher returns on private
equity investments, partially offset by the impact from the low interest rate environment, which resulted in investments in fixed
maturity securities and mortgage loans at yields lower than the portfolio average. The average invested asset base increased as
a result of the SPDA Recaptures, positive net flows in the general account and an increase in allocated equity. Interest credited
on policyholder account balances decreased primarily due to lower average crediting rates in connection with the low interest
rate environment.
Insurance-related Activities. Net costs from insurance-related activities increased by $135 million, primarily due to:
•
higher costs associated with GMDBs of $109 million driven by an increase in liability balances resulting from
changes in rider utilization assumptions, higher claims, and hedge losses; and
•
unfavorable mortality of $38 million in our income annuities business.
Excluding the impact of the annual actuarial assumption review, net costs from insurance-related activities increased by
$89 million.
Amortization of DAC and VOBA. Lower DAC and VOBA amortization had a favorable impact on comparative results of
$88 million. The decrease in amortization was primarily due to:
•
•
•
a decrease of $109 million from a recovery of DAC related to the SPDA Recaptures;
a decrease of $62 million from lower actual profits resulting from lower asset-based fees earned on the lower
average separate account balances noted above, net of the inverse impact on amortization from reduced future
expected gross profits due to the same lower fees; and
a decrease of $29 million from model refinements to DAC amortization related to affiliated reinsurance and hedges
of variable annuities; partially offset by
•
an increase of $112 million from changes in annual actuarial assumptions discussed below.
Excluding the impact of the actuarial assumption review, DAC and VOBA amortization had a favorable impact on
comparative results of $200 million.
Other Expenses, Net of DAC Capitalization. Expenses decreased by $55 million, primarily due (i) to the sale of MPCG to
MassMutual, (ii) impacts from the suspension of sales by a major distributor, (iii) lower investment management fees resulting
from lower assets under management in our proprietary funds, and (iv) lower asset-based commissions related to the lower
average separate account balances noted above. These decreases were partially offset by higher allocated software amortization.
Actuarial Assumption Review. The results from the annual actuarial assumption review, which is included in the amounts
discussed above, had an unfavorable impact on comparative results of $158 million, primarily due to:
•
•
additional DAC amortization of $112 million from assumption changes related to rider utilization, separate account
growth, market volatility and lapses; and
higher net costs from insurance-related activities of $46 million resulting from changes to rider utilization
assumptions impacting GMDBs, net of changes in lapse assumptions.
Income Tax Expense (Benefit). Income tax expense for the year ended December 31, 2016 was $484 million, or 30% of
adjusted earnings before provision for income tax, compared to $363 million, or 25% of adjusted earnings before provision for
income tax, for the year ended December 31, 2015. Our effective tax rate differs from the U.S. statutory rate primarily due to
the impacts of the dividend received deductions.
118
Life
The following table presents the components of adjusted earnings for our Life segment:
Fee income
Net investment spread
Insurance-related activities
Amortization of DAC and VOBA
Other expenses, net of DAC capitalization
Adjusted earnings before provision for income tax
Provision for income tax expense (benefit)
Adjusted earnings
Years Ended December 31,
2017
2016
2015
(In millions)
$
395
$
386
$
85
15
(223)
(265)
7
(9)
$
16
$
98
85
(284)
(259)
26
—
26
$
254
106
126
(190)
(275)
21
1
20
Year Ended December 31, 2017 Compared with the Year Ended December 31, 2016
Overview. Adjusted earnings decreased $10 million, primarily due to unfavorable impacts from insurance-related activities
partially offset by lower amortization of DAC and VOBA. Excluding the impact of the annual actuarial assumption review,
adjusted earnings increased $10 million. During 2016 we recaptured several reinsurance agreements from an affiliate of MetLife
and a third party. While these recaptures did not result in a material impact to adjusted earnings, the primary impacts of the
recaptures resulted in a significant increase in amortization of DAC that was mostly offset by higher fee income.
Fee Income. Fee income increased by $9 million, primarily due to (i) the recapture from a former affiliate of a yearly
renewable term reinsurance agreement for certain life contracts (“YRT Recapture”) in the second quarter of 2017, (ii) a refinement
in the allocation of ceded reinsurance fees between the Run-off and Life segments, and (iii) amortization of unearned revenue
mostly related to changes in assumptions regarding maintenance expenses and mortality in connection with the annual actuarial
assumption review. These favorable items were partially offset by lower fees resulting from the prior year reinsurance recapture
transactions. Excluding the impact from the annual actuarial assumption review, fee income decreased by $55 million.
Net Investment Spread. Net investment spread decreased by $13 million, primarily driven by a decrease in net investment
income, partially offset by lower interest credited to policyholders. The decline in net investment income was primarily due to
(i) lower investment yields on fixed maturity securities, as proceeds from maturing investments were invested at lower yields
than the portfolio average, (ii) lower funds withheld assets as a result of reinsurance recapture activity and (iii) a reduction in
interest on allocated equity as a result of reduced interest credited and allocated equity assets. These decreases were partially
offset by higher returns on other limited partnership interests driven by an improvement in equity market performance. Interest
credited to policyholders decreased due to lower imputed interest on insurance liabilities driven by the prior year reinsurance
recapture transactions, partially offset by higher interest credited on higher average policyholder account balances resulting from
positive net flows.
Insurance-related Activities. Insurance-related activities had an unfavorable impact on comparative results of $70 million,
primarily due to lower ceded claim recoveries resulting from the current period YRT Recapture and a higher volume of low
severity claims below our reinsurance retention limits, partially offset by lower direct claims and favorable impacts from the
prior year reinsurance recapture transactions.
Amortization of DAC and VOBA. Lower amortization of DAC and VOBA had a favorable impact on comparative results
of $61 million, primarily due to the prior year reinsurance recapture transactions and the impact on gross profits from higher
policyholder benefits and claims in 2017, partially offset by the impact from changes in assumptions regarding mortality and
maintenance expenses in connection with the annual actuarial assumption review. Excluding the impact of the annual actuarial
assumption review, amortization of DAC and VOBA had a favorable impact on comparative results of $150 million.
Other Expenses, Net of DAC Capitalization. Expenses increased by $6 million, primarily due to increased operating costs
as a result of being a stand-alone company and from one-time, separation-related reinsurance activity, partially offset by lower
operational expenses as a result of the sale of MPCG to MassMutual.
119
Actuarial Assumption Review. The results of the annual actuarial assumption review, which are included in the amounts
discussed above, had an unfavorable impact on comparative results of $30 million, primarily due to:
•
•
higher DAC amortization of $89 million mostly driven by changes in mortality and maintenance expense
assumptions and, to a lesser extent, projected premiums and separate account growth rates; partially offset by
higher amortization of unearned revenue of $64 million due to changes in mortality and maintenance expense
assumptions.
Income Tax Expense (Benefit). Income tax benefit for the year ended December 31, 2017 was $9 million. There was no tax
expense for the year ended December 31, 2016. Our effective tax rate typically differs from the U.S. statutory rate primarily
due to the impacts of the dividend received deductions. In the current period, we recognized an additional benefit related to true-
ups for the dividend received deductions.
Year Ended December 31, 2016 Compared with the Year Ended December 31, 2015
Overview. Adjusted earnings increased $6 million resulting primarily from lower amortization of DAC and VOBA excluding
the 2016 reinsurance recapture transactions and lower expenses, partially offset by unfavorable underwriting experience.
Fee Income. Fee income increased by $132 million, primarily due to the impact from the 2016 reinsurance recapture
transactions.
Net Investment Spread. Net investment spread decreased by $8 million, primarily due to higher implied interest on insurance
liabilities due to growth in the average liability balances.
Insurance-related Activities. Insurance-related activities had an unfavorable impact on comparative results of $41 million,
primarily due to higher frequency and severity of claims in our variable and universal life business.
Amortization of DAC and VOBA. Higher amortization of DAC and VOBA had an unfavorable impact on comparative results
of $94 million, primarily due to:
•
•
higher amortization of $120 million resulting from the 2016 reinsurance recapture transactions; partially offset by
lower amortization of $37 million from a decline in expected gross profits resulting from the aging of the business.
Other Expenses, Net of DAC Capitalization. Expenses decreased by $16 million, primarily due to the impacts from the sale
of MPCG to MassMutual, partially offset by higher allocated software amortization and costs related to the 2016 reinsurance
recapture transactions.
Actuarial Assumption Review. There was not a significant impact to comparative results from the annual actuarial assumption
review.
Income Tax Expense (Benefit). There was no income tax expense or benefit for the year ended December 31, 2016 compared
to income tax expense of $1 million, or 5% of adjusted earnings before provision for income tax, for the year ended December 31,
2015. Our effective tax rate typically differs from the U.S. statutory rate primarily due to the impacts of the dividend received
deductions.
Run-off
The following table presents the components of adjusted earnings for our Run-off segment:
Fee income
Net investment spread
Insurance-related activities
Amortization of DAC and VOBA
Other expenses, net of DAC capitalization
Adjusted earnings before provision for income tax
Provision for income tax expense (benefit)
Adjusted earnings
120
Years Ended December 31,
2017
2016
2015
(In millions)
$
$
748
506
(821)
(7)
(279)
147
43
$
757
496
(851)
(961)
(275)
(834)
(295)
$
104
$
(539) $
803
604
(340)
(65)
(285)
717
249
468
Year Ended December 31, 2017 Compared with the Year Ended December 31, 2016
Overview. Adjusted earnings increased by $643 million, primarily due to lower amortization of DAC and VOBA and
favorable impacts from ULSG-related charges recognized in the prior period, net of additional charges recognized in the current
period. Excluding the impact from the annual actuarial assumption review, adjusted earnings increased by $615 million.
Fee Income. Fee income decreased by $9 million, primarily due to a refinement in the allocation of ceded reinsurance fees
between the Run-off and Life segments, as well as declines in separate account balances, partially offset by changes in assumptions
regarding premium persistency and mortality in connection with the annual actuarial assumption review. Excluding the impact
from the annual actuarial assumption review, fee income decreased by $29 million.
Insurance-related Activities. Net costs from insurance-related activities decreased by $30 million, primarily due to:
•
•
a charge recognized in the prior period of $231 million related to the ULSG Model Change; partially offset by
higher net costs of $119 million associated with ULSG of which $66 million was attributable to the ULSG Actions
and $53 million was driven by the recurring impact of the ULSG Re-segmentation combined with additional loss
recognition from an increase in policyholder conversions from term life policies in anticipation of the
discontinuation of the ULSG products; and
•
higher policyholder benefits and claims of $58 million resulting from an increase in pension risk transfer reserves.
Excluding the impact from the annual actuarial assumption review, net costs from insurance-related activities decreased by
$7 million.
Amortization of DAC and VOBA. Lower amortization of DAC and VOBA had a favorable impact on comparative results
of $954 million driven by charges in 2016 to write-down the DAC asset in connection with the loss recognition triggered by the
ULSG Model Change and ULSG Re-segmentation, which also resulted in no ULSG-related amortization expense in the current
period.
Actuarial Assumption Review. The results from the annual actuarial assumption review, which are included in the amounts
discussed above, had a favorable impact on comparative results of $43 million, primarily due to:
•
lower policyholder benefits and claims of $23 million from a decrease in insurance liabilities from changes in
general account growth rates and mortality, net of changes regarding premium persistency and maintenance
expenses; and
•
higher amortization of unearned revenue of $20 million due to changes in premium persistency and mortality.
Income Tax Expense (Benefit). Income tax expense for the year ended December 31, 2017 was $43 million, or 29% of
adjusted earnings before provision for income tax, compared to a benefit of $295 million, or 35% of adjusted earnings before
provision for income tax, for the year ended December 31, 2016. Our effective tax rate typically differs from the U.S. statutory
rate primarily due to the impacts of the dividend received deductions.
Year Ended December 31, 2016 Compared with the Year Ended December 31, 2015
Overview. Adjusted earnings decreased by $1.0 billion primarily due to the impacts of the ULSG Model Change and the
ULSG Re-segmentation as well as lower net investment spread.
Fee Income. Fee income decreased by $46 million primarily due to our no longer selling ULSG products with lifetime
guarantees and lower amortization of unearned revenue resulting from the ULSG Model Change.
Net Investment Spread. Net investment spread decreased by $108 million, primarily due to the impacts to net investment
income from a lower average invested asset base and lower yields. Average invested assets decreased due to continued repayments
of funding agreements in our spread-based business. Investment yields declined primarily due to lower returns on real estate
joint ventures. Net investment income also declined due to a reduction in the size of our securities lending program and lower
margins on the remaining balances as a result of a flatter yield curve.
Insurance-related Activities. Net costs from insurance-related activities increased by $511 million, primarily due to the
following:
•
•
an increase in policyholder benefits and claims of $263 million resulting from higher insurance liabilities due to
one-time impacts of the ULSG Model Change;
an increase in policyholder benefits and claims of $132 million resulting from higher insurance liabilities due to
the recurring impact of lower expected future gross profits due to the ULSG Model Change;
121
•
an increase in policyholder benefits and claims of $52 million resulting from higher insurance liabilities due to the
ULSG Re-segmentation; and
•
unfavorable mortality experience of $46 million due to higher claims in our ULSG products.
Excluding the impact of the annual actuarial assumption review, net costs from insurance-related activities increased by
$549 million.
Amortization of DAC and VOBA. Higher amortization of DAC and VOBA had an unfavorable impact on comparative results
of $896 million, primarily due to the following:
•
•
higher amortization of $562 million resulting from the ULSG Re-segmentation; and
higher amortization of $365 million resulting from the ULSG Model Change.
Actuarial Assumption Review. The results of the annual actuarial assumption review, which are included in the amounts
discussed above, had a favorable impact on comparative results of $42 million, primarily due to lower liabilities resulting from
changes in assumptions related to surrenders in our ULSG business.
Income Tax Expense (Benefit). Income tax benefit for the year ended December 31, 2016 was $295 million, or 35% of
adjusted earnings before provision for income tax, compared to income tax expense of $249 million, or 35% of adjusted earnings
before provision for income tax, for the year ended December 31, 2015.
Corporate & Other
The following table presents the components of adjusted earnings for Corporate & Other:
Fee income
Net investment spread
Insurance-related activities
Amortization of DAC and VOBA
Other expenses, net of DAC capitalization
Adjusted earnings before provision for income tax
Provisions for income tax expense (benefit)
Adjusted earnings
Years Ended December 31,
2017
2016
2015
$
209
192
47
(20)
(371)
57
274
(In millions)
$
22
$
238
53
(22)
(252)
39
(8)
$
(217) $
47
$
(9)
125
81
(24)
(250)
(77)
(41)
(36)
Year Ended December 31, 2017 Compared with the Year Ended December 31, 2016
Overview. Adjusted earnings decreased by $264 million, primarily due to net unfavorable tax adjustments recognized in the
current period, higher expenses and lower net investment income. Excluding the impact of the current period tax adjustments,
adjusted earnings decreased by $124 million.
Fee Income. Fee income increased by $187 million, primarily from a reduction in the tax liability due to MetLife under the
Tax Separation Agreement as a result of the enactment of the Tax Act. This adjustment was recognized in other revenue. See
Note 13 of the Notes to the Consolidated and Combined Financial Statements for additional information regarding the Tax
Separation Agreement.
Net Investment Spread. Net investment income decreased by $46 million, primarily driven by (i) a reduction in the invested
asset base, (ii) lower returns on other limited partnerships and (iii) lower income from our securities lending program. These
decreases were partially offset by the impact from a lower interest credited rate on allocated equity. The invested asset base
decreased as a result of the termination of certain collateral financing arrangements in connection with the formation of BRCD
and a cash distribution paid to MetLife in the current period in connection with the Separation, as well as lower allocated equity
managed on behalf of the segments. Income from our securities lending program decreased as a result of a reduction in program
size, as well as lower margins resulting from a flatter yield curve.
Other Expenses, Net of DAC Capitalization. Expenses increased by $119 million, primarily due to establishment costs
related to our technology transformation and branding. In addition, certain corporate branding costs that had previously been
allocated to the segments were reallocated to Corporate & Other. These increases were partially offset by lower project-related
costs and lower marketing costs associated with our U.S. direct to consumer business.
122
Income Tax Expense (Benefit). Income tax expense for the year ended December 31, 2017 was $274 million compared to
$8 million benefit for the year ended December 31, 2016. Our effective tax rate typically differs from the U.S. statutory rate
primarily due to the utilization of tax credits. We recognized a $1.1 billion non-cash tax charge in connection with the Separation.
We also recognized an additional tax benefit of $725 million related to the Tax Act. These adjustments resulted in effective tax
rate percentages that are not meaningful for comparison purposes and accordingly have not been included.
Year Ended December 31, 2016 Compared with the Year Ended December 31, 2015
Overview. Adjusted earnings increased by $83 million primarily due to higher net investment spread.
Net Investment Spread. Net investment spread increased by $113 million, primarily due to higher net investment income
resulting from an increase in the average invested asset base, increased accruals on interest rate derivatives and higher returns
on private equity investments, partially offset by lower yields. Average invested assets increased primarily as a result of a capital
contribution from MetLife. Investment yields declined as we continued to encounter negative impacts of the low interest rate
environment on the investment of fixed maturity securities at yields lower than the portfolio average.
Income Tax Expense (Benefit). Income tax benefit for the year ended December 31, 2016 was $8 million, or 21% of adjusted
earnings before provision for income tax, compared to $41 million, or 53% of adjusted earnings before provision for income
tax, for the year ended December 31, 2015. Our effective tax rate differs from the U.S. statutory rate primarily due to the utilization
of tax credits.
123
GMLB Riders for the Years Ended December 31, 2017, 2016 and 2015
The following table presents the overall impact on income (loss) before provision for income tax from the performance of
GMLB Riders for (i) changes in carrying value of the GAAP liabilities, (ii) the mark-to-market of hedges and reinsurance,
(iii) fees, and (iv) associated DAC offsets.
Directly Written Liabilities (1)
Assumed Reinsurance Liabilities
Total Liabilities
Hedging Program (2)
Ceded Reinsurance
Total Hedging Program and Reinsurance
Directly Written Fees
Assumed Reinsurance Fees
Total Fees (3)
GMLB Riders before DAC Offsets
DAC Offsets
Total GMLB Riders
______________
Years Ended December 31,
2017
2016
2015
(In millions)
$
391
$
(2,587) $
(1,139)
1
392
(3,143)
(169)
(3,312)
864
—
864
(35)
(2,622)
(2,800)
69
(2,731)
859
12
871
(2,056)
119
(4,482)
1,261
$
(1,937) $
(3,221) $
(45)
(1,184)
(249)
119
(130)
849
12
861
(453)
(47)
(500)
(1) Includes cumulative changes in fair value of the Shield Annuities embedded derivatives of ($305) million for the third and
fourth quarters of 2017. Changes in the fair value of the Shield Annuities embedded derivatives were not included in the
GMLB results for the first and second quarters of 2017 and the years ended December 31, 2016 and 2015.
(2) Certain hedges of GMIB insurance liabilities were historically reported in policyholder benefits and claims. Amounts
reported in policyholder benefits and claims were ($324) million, ($278) million and $14 million for the years ended
December 2017, 2016 and 2015, respectively. Consistent with the hedge strategy now focused on a statutory target, with
less emphasis on matching GAAP liabilities, all hedge program amounts will be recorded in net derivative gains (losses)
beginning in 2018.
(3) Excludes living benefit fees, included as a component of adjusted earnings, of $71 million, $76 million and $76 million for
the years ended December 31, 2017, 2016 and 2015, respectively.
Year Ended December 31, 2017 Compared with the Year Ended December 31, 2016
Comparative results from GMLB Riders were favorable by $1.3 billion. Of this amount, a favorable change of $2.6 billion
was recorded in net derivative gains (losses). Excluding the impact of the annual actuarial assumption review, comparative
results from GLMB Riders were unfavorable by $735 million.
GMLB Riders Liabilities. GMLB Riders liabilities represent our obligation to protect policyholders against the possibility
that a downturn in the markets will reduce the specified benefits that can be claimed under the base annuity contract. Any periods
of significant and/or sustained downturns in equity markets, increased equity volatility, or reduced interest rates could result in
an increase in the valuation of the GMLB Riders liabilities. An increase in these liabilities would result in a decrease to our net
income (loss), which could be significant.
The change in carrying value of GMLB Riders Liabilities resulted in a favorable impact on comparative results of $3.0
billion primarily due to lower charges related to the annual actuarial assumption review in the current year than in the prior year
combined with favorable market impacts resulting from higher equity market performance partially offset by interest rates
increasing less in the current period than in the prior period. Included in this amount is a decrease of $305 million in the fair
value of our Shield Annuities embedded derivatives which have been included in the directly written liability results beginning
in the third quarter of 2017 on a prospective basis. Excluding the impact of the annual actuarial assumption review, GMLB
Riders Liabilities had an unfavorable impact on comparative results of $61 million.
124
GMLB Riders Hedging Program and Reinsurance. We enter into freestanding derivatives, and to a lesser extent reinsurance,
to hedge the market risks inherent in the GMLB Riders liabilities. However, certain of the risks inherent in the GMLB Riders
liabilities are unhedged, including the adjustment for nonperformance risk. Generally, the same market factors that impact the
fair value of the GMLB Riders liabilities impact the value of the hedges, though in the opposite direction. However, due to the
complex nature of the business and any unhedged risks, the changes in fair value of the GMLB Riders liabilities and GMLB
Riders hedges and reinsurance are not always in an equal amount.
The change in the fair value of GMLB Riders hedging program and reinsurance had an unfavorable impact on comparative
results of $581 million primarily due to the inverse impact of the same equity market and interest rate factors that favorably
impacted the GMLB Riders liabilities.
GMLB Riders Fees.We earn fees on the GMLB Riders liabilities, which are calculated based on the policyholder’s Benefit
Base. Fees calculated based on the Benefit Base are more stable in market downturns, compared to fees based on the account
value because the Benefit Base excludes the impact of a decline in the market value of the policyholder’s account value. We use
the fees directly earned from the GMLB Riders to fund the reserves, future claims and costs associated with the hedges of market
risks inherent in the GMLB Riders liabilities. For GMLB Riders liabilities accounted for as embedded derivatives, the future
fees are included in the fair value of the embedded derivative liabilities, with changes recorded in net derivative gains (losses).
For GMLB Riders liabilities accounted for as insurance, while the related fees do affect the valuations of these liabilities, they
are not included in the resulting liability values, but are recorded separately in universal life and investment-type policy fees.
Fees from GMLB Riders were largely unchanged.
DAC Offsets. DAC offsets, which are inversely related to the changes in certain components of the GMLB Riders discussed
above, resulted in an unfavorable impact on comparative results by $1.1 billion. The DAC offset related to certain components
of the directly written GMLB Riders is determined by the same factors that impact the respective component, but generally in
the opposite direction. There is no DAC related to assumed reinsurance and, accordingly, no DAC offset. Excluding the impact
of the annual actuarial assumption review, DAC offsets had an unfavorable impact on comparative results of $90 million.
Actuarial Assumption Review. As previously discussed, we review and update, on an annual basis, our long-term assumptions
used in the calculations of the GMLB Riders liabilities. The annual actuarial assumption review, which is included in the amounts
discussed above, resulted in a favorable impact on comparative results of $2.0 billion, primarily due to the following:
•
•
•
•
lower net derivative losses of $3.0 billion resulting from the prior period increase in GMLB Riders liabilities accounted
for as embedded derivatives, of which $2.4 billion was primarily due to changes in behavioral assumptions regarding
rider utilization and $571 million was due to changes in risk margins related to these behavioral assumption changes;
and
a favorable change to comparative results of $521 million, recognized in net derivative gains (losses), from the current
period adjustment for nonperformance risk resulting from a change in the assumption for the underlying credit spread
being based on Brighthouse’s post-separation creditworthiness, instead of that of MetLife; partially offset by
unfavorable DAC amortization offsets of $1.1 billion primarily due to (i) the large offset benefit recorded in the prior
period, (ii) an unfavorable offset adjustment in the current period related to the change in nonperformance risk and (iii)
refinements in the current period to the amortization period; and
higher policyholder benefits and claims of $146 million resulting from net favorable changes in the prior period to
GMLB Riders liabilities accounted for as insurance, of which $326 million was primarily due behavioral assumption
changes, mainly relating to rider utilization, reduced by $180 million related to economic assumptions, primarily lower
projected interest rates.
Year Ended December 31, 2016 Compared with the Year Ended December 31, 2015
Comparative results from GMLB Riders were unfavorable by $2.7 billion. Of this amount, an unfavorable change of $3.7
billion was recorded in net derivative gains (losses). Excluding the impact of the annual actuarial assumption review, comparative
results from GMLB Riders were unfavorable by $466 million.
GMLB Riders Liabilities. The change in the carrying value of GMLB Riders liabilities resulted in an unfavorable impact
on comparative results of $1.4 billion, primarily due to:
•
net derivative losses of $3.3 billion due to increased reserves resulting from non-market risks that generally cannot be
hedged, primarily changes in actuarial assumptions related to policyholder behavior, mainly rider utilization, net of a
favorable impact from the associated nonperformance risk adjustment, and the risk margins related to these policyholder
behavior assumptions; partially offset by
125
•
a favorable adjustment to net derivative gains (losses) of $1.9 billion due to decreased reserves resulting from market
factors, as higher equity market performance and a decrease in key equity market volatility measures, as compared to
2015, together with the impact from long-term interest rates increasing during 2016, compared to decreasing in 2015,
resulted in a favorable change in our liabilities accounted for as embedded derivatives.
Excluding the impact of the actuarial assumption review, GMLB Riders liabilities had an unfavorable impact on comparative
results of $1.6 billion.
GMLB Riders Hedging Program and Reinsurance. The change in the fair value of GMLB Riders hedges and reinsurance
had an unfavorable impact on comparative results of $2.6 billion, primarily due to the inverse effect on the hedges from the
interest rate and equity market factors that impacted the GMLB Rider liabilities.
GMLB Riders Fees. GMLB Riders fees increased by $10 million, primarily due to the impact from the roll-up of the average
Benefit Base.
DAC Offsets. DAC offsets, which are inversely related to the changes in certain components of GMLB Riders discussed
above, resulted in a favorable impact on comparative results of $1.3 billion. Excluding the impact of the annual actuarial
assumption review, DAC offsets had a favorable impact on comparative results of $552 million.
Actuarial Assumption Review. As previously discussed, we review and update, on an annual basis, our long-term assumptions
used in the calculations of the GMLB Riders liabilities. The annual assumption review, which is included in the amounts discussed
above, resulted in an unfavorable impact on comparative results of $2.3 billion, primarily due to the following:
•
•
net derivative losses of $3.0 billion from an increase in GMLB Riders liabilities accounted for as embedded derivatives,
of which $2.4 billion was primarily due to changes in behavioral assumptions regarding rider utilization and $571
million was due to changes in risk margins related to these behavioral assumption changes; and
higher policyholder benefits and claims resulting from an increase in GMLB Riders liabilities accounted for as insurance
of $7 million, of which $250 million was due to unfavorable impacts of economic assumption changes mainly related
to lower projected interest rates and long-term separate account returns, mostly offset by $247 million related to
behavioral assumption changes, primarily regarding rider utilization; partially offset by
•
favorable DAC amortization offsets of $756 million, which are inversely related to the assumption changes above.
Effects of Inflation
Management believes that inflation has not had a material effect on the Company’s results of operations, except insofar as
inflation may affect interest rates.
An increase in inflation could affect our business in several ways. During inflationary periods, the value of fixed income
investments falls which could increase realized and unrealized losses. Inflation also increases expenses for labor and other
materials, potentially putting pressure on profitability if such costs cannot be passed through in our product prices. Prolonged
and elevated inflation could adversely affect the financial markets and the economy generally, and dispelling it may require
governments to pursue a restrictive fiscal and monetary policy, which could constrain overall economic activity, inhibit revenue
growth and reduce the number of attractive investment opportunities.
126
Investments
Investment Risks
Our primary investment objective is to optimize risk-adjusted net investment income and risk-adjusted total return while
appropriately matching assets and liabilities. In addition, the investment process is designed to ensure that the portfolio has an
appropriate level of liquidity, quality and diversification.
We are exposed to the following primary sources of investment risks:
•
•
credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments
of principal and interest;
interest rate risk, relating to the market price and cash flow variability associated with changes in market interest rates.
Changes in market interest rates will impact the net unrealized gain or loss position of our fixed income investment
portfolio and the rates of return we receive on both new funds invested and reinvestment of existing funds;
• market valuation risk, relating to the variability in the estimated fair value of investments associated with changes in
market factors such as credit spreads and equity market levels. A widening of credit spreads will adversely impact the
net unrealized gain (loss) position of the fixed income investment portfolio, will increase losses associated with credit-
based non-qualifying derivatives while we assume credit exposure, and, if credit spreads widen significantly or for an
extended period of time, will likely result in higher OTTI. Credit spread tightening will reduce net investment income
associated with new purchases of fixed maturity securities and will favorably impact the net unrealized gain (loss)
position of the fixed income investment portfolio;
•
•
liquidity risk, relating to the diminished ability to sell certain investments, in times of strained market conditions;
real estate risk, relating to commercial, agricultural and residential real estate, and stemming from factors, which include,
but are not limited to, market conditions, including the demand and supply of leasable commercial space,
creditworthiness of borrowers and their tenants and joint venture partners, capital markets volatility and inherent interest
rate movements; and
•
currency risk, relating to the variability in currency exchange rates for foreign denominated investments.
We manage these risks through asset-type allocation and industry and issuer diversification. Risk limits are also used to
promote diversification by asset sector, avoid concentrations in any single issuer and limit overall aggregate credit and equity
risk exposure. Real estate risk is managed through geographic and property type and product type diversification. We manage
interest rate risk as part of our Asset Liability Management (“ALM”) strategies. Product design, such as the use of market value
adjustment features and surrender charges, is also utilized to manage interest rate risk. These strategies include maintaining an
investment portfolio with diversified maturities that targets a weighted average duration that reflects the duration of our estimated
liability cash flow profile. For certain of our liability portfolios, it is not possible to invest assets to the full liability duration,
thereby creating some asset/liability mismatch. We also use certain derivatives in the management of currency, credit, interest
rate, and equity market risks.
Current Environment
Our business and results of operations are materially affected by conditions in capital markets and the economy, generally.
As a U.S. insurance company, we are affected by the monetary policy of the Federal Reserve Board in the United States. In
December 2017, the Federal Open Market Committee increased the federal funds rate, the third such increase in 2017. The
Federal Reserve may take further actions to influence interest rates in the future, which may have an impact on the pricing levels
of risk-bearing investments and may adversely impact the level of product sales. We are also affected by the monetary policy
of central banks around the world due to the diversification of our investment portfolio. See “— Industry Trends — Financial
and Economic Environment.”
Selected Country and Sector Investments
Recent elevated levels of market volatility have affected the performance of various asset classes. Contributing factors
include concerns about economic conditions and capital markets; declining sales and increased online competition in the retail
sector and recent country and sector specific volatility due to local economic and/or political concerns have affected the
performance of certain of our investments. See “— Industry Trends — Financial and Economic Environment”
We have exposure to global market volatility, as we maintain general account investments in Puerto Rico, among other
countries, through our global portfolio diversification. Our exposure to sovereign fixed maturity securities and total fixed maturity
securities of Puerto Rico totaled $3 million and $20 million, at estimated fair value, respectively, at December 31, 2017.
127
There has been an increased market focus on retail sector investments as a result of declining sales and the effects of online
competition. Our exposure to retail sector corporate fixed maturity securities was $1.5 billion, of which 95% were investment
grade, with unrealized gains of $90 million at December 31, 2017.
We manage direct and indirect investment exposure in the selected countries and retail sectors through fundamental credit
analysis and we continually monitor and adjust our level of investment exposure. We do not expect that our general account
investments in these countries and retail sectors will have a material adverse effect on our results of operations or financial
condition.
Current Environment Summary
All of these factors have had and could continue to have an adverse effect on the financial results of companies in the
financial services industry, including us. Such global economic conditions, as well as the global financial markets, continue to
impact our net investment income, net investment gains (losses), net derivative gains (losses), level of unrealized gains (losses)
within the various asset classes in our investment portfolio, and our level of investment in lower yielding cash equivalents, short-
term investments and government securities. See “— Industry Trends and Uncertainties” and “Risk Factors — Economic
Environment and Capital Markets-Related Risks — We are exposed to significant financial and capital markets risks which may
adversely affect our results of operations, financial condition and liquidity, and may cause our net investment income and net
income to vary from period to period.”
Investment Portfolio Results
The table below presents the yield and adjusted net investment income for our investment portfolio. As described below,
this table reflects certain differences from the presentation of net investment income presented in the GAAP statement of
operations. This summary yield table presentation is consistent with how we measure our investment performance for
management purposes, and we believe it enhances understanding of our investment portfolio results.
Investment income
Investment fees and expenses
Years Ended December 31,
2017
2016
2015
Yield% (1)
Amount
Yield% (1)
Amount
Yield% (1)
Amount
(Dollars in millions)
4.59% $
3,319
4.93% $
3,609
5.12% $
3,413
(0.15)
(109)
(0.15)
(107)
(0.13)
(85)
Adjusted net investment income (2) (3)
4.44% $
3,210
4.78% $
3,502
4.99% $
3,328
_______________
(1) Yields are calculated as investment income as a percent of average quarterly asset carrying values. Investment income
excludes recognized gains and losses and reflects the adjustments presented in footnote (3) below to arrive at adjusted net
investment income. Asset carrying values exclude unrealized gains (losses), collateral received in connection with our
securities lending program, freestanding derivative assets, collateral received from derivative counterparties and the effects
of consolidated securitization entities (“CSEs”).
(2) Adjusted net investment income included in yield calculations includes Investment Hedge Adjustments.
(3) Adjusted net investment income presented in the yield table varies from the most directly comparable GAAP measure due
to certain reclassifications and adjustments and excludes the effects of CSEs, as presented below.
Net investment income — GAAP consolidated statements of operations
Investment hedge adjustments
Incremental net investment income from CSEs
Adjusted net investment income — in the above yield table
Years Ended December 31,
2017
2016
2015
(In millions)
$
3,078
$
3,207
$
3,099
131
1
298
(3)
237
(8)
$
3,210
$
3,502
$
3,328
See “— Results of Operations — Consolidated Results — Year Ended December 31, 2017 Compared with the Year Ended
December 31, 2016” and “— Results of Operations — Consolidated Results —Year Ended December 31, 2016 Compared with
the Year Ended December 31, 2015,” for an analysis of the year over year changes in net investment income.
128
Fixed Maturity and Equity Securities AFS
The following table presents fixed maturity and equity securities AFS by type (public or private) held at:
Fixed maturity securities
Publicly-traded
Privately-placed
Total fixed maturity securities
Percentage of cash and invested assets
Equity securities
Publicly-traded
Privately-held
Total equity securities
Percentage of cash and invested assets
December 31, 2017
December 31, 2016
Estimated
Fair
Value
% of
Total
Estimated
Fair
Value
% of
Total
(Dollars in millions)
$ 54,332
83.6% $ 51,437
10,659
16.4
9,951
83.8%
16.2
$ 64,991
100.0% $ 61,388
100.0%
77.2%
156
76
232
0.3%
$
$
67.2% $
32.8
100.0% $
71.5%
212
88
300
0.3%
70.7%
29.3
100.0%
Valuation of Securities. We engage MetLife Investment Advisors, LLC (“MLIA”), a related party investment manager, to
execute on our valuation controls and policies to determine the estimated fair value of our investments. The estimated fair value
of publicly-traded securities is determined after considering one of three primary sources of information: quoted market prices
in active markets, independent pricing services, or independent broker quotations. The estimated fair value of privately-placed
securities is determined after considering one of three primary sources of information: market standard internal matrix pricing,
market standard internal discounted cash flow techniques, or independent pricing services (after the independent pricing services’
use of available observable market data is determined). For publicly-traded securities, the number of quotations obtained varies
by instrument and depends on the liquidity of the particular instrument. Generally, prices are obtained from multiple pricing
services to cover all asset classes and obtain multiple prices for certain securities, but ultimately use the price with the highest
placement in the fair value hierarchy. Independent pricing services that value these instruments use market standard valuation
methodologies based on data about market transactions and inputs from multiple pricing sources that are market observable or
can be derived principally from or corroborated by observable market data. See Note 8 of the Notes to the Consolidated and
Combined Financial Statements for a discussion of the types of market standard valuation methodologies utilized and key
assumptions and observable inputs used in applying these standard valuation methodologies. When a price is not available in
the active market or through an independent pricing service, the security is priced primarily using non-binding quotations from
independent brokers who are knowledgeable about these securities. Independent non-binding broker quotations use inputs that
may be difficult to corroborate with observable market data. As shown in the following section, less than 1% of our fixed maturity
securities were valued using non-binding quotations from independent brokers at December 31, 2017.
The Company is responsible for monitoring and providing the oversight over the valuation controls and policies, including
reviewing and approving new transaction types and markets, for ensuring that observable market prices and market-based
parameters are used for valuation, wherever possible, and for determining that valuation adjustments, when applied, are based
upon established policies and are applied consistently over time. See Note 8 of the Notes to the Consolidated and Combined
Financial Statements for further information on our valuation controls and procedures including our formal process to challenge
any prices received from independent pricing services that are not considered representative of estimated fair value.
We have reviewed the significance and observability of inputs used in the valuation methodologies to determine the
appropriate fair value hierarchy level for each of our securities. Based on the results of this review and investment class analysis,
each instrument is categorized as Level 1, 2 or 3 based on the lowest level significant input to its valuation. See Note 8 of the
Notes to the Consolidated and Combined Financial Statements for information regarding the valuation techniques and inputs
by level within the three level fair value hierarchy by major classes of invested assets.
129
Fair Value of Fixed Maturity and Equity Securities – AFS
Fixed maturity and equity securities AFS measured at estimated fair value on a recurring basis and their corresponding fair
value pricing sources are as follows:
December 31, 2017
December 31, 2016
Fixed Maturity
Securities
Equity
Securities
Fixed Maturity
Securities
Equity
Securities
(Dollars in millions)
Level 1
Quoted prices in active markets for identical assets
$ 8,304
12.8% $ 18
7.8% $ 6,210
10.1% $ 39
13.0%
Level 2
Independent pricing sources
Internal matrix pricing or discounted cash flow techniques
Significant other observable inputs
Level 3
Independent pricing sources
Internal matrix pricing or discounted cash flow techniques
Independent broker quotations
Significant unobservable inputs
Total estimated fair value
52,847
608
53,455
2,593
489
150
3,232
81.3
0.9
82.2
4.0
0.8
0.2
5.0
90
—
90
38.8
—
38.8
50,654
405
51,059
119
51.3
3,509
5
—
2.1
—
411
199
124
53.4
4,119
82.5
0.7
83.2
5.7
0.7
0.3
6.7
124
—
124
41.3
—
41.3
124
41.3
13
—
4.4
—
137
45.7
$ 64,991
100.0% $ 232
100.0% $ 61,388
100.0% $ 300
100.0%
See Note 8 of the Notes to the Consolidated and Combined Financial Statements for the fixed maturity securities and equity
securities AFS fair value hierarchy.
The composition of fair value pricing sources for and significant changes in Level 3 securities at December 31, 2017 are
as follows:
• The majority of the Level 3 fixed maturity and equity securities AFS were concentrated in three sectors: U.S. and
foreign corporate securities and residential mortgage-backed securities (“RMBS”).
• Level 3 fixed maturity securities are priced principally through market standard valuation methodologies, independent
pricing services and, to a much lesser extent, independent non-binding broker quotations using inputs that are not market
observable or cannot be derived principally from or corroborated by observable market data. Level 3 fixed maturity
securities consist of less liquid securities with very limited trading activity or where less price transparency exists
around the inputs to the valuation methodologies.
• During the year ended December 31, 2017, Level 3 fixed maturity securities decreased by $887 million, or 22%. The
decrease was driven by net transfers out of Level 3 and sales in excess of purchases, partially offset by an increase in
estimated fair value recognized in OCI.
See Note 8 of the Notes to the Consolidated and Combined Financial Statements for a rollforward of the fair value
measurements for fixed maturity securities and equity securities AFS measured at estimated fair value on a recurring basis using
significant unobservable (Level 3) inputs; transfers into and/or out of Level 3; and further information about the valuation
techniques and inputs by level by major classes of invested assets that affect the amounts reported above.
Fixed Maturity Securities AFS
See Notes 1 and 6 of the Notes to the Consolidated and Combined Financial Statements for information about fixed maturity
securities AFS by sector, contractual maturities and continuous gross unrealized losses.
130
Fixed Maturity Securities Credit Quality — Ratings
The Securities Valuation Office of the NAIC evaluates the fixed maturity security investments of insurers for regulatory
reporting and capital assessment purposes and assigns securities to one of six credit quality categories called “NAIC designations.”
If no designation is available from the NAIC, then, as permitted by the NAIC, an internally developed designation is used. The
NAIC designations are generally similar to the credit quality ratings of the NRSRO for fixed maturity securities, except for
certain structured securities as described below. Rating agency ratings are based on availability of applicable ratings from rating
agencies on the NAIC credit rating provider list, including Moody’s Investors Service, Inc. (“Moody’s”), S&P, Fitch, Dominion
Bond Rating Service, A.M. Best, Kroll Bond Rating Agency, Egan Jones Ratings Company and Morningstar, Inc.
(“Morningstar”). If no rating is available from a rating agency, then an internally developed rating is used.
The NAIC has adopted revised methodologies for certain structured securities comprised of non-agency RMBS, commercial
mortgage-backed securities (“CMBS”) and asset backed securities (“ABS”). The NAIC’s objective with the revised
methodologies for these structured securities was to increase the accuracy in assessing expected losses, and to use the improved
assessment to determine a more appropriate capital requirement for such structured securities. The revised methodologies reduce
regulatory reliance on rating agencies and allow for greater regulatory input into the assumptions used to estimate expected
losses from structured securities. We apply the revised NAIC methodologies to structured securities held by our insurance
subsidiaries that maintain the NAIC statutory basis of accounting. The NAIC’s present methodology is to evaluate structured
securities held by insurers using the revised NAIC methodologies on an annual basis. If our insurance subsidiaries acquire
structured securities that have not been previously evaluated by the NAIC, but are expected to be evaluated by the NAIC in the
upcoming annual review, an internally developed designation is used until a final designation becomes available.
The following table presents total fixed maturity securities by NRSRO rating and the applicable NAIC designation from
the NAIC published comparison of NRSRO ratings to NAIC designations, except for certain structured securities, which are
presented using the revised NAIC methodologies, as well as the percentage, based on estimated fair value that each NAIC
designation is comprised of at:
NAIC
Designation
NRSRO Rating
Amortized
Cost
Unrealized
Gain (Loss)
Estimated
Fair Value
% of
Total
Amortized
Cost
Unrealized
Gain (Loss)
Estimated
Fair Value
% of
Total
December 31, 2017
December 31, 2016
Aaa/Aa/A
$
42,098
$
3,631
$ 45,729
70.4% $
41,070
$
2,112
$
43,182
70.3%
(Dollars in millions)
1
2
Baa
Subtotal investment grade
3
4
5
6
Ba
B
Caa and lower
In or near default
15,137
57,235
2,102
799
31
6
Subtotal below investment grade
2,938
1,113
4,744
63
15
(2)
(2)
74
16,250
61,979
2,165
814
29
4
3,012
25.0
95.4
3.3
1.3
—
—
4.6
14,730
55,800
2,156
700
54
5
2,915
547
2,659
10
6
(2)
—
14
15,277
58,459
2,166
706
52
5
2,929
24.9
95.2
3.5
1.2
0.1
—
4.8
Total fixed maturity securities
$
60,173
$
4,818
$ 64,991
100.0% $
58,715
$
2,673
$
61,388
100.0%
131
The following tables present total fixed maturity securities, based on estimated fair value, by sector classification and by
NRSRO rating and the applicable NAIC designations from the NAIC published comparison of NRSRO ratings to NAIC
designations, except for certain structured securities, which are presented using the NAIC methodologies as described above:
NAIC Designation:
1
2
NRSRO Rating:
Aaa/Aa/A
Baa
3
Ba
4
B
5
6
Caa and
Lower
In or Near
Default
Total
Estimated
Fair Value
(Dollars in millions)
Fixed Maturity Securities — by Sector & Credit Quality Rating
December 31, 2017
U.S. corporate
U.S. government and agency
RMBS
Foreign corporate
State and political subdivision
CMBS
ABS
Foreign government
$ 10,263
$ 10,548
$
1,408
$
714
$
16,111
7,830
1,835
4,105
3,423
1,538
624
181
27
4,657
70
—
258
509
—
102
483
3
—
33
136
—
12
48
—
—
—
40
Total fixed maturity securities
$ 45,729
$ 16,250
$
2,165
$
814
$
23
—
6
—
—
—
—
—
29
70.4%
25.0%
3.3%
1.3%
—%
Percentage of total
December 31, 2016
U.S. corporate
U.S. government and agency
RMBS
Foreign corporate
State and political subdivision
CMBS
ABS
Foreign government
$
9,978
$ 10,241
$
1,466
$
595
$
12,920
7,726
1,918
3,905
3,812
2,343
580
170
202
3,898
31
—
278
457
—
78
502
4
—
31
85
—
1
70
—
—
—
40
31
—
11
5
5
—
—
—
52
$
$
$
$
1
—
—
—
3
—
—
—
4
$ 22,957
16,292
7,977
7,023
4,181
3,423
1,829
1,309
$ 64,991
—%
100.0%
— $ 22,311
—
5
—
—
—
—
—
5
13,090
8,023
6,393
3,945
3,812
2,652
1,162
$ 61,388
Total fixed maturity securities
$ 43,182
$ 15,277
$
2,166
$
706
$
Percentage of total
70.3%
24.9%
3.5%
1.2%
0.1%
—%
100.0%
U.S. and Foreign Corporate Fixed Maturity Securities
We maintain a diversified portfolio of corporate fixed maturity securities across industries and issuers. This portfolio does
not have any exposure to any single issuer in excess of 1% of total investments and the top ten holdings in aggregate comprise
2% of total investments at both December 31, 2017 and 2016. The tables below present our U.S. and foreign corporate securities
holdings by industry at:
Industrial
Consumer
Finance
Utility
Communications
Other
Total
December 31, 2017
December 31, 2016
Estimated
Fair
Value
% of
Total
Estimated
Fair
Value
% of
Total
$
9,459
7,213
5,834
4,333
2,338
803
(Dollars in millions)
31.5% $
24.1
19.4
14.5
7.8
2.7
8,790
7,168
5,644
4,018
2,319
765
30.6%
25.0
19.6
14.0
8.1
2.7
$
29,980
100.0% $
28,704
100.0%
132
Structured Securities
We held $13.2 billion and $14.5 billion of structured securities, at estimated fair value, at December 31, 2017 and 2016,
respectively, as presented in the RMBS, CMBS and ABS sections below.
RMBS
The following table presents our RMBS holdings at:
December 31, 2017
December 31, 2016
Estimated
Fair
Value
% of
Total
Net
Unrealized
Gains (Losses)
Estimated
Fair
Value
% of
Total
Net
Unrealized
Gains (Losses)
(Dollars in millions)
By security type:
Collateralized mortgage obligations
Pass-through securities
Total RMBS
By risk profile:
Agency
Prime
Alt-A
Sub-prime
Total RMBS
Ratings profile:
Rated Aaa/AAA
Designated NAIC 1
$
$
$
$
$
$
4,623
3,354
7,977
58.0% $
42.0
100.0% $
68.1% $
4.2
14.9
12.8
5,439
333
1,185
1,020
7,977
$
$
$
219
9
228
46
22
93
67
5,505
2,518
8,023
68.6% $
31.4
100.0% $
4,771
389
1,585
1,278
8,023
59.5% $
4.8
19.8
15.9
100.0% $
49
13
62
8
16
21
17
62
100.0% $
228
$
5,553
7,830
69.6%
98.2%
$
$
4,955
7,726
61.8%
96.3%
See also “— Structured Securities — RMBS” for further information about collateralized mortgage obligations and pass-
through mortgage-backed securities, as well as agency, prime, alternative residential mortgage loan and sub-prime RMBS.
Historically, we have managed our exposure to sub-prime RMBS holdings by focusing primarily on senior tranche securities,
stress testing the portfolio with severe loss assumptions and closely monitoring the performance of the portfolio. Our sub-prime
RMBS portfolio consists predominantly of securities that were purchased after 2012 at significant discounts to par value and
discounts to the expected principal recovery value of these securities. The vast majority of these securities are investment grade
under the NAIC designations (e.g., NAIC 1 and NAIC 2). The estimated fair value of our sub-prime RMBS holdings purchased
since 2012 was $976 million and $1.2 billion at December 31, 2017 and 2016, respectively, with unrealized gains (losses) of
$65 million and $17 million at December 31, 2017 and 2016, respectively.
133
CMBS
Our CMBS holdings are diversified by vintage year. The following tables present our CMBS holdings by rating agency
rating and by vintage year at:
Aaa
Aa
A
Baa
Below Investment Grade
Total
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
December 31, 2017
2003 - 2010
$
28
$
2011
2012
2013
2014
2015
2016
2017
Total
$
— $ — $
— $ — $
(Dollars in millions)
11
111
143
285
184
51
53
11
112
144
289
186
49
53
32
102
73
44
29
28
13
32
103
73
45
30
27
13
31
274
90
106
220
848
431
251
270
88
102
215
840
430
251
$
2,224
$ 2,251
$
838
$
844
$
321
$
323
$
1
—
2
—
—
—
—
—
3
$
$
1
—
3
—
—
—
—
—
4
$
— $
—
—
—
—
—
—
—
$
— $
1
—
—
—
—
—
—
—
1
$
29
$
313
303
318
544
33
317
308
323
554
1,053
1,064
509
317
507
317
$
3,386
$ 3,423
Ratings Distribution
65.8%
24.7%
9.4%
0.1%
—%
100.0%
Aaa
Aa
A
Baa
Below Investment Grade
Total
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
(Dollars in millions)
December 31, 2016
2003 - 2010
$
93
$
2011
2012
2013
2014
2015
2016
273
111
156
316
1,051
536
$
95
279
114
160
319
1,048
529
15
12
121
147
323
238
64
$
15
12
123
149
327
237
62
$
— $
32
102
71
54
51
28
1
32
104
70
54
51
26
Total
$
2,536
$ 2,544
$
920
$
925
$
338
$
338
$
$
— $ — $
—
2
—
—
—
—
2
$
—
2
—
—
—
—
2
$
3
—
—
—
—
—
—
3
$
$
3
—
—
—
—
—
—
3
$
111
317
336
374
693
$
114
323
343
379
700
1,340
628
1,336
617
$
3,799
$ 3,812
Ratings Distribution
66.7%
24.2%
8.9%
0.1%
0.1%
100.0%
The tables above reflect rating agency ratings assigned by NRSROs, including Moody’s, S&P, Fitch and Morningstar. CMBS
designated NAIC 1 were 100.0% of total CMBS at both December 31, 2017 and 2016.
134
ABS
Our ABS are diversified both by collateral type and by issuer. The following table presents our ABS holdings at:
By collateral type:
Collateralized obligations
Consumer loans
Automobile loans
Student loans
Credit card loans
Other loans
Total
Ratings profile:
Rated Aaa/AAA
Designated NAIC 1
December 31, 2017
December 31, 2016
Estimated
Fair
Value
% of
Total
Net
Unrealized
Gains (Losses)
Estimated
Fair
Value
% of
Total
Net
Unrealized
Gains (Losses)
(Dollars in millions)
$
$
$
$
819
262
189
169
101
289
44.8% $
14.3
10.3
9.3
5.5
15.8
1,829
100.0% $
637
1,538
34.8%
84.1%
8
3
—
4
—
4
19
$
1,155
43.6% $
319
356
160
208
454
12.0
13.4
6.0
7.8
17.2
$
$
$
2,652
100.0% $
1,106
2,343
41.7%
88.3%
—
(1)
1
(4)
3
(1)
(2)
Evaluation of AFS Securities for OTTI and Evaluating Temporarily Impaired AFS Securities
See Note 6 of the Notes to the Consolidated and Combined Financial Statements for information about the evaluation of
fixed maturity securities and equity securities AFS for OTTI and evaluation of temporarily impaired AFS securities.
OTTI Losses on Fixed Maturity and Equity Securities AFS Recognized in Earnings
See Note 6 of the Notes to the Consolidated and Combined Financial Statements for information about OTTI losses and
gross gains and gross losses on AFS securities sold.
Overview of Fixed Maturity and Equity Security OTTI Losses Recognized in Earnings
Impairments of fixed maturity and equity securities were $5 million, $24 million and $34 million for the years ended
December 31, 2017, 2016 and 2015, respectively. Impairments of fixed maturity securities were $1 million, $22 million and
$31 million for the years ended December 31, 2017, 2016 and 2015, respectively. Impairments of equity securities were
$4 million, $2 million and $3 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Credit-related impairments of fixed maturity securities were $1 million, $20 million and $31 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
Explanations of changes in fixed maturity and equity securities impairments are as follows:
Year Ended December 31, 2017 Compared with the Year Ended December 31, 2016
Overall OTTI losses recognized in earnings on fixed maturity and equity securities were $5 million for the year ended
December 31, 2017 as compared to $24 million for the year ended December 31, 2016. A decrease of $16 million in OTTI losses
on U.S. and foreign corporate industrial securities in the current period primarily reflects impairments on energy sector
impairments in the prior period.
Year Ended December 31, 2016 Compared with the Year Ended December 31, 2015
Overall OTTI losses recognized in earnings on fixed maturity and equity securities were $24 million for the year ended
December 31, 2016 as compared to $34 million for the year ended December 31, 2015. A decrease of $8 million in OTTI losses
on RMBS in the current period reflected the impact of improving economic and employment fundamentals.
Future Impairments
Future OTTI will depend primarily on economic fundamentals, issuer performance (including changes in the present value
of future cash flows expected to be collected), and changes in credit ratings, collateral valuation, interest rates and credit spreads,
as well as a change in our intention to hold or sell a security that is in an unrealized loss position. If economic fundamentals
deteriorate or if there are adverse changes in the above factors, OTTI may be incurred in upcoming periods.
135
Securities Lending
We participate in a securities lending program whereby securities are loaned to third parties, primarily brokerage firms and
commercial banks. We obtain collateral, usually cash, in an amount generally equal to 102% of the estimated fair value of the
securities loaned, which is obtained at the inception of a loan and maintained at a level greater than or equal to 100% for the
duration of the loan. We monitor the estimated fair value of the securities loaned on a daily basis with additional collateral
obtained as necessary throughout the duration of the loan. Securities loaned under such transactions may be sold or repledged
by the transferee. We are liable to return to our counterparties the cash collateral under our control. Security collateral received
from counterparties may not be sold or repledged, unless the counterparty is in default, and is not reflected in the financial
statements. These transactions are treated as financing arrangements and the associated cash collateral liability is recorded at
the amount of the cash received.
See “— Liquidity and Capital Resources — The Company — Liquidity and Capital Uses — Securities Lending” and Note
6 of the Notes to the Consolidated and Combined Financial Statements for information regarding our securities lending program.
Mortgage Loans
Our mortgage loans are principally collateralized by commercial, agricultural and residential properties. Mortgage loans
and the related valuation allowances are summarized as follows at:
December 31, 2017
December 31, 2016
Recorded
Investment
% of
Total
Valuation
Allowance
% of
Recorded
Investment
Recorded
Investment
% of
Total
Valuation
Allowance
% of
Recorded
Investment
(Dollars in millions)
$
7,260
2,276
1,138
68.0% $
21.3
10.7
$
10,674
100.0% $
36
7
4
47
0.5% $
0.3%
0.4%
6,523
1,892
867
70.3% $
20.4
9.3
0.4% $
9,282
100.0% $
32
5
3
40
0.5%
0.3%
0.3%
0.4%
Commercial
Agricultural
Residential
Total
The information presented in the tables herein exclude mortgage loans where we elected the fair value option (“FVO”).
Such amounts are presented in Note 6 of the Notes to the Consolidated and Combined Financial Statements.
We diversify our mortgage loan portfolio by both geographic region and property type to reduce the risk of concentration.
Of our commercial and agricultural mortgage loan portfolios, at December 31, 2017 and 2016, 97% and 96%, respectively, were
collateralized by properties located in the U.S. and the remainder was collateralized by properties located outside of the U.S.
The carrying value as a percentage of total commercial and agricultural mortgage loans for the top three states in the U.S. is as
follows at:
California
New York
Texas
December 31,
2017
2016
24%
15%
9%
25%
15%
9%
Additionally, we manage risk when originating commercial and agricultural mortgage loans by generally lending up to 75%
of the estimated fair value of the underlying real estate collateral.
136
We manage our residential mortgage loan portfolio in a similar manner to reduce risk of concentration. All residential
mortgage loans were collateralized by properties located in the U.S. at both December 31, 2017 and 2016. The carrying value
as a percentage of total residential mortgage loans for the top three states in the U.S. is as follows at:
California
Florida
New York
December 31,
2017
2016
32%
13%
8%
34%
12%
8%
Commercial Mortgage Loans by Geographic Region and Property Type. Commercial mortgage loans are the largest
component of the mortgage loan invested asset class. The tables below present the diversification across geographic regions and
property types of commercial mortgage loans at:
Region
Pacific
Middle Atlantic
South Atlantic
West South Central
East North Central
International
Mountain
New England
West North Central
East South Central
Multi-region and Other
Total recorded investment
Less: valuation allowances
Carrying value, net of valuation allowances
Property Type
Office
Retail
Apartment
Hotel
Industrial
Other
Total recorded investment
Less: valuation allowances
December 31, 2017
December 31, 2016
Amount
% of
Total
Amount
(Dollars in millions)
% of
Total
$
1,955
1,699
1,190
777
489
323
266
220
130
48
163
7,260
36
7,224
3,246
1,933
968
683
385
45
7,260
36
$
$
26.9% $
23.4
16.4
10.7
6.7
4.5
3.7
3.0
1.8
0.7
2.2
1,748
1,445
1,112
686
410
312
258
215
102
26
209
100.0%
6,523
32
$
6,491
44.7% $
26.7
13.3
9.4
5.3
0.6
100.0%
2,975
1,911
630
620
339
48
6,523
32
26.8%
22.1
17.0
10.5
6.3
4.8
4.0
3.3
1.6
0.4
3.2
100.0%
45.6%
29.3
9.7
9.5
5.2
0.7
100.0%
Carrying value, net of valuation allowances
$
7,224
$
6,491
Mortgage Loan Credit Quality — Monitoring Process. We monitor our mortgage loan investments on an ongoing basis,
including a review of loans that are current, past due, restructured and under foreclosure. See Note 6 of the Notes to the
Consolidated and Combined Financial Statements for information on mortgage loans by credit quality indicator, past due and
nonaccrual mortgage loans, as well as impaired mortgage loans.
We review our commercial mortgage loans on an ongoing basis. These reviews may include an analysis of the property
financial statements and rent roll, lease rollover analysis, property inspections, market analysis, estimated valuations of the
underlying collateral, loan-to-value ratios, debt service coverage ratios and tenant creditworthiness. The monitoring process
137
focuses on higher risk loans, which include those that are classified as restructured, delinquent or in foreclosure, as well as loans
with higher loan-to-value ratios and lower debt service coverage ratios. The monitoring process for agricultural mortgage loans
is generally similar, with a focus on higher risk loans, such as loans with higher loan-to-value ratios, including reviews on a
geographic and sector basis. We review our residential mortgage loans on an ongoing basis. See Note 6 of the Notes to the
Consolidated and Combined Financial Statements for information on our evaluation of residential mortgage loans and related
valuation allowance methodology.
Loan-to-value ratios and debt service coverage ratios are common measures in the assessment of the quality of commercial
mortgage loans. Loan-to-value ratios are a common measure in the assessment of the quality of agricultural mortgage loans.
Loan-to-value ratios compare the amount of the loan to the estimated fair value of the underlying collateral. A loan-to-value
ratio greater than 100% indicates that the loan amount is greater than the collateral value. A loan-to-value ratio of less than 100%
indicates an excess of collateral value over the loan amount. Generally, the higher the loan-to-value ratio, the higher the risk of
experiencing a credit loss. The debt service coverage ratio compares a property’s net operating income to amounts needed to
service the principal and interest due under the loan. Generally, the lower the debt service coverage ratio, the higher the risk of
experiencing a credit loss. For our commercial mortgage loans, our average loan-to-value ratio was 51% and 49% at December
31, 2017 and 2016, respectively, and our average debt service coverage ratio was 2.3x and 2.2x at December 31, 2017 and 2016,
respectively. The debt service coverage ratio, as well as the values utilized in calculating the ratio, is updated annually on a
rolling basis, with a portion of the portfolio updated each quarter. In addition, the loan-to-value ratio is routinely updated for all
but the lowest risk loans as part of our ongoing review of our commercial mortgage loan portfolio. For our agricultural mortgage
loans, our average loan-to-value ratio was 43% and 40% at December 31, 2017 and 2016, respectively. The values utilized in
calculating the agricultural mortgage loan loan-to-value ratio are developed in connection with the ongoing review of the
agricultural loan portfolio and are routinely updated.
Mortgage Loan Valuation Allowances. Our valuation allowances are established both on a loan specific basis for those loans
considered impaired where a property specific or market specific risk has been identified that could likely result in a future loss,
as well as for pools of loans with similar risk characteristics where a property specific or market specific risk has not been
identified, but for which we expect to incur a loss. Accordingly, a valuation allowance is provided to absorb these estimated
probable credit losses.
The determination of the amount of valuation allowances is based upon our periodic evaluation and assessment of known
and inherent risks associated with our loan portfolios. Such evaluations and assessments are based upon several factors, including
our experience for loan losses, defaults and loss severity, and loss expectations for loans with similar risk characteristics. These
evaluations and assessments are revised as conditions change and new information becomes available, which can cause the
valuation allowances to increase or decrease over time as such evaluations are revised. Negative credit migration, including an
actual or expected increase in the level of problem loans, will result in an increase in the valuation allowance. Positive credit
migration, including an actual or expected decrease in the level of problem loans, will result in a decrease in the valuation
allowance.
See Notes 6 and 8 of the Notes to the Consolidated and Combined Financial Statements for information about how valuation
allowances are established and monitored, activity in and balances of the valuation allowance, and the estimated fair value of
impaired mortgage loans and related impairments included within net investment gains (losses) at and for the years ended
December 31, 2017 and 2016.
Real Estate Joint Ventures
Real estate joint ventures is comprised of joint ventures with interests in single property income-producing real estate, and
to a lesser extent joint ventures with interests in multi-property projects with varying strategies ranging from the development
of properties to the operation of income-producing properties, as well as a runoff portfolio of real estate private equity funds.
The carrying values of real estate joint ventures was $433 million and $215 million, or 0.5% and 0.3% of cash and invested
assets, at December 31, 2017 and 2016, respectively.
The estimated fair value of the real estate joint venture investment portfolios was $594 million and $377 million at December
31, 2017 and 2016, respectively.
Other Limited Partnership Interests
Other limited partnership interests are comprised of private equity funds and hedge funds. The carrying value of other
limited partnership interests was $1.7 billion and $1.6 billion at December 31, 2017 and 2016, respectively, which included
$104 million and $210 million of hedge funds at December 31, 2017 and 2016, respectively. Cash distributions on these
investments are generated from investment gains, operating income from the underlying investments of the funds and liquidation
138
of the underlying investments of the funds. We estimate that the underlying investments of the funds will typically be liquidated
over the next two to 10 years.
Other Invested Assets
The following table presents the carrying value of our other invested assets by type at:
December 31, 2017
December 31, 2016
Carrying
Value
% of
Total
Carrying
Value
% of
Total
(Dollars in millions)
Freestanding derivatives with positive estimated fair values
$
2,254
92.6% $
Loans to affiliates (primarily MetLife, Inc.) (1)
Tax credit and renewable energy partnerships
Leveraged leases, net of non-recourse debt
Other
Total
_______________
—
103
66
13
—
4.2
2.7
0.5
3,622
1,090
113
69
10
73.9%
22.2
2.3
1.4
0.2
$
2,436
100.0% $
4,904
100.0%
(1) In April 2017, MetLife, Inc. repaid its loans to the Company. See Note 6 of the Notes to the Consolidated and Combined
Financial Statements.
Derivatives
Derivative Risks
We are exposed to various risks relating to our ongoing business operations, including interest rate, foreign currency exchange
rate, credit and equity market. We use a variety of strategies to manage these risks, including the use of derivatives. See Note 7
of the Notes to the Consolidated and Combined Financial Statements:
• A comprehensive description of the nature of our derivatives, including the strategies for which derivatives are used
in managing various risks.
•
Information about the gross notional amount, estimated fair value, and primary underlying risk exposure of our
derivatives by type of hedge designation, excluding embedded derivatives held at December 31, 2017, 2016 and 2015.
• The statement of operations effects of derivatives in cash flow, fair value, or nonqualifying hedge relationships for the
years ended December 31, 2017, 2016 and 2015.
See “Business — Segments and Corporate & Other — Annuities” and “Business — Risk Management Strategies — ULSG
Market Risk Exposure Management” for more information about our use of derivatives by major hedge programs, as well as
“— Results of Operations — Actuarial Assumption Review.”
Fair Value Hierarchy
See Note 7 of the Notes to the Consolidated and Combined Financial Statements for derivatives measured at estimated fair
value on a recurring basis and their corresponding fair value hierarchy.
The valuation of Level 3 derivatives involves the use of significant unobservable inputs and generally requires a higher
degree of management judgment or estimation than the valuations of Level 1 and Level 2 derivatives. Although Level 3 inputs
are unobservable, management believes they are consistent with what other market participants would use when pricing such
instruments and are considered appropriate given the circumstances. The use of different inputs or methodologies could have a
material effect on the estimated fair value of Level 3 derivatives and could materially affect net income.
Derivatives categorized as Level 3 at December 31, 2017 include: credit default swaps priced using unobservable credit
spreads, or that are priced through independent broker quotations; equity variance swaps with unobservable volatility inputs;
and equity index options with unobservable correlation inputs. At December 31, 2017, 1% of the estimated fair value of our
derivatives were priced through independent broker quotations.
See Note 8 of the Notes to Consolidated and Combined Financial Statements for a roll-forward of the fair value measurements
for derivatives measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs.
139
Credit Risk
See Note 7 of the Notes to the Consolidated and Combined Financial Statements for information about how we manage
credit risk related to derivatives and for the estimated fair value of our net derivative assets and net derivative liabilities after
the application of master netting agreements and collateral.
Our policy is not to offset the fair value amounts recognized for derivatives executed with the same counterparty under the
same master netting agreement. This policy applies to the recognition of derivatives on the balance sheets, and does not affect
our legal right of offset.
Credit Derivatives
The following table presents the gross notional amount and estimated fair value of credit default swaps at:
Purchased
Written
Total
December 31, 2017
December 31, 2016
Gross
Notional
Amount
Estimated
Fair Value
Gross
Notional
Amount
Estimated
Fair Value
(In millions)
$
$
65
1,900
1,965
$
$
(1) $
40
39
$
37
1,913
1,950
$
$
—
28
28
The maximum amount at risk related to our written credit default swaps is equal to the corresponding gross notional amount.
In a replication transaction, we pair an asset on our balance sheet with a written credit default swap to synthetically replicate a
corporate bond, a core asset holding of life insurance companies. Replications are entered into in accordance with the guidelines
approved by insurance regulators and are an important tool in managing the overall corporate credit risk within the Company.
In order to match our long-dated insurance liabilities, we will seek to buy long-dated corporate bonds. In some instances, these
may not be readily available in the market, or they may be issued by corporations to which we already have significant corporate
credit exposure. For example, by purchasing Treasury bonds (or other high-quality assets) and associating them with written
credit default swaps on the desired corporate credit name, we, at times, can replicate the desired bond exposures and meet our
ALM needs. In addition, given the shorter tenor of the credit default swaps (generally five-year tenors) versus a long-dated
corporate bond, we have more flexibility in managing our credit exposures.
Embedded Derivatives
See Note 8 of the Notes to the Consolidated and Combined Financial Statements for information about embedded derivatives
measured at estimated fair value on a recurring basis and their corresponding fair value hierarchy.
See Note 8 of the Notes to the Consolidated and Combined Financial Statements for a rollforward of the fair value
measurements for net embedded derivatives measured at estimated fair value on a recurring basis using significant unobservable
(Level 3) inputs.
See Note 7 of the Notes to the Consolidated and Combined Financial Statements for information about the nonperformance
risk adjustment included in the valuation of guaranteed minimum benefits accounted for as embedded derivatives.
See “— Summary of Critical Accounting Estimates — Derivatives” for further information on the estimates and assumptions
that affect embedded derivatives.
Off-Balance Sheet Arrangements
Credit and Committed Facilities
On December 2, 2016, we entered into the Revolving Credit Facility and, on July 21, 2017, we entered into the 2017 Term
Loan Facility. See Note 9 of the Notes to the Consolidated and Combined Financial Statements for further information regarding
the Revolving Credit Facility and the 2017 Term Loan Facility. For the classification of expenses on such credit and committed
facilities and the nature of the associated liability for letters of credit issued and drawdowns on these credit and committed
facilities, see Note 9 of the Notes to the Consolidated and Combined Financial Statements.
Collateral for Securities Lending, Repurchase Programs and Derivatives
We participate in a securities lending program in the normal course of business for the purpose of enhancing the total return
on our investment portfolio. Periodically we receive non-cash collateral for securities lending from counterparties, which cannot
be sold or repledged, and which is not recorded on our balance sheets. The amount of this collateral was $29 million and $27
140
million at estimated fair value at December 31, 2017 and 2016, respectively. See Note 6 of the Notes to the Consolidated and
Combined Financial Statements, as well as “— Investments — Securities Lending” for discussion of our securities lending
program, the classification of revenues and expenses, and the nature of the secured financing arrangement and associated liability.
From time to time we participate in repurchase and reverse repurchase programs. In connection with these transactions, we
obtain fixed maturity securities as collateral from unaffiliated financial institutions, which can be repledged, and which are not
recorded on our balance sheets. We had no pledged or repledged securities at either December 31, 2017 or December 31, 2016.
We enter into derivatives to manage various risks relating to our ongoing business operations. We have non-cash collateral
from counterparties for derivatives, which can be sold or repledged subject to certain constraints, and which has not been recorded
on our balance sheets. The amount of this non-cash collateral was $368 million and $564 million at December 31, 2017 and
2016, respectively. See Note 7 of the Notes to the Consolidated and Combined Financial Statements and “— Liquidity and
Capital Resources — The Company — Liquidity and Capital Uses — Pledged Collateral” for information regarding the earned
income on and the gross notional amount, estimated fair value of assets and liabilities and primary underlying risk exposure of
our derivatives.
Guarantees
See “Guarantees” in Note 15 of the Notes to the Consolidated and Combined Financial Statements.
Other
Additionally, we enter into commitments in the normal course of business for the purpose of enhancing the total return on
our investment portfolio: mortgage loan commitments and commitments to fund partnerships, bank credit facilities and private
corporate bond investments. See “Net Investment Income” and “Net Investment Gains (Losses)” in Note 6 of the Notes to the
Consolidated and Combined Financial Statements for information on the investment income, investment expense, gains and
losses from such investments. See also “— Investments — Fixed Maturity and Equity Securities AFS” and “— Investments —
Mortgage Loans” for information on our investments in fixed maturity securities and mortgage loans. See “— Investments —
Real Estate and Real Estate Joint Ventures” and “— Investments — Other Limited Partnership Interests” for information on our
partnership investments.
Other than the commitments disclosed in Note 15 of the Notes to the Consolidated and Combined Financial Statements,
there are no other material obligations or liabilities arising from the commitments to fund mortgage loans, partnerships, bank
credit facilities, and private corporate bond investments. For further information on commitments to fund partnership investments,
mortgage loans, bank credit facilities and private corporate bond investments. See “— Liquidity and Capital Resources — The
Company — Contractual Obligations.”
Policyholder Liabilities
We establish, and carry as liabilities, actuarially determined amounts that are calculated to meet policy obligations or to
provide for future annuity payments. Amounts for actuarial liabilities are computed and reported in the financial statements in
conformity with GAAP. For more details on policyholder liabilities. See “— Summary of Critical Accounting Estimates.”
Due to the nature of the underlying risks and the uncertainty associated with the determination of actuarial liabilities, we
cannot precisely determine the amounts that will ultimately be paid with respect to these actuarial liabilities, and the ultimate
amounts may vary from the estimated amounts, particularly when payments may not occur until well into the future.
We periodically review the assumptions supporting our estimates of actuarial liabilities for future policy benefits. We revise
estimates, to the extent permitted or required under GAAP, if we determine that future expected experience differs from
assumptions used in the development of actuarial liabilities. We charge or credit changes in our liabilities to expenses in the
period the liabilities are established or re-estimated. If the liabilities originally established for future benefit payments prove
inadequate, we must increase them. Such an increase could adversely affect our earnings and have a material adverse effect on
our business, results of operations and financial condition.
We have experienced, and will likely in the future experience, catastrophe losses and possibly acts of terrorism, as well as
turbulent financial markets that may have an adverse impact on our business, results of operations, and financial condition. Due
to their nature, we cannot predict the incidence, timing, severity or amount of losses from catastrophes and acts of terrorism,
but we make broad use of catastrophic and non-catastrophic reinsurance to manage risk from these perils.
Future Policy Benefits
We establish liabilities for amounts payable under insurance policies. See “— Summary of Critical Accounting Estimates
— Liability for Future Policy Benefits” and Notes 1 and 3 of the Notes to the Consolidated and Combined Financial Statements.
A discussion of future policy benefits by segment, as well as Corporate & Other follows.
141
Annuities
Future policy benefits for the annuities business are comprised mainly of liabilities for life-contingent income annuities,
and liabilities for the variable annuity guaranteed minimum benefits accounted for as insurance.
Life
Future policy benefits for the life business are comprised mainly of liabilities for traditional life and for universal and
variable life insurance contracts. In order to manage risk, we have often reinsured a portion of the mortality risk on life insurance
policies. The reinsurance programs are routinely evaluated and this may result in increases or decreases to existing coverage.
We have entered into various derivative positions, primarily interest rate swaps, to mitigate the risk that investment of premiums
received and reinvestment of maturing assets over the life of the policy will be at rates below those assumed in the original
pricing of these contracts.
Run-off
Future policy benefits primarily include liabilities for structured settlement annuities and pension risk transfers. There is
no interest rate crediting flexibility on the liabilities for payout annuities. As a result, a sustained low interest rate environment
could negatively impact earnings; however, we mitigate our risks by applying various ALM strategies, including the use of
derivative positions, primarily interest rate swaps, to mitigate the risks associated with such a scenario.
Corporate & Other
Future policy benefits primarily include liabilities for certain run-off long-term care and workers’ compensation business.
Additionally, future policy benefits historically included liabilities for variable annuity guaranteed minimum benefits assumed
from a former operating joint venture in Japan that were accounted for as insurance prior to 2014.
Policyholder Account Balances
Policyholder account balances are generally equal to the account value, which includes accrued interest credited, but excludes
the impact of any applicable charge that may be incurred upon surrender. See “— Variable Annuity Guarantees” and “Quantitative
and Qualitative Disclosures About Market Risk — Market Risk — Fair Value Exposures — Interest Rates.” See Notes 1 and 3
of the Notes to the Consolidated and Combined Financial Statements for additional information for a discussion of policyholder
account balances by segment, as well as Corporate & Other, follows.
Annuities
Policyholder account balances for annuities are held for fixed deferred annuities, the fixed account portion of variable
annuities, and non-life contingent income annuities. Interest is credited to the policyholder’s account at interest rates we determine
which are influenced by current market rates, subject to specified minimums. A sustained low interest rate environment could
negatively impact earnings as a result of the minimum credited rate guarantees present in most of these policyholder account
balances. We have various derivative positions, including interest rate floors, to partially mitigate the risks associated with such
a scenario. Additionally, policyholder account balances are held for variable annuity guaranteed minimum living benefits that
are accounted for as embedded derivatives.
The following table presents the breakdown of account value subject to minimum guaranteed crediting rates for Annuities
at:
Greater than 0% but less than 2%
Equal to 2% but less than 4%
Equal to or greater than 4%
______________
(1) These amounts are not adjusted for policy loans.
December 31, 2017
December 31, 2016
Account
Value (1)
Account
Value at
Guarantee (1)
Account
Value (1)
Account
Value at
Guarantee (1)
(In millions)
$
$
$
1,436
15,158
544
$
$
$
915
13,706
544
$
$
$
1,535
15,966
571
$
$
$
1,047
14,513
571
As a result of acquisitions, we establish additional liabilities known as excess interest reserves for policies with credited
rates in excess of market rates as of the applicable acquisition dates. Excess interest reserves for Annuities were $297 million
and $317 million at December 31, 2017 and 2016, respectively.
142
Life
Life policyholder account balances are held for retained asset accounts, universal life policies and the fixed account of
universal variable life insurance policies. Interest is credited to the policyholder’s account at interest rates we determine which
are influenced by current market rates, subject to specified minimums. A sustained low interest rate environment could negatively
impact earnings as a result of the minimum credited rate guarantees present in most of these policyholder account balances. We
have various derivative positions, including interest rate floors, to partially mitigate the risks associated with such a scenario.
The following table presents the breakdown of account value subject to minimum guaranteed crediting rates for Life at:
Greater than 0% but less than 2%
Equal to 2% but less than 4%
Equal to or greater than 4%
_______________
(1) These amounts are not adjusted for policy loans.
December 31, 2017
December 31, 2016
Account
Value (1)
Account
Value at
Guarantee (1)
Account
Value (1)
Account
Value at
Guarantee (1)
$
$
$
128
1,156
1,963
$
$
$
(In millions)
128
551
1,963
$
$
$
185
1,266
2,035
$
$
$
185
590
1,668
As a result of acquisitions, we establish additional liabilities known as excess interest reserves for policies with credited
rates in excess of market rates as of the applicable acquisition dates. Excess interest reserves for Life were $28 million and $27
million at December 31, 2017 and 2016, respectively.
Run-off
Policyholder account balances in Run-off are comprised of funding agreements and COLI. Interest crediting rates vary by
type of contract, and can be fixed or variable. Variable interest crediting rates are generally tied to an external index, most
commonly (one-month or three-month) London InterBank Offered Rate (“LIBOR”). We are exposed to interest rate risks, when
guaranteeing payment of interest and return on principal at the contractual maturity date. We may invest in floating rate assets
or enter into receive-floating rate swaps, also tied to external indices, as well as caps, to mitigate the impact of changes in market
interest rates. We also mitigate our risks by applying various ALM strategies.
The following table presents the breakdown of account value subject to minimum guaranteed crediting rates for Run-off
as of:
Universal Life Secondary Guarantee
Greater than 0% but less than 2%
Equal to 2% but less than 4%
Equal to or greater than 4%
_______________
(1) These amounts are not adjusted for policy loans.
December 31, 2017
December 31, 2016
Account
Value (1)
Account
Value at
Guarantee (1)
Account
Value (1)
Account
Value at
Guarantee (1)
(In millions)
$
$
$
— $
5,695
591
$
$
— $
790
591
$
$
— $
5,618
633
$
$
—
146
102
As a result of acquisitions, we establish additional liabilities known as excess interest reserves for policies with credited
rates in excess of market rates as of the applicable acquisition dates. Excess interest reserves for Run-off were $64 million and
$73 million at December 31, 2017 and 2016, respectively.
Corporate & Other
Policyholder account balances were historically held for variable annuity guaranteed minimum benefits assumed from a
former operating joint venture in Japan that were accounted for as embedded derivatives prior to 2014.
143
Variable Annuity Guarantees
We issue directly and assume from an affiliate through reinsurance certain variable annuity products with guaranteed
minimum benefits that provide the policyholder a minimum return based on their initial deposit (i.e., the Benefit Base) less
withdrawals. In some cases, the Benefit Base may be increased by additional deposits, bonus amounts, accruals or optional
market value step-ups.
Certain of our variable annuity guarantee features are accounted for as insurance liabilities and recorded in future policy
benefits while others are accounted for at fair value as embedded derivatives and recorded in policyholder account balances.
Generally speaking, a guarantee is accounted for as an insurance liability if the guarantee is paid only upon either (i) the occurrence
of a specific insurable event, or (ii) annuitization. Alternatively, a guarantee is accounted for as an embedded derivative if a
guarantee is paid without requiring (i) the occurrence of specific insurable event, or (ii) the policyholder to annuitize, that is,
the policyholder can receive the guarantee on a net basis. In certain cases, a guarantee may have elements of both an insurance
liability and an embedded derivative and in such cases the guarantee is split and accounted for under both models. Further,
changes in assumptions, principally involving behavior, can result in a change of expected future cash outflows of a guarantee
between portions accounted for as insurance liabilities and portions accounted for as embedded derivatives.
Guarantees accounted for as insurance liabilities in future policy benefits include GMDBs, the life contingent portion of
the GMWBs and the portion of the GMIBs that require annuitization, as well as the life contingent portion of the expected
annuitization when the policyholder is forced into an annuitization upon depletion of their account value.
These insurance liabilities are accrued over the accumulation phase of the contract in proportion to actual and future expected
policy assessments based on the level of guaranteed minimum benefits generated using multiple scenarios of separate account
returns. The scenarios are based on best estimate assumptions consistent with those used to amortize DAC. When current
estimates of future benefits exceed those previously projected or when current estimates of future assessments are lower than
those previously projected, liabilities will increase, resulting in a current period charge to net income. The opposite result occurs
when the current estimates of future benefits are lower than those previously projected or when current estimates of future
assessments exceed those previously projected. At each reporting period, we update the actual amount of business remaining
in-force, which impacts expected future assessments and the projection of estimated future benefits resulting in a current period
charge or increase to earnings. See Note 3 of the Notes to the Consolidated and Combined Financial Statements for additional
details of guarantees accounted for as insurance liabilities.
Guarantees accounted for as embedded derivatives in policyholder account balances include the non-life contingent portion
of GMWBs, GMABs, and for GMIBs the non-life contingent portion of the expected annuitization when the policyholder is
forced into an annuitization upon depletion of their account value, as well as the Guaranteed Principal Option.
The estimated fair values of guarantees accounted for as embedded derivatives are determined based on the present value
of projected future benefits minus the present value of projected future fees. At policy inception, we attribute to the embedded
derivative a portion of the projected future guarantee fees to be collected from the policyholder equal to the present value of
projected future guaranteed benefits. Any additional fees represent “excess” fees and are reported in universal life and investment-
type product policy fees. In valuing the embedded derivative, the percentage of fees included in the fair value measurement is
locked-in at inception.
The projections of future benefits and future fees require capital market and actuarial assumptions including expectations
concerning policyholder behavior. A risk neutral valuation methodology is used to project the cash flows from the guarantees
under multiple capital market scenarios to determine an economic liability. The reported estimated fair value is then determined
by taking the present value of these risk-free generated cash flows using a discount rate that incorporates a spread over the risk-
free rate to reflect our nonperformance risk and adding a risk margin. For more information on the determination of estimated
fair value. See Note 8 of the Notes to the Consolidated and Combined Financial Statements.
Liquidity and Capital Resources
Liquidity refers to our ability to generate adequate cash flows from our normal operations to meet the cash requirements
of our operating, investing and financing activities. Capital refers to our long-term financial resources available to support our
business operations and contribute to future growth. Our ability to generate and maintain sufficient liquidity and capital depends
on the profitability of the businesses, timing of cash flows on investments and products, general economic conditions and access
to the Revolving Credit Facility and the Term Loan Facility described below and access to the capital markets and the alternate
sources of liquidity and capital described herein.
Parent Company
144
Liquidity
In evaluating liquidity it is important to distinguish the cash flow needs of the parent company, Brighthouse Financial, Inc.,
from the cash flow needs of the combined group of companies. Brighthouse Financial, Inc. is largely dependent on cash flows
from its insurance subsidiaries to meet its obligations. The principal sources of funds available to Brighthouse Financial, Inc.
will include dividends and returns of capital from its insurance and non-insurance subsidiaries, as well as its own cash and short-
term investments. Such funds are paid to Brighthouse Financial, Inc. by BH Holdings, its direct wholly-owned holding company
subsidiary. These sources of funds may also be supplemented by alternate sources of liquidity either directly or indirectly through
our insurance subsidiaries. For example, we have established internal liquidity facilities to provide liquidity within and across
our regulated and non-regulated entities to support our businesses. See Note 2 of the Schedule II — Condensed Financial
Information (Parent Company Only).
Liquid Assets and Short-term Liquidity
An integral part of our liquidity management includes managing our levels of short-term liquidity and liquid assets. Short-
term liquidity and liquid assets are made available from the issuance of the Senior Notes and from drawdowns under the 2017
Term Loan Facility. In addition, any undrawn capacity under our Revolving Credit Facility is a potential source of liquidity. In
order to manage our capital more efficiently, we have also established internal liquidity facilities to provide liquidity within and
across the combined group of companies. See Note 3 of the Notes to the Condensed Financial Information included in Schedule
II.
At December 31, 2017 and 2016, Brighthouse Financial, Inc. and certain of its non-insurance subsidiaries had $656 million
and $102 million, respectively, in liquid assets. Of these amounts, $563 million and $0 were held by Brighthouse Financial, Inc.
at December 31, 2017 and 2016, respectively. Liquid assets include cash and cash equivalents, short-term investments and
publicly-traded securities excluding assets that are pledged or otherwise committed. Assets pledged or otherwise committed
include amounts received in connection with derivatives and collateral financing arrangements.
Non-insurance company liquid assets are generated through borrowings, as well as through dividends and returns of capital
from insurance subsidiaries, offset by payments for certain services provided from our insurance and non-insurance subsidiaries,
which include, but are not limited to, executive oversight, treasury, finance, legal, human resources, tax planning, internal audit,
financial reporting, information technology, distribution services and investor relations. Insurance subsidiary dividends are
subject to local insurance regulatory requirements, as discussed in “— The Company — Capital — Restrictions on Dividends
and Returns of Capital from Insurance Subsidiaries.”
At December 31, 2017 and 2016, Brighthouse Financial, Inc. and certain of its non-insurance subsidiaries had $419 million
and $122 million, respectively in short-term liquidity. Short-term liquidity includes cash and cash equivalents and short-term
investments, excluding assets that are pledged or otherwise committed, including amounts received in connection with securities
lending, repurchase agreements, derivatives and secured borrowings.
Constraints on Parent Company Liquidity
Constraints on Brighthouse Financial, Inc.’s liquidity may occur as a result of operational demands and/or as a result of
compliance with regulatory requirements. For example, we may be constrained in the payment of dividends from our insurance
subsidiaries pursuant to reserving requirements under actuarial guidelines whereby we are required to calculate the statutory
reserves which support our variable annuity products in conformity with AG 43.
As previously discussed, we intend to support our variable annuity contracts with assets which are $2.0 billion to $3.0 billion
in excess of the amount of assets required under CTE95, for which we anticipate that the assets we hold to support our variable
annuity contracts at CTE95 under our Base Case Scenario will exceed the amount required by AG 43 in the near term. Under
this scenario, we then anticipate that beginning in approximately 2021 under AG 43 as currently in effect the Standard Scenario
Reserve Amount will exceed the amount that would be required to be held consistent with CTE95 (although still less than CTE95
plus $2.0 billion to $3.0 billion), and that the amount of such excess will increase materially in subsequent years.
During the period that the AG 43 reserving requirement materially exceeds CTE95, our insurance subsidiaries’ RBC ratios
and surplus will be adversely affected to the extent we make distributions to our shareholders. Notwithstanding this impact, and
although no assurances can be given, under our Base Case Scenario we believe that during this period our excess reserving
requirements under the standard scenario will not impair our ability to make any such distributions as contemplated by our Base
Case Scenario while still maintaining our Combined RBC ratio, surplus and financial strength ratings at levels necessary to
market and sell our products in accordance with our business plan. Furthermore, if anticipated regulatory reform fails to bring
145
AG 43 calculations in line with CTE90 calculations, we may seek regulatory relief or engage in transactions, including
restructuring or financing transactions, to mitigate the effect of the standard scenario on the surplus and RBC ratios of our
insurance subsidiaries.
Capital
We expect to maintain adequate liquidity at Brighthouse Financial, Inc., a debt-to-capital ratio of approximately 25% and
a funding of $2.0 billion to $3.0 billion of assets in excess of CTE95 to support our variable annuity contracts during normal
markets. We monitor our financial leverage ratio based on an average of our key leverage calculations of A.M. Best, Fitch,
Moody’s and S&P. At December 31, 2017, assets above CTE95 were $2.6 billion.
We may opportunistically look to pursue additional debt financing over time to reach our targeted debt-to-capital ratio of
25% and to refinance borrowings outstanding under our 2017 Term Loan Facility. Such debt financing may include the incurrence
of term loans or the issuance of senior or subordinated debt securities. There can be no assurance that we will be able to complete
any such debt financing transactions on terms and conditions favorable to us or at all.
We do not currently anticipate declaring or paying regular cash dividends or making other distributions on our common
stock in the near term. Any future declaration and payment of dividends or other distributions of capital will be at the discretion
of our Board of Directors and will depend on and be subject to our financial condition, results of operations, earnings, cash
needs, regulatory and other constraints, capital requirements (including capital requirements of our subsidiaries), contractual
restrictions and any other factors that our Board of Directors deems relevant in making such a determination, including, without
limitation, the Company’s continued development as a standalone public company. Therefore, there can be no assurance that
we will pay any dividends or make other distributions on our common stock, or as to the amount of any such dividends or
distributions of capital.
See also “— The Company — Capital” for a discussion of how we manage our capital for the combined group of companies.
The Company
Sources and Uses of Liquidity and Capital
Our principal sources of liquidity are insurance premiums and annuity considerations, net investment income and proceeds
from the maturity and sale of investments. The primary uses of these funds are investing activities, payments of policyholder
benefits, commissions and operating expenses, and contract maturities, withdrawals and surrenders.
146
Summary of the Primary Sources and Uses of Liquidity and Capital
The following table presents a summary of the primary sources and uses of liquidity and capital:
Sources:
Operating activities, net
Investing activities, net
Changes in policyholder account balances, net
Changes in payables for collateral under securities loaned and other transactions, net
Long-term debt issued
Cash received from MetLife, Inc. in connection with shareholder’s net investment
Total sources
Uses:
Investing activities, net
Changes in policyholder account balances, net
Changes in payables for collateral under securities loaned and other transactions, net
Long-term debt repaid
Collateral financing arrangement repaid
Financing element on certain derivative instruments and other derivative related
transactions, net
Distribution to MetLife, Inc.
Cash paid to MetLife, Inc. in connection with shareholder’s net investment
Other, net
Effect of change in foreign currency exchange rates on cash and cash equivalents
Years Ended December 31,
2017
2016
2015
(In millions)
$
3,396
$
3,736
$
4,631
—
1,887
—
3,588
293
9,164
3,915
—
3,147
13
2,797
149
1,798
668
48
—
4,674
—
—
—
1,833
10,243
—
1,667
3,247
26
—
1,011
—
634
—
—
—
—
3,126
175
406
8,338
7,042
225
—
235
—
96
—
771
—
2
Total uses
Net increase (decrease) in cash and cash equivalents
______________
12,535
6,585
$
(3,371) $
3,658
$
8,371
(33)
Cash Flows from Operations. The principal cash inflows from our insurance activities come from insurance premiums, net
investment income and annuity considerations. The principal cash outflows relate to life insurance and annuity products and
operating expenses, as well as interest expense.
Cash Flows from Investments. The principal cash inflows from our investment activities come from repayments of principal,
proceeds from maturities and sales of investments and settlements of freestanding derivatives. The principal cash outflows relate
to purchases of investments and settlements of freestanding derivatives. We typically have a net cash outflow from investing
activities because cash inflows from insurance operations are reinvested in accordance with our ALM discipline to fund insurance
liabilities.
Cash Flows from Financing, Parent Company. The principal cash inflows from parent company financing activities come
from issuances of debt and other securities and dividends form subsidiaries. The principal cash outflows from parent company
financing activities come from interest expense on and repayments of debt, and payment of dividends on and repurchases of
common or preferred stock.
Cash Flows from Financing, The Company. The principal cash inflows from our financing activities come from issuances
of debt and other securities, deposits of funds associated with policyholder account balances and lending of securities. The
principal cash outflows come from interest expense on and repayment of debt, withdrawals associated with policyholder account
balances and the return of securities on loan.
147
Liquidity
Liquidity Management
Based upon our capitalization, expectations regarding maintaining our ratings, business mix and funding sources available
to us, we believe we have sufficient liquidity to meet business requirements under current market conditions and certain stress
scenarios. We continuously monitor and adjust our liquidity and capital plans in light of market conditions, as well as changing
needs and opportunities.
We determine our liquidity needs based on a rolling 12-month forecast by portfolio of invested assets which we monitor
daily. We adjust the general account asset and derivatives mix and general account asset maturities based on this rolling 12-
month forecast. To support this forecast, we conduct cash flow and stress testing, which include various scenarios of the potential
increase to post or return collateral, reduction to new business sales, and risk of early contract holder and policyholder withdrawals,
and lapses and surrenders of existing policies and contracts. We include provisions limiting withdrawal rights on many of our
products. Certain of these provisions prevent the customer from making withdrawals prior to the maturity date of the product.
In the event of significant cash requirements beyond anticipated liquidity needs, we have various alternatives available depending
on market conditions and the amount and timing of the liquidity need. These potential available alternative sources of liquidity
include cash flows from operations, sales of liquid assets, internal liquidity facilities, collateralized borrowing arrangements,
such as from FHLB, and any undrawn capacity under our Revolving Credit Facility.
Consolidated Liquid Assets and Short-term Liquidity
Consolidated liquid assets were $38.3 billion and $31.7 billion at December 31, 2017 and 2016, respectively. Consolidated
short-term liquidity was $1.6 billion and $5.0 billion at December 31, 2017 and 2016, respectively.
Capital
We manage our capital position to maintain our financial strength and credit ratings. Our capital position will be supported
by our ability to generate cash flows within our insurance companies, our ability to effectively manage the risk of our businesses
and our expected ability to borrow funds, and raise additional capital to meet operating and growth needs in the event of adverse
market and economic conditions.
Capital Management
Our Board of Directors and senior management are directly involved in the governance of the capital management process,
including proposed changes to the annual capital plan and capital targets. In connection with the Separation, we undertook
various capitalization activities. For example, we have eliminated intercompany financing arrangements with or guaranteed by
MetLife. We are targeting a debt-to-total capitalization ratio commensurate with our parent company credit ratings and our
insurance subsidiaries’ financial strength ratings.
Statutory Capital
Our insurance companies have statutory surplus above the level needed to meet current regulatory requirements.
At the date of the most recent annual statutory financial statements filed with insurance regulators, the total adjusted capital
of each of these insurance subsidiaries subject to these requirements was in excess of each of those RBC levels.
Restrictions on Dividends and Returns of Capital from Insurance Subsidiaries
Our business is primarily conducted through our insurance subsidiaries. The insurance subsidiaries are subject to regulatory
restrictions on the payment of dividends and other distributions imposed by the regulators of their respective state domiciles.
See “Regulation — Insurance Regulation — Holding Company Regulation.”
Any requested payment of dividends by Brighthouse Life Insurance Company and NELICO to Brighthouse Financial, Inc.,
or by BHNY to Brighthouse Life Insurance Company, in excess of the 2018 limit on the permitted payment of dividends without
approval would be considered an extraordinary dividend and would require prior approval from the Delaware Department of
Insurance or the Massachusetts Division of Insurance, and the New York State Department of Financial Services,
respectively. Statutory accounting practices, as prescribed by insurance regulators of various states in which we conduct business,
differ in certain respects from accounting principles used in financial statements prepared in conformity with GAAP. The
significant differences relate to the treatment of DAC, certain deferred income tax, required investment liabilities, statutory
reserve calculation assumptions, goodwill and surplus notes.
The table below sets forth the dividends permitted to be paid by our insurance subsidiaries without insurance regulatory
approval and the respective dividends paid.
148
2018
2017
2016
2015
Permitted
without
Approval (1)
Paid (2)
Permitted
without
Approval (3)
Paid (2)
(In millions)
Permitted
without
Approval (3)
Paid (2)
Permitted
without
Approval (3)
Brighthouse Life Insurance Company (4)
New England Life Insurance Company (5)
Brighthouse Life Insurance Company of NY (6)
$
$
$
84
65
21
$ — $
$
106
$
$ — $
473
106
$
$
261
295
$
$
586
156
$
$
500
199
$
$
— $ — $
16
$ — $
3,056
199
10
_______________
(1) Reflects dividend amounts that may be paid during 2018 without prior regulatory approval. However, because dividend
tests may be based on dividends previously paid over rolling 12-month periods, if paid before a specified date during 2018,
some or all of such dividends may require regulatory approval.
(2) Reflects all amounts paid, including those requiring regulatory approval.
(3) Reflects dividend amounts that could have been paid during the relevant year without prior regulatory approval.
(4) Dividends paid by BLIC in 2016 and 2015 were paid to its former parent, MetLife, Inc.
(5) Dividends paid by NELICO in 2016, including a $295 million extraordinary cash dividend, were paid to its former parent,
MetLife, Inc. Dividends paid by NELICO in 2015 were paid to its former parent, MLIC.
(6) Dividends are not anticipated to be paid by BHNY in 2018.
In addition to the amounts presented above, prior to the Separation, we made cash payments to certain MetLife affiliates
related to a profit sharing agreement of $40 million, $78 million and $72 million, for the years ended December 31, 2017, 2016
and 2015, respectively.
Brighthouse Financial, Inc. received a $50 million cash distribution from BH Holdings during the year ended December 31,
2017. There were no cash dividends or returns of capital paid by our non-insurance subsidiaries for the years ended December 31,
2016 and 2015.
Rating Agencies
Rating agencies use an “outlook statement” of “positive,” “stable,” ‘‘negative’’ or “developing” to indicate a medium- or
long-term trend in credit fundamentals which, if continued, may lead to a rating change. A rating may have a “stable” outlook
to indicate that the rating is not expected to change; however, a “stable” rating does not preclude a rating agency from changing
a rating at any time, without notice. Certain rating agencies assign rating modifiers such as “CreditWatch” or “under review”
to indicate their opinion regarding the potential direction of a rating. These ratings modifiers are generally assigned in connection
with certain events such as potential mergers, acquisitions, dispositions or material changes in a company’s results, in order for
the rating agency to perform its analysis to fully determine the rating implications of the event.
The following financial strength ratings represent each rating agency’s opinion of our principal insurance subsidiaries’
ability to pay obligations under insurance policies and contracts in accordance with their terms and are not evaluations directed
toward the protection of investors in our securities. Financial strength ratings are not statements of fact nor are they
recommendations to purchase, hold or sell any security, contract or policy. Each rating should be evaluated independently of
any other rating.
Our financial strength ratings at the date of this filing are indicated in the following table. All financial strength ratings have
a stable outlook unless otherwise indicated.
149
A.M. Best
Fitch
Moody's
S&P
“A++ (superior)” to
“S (suspended)”
“AAA (exceptionally
strong)” to “C
(distressed)”
“Aaa (highest
quality)” to “C
(lowest rated)”
A
3rd of 16
A
3rd of 16
A
3rd of 16
A
6th of 19
A
6th of 19
NR
A3
7th of 21
A3
7th of 21
NR
“AAA (extremely
strong)” to “SD
(Selective Default)”
or “D (Default)”
A+ (1)
5th of 22
A+ (1)
5th of 22
A+ (1)
5th of 22
Brighthouse Life Insurance Company
New England Life Insurance Company
Brighthouse Life Insurance Company of NY
_______________
(1) Negative outlook.
Our long-term issuer credit ratings at the date of this filing are indicated in the following table. All long-term issuer credit
ratings have a stable outlook unless otherwise indicated.
Brighthouse Financial, Inc. (1)
Brighthouse Holdings, LLC (1)
_______________
A.M. Best
Fitch
Moody's
S&P
“aaa (Exceptional)”
to “c (Poor)”
“AAA (highest
rating)” to “D
(default)”
“Aaa (highest
quality)” to “C
(lowest rated)”
bbb+
bbb+
BBB+
BBB+
Baa3
Baa3
“AAA (extremely
strong)” to “SD
(Selective Default)”
or “D (Default)”
BBB+ (2)
BBB+ (2)
(1) Long-term Issuer Credit Rating refers to issuer credit rating, issuer default rating, long-term issuer rating and long-term
counterparty credit rating for A.M. Best, Fitch Ratings, Moody’s and S&P Global Ratings, respectively.
(2) Negative outlook.
Additional information about financial strength ratings and credit ratings can be found on the respective websites of the
rating agencies.
Rating agencies may continue to review and adjust our ratings. A downgrade in the credit ratings of Brighthouse Financial,
Inc., the parent company, would likely impact us in many ways, including the cost and availability of financing for Brighthouse
Financial, Inc., and its subsidiaries. See Note 7 of the Notes to the Consolidated and Combined Financial Statements. See also
“Risk Factors — Risks Related to our Business — A downgrade or a potential downgrade in our financial strength or credit
ratings could result in a loss of business and materially adversely affect our financial condition and results of operations” for an
in-depth description of the impact of a ratings downgrade.
Downgrades in our financial strength ratings could have a material adverse effect on our financial condition and results of
operations in many ways, including:
•
•
•
•
•
•
•
•
•
reducing new sales of insurance products and annuity products;
adversely affecting our relationships with independent sales intermediaries;
increasing the number or amount of policy surrenders and withdrawals by contract holders and policyholders;
requiring us to reduce prices for many of our products and services to remain competitive;
providing termination rights for the benefit of our derivative instrument counterparties;
triggering termination and recapture rights under certain of our ceded reinsurance agreements;
adversely affecting our ability to obtain reinsurance at reasonable prices, if at all;
requiring us to post additional collateral under certain of our financing and derivative transactions; and
subjecting us to potentially increased regulatory scrutiny.
150
Additionally, downgrades in the credit ratings of Brighthouse Financial, Inc. or financial strength ratings of our insurance
subsidiaries would likely impact us in the following ways:
•
•
impact our ability to generate cash flows from the sale of funding agreements and other capital market products we
offer; and
impact the cost and availability of financing for Brighthouse.
Reinsurance Financing Transactions
Our reinsurance subsidiary, BRCD, was formed to manage our capital and risk exposures and to support our various
operations, through the use of affiliated reinsurance arrangements and related reserve financing. Simultaneously with the
Reinsurance Merger in April 2017, certain existing reserve financing arrangements were terminated and replaced with a single
financing arrangement supported by a pool of highly rated third-party reinsurers. This financing arrangement has a total capacity
of $10.0 billion and consists of credit-linked notes that each have a term of 20 years. As of December 31, 2017, there were no
drawdowns on this facility and there was $8.3 billion of funding available under this financing arrangement. See “Risk Factors —
Risks Related to Our Business — We may not be able to take credit for reinsurance, our statutory life insurance reserve financings
may be subject to cost increases and new financings may be subject to limited market capacity” for further information. In April
2017, in connection with the Reinsurance Merger, a $2.8 billion collateral financing arrangement was terminated and the
obligation outstanding was extinguished utilizing $2.8 billion of assets held in trust, which had been repositioned into short-
term investments and cash equivalents. The remaining assets held in trust of $590 million were returned to MetLife, Inc. See
“— Outstanding Debt and Collateral Financing Arrangement.”
In connection with our reinsurance subsidiary restructuring, we were granted approval from the Delaware Department of
Insurance to pay a dividend from BRCD to its parent, BLIC. The dividend consisted of (i) $535 million in cash, which was
declared and paid in May 2017 and (ii) two surplus notes with an aggregate principal balance payable at maturity of $365 million,
which have not yet been issued. All payments of principal and interest on these surplus notes would be subject to the prior
approval of the Delaware Department of Insurance. BRCD can only make distributions of capital to BLIC over time and subject
to the approval of the Delaware Department of Insurance.
BRCD is capitalized with cash and invested assets, including funds withheld (“Minimum Initial Target Assets”) at a level
that is sufficient to satisfy all of its future cash obligations assuming a permanent level yield curve, consistent with NAIC cash
flow testing scenarios. BRCD utilizes a financing program to cover the difference between full required statutory assets (i.e.,
XXX/AXXX reserves plus target RBC) and Minimum Initial Target Assets. An admitted deferred tax asset, if any, would also
serve to reduce the amount of funding required under this financing program.
Primary Sources of Liquidity and Capital
Liquidity is provided by a variety of funding sources, including funding agreements. Capital is provided by a variety of
funding sources, including long-term debt, credit facilities and reserve financing facilities. The diversity of our funding sources
enhances our funding flexibility, limits dependence on any one market or source of funds and generally lowers the cost of funds.
In addition to senior note issuances, credit facilities and a reinsurance financing arrangement discussed in more detail in
“— Outstanding Debt and Collateral Financing Arrangement,” our other funding sources include or have included:
Federal Home Loan Bank Funding Agreements, Reported in Policyholder Account Balances
BLIC is a member of the FHLB of Pittsburgh and has obligations outstanding with certain regional banks in the FHLB
system. During the years ended December 31, 2017, 2016 and 2015, we issued $25 million, $4.7 billion and $4.1 billion,
respectively, and repaid $75 million, $5.9 billion and $3.3 billion, respectively, under funding agreements with certain regional
FHLBs. At December 31, 2017 and 2016, total obligations outstanding under these funding agreements were $595 million and
$645 million, respectively. See Note 3 of the Notes to the Consolidated and Combined Financial Statements. Activity related to
these funding agreements is reported in the Run-off segment.
We intend to maintain a funding agreement program with the FHLB to support our liquidity needs; whereas historically
this program was used in the spread-based business.
151
Special Purpose Entity Funding Agreements, Reported in Policyholder Account Balances
BLIC issued fixed and floating rate funding agreements which are denominated in either U.S. dollars or foreign currencies,
to certain special purpose entities that have issued either debt securities or commercial paper for which payment of interest and
principal is secured by such funding agreements. During the years ended December 31, 2017, 2016 and 2015, we issued $0,
$1.4 billion and $13.0 billion, respectively, and repaid $6 million, $3.4 billion and $14.4 billion, respectively, under such funding
agreements. At December 31, 2017 and 2016, total obligations outstanding under these funding agreements were $141 million
and $127 million, respectively. See Note 3 of the Notes to the Consolidated and Combined Financial Statements. Activity related
to these funding agreements is reported in the Run-off segment.
We no longer maintain this funding agreement program to support our liquidity needs.
Federal Agricultural Mortgage Corporation Funding Agreements, Reported in Policyholder Account Balances
BLIC issued funding agreements to a subsidiary of the Federal Agricultural Mortgage Corporation. The obligations under
all such funding agreements are secured by a pledge of certain eligible agricultural real estate mortgage loans. During the years
ended December 31, 2017, 2016 and 2015, there were no issuances and we repaid $0, $0 and $200 million under such funding
agreements, respectively. At December 31, 2017 and 2016, there were no obligations outstanding under these funding agreements.
Activities related to these funding agreements are reported in the Run-off segment.
Outstanding Debt and Collateral Financing Arrangement
The following table summarizes our outstanding debt and collateral financing arrangement liability as of:
Senior notes — unaffiliated (1)
Senior notes — unaffiliated (1)
Surplus notes — affiliated with MetLife, Inc.
Surplus note — affiliated with MetLife, Inc.
Surplus note — affiliated with MetLife, Inc.
Long-term debt — unaffiliated (2)
Term loan — unaffiliated
Total long-term debt (3)
Collateral financing arrangement
_______________
Interest Rate
Maturity
2017
2016
(Dollars in millions)
December 31,
3.700%
4.700%
8.595%
5.130%
6.000%
7.028%
LIBOR plus 1.5%
3-month LIBOR
plus 0.70%
2027
2047
2038
2032
2033
2030
2019
2037
$
1,489
$
1,477
—
—
—
35
600
—
—
750
750
350
37
—
$
$
3,601
$
1,887
— $
2,797
(1) Includes unamortized debt issuance costs and debt discount totaling $34 million for the senior notes due 2027 and 2047 on
a combined basis at December 31, 2017.
(2) Represents non-recourse debt for which creditors have no access, subject to customary exceptions, to the general assets of
the Company other than recourse to certain investment companies.
(3) Excludes $11 million and $23 million of long-term debt related to CSEs at December 31, 2017 and 2016, respectively. See
Note 6 of the Notes to the Consolidated and Combined Financial Statements for more information regarding CSEs and Note 9
of the Notes to the Consolidated and Combined Financial Statements for further information regarding long-term debt.
Senior Notes
On June 22, 2017, Brighthouse Financial, Inc. issued $1.5 billion of senior notes due June 2027, which bear interest at a
fixed rate of 3.70%, payable semi-annually, and $1.5 billion of senior notes due June 2047, which bear interest at a fixed rate of
4.70%, payable semi-annually.
152
Surplus Notes
On June 16, 2017, MetLife, Inc. forgave Brighthouse Life Insurance Company’s obligation to pay the principal amount of
$750 million,8.595% surplus notes held by MetLife, Inc., which were originally issued in 2008. The forgiveness of the surplus
notes was treated as a capital transaction and recorded as an increase to additional paid-in-capital.
On April 28, 2017, two surplus note obligations due to MetLife, Inc. totaling $1.1 billion, which were originally issued in
2012 and 2013, were due on September 30, 2032 and December 31, 2033 and bore interest at 5.13% and 6.00%, respectively,
were satisfied in a non-cash exchange for $1.1 billion of loans due from MetLife, Inc.
Credit Facilities
On December 2, 2016, Brighthouse Financial, Inc. entered into a $2.0 billion five-year senior unsecured Revolving Credit
Facility and a $3.0 billion three-year term loan facility (the “2016 Term Loan Facility”) with a syndicate of banks.
On July 21, 2017, Brighthouse Financial, Inc. entered into a new term loan agreement (the “2017 Term Loan Agreement”)
with respect to a new $600 million unsecured delayed draw term loan facility due December 2, 2019 (the “2017 Term Loan
Facility”). Also on July 21, 2017, concurrently with entering into the 2017 Term Loan Agreement, the 2016 Term Loan Facility
was terminated without penalty.
At December 31, 2017, there were no drawdowns under the Revolving Credit Facility and there was $600 million outstanding
under the 2017 Term Loan Facility, resulting in unused commitments totaling $2.0 billion in comparison to the maximum capacity
of $2.6 billion under these facilities.
Committed Facilities, Collateral Financing Arrangement and Reinsurance Financing Arrangement
The Company previously had access to an unsecured revolving credit facility and certain committed facilities through the
Company’s former parent, MetLife, Inc. These facilities were used for collateral for certain of the Company’s affiliated reinsurance
liabilities.
In connection with the Reinsurance Merger, effective April 28, 2017, MetLife, Inc.’s then existing affiliated reinsurance
subsidiaries that supported the business interests of Brighthouse Financial, Inc. became a part of Brighthouse Financial, Inc.
Simultaneously with the Reinsurance Merger, the existing reserve financing arrangements of the affected reinsurance subsidiaries,
as well as Brighthouse Financial, Inc.’s access to MetLife Inc.’s revolving credit facility and certain committed facilities, including
outstanding letters of credit, were terminated and replaced with a single reinsurance financing arrangement, which is discussed
in more detail below. The terminated committed facilities included a $3.5 billion committed facility for the benefit of MetLife
Reinsurance Company of South Carolina (“MRSC”) and a $4.3 billion committed facility for the benefit of a designated protected
cell of MetLife Reinsurance Company of Vermont.
In 2007, MetLife, Inc. and MRSC entered into a 30-year collateral financing arrangement with an unaffiliated financial
institution that provided up to $3.5 billion of statutory reserve support for MRSC associated with reinsurance obligations under
affiliated reinsurance agreements. At December 31, 2016, the amount outstanding under this collateral financing arrangement
was $2.8 billion. On April 28, 2017, MetLife, Inc. and MRSC terminated this collateral financing arrangement. As a result, the
$2.8 billion collateral financing arrangement obligation outstanding was extinguished utilizing $2.8 billion of assets held in trust,
which had been repositioned into short-term investments and cash equivalents. The remaining assets held in trust of $590 million
were returned to MetLife, Inc. and reported as an increase to additional paid-in capital.
On April 28, 2017, BRCD entered into a new $10.0 billion financing arrangement with a pool of highly rated third-party
reinsurers. This financing arrangement consists of credit-linked notes that each have a term of 20 years. At December 31, 2017,
there were no drawdowns and there was $8.3 billion of funding available under this arrangement.
See Note 9 of the Notes to the Consolidated and Combined Financial Statements for further information regarding the
Company’s committed facilities, collateral financing arrangement and reinsurance financing arrangement.
Debt and Facility Covenants
Certain of the Company’s debt instruments, credit and committed facilities, and the reinsurance financing arrangement contain
administrative, reporting, legal and financial covenants, including requirements to maintain a specified minimum consolidated
net worth and to maintain a ratio of indebtedness to total capitalization not in excess of a specified percentage, and limitation on
the dollar amount of indebtedness that may be incurred by our subsidiaries, which could restrict our operations and use of funds.
The Company is not aware of any non-compliance with these financial covenants at December 31, 2017.
Debt Repurchases
We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for other
securities, in open market purchases, privately negotiated transactions or otherwise. Any such repurchases or exchanges will be
dependent upon several factors, including our liquidity requirements, contractual restrictions, general market conditions, and
153
applicable regulatory, legal and accounting factors. Whether or not to repurchase any debt and the size and timing of any such
repurchases will be determined at our discretion.
Liquidity and Capital Uses
In addition to the general description of liquidity and capital uses in “— Primary Sources of Liquidity and Capital,” and
“— Contractual Obligations,” the following additional information is provided regarding our primary uses of liquidity and
capital:
Debt Repayments
In April 2017, MetLife, Inc. and MRSC terminated the collateral financing arrangement and, as a result, the $2.8 billion
obligation outstanding, under this arrangement was extinguished.
Insurance Liabilities
Liabilities arising from our insurance activities primarily relate to benefit payments under various life insurance products,
and annuity products, as well as payments for policy surrenders, withdrawals and loans. For annuity or deposit type products,
surrender or lapse behavior differs somewhat by segment. In the Annuities segment, lapses and surrenders tend to occur in the
normal course of business. During the years ended December 31, 2017 and 2016, general account surrenders and withdrawals
from annuity products were $1.8 billion and $1.9 billion, respectively.
Pledged Collateral
We pledge collateral to, and have collateral pledged to us by, counterparties in connection with our derivatives. At
December 31, 2017 and 2016, counterparties were obligated to return cash collateral pledged by us of $44 million and
$765 million, respectively. At December 31, 2017 and 2016, we were obligated to return cash collateral pledged to us by
counterparties of $379 million and $749 million, respectively. See Note 7 of the Notes to the Consolidated and Combined
Financial Statements for additional information about pledged collateral.
We pledge collateral from time to time in connection with funding agreements.
Securities Lending
We participate in a securities lending program whereby securities are loaned to third parties, primarily brokerage firms and
commercial banks. We obtain collateral, usually cash, from the borrower, which must be returned to the borrower when the
loaned securities are returned to us. Under our securities lending program, we were liable for cash collateral under our control
of $3.8 billion and $6.6 billion at December 31, 2017 and 2016, respectively. Of these amounts, $1.6 billion and $2.1 billion at
December 31, 2017 and 2016, respectively, were on open, meaning that the related loaned security could be returned to us on
the next business day requiring the immediate return of cash collateral we hold. The estimated fair value of the securities on
loan related to the cash collateral on open at December 31, 2017 was $1.6 billion, all of which were U.S. government and agency
securities which, if put to us, could be immediately sold to satisfy the cash requirements to immediately return the cash collateral.
See Note 6 of the Notes to the Consolidated and Combined Financial Statements.
Litigation
Putative or certified class action litigation and other litigation, and claims and assessments against us, in addition to those
discussed elsewhere herein and those otherwise provided for in the financial statements, have arisen in the course of our business,
including, but not limited to, in connection with our activities as an insurer, employer, investor, investment advisor, and taxpayer.
Further, state insurance regulatory authorities and other federal and state authorities regularly make inquiries and conduct
investigations concerning our compliance with applicable insurance and other laws and regulations. See Note 15 of the Notes
to the Consolidated and Combined Financial Statements.
We establish liabilities for litigation and regulatory loss contingencies when it is probable that a loss has been incurred and
the amount of the loss can be reasonably estimated. For material matters where a loss is believed to be reasonably possible but
not probable, no accrual is made but we disclose the nature of the contingency and an aggregate estimate of the reasonably
possible range of loss in excess of amounts accrued, when such an estimate can be made. It is not possible to predict or determine
the ultimate outcome of all pending investigations and legal proceedings. In some of the matters referred to herein, very large
and/or indeterminate amounts, including punitive and treble damages, are sought. Although in light of these considerations, it
is possible that an adverse outcome in certain cases could have a material adverse effect upon our financial position, based on
information currently known by us, in our opinion, the outcome of such pending investigations and legal proceedings are not
likely to have such an effect. However, given the large and/or indeterminate amounts sought in certain of these matters and the
inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a
material adverse effect on our combined net income or cash flows in particular quarterly or annual periods.
154
Contractual Obligations
The following table summarizes our major contractual obligations at:
Total
One Year
or Less
December 31, 2017
More than
One Year to
Three Years
(In millions)
More than
Three Years
to Five Years
More than
Five Years
$
76,524
$
7,788
$
5,134
$
5,235
$
59,683
4,169
6,305
1,813
5,037
1,740
4,169
148
1,722
4,948
4,062
4,298
—
876
78
—
—
261
13
—
58,367
49,583
—
5,020
—
89
$
153,531
$
20,515
$
10,150
$
9,807
$
113,059
Insurance liabilities
Policyholder account balances
Payables for collateral under securities loaned and other
transactions
Debt
Investment commitments
Other
Total
Insurance Liabilities
Insurance liabilities include future policy benefits and other policy-related balances, which are reported on the balance sheet
and are more fully described in Notes 1 and 3 of the Notes to the Consolidated and Combined Financial Statements. The amounts
presented reflect future estimated cash payments and (i) are based on mortality, morbidity, lapse and other assumptions
comparable with our experience and expectations of future payment patterns; and (ii) consider future premium receipts on current
policies in-force. All estimated cash payments presented are undiscounted as to interest, net of estimated future premiums on
in-force policies and gross of any reinsurance recoverable. Additionally, the more than five years category includes estimated
payments due for periods extending for more than 100 years.
The sum of the estimated cash flows shown for all years of $76.5 billion exceeds the liability amounts of $39.6 billion
included on the balance sheet principally due to (i) the time value of money, which accounts for a substantial portion of the
difference; and (ii) differences in assumptions, most significantly mortality, between the date the liabilities were initially
established and the current date; and are partially offset by liabilities related to accounting conventions (such as interest reserves
and unearned revenue), or which are not contractually due, which are excluded.
Actual cash payments may differ significantly from the liabilities as presented on the balance sheet and the estimated cash
payments as presented due to differences between actual experience and the assumptions used in the establishment of these
liabilities and the estimation of these cash payments.
For the majority of our insurance operations, estimated contractual obligations for future policy benefits and policyholder
account balances, as presented, are derived from the annual asset adequacy analysis used to develop actuarial opinions of statutory
reserve adequacy for state regulatory purposes. See “— Policyholder Account Balances.”
Policyholder Account Balances
See Notes 1 and 3 of the Notes to the Consolidated and Combined Financial Statements for a description of the components
of policyholder account balances. See “— Insurance Liabilities” regarding the source and uncertainties associated with the
estimation of the contractual obligations related to future policy benefits and policyholder account balances.
Amounts presented represent the estimated cash payments undiscounted as to interest and including assumptions related to
the receipt of future premiums and deposits; withdrawals, including unscheduled or partial withdrawals; policy lapses; surrender
charges; annuitization; mortality; future interest credited; policy loans and other contingent events as appropriate for the respective
product type. Such estimated cash payments are also presented net of estimated future premiums on policies currently in-force
and gross of any reinsurance recoverable.
155
The sum of the estimated cash flows shown for all years of $59.7 billion exceeds the liability amount of $37.8 billion
included on the balance sheet principally due to (i) the time value of money, which accounts for a substantial portion of the
difference; (ii) differences in assumptions, between the date the liabilities were initially established and the current date; and
(iii) liabilities related to accounting conventions (such as interest reserves and embedded derivatives), or which are not
contractually due, which are excluded.
Payables for Collateral Under Securities Loaned and Other Transactions
We have accepted cash collateral in connection with securities lending and derivatives. As the securities lending transactions
expire within the next year and the timing of the return of the derivatives collateral is uncertain, the return of the collateral has
been included in the one year or less category in the table. We also held non-cash collateral, which is not reflected as a liability
on the balance sheet of $397 million at December 31, 2017.
Debt
The total amount presented for debt differs from the total amount presented on the consolidated and combined balance
sheets due to the following: (i) the amounts presented herein do not include premiums or discounts upon issuance; (ii) the amounts
presented herein include future interest on such obligations for the period from January 1, 2018 through maturity; and (iii) the
amounts presented herein do not include $11 million at December 31, 2017 of long-term debt relating to CSEs — FVO as such
debt does not represent our contractual obligation. Future interest on variable rate debt was computed using prevailing rates at
December 31, 2017 and, as such, does not consider the impact of future rate movements. Future interest on fixed rate debt was
computed using the stated rate on the obligations.
Investment Commitments
To enhance the return on our investment portfolio, we commit to lend funds under mortgage loans, bank credit facilities
and private corporate bond investments and we commit to fund partnership investments. In the table, the timing of the funding
of mortgage loans and private corporate bond investments is based on the expiration dates of the corresponding commitments.
As it relates to commitments to fund partnerships and bank credit facilities, we anticipate that these amounts could be invested
any time over the next five years; however, as the timing of the fulfillment of the obligation cannot be predicted, such obligations
are generally presented in the one year or less category. See Note 15 of the Notes to the Consolidated and Combined Financial
Statements and “— Off-Balance Sheet Arrangements.”
Other
Other obligations presented are principally comprised of amounts due under reinsurance agreements, payables related to
securities purchased but not yet settled, accrued interest on debt obligations, estimated fair value of derivative obligations,
guaranty liabilities, and accruals and accounts payable due under contractual obligations, which are all reported in other liabilities
on the balance sheet. If the timing of any of these other obligations is sufficiently uncertain, the amounts are included within
the one year or less category. Items reported in other liabilities on the balance sheet that were excluded from the table represent
accounting conventions or are not liabilities due under contractual obligations. Unrecognized tax benefits and related accrued
interest totaling $25 million was excluded as the timing of payment cannot be reliably determined.
Separate account liabilities are excluded as they are fully funded by cash flows from the corresponding separate account
assets and are set equal to the estimated fair value of separate account assets.
We also enter into agreements to purchase goods and services in the normal course of business; however, such amounts are
excluded as these purchase obligations were not material to our results of operations or financial position.
Additionally, we have agreements in place for services we conduct, generally at cost, between companies relating to
insurance, reinsurance, loans and capitalization. Intercompany transactions have been eliminated in combination. Intercompany
transactions among insurance companies and affiliates have been approved by the appropriate insurance regulators as required.
156
GLOSSARY
Glossary of Selected Financial Terms
Account value
The amount of money in a policyholder’s account. The value increases with
additional premiums and investment gains, and it decreases with withdrawals,
investment losses and fees.
Adjusted earnings
See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Non-GAAP and Other Financial Disclosures.”
Alternative investments
General account invested assets in real estate joint ventures, other limited
partnership interests and other invested assets.
Annualized new premium (“ANP”)
A sales term used to compare new business written in a year on a recurring basis.
The annualization is determined by using 100% of annual recurring premium and
10% of single premiums or deposits.
Assets under management (“AUM”)
General account investments and separate account assets.
Conditional tail expectation
(“CTE”)
Calculated as the average amount of total assets required to satisfy obligations over
the life of the contract or policy in the worst [x]% of scenarios. Represented as CTE
(100 less x). Example: CTE95 represents the five worst percent of scenarios.
Credit loss
Deferred acquisition cost (“DAC”)
The difference between the amortized cost of the security and the present value of
projected future cash flows expected to be collected is recognized as an OTTI in
earnings.
Represents the incremental costs related directly to the successful acquisition of
new and renewal insurance and annuity contracts and which have been deferred on
the balance sheet as an asset.
Deferred sales inducements (“DSI”)
Represent amounts that are credited to a policyholder’s account balance that are
higher than the expected crediting rates on similar contracts without such an
inducement and that are an incentive to purchase a contract and also meet the
accounting criteria to be deferred as an asset that is amortized over the life of the
contract.
Deferred tax asset or deferred tax
liability
Assets or liabilities that are recorded for the difference between book basis and tax
basis of an asset or a liability.
General account assets
All insurance company assets not allocated to separate accounts.
Invested assets
General account investments. Includes fixed maturity securities, equity securities,
mortgage loans, policy loans, alternative investments and short-term investments.
Investment Hedge Adjustments
Market Value Adjustments
Earned income on derivatives and amortization of premium on derivatives that are
hedges of investments or that are used to replicate certain investments, but do not
qualify for hedge accounting treatment.
Amounts associated with periodic crediting rate adjustments based on the total
return of a contractually referenced pool of assets and market value adjustments
associated with surrenders or terminations of contracts.
Minimum Initial Target Assets
Cash and invested assets, including funds withheld.
Net amount at risk (“NAR”)
Represents the difference between a claim amount payable if a specific event occurs
and the amount set aside to support the claim. The calculation of NAR can differ by
policy type and/or guarantee.
157
Net investment spread
See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Non-GAAP and Other Financial Disclosures.”
Reinsurance
Insurance that an insurance company buys for its own protection. Reinsurance
enables an insurance company to expand its capacity, stabilize its underwriting
results, or finance its expanding volume.
Risk-based capital (“RBC”)
Rules to determine insurance company regulatory capital requirements. It is based
on rules published by the National Association of Insurance Commissioners
(“NAIC”).
Sales
Tax-deferral
See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Non-GAAP and Other Financial Disclosures.”
An investment with earnings such as interest, dividends or capital gains that
accumulate tax free until the investor withdraws and takes possession of them. The
most common types of tax-deferred investments include those in individual
retirement accounts and individual retirement annuities (collectively, “IRAs”) and
deferred annuities.
Value of business acquired
(“VOBA”)
Present value of projected future gross profits from in-force policies of acquired
businesses.
Glossary of Product Terms
Accumulation phase
Annuitant
Annuities
Annuitization
Benefit Base
Cash surrender value
Deferred annuity
Dollar-for-dollar withdrawal
The phase of a variable annuity contract during which assets accumulate based on
the policyholder’s lump sum or periodic deposits and reinvested interest, capital
gains and dividends that are generally tax deferred.
The person who receives annuity payments or the person whose life expectancy
determines the amount of variable annuity payments upon annuitization of a life
contingent annuity.
Long-term, tax deferred investments designed to help investors save for retirement.
The process of converting an annuity investment into a series of periodic income
payments, generally for life.
A notional amount (not actual cash value) used to calculate the owner’s guaranteed
benefits within an annuity contract. The death benefit and living benefit within the
same contract may not have the same Benefit Base.
The amount an insurance company pays (minus any surrender charge) to the
variable annuity owner when the contract is voluntarily terminated prematurely.
An annuity purchased with premiums paid either over a period of years or as a lump
sum, for which savings accumulate prior to annuitization or surrender, and upon
annuitization, such savings are exchanged for either a future lump sum or periodic
payments for a specific length of time or for a lifetime.
A method of calculating the reduction of a variable annuity Benefit Base after a
withdrawal in which the benefit is reduced by one dollar for every dollar
withdrawn.
Enhanced death benefit
An optional benefit that locks in investment gains annually, or every few years, or
pays a minimum stated interest rate on purchase payments to the beneficiary.
Fixed annuity
An annuity that guarantees a set annual rate of return with interest at rates we
determine, subject to specified minimums. Credited interest rates are guaranteed not
to change for certain limited periods of time.
158
Future policy benefits
Guaranteed minimum accumulation
benefits (“GMAB”)
Future policy benefits for the annuities business are comprised mainly of liabilities
for life-contingent income annuities, and liabilities for the variable annuity
guaranteed minimum benefits accounted for as insurance.
An optional benefit (available for an additional cost) which entitles an annuitant to
a minimum payment, typically in lump-sum, after a set period of time, typically
referred to as the accumulation period. The minimum payment is based on the
Benefit Base, which could be greater than the underlying account value.
Guaranteed minimum death
benefits (“GMDB”)
An optional benefit (available for an additional cost) that guarantees an annuitant’s
beneficiaries are entitled to a minimum payment based on the Benefit Base, which
could be greater than the underlying account value, upon the death of the annuitant.
Guaranteed minimum income
benefits (“GMIB”)
An optional benefit (available for an additional cost) where an annuitant is entitled
to annuitize the policy and receive a minimum payment stream based on the Benefit
Base, which could be greater than the underlying account value.
Guaranteed minimum living
benefits (“GMLB”)
A reference to all forms of guaranteed minimum living benefits, including GMIBs,
GMWBs and GMABs (does not include GMDBs).
Guaranteed minimum withdrawal
benefit for life (“GMWBL”)
An optional benefit (available for an additional cost) where an annuitant is entitled
to withdraw a maximum amount of their Benefit Base each year, for the duration of
the contract holder’s life, regardless of account performance.
Guaranteed minimum withdrawal
benefit riders (“GMLB Riders”)
Changes in the carrying value of GMLB liabilities, related hedges and reinsurance;
the fees earned directly from the GMLB liabilities; and related DAC offsets.
Guaranteed minimum withdrawal
benefits (“GMWB”)
An optional benefit (available for an additional cost) where an annuitant is entitled
to withdraw a maximum amount of their Benefit Base each year, for which
cumulative payments to the annuitant could be greater than the underlying account
value.
Guaranteed minimum benefits
(“GMxB”)
A general reference to all forms of guaranteed minimum benefits, inclusive of
living benefits and death benefits.
Immediate income annuity
Index-linked annuities
A type of annuity for which the owner pays a lump sum and receives periodic
payments immediately or soon after purchase.
Single premium immediate annuities (“SPIAs”) are single premium annuity
products that provide a guaranteed level of income to the owner generally for a
specified number of years and/or for the life of the annuitant.
Deferred income annuities (“DIAs”) provide a pension-like stream of income
payments after a specified deferral period.
An annuity that provides for asset accumulation and asset distribution needs with an
ability to share in the upside from certain financial markets such as equity indices,
or an interest rate benchmark. With an index-linked annuity, the customer’s account
value can grow or decline due to various external financial market indices
performance.
Living benefits
Optional benefits (available at an additional cost) that guarantee that the owner will
get back at least his original investment when the money is withdrawn.
Mortality and expense risk fee
(“M&E fee”)
A fee charged by insurance companies to compensate for the risk they take by
issuing variable annuity contracts.
Net flows
Net change in customer account balances in a period including, but not limited to,
new sales, full or partial exits and the net impact of clients utilizing or withdrawing
their funds. It excludes the impact of markets on account balances.
Period certain annuity
Type of annuity that guarantees payment to the annuitant for a specified time period
and to the beneficiary if the annuitant dies before the period ends.
159
Policyholder account balances
Rider
Roll-up rate
Separate account
Step-up
Surrender charge
Term life products
Annuities: Policyholder account balances are held for fixed deferred annuities, the
fixed account portion of variable annuities, and non-life contingent income
annuities. Interest is credited to the policyholder’s account at interest rates we
determine which are influenced by current market rates, subject to specified
minimums.
Life Insurance Policies: Policyholder account balances are held for retained asset
accounts, universal life policies and the fixed account of universal variable life
insurance policies. Interest is credited to the policyholder’s account at interest rates
we determine which are influenced by current market rates, subject to specified
minimums.
An optional feature or benefit that a variable annuity contract holder can purchase
at an additional cost.
The guaranteed percentage that the Benefit Base increases by each year.
An insurance company account, legally segregated from the general account, that
holds the contract assets or subaccount investments that can be actively or passively
managed and invest in stock, bonds or money market portfolios.
An optional variable annuity feature (available at an additional cost) that can
increase the Benefit Base amount if the variable annuity account value is higher
than the Benefit Base on specified dates.
A fee paid by a contract owner for the early withdrawal of an amount that exceeds a
specific percentage or for cancellation of the contract within a specified amount of
time after purchase.
Term life products provide a fixed death benefit in exchange for a guaranteed level
premium over a specified period of time, usually ten to thirty years. Generally, term
life does not include any cash value, savings or investment components.
Total adjusted capital (“TAC”)
Primarily consists of statutory capital and surplus and the statutory asset valuation
reserve.
Universal life products
Variable annuity
Variable universal life
Whole life products
Life insurance products that provide a death benefit in return for payment of
specified annual policy charges that are generally related to specific costs, which
may change over time. To the extent that the policyholder chooses to pay more than
the charges required in any given year to keep the policy in-force, the excess
premium will be placed into the account value of the policy and credited with a
stated interest rate on a monthly basis.
A type of annuity that offers guaranteed periodic payments for a defined period of
time or for life and gives purchasers the ability to invest in various markets though
the underlying investment options, which may result in potentially higher, but
variable, returns.
Universal life products where the excess amount paid over policy charges can be
directed by the policyholder into a variety of separate account investment options.
In the separate account investment options, the policyholder bears the entire risk
and returns of the investment results.
Life insurance products that provide a guaranteed death benefit in exchange for a
guaranteed level premium for a specified period of time in order to maintain
coverage for the life of the insured. Whole life products also have guaranteed
minimum cash surrender values. Although the primary purpose is protection, the
policyholder can withdraw or borrow against the policy (sometimes on a tax
favored basis).
160
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Risk Management
We have an integrated process for managing risk exposures, which is coordinated among our Risk Management, Treasury,
Actuarial and Investment Departments. The process is designed to assess and manage exposures on a consolidated, company-
wide basis. Brighthouse Financial, Inc. has established a Balance Sheet and Financial Risk Committee (“BSFRC”). The BSFRC
is responsible for periodically reviewing all material financial risks to us and, in the event risks exceed desired tolerances, informs
the Finance and Risk Committee of the Board of Directors, considers possible courses of action and determines how best to
resolve or mitigate such risks. In taking such actions, the BSFRC considers industry best practices and the current economic
environment. The BSFRC also reviews and approves target investment portfolios in order to align them with our liability profile,
and establishes guidelines and limits for various risk taking departments, such as the Investment Department. Our Treasury
Department is responsible for coordinating our ALM strategies throughout the enterprise. The membership of the BSFRC is
comprised of the following members of senior management: Chief Executive Officer, Chief Risk Officer, Chief Financial Officer,
Chief Operating Officer, Chief Strategy Officer and Chief Investment Officer.
Our significant market risk management practices include, but are not limited to, the following:
Managing Interest Rate Risk
To manage interest rate risk, we employ product design, pricing and ALM strategies to mitigate the potential effects of
interest rate movements. Product design and pricing strategies include the use of surrender charges or restrictions on
withdrawals in some products and the ability to reset crediting rates for certain products. Our ALM strategies include the use
of derivatives and duration mismatch limits.
We analyze interest rate risk using various models, including multi-scenario cash flow projection models that forecast
cash flows of the liabilities and their supporting investments, including derivatives. These projections involve evaluating the
potential gain or loss on most of our in-force business under various increasing and decreasing interest rate environments.
State insurance department regulations require that we perform some of these analyses annually as part of our review of the
sufficiency of our regulatory reserves. We measure relative sensitivities of the value of our assets and liabilities to changes in
key assumptions using internal models. These models reflect specific product characteristics and include assumptions based
on current and anticipated experience regarding lapse, mortality and interest crediting rates. In addition, these models include
asset cash flow projections reflecting interest payments, sinking fund payments, principal payments, bond calls, prepayments
and defaults.
We also use common industry metrics, such as duration and convexity, to measure the relative sensitivity of asset and
liability values to changes in interest rates. In computing the duration of liabilities, we consider all policyholder guarantees
and how indeterminate policy elements such as interest credits or dividends are set. Each asset portfolio has a duration target
based on the liability duration and the investment objectives of that portfolio.
Managing Equity Market and Foreign Currency Risks
We manage equity market risk in a coordinated process across our Investment and Treasury Departments primarily by
holding sufficient capital to permit us to absorb modest losses, which may be temporary, from changes in equity markets and
interest rates without adversely affecting our financial strength ratings and through the use of derivatives, such as equity index
options contracts, exchange-traded equity futures, equity variance swaps and equity total return swaps. We may also employ
reinsurance strategies to manage these exposures. Key management objectives include limiting losses, minimizing exposures
to significant risks and providing additional capital capacity for future growth. The Investment and Treasury Departments are
also responsible for managing the exposure to foreign currency denominated investments. We use foreign currency swaps and
forwards to mitigate the exposure, risk of loss and financial statement volatility associated with foreign currency denominated
fixed income investments.
Market Risk - Fair Value Exposures
We regularly analyze our market risk exposure to interest rate, equity market, credit spread and foreign currency exchange
rate risks. As a result of that analysis, we have determined that the estimated fair values of certain assets and liabilities are
significantly exposed to changes in interest rates, and to a lesser extent, to changes in equity markets and foreign currency
exchange rates. We have exposure to market risk through our insurance and annuity operations and general account investment
activities. For purposes of this discussion, “market risk” is defined as changes in fair value resulting from changes in interest
rates, equity markets, credit spread and foreign currency exchange rates. We may have additional financial impacts other than
changes in fair value, which are beyond the scope of this discussion. See “Risk Factors” for additional disclosure regarding our
market risk and related sensitivities.
161
Interest Rates
Our fair value exposure to changes in interest rates arises most significantly from our interest rate sensitive liabilities and
our holdings of fixed maturity securities, mortgage loans and derivatives that are used to support our policyholder liabilities.
Our interest rate sensitive liabilities include long-term debt, policyholder account balances related to certain investment type
contracts, and embedded derivatives in variable annuity contracts with guaranteed minimum benefits. Our fixed maturity
securities including U.S. and foreign government bonds, securities issued by government agencies, corporate bonds, mortgage-
backed and other ABS, and our commercial, agricultural and residential mortgage loans, are exposed to changes in interest
rates. We also use derivatives including swaps, caps, floors and options to mitigate the exposure related to interest rate risks
from our product liabilities.
162
Equity Market
Along with investments in equity securities, we have fair value exposure to equity market risk through certain liabilities
that involve long-term guarantees on equity performance such as embedded derivatives in variable annuity contracts with
guaranteed minimum benefits, as well as certain policyholder account balances. In addition, we have exposure to equity
markets through derivatives including futures, options and swaps that we enter into to mitigate potential equity market exposure
from our product liabilities.
Foreign Currency Exchange Rates
Our fair value exposure to fluctuations in foreign currency exchange rates against the U.S. dollar results from our holdings
in non-U.S. dollar denominated fixed maturity and equity securities, mortgage loans and certain liabilities. The principal
currencies that create foreign currency exchange rate risk in our investment portfolios and liabilities are the Euro and the British
pound. We economically hedge substantially all of our foreign currency exposure.
Risk Measurement: Sensitivity Analysis
In the following discussion and analysis, we measure market risk related to our market sensitive assets and liabilities based
on changes in interest rates, equity market prices and foreign currency exchange rates using a sensitivity analysis. This analysis
estimates the potential changes in estimated fair value based on a hypothetical 10% change (increase or decrease) in interest
rates, equity market prices and foreign currency exchange rates. We believe that these changes in market rates and prices is
reasonably possible in the near term. In performing the analysis summarized below, we used market rates as of December 31,
2017. We modeled the impact of changes in market rates and prices on the estimated fair values of our market sensitive assets
and liabilities as follows:
•
•
•
the net present values of our interest rate sensitive exposures resulting from a 10% change (increase or decrease) in
interest rates;
the estimated fair value of our equity positions due to a 10% change (increase or decrease) in equity market prices; and
the U.S. dollar equivalent of estimated fair values of our foreign currency exposures due to a 10% change (increase in
the value of the U.S. dollar compared to the foreign currencies or decrease in the value of the U.S. dollar compared to
the foreign currencies) in foreign currency exchange rates.
The sensitivity analysis is an estimate and should not be viewed as predictive of our future financial performance. Our actual
losses in any particular period may vary from the amounts indicated in the table below. Limitations related to this sensitivity
analysis include:
•
•
•
•
•
•
interest sensitive liabilities do not include $39.6 billion of insurance contracts, which are accounted for on a book value
basis. Management believes that the changes in the economic value of those contracts under changing interest rates
would offset a significant portion of the fair value changes of interest sensitive assets;
the market risk information is limited by the assumptions and parameters established in creating the related sensitivity
analysis, including the impact of prepayment rates on mortgage loans;
foreign currency exchange rate risk is not isolated for certain embedded derivatives within host asset and liability
contracts, as the risk on these instruments is reflected as equity;
for derivatives that qualify for hedge accounting, the impact on reported earnings may be materially different from the
change in market values;
the analysis excludes limited partnership interests; and
the model assumes that the composition of assets and liabilities remains unchanged throughout the period.
Accordingly, we use such models as tools and not as substitutes for the experience and judgment of our management.
163
The table below illustrates the potential loss in estimated fair value of our interest sensitive financial instruments due to a
10% increase in the yield curve by type of asset and liability as of:
Financial assets with interest rate risk
Fixed maturity securities
Mortgage loans
Policy loans
Premiums, reinsurance and other receivables
Embedded derivatives within asset host contracts (2)
Increase (decrease) in fair value of assets
Financial liabilities with interest rate risk (3)
Policyholder account balances
Long-term debt
Other liabilities
Embedded derivatives within liability host contracts (2)
(Increase) decrease in fair value of liabilities
Derivative instruments with interest rate risk
Interest rate contracts
Foreign currency contracts
Credit contracts
Equity contracts
Increase (decrease) in fair value of derivative instruments
Net change
_______________
December 31, 2017
Notional
Amount
Estimated
Fair
Value (1)
(In millions)
Assuming a
10% Increase
in the Yield
Curve
$
$
$
$
$
$
$
$
$
$
$
$
$
64,991
$
(1,395)
10,871
1,740
2,113
227
15,927
3,639
314
1,887
275
47
39
(1,236)
$
(126)
(17)
(61)
(22)
(1,621)
236
93
(20)
362
671
(545)
(29)
—
(14)
(588)
(1,538)
$
$
$
$
47,968
3,072
1,965
60,544
(1) Separate account assets and liabilities, which are interest rate sensitive, are not included herein as any interest rate risk is
borne by the contract holder.
(2) Embedded derivatives are recognized in the consolidated balance sheet in the same caption as the host contract.
(3) Excludes $39.6 billion of liabilities, at carrying value, pursuant to insurance contracts reported within future policy benefits
and other policy-related balances. Management believes that the changes in the economic value of those contracts under
changing interest rates would offset a significant portion of the fair value changes of interest sensitive assets.
Sensitivity Summary
Sensitivity to rising interest rates decreased by $374 million, or 20%, to $1.5 billion as of December 31, 2017 from
$1.9 billion as of December 31, 2016. This change was primarily due to lower sensitivity of derivatives used by the Company
as hedges against changes in interest rates.
Sensitivity to a 10% rise in equity prices decreased by $514 million, or 88%, to $70 million as of December 31, 2017 from
$584 million at December 31, 2016. This change was primarily due to lower sensitivity of derivatives used by the Company as
hedges against changes in equity prices.
Sensitivity to a 10% decrease in the U.S. dollar compared to all foreign currencies decreased by $27 million, or 32%, to
$58 million as of December 31, 2017 from $85 million at December 31, 2016. This decrease was primarily due to an increase
in the sensitivity of foreign currency sensitive assets that was more closely offset by an increase in the sensitivity of our derivative
hedges.
164
Item 8. Financial Statements and Supplementary Data
Index to Consolidated and Combined Financial Statements, Notes and Schedules
Report of Independent Registered Public Accounting Firm
Financial Statements at December 31, 2017 and 2016 and for the Years Ended December 31, 2017, 2016 and
2015:
Consolidated and Combined Balance Sheets
Consolidated and Combined Statements of Operations
Consolidated and Combined Statements Comprehensive Income (Loss)
Consolidated and Combined Statements of Equity
Consolidated and Combined Statements of Cash Flows
Notes to the Consolidated and Combined Financial Statements
Note 1 — Business, Basis of Presentation and Summary of Significant Accounting Policies
Note 2 — Segment Information
Note 3 — Insurance
Note 4 — Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles
Note 5 — Reinsurance
Note 6 — Investments
Note 7 — Derivatives
Note 8 — Fair Value
Note 9 — Long-term Debt and Collateral Financing Arrangement
Note 10 — Equity
Note 11 — Other Expenses
Note 12 — Employee Benefit Plans
Note 13 — Income Tax
Note 14 — Earnings Per Common Share
Note 15 — Contingencies, Commitments and Guarantees
Note 16 — Related Party Transactions
Note 17 — Quarterly Results of Operations (Unaudited)
Financial Statement Schedules at December 31, 2017 and 2016 and for the Years Ended December 31, 2017,
2016 and 2015:
Schedule I — Consolidated and Combined Summary of Investments — Other Than Investments in Related Parties
Schedule II — Condensed Financial Information (Parent Company Only)
Schedule III — Consolidated and Combined Supplementary Insurance Information
Schedule IV — Consolidated and Combined Reinsurance
Page
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168
169
170
171
173
186
191
195
198
203
218
229
243
245
251
251
256
259
260
262
264
265
266
272
274
165
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Brighthouse Financial, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated and combined balance sheets of Brighthouse Financial, Inc. and subsidiaries
(the “Company”) as of December 31, 2017 and 2016, and the related consolidated and combined statements of operations,
comprehensive income (loss), equity, and cash flows for each of the three years in the period ended December 31, 2017, and
the related notes and the schedules listed in the Index to the Financial Statements, Notes and Schedules (collectively referred
to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United
States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due
to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Charlotte, North Carolina
March 15, 2018
We have served as the Company’s auditor since 2016.
166
Brighthouse Financial, Inc.
Consolidated and Combined Balance Sheets
December 31, 2017 and 2016
(In millions, except share and per share data)
Assets
Investments:
Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $60,173 and $58,715,
respectively; includes $0 and $3,413, respectively, relating to variable interest entities)
Equity securities available-for-sale, at estimated fair value (cost: $212 and $280, respectively)
Mortgage loans (net of valuation allowances of $47 and $40, respectively; includes $115 and $136, respectively, at
estimated fair value, relating to variable interest entities)
Policy loans
Real estate joint ventures
Other limited partnership interests
Short-term investments, principally at estimated fair value
Other invested assets, principally at estimated fair value
Total investments
Cash and cash equivalents, principally at estimated fair value (includes $0 and $9, respectively, relating to variable
interest entities)
Accrued investment income (includes $1 and $1, respectively, relating to variable interest entities)
Premiums, reinsurance and other receivables
Deferred policy acquisition costs and value of business acquired
Current income tax recoverable
Other assets
Separate account assets
Total assets
Liabilities and Equity
Liabilities
Future policy benefits
Policyholder account balances
Other policy-related balances
Payables for collateral under securities loaned and other transactions
Long-term debt (includes $11 and $23, respectively, at estimated fair value, relating to variable interest entities)
Collateral financing arrangement
Deferred income tax liability
Other liabilities (includes $0 and $1, respectively, relating to variable interest entities)
Separate account liabilities
Total liabilities
Contingencies, Commitments and Guarantees (Note 16)
Equity
Brighthouse Financial, Inc.’s stockholders’ equity:
Common stock, par value $0.01 per share; 1,000,000,000 and 100,000 shares authorized, respectively; 119,773,106
and 100,000 shares issued and outstanding, respectively
Additional paid-in capital
Retained earnings
Shareholder's net investment
Accumulated other comprehensive income (loss)
Total Brighthouse Financial, Inc.’s stockholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
2017
2016
$
64,991
$
232
10,742
1,523
433
1,669
312
2,436
82,338
1,857
601
13,525
6,286
740
588
61,388
300
9,378
1,517
215
1,642
1,288
4,904
80,632
5,228
693
14,647
6,293
778
616
118,257
224,192
$
113,043
221,930
$
$
36,616
$
37,783
2,985
4,169
3,612
—
927
5,263
118,257
209,612
1
12,432
406
—
1,676
14,515
65
14,580
33,372
37,526
3,045
7,390
1,910
2,797
2,056
5,929
113,043
207,068
—
—
—
13,597
1,265
14,862
—
14,862
221,930
$
224,192
$
See accompanying notes to the consolidated and combined financial statements.
167
Brighthouse Financial, Inc.
Consolidated and Combined Statements of Operations
For the Years Ended December 31, 2017, 2016 and 2015
(In millions, except per share data)
Revenues
Premiums
Universal life and investment-type product policy fees
Net investment income
Other revenues
Net investment gains (losses):
Other-than-temporary impairments on fixed maturity securities
Other-than-temporary impairments on fixed maturity securities transferred to other
comprehensive income (loss)
Other net investment gains (losses)
Total net investment gains (losses)
Net derivative gains (losses)
Total revenues
Expenses
Policyholder benefits and claims
Interest credited to policyholder account balances
Amortization of deferred policy acquisition costs and value of business acquired
Other expenses
Total expenses
Income (loss) before provision for income tax
Provision for income tax expense (benefit)
Net income (loss)
Earnings per common share
Basic
2017
2016
2015
$
$
863
3,898
3,078
651
$
1,222
3,782
3,207
736
1,679
4,010
3,099
422
(1)
(19)
(23)
—
(27)
(28)
(1,620)
6,842
3,636
1,111
227
2,483
7,457
(615)
(237)
(378) $
(3)
(56)
(78)
(5,851)
3,018
3,903
1,165
371
2,284
7,723
(4,705)
(1,766)
(2,939) $
(8)
38
7
(326)
8,891
3,269
1,259
781
2,120
7,429
1,462
343
1,119
(3.16) $
(24.54) $
9.34
$
$
See accompanying notes to the consolidated and combined financial statements.
168
Brighthouse Financial, Inc.
Consolidated and Combined Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2017, 2016 and 2015
(In millions)
Net income (loss)
Other comprehensive income (loss):
Unrealized investment gains (losses), net of related offsets
Unrealized gains (losses) on derivatives
Foreign currency translation adjustments
Defined benefit plans adjustment
Other comprehensive income (loss), before income tax
Income tax (expense) benefit related to items of other comprehensive income (loss)
Other comprehensive income (loss), net of income tax
Comprehensive income (loss)
2017
2016
2015
$
(378) $
(2,939) $
1,119
336
(175)
10
(19)
152
259
411
33
$
(421)
26
1
3
(391)
133
(258)
(3,197) $
(1,898)
95
(25)
(6)
(1,834)
642
(1,192)
(73)
$
See accompanying notes to the consolidated and combined financial statements.
169
Brighthouse Financial, Inc.
Consolidated and Combined Statements of Equity
For the Years Ended December 31, 2017, 2016 and 2015
(In millions)
Shareholder’s
Net
Investment
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Brighthouse
Financial,
Inc.'s
Stockholders’
Equity
Noncontrolling
Interests
Total
Equity
Balance at December 31, 2014
$
14,810
$
— $
— $
— $
2,715
$
17,525
$
— $ 17,525
Change in net investment
Net income (loss)
Other comprehensive income
(loss), net of income tax
Balance at December 31, 2015
Change in net investment
Net income (loss)
Other comprehensive income
(loss), net of income tax
Balance at December 31, 2016
Issuance of common stock to
MetLife, Inc.
Distribution to MetLife, Inc.
Other Separation related
transactions
Net income (loss)
Effect of change in accounting
principle (Note 1)
(613)
1,119
15,316
1,220
(2,939)
—
—
—
13,597
—
—
—
1
(1,798)
1,718
(1,085)
707
(301)
Separation from MetLife, Inc.
(12,433)
1
12,432
Change in noncontrolling interests
Other comprehensive income
(loss), net of income tax
Balance at December 31, 2017
(613)
1,119
(1,192)
16,839
1,220
(2,939)
(258)
14,862
1
(1,798)
1,718
(378)
—
—
—
110
(1,192)
1,523
(258)
1,265
301
110
—
(613)
1,119
(1,192)
16,839
1,220
(2,939)
(258)
—
14,862
1
(1,798)
1,718
(378)
—
—
65
110
65
$
— $
1
$ 12,432
$
406
$
1,676
$
14,515
$
65
$ 14,580
See accompanying notes to the consolidated and combined financial statements.
170
Brighthouse Financial, Inc.
Consolidated and Combined Statements of Cash Flows
For the Years Ended December 31, 2017, 2016 and 2015
(In millions)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization expenses
Amortization of premiums and accretion of discounts associated with investments, net
(Gains) losses on investments, net
(Gains) losses on derivatives, net
(Income) loss from equity method investments, net of dividends and distributions
Interest credited to policyholder account balances
Universal life and investment-type product policy fees
Goodwill impairment
Change in accrued investment income
Change in premiums, reinsurance and other receivables
Change in deferred policy acquisition costs and value of business acquired, net
Change in income tax
Change in other assets
Change in future policy benefits and other policy-related balances
Change in other liabilities
Other, net
Net cash provided by (used in) operating activities
Cash flows from investing activities
Sales, maturities and repayments of:
Fixed maturity securities
Equity securities
Mortgage loans
Real estate and real estate joint ventures
Other limited partnership interests
Purchases of:
Fixed maturity securities
Equity securities
Mortgage loans
Real estate and real estate joint ventures
Other limited partnership interests
Cash received in connection with freestanding derivatives
Cash paid in connection with freestanding derivatives
Cash received under repurchase agreements
Cash paid under repurchase agreements
Cash received under reverse repurchase agreements
Cash paid under reverse repurchase agreements
Sale of loans to a former affiliate
Receipts on loans to a former affiliate
Net change in policy loans
Net change in short-term investments
Net change in other invested assets
Other, net
2017
2016
2015
$
(378) $
(2,939) $
1,119
17
(276)
28
3,000
(46)
1,111
(3,898)
—
(80)
197
(33)
(117)
2,254
1,418
70
129
3,396
17,214
97
742
77
264
(18,782)
(2)
(2,041)
(268)
(263)
1,865
(3,831)
—
—
—
—
—
—
(6)
1,030
(13)
2
17
(235)
78
7,093
(7)
1,165
(3,782)
161
(33)
40
38
(2,084)
2,240
2,438
(586)
132
3,736
46,130
224
1,602
450
417
(39,687)
(58)
(2,855)
(75)
(203)
709
(2,765)
—
—
—
—
—
50
111
616
8
—
26
(240)
(7)
1,221
118
1,259
(4,010)
—
1
(394)
382
731
2,348
2,295
(247)
29
4,631
38,885
308
1,105
512
426
(44,058)
(273)
(2,570)
(109)
(233)
227
(871)
199
(199)
199
(199)
26
—
(77)
(316)
(24)
—
Net cash provided by (used in) investing activities
$
(3,915) $
4,674
$
(7,042)
See accompanying notes to the consolidated and combined financial statements.
171
Brighthouse Financial, Inc.
Consolidated and Combined Statements of Cash Flows (continued)
For the Years Ended December 31, 2017, 2016 and 2015
(In millions)
Cash flows from financing activities
Policyholder account balances:
Deposits
Withdrawals
Net change in payables for collateral under securities loaned and other transactions
Long-term debt issued
Long-term debt repaid
Collateral financing arrangement repaid
Distribution to MetLife, Inc.
Cash received from MetLife, Inc. in connection with shareholder’s net investment
Cash paid to MetLife, Inc. in connection with shareholder’s net investment
Financing element on certain derivative instruments and other derivative related transactions, net
Other, net
Net cash provided by (used in) financing activities
Effect of change in foreign currency exchange rates on cash and cash equivalents balances
Change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosures of cash flow information
Net cash paid (received) for:
Interest
Income tax
Non-cash transactions:
Transfer of fixed maturity securities from former affiliates
Transfer of mortgage loans from former affiliates
Transfer of short-term investments from former affiliates
Transfer of fixed maturity securities to former affiliates
Reduction of other invested assets in connection with affiliated reinsurance transactions
Reduction of policyholder account balances in connection with reinsurance transactions
2017
2016
2015
$
4,990
$
10,712
$
20,953
(3,103)
(3,147)
3,588
(13)
(2,797)
(1,798)
293
(668)
(149)
(48)
(2,852)
—
(3,371)
5,228
1,857
$
155
$
(637) $
— $
— $
— $
293
$
— $
293
$
(12,379)
(3,247)
—
(26)
—
—
1,833
(634)
(1,011)
—
(4,752)
—
3,658
1,570
5,228
186
189
4,030
662
94
346
676
$
$
$
$
$
$
$
$
— $
(21,178)
3,126
175
(235)
—
—
406
(771)
(96)
—
2,380
(2)
(33)
1,603
1,570
195
(405)
—
—
—
—
—
—
$
$
$
$
$
$
$
$
$
See accompanying notes to the consolidated and combined financial statements.
172
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements
1. Business, Basis of Presentation and Summary of Significant Accounting Policies
Business
“Brighthouse” and the “Company” refer to Brighthouse Financial, Inc. and its subsidiaries (formerly, MetLife U.S. Retail
Separation Business). Brighthouse Financial, Inc. is a holding company formed to own the legal entities that historically operated
a substantial portion of MetLife, Inc.’s former Retail segment. Brighthouse Financial, Inc. was incorporated in Delaware on
August 1, 2016 in preparation for MetLife, Inc.’s separation of a substantial portion of its former Retail segment, as well as
certain portions of its Corporate Benefit Funding segment (the “Separation”), which was completed on August 4, 2017.
The Company offers a range of individual annuities and individual life insurance products. The Company reports results
through three segments: Annuities, Life and Run-off. In addition, the Company reports certain of its results in Corporate &
Other.
On January 12, 2016, MetLife, Inc. (MetLife, Inc., together with its subsidiaries and affiliates, “MetLife”) announced its
plan to pursue the separation of a substantial portion of its former U.S. retail business. Additionally, on July 21, 2016, MetLife,
Inc. announced that the separated business would be rebranded as “Brighthouse Financial.”
On October 5, 2016, Brighthouse Financial, Inc., which until the completion of the Separation on August 4, 2017, was a
wholly-owned subsidiary of MetLife, Inc., filed a registration statement on Form 10 (as amended, the “Form 10”) with the U.S.
Securities and Exchange Commission (“SEC”) that was declared effective by the SEC on July 6, 2017. The Form 10 disclosed
MetLife, Inc.’s plans to undertake several actions, including an internal reorganization involving its U.S. retail business (the
“Restructuring”) and include Brighthouse Life Insurance Company, Brighthouse Life Insurance Company of NY (“BHNY”),
New England Life Insurance Company (“NELICO”), Brighthouse Reinsurance Company of Delaware (“BRCD”) and
Brighthouse Investment Advisers, LLC in the planned separated business and distribute at least 80.1% of the shares of Brighthouse
Financial, Inc.’s common stock on a pro rata basis to the holders of MetLife, Inc. common stock. In connection with the
Restructuring, effective April 2017, following receipt of applicable regulatory approvals, MetLife, Inc. contributed certain
affiliated reinsurance companies and BHNY to Brighthouse Life Insurance Company. The affiliated reinsurance companies,
which included MetLife Reinsurance Company of Delaware (“MRD”), MetLife Reinsurance Company of South Carolina
(“MRSC”) and a designated protected cell of MetLife Reinsurance Company of Vermont (“MRV Cell”), were then merged into
BRCD, a licensed reinsurance subsidiary of Brighthouse Life Insurance Company. On July 28, 2017, MetLife, Inc. contributed
Brighthouse Holdings, LLC (“BH Holdings”) to Brighthouse Financial, Inc. See Notes 10 and 14.
On August 4, 2017, Brighthouse Financial, Inc. entered into the Master Separation Agreement with MetLife and MetLife,
Inc. completed the Separation through a distribution of 80.8% of MetLife, Inc.’s interest in Brighthouse Financial, Inc., to holders
of MetLife, Inc.’s common stock and retained the remaining 19.2%. As a result, Brighthouse Financial, Inc. is now an independent,
publicly traded company on the Nasdaq Stock Market under the symbol “BHF.”
Basis of Presentation
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America (“GAAP”) requires management to adopt accounting policies and make estimates and assumptions that affect amounts
reported on the consolidated financial statements. In applying these policies and estimates, management makes subjective and
complex judgments that frequently require assumptions about matters that are inherently uncertain. Many of these policies,
estimates and related judgments are common in the insurance and financial services industries; others are specific to the
Company’s business and operations. Actual results could differ from these estimates.
Consolidation
The financial statements presented in this annual report for periods on or after the Separation are presented on a consolidated
basis and include the financial position, results of operations and cash flows of the Company. The accompanying consolidated
financial statements include the accounts of Brighthouse Financial, Inc. and its subsidiaries, as well as partnerships and joint
ventures in which the Company has control, and variable interest entities (“VIEs”) for which the Company is the primary
beneficiary. Intercompany accounts and transactions have been eliminated.
The Company uses the equity method of accounting for equity securities when it has significant influence or at least 20%
interest and for real estate joint ventures and other limited partnership interests (“investee”) when it has more than a minor
ownership interest or more than a minor influence over the investee’s operations. The Company generally recognizes its share
of the investee’s earnings on a three-month lag in instances where the investee’s financial information is not sufficiently timely
or when the investee’s reporting period differs from the Company’s reporting period. The Company uses the cost method of
accounting for investments in which it has virtually no influence over the investee’s operations.
173
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Combination
The financial statements for the periods prior to the Separation are presented on a combined basis and reflect the historical
combined financial position, results of operations and cash flows. The combined balance sheets include the attribution of certain
assets and liabilities that were historically held at the MetLife corporate level but which were specifically identifiable or
attributable to the Company. Similarly, certain assets attributable to shared services managed at the MetLife corporate level were
excluded from the combined balance sheets. The combined statements of operations reflect certain corporate expenses allocated
to the Company by MetLife for certain corporate functions and for shared services provided by MetLife. These expenses were
allocated to the Company based on direct usage or benefit where specifically identifiable, with the remainder allocated based
upon other reasonable allocation measures. The Company considers the expense methodology and results to be reasonable for
all periods presented. See Note 16 for further information on expenses allocated by MetLife.
The Company previously recorded affiliated transactions with certain MetLife subsidiaries which are not included in the
combined financial statements of the Company.
The income tax amounts in these combined financial statements have been calculated based on a separate return methodology
and presented as if each company was a separate taxpayer in its respective jurisdiction.
The historical financial results in the combined financial statements presented may not be indicative of the results that would
have been achieved by the Company had it operated as a separate, stand-alone entity prior to the Separation. The combined
financial statements presented do not reflect any changes that may occur in the Company’s financing and operations in connection
with or as a result of the Separation. Management believes that the combined financial statements include all adjustments
necessary for a fair presentation of the business.
Reclassifications
Certain amounts in the prior years’ combined financial statements and related footnotes thereto have been reclassified to
conform with the current year presentation as discussed throughout the Notes to the Consolidated and Combined Financial
Statements.
Summary of Significant Accounting Policies
The following are the Company’s significant accounting policies with references to notes providing additional information
on such policies and critical accounting estimates relating to such policies.
Accounting Policy
Insurance
Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles
Reinsurance
Investments
Derivatives
Fair Value
Income Tax
Litigation Contingencies
Insurance
Note
3
4
5
6
7
8
13
15
Future Policy Benefit Liabilities and Policyholder Account Balances
The Company establishes liabilities for future amounts payable under insurance policies. Insurance liabilities are
generally calculated as the present value of future expected benefits to be paid, reduced by the present value of future
expected premiums. Such liabilities are established based on methods and underlying assumptions that are in accordance
with GAAP and applicable actuarial standards. The principal assumptions used in the establishment of liabilities for future
policy benefits are mortality, morbidity, benefit utilization and withdrawals, policy lapse, retirement, disability incidence,
disability terminations, investment returns, inflation, expenses and other contingent events as appropriate to the respective
product type.
174
Notes to the Consolidated and Combined Financial Statements (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Brighthouse Financial, Inc.
For traditional long duration insurance contracts (term and whole-life insurance and immediate annuities), assumptions
are determined at issuance of the policy and remain “locked-in” unless a premium deficiency exists. A premium deficiency
exists when the liability for future policy benefits plus the present value of expected future gross premiums are less than
expected future benefits and expenses (based on current assumptions). When a premium deficiency exists, the Company
will reduce any deferred acquisition costs and may also establish an additional liability to eliminate the deficiency. To assess
whether a premium deficiency exists, the Company groups insurance contracts based on the manner acquired, serviced and
the measurement of profitability. In applying the profitability criteria, groupings are limited by segment.
Liabilities for universal life insurance with secondary guarantees are determined by estimating the expected value of
death benefits payable when the account balance is projected to be zero and recognizing those benefits ratably over the
contract period based on total expected assessments. The assumptions used in estimating the secondary guarantee liabilities
are consistent with those used for amortizing deferred policy acquisition costs (“DAC”), and are reviewed and updated at
least annually. The assumptions of investment performance and volatility for variable products are consistent with historical
experience of the appropriate underlying equity indices, such as the Standard & Poor’s Global Ratings (“S&P”) 500 Index.
The benefits used in calculating the liabilities are based on the average benefits payable over a range of scenarios.
In certain cases, the liability for an insurance product may be sufficient in the aggregate, but the pattern of future
earnings may result in profits followed by losses. In these situations, the Company may establish an additional liability to
offset the losses that are expected to be recognized in later years.
Policyholder account balances relate to customer deposits on universal life insurance and fixed and variable deferred
annuity contracts and are equal to the sum of deposits, plus interest credited, less charges and withdrawals.
See “— Variable Annuity Guarantees” for additional information on the Company’s variable annuity guarantee features
that are accounted for as insurance liabilities and recorded in future policy benefits, as well as the guarantee features that
are accounted for at fair value as embedded derivatives and recorded in policyholder account balances.
Recognition of Insurance Revenues and Deposits
Premiums related to traditional life insurance and annuity contracts with life contingencies are recognized as revenues
when due from policyholders. When premiums are due over a significantly shorter period than the period over which
policyholder benefits are incurred, any excess profit is deferred and recognized into earnings in proportion to insurance in-
force or, for annuities, the amount of expected future policy benefit payments.
Deposits related to universal life insurance, fixed and variable deferred annuity contracts and investment-type products
are credited to policyholder account balances. Revenues from such contracts consist of asset-based investment management
fees, mortality charges, risk charges, policy administration fees and surrender charges. These fees are recognized when
assessed to the contract holder and are included in universal life and investment-type product policy fees on the statements
of operations.
Premiums, policy fees, policyholder benefits and expenses are presented net of reinsurance.
Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles
The Company incurs significant costs in connection with acquiring new and renewal insurance business. Costs that are
related directly to the successful acquisition or renewal of insurance contracts are capitalized as DAC. Such costs include:
•
•
incremental direct costs of contract acquisition, such as commissions;
the portion of an employee’s total compensation and benefits related to time spent selling, underwriting or processing
the issuance of new and renewal insurance business only with respect to actual policies acquired or renewed; and
•
other essential direct costs that would not have been incurred had a policy not been acquired or renewed.
All other acquisition-related costs, including those related to general advertising and solicitation, market research, agent
training, product development, unsuccessful sales and underwriting efforts, as well as all indirect costs, are expensed as
incurred.
175
Notes to the Consolidated and Combined Financial Statements (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Brighthouse Financial, Inc.
Value of business acquired (“VOBA”) is an intangible asset resulting from a business combination that represents the
excess of book value over the estimated fair value of acquired insurance, annuity, and investment-type contracts in-force as
of the acquisition date. The estimated fair value of the acquired liabilities is based on projections, by each block of business,
of future policy and contract charges, premiums, mortality and morbidity, separate account performance, surrenders, operating
expenses, investment returns, nonperformance risk adjustment and other factors. Actual experience on the purchased business
may vary from these projections.
DAC and VOBA on traditional long-duration insurance contracts is amortized based on actual and expected future gross
premiums while DAC and VOBA on fixed and variable universal life insurance and deferred annuities is amortized based on
estimated gross profits. The recoverability of DAC and VOBA is dependent upon the future profitability of the related business.
DAC and VOBA are aggregated on the financial statements for reporting purposes.
See Note 4 for additional information on DAC and VOBA amortization.
The Company also has deferred sales inducements (“DSI”) and value of distribution agreements (“VODA”) which are
included in other assets. The Company defers sales inducements and amortizes them over the life of the policy using the same
methodology and assumptions used to amortize DAC. The amortization of DSI is included in policyholder benefits and claims.
VODA represents the present value of expected future profits associated with the expected future business derived from the
distribution agreements acquired as part of a business combination. The VODA associated with past business combinations
is amortized over useful lives ranging from 10 to 40 years and such amortization is included in other expenses. Each year, or
more frequently if circumstances indicate a possible impairment exists, the Company reviews DSI and VODA to determine
whether the assets are impaired.
Reinsurance
For each of its reinsurance agreements, the Company determines whether the agreement provides indemnification against
loss or liability relating to insurance risk in accordance with applicable accounting standards. Cessions under reinsurance
agreements do not discharge the Company’s obligations as the primary insurer. The Company reviews all contractual features,
including those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely
reimbursement of claims.
For reinsurance of existing in-force blocks of long-duration contracts that transfer significant insurance risk, the difference,
if any, between the amounts paid (received), and the liabilities ceded (assumed) related to the underlying contracts is considered
the net cost of reinsurance at the inception of the reinsurance agreement. The net cost of reinsurance is recorded as an adjustment
to DAC when there is a gain at inception on the ceding entity and to other liabilities when there is a loss at inception. The net
cost of reinsurance is recognized as a component of other expenses when there is a gain at inception and as policyholder
benefits and claims when there is a loss and is subsequently amortized on a basis consistent with the methodology used for
amortizing DAC related to the underlying reinsured contracts. Subsequent amounts paid (received) on the reinsurance of in-
force blocks, as well as amounts paid (received) related to new business, are recorded as ceded (assumed) premiums and ceded
(assumed) premiums, reinsurance and other receivables (future policy benefits) are established.
Amounts currently recoverable under reinsurance agreements are included in premiums, reinsurance and other receivables
and amounts currently payable are included in other liabilities. Assets and liabilities relating to reinsurance agreements with
the same reinsurer may be recorded net on the balance sheet, if a right of offset exists within the reinsurance agreement. If
reinsurers do not meet their obligations to the Company under the terms of the reinsurance agreements, reinsurance recoverable
balances could become uncollectible. In such instances, reinsurance recoverable balances are stated net of allowances for
uncollectible reinsurance.
The funds withheld liability represents amounts withheld by the Company in accordance with the terms of the reinsurance
agreements. Under certain reinsurance agreements, the Company withholds the funds rather than transferring the underlying
investments and, as a result, records funds withheld liability within other liabilities. The Company recognizes interest on funds
withheld, included in other expenses, at rates defined by the terms of the agreement which may be contractually specified or
directly related to the investment portfolio.
176
Notes to the Consolidated and Combined Financial Statements (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Brighthouse Financial, Inc.
Premiums, fees and policyholder benefits and claims include amounts assumed under reinsurance agreements and are
net of reinsurance ceded. Amounts received from reinsurers for policy administration are reported in other revenues. With
respect to guaranteed minimum income benefits (“GMIBs”), a portion of the directly written GMIBs are accounted for as
insurance liabilities, but the associated reinsurance agreements contain embedded derivatives. These embedded derivatives
are included in premiums, reinsurance and other receivables with changes in estimated fair value reported in net derivative
gains (losses).
If the Company determines that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a
significant loss from insurance risk, the Company records the agreement using the deposit method of accounting. Deposits
received are included in other liabilities and deposits made are included within premiums, reinsurance and other receivables.
As amounts are paid or received, consistent with the underlying contracts, the deposit assets or liabilities are adjusted. Interest
on such deposits is recorded as other revenues or other expenses, as appropriate. Periodically, the Company evaluates the
adequacy of the expected payments or recoveries and adjusts the deposit asset or liability through other revenues or other
expenses, as appropriate. Certain previously assumed non-life contingent portion of guaranteed minimum withdrawal
benefits (“GMWBs”), guaranteed minimum accumulation benefits (“GMABs”) and GMIBs are also accounted for as
embedded derivatives with changes in estimated fair value reported in net derivative gains (losses).
Variable Annuity Guarantees
The Company issues directly and previously assumed from a former affiliate through reinsurance certain variable annuity
products with guaranteed minimum benefits that provide the policyholder a minimum return based on their initial deposit (the
“Benefit Base”) less withdrawals. In some cases, the Benefit Base may be increased by additional deposits, bonus amounts,
accruals or optional market value step-ups.
Certain of the Company’s variable annuity guarantee features are accounted for as insurance liabilities and recorded in
future policy benefits while others are accounted for at fair value as embedded derivatives and recorded in policyholder account
balances. Generally, a guarantee is accounted for as an insurance liability if the guarantee is paid only upon either (i) the
occurrence of a specific insurable event, or (ii) annuitization. Alternatively, a guarantee is accounted for as an embedded
derivative if a guarantee is paid without requiring (i) the occurrence of specific insurable event, or (ii) the policyholder to
annuitize, that is, the policyholder can receive the guarantee on a net basis. In certain cases, a guarantee may have elements
of both an insurance liability and an embedded derivative and in such cases the guarantee is split and accounted for under
both models. Further, changes in assumptions, principally involving behavior, can result in a change of expected future cash
outflows of a guarantee between portions accounted for as insurance liabilities and portions accounted for as embedded
derivatives.
Guarantees accounted for as insurance liabilities in future policy benefits include guaranteed minimum death
benefits (“GMDBs”), the life contingent portion of the GMWBs and the portion of the GMIBs that require annuitization, as
well as the life contingent portion of the expected annuitization when the policyholder is forced into an annuitization upon
depletion of their account value.
These insurance liabilities are accrued over the accumulation phase of the contract in proportion to actual and future
expected policy assessments based on the level of guaranteed minimum benefits generated using multiple scenarios of separate
account returns. The scenarios are based on best estimate assumptions consistent with those used to amortize DAC. When
current estimates of future benefits exceed those previously projected or when current estimates of future assessments are
lower than those previously projected, liabilities will increase, resulting in a current period charge to net income. The opposite
result occurs when the current estimates of future benefits are lower than those previously projected or when current estimates
of future assessments exceed those previously projected. At each reporting period, the actual amount of business remaining
in-force is updated, which impacts expected future assessments and the projection of estimated future benefits resulting in a
current period charge or increase to earnings. See Note 3 for additional details of guarantees accounted for as insurance
liabilities.
Guarantees accounted for as embedded derivatives in policyholder account balances include the non-life contingent
portion of GMWBs, GMABs, and for GMIBs the non-life contingent portion of the expected annuitization when the
policyholder is forced into an annuitization upon depletion of their account value, as well as the Guaranteed Principal Option.
177
Notes to the Consolidated and Combined Financial Statements (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Brighthouse Financial, Inc.
The estimated fair values of guarantees accounted for as embedded derivatives are determined based on the present value
of projected future benefits minus the present value of projected future fees. At policy inception, the Company attributes to
the embedded derivative a portion of the projected future guarantee fees to be collected from the policyholder equal to the
present value of projected future guaranteed benefits. Any additional fees represent “excess” fees and are reported in universal
life and investment-type product policy fees. In valuing the embedded derivative, the percentage of fees included in the fair
value measurement is locked-in at inception.
The projections of future benefits and future fees require capital market and actuarial assumptions including expectations
concerning policyholder behavior. A risk neutral valuation methodology is used to project the cash flows from the guarantees
under multiple capital market scenarios to determine an economic liability. The reported estimated fair value is then determined
by taking the present value of these risk-free generated cash flows using a discount rate that incorporates a spread over the
risk-free rate to reflect the Company’s nonperformance risk and adding a risk margin. For more information on the determination
of estimated fair value. See Note 8.
Investments
Net Investment Income and Net Investment Gains (Losses)
Income from investments is reported within net investment income, unless otherwise stated herein. Gains and losses
on sales of investments, impairment losses and changes in valuation allowances are reported within net investment gains
(losses), unless otherwise stated herein.
Fixed Maturity and Equity Securities
The Company’s fixed maturity and equity securities are classified as available-for-sale (“AFS”) and are reported at
their estimated fair value. Unrealized investment gains and losses on these securities are recorded as a separate component
of other comprehensive income (loss) (“OCI”), net of policy-related amounts and deferred income taxes. All security
transactions are recorded on a trade date basis. Investment gains and losses on sales are determined on a specific identification
basis.
Interest income and prepayment fees are recognized when earned. Interest income is recognized using an effective
yield method giving effect to amortization of premiums and accretion of discounts and is based on the estimated economic
life of the securities, which for residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities
(“CMBS”) and asset-backed securities (“ABS”) (collectively, “Structured Securities”) considers the estimated timing and
amount of prepayments of the underlying loans. The amortization of premium and accretion of discount of fixed maturity
securities also takes into consideration call and maturity dates.
Amortization of premium and accretion of discount on Structured Securities considers the estimated timing and amount
of prepayments of the underlying loans. Actual prepayment experience is periodically reviewed and effective yields are
recalculated when differences arise between the originally anticipated and the actual prepayments received and currently
anticipated. Prepayment assumptions for Structured Securities are estimated using inputs obtained from third-party
specialists and based on management’s knowledge of the current market. For credit-sensitive Structured Securities and
certain prepayment-sensitive securities, the effective yield is recalculated on a prospective basis. For all other Structured
Securities, the effective yield is recalculated on a retrospective basis.
The Company periodically evaluates fixed maturity and equity securities for impairment. The assessment of whether
impairments have occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in
estimated fair value, as well as an analysis of the gross unrealized losses by severity and/or age. See Note 6 “—Evaluation
of AFS Securities for OTTI and Evaluating Temporarily Impaired AFS Securities.”
For fixed maturity securities in an unrealized loss position, an other-than-temporary impairment (“OTTI”) is recognized
in earnings when it is anticipated that the amortized cost will not be recovered. When either: (i) the Company has the intent
to sell the security; or (ii) it is more likely than not that the Company will be required to sell the security before recovery,
the OTTI recognized in earnings is the entire difference between the security’s amortized cost and estimated fair value. If
neither of these conditions exists, the difference between the amortized cost of the security and the present value of projected
future cash flows expected to be collected is recognized as an OTTI in earnings (“credit loss”). If the estimated fair value
is less than the present value of projected future cash flows expected to be collected, this portion of OTTI related to other-
than-credit factors (“noncredit loss”) is recorded in OCI.
178
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Mortgage Loans
Mortgage loans are stated at unpaid principal balance, adjusted for any unamortized premium or discount, and any
deferred fees or expenses, and are net of valuation allowances. Interest income and prepayment fees are recognized when
earned. Interest income is recognized using an effective yield method giving effect to amortization of premiums and accretion
of discounts. See Note 6 for information on impairments on mortgage loans.
Also included in mortgage loans are commercial mortgage loans held by consolidated securitization entities (“CSEs”)
for which the fair value option (“FVO”) was elected, which are stated at estimated fair value. Changes in estimated fair
value are recognized in net investment gains (losses) for commercial mortgage loans held by CSEs.
Policy Loans
Policy loans are stated at unpaid principal balances. Interest income is recorded as earned using the contractual interest
rate. Generally, accrued interest is capitalized on the policy’s anniversary date. Any unpaid principal and accrued interest
is deducted from the cash surrender value or the death benefit prior to settlement of the insurance policy.
Real Estate Joint Ventures and Other Limited Partnership Interests
The Company uses the equity method of accounting for investments when it has more than a minor ownership interest
or more than a minor influence over the investee’s operations; while the cost method is used when the Company has virtually
no influence over the investee’s operations. The Company generally recognizes its share of the equity method investee’s
earnings on a three-month lag in instances where the investee’s financial information is not sufficiently timely or when the
investee’s reporting period differs from the Company’s reporting period; while distributions on cost method investments
are recognized as earned or received.
The Company routinely evaluates such investments for impairment. For equity method investees, the Company
considers financial and other information provided by the investee, other known information and inherent risks in the
underlying investments, as well as future capital commitments, in determining whether an impairment has occurred. The
Company considers its cost method investments for impairment when the carrying value of such investments exceeds the
net asset value (“NAV”). The Company takes into consideration the severity and duration of this excess when determining
whether the cost method investment is impaired.
Short-term Investments
Short-term investments include securities and other investments with remaining maturities of one year or less, but
greater than three months, at the time of purchase and are stated at estimated fair value or amortized cost, which approximates
estimated fair value. Short-term investments also include investments in affiliated money market pools.
Other Invested Assets
Other invested assets consist principally of freestanding derivatives with positive estimated fair values which are
described in “—Derivatives” below.
Securities Lending Program
Securities lending transactions, whereby blocks of securities are loaned to third parties, primarily brokerage firms and
commercial banks, are treated as financing arrangements and the associated liability is recorded at the amount of cash
received. Income and expenses associated with securities lending transactions are reported as investment income and
investment expense, respectively, within net investment income.
The Company obtains collateral at the inception of the loan, usually cash, in an amount generally equal to 102% of the
estimated fair value of the securities loaned, and maintains it at a level greater than or equal to 100% for the duration of the
loan. The Company monitors the estimated fair value of the securities loaned on a daily basis and additional collateral is
obtained as necessary throughout the duration of the loan. Securities loaned under such transactions may be sold or repledged
by the transferee. The Company is liable to return to the counterparties the cash collateral received.
179
Notes to the Consolidated and Combined Financial Statements (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Brighthouse Financial, Inc.
Derivatives
Freestanding Derivatives
Freestanding derivatives are carried on the Company’s balance sheet either as assets within other invested assets or as
liabilities within other liabilities at estimated fair value. The Company does not offset the estimated fair value amounts
recognized for derivatives executed with the same counterparty under the same master netting agreement.
Accruals on derivatives are generally recorded in accrued investment income or within other liabilities. However,
accruals that are not scheduled to settle within one year are included with the derivatives carrying value in other invested
assets or other liabilities.
If a derivative is not designated as an accounting hedge or its use in managing risk does not qualify for hedge accounting,
changes in the estimated fair value of the derivative are reported in net derivative gains (losses) except for economic hedges
of variable annuity guarantees which are presented in future policy benefits and claims and economic hedges of equity
method investments in joint ventures which are presented in net investment income.
Hedge Accounting
The Company primarily designates derivatives as a hedge of a forecasted transaction or a variability of cash flows to
be received or paid related to a recognized asset or liability (cash flow hedge). When a derivative is designated as a cash
flow hedge and is determined to be highly effective, changes in fair value are recorded in OCI and subsequently reclassified
into the statement of operations when the Company’s earnings are affected by the variability in cash flows of the hedged
item. The Company also designates derivatives as a hedge of the estimated fair value of a recognized asset or liabilities (fair
value hedge). When a derivative is designated as fair value hedge and is determined to be highly effective, changes in fair
value are recorded in net derivative gains (losses), consistent with the change in estimated fair value of the hedged item
attributable to the designated risk being hedged.
To qualify for hedge accounting, at the inception of the hedging relationship, the Company formally documents its
risk management objective and strategy for undertaking the hedging transaction, as well as its designation of the hedge. In
its hedge documentation, the Company sets forth how the hedging instrument is expected to hedge the designated risks
related to the hedged item and sets forth the method that will be used to retrospectively and prospectively assess the hedging
instrument’s effectiveness and the method that will be used to measure ineffectiveness. A derivative designated as a hedging
instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness
is formally assessed at inception and at least quarterly throughout the life of the designated hedging relationship.
The Company discontinues hedge accounting prospectively when: (i) it is determined that the derivative is no longer
highly effective in offsetting changes in the estimated fair value or cash flows of a hedged item; (ii) the derivative expires,
is sold, terminated, or exercised; (iii) it is no longer probable that the hedged forecasted transaction will occur; or (iv) the
derivative is de-designated as a hedging instrument.
When hedge accounting is discontinued because it is determined that the derivative is not highly effective in offsetting
changes in the estimated fair value or cash flows of a hedged item, the derivative continues to be carried on the balance
sheet at its estimated fair value, with changes in estimated fair value recognized in net derivative gains (losses). The carrying
value of the hedged recognized asset or liability under a fair value hedge is no longer adjusted for changes in its estimated
fair value due to the hedged risk, and the cumulative adjustment to its carrying value is amortized into income over the
remaining life of the hedged item. Provided the hedged forecasted transaction is still probable of occurrence, the changes
in estimated fair value of derivatives recorded in OCI related to discontinued cash flow hedges are released into the statement
of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item.
In all other situations in which hedge accounting is discontinued, the derivative is carried at its estimated fair value on
the balance sheet, with changes in its estimated fair value recognized in the current period as net derivative gains (losses).
180
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Embedded Derivatives
The Company sells variable annuities and issues certain insurance products and investment contracts and is a party to
certain reinsurance agreements that have embedded derivatives. The Company assesses each identified embedded derivative
to determine whether it is required to be bifurcated. The embedded derivative is bifurcated from the host contract and
accounted for as a freestanding derivative if:
•
•
the combined instrument is not accounted for in its entirety at estimated fair value with changes in estimated fair value
recorded in earnings;
the terms of the embedded derivative are not clearly and closely related to the economic characteristics of the host
contract; and
•
a separate instrument with the same terms as the embedded derivative would qualify as a derivative instrument.
Such embedded derivatives are carried on the balance sheet at estimated fair value with the host contract and changes
in their estimated fair value are generally reported in net derivative gains (losses), except for those in policyholder benefits
and claims related to ceded reinsurance of GMIB.
See “— Variable Annuity Guarantees” for additional information on the accounting policy for embedded derivatives
bifurcated from variable annuity host contracts.
Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. In most cases, the exit price and the transaction (or entry) price will be the same at initial recognition.
In determining the estimated fair value of the Company’s investments, fair values are based on unadjusted quoted prices
for identical investments in active markets that are readily and regularly obtainable. When such quoted prices are not available,
fair values are based on quoted prices in markets that are not active, quoted prices for similar but not identical investments,
or other observable inputs. If these inputs are not available, or observable inputs are not determinable, unobservable inputs
and/or adjustments to observable inputs requiring management judgment are used to determine the estimated fair value of
investments.
181
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Separate Accounts
Separate accounts underlying the Company’s variable life and annuity contracts are reported at fair value. Assets supporting
the contract liabilities are legally insulated from the Company’s general account liabilities. Investments in these separate
accounts are directed by the contract holder and all investment performance, net of contract fees and assessments, is passed
through to the contract holder. Investment performance and the corresponding amounts credited to contract holders of such
separate accounts are offset within the same line on the statements of operations.
Separate accounts that do not pass all investment performance to the contract holder, including those underlying the index-
linked annuities, are combined on a line-by-line basis with the Company’s general account assets, liabilities, revenues and
expenses. The accounting for investments in these separate accounts is consistent with the methodologies described herein
for similar financial instruments held within the general account.
The Company receives asset-based distribution and service fees from mutual funds available to the variable life and
annuity contract holders. These fees are recognized in the period in which the related services are performed and are included
in other revenues in the statement of operations.
Income Tax
Income taxes as presented herein attribute current and deferred income taxes of MetLife, Inc., for periods up until the
Separation, to Brighthouse Financial, Inc. and its subsidiaries in a manner that is systematic, rational and consistent with the
asset and liability method prescribed by the Financial Accounting Standards Board (“FASB”) guidance Accounting Standards
Codification 740 — Income Taxes (“ASC 740”). The Company’s income tax provision was prepared following the modified
separate return method. The modified separate return method applies ASC 740 to the standalone financial statements of each
member of the consolidated group as if the group member were a separate taxpayer and a standalone enterprise, after providing
benefits for losses. The Company’s accounting for income taxes represents management’s best estimate of various events and
transactions.
Deferred tax assets and liabilities resulting from temporary differences between the financial reporting and tax bases of
assets and liabilities are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the
years the temporary differences are expected to reverse.
The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryback or
carryforward periods under the tax law in the applicable tax jurisdiction. Valuation allowances are established when
management determines, based on available information, that it is more likely than not that deferred income tax assets will
not be realized. Significant judgment is required in determining whether valuation allowances should be established, as well
as the amount of such allowances. When making such determination, the Company considers many factors, including:
•
•
•
•
•
•
•
the nature, frequency, and amount of cumulative financial reporting income and losses in recent years;
the jurisdiction in which the deferred tax asset was generated;
the length of time that carryforward can be utilized in the various taxing jurisdiction;
future taxable income exclusive of reversing temporary differences and carryforwards;
future reversals of existing taxable temporary differences;
taxable income in prior carryback years; and
tax planning strategies.
The Company may be required to change its provision for income taxes when estimates used in determining valuation
allowances on deferred tax assets significantly change or when receipt of new information indicates the need for adjustment
in valuation allowances. Additionally, the effect of changes in tax laws, tax regulations, or interpretations of such laws or
regulations, is recognized in net income tax expense (benefit) in the period of change.
182
Notes to the Consolidated and Combined Financial Statements (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Brighthouse Financial, Inc.
The Company determines whether it is more likely than not that a tax position will be sustained upon examination by the
appropriate taxing authorities before any part of the benefit can be recorded on the financial statements. A tax position is
measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Unrecognized tax
benefits due to tax uncertainties that do not meet the threshold are included within other liabilities and are charged to earnings
in the period that such determination is made.
The Company classifies interest recognized as interest expense and penalties recognized as a component of income tax
expense.
On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (“the Tax Act”) into law. The Tax Act reduced
the corporate tax rate to 21%, reduced interest expense deductibility, increased capitalization amounts for deferred acquisition
costs, eliminated the corporate alternative minimum tax, provided for determining reserve deductions as 92.81% of statutory
reserves, and reduced the dividend received deduction. Most of the changes in the Tax Act are effective as of January 1, 2018.
The reduction in the corporate rate required a one-time remeasurement of certain deferred tax items as of December 31,
2017. For the estimated impact of the Tax Act on the financial statements, including the estimated impact resulting from the
remeasurement of deferred tax assets and liabilities. See Note 13 for more information. Actual results may materially differ
from the Company’s current estimate due to, among other things, further guidance that may be issued by U.S. tax authorities
or regulatory bodies and/or changes in interpretations and assumptions preliminarily made. The Company will continue to
analyze the Tax Act to finalize its financial statement impact.
In December 2017, the SEC issued Staff Accounting Bulletin (“SAB”) 118, addressing the application of GAAP in
situations when a registrant does not have necessary information available to complete the accounting for certain income tax
effects of the Tax Act. SAB 118 provides guidance for registrants under three scenarios: (1) the measurement of certain income
tax effects is complete, (2) the measurement of certain income tax effects can be reasonably estimated, and (3) the measurement
of certain income tax effects cannot be reasonably estimated. SAB 118 provides that the measurement period is complete
when a company’s accounting is complete. The measurement period cannot extend beyond one year from the enactment date.
SAB 118 acknowledges that a company may be able to complete the accounting for some provisions earlier than others. As
such, it may need to apply all three scenarios in determining the accounting for the Tax Act based on information that is
available. The Company has not fully completed its accounting for the tax effects of the Tax Act, and thus certain items relating
to accounting for the Tax Act are provisional, including accounting for reserves. However, it has recorded the effects of the
Tax Act as reasonable estimates due to the need for further analysis of the provisions within the Tax Act and collection,
preparation and analysis of relevant data necessary to complete the accounting.
The corporate rate reduction also left certain tax effects, which were originally recorded using the previous corporate
rate, stranded in accumulated other comprehensive income (“AOCI”). The Company adopted new accounting guidance as of
December 31, 2017 that allowed the Company to reclassify the stranded tax effects from AOCI into retained earnings. The
Company elected to reclassify amounts based on the difference between the previously enacted federal corporate tax rate and
the newly enacted rate as applied on an aggregate basis. See Note 13 for more information.
Litigation Contingencies
The Company is a party to a number of legal actions and is involved in a number of regulatory investigations. Given the
inherent unpredictability of these matters, it is difficult to estimate the impact on the Company’s financial position. Liabilities
are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Legal
costs are recognized as incurred. On a quarterly and annual basis, the Company reviews relevant information with respect to
liabilities for litigation, regulatory investigations and litigation-related contingencies to be reflected on the Company’s financial
statements.
Other Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid securities and other investments purchased with an original or remaining
maturity of three months or less at the date of purchase to be cash equivalents. Cash equivalents are stated at amortized
cost, which approximates estimated fair value.
183
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Employee Benefit Plans
Brighthouse Services, LLC (“Brighthouse Services”), an affiliate, sponsors qualified and nonqualified defined
contribution plans, and NELICO sponsors certain frozen defined benefit pension and postretirement plans. NELICO
recognizes the funded status of each of its pension plans, measured as the difference between the fair value of plan assets
and the benefit obligation, which is the projected benefit obligation (“PBO”) for pension benefits in other assets or other
liabilities.
Actuarial gains and losses result from differences between the actual experience and the assumed experience on plan
assets or PBO during a particular period and are recorded in AOCI. To the extent such gains and losses exceed 10% of the
greater of the PBO or the estimated fair value of plan assets, the excess is amortized into net periodic benefit costs over the
average projected future lifetime of all plan participants or projected future working lifetime, as appropriate. Prior service
costs (credit) are recognized in AOCI at the time of the amendment and then amortized into net periodic benefit costs over
the average projected future lifetime of all plan participants or projected future working lifetime, as appropriate.
Net periodic benefit costs are determined using management estimates and actuarial assumptions; and are comprised
of service cost, interest cost, expected return on plan assets, amortization of net actuarial (gains) losses, settlement and
curtailment costs, and amortization of prior service costs (credit).
Through December 31, 2016, Metropolitan Life Insurance Company (“MLIC”), a former affiliate, provided and the
Company contributed to defined benefit pension plans for its employees and retirees. The Company accounts for these plans
as multiemployer benefit plans and as a result the assets, obligations and other comprehensive gains and losses of these
benefit plans are not included on the consolidated balance sheet. Within its consolidated statement of operations, the Company
has included expenses associated with its participants in these plans. These plans also include participants from other affiliates
of MLIC. The Company’s participation in these plans ceased December 31, 2016.
Adoption of New Accounting Pronouncements
Changes to GAAP are established by the FASB in the form of accounting standards updates (“ASU”) to the FASB Accounting
Standards Codification. The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed
and determined to be either not applicable or are not expected to have a material impact on the Company’s consolidated financial
statements. The following table provides a description of new ASUs issued by the FASB and the expected impact of the adoption
on the Company’s consolidated financial statements.
184
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Except as noted below, the ASUs adopted by the Company during 2017 did not have a material impact on its consolidated
financial statements.
Standard
ASU 2018-02, Reporting
Comprehensive Income
(Topic 220)-
Reclassification of
Certain Tax Effects from
Accumulated Other
Comprehensive Income
Description
The amendments to Topic 220 provide an option to
reclassify stranded tax effects within AOCI to retained
earnings in each period in which the effect of the change
in the U.S. federal corporate income tax rate in the Tax
Act of 2017 (or portion thereof) is recorded.
Effective Date
January 1, 2019
applied in the
period of adoption
(with early
adoption
permitted)
Impact on Financial Statements
The Company elected to early adopt
the ASU as of December 31, 2017
and reclassified $301 million from
AOCI into retained earnings related
to the impact of the Tax Act of 2017.
See Notes 10 and 13.
ASU 2017-12,
Derivatives and Hedging
(Topic 815): Targeted
Improvements to
Accounting for Hedging
Activities
The amendments to Topic 815 (i) refine and expand the
criteria for achieving hedge accounting on certain
hedging strategies, (ii) require the earnings effect of the
hedging instrument be presented in the same line item
in which the earnings effect of the hedged item is
reported, and (iii) eliminate the requirement to
separately measure and report hedge ineffectiveness.
January 1, 2019
using modified
retrospective
method (with
early adoption
permitted)
The Company does not expect a
material impact on its financial
statements from adoption of the new
guidance.
ASU 2016-13, Financial
Instruments - Credit
Losses (Topic 326):
Measurement of Credit
Losses on Financial
Instruments
ASU 2016-02, Leases -
Topic 842
ASU 2016-01, Financial
Instruments - Overall:
Recognition and
Measurement of
Financial Assets and
Financial Liabilities
for certain
The amendments to Topic 326 replace the incurred loss
impairment methodology
financial
instruments with one that reflects expected credit losses
based on historical
information, current
loss
conditions, and reasonable and supportable forecasts.
The new guidance also requires that an OTTI on a debt
security will be recognized as an allowance going
forward, such that improvements in expected future
cash flows after an impairment will no longer be
reflected as a prospective yield adjustment through net
investment income, but rather a reversal of the previous
impairment
realized
recognized
investment gains and losses.
through
and
January 1, 2020
using the modified
retrospective
method (with
early adoption
permitted
beginning January
1, 2019)
The new guidance will require a lessee to recognize
assets and liabilities for leases with lease terms of more
than 12 months. Leases would be classified as finance
or operating leases and both types of leases will be
recognized on the balance sheet. Lessor accounting
will remain largely unchanged from current guidance
except for certain targeted changes. The amendments
also
require new qualitative and quantitative
disclosures.
January 1, 2019
using the modified
retrospective
method (with
early adoption
permitted)
to (i)
The new guidance changes the current accounting
the classification and
guidance related
measurement of certain equity investments, (ii) the
presentation of changes in the fair value of financial
liabilities measured under the FVO that are due to
instrument-specific credit risk, and (iii) certain
disclosures associated with the fair value of financial
instruments. Additionally, there will no longer be a
requirement to assess equity securities for impairment
since such securities will be measured at fair value
through net income.
January 1, 2018
using the modified
retrospective
method
185
is
the
impact of
currently
The Company
evaluating
this
guidance on its financial statements.
The Company expects the most
significant impacts to be earlier
recognition of
impairments on
mortgage loan investments.
is
the
impact of
currently
The Company
evaluating
this
guidance on its financial statements,
with implementation efforts focused
on the review of its existing lease
contracts, as well as identification of
other contracts that may fall under
the scope of the new guidance.
equity
securities
Effective January 1, 2018
the
Company will carry available-for-
sale
and
partnerships and
joint ventures
accounted for under the cost method
at fair value with changes in fair
value recognized in net income. The
Company will reclassify unrealized
gains related to equity securities of
$19 million from AOCI to opening
retained earnings. Additionally, the
Company will adjust the carrying
value of partnerships and joint
ventures, previously accounted for
under the cost method, from cost to
fair value, resulting in a $9 million
increase to retained earnings.
Notes to the Consolidated and Combined Financial Statements (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Brighthouse Financial, Inc.
Standard
ASU 2014-09 Revenue
from Contracts with
Customers (Topic 606)
Description
For those contracts that are impacted, the guidance will
require an entity to recognize revenue upon the transfer
of promised goods or services to customers in an
amount that reflects the consideration to which the
entity expects to be entitled, in exchange for those
goods or services.
Effective Date
January 1, 2018
using the modified
retrospective
method
Impact on Financial Statements
No impact on the Company’s
financial statements.
Other
Effective January 3, 2017, the Chicago Mercantile Exchange (“CME”) amended its rulebook, resulting in the characterization
of variation margin transfers as settlement payments, as opposed to adjustments to collateral. These amendments impacted the
accounting treatment of the Company’s centrally cleared derivatives, for which the CME serves as the central clearing party.
As of the effective date, the application of the amended rulebook, reduced gross derivative assets by $206 million, gross derivative
liabilities by $927 million, accrued investment income by $30 million, collateral receivables recorded within premiums,
reinsurance and other receivables of $765 million, and collateral payables recorded within payables for collateral under securities
loaned and other transactions of $74 million.
2. Segment Information
The Company is organized into three segments: Annuities; Life; and Run-off. In addition, the Company reports certain of
its results of operations in Corporate & Other.
Annuities
The Annuities segment offers a variety of variable, fixed, index-linked and income annuities designed to address contract
holders’ needs for protected wealth accumulation on a tax-deferred basis, wealth transfer and income security.
Life
The Life segment offers insurance products and services, including term, whole, universal and variable life products
designed to address policyholders’ needs for financial security and protected wealth transfer, which may be provided on a tax-
advantaged basis.
Run-off
The Run-off segment consists of products no longer actively sold and which are separately managed, including structured
settlements, pension risk transfer contracts, certain company-owned life insurance policies, bank-owned life insurance policies,
funding agreements and universal life with secondary guarantees (“ULSG”).
Corporate & Other
Corporate & Other contains the excess capital not allocated to the segments and interest expense related to the majority
of the Company’s outstanding debt, as well as expenses associated with certain legal proceedings and income tax audit issues.
Corporate & Other also includes the elimination of intersegment amounts, long term care and workers compensation business
reinsured through 100% quota share reinsurance agreements, and term life insurance sold direct to consumers, which is no
longer being offered for new sales.
Financial Measures and Segment Accounting Policies
Adjusted earnings is a financial measure used by management to evaluate performance, allocate resources and facilitate
comparisons to industry results. Consistent with GAAP guidance for segment reporting, adjusted earnings is also used to measure
segment performance. The Company believes the presentation of adjusted earnings, as the Company measures it for management
purposes, enhances the understanding of its performance by the investor community. Adjusted earnings should not be viewed
as a substitute for net income (loss).
186
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
2. Segment Information (continued)
Adjusted earnings, which may be positive or negative, focuses on the Company’s primary businesses principally by excluding
the impact of market volatility, which could distort trends, as well as businesses that have been or will be sold or exited by the
Company, referred to as divested businesses.
The following are the significant items excluded from total revenues in calculating adjusted earnings:
• Net investment gains (losses);
• Net derivative gains (losses) except earned income on derivatives and amortization of premium on derivatives that are
hedges of investments or that are used to replicate certain investments, but do not qualify for hedge accounting treatment;
and
• Amortization of unearned revenue related to net investment gains (losses) and net derivative gains (losses) and certain
variable annuity GMIB fees (“GMIB Fees”).
The following are the significant items excluded from total expenses in calculating adjusted earnings:
• Amounts associated with benefits and hedging costs related to GMIBs (“GMIB Costs”);
• Amounts associated with periodic crediting rate adjustments based on the total return of a contractually referenced pool
of assets and market value adjustments associated with surrenders or terminations of contracts (“Market Value
Adjustments”); and
• Amortization of DAC and VOBA related to: (i) net investment gains (losses), (ii) net derivative gains (losses), (iii)
GMIB Fees and GMIB Costs and (iv) Market Value Adjustments.
The tax impact of the adjustments mentioned above are calculated net of the U.S. statutory tax rate, which could differ from
the Company’s effective tax rate.
Set forth in the tables below is certain financial information with respect to the Company’s segments, as well as Corporate &
Other, for the years ended December 31, 2017, 2016 and 2015 and at December 31, 2017 and 2016. The segment accounting
policies are the same as those used to prepare the Company’s consolidated and combined financial statements, except for the
adjustments to calculate adjusted earnings described above. In addition, segment accounting policies include the historical
method of capital allocation described below.
The internal capital model is a risk capital model that reflects management’s judgment and view of required capital to
represent the measurement of the risk profile of the business, to meet the Company’s long term promises to clients, to service
long-term obligations and to support the credit ratings of the Company. It accounts for the unique and specific nature of the risks
inherent in the Company’s business. Management is responsible for the ongoing production and enhancement of the internal
capital model and reviewed its approach periodically to ensure that it remained consistent with emerging industry practice
standards.
Beginning in 2018, the Company will allocate equity to the segments based on its new statutory capital oriented internal
capital allocation model, which considers capital requirements and aligns with emerging standards and consistent risk principles.
In 2017 and prior years, segment net investment income was credited or charged based on the level of allocated equity;
however, changes in allocated equity do not impact the Company’s consolidated and combined net investment income, or net
income (loss). Going forward, investment portfolios will be funded to support both liabilities and allocated surplus of each
segment, requiring no allocated equity adjustments to net investment income. The impact to segment results is not expected to
be material. Net investment income is based upon the actual results of each segment’s specifically identifiable investment
portfolios adjusted for allocated equity. Other costs are allocated to each of the segments based upon: (i) a review of the nature
of such costs; (ii) time studies analyzing the amount of employee time incurred by each segment; and (iii) cost estimates included
in the Company’s product pricing.
187
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
2. Segment Information (continued)
Year Ended December 31, 2017
Pre-tax adjusted earnings
Provision for income tax expense (benefit)
Adjusted earnings
Adjustments for:
Net investment gains (losses)
Net derivative gains (losses)
Other adjustments to net income
Provision for income tax (expense) benefit
Net income (loss)
Interest revenue
Interest expense
Balance at December 31, 2017
Total assets
Separate account assets
Separate account liabilities
Operating Results
Annuities
Life
Run-off
Corporate
& Other
Total
1,386
369
1,017
$
$
(In millions)
7
(9)
16
$
$
147
43
104
$
$
57
$
1,597
274
(217)
677
920
(28)
(1,620)
(564)
914
(378)
$
1,277
$
342
$
1,399
— $
— $
23
$
$
192
132
Annuities
Life
Run-off
Corporate
& Other
Total
(In millions)
154,667
109,888
109,888
$
$
$
18,049
5,250
5,250
$
$
$
36,824
3,119
3,119
$
$
$
14,652
$
— $
— $
224,192
118,257
118,257
$
$
$
$
$
$
$
188
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
2. Segment Information (continued)
Year Ended December 31, 2016
Annuities
Life
Run-off
Corporate
& Other
Total
Operating Results
Pre-tax adjusted earnings
Provision for income tax expense (benefit)
Adjusted earnings
Adjustments for:
Net investment gains (losses)
Net derivative gains (losses)
Other adjustments to net income
Provision for income tax (expense) benefit
Net income (loss)
Interest revenue
Interest expense
Balance at December 31, 2016
Total assets
Separate account assets
Separate account liabilities
(In millions)
1,636
484
1,152
$
$
26
—
26
$
$
(834) $
39
$
(295)
(539) $
(8)
47
867
181
686
(78)
(5,851)
357
1,947
1,451
$
371
$
1,441
— $
— $
61
$
$
239
111
$
(2,939)
$
$
$
$
Annuities
Life
Run-off
Corporate
& Other
Total
(In millions)
$
$
$
152,146
104,855
104,855
$
$
$
17,150
4,704
4,704
$
$
$
40,007
3,484
3,484
$
$
$
12,627
$
— $
— $
221,930
113,043
113,043
Operating Results
Year Ended December 31, 2015
Annuities
Life
Run-off
Corporate
& Other
Total
Pre-tax adjusted earnings
Provision for income tax expense (benefit)
Adjusted earnings
Adjustments for:
Net investment gains (losses)
Net derivative gains (losses)
Other adjustments to net income
Provision for income tax (expense) benefit
Net income (loss)
Interest revenue
Interest expense
1,452
363
1,089
$
$
(In millions)
21
1
20
$
$
717
249
468
$
$
(77) $
(41)
(36)
2,113
572
1,541
7
(326)
(332)
229
$
1,119
1,281
$
371
$
1,551
— $
— $
60
$
$
125
101
$
$
$
$
189
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
2. Segment Information (continued)
The following table presents total revenues with respect to the Company’s segments, as well as Corporate & Other:
Annuities
Life
Run-off
Corporate & Other
Adjustments
Total
Years Ended December 31,
2017
2016
2015
(In millions)
4,370
$
4,958
$
1,315
2,147
510
1,249
2,343
401
(1,500)
(5,933)
6,842
$
3,018
$
$
$
5,229
1,137
2,367
415
(257)
8,891
The following table presents total premiums, universal life and investment-type product policy fees and other revenues by
major product groups of the Company’s segments, as well as Corporate & Other:
Annuity products
Life insurance products
Other products
Total
Years Ended December 31,
2017
2016
2015
(In millions)
3,363
$
3,938
$
1,822
227
1,745
57
5,412
$
5,740
$
$
$
4,249
1,726
136
6,111
Substantially all of the Company’s premiums, universal life and investment-type product policy fees and other revenues
originated in the U.S.
Revenues derived from any customer did not exceed 10% of premiums, universal life and investment-type product policy
fees and other revenues for the years ended December 31, 2017, 2016 and 2015.
190
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
3. Insurance
Insurance Liabilities
Insurance liabilities, including affiliated insurance liabilities on reinsurance assumed and ceded, are comprised of future
policy benefits, policyholder account balances and other policy-related balances. Information regarding insurance liabilities by
segment, as well as Corporate & Other, was as follows at:
Annuities
Life
Run-off
Corporate & Other
Total
December 31,
2017
2016
(In millions)
34,281
$
8,542
27,027
7,534
77,384
$
33,155
8,539
24,819
7,430
73,943
$
$
See Note 5 for discussion of affiliated reinsurance liabilities included in the table above.
Future policy benefits are measured as follows:
Product Type:
Measurement Assumptions:
Participating life insurance
Nonparticipating life insurance
Individual and group
fixed annuities
after annuitization
Long-term care and
disability insurance
active life reserves
Long-term care and
disability insurance
claim reserves
Aggregate of (i) net level premium reserves for death and endowment policy benefits (calculated based
upon the non-forfeiture interest rate, ranging from 4% to 5%, and mortality rates guaranteed in
calculating the cash surrender values described in such contracts); and (ii) the liability for terminal
dividends.
Aggregate of the present value of expected future benefit payments and related expenses less the present
value of expected future net premiums. Assumptions as to mortality and persistency are based upon
the Company’s experience when the basis of the liability is established. Interest rate assumptions
for the aggregate future policy benefit liabilities range from 3% to 9%.
Present value of expected future payments. Interest rate assumptions used in establishing such liabilities
range from 2% to 8%.
The net level premium method and assumptions as to future morbidity, withdrawals and interest, which
provide a margin for adverse deviation. Interest rate assumptions used in establishing such liabilities
range from 4% to 7%.
Present value of benefits method and experience assumptions as to claim terminations, expenses and
interest. Interest rate assumptions used in establishing such liabilities range from 3% to 7%.
Participating business represented 3% of the Company’s life insurance in-force at both December 31, 2017 and 2016.
Participating policies represented 38%, 42% and 39% of gross traditional life insurance premiums for the years ended
December 31, 2017, 2016 and 2015, respectively.
Policyholder account balances are equal to: (i) policy account values, which consist of an accumulation of gross premium
payments; (ii) credited interest, ranging from 0% to 7%, less expenses, mortality charges and withdrawals; and (iii) fair value
adjustments relating to business combinations.
191
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
3. Insurance (continued)
Guarantees
The Company issues variable annuity products with guaranteed minimum benefits. GMABs, the non-life-contingent portion
of GMWBs and the portion of certain GMIBs that do not require annuitization are accounted for as embedded derivatives in
policyholder account balances and are further discussed in Note 7. Guarantees accounted for as insurance liabilities include:
Guarantee:
Measurement Assumptions:
GMDBs
• A return of purchase payment upon death even if the
account value is reduced to zero.
• Present value of expected death benefits in excess of the
projected account balance recognizing the excess ratably
over the accumulation period based on the present value
of total expected assessments.
• An enhanced death benefit may be available for an
additional fee.
• Assumptions are consistent with those used for amortizing
DAC, and are thus subject to the same variability and risk.
GMIBs
• After a specified period of time determined at the time
of issuance of the variable annuity contract, a
minimum accumulation of purchase payments, even
if the account value is reduced to zero, that can be
annuitized to receive a monthly income stream that is
not less than a specified amount.
•
Investment performance and volatility assumptions are
consistent with the historical experience of the appropriate
underlying equity index, such as the S&P 500 Index.
• Benefit assumptions are based on the average benefits payable
over a range of scenarios.
• Present value of expected income benefits in excess of the
projected account balance at any future date of
annuitization and recognizing the excess ratably over the
accumulation period based on present value of total
expected assessments.
• Certain contracts also provide for a guaranteed lump sum
return of purchase premium in lieu of the annuitization
benefit.
• Assumptions are consistent with those used for estimating
GMDB liabilities.
GMWBs
• A return of purchase payment via partial withdrawals,
even if the account value is reduced to zero, provided
that cumulative withdrawals in a contract year do not
exceed a certain limit.
• Certain contracts include guaranteed withdrawals that
are life contingent.
• Calculation incorporates an assumption for the percentage of
the potential annuitizations that may be elected by the
contract holder.
• Expected value of the life contingent payments and expected
assessments using assumptions consistent with those used
for estimating the GMDB liabilities.
The Company also issues universal and variable life contracts where the Company contractually guarantees to the contract
holder a secondary guarantee.
192
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
3. Insurance (continued)
Information regarding the liabilities for guarantees (excluding base policy liabilities and embedded derivatives) relating to
annuity and universal and variable life contracts was as follows:
Annuity Contracts
Universal and Variable
Life Contracts
GMDBs
GMIBs
Secondary
Guarantees
(In millions)
Total
Direct
Balance at January 1, 2015
Incurred guaranteed benefits (1)
Paid guaranteed benefits
Balance at December 31, 2015
Incurred guaranteed benefits
Paid guaranteed benefits
Balance at December 31, 2016
Incurred guaranteed benefits
Paid guaranteed benefits
Balance at December 31, 2017
Net Ceded/(Assumed)
Balance at January 1, 2015
Incurred guaranteed benefits (1)
Paid guaranteed benefits
Balance at December 31, 2015
Incurred guaranteed benefits
Paid guaranteed benefits
Balance at December 31, 2016
Incurred guaranteed benefits
Paid guaranteed benefits
Balance at December 31, 2017
Net
Balance at January 1, 2015
Incurred guaranteed benefits (1)
Paid guaranteed benefits
Balance at December 31, 2015
Incurred guaranteed benefits
Paid guaranteed benefits
Balance at December 31, 2016
Incurred guaranteed benefits
Paid guaranteed benefits
Balance at December 31, 2017
(1) See Note 5.
2,374
413
—
2,787
753
—
3,540
692
—
4,232
846
161
—
1,007
98
—
1,105
(160)
—
945
1,528
252
—
1,780
655
—
2,435
852
—
3,287
$
$
$
$
$
$
4,653
1,020
(37)
5,636
1,423
(60)
6,999
1,439
(58)
8,380
842
188
(33)
997
156
(55)
1,098
(79)
(56)
963
3,811
832
(4)
4,639
1,267
(5)
5,901
1,518
(2)
7,417
1,649
355
—
2,004
331
—
2,335
374
—
2,709
$
$
$
6
3
1
10
10
—
20
(20)
—
— $
1,643
352
(1)
1,994
321
—
2,315
394
—
2,709
$
$
$
$
$
$
$
$
630
252
(37)
845
339
(60)
1,124
373
(58)
1,439
$
$
(10) $
24
(34)
(20)
48
(55)
(27)
101
(56)
18
$
640
228
(3)
865
291
(5)
1,151
272
(2)
1,421
$
$
193
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
3. Insurance (continued)
Information regarding the Company’s guarantee exposure was as follows at:
Annuity Contracts (1), (2)
Variable Annuity Guarantees
Total account value (3)
Separate account value
Net amount at risk
December 31,
2017
2016
In the
Event of Death
At
Annuitization
In the
Event of Death
At
Annuitization
(Dollars in millions)
$
$
$
115,147
109,792
$
$
67,110
65,782
$
$
111,719
106,759
$
$
64,503
63,025
5,261 (4) $
2,642 (5) $
6,837 (4) $
3,313 (5)
Average attained age of contract holders
68 years
68 years
67 years
67 years
Universal Life Contracts
Total account value (3)
Net amount at risk (6)
Average attained age of policyholders
Variable Life Contracts
Total account value (3)
Net amount at risk (6)
Average attained age of policyholders
__________________
December 31,
2017
2016
Secondary Guarantees
(Dollars in millions)
$
$
$
$
$
$
$
$
6,244
75,304
64 years
3,379
24,546
49 years
6,216
76,216
63 years
3,110
26,419
48 years
(1)
(2)
The Company’s annuity contracts with guarantees may offer more than one type of guarantee in each contract. Therefore,
the amounts listed above may not be mutually exclusive.
Includes direct business, but excludes offsets from hedging or reinsurance, if any. Therefore, the net amount at risk
presented reflects the economic exposures of living and death benefit guarantees associated with variable annuities, but
not necessarily their impact on the Company. See Note 5 for a discussion of guaranteed minimum benefits which have
been reinsured.
(3)
Includes the contract holder’s investments in the general account and separate account, if applicable.
(4) Defined as the death benefit less the total account value, as of the balance sheet date. It represents the amount of the claim
that the Company would incur if death claims were filed on all contracts on the balance sheet date and includes any
additional contractual claims associated with riders purchased to assist with covering income taxes payable upon death.
(5) Defined as the amount (if any) that would be required to be added to the total account value to purchase a lifetime income
stream, based on current annuity rates, equal to the minimum amount provided under the guaranteed benefit. This amount
represents the Company’s potential economic exposure to such guarantees in the event all contract holders were to annuitize
on the balance sheet date, even though the contracts contain terms that allow annuitization of the guaranteed amount only
after the 10th anniversary of the contract, which not all contract holders have achieved.
(6) Defined as the guarantee amount less the account value, as of the balance sheet date. It represents the amount of the claim
that the Company would incur if death claims were filed on all contracts on the balance sheet date.
194
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
3. Insurance (continued)
Account balances of contracts with guarantees were invested in separate account asset classes as follows at:
Fund Groupings:
Balanced
Equity
Bond
Money Market
Total
December 31,
2017
2016
(In millions)
$
56,979
$
47,571
6,662
657
54,371
44,750
6,686
761
$
111,869
$
106,568
Obligations Under Funding Agreements
The Company has issued fixed and floating rate funding agreements, which are denominated in either U.S. dollars or foreign
currencies, to certain special purpose entities that have issued either debt securities or commercial paper for which payment of
interest and principal is secured by such funding agreements. During the years ended December 31, 2017, 2016 and 2015, the
Company issued $0, $1.4 billion and $13.0 billion, respectively, and repaid $6 million, $3.4 billion and $14.4 billion,
respectively, of such funding agreements. At December 31, 2017 and 2016, liabilities for funding agreements outstanding, which
are included in policyholder account balances, were $141 million and $127 million, respectively.
Brighthouse Life Insurance Company is a member of the Federal Home Loan Bank (“FHLB”) of Pittsburgh and holds
common stock in certain regional banks in the FHLB system. Holdings of FHLB common stock carried at cost at December 31,
2017 and 2016 were $71 million and $75 million, respectively.
Brighthouse Life Insurance Company has also entered into funding agreements with FHLBs. The liabilities for these funding
agreements are included in policyholder account balances. Information related to FHLB funding agreements was as follows at:
Liabilities
December 31,
2017
2016
(In millions)
$
595
$
645
Funding agreements are issued to FHLBs in exchange for cash. The FHLBs have been granted liens on certain assets, some
of which are in their custody, including RMBS, to collateralize the Company’s obligations under the funding agreements. The
Company is permitted to withdraw any portion of the collateral in the custody of the FHLBs as long as there is no event of
default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level. Upon any event of default
by the Company, the FHLBs recovery on the collateral is limited to the amount of the Company’s liabilities to the FHLBs.
4. Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles
See Note 1 for a description of capitalized acquisition costs.
Traditional Life Insurance Contracts
The Company amortizes DAC and VOBA related to these contracts (primarily term insurance) over the appropriate premium
paying period in proportion to the actual and expected future gross premiums that were set at contract issue. The expected
premiums are based upon the premium requirement of each policy and assumptions for mortality, persistency and investment
returns at policy issuance, or policy acquisition (as it relates to VOBA), include provisions for adverse deviation, and are consistent
with the assumptions used to calculate future policy benefit liabilities. These assumptions are not revised after policy issuance
or acquisition unless the DAC or VOBA balance is deemed to be unrecoverable from future expected profits. Absent a premium
deficiency, variability in amortization after policy issuance or acquisition is caused only by variability in premium volumes.
195
Notes to the Consolidated and Combined Financial Statements (continued)
4. Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles (continued)
Brighthouse Financial, Inc.
Fixed and Variable Universal Life Contracts and Fixed and Variable Deferred Annuity Contracts
The Company amortizes DAC and VOBA related to these contracts over the estimated lives of the contracts in proportion
to actual and expected future gross profits. The amortization includes interest based on rates in effect at inception or acquisition
of the contracts. The amount of future gross profits is dependent principally upon returns in excess of the amounts credited to
policyholders, mortality, persistency, benefit elections and withdrawals, interest crediting rates, expenses to administer the
business, creditworthiness of reinsurance counterparties, the effect of any hedges used and certain economic variables, such as
inflation. Of these factors, the Company anticipates that investment returns, expenses, persistency and benefit elections and
withdrawals are reasonably likely to significantly impact the rate of DAC and VOBA amortization. Each reporting period, the
Company updates the estimated gross profits with the actual gross profits for that period. When the actual gross profits change
from previously estimated gross profits, the cumulative DAC and VOBA amortization is re-estimated and adjusted by a
cumulative charge or credit to current operations. When actual gross profits exceed those previously estimated, the DAC and
VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when the actual
gross profits are below the previously estimated gross profits. Each reporting period, the Company also updates the actual amount
of business remaining in-force, which impacts expected future gross profits. When expected future gross profits are below those
previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The
opposite result occurs when the expected future gross profits are above the previously estimated expected future gross profits.
Each period, the Company also reviews the estimated gross profits for each block of business to determine the recoverability
of DAC and VOBA balances.
Factors Impacting Amortization
Separate account rates of return on variable universal life contracts and variable deferred annuity contracts affect in-force
account balances on such contracts each reporting period, which can result in significant fluctuations in amortization of DAC
and VOBA. Returns that are higher than the Company’s long-term expectation produce higher account balances, which increases
the Company’s future fee expectations and decreases future benefit payment expectations on minimum death and living benefit
guarantees, resulting in higher expected future gross profits. The opposite result occurs when returns are lower than the Company’s
long-term expectation. The Company’s practice to determine the impact of gross profits resulting from returns on separate
accounts assumes that long-term appreciation in equity markets is not changed by short-term market fluctuations, but is only
changed when sustained interim deviations are expected. The Company monitors these events and only changes the assumption
when its long-term expectation changes.
The Company also annually reviews other long-term assumptions underlying the projections of estimated gross profits.
These assumptions primarily relate to investment returns, policyholder dividend scales, interest crediting rates, mortality,
persistency, benefit elections and withdrawals and expenses to administer business. Management annually updates assumptions
used in the calculation of estimated gross profits which may have significantly changed. If the update of assumptions causes
expected future gross profits to increase, DAC and VOBA amortization will generally decrease, resulting in a current period
increase to earnings. The opposite result occurs when the assumption update causes expected future gross profits to decrease.
Periodically, the Company modifies product benefits, features, rights or coverages that occur by the exchange of a contract
for a new contract, or by amendment, endorsement, or rider to a contract, or by election or coverage within a contract. If such
modification, referred to as an internal replacement, substantially changes the contract, the associated DAC or VOBA is written
off immediately through income and any new deferrable costs associated with the replacement contract are deferred. If the
modification does not substantially change the contract, the DAC or VOBA amortization on the original contract will continue
and any acquisition costs associated with the related modification are expensed.
Amortization of DAC and VOBA is attributed to net investment gains (losses) and net derivative gains (losses), and to other
expenses for the amount of gross profits originating from transactions other than investment gains and losses. Unrealized
investment gains and losses represent the amount of DAC and VOBA that would have been amortized if such gains and losses
had been recognized.
196
Notes to the Consolidated and Combined Financial Statements (continued)
4. Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles (continued)
Brighthouse Financial, Inc.
Information regarding DAC and VOBA was as follows:
DAC:
Balance at January 1,
Capitalizations
Amortization related to:
Net investment gains (losses) and net derivative gains (losses)
Other expenses
Total amortization
Unrealized investment gains (losses)
Other
Balance at December 31,
VOBA:
Balance at January 1,
Amortization related to:
Net investment gains (losses) and net derivative gains (losses)
Other expenses
Total amortization
Unrealized investment gains (losses)
Balance at December 31,
Total DAC and VOBA:
Balance at December 31,
Years Ended December 31,
2017
2016
(In millions)
2015
$
5,652
$
5,679
$
260
334
258
(445)
(187)
(47)
—
5,678
641
(9)
(31)
(40)
7
608
1,400
(1,656)
(256)
(56)
(49)
5,652
711
2
(117)
(115)
45
641
5,819
399
109
(744)
(635)
96
—
5,679
763
(19)
(127)
(146)
94
711
$
6,286
$
6,293
$
6,390
Information regarding total DAC and VOBA by segment, as well as Corporate & Other, was as follows at:
Annuities
Life
Run-off
Corporate & Other
Total
December 31,
2017
2016
(In millions)
5,047
$
1,106
5
128
6,286
$
4,878
1,261
6
148
6,293
$
$
197
Notes to the Consolidated and Combined Financial Statements (continued)
4. Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles (continued)
Brighthouse Financial, Inc.
Information regarding other intangibles was as follows:
DSI:
Balance at January 1,
Capitalization
Amortization
Unrealized investment gains (losses)
Balance at December 31,
VODA:
Balance at January 1,
Amortization
Balance at December 31,
Accumulated amortization
Years Ended December 31,
2017
2016
2015
(In millions)
445
$
532
$
2
(5)
(11)
431
120
(15)
105
155
$
$
$
$
3
(88)
(2)
445
136
(16)
120
140
$
$
$
$
$
$
$
$
$
The estimated future amortization expense to be reported in other expenses for the next five years is as follows:
2018
2019
2020
2021
2022
5. Reinsurance
VOBA
VODA
(In millions)
$
$
$
$
$
98
84
62
53
46
$
$
$
$
$
586
4
(76)
18
532
155
(19)
136
124
14
13
12
10
9
The Company enters into reinsurance agreements primarily as a purchaser of reinsurance for its various insurance products
and also as a provider of reinsurance for some insurance products issued by former affiliated and unaffiliated companies. The
Company participates in reinsurance activities in order to limit losses, minimize exposure to significant risks and provide
additional capacity for future growth.
Accounting for reinsurance requires extensive use of assumptions and estimates, particularly related to the future
performance of the underlying business and the potential impact of counterparty credit risks. The Company periodically reviews
actual and anticipated experience compared to the aforementioned assumptions used to establish assets and liabilities relating
to ceded and assumed reinsurance and evaluates the financial strength of counterparties to its reinsurance agreements using
criteria similar to that evaluated in the security impairment process discussed in Note 6.
Annuities and Life
For annuities, the Company reinsures portions of the living and death benefit guarantees issued in connection with certain
variable annuities to unaffiliated reinsurers. Under these reinsurance agreements, the Company pays a reinsurance premium
generally based on fees associated with the guarantees collected from policyholders, and receives reimbursement for benefits
paid or accrued in excess of account values, subject to certain limitations. The value of embedded derivatives on the ceded risk
is determined using a methodology consistent with the guarantees directly written by the Company with the exception of the
input for nonperformance risk that reflects the credit of the reinsurer. The Company also reinsures 100% of certain variable
annuity risks to a former affiliate and assumed 100% of the living and death benefit guarantees issued in connection with certain
variable annuities issued by a former affiliate.
198
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
5. Reinsurance (continued)
For its life products, the Company has historically reinsured the mortality risk primarily on an excess of retention basis or
on a quota share basis. The Company currently reinsures 90% of the mortality risk in excess of $2 million for most products.
In addition to reinsuring mortality risk as described above, the Company reinsures other risks, as well as specific coverages.
Placement of reinsurance is done primarily on an automatic basis and also on a facultative basis for risks with specified
characteristics. On a case by case basis, the Company may retain up to $20 million per life and reinsure 100% of amounts in
excess of the amount the Company retains. The Company also reinsures portions of the risk associated with certain whole life
policies to a former affiliate and assumes certain term life policies and universal life policies with secondary death benefit
guarantees issued by a former affiliate. The Company evaluates its reinsurance programs routinely and may increase or decrease
its retention at any time.
Corporate & Other
The Company reinsures, through 100% quota share reinsurance agreements certain run-off long-term care and workers’
compensation business written by the Company. At December 31, 2017, the Company had $6.5 billion of reinsurance recoverables
associated with our reinsured long-term care business. The reinsurer has established trust accounts for our benefit to secure their
obligations under the reinsurance agreements.
Catastrophe Coverage
The Company has exposure to catastrophes which could contribute to significant fluctuations in the Company’s results of
operations. The Company uses excess of retention and quota share reinsurance agreements to provide greater diversification of
risk and minimize exposure to larger risks.
Reinsurance Recoverables
The Company reinsures its business through a diversified group of reinsurers. The Company analyzes recent trends in
arbitration and litigation outcomes in disputes, if any, with its reinsurers. The Company monitors ratings and evaluates the
financial strength of its reinsurers by analyzing their financial statements. In addition, the reinsurance recoverable balance due
from each reinsurer is evaluated as part of the overall monitoring process. Recoverability of reinsurance recoverable balances
is evaluated based on these analyses. The Company generally secures large reinsurance recoverable balances with various forms
of collateral, including secured trusts, funds withheld accounts and irrevocable letters of credit. These reinsurance recoverable
balances are stated net of allowances for uncollectible reinsurance, which at both December 31, 2017 and 2016, were not
significant.
The Company has secured certain reinsurance recoverable balances with various forms of collateral, including secured
trusts, funds withheld accounts and irrevocable letters of credit. The Company had $2.6 billion and $2.7 billion of unsecured
reinsurance recoverable balances with third-party reinsurers at December 31, 2017 and 2016, respectively.
At December 31, 2017, the Company had $9.3 billion of net ceded reinsurance recoverables with third-parties. Of this total,
$8.0 billion, or 86%, were with the Company’s five largest ceded reinsurers, including $1.4 billion of net ceded reinsurance
recoverables which were unsecured. At December 31, 2016, the Company had $9.3 billion of net ceded reinsurance recoverables
with third-parties. Of this total, $7.8 billion, or 84%, were with the Company’s five largest ceded reinsurers, including $1.5 billion
of net ceded reinsurance recoverables which were unsecured.
199
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
5. Reinsurance (continued)
The amounts on the consolidated and combined statements of operations include the impact of reinsurance. Information
regarding the significant effects of reinsurance was as follows:
Premiums
Direct premiums
Reinsurance assumed
Reinsurance ceded
Net premiums
Universal life and investment-type product policy fees
Direct universal life and investment-type product policy fees
Reinsurance assumed
Reinsurance ceded
Net universal life and investment-type product policy fees
Other revenues
Direct other revenues
Reinsurance assumed
Reinsurance ceded
Net other revenues
Policyholder benefits and claims
Direct policyholder benefits and claims
Reinsurance assumed
Reinsurance ceded
Net policyholder benefits and claims
Years Ended December 31,
2017
2016
2015
(In millions)
$
$
$
$
$
$
$
$
1,795
$
2,296
$
11
(943)
863
4,430
96
(628)
3,898
576
28
47
651
5,228
31
(1,623)
$
$
$
$
$
$
79
(1,153)
1,222
4,300
119
(637)
3,782
326
87
323
736
6,351
123
(2,571)
$
$
$
$
$
$
3,636
$
3,903
$
2,472
297
(1,090)
1,679
4,472
132
(594)
4,010
292
—
130
422
5,208
298
(2,237)
3,269
The amounts on the consolidated and combined balance sheets include the impact of reinsurance. Information regarding
the significant effects of reinsurance was as follows at:
2017
2016
December 31,
Direct
Assumed
Ceded
Total
Balance
Sheet
Direct
Assumed
Ceded
Total
Balance
Sheet
(In millions)
Assets
Premiums, reinsurance and
other receivables
$
647
Liabilities
Policyholder account balances $
Other policy-related balances
$
Other liabilities
$
37,510
1,311
4,475
$
$
$
$
27
273
1,674
32
$
$
$
$
12,851
$
13,525
— $
37,783
— $
756
$
2,985
5,263
$
$
$
$
1,152
37,066
1,368
4,818
$
$
$
$
21
460
1,677
12
$
$
$
$
13,474
$
14,647
— $
37,526
— $
1,099
$
3,045
5,929
Effective December 1, 2016, the Company terminated two agreements with an third-party reinsurer which covered 90% of
the liabilities on certain participating whole life insurance policies issued between April 1, 2000 and December 31, 2001 by
MLIC. This termination resulted in a decrease in other invested assets of $713 million, a decrease in DAC and VOBA of $95
million, a decrease in future policy benefits of $654 million, and a decrease in other liabilities of $43 million. The Company
recognized a loss of approximately $72 million, net of income tax, as a result of this transaction.
200
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
5. Reinsurance (continued)
Reinsurance agreements that do not expose the Company to a reasonable possibility of a significant loss from insurance
risk are recorded using the deposit method of accounting. The deposit assets on reinsurance were $1.6 billion and $2.0 billion
at December 31, 2017 and 2016, respectively. The deposit liabilities on reinsurance were less than $1 million and $1 million at
December 31, 2017 and 2016, respectively.
Related Party Reinsurance Transactions
The Company has reinsurance agreements with certain MetLife, Inc. subsidiaries, including MLIC, General American Life
Insurance Company, MetLife Europe d.a.c., MetLife Reinsurance Company of Vermont (“MRV”), Delaware American Life
Insurance Company and American Life Insurance Company, all of which were related parties at December 31, 2017.
Information regarding the significant effects of reinsurance with former MetLife affiliates included on the consolidated and
combined statements of operations was as follows:
Premiums
Reinsurance assumed
Reinsurance ceded
Net premiums
Universal life and investment-type product policy fees
Reinsurance assumed
Reinsurance ceded
Net universal life and investment-type product policy fees
Other revenues
Reinsurance assumed
Reinsurance ceded
Net other revenues
Policyholder benefits and claims
Reinsurance assumed
Reinsurance ceded
Net policyholder benefits and claims
Years Ended December 31,
2017
2016
2015
(In millions)
$
$
$
$
$
$
$
$
11
$
(537)
(526) $
96
$
(14)
82
$
27
44
71
$
$
30
$
(420)
(390) $
34
$
(766)
(732) $
119
$
(60)
59
$
56
$
320
376
$
86
$
(757)
(671) $
227
(687)
(460)
132
(59)
73
—
130
130
248
(678)
(430)
201
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
5. Reinsurance (continued)
Information regarding the significant effects of reinsurance with former MetLife affiliates included on the consolidated and
combined balance sheets was as follows at:
Assets
Premiums, reinsurance and other receivables
Liabilities
Policyholder account balances
Other policy-related balances
Other liabilities
December 31,
2017
2016
Assumed
Ceded
Assumed
Ceded
(In millions)
$
$
$
$
18
$
3,410
$
21
$
4,020
— $
— $
460
1,674
30
$
$
— $
1,677
401
$
10
$
$
$
—
—
715
The Company previously assumed risks from MLIC related to guaranteed minimum benefits written directly by MLIC.
The assumed reinsurance agreement contained embedded derivatives and changes in the estimated fair value are also included
within net derivative gains (losses). The embedded derivatives associated with the agreement are included within policyholder
account balances and were $0 and $460 million at December 31, 2017 and 2016, respectively. Net derivative gains (losses)
associated with the embedded derivatives were $110 million, ($27) million and ($34) million for the years ended December 31,
2017, 2016 and 2015, respectively. In January 2017, MLIC recaptured these risks being reinsured by the Company. This recapture
resulted in a decrease in investments and cash and cash equivalents of $568 million, a decrease in future policy benefits of
$106 million, and a decrease in policyholder account balances of $460 million. In June 2017, there was an adjustment to the
recapture amounts of this transaction, which resulted in an increase in premiums, reinsurance and other receivables of $140
million at June 30, 2017. The Company recognized a gain of $89 million, net of income tax, as a result of this transaction.
The Company cedes risks to MLIC related to guaranteed minimum benefits written directly by the Company. The ceded
reinsurance agreement contains embedded derivatives and changes in the estimated fair value are also included within net
derivative gains (losses). The embedded derivatives associated with the cessions are included within premiums, reinsurance and
other receivables and were $2 million and $390 million at December 31, 2017 and 2016, respectively. Net derivative gains
(losses) associated with the embedded derivatives were ($263) million, $62 million and $100 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
In May 2017, the Company recaptured from MLIC risks related to multiple life products ceded under yearly renewable
term and coinsurance agreements. This recapture resulted in an increase in cash and cash equivalents of $214 million and a
decrease in premiums, reinsurance and other receivables of $189 million. The Company recognized a gain of $17 million, net
of income tax, as a result of reinsurance termination.
In January 2017, the Company executed a novation and assignment of reinsurance agreements under which MLIC reinsured
certain variable annuities, including guaranteed minimum benefits, issued by BHNY and NELICO. As a result of the novation
and assignment, the reinsurance agreements are now between Brighthouse Life Insurance Company, BHNY and NELICO. The
transaction was treated as a termination of the existing reinsurance agreements with recognition of a loss and new reinsurance
agreements with no recognition of a gain or loss. The transaction resulted in an increase in other liabilities of $274 million. The
Company recognized a loss of $178 million, net of income tax, as a result of this transaction.
In December 2016, the Company recaptured level premium term business previously reinsured to MRV. This recapture
resulted in a decrease in cash and cash equivalents of $27 million, a decrease in premiums, reinsurance and other receivables
of $94 million and a decrease in other liabilities of $158 million. The Company recognized a gain of $24 million, net of income
tax, as a result of this recapture.
In November 2016, the Company recaptured certain single premium deferred annuity contracts previously reinsured to
MLIC. This recapture resulted in an increase in investments and cash and cash equivalents of $933 million and increase in DAC
of $23 million, offset by a decrease in premiums, reinsurance and other receivables of $923 million. The Company recognized
a gain of $22 million, net of income tax, as a result of this recapture.
202
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
5. Reinsurance (continued)
In April 2016, the Company recaptured risks related to certain single premium deferred annuity contracts previously reinsured
to MLIC. As a result of this recapture, the significant effects to the Company were an increase in investments and cash and cash
equivalents of $4.3 billion and an increase in DAC of $87 million, offset by a decrease in premiums, reinsurance and other
receivables of $4.0 billion. The Company recognized a gain of $246 million, net of income tax, as a result of this recapture.
The Company has secured certain reinsurance recoverable balances with various forms of collateral, including secured
trusts, funds withheld accounts and irrevocable letters of credit. The Company had $2.6 billion and $3.2 billion of unsecured
related party reinsurance recoverable balances at December 31, 2017 and 2016, respectively.
Related party reinsurance agreements that do not expose the Company to a reasonable possibility of a significant loss from
insurance risk are recorded using the deposit method of accounting. The deposit assets on related party reinsurance were
$1.4 billion and $1.7 billion at December 31, 2017 and 2016, respectively. There were no deposit liabilities on related party
reinsurance at both December 31, 2017 and 2016.
6. Investments
See Note 8 for information about the fair value hierarchy for investments and the related valuation methodologies.
Fixed Maturity and Equity Securities AFS
Fixed Maturity and Equity Securities AFS by Sector
The following table presents the fixed maturity and equity securities AFS by sector at:
December 31, 2017
Gross Unrealized
December 31, 2016
Gross Unrealized
Cost or
Amortized
Cost
Gains
Temporary
Losses
OTTI
Losses
(1)
Estimated
Fair
Value
Cost or
Amortized
Cost
Gains
Temporary
Losses
OTTI
Losses
(1)
Estimated
Fair
Value
Fixed maturity securities: (2)
U.S. corporate
$ 21,190
$ 1,859
$
92
$ — $ 22,957
$ 21,278
$ 1,324
$
(In millions)
U.S. government and agency
14,548
1,862
118
RMBS
Foreign corporate
State and political subdivision
CMBS
ABS
Foreign government
7,749
6,703
3,635
3,386
1,810
1,152
285
386
553
53
21
161
Total fixed maturity securities
$ 60,173
$ 5,180
Equity securities (2)
__________________
$
212
$
21
—
(3)
—
1
(1)
—
—
16,292
12,032
1,294
7,977
7,023
4,181
3,423
1,829
1,309
7,961
6,343
3,590
3,799
2,654
1,058
206
230
393
44
12
116
60
66
6
17
2
4
291
236
144
180
38
32
14
12
$ — $ 22,311
—
—
—
—
(1)
—
—
13,090
8,023
6,393
3,945
3,812
2,652
1,162
$
$
365
$
(3) $ 64,991
$ 58,715
$ 3,619
1
$ — $
232
$
280
$
29
$
$
947
$
(1) $ 61,388
9
$ — $
300
(1) Noncredit OTTI losses included in AOCI in an unrealized gain position are due to increases in estimated fair value
subsequent to initial recognition of noncredit losses on such securities. See also “— Net Unrealized Investment Gains
(Losses).”
(2) Redeemable preferred stock is reported within U.S. corporate and foreign corporate fixed maturity securities and non-
redeemable preferred stock is reported within equity securities. Included within fixed maturity securities are Structured
Securities.
The Company held non-income producing fixed maturity securities with an estimated fair value of $4 million and
$5 million with unrealized gains (losses) of ($2) million and less than $1 million at December 31, 2017 and 2016, respectively.
203
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
6. Investments (continued)
Maturities of Fixed Maturity Securities
The amortized cost and estimated fair value of fixed maturity securities, by contractual maturity date, were as follows at
December 31, 2017:
Due in One
Year or Less
Due After One
Year Through
Five Years
Due After Five
Years
Through Ten
Years
Due After Ten
Years
Structured
Securities
Total Fixed
Maturity
Securities
(In millions)
Amortized cost
Estimated fair value
$
$
1,871
1,876
$
$
10,548
10,890
$
$
11,478
11,816
$
$
23,331
27,180
$
$
12,945
13,229
$
$
60,173
64,991
Actual maturities may differ from contractual maturities due to the exercise of call or prepayment options. Fixed maturity
securities not due at a single maturity date have been presented in the year of final contractual maturity. Structured Securities
are shown separately, as they are not due at a single maturity.
Continuous Gross Unrealized Losses for Fixed Maturity and Equity Securities AFS by Sector
The following table presents the estimated fair value and gross unrealized losses of fixed maturity and equity securities
AFS in an unrealized loss position, aggregated by sector and by length of time that the securities have been in a continuous
unrealized loss position at:
December 31, 2017
December 31, 2016
Less than 12 Months
Equal to or Greater than
12 Months
Less than 12 Months
Equal to or Greater than 12
Months
Estimated
Fair
Value
Gross
Unrealized
Losses
Estimated
Fair
Value
Gross
Unrealized
Losses
Estimated
Fair
Value
Gross
Unrealized
Losses
Estimated
Fair
Value
Gross
Unrealized
Losses
(Dollars in millions)
$
1,783
$
$
1,451
$
Fixed maturity securities:
U.S. corporate
U.S. government and agency
RMBS
Foreign corporate
State and political subdivision
CMBS
ABS
Foreign government
Total fixed maturity securities
Equity securities
Total number of securities in an
unrealized loss position
$
$
4,962
2,367
637
170
619
170
155
10,863
17
922
$
$
71
80
43
58
4
10
2
2
$
4,676
$
4,396
3,494
1,466
889
1,572
478
273
189
236
112
66
35
27
6
11
$
745
$
—
818
633
29
171
461
6
$
$
270
1
$
$
17,244
57
$
$
682
2
$
$
2,863
40
$
$
1,741
483
102
—
32
114
3
4
8
1
264
7
21
38
14
8
3
6
—
2
92
1,573
1,332
603
106
335
74
69
$
5,543
— $
10
642
204
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
6. Investments (continued)
Evaluation of AFS Securities for OTTI and Evaluating Temporarily Impaired AFS Securities
Evaluation and Measurement Methodologies
Management considers a wide range of factors about the security issuer and uses its best judgment in evaluating the
cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent
in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future
earnings potential. Considerations used in the impairment evaluation process include, but are not limited to: (i) the length
of time and the extent to which the estimated fair value has been below cost or amortized cost; (ii) the potential for impairments
when the issuer is experiencing significant financial difficulties; (iii) the potential for impairments in an entire industry
sector or sub-sector; (iv) the potential for impairments in certain economically depressed geographic locations; (v) the
potential for impairments where the issuer, series of issuers or industry has suffered a catastrophic loss or has exhausted
natural resources; (vi) with respect to fixed maturity securities, whether the Company has the intent to sell or will more
likely than not be required to sell a particular security before the decline in estimated fair value below amortized cost
recovers; (vii) with respect to Structured Securities, changes in forecasted cash flows after considering the quality of
underlying collateral, expected prepayment speeds, current and forecasted loss severity, consideration of the payment terms
of the underlying assets backing a particular security, and the payment priority within the tranche structure of the security;
(viii) the potential for impairments due to weakening of foreign currencies on non-functional currency denominated fixed
maturity securities that are near maturity; and (ix) other subjective factors, including concentrations and information obtained
from regulators and rating agencies.
Current Period Evaluation
Based on the Company’s current evaluation of its AFS securities in an unrealized loss position in accordance with its
impairment policy, and the Company’s current intentions and assessments (as applicable to the type of security) about
holding, selling and any requirements to sell these securities, the Company concluded that these securities were not other-
than-temporarily impaired at December 31, 2017.
Gross unrealized losses on fixed maturity securities decreased $584 million during the year ended December 31, 2017
to $362 million. The decrease in gross unrealized losses for the year ended December 31, 2017, was primarily attributable
to narrowing credit spreads and decreasing longer-term interest rates.
At December 31, 2017, $7 million of the total $362 million of gross unrealized losses were from 10 fixed maturity
securities with an unrealized loss position of 20% or more of amortized cost for six months or greater, of which $3 million
were from investment grade fixed maturity securities.
205
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
6. Investments (continued)
Mortgage Loans
Mortgage Loans by Portfolio Segment
Mortgage loans are summarized as follows at:
Mortgage loans:
Commercial
Agricultural
Residential
Subtotal (1)
Valuation allowances (2)
Subtotal mortgage loans, net
Commercial mortgage loans held by CSEs — FVO
Total mortgage loans, net
__________________
December 31,
2017
2016
Carrying
Value
% of
Total
Carrying
Value
% of
Total
$
7,260
2,276
1,138
10,674
(47)
10,627
115
(Dollars in millions)
67.5% $
21.2
10.6
99.3
(0.4)
98.9
1.1
$
10,742
100.0% $
6,523
1,892
867
9,282
(40)
9,242
136
9,378
69.6%
20.2
9.2
99.0
(0.4)
98.6
1.4
100.0%
(1)
The Company purchases unaffiliated mortgage loans under a master participation agreement from a former affiliate,
simultaneously with the former affiliate’s origination or acquisition of mortgage loans. The aggregate amount of
unaffiliated mortgage loan participation interests purchased by the Company from the former affiliate during the years
ended December 31, 2017, 2016 and 2015 were $1.2 billion, $2.4 billion and $2.0 billion, respectively. In connection
with the mortgage loan participations, the former affiliate collected mortgage loan principal and interest payments on the
Company’s behalf and the former affiliate remitted such payments to the Company in the amount of $946 million,
$1.6 billion and $1.0 billion during the years ended December 31, 2017, 2016 and 2015, respectively.
Purchases of mortgage loans from third parties were $420 million and $619 million for the years ended December 31,
2017 and 2016, respectively, and were primarily comprised of residential mortgage loans.
(2)
The valuation allowances were primarily from collective evaluation (non-specific loan related).
See “— Variable Interest Entities” for discussion of CSEs.
Information on commercial, agricultural and residential mortgage loans is presented in the tables below. Information on
residential — FVO and commercial mortgage loans held by CSEs — FVO is presented in Note 8. The Company elects the
FVO for certain mortgage loans and related long-term debt that are managed on a total return basis.
206
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
6. Investments (continued)
Valuation Allowance Methodology
Mortgage loans are considered to be impaired when it is probable that, based upon current information and events, the
Company will be unable to collect all amounts due under the loan agreement. Specific valuation allowances are established
using the same methodology for all three portfolio segments as the excess carrying value of a loan over either (i) the present
value of expected future cash flows discounted at the loan’s original effective interest rate, (ii) the estimated fair value of the
loan’s underlying collateral if the loan is in the process of foreclosure or otherwise collateral dependent, or (iii) the loan’s
observable market price. A common evaluation framework is used for establishing non-specific valuation allowances for all
loan portfolio segments; however, a separate non-specific valuation allowance is calculated and maintained for each loan
portfolio segment that is based on inputs unique to each loan portfolio segment. Non-specific valuation allowances are
established for pools of loans with similar risk characteristics where a property-specific or market-specific risk has not been
identified, but for which the Company expects to incur a credit loss. These evaluations are based upon several loan portfolio
segment-specific factors, including the Company’s experience for loan losses, defaults and loss severity, and loss expectations
for loans with similar risk characteristics. These evaluations are revised as conditions change and new information becomes
available.
Credit Quality of Commercial Mortgage Loans
The credit quality of commercial mortgage loans was as follows at:
Recorded Investment
Debt Service Coverage Ratios
> 1.20x
1.00x - 1.20x
< 1.00x
Total
% of
Total
Estimated
Fair
Value
% of
Total
(Dollars in millions)
December 31, 2017
Loan-to-value ratios:
Less than 65%
65% to 75%
76% to 80%
Greater than 80%
Total
December 31, 2016
Loan-to-value ratios:
Less than 65%
65% to 75%
76% to 80%
Greater than 80%
Total
$
$
$
6,194
$
293
$
642
42
—
—
—
9
6,878
$
302
$
33
14
9
24
80
$
6,520
656
51
33
89.8% $
9.0
0.7
0.5
6,681
658
50
30
90.0%
8.9
0.7
0.4
$
7,260
100.0% $
7,419
100.0%
5,744
$
230
$
167
$
291
34
24
—
—
14
19
—
—
6,141
310
34
38
94.1% $
4.8
0.5
0.6
6,222
303
33
37
94.3%
4.6
0.5
0.6
$
6,093
$
244
$
186
$
6,523
100.0% $
6,595
100.0%
Credit Quality of Agricultural Mortgage Loans
The credit quality of agricultural mortgage loans was as follows at:
Loan-to-value ratios:
Less than 65%
65% to 75%
Total
December 31,
2017
2016
Recorded
Investment
% of
Total
Recorded
Investment
% of
Total
(Dollars in millions)
$
$
2,113
163
2,276
92.8% $
7.2
100.0% $
1,849
43
1,892
97.7%
2.3
100.0%
207
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
6. Investments (continued)
The estimated fair value of agricultural mortgage loans was $2.3 billion and $1.9 billion at December 31, 2017 and 2016,
respectively.
Credit Quality of Residential Mortgage Loans
The credit quality of residential mortgage loans was as follows at:
Performance indicators:
Performing
Nonperforming
Total
December 31,
2017
2016
Recorded
Investment
% of
Total
Recorded
Investment
% of
Total
(Dollars in millions)
$
$
1,106
32
1,138
97.2% $
2.8
100.0% $
856
11
867
98.7%
1.3
100.0%
The estimated fair value of residential mortgage loans was $1.2 billion and $867 million at December 31, 2017 and 2016,
respectively.
Past Due, Nonaccrual and Modified Mortgage Loans
The Company has a high quality, well performing mortgage loan portfolio, with over 99% of all mortgage loans classified
as performing at both December 31, 2017 and 2016. The Company defines delinquency consistent with industry practice,
when mortgage loans are past due as follows: commercial and residential mortgage loans — 60 days and agricultural mortgage
loans — 90 days. The Company had no commercial or agricultural mortgage loans past due and no commercial or agricultural
mortgage loans in nonaccrual status at either December 31, 2017 or 2016. The recorded investment of residential mortgage
loans past due and in nonaccrual status was $32 million and $11 million at December 31, 2017 and 2016, respectively. During
the years ended December 31, 2017 and 2016, the Company did not have a significant amount of mortgage loans modified
in a troubled debt restructuring.
Other Invested Assets
Freestanding derivatives with positive estimated fair values and loans to affiliates comprise over 80% of other invested
assets. See Note 7 for information about freestanding derivatives with positive estimated fair values and see “— Related Party
Investment Transactions” for information regarding loans to affiliates. Other invested assets also includes tax credit and renewable
energy partnerships and leveraged leases.
Leveraged Leases
Investment in leveraged leases consisted of the following at:
Rental receivables, net
Estimated residual values
Subtotal
Unearned income
Investment in leases, net of non-recourse debt
December 31,
2017
2016
(In millions)
$
$
$
87
14
101
(35)
66
$
87
14
101
(32)
69
Rental receivables are generally due in periodic installments. The payment periods for leveraged leases generally range
from one to 15 years. For rental receivables, the primary credit quality indicator is whether the rental receivable is performing
or nonperforming, which is assessed monthly. The Company generally defines nonperforming rental receivables as those that
are 90 days or more past due. At December 31, 2017 and 2016, all leverage leases were performing.
208
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
6. Investments (continued)
The deferred income tax liability related to leveraged leases was $43 million and $74 million at December 31, 2017 and
2016, respectively.
Cash Equivalents
The carrying value of cash equivalents, which includes securities and other investments with an original or remaining
maturity of three months or less at the time of purchase, was $1.4 billion and $4.8 billion at December 31, 2017 and 2016,
respectively.
Net Unrealized Investment Gains (Losses)
Unrealized investment gains (losses) on fixed maturity and equity securities AFS and the effect on DAC, VOBA, DSI and
future policy benefits, that would result from the realization of the unrealized gains (losses), are included in net unrealized
investment gains (losses) in AOCI.
The components of net unrealized investment gains (losses), included in AOCI, were as follows:
Fixed maturity securities
Fixed maturity securities with noncredit OTTI losses in AOCI
Total fixed maturity securities
Equity securities
Derivatives
Short-term investments
Other
Subtotal
Amounts allocated from:
Future policy benefits
DAC and VOBA related to noncredit OTTI losses recognized in AOCI
DAC, VOBA and DSI
Subtotal
Deferred income tax benefit (expense) related to noncredit OTTI losses recognized in AOCI
Deferred income tax benefit (expense)
Net unrealized investment gains (losses)
Years Ended December 31,
2017
2016
2015
(In millions)
$
4,806
$
2,663
$
2,324
2
4,808
39
239
—
(8)
1
2,664
32
414
(42)
(26)
(23)
2,301
54
388
—
5
5,078
3,042
2,748
(2,626)
(2)
(265)
(802)
(2)
(214)
(2,893)
(1,018)
—
(459)
—
(712)
(126)
(1)
(202)
(329)
9
(855)
$
1,726
$
1,312
$
1,573
209
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
6. Investments (continued)
The changes in net unrealized investment gains (losses) were as follows:
Balance at January 1,
Fixed maturity securities on which noncredit OTTI losses have been recognized
Unrealized investment gains (losses) during the year
Unrealized investment gains (losses) relating to:
Future policy benefits
DAC and VOBA related to noncredit OTTI losses recognized in AOCI
DAC, VOBA and DSI
Deferred income tax benefit (expense) related to noncredit OTTI losses recognized in AOCI
Deferred income tax benefit (expense)
Balance at December 31,
Change in net unrealized investment gains (losses)
Concentrations of Credit Risk
Years Ended December 31,
2017
2016
2015
(In millions)
$
1,312
$
1,573
$
2,745
1
2,035
(1,824)
—
(51)
—
253
24
270
(676)
(1)
(12)
(9)
143
15
(2,513)
487
1
207
(5)
636
$
$
1,726
414
$
$
1,312
$
1,573
(261) $
(1,172)
There were no investments in any counterparty that were greater than 10% of the Company’s equity, other than the U.S.
government and its agencies, at both December 31, 2017 and 2016.
Securities Lending
Elements of the securities lending program are presented below at:
Securities on loan: (1)
Amortized cost
Estimated fair value
Cash collateral received from counterparties (2)
Security collateral received from counterparties (3)
Reinvestment portfolio — estimated fair value
__________________
December 31,
2017
2016
(In millions)
$
$
$
$
$
3,085
3,748
3,791
29
3,823
$
$
$
$
$
5,895
6,555
6,642
27
6,571
(1)
(2)
(3)
Included within fixed maturity securities.
Included within payables for collateral under securities loaned and other transactions.
Security collateral received from counterparties may not be sold or re-pledged, unless the counterparty is in default, and
is not reflected on the consolidated and combined financial statements.
210
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
6. Investments (continued)
The cash collateral liability by loaned security type and remaining tenor of the agreements were as follows at:
December 31, 2017
December 31, 2016
Remaining Tenor of Securities Lending
Agreements
Remaining Tenor of Securities Lending
Agreements
Open (1)
1 Month or
Less
1 to 6
Months
Total
Open (1)
(In millions)
1 Month or
Less
1 to 6
Months
Total
Cash collateral liability by loaned security type:
U.S. government and agency
$
1,626
$
964
$
1,201
$ 3,791
$
2,129
$
1,906
$
1,743
$ 5,778
U.S. corporate
Agency RMBS
Foreign corporate
Foreign government
Total
__________________
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
480
—
58
52
—
274
—
—
480
274
58
52
$
1,626
$
964
$
1,201
$ 3,791
$
2,129
$
2,496
$
2,017
$ 6,642
(1)
The related loaned security could be returned to the Company on the next business day which would require the Company
to immediately return the cash collateral.
If the Company is required to return significant amounts of cash collateral on short notice and is forced to sell securities to
meet the return obligation, it may have difficulty selling such collateral that is invested in securities in a timely manner, be forced
to sell securities in a volatile or illiquid market for less than what otherwise would have been realized under normal market
conditions, or both. The estimated fair value of the securities on loan related to the cash collateral on open at December 31, 2017
was $1.6 billion, all of which were U.S. government and agency securities which, if put back to the Company, could be
immediately sold to satisfy the cash requirement.
The reinvestment portfolio acquired with the cash collateral consisted principally of fixed maturity securities (including
agency RMBS, U.S. government and agency securities, ABS, U.S. and foreign corporate securities, and non-agency RMBS)
with 59% invested in agency RMBS, U.S. government and agency securities, cash equivalents, short-term investments or held
in cash at December 31, 2017. If the securities on loan or the reinvestment portfolio become less liquid, the Company has the
liquidity resources of most of its general account available to meet any potential cash demands when securities on loan are put
back to the Company.
Invested Assets on Deposit, Held in Trust and Pledged as Collateral
Invested assets on deposit, held in trust and pledged as collateral are presented below at estimated fair value at:
Invested assets on deposit (regulatory deposits) (1)
Invested assets held in trust (reinsurance agreements) (2)
Invested assets pledged as collateral (3)
Total invested assets on deposit, held in trust and pledged as collateral
__________________
December 31,
2017
2016
(In millions)
8,263
$
2,634
3,199
7,648
9,054
3,548
14,096
$
20,250
$
$
(1)
(2)
The Company has assets, primarily fixed maturity securities, on deposit with governmental authorities relating to certain
policy holder liabilities, of which $34 million of the assets on deposit balance represents restricted cash at both December
31, 2017 and 2016.
The Company has assets, primarily fixed maturity securities, held in trust relating to certain reinsurance transactions.
$42 million and $15 million of the assets held in trust balance represents restricted cash at December 31, 2017 and 2016,
respectively.
211
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
6. Investments (continued)
(3)
The Company has pledged invested assets in connection with various agreements and transactions, including funding
agreements (see Note 3) and derivative transactions (see Note 7).
See “— Securities Lending” for information regarding securities on loan.
Purchased Credit Impaired Investments
Investments acquired with evidence of credit quality deterioration since origination and for which it is probable at the
acquisition date that the Company will be unable to collect all contractually required payments are classified as purchased credit
impaired (“PCI”) investments. For each investment, the excess of the cash flows expected to be collected as of the acquisition
date over its acquisition date fair value is referred to as the accretable yield and is recognized as net investment income on an
effective yield basis. If, subsequently, based on current information and events, it is probable that there is a significant increase
in cash flows previously expected to be collected or if actual cash flows are significantly greater than cash flows previously
expected to be collected, the accretable yield is adjusted prospectively. The excess of the contractually required
payments (including interest) as of the acquisition date over the cash flows expected to be collected as of the acquisition date
is referred to as the nonaccretable difference, and this amount is not expected to be realized as net investment income. Decreases
in cash flows expected to be collected can result in OTTI.
The Company’s PCI fixed maturity securities were as follows at:
Outstanding principal and interest balance (1)
Carrying value (2)
__________________
December 31,
2017
2016
(In millions)
1,270
1,044
$
$
1,497
1,142
$
$
(1) Represents the contractually required payments, which is the sum of contractual principal, whether or not currently due,
and accrued interest.
(2)
Estimated fair value plus accrued interest.
The following table presents information about PCI fixed maturity securities acquired during the periods indicated:
Contractually required payments (including interest)
Cash flows expected to be collected (1)
Fair value of investments acquired
__________________
Years Ended December 31,
2017
2016
(In millions)
$
$
$
3
3
2
$
$
$
567
490
347
(1) Represents undiscounted principal and interest cash flow expectations, at the date of acquisition.
212
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
6. Investments (continued)
The following table presents activity for the accretable yield on PCI fixed maturity securities for:
Accretable yield, January 1,
Investments purchased
Accretion recognized in earnings
Disposals
Reclassification (to) from nonaccretable difference
Accretable yield, December 31,
Collectively Significant Equity Method Investments
Years Ended December 31,
2017
2016
(In millions)
429
$
1
(69)
(10)
34
385
$
420
143
(68)
(13)
(53)
429
$
$
The Company holds investments in real estate joint ventures, real estate funds and other limited partnership interests
consisting of leveraged buy-out funds, hedge funds, private equity funds, joint ventures and other funds. The portion of these
investments accounted for under the equity method had a carrying value of $2.2 billion at December 31, 2017. The Company’s
maximum exposure to loss related to these equity method investments is limited to the carrying value of these investments plus
unfunded commitments of $1.1 billion at December 31, 2017. Except for certain real estate joint ventures, the Company’s
investments in real estate funds and other limited partnership interests are generally of a passive nature in that the Company
does not participate in the management of the entities.
As described in Note 1, the Company generally records its share of earnings in its equity method investments using a three-
month lag methodology and within net investment income. Aggregate net investment income from these equity method
investments exceeded 10% of the Company’s consolidated pre-tax income (loss) for two of the three most recent annual periods:
2017 and 2015. This aggregated summarized financial data does not represent the Company’s proportionate share of the assets,
liabilities, or earnings of such entities.
The aggregated summarized financial data presented below reflects the latest available financial information and is as of
and for the years ended December 31, 2017, 2016 and 2015. Aggregate total assets of these entities totaled $329.2 billion and
$285.3 billion at December 31, 2017 and 2016, respectively. Aggregate total liabilities of these entities totaled $40.0 billion and
$26.4 billion at December 31, 2017 and 2016, respectively. Aggregate net income (loss) of these entities totaled $36.4 billion,
$21.3 billion and $13.7 billion for the years ended December 31, 2017, 2016 and 2015, respectively. Aggregate net income (loss)
from the underlying entities in which the Company invests is primarily comprised of investment income, including recurring
investment income and realized and unrealized investment gains (losses).
Variable Interest Entities
The Company has invested in legal entities that are VIEs. In certain instances, the Company holds both the power to direct
the most significant activities of the entity, as well as an economic interest in the entity and, as such, is deemed to be the primary
beneficiary or consolidator of the entity.
The determination of the VIE’s primary beneficiary requires an evaluation of the contractual and implied rights and
obligations associated with each party’s relationship with or involvement in the entity, an estimate of the entity’s expected losses
and expected residual returns and the allocation of such estimates to each party involved in the entity.
Consolidated VIEs
Creditors or beneficial interest holders of VIEs where the Company is the primary beneficiary have no recourse to the
general credit of the Company, as the Company’s obligation to the VIEs is limited to the amount of its committed investment.
The following table presents the total assets and total liabilities relating to VIEs for which the Company has concluded
that it is the primary beneficiary and which are consolidated at:
213
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
6. Investments (continued)
MRSC (collateral financing arrangement (primarily securities)) (1)
CSEs (assets (primarily loans) and liabilities (primarily debt)) (2)
Total
__________________
December 31,
2017
2016
Total
Assets
Total
Liabilities
Total
Assets
Total
Liabilities
$
$
— $
116
116
$
(In millions)
— $
11
11
$
3,422
137
3,559
$
$
—
24
24
(1)
(2)
In April 2017, these assets were liquidated and the proceeds were used to repay the MRSC collateral financing arrangement
(see Note 9).
The Company consolidates entities that are structured as CMBS. The assets of these entities can only be used to settle
their respective liabilities, and under no circumstances is the Company liable for any principal or interest shortfalls should
any arise. The Company’s exposure was limited to that of its remaining investment in these entities of $86 million and
$95 million at estimated fair value at December 31, 2017 and 2016, respectively.
Unconsolidated VIEs
The carrying amount and maximum exposure to loss relating to VIEs in which the Company holds a significant variable
interest but is not the primary beneficiary and which have not been consolidated were as follows at:
December 31,
2017
2016
Carrying
Amount
Maximum
Exposure
to Loss (1)
Carrying
Amount
Maximum
Exposure
to Loss (1)
(In millions)
$
$
11,461
$
11,461
$
13,062
$
13,062
504
1,511
82
504
2,463
89
518
1,495
90
518
2,292
101
13,558
$
14,517
$
15,165
$
15,973
Fixed maturity securities AFS:
Structured Securities (2)
U.S. and foreign corporate
Other limited partnership interests
Other investments (3)
Total
__________________
(1)
The maximum exposure to loss relating to fixed maturity securities AFS is equal to their carrying amounts or the carrying
amounts of retained interests. The maximum exposure to loss relating to other limited partnership interests and real estate
joint ventures is equal to the carrying amounts plus any unfunded commitments. Such a maximum loss would be expected
to occur only upon bankruptcy of the issuer or investee.
(2)
For these variable interests, the Company’s involvement is limited to that of a passive investor in mortgage-backed or
asset-backed securities issued by trusts that do not have substantial equity.
(3) Other investments are comprised of real estate joint ventures, other invested assets and non-redeemable preferred stock.
As described in Note 15, the Company makes commitments to fund partnership investments in the normal course of
business. Excluding these commitments, the Company did not provide financial or other support to investees designated as
VIEs during the years ended December 31, 2017, 2016 and 2015.
214
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
6. Investments (continued)
Net Investment Income
The components of net investment income were as follows:
Investment income:
Fixed maturity securities
Equity securities
Mortgage loans
Policy loans
Real estate and real estate joint ventures
Other limited partnership interests
Cash, cash equivalents and short-term investments
Other
Subtotal
Less: Investment expenses
Subtotal, net
FVO CSEs — interest income — commercial mortgage loans
Net investment income
See “— Variable Interest Entities” for discussion of CSEs.
Years Ended December 31,
2017
2016
2015
(In millions)
$
2,420
$
2,642
$
2,478
12
446
73
53
184
35
25
3,248
178
3,070
8
19
401
78
32
163
20
16
3,371
176
3,195
12
19
373
78
108
134
9
12
3,211
128
3,083
16
$
3,078
$
3,207
$
3,099
See “— Related Party Investment Transactions” for discussion of related party net investment income and investment
expenses.
215
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
6. Investments (continued)
Net Investment Gains (Losses)
Components of Net Investment Gains (Losses)
The components of net investment gains (losses) were as follows:
Total gains (losses) on fixed maturity securities:
Total OTTI losses recognized — by sector and industry:
U.S. and foreign corporate securities — by industry:
Industrial
Consumer
Utility
Total U.S. and foreign corporate securities
RMBS
State and political subdivision
OTTI losses on fixed maturity securities recognized in earnings
Fixed maturity securities — net gains (losses) on sales and disposals
Total gains (losses) on fixed maturity securities
Total gains (losses) on equity securities:
OTTI losses on equity securities recognized in earnings
Equity securities — net gains (losses) on sales and disposals
Total gains (losses) on equity securities
Mortgage loans
Real estate and real estate joint ventures
Other limited partnership interests
Other
Subtotal
FVO CSEs:
Commercial mortgage loans
Long-term debt — related to commercial mortgage loans
Non-investment portfolio gains (losses)
Subtotal
Total net investment gains (losses)
Years Ended December 31,
2017
2016
2015
(In millions)
$
— $
(16) $
—
—
—
—
(1)
(1)
(25)
(26)
(4)
26
22
(9)
4
(11)
(5)
(25)
(3)
1
(1)
(3)
—
—
(16)
(6)
—
(22)
(40)
(62)
(2)
10
8
6
(34)
(7)
11
(78)
(2)
1
1
—
$
(28) $
(78) $
(3)
(8)
(6)
(17)
(14)
—
(31)
(59)
(90)
(3)
18
15
(11)
98
(1)
—
11
(7)
4
(1)
(4)
7
See “— Variable Interest Entities” for discussion of CSEs.
See “— Related Party Investment Transactions” for discussion of related party net investment gains (losses) related to
transfers of invested assets.
216
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
6. Investments (continued)
Sales or Disposals and Impairments of Fixed Maturity and Equity Securities
Investment gains and losses on sales of securities are determined on a specific identification basis. Proceeds from sales
or disposals of fixed maturity and equity securities and the components of fixed maturity and equity securities net investment
gains (losses) were as shown in the table below.
Years Ended December 31,
2017
2016
2015
2017
2016
2015
Fixed Maturity Securities
Equity Securities
(In millions)
$
$
$
$
$
12,665
59
(84)
(1)
$
$
39,800
266
(306)
(22)
$
$
32,524
190
(249)
(31)
$
$
68
27
(1)
(4)
$
$
48
10
—
(2)
(26) $
(62) $
(90) $
22
$
8
$
80
26
(8)
(3)
15
Proceeds
Gross investment gains
Gross investment losses
OTTI losses
Net investment gains (losses)
Credit Loss Rollforward
The table below presents a rollforward of the cumulative credit loss component of OTTI loss recognized in earnings on
fixed maturity securities still held for which a portion of the OTTI loss was recognized in OCI:
Balance at January 1,
Additions:
Additional impairments — credit loss OTTI on securities previously impaired
Reductions:
Sales (maturities, pay downs or prepayments) of securities previously impaired as credit loss OTTI
Increase in cash flows — accretion of previous credit loss OTTI
Balance at December 31,
Related Party Investment Transactions
Years Ended December 31,
2017
2016
(In millions)
28
$
—
(28)
—
— $
66
5
(42)
(1)
28
$
$
The Company previously transferred fixed maturity securities, mortgage loans, real estate and real estate joint ventures, to
and from former affiliates, which were as follows:
Estimated fair value of invested assets transferred to former affiliates
Amortized cost of invested assets transferred to former affiliates
Net investment gains (losses) recognized on transfers
Change in additional paid-in-capital recognized on transfers
Estimated fair value of invested assets transferred from former affiliates
Years Ended December 31,
2017
2016
2015
292
294
(In millions)
1,517
$
1,419
$
27
(2) $
71
— $
— $
5,582
$
$
$
$
$
$
$
$
$
$
185
169
16
—
928
In April 2016 and in November 2016, the Company received transfers of investments and cash and cash equivalents of
$5.2 billion for the recapture of risks related to certain single premium deferred annuity contracts previously reinsured to MLIC,
a former affiliate, which are included in the table above. See Note 5 for additional information related to these transfers.
At December 31, 2016, the Company had $1.1 billion of loans due from MetLife, Inc., which were included in other invested
assets. These loans were carried at fixed interest rates of 4.21% and 5.10%, payable semiannually, and were due on September 30,
2032 and December 31, 2033, respectively. In April 2017, these loans were satisfied in a non-cash exchange for $1.1 billion of
notes due to MetLife, Inc. See Note 9.
217
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
6. Investments (continued)
In January 2017, MLIC recaptured risks related to guaranteed minimum benefit guarantees on certain variable annuities
being reinsured by the Company. The Company transferred investments and cash and cash equivalents which are included in
the table above. See Note 5 for additional information related to the transfer.
In March 2017, the Company sold an operating joint venture with a book value of $89 million to MLIC for $286 million.
The operating joint venture was accounted for under the equity method and included in other invested assets. This sale resulted
in an increase in additional paid-in capital, which is included in shareholder’s net investment (see Note 10), of $202 million in
the first quarter of 2017.
The Company had affiliated loans outstanding to wholly owned real estate subsidiaries of MLIC which were fully repaid
in cash by December 2015. Net investment income and mortgage loan prepayment income earned from these affiliated loans
was $39 million for the year ended December 31, 2015.
The Company receives investment administrative services from MetLife Investment Advisors, LLC (“MLIA”), a related
party investment manager. The related investment administrative service charges were $95 million, $100 million and $81 million
for the years ended December 31, 2017, 2016 and 2015, respectively.
7. Derivatives
Accounting for Derivatives
See Note 1 for a description of the Company’s accounting policies for derivatives and Note 8 for information about the fair
value hierarchy for derivatives
Derivatives are financial instruments with values derived from interest rates, foreign currency exchange rates, credit spreads
and/or other financial indices. Derivatives may be exchange-traded or contracted in the over-the-counter (“OTC”) market. Certain
of the Company’s OTC derivatives are cleared and settled through central clearing counterparties (“OTC-cleared”), while others
are bilateral contracts between two counterparties (“OTC-bilateral”). The types of derivatives the Company uses include swaps,
forwards, futures and option contracts. To a lesser extent, the Company uses credit default swaps to synthetically replicate
investment risks and returns which are not readily available in the cash markets.
Interest Rate Derivatives
The Company uses a variety of interest rate derivatives to reduce its exposure to changes in interest rates, including
interest rate swaps, interest rate total return swaps, caps, floors, swaptions, futures and forwards.
Interest rate swaps are used by the Company primarily to reduce market risks from changes in interest rates and to alter
interest rate exposure arising from mismatches between assets and liabilities (duration mismatches). In an interest rate swap,
the Company agrees with another party to exchange, at specified intervals, the difference between fixed rate and floating rate
interest amounts as calculated by reference to an agreed notional amount. The Company utilizes interest rate swaps in fair
value, cash flow and nonqualifying hedging relationships.
Interest rate total return swaps are swaps whereby the Company agrees with another party to exchange, at specified
intervals, the difference between the economic risk and reward of an asset or a market index and the London Interbank Offered
Rate (“LIBOR”), calculated by reference to an agreed notional amount. No cash is exchanged at the outset of the contract.
Cash is paid and received over the life of the contract based on the terms of the swap. These transactions are entered into
pursuant to master agreements that provide for a single net payment to be made by the counterparty at each due date. Interest
rate total return swaps are used by the Company to reduce market risks from changes in interest rates and to alter interest rate
exposure arising from mismatches between assets and liabilities (duration mismatches). The Company utilizes interest rate
total return swaps in nonqualifying hedging relationships.
The Company purchases interest rate caps and floors primarily to protect its floating rate liabilities against rises in interest
rates above a specified level, and against interest rate exposure arising from mismatches between assets and liabilities, as well
as to protect its minimum rate guarantee liabilities against declines in interest rates below a specified level, respectively. In
certain instances, the Company locks in the economic impact of existing purchased caps and floors by entering into offsetting
written caps and floors. The Company utilizes interest rate caps and floors in nonqualifying hedging relationships.
218
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
7. Derivatives (continued)
In exchange-traded interest rate (Treasury and swap) futures transactions, the Company agrees to purchase or sell a
specified number of contracts, the value of which is determined by the different classes of interest rate securities, and to post
variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. The
Company enters into exchange-traded futures with regulated futures commission merchants that are members of the exchange.
Exchange-traded interest rate (Treasury and swap) futures are used primarily to hedge mismatches between the duration of
assets in a portfolio and the duration of liabilities supported by those assets, to hedge against changes in value of securities
the Company owns or anticipates acquiring, to hedge against changes in interest rates on anticipated liability issuances by
replicating Treasury or swap curve performance, and to hedge minimum guarantees embedded in certain variable annuity
products offered by the Company. The Company utilizes exchange-traded interest rate futures in nonqualifying hedging
relationships.
Swaptions are used by the Company to hedge interest rate risk associated with the Company’s long-term liabilities and
invested assets. A swaption is an option to enter into a swap with a forward starting effective date. In certain instances, the
Company locks in the economic impact of existing purchased swaptions by entering into offsetting written swaptions. The
Company pays a premium for purchased swaptions and receives a premium for written swaptions. The Company utilizes
swaptions in nonqualifying hedging relationships. Swaptions are included in interest rate options.
Foreign Currency Exchange Rate Derivatives
The Company uses foreign currency swaps to reduce the risk from fluctuations in foreign currency exchange rates
associated with its assets and liabilities denominated in foreign currencies. In a foreign currency swap transaction, the Company
agrees with another party to exchange, at specified intervals, the difference between one currency and another at a fixed
exchange rate, generally set at inception, calculated by reference to an agreed upon notional amount. The notional amount of
each currency is exchanged at the inception and termination of the currency swap by each party. The Company utilizes foreign
currency swaps in cash flow and nonqualifying hedging relationships.
To a lesser extent, the Company uses foreign currency forwards in nonqualifying hedging relationships.
Credit Derivatives
The Company enters into purchased credit default swaps to hedge against credit-related changes in the value of its
investments. In a credit default swap transaction, the Company agrees with another party to pay, at specified intervals, a
premium to hedge credit risk. If a credit event occurs, as defined by the contract, the contract may be cash settled or it may
be settled gross by the delivery of par quantities of the referenced investment equal to the specified swap notional amount in
exchange for the payment of cash amounts by the counterparty equal to the par value of the investment surrendered. Credit
events vary by type of issuer but typically include bankruptcy, failure to pay debt obligations, repudiation, moratorium,
involuntary restructuring or governmental intervention. In each case, payout on a credit default swap is triggered only after
the Credit Derivatives Determinations Committee of the International Swaps and Derivatives Association, Inc. (“ISDA”)
deems that a credit event has occurred. The Company utilizes credit default swaps in nonqualifying hedging relationships.
The Company enters into written credit default swaps to create synthetic credit investments that are either more expensive
to acquire or otherwise unavailable in the cash markets. These transactions are a combination of a derivative and one or more
cash instruments, such as U.S. government and agency securities or other fixed maturity securities. These credit default swaps
are not designated as hedging instruments.
Equity Derivatives
The Company uses a variety of equity derivatives to reduce its exposure to equity market risk, including equity index
options, equity variance swaps, exchange-traded equity futures and equity total return swaps.
Equity index options are used by the Company primarily to hedge minimum guarantees embedded in certain variable
annuity products offered by the Company. To hedge against adverse changes in equity indices, the Company enters into
contracts to sell the equity index within a limited time at a contracted price. The contracts will be net settled in cash based on
differentials in the indices at the time of exercise and the strike price. Certain of these contracts may also contain settlement
provisions linked to interest rates. In certain instances, the Company may enter into a combination of transactions to hedge
adverse changes in equity indices within a pre-determined range through the purchase and sale of options. The Company
utilizes equity index options in nonqualifying hedging relationships.
219
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
7. Derivatives (continued)
Equity variance swaps are used by the Company primarily to hedge minimum guarantees embedded in certain variable
annuity products offered by the Company. In an equity variance swap, the Company agrees with another party to exchange
amounts in the future, based on changes in equity volatility over a defined period. The Company utilizes equity variance swaps
in nonqualifying hedging relationships.
In exchange-traded equity futures transactions, the Company agrees to purchase or sell a specified number of contracts,
the value of which is determined by the different classes of equity securities, and to post variation margin on a daily basis in
an amount equal to the difference in the daily market values of those contracts. The Company enters into exchange-traded
futures with regulated futures commission merchants that are members of the exchange. Exchange-traded equity futures are
used primarily to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. The
Company utilizes exchange-traded equity futures in nonqualifying hedging relationships.
In an equity total return swap, the Company agrees with another party to exchange, at specified intervals, the difference
between the economic risk and reward of an asset or a market index and the LIBOR, calculated by reference to an agreed
notional amount. No cash is exchanged at the outset of the contract. Cash is paid and received over the life of the contract
based on the terms of the swap. The Company uses equity total return swaps to hedge its equity market guarantees in certain
of its insurance products. Equity total return swaps can be used as hedges or to create synthetic investments. The Company
utilizes equity total return swaps in nonqualifying hedging relationships.
220
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
7. Derivatives (continued)
Primary Risks Managed by Derivatives
The following table presents the primary underlying risk exposure, gross notional amount, and estimated fair value of the
Company’s derivatives, excluding embedded derivatives, held at:
Primary Underlying Risk Exposure
Derivatives Designated as Hedging Instruments
Fair value hedges:
Interest rate swaps
Cash flow hedges:
Interest rate swaps
Interest rate
Interest rate
Foreign currency swaps
Foreign currency exchange rate
Subtotal
Total qualifying hedges
Derivatives Not Designated or Not Qualifying as Hedging
Instruments
Interest rate swaps
Interest rate floors
Interest rate caps
Interest rate futures
Interest rate options
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate total return swaps
Foreign currency swaps
Interest rate
Foreign currency exchange rate
Foreign currency forwards
Foreign currency exchange rate
Credit default
swaps — purchased
Credit default swaps — written
Equity futures
Equity index options
Equity variance swaps
Equity total return swaps
Credit
Credit
Equity market
Equity market
Equity market
Equity market
December 31,
2017
2016
Estimated Fair Value
Estimated Fair Value
Gross
Notional
Amount
Assets
Liabilities
Gross
Notional
Amount
(In millions)
Assets
Liabilities
$
175
$
44
$
— $
310
$
41
$
1,928
1,687
27
1,827
1,854
2,029
20,213
—
2,671
282
5
94
99
143
922
—
7
1
24,600
133
—
1,115
130
65
1,900
2,713
47,066
8,998
1,767
—
71
—
—
40
15
794
128
—
—
75
75
75
774
—
—
—
63
—
42
1
1
—
—
1,664
430
79
45
1,493
1,538
1,848
28,175
2,100
12,042
1,288
15,520
3,876
1,261
158
37
1,913
8,037
37,501
14,894
2,855
7
202
209
250
6
25
9
136
—
155
9
—
28
38
897
140
1
—
—
11
11
11
2
—
—
—
611
4
—
—
—
—
934
517
117
3,872
3,883
Total non-designated or nonqualifying derivatives
111,520
2,111
3,054
129,657
3,372
Total
$ 113,549
$ 2,254
$
3,129
$ 131,505
$
3,622
$
Based on gross notional amounts, a substantial portion of the Company’s derivatives was not designated or did not qualify
as part of a hedging relationship at both December 31, 2017 and 2016. The Company’s use of derivatives includes (i) derivatives
that serve as macro hedges of the Company’s exposure to various risks and that generally do not qualify for hedge accounting
due to the criteria required under the portfolio hedging rules; (ii) derivatives that economically hedge insurance liabilities that
contain mortality or morbidity risk and that generally do not qualify for hedge accounting because the lack of these risks in the
derivatives cannot support an expectation of a highly effective hedging relationship; (iii) derivatives that economically hedge
embedded derivatives that do not qualify for hedge accounting because the changes in estimated fair value of the embedded
derivatives are already recorded in net income; and (iv) written credit default swaps that are used to create synthetic credit
investments and that do not qualify for hedge accounting because they do not involve a hedging relationship. For these
nonqualified derivatives, changes in market factors can lead to the recognition of fair value changes on the statement of operations
without an offsetting gain or loss recognized in earnings for the item being hedged.
221
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
7. Derivatives (continued)
The following table presents earned income on derivatives:
Qualifying hedges:
Net investment income
Interest credited to policyholder account balances
Nonqualifying hedges:
Net derivative gains (losses)
Policyholder benefits and claims
Total
Years Ended December 31,
2017
2016
2015
(In millions)
$
$
$
23
—
314
8
$
21
—
461
15
345
$
497
$
13
(2)
361
14
386
The following tables present the amount and location of gains (losses) recognized for derivatives and gains (losses) pertaining
to hedged items presented in net derivative gains (losses):
$
Derivatives Designated as Hedging Instruments:
Fair value hedges (5):
Interest rate derivatives
Total fair value hedges
Cash flow hedges (5):
Interest rate derivatives
Foreign currency exchange rate derivatives
Total cash flow hedges
Derivatives Not Designated or Not Qualifying as Hedging
Instruments:
Interest rate derivatives
Foreign currency exchange rate derivatives
Credit derivatives
Equity derivatives
Embedded derivatives
Total non-qualifying hedges
Total
Year Ended December 31, 2017
Net
Derivative
Gains
(Losses)
Recognized for
Derivatives (1)
Net
Derivatives
Gains
(Losses)
Recognized
for
Hedged
Items (2)
Net
Investment
Income
(3)
Policyholder
Benefits and
Claims (4)
Amount
of Gains
(Losses)
deferred
in AOCI
(In millions)
$
(2) $
(2)
—
(9)
(9)
—
(33)
—
—
—
(33)
2
2
2
10
12
(324)
(99)
21
(2,584)
1,082
(1,904)
— $
— $
—
6
—
6
—
—
—
(1)
—
(1)
—
—
—
—
8
—
—
(341)
(16)
(349)
—
—
3
(160)
(157)
—
—
—
—
—
—
$
(1,890) $
(44) $
5
$
(349) $
(157)
222
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
7. Derivatives (continued)
Year Ended December 31, 2016
Net
Derivative
Gains
(Losses)
Recognized for
Derivatives (1)
Net
Derivatives
Gains
(Losses)
Recognized
for
Hedged
Items (2)
Net
Investment
Income
(3)
Policyholder
Benefits and
Claims (4)
Amount
of Gains
(Losses)
deferred
in AOCI
$
Derivatives Designated as Hedging Instruments:
Fair value hedges (5):
Interest rate derivatives
Total fair value hedges
Cash flow hedges (5):
Interest rate derivatives
Foreign currency exchange rate derivatives
Total cash flow hedges
Derivatives Not Designated or Not Qualifying as Hedging
Instruments:
Interest rate derivatives
Foreign currency exchange rate derivatives
Credit derivatives
Equity derivatives
Embedded derivatives
Total non-qualifying hedges
Total
(In millions)
$
(1) $
(1)
—
(3)
(3)
—
(15)
—
—
—
(15)
1
1
35
5
40
(2,872)
76
10
(1,724)
(1,824)
(6,334)
— $
— $
—
5
—
5
—
—
—
(6)
—
(6)
—
—
—
—
(4)
—
—
(320)
(4)
(328)
—
—
28
43
71
—
—
—
—
—
—
71
$
(6,293) $
(19) $
(1) $
(328) $
223
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
7. Derivatives (continued)
Year Ended December 31, 2015
Net
Derivative
Gains
(Losses)
Recognized for
Derivatives (1)
Net
Derivatives
Gains
(Losses)
Recognized
for
Hedged
Items (2)
Net
Investment
Income
(3)
Policyholder
Benefits and
Claims (4)
Amount
of Gains
(Losses)
deferred
in AOCI
$
Derivatives Designated as Hedging Instruments:
Fair value hedges (5):
Interest rate derivatives
Total fair value hedges
Cash flow hedges (5):
Interest rate derivatives
Foreign currency exchange rate derivatives
Total cash flow hedges
Derivatives Not Designated or Not Qualifying as Hedging
Instruments:
Interest rate derivatives
Foreign currency exchange rate derivatives
Credit derivatives
Equity derivatives
Embedded derivatives
Total non-qualifying hedges
Total
______________
(In millions)
$
(1) $
(1)
—
1
1
—
(6)
—
—
—
(6)
3
3
3
—
3
(67)
45
(14)
(476)
(175)
(687)
—
3
—
3
—
—
—
(4)
—
(4)
— $
— $
—
—
17
85
102
—
—
—
—
—
—
—
—
—
—
5
—
—
(25)
21
1
1
$
(681) $
(6) $
(1) $
$
102
(1)
(2)
Includes gains (losses) reclassified from AOCI for cash flow hedges. Ineffective portion of the gains (losses) recognized
in income is not significant.
Includes foreign currency transaction gains (losses) on hedged items in cash flow and nonqualifying hedging relationships.
Hedged items in fair value hedging relationship includes fixed rate liabilities reported in policyholder account balances
or future policy benefits and fixed maturity securities.
(3)
Includes changes in estimated fair value related to economic hedges of equity method investments in joint ventures and
gains (losses) reclassified from AOCI for cash flow hedges.
(4) Changes in estimated fair value related to economic hedges of variable annuity guarantees included in future policy
benefits.
(5) All components of each derivative's gain or loss were included in the assessment of hedge effectiveness.
In certain instances, the Company discontinued cash flow hedge accounting because the forecasted transactions were no
longer probable of occurring. Because certain of the forecasted transactions also were not probable of occurring within two
months of the anticipated date, the Company reclassified amounts from AOCI into net derivative gains (losses). These amounts
were $12 million, $1 million and $3 million for the years ended December 31, 2017, 2016 and 2015, respectively.
At December 31, 2017 and 2016, the maximum length of time over which the Company was hedging its exposure to
variability in future cash flows for forecasted transactions did not exceed two years and three years, respectively.
At December 31, 2017 and 2016, the balance in AOCI associated with cash flow hedges was $239 million and $414 million,
respectively.
224
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
7. Derivatives (continued)
Credit Derivatives
In connection with synthetically created credit investment transactions, the Company writes credit default swaps for which
it receives a premium to insure credit risk. Such credit derivatives are included within the nonqualifying derivatives and derivatives
for purposes other than hedging table. If a credit event occurs, as defined by the contract, the contract may be cash settled or it
may be settled gross by the Company paying the counterparty the specified swap notional amount in exchange for the delivery
of par quantities of the referenced credit obligation. The Company can terminate these contracts at any time through cash
settlement with the counterparty at an amount equal to the then current estimated fair value of the credit default swaps.
The following table presents the estimated fair value, maximum amount of future payments and weighted average years to
maturity of written credit default swaps at:
2017
Maximum
Amount
of Future
Payments under
Credit Default
Swaps
Estimated
Fair Value
of Credit
Default
Swaps
December 31,
Weighted
Average
Years to
Maturity (2)
Estimated
Fair Value
of Credit
Default
Swaps
(Dollars in millions)
2016
Maximum
Amount
of Future
Payments under
Credit Default
Swaps
Weighted
Average
Years to
Maturity (2)
$
$
12
28
—
40
$
$
558
1,317
25
1,900
2.8
4.7
4.5
4.1
$
$
8
20
—
28
$
$
478
1,415
20
1,913
3.6
4.4
2.7
4.2
Rating Agency Designation of Referenced
Credit Obligations (1)
Aaa/Aa/A
Baa
Ba
Total
__________________
(1)
Includes both single name credit default swaps that may be referenced to the credit of corporations, foreign governments,
or state and political subdivisions and credit default swap referencing indices. The rating agency designations are based
on availability and the midpoint of the applicable ratings among Moody’s Investors Service, Inc. (“Moody’s”), S&P and
Fitch Ratings. If no rating is available from a rating agency, then an internally developed rating is used.
(2)
The weighted average years to maturity of the credit default swaps is calculated based on weighted average gross notional
amounts.
Counterparty Credit Risk
The Company may be exposed to credit-related losses in the event of nonperformance by its counterparties to derivatives.
Generally, the current credit exposure of the Company’s derivatives is limited to the net positive estimated fair value of derivatives
at the reporting date after taking into consideration the existence of master netting or similar agreements and any collateral
received pursuant to such agreements.
The Company manages its credit risk related to derivatives by entering into transactions with creditworthy counterparties
and establishing and monitoring exposure limits. The Company’s OTC-bilateral derivative transactions are generally governed
by ISDA Master Agreements which provide for legally enforceable set-off and close-out netting of exposures to specific
counterparties in the event of early termination of a transaction, which includes, but is not limited to, events of default and
bankruptcy. In the event of an early termination, the Company is permitted to set off receivables from the counterparty against
payables to the same counterparty arising out of all included transactions. Substantially all of the Company’s ISDA Master
Agreements also include Credit Support Annex provisions which require both the pledging and accepting of collateral in
connection with its OTC-bilateral derivatives.
The Company’s OTC-cleared derivatives are effected through central clearing counterparties and its exchange-traded
derivatives are effected through regulated exchanges. Such positions are marked to market and margined on a daily basis (both
initial margin and variation margin), and the Company has minimal exposure to credit-related losses in the event of
nonperformance by counterparties to such derivatives.
See Note 8 for a description of the impact of credit risk on the valuation of derivatives.
225
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
7. Derivatives (continued)
The estimated fair values of the Company’s net derivative assets and net derivative liabilities after the application of master
netting agreements and collateral were as follows at:
Derivatives Subject to a Master Netting Arrangement or a Similar Arrangement
Assets
Liabilities
Assets
Liabilities
December 31,
2017
2016
Gross estimated fair value of derivatives:
OTC-bilateral (1)
OTC-cleared and Exchange-traded (1), (6)
Total gross estimated fair value of derivatives (1)
Amounts offset on the consolidated and combined balance sheets
Estimated fair value of derivatives presented on the consolidated and combined
balance sheets (1), (6)
Gross amounts not offset on the consolidated and combined balance sheets:
Gross estimated fair value of derivatives: (2)
(In millions)
$
2,233
$
3,081
$
3,411
$
2,929
70
2,303
—
40
3,121
—
315
3,726
—
905
3,834
—
2,303
3,121
3,726
3,834
OTC-bilateral
OTC-cleared and Exchange-traded
Cash collateral: (3), (4)
OTC-bilateral
OTC-cleared and Exchange-traded
Securities collateral: (5)
OTC-bilateral
OTC-cleared and Exchange-traded
Net amount after application of master netting agreements and collateral
$
__________________
(1,942)
(1,942)
(2,231)
(2,231)
(1)
(1)
(165)
(165)
(257)
(28)
—
(39)
(31)
(1,138)
—
44
$
—
1
(653)
(92)
(429)
—
$
156
$
—
(740)
(698)
—
—
(1) At December 31, 2017 and 2016, derivative assets included income or (expense) accruals reported in accrued investment
income or in other liabilities of $49 million and $104 million, respectively, and derivative liabilities included (income)
or expense accruals reported in accrued investment income or in other liabilities of ($8) million and ($49) million,
respectively.
(2)
Estimated fair value of derivatives is limited to the amount that is subject to set-off and includes income or expense
accruals.
(3) Cash collateral received by the Company for OTC-bilateral and OTC-cleared derivatives is included in cash and cash
equivalents, short-term investments or in fixed maturity securities, and the obligation to return it is included in payables
for collateral under securities loaned and other transactions on the balance sheet.
(4)
The receivable for the return of cash collateral provided by the Company is inclusive of initial margin on exchange-traded
and OTC-cleared derivatives and is included in premiums, reinsurance and other receivables on the balance sheet. The
amount of cash collateral offset in the table above is limited to the net estimated fair value of derivatives after application
of netting agreements. At December 31, 2017 and 2016, the Company received excess cash collateral of $94 million and
$4 million, respectively, and provided excess cash collateral of $5 million and $25 million, respectively, which is not
included in the table above due to the foregoing limitation.
226
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
7. Derivatives (continued)
(5)
Securities collateral received by the Company is held in separate custodial accounts and is not recorded on the balance
sheet. Subject to certain constraints, the Company is permitted by contract to sell or re-pledge this collateral, but at
December 31, 2017, none of the collateral had been sold or re-pledged. Securities collateral pledged by the Company is
reported in fixed maturity securities on the balance sheet. Subject to certain constraints, the counterparties are permitted
by contract to sell or re-pledge this collateral. The amount of securities collateral offset in the table above is limited to
the net estimated fair value of derivatives after application of netting agreements and cash collateral. At December 31,
2017 and 2016, the Company received excess securities collateral with an estimated fair value of $337 million and
$135 million, respectively, for its OTC-bilateral derivatives, which are not included in the table above due to the foregoing
limitation. At December 31, 2017 and 2016, the Company provided excess securities collateral with an estimated fair
value of $471 million and $108 million, respectively, for its OTC-bilateral derivatives, $427 million and $630 million,
respectively, for its OTC-cleared derivatives, and $118 million and $453 million, respectively, for its exchange-traded
derivatives, which are not included in the table above due to the foregoing limitation.
(6)
Effective January 3, 2017, the CME amended its rulebook, resulting in the characterization of variation margin transfers
as settlement payments, as opposed to adjustments to collateral. See Note 1 for further information on the CME
amendments.
The Company’s collateral arrangements for its OTC-bilateral derivatives generally require the counterparty in a net liability
position, after considering the effect of netting agreements, to pledge collateral when the amount owed by that counterparty
reaches a minimum transfer amount. A small number of these arrangements also include credit-contingent provisions that include
a threshold above which collateral must be posted. Such agreements provide for a reduction of these thresholds (on a sliding
scale that converges toward zero) in the event of downgrades in the credit ratings of the Company and/or the counterparty. In
addition, substantially all of the Company’s netting agreements for derivatives contain provisions that require both the Company
and the counterparty to maintain a specific investment grade credit rating from each of Moody’s and S&P. If a party’s financial
strength or credit ratings were to fall below that specific investment grade credit rating, that party would be in violation of these
provisions, and the other party to the derivatives could terminate the transactions and demand immediate settlement and payment
based on such party’s reasonable valuation of the derivatives.
The following table presents the estimated fair value of the Company’s OTC-bilateral derivatives that are in a net liability
position after considering the effect of netting agreements, together with the estimated fair value and balance sheet location of
the collateral pledged. The Company’s collateral agreements require both parties to be fully collateralized, as such, the Company
would not be required to post additional collateral as a result of a downgrade in its financial strength rating. OTC-bilateral
derivatives that are not subject to collateral agreements are excluded from this table.
Estimated fair value of derivatives in a net liability position (1)
Estimated Fair Value of Collateral Provided:
Fixed maturity securities
__________________
(1) After taking into consideration the existence of netting agreements.
Embedded Derivatives
December 31,
2017
2016
(In millions)
1,138
1,414
$
$
698
777
$
$
The Company issues certain products or purchases certain investments that contain embedded derivatives that are required
to be separated from their host contracts and accounted for as freestanding derivatives. These host contracts principally include:
variable annuities with guaranteed minimum benefits, including GMWBs, GMABs and certain GMIBs; related party ceded
reinsurance of guaranteed minimum benefits related to GMWBs, GMABs and certain GMIBs; related party assumed reinsurance
of guaranteed minimum benefits related to GMWBs and certain GMIBs; funds withheld on assumed and ceded reinsurance;
assumed reinsurance on fixed deferred annuities; fixed annuities with equity-indexed returns; and certain debt and equity
securities.
227
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
7. Derivatives (continued)
The following table presents the estimated fair value and balance sheet location of the Company’s embedded derivatives
that have been separated from their host contracts at:
Balance Sheet Location
2017
2016
December 31,
(In millions)
Embedded derivatives within asset host contracts:
Ceded guaranteed minimum benefits
Options embedded in debt or equity securities
Embedded derivatives within asset host contracts
Embedded derivatives within liability host contracts:
Direct guaranteed minimum benefits
Assumed reinsurance on fixed deferred annuities
Assumed guaranteed minimum benefits
Fixed annuities with equity indexed returns
Embedded derivatives within liability host contracts
Premiums, reinsurance and other
receivables
Investments
Policyholder account balances
Policyholder account balances
Policyholder account balances
Policyholder account balances
The following table presents changes in estimated fair value related to embedded derivatives:
$
$
$
227
$
(52)
175
$
628
(49)
579
1,212
$
2,359
1
—
674
—
460
192
$
1,887
$
3,011
Net derivative gains (losses) (1), (2)
Policyholder benefits and claims
__________________
Years Ended December 31,
2017
2016
2015
(In millions)
$
$
1,082
$
(1,824) $
(16) $
(4) $
(175)
21
(1)
The valuation of direct and assumed guaranteed minimum benefits includes a nonperformance risk adjustment. The
amounts included in net derivative gains (losses) in connection with this adjustment were $290 million, $246 million and
$26 million for the years ended December 31, 2017, 2016 and 2015, respectively. In addition, the valuation of ceded
guaranteed minimum benefits includes a nonperformance risk adjustment. The amounts included in net derivative gains
(losses) in connection with this adjustment, were less than $1 million, ($22) million and ($5) million for the years ended
December 31, 2017, 2016 and 2015, respectively.
(2)
See Note 5 for discussion of related party net derivative gains (losses).
228
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
8. Fair Value
When developing estimated fair values, the Company considers three broad valuation techniques: (i) the market approach,
(ii) the income approach, and (iii) the cost approach. The Company determines the most appropriate valuation technique to use,
given what is being measured and the availability of sufficient inputs, giving priority to observable inputs. The Company
categorizes its assets and liabilities measured at estimated fair value into a three-level hierarchy, based on the significant input
with the lowest level in its valuation. The input levels are as follows:
Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities. The Company defines active markets based
on average trading volume for equity securities. The size of the bid/ask spread is used as an indicator of market activity
for fixed maturity securities.
Level 2 Quoted prices in markets that are not active or inputs that are observable either directly or indirectly. These inputs can
include quoted prices for similar assets or liabilities other than quoted prices in Level 1, quoted prices in markets that
are not active, or other significant inputs that are observable or can be derived principally from or corroborated by
observable market data for substantially the full term of the assets or liabilities.
Level 3 Unobservable inputs that are supported by little or no market activity and are significant to the determination of estimated
fair value of the assets or liabilities. Unobservable inputs reflect the reporting entity’s own assumptions about the
assumptions that market participants would use in pricing the asset or liability.
229
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
8. Fair Value (continued)
Recurring Fair Value Measurements
The assets and liabilities measured at estimated fair value on a recurring basis and their corresponding placement in the fair
value hierarchy, including those items for which the Company has elected the FVO, are presented below at:
Assets
Fixed maturity securities:
U.S. corporate
U.S government and agency
RMBS
Foreign corporate
State and political subdivision
CMBS
ABS
Foreign government
Total fixed maturity securities
Equity securities
Short-term investments
Commercial mortgage loans held by CSEs — FVO
Loans to MetLife, Inc.
Derivative assets: (1)
Interest rate
Foreign currency exchange rate
Credit
Equity market
Total derivative assets
Embedded derivatives within asset host contracts (2)
Separate account assets
Total assets
Liabilities
Derivative liabilities: (1)
Interest rate
Foreign currency exchange rate
Credit
Equity market
Total derivative liabilities
Embedded derivatives within liability host contracts (2)
Long-term debt of CSEs — FVO
Total liabilities
December 31, 2017
Fair Value Hierarchy
Level 1
Level 2
Level 3
Total Estimated
Fair Value
(In millions)
$
— $
22,048
$
909
$
8,304
—
—
—
—
—
—
7,988
6,989
5,935
4,181
3,287
1,723
1,304
8,304
53,455
18
142
—
—
1
—
—
15
16
—
90
156
115
—
1,111
165
30
773
2,079
—
410
117,842
—
988
1,088
—
136
106
5
3,232
124
14
—
—
—
—
10
149
159
227
5
$
$
$
8,890
$
173,737
$
3,761
$
— $
—
—
—
—
—
—
837
117
1
1,736
2,691
—
11
$
— $
1
—
437
438
1,887
—
— $
2,702
$
2,325
$
22,957
16,292
7,977
7,023
4,181
3,423
1,829
1,309
64,991
232
312
115
—
1,112
165
40
937
2,254
227
118,257
186,388
837
118
1
2,173
3,129
1,887
11
5,027
230
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
8. Fair Value (continued)
December 31, 2016
Fair Value Hierarchy
Level 1
Level 2
Level 3
Total Estimated
Fair Value
(In millions)
Assets
Fixed maturity securities:
U.S. corporate
U.S. government and agency
RMBS
Foreign corporate
State and political subdivision
CMBS
ABS
Foreign government
Total fixed maturity securities
Equity securities
Short-term investments
Commercial mortgage loans held by CSEs — FVO
Loans to MetLife, Inc.
Derivative assets: (1)
Interest rate
Foreign currency exchange rate
Credit
Equity market
Total derivative assets
Embedded derivatives within asset host contracts (2)
Separate account assets
Total assets
Liabilities
Derivative liabilities: (1)
Interest rate
Foreign currency exchange rate
Credit
Equity market
Total derivative liabilities
Embedded derivatives within liability host contracts (2)
Long-term debt of CSEs — FVO
Total liabilities
__________________
$
— $
20,828
$
1,483
$
6,210
—
—
—
—
—
—
6,210
39
718
—
—
9
—
—
38
47
—
6,880
6,703
5,485
3,928
3,645
2,428
1,162
51,059
124
568
136
1,090
2,143
366
20
859
3,388
—
720
112,313
—
1,320
908
17
167
224
—
4,119
137
2
—
—
—
—
8
179
187
628
10
7,734
$
168,678
$
5,083
$
22,311
13,090
8,023
6,393
3,945
3,812
2,652
1,162
61,388
300
1,288
136
1,090
2,152
366
28
1,076
3,622
628
113,043
181,495
— $
1,689
$
611
$
2,300
—
—
—
—
—
—
15
—
1,038
2,742
—
23
—
—
530
1,141
3,011
—
— $
2,765
$
4,152
$
15
—
1,568
3,883
3,011
23
6,917
$
$
$
(1) Derivative assets are presented within other invested assets on the consolidated and combined balance sheets and derivative
liabilities are presented within other liabilities on the consolidated and combined balance sheets. The amounts are presented
gross in the tables above to reflect the presentation on the consolidated and combined balance sheets, but are presented
net for purposes of the rollforward in the Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
tables.
(2)
Embedded derivatives within asset host contracts are presented within premiums, reinsurance and other receivables and
other invested assets on the consolidated and combined balance sheets. Embedded derivatives within liability host contracts
are presented within policyholder account balances, on the consolidated and combined balance sheets. At December 31,
2017 and 2016, debt and equity securities also included embedded derivatives of ($52) million and ($49) million,
respectively.
231
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
8. Fair Value (continued)
Valuation Controls and Procedures
The Company monitors and provides oversight of valuation controls and policies for securities, mortgage loans and
derivatives, which are primarily executed by MLIA. The valuation methodologies used to determine fair values prioritize the
use of observable market prices and market-based parameters and determines that judgmental valuation adjustments, when
applied, are based upon established policies and are applied consistently over time. The valuation methodologies for securities,
mortgage loans and derivatives are reviewed on an ongoing basis and revised when necessary, based on changing market
conditions. In addition, the Chief Accounting Officer periodically reports to the Audit Committee of Brighthouse’s Board of
Directors regarding compliance with fair value accounting standards.
The fair value of financial assets and financial liabilities is based on quoted market prices, where available. The Company
assesses whether prices received represent a reasonable estimate of fair value through controls designed to ensure valuations
represent an exit price. MLIA performs several controls, including certain monthly controls, which include, but are not limited
to, analysis of portfolio returns to corresponding benchmark returns, comparing a sample of executed prices of securities sold
to the fair value estimates, reviewing the bid/ask spreads to assess activity, comparing prices from multiple independent pricing
services and ongoing due diligence to confirm that independent pricing services use market-based parameters. The process
includes a determination of the observability of inputs used in estimated fair values received from independent pricing services
or brokers by assessing whether these inputs can be corroborated by observable market data. Independent non-binding broker
quotes, also referred to herein as “consensus pricing”, are used for non-significant portion of the portfolio. Prices received
from independent brokers are assessed to determine if they represent a reasonable estimate of fair value by considering such
pricing relative to the current market dynamics and current pricing for similar financial instruments. Fixed maturity securities
priced using independent non-binding broker quotations represent less than 1% of the total estimated fair value of fixed
maturity securities and 5% of the total estimated fair value of Level 3 fixed maturity securities at December 31, 2017.
MLIA also applies a formal process to challenge any prices received from independent pricing services that are not
considered representative of estimated fair value. If prices received from independent pricing services are not considered
reflective of market activity or representative of estimated fair value, independent non-binding broker quotations are obtained.
If obtaining an independent non-binding broker quotation is unsuccessful, MLIA will use the last available price.
The Company reviews outputs of MLIA’s controls and performs additional controls, including certain monthly controls,
which include but are not limited to, performing balance sheet analytics to assess reasonableness of period to period pricing
changes, including any price adjustments. Price adjustments are applied if prices or quotes received from independent pricing
services or brokers are not considered reflective of market activity or representative of estimated fair value. The Company
did not have significant price adjustments during the year ended December 31, 2017.
Determination of Fair Value
Fixed maturities
The fair values for actively traded marketable bonds, primarily U.S. government and agency securities, are determined
using the quoted market prices and are classified as Level 1 assets. For fixed maturities classified as Level 2 assets, fair
values are determined using either a market or income approach and are valued based on a variety of observable inputs as
described below.
U.S. corporate and foreign corporate securities: Fair value is determined using third-party commercial pricing services,
with the primary inputs being quoted prices in markets that are not active, benchmark yields, spreads off benchmark yields,
new issuances, issuer rating, trades of identical or comparable securities, or duration. Privately-placed securities are valued
using the additional key inputs: market yield curve, call provisions, observable prices and spreads for similar public or
private securities that incorporate the credit quality and industry sector of the issuer, and delta spread adjustments to reflect
specific credit-related issues.
U.S. government and agency, state and political subdivision and foreign government securities: Fair value is determined
using third-party commercial pricing services, with the primary inputs being quoted prices in markets that are not active,
benchmark U.S. Treasury yield or other yields, spread off the U.S. Treasury yield curve for the identical security, issuer
ratings and issuer spreads, broker dealer quotes, and comparable securities that are actively traded.
Structured securities: Fair value is determined using third-party commercial pricing services, with the primary inputs
being quoted prices in markets that are not active, spreads for actively traded securities, spreads off benchmark yields,
232
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
8. Fair Value (continued)
expected prepayment speeds and volumes, current and forecasted loss severity, ratings, geographic region, weighted average
coupon and weighted average maturity, average delinquency rates and debt-service coverage ratios. Other issuance-specific
information is also used, including, but not limited to; collateral type, structure of the security, vintage of the loans, payment
terms of the underlying asset, payment priority within tranche, and deal performance.
Equity securities, short-term investments, loans to MetLife, Inc., commercial mortgage loans held by CSEs FVO and
long-term debt of CSEs - FVO
The fair value for actively traded equity and short-term investments are determined using quoted market prices and
are classified as Level 1 assets. For financial instruments classified as Level 2 assets or liabilities, fair values are determined
using a market approach and are valued based on a variety of observable inputs as described below.
Equity securities, short-term investments and loans to MetLife, Inc.: Fair value is determined using third-party
commercial pricing services, with the primary input being quoted prices in markets that are not active.
Commercial mortgage loans held by CSEs - FVO and long-term debt of CSEs - FVO: Fair value is determined using
third-party commercial pricing services, with the primary input being quoted securitization market price determined
principally by independent pricing services using observable inputs or quoted prices or reported NAV provided by the fund
managers.
Derivatives
The fair values for exchange-traded derivatives are determined using the quoted market prices and are classified as
Level 1 assets. For OTC-bilateral derivatives and OTC-cleared derivatives classified as Level 2 assets or liabilities, fair
values are determined using the income approach. Valuations of non-option-based derivatives utilize present value
techniques, whereas valuations of option-based derivatives utilize option pricing models which are based on market standard
valuation methodologies and a variety of observable inputs.
The significant inputs to the pricing models for most OTC-bilateral and OTC-cleared derivatives are inputs that are
observable in the market or can be derived principally from, or corroborated by, observable market data. Certain OTC-
bilateral and OTC-cleared derivatives may rely on inputs that are significant to the estimated fair value that are not observable
in the market or cannot be derived principally from, or corroborated by, observable market data. These unobservable inputs
may involve significant management judgment or estimation. Even though unobservable, these inputs are based on
assumptions deemed appropriate given the circumstances and management believes they are consistent with what other
market participants would use when pricing such instruments.
Most inputs for OTC-bilateral and OTC-cleared derivatives are mid-market inputs but, in certain cases, liquidity
adjustments are made when they are deemed more representative of exit value. Market liquidity, as well as the use of different
methodologies, assumptions and inputs, may have a material effect on the estimated fair values of the Company’s derivatives
and could materially affect net income.
The credit risk of both the counterparty and the Company are considered in determining the estimated fair value for
all OTC-bilateral and OTC-cleared derivatives, and any potential credit adjustment is based on the net exposure by
counterparty after taking into account the effects of netting agreements and collateral arrangements. The Company values
its OTC-bilateral and OTC-cleared derivatives using standard swap curves which may include a spread to the risk-free rate,
depending upon specific collateral arrangements. This credit spread is appropriate for those parties that execute trades at
pricing levels consistent with similar collateral arrangements. As the Company and its significant derivative counterparties
generally execute trades at such pricing levels and hold sufficient collateral, additional credit risk adjustments are not
currently required in the valuation process. The Company’s ability to consistently execute at such pricing levels is in part
due to the netting agreements and collateral arrangements that are in place with all of its significant derivative counterparties.
An evaluation of the requirement to make additional credit risk adjustments is performed by the Company each reporting
period.
Embedded Derivatives
Embedded derivatives principally include certain direct, assumed and ceded variable annuity guarantees, equity or
bond indexed crediting rates within certain annuity contracts, and those related to funds withheld on ceded reinsurance
agreements. Embedded derivatives are recorded at estimated fair value with changes in estimated fair value reported in net
income.
233
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
8. Fair Value (continued)
The Company issues certain variable annuity products with guaranteed minimum benefits. GMWBs, GMABs and
certain GMIBs contain embedded derivatives, which are measured at estimated fair value separately from the host variable
annuity contract, with changes in estimated fair value reported in net derivative gains (losses). These embedded derivatives
are classified within policyholder account balances on the consolidated and combined balance sheets.
The Company’s actuarial department calculates the fair value of these embedded derivatives, which are estimated as
the present value of projected future benefits minus the present value of projected future fees using actuarial and capital
market assumptions including expectations concerning policyholder behavior. The calculation is based on in-force business,
and is performed using standard actuarial valuation software which projects future cash flows from the embedded derivative
over multiple risk neutral stochastic scenarios using observable risk-free rates.
Capital market assumptions, such as risk-free rates and implied volatilities, are based on market prices for publicly
traded instruments to the extent that prices for such instruments are observable. Implied volatilities beyond the observable
period are extrapolated based on observable implied volatilities and historical volatilities. Actuarial assumptions, including
mortality, lapse, withdrawal and utilization, are unobservable and are reviewed at least annually based on actuarial studies
of historical experience.
The valuation of these guarantee liabilities includes nonperformance risk adjustments and adjustments for a risk margin
related to non-capital market inputs. The nonperformance adjustment is determined by taking into consideration publicly
available information relating to spreads in the secondary market for Brighthouse Financial, Inc.’s debt. These observable
spreads are then adjusted to reflect the priority of these liabilities and claims paying ability of the issuing insurance subsidiaries
as compared to Brighthouse Financial, Inc.’s overall financial strength.
Risk margins are established to capture the non-capital market risks of the instrument which represent the additional
compensation a market participant would require to assume the risks related to the uncertainties of such actuarial assumptions
as annuitization, premium persistency, partial withdrawal and surrenders. The establishment of risk margins requires the
use of significant management judgment, including assumptions of the amount and cost of capital needed to cover the
guarantees. These guarantees may be more costly than expected in volatile or declining equity markets. Market conditions
including, but not limited to, changes in interest rates, equity indices, market volatility and foreign currency exchange rates;
changes in nonperformance risk; and variations in actuarial assumptions regarding policyholder behavior, mortality and
risk margins related to non-capital market inputs, may result in significant fluctuations in the estimated fair value of the
guarantees that could materially affect net income.
The Company recaptured from a former affiliate the risk associated with certain GMIBs. These embedded derivatives
are included in policyholder account balances on the consolidated and combined balance sheets with changes in estimated
fair value reported in net derivative gains (losses). The value of the embedded derivatives on these recaptured risks is
determined using a methodology consistent with that described previously for the guarantees directly written by the Company.
The Company ceded to a former affiliate the risk associated with certain of the GMIBs, GMABs and GMWBs described
above that are also accounted for as embedded derivatives. In addition to ceding risks associated with guarantees that are
accounted for as embedded derivatives, the Company also ceded, to a former affiliate, certain directly written GMIBs that
are accounted for as insurance (i.e., not as embedded derivatives), but where the reinsurance agreement contains an embedded
derivative. These embedded derivatives are included within premiums, reinsurance and other receivables on the consolidated
and combined balance sheets with changes in estimated fair value reported in net derivative gains (losses). The value of the
embedded derivatives on the ceded risk is determined using a methodology consistent with that described previously for
the guarantees directly written by the Company with the exception of the input for nonperformance risk that reflects the
credit of the reinsurer.
The estimated fair value of the embedded derivatives within funds withheld related to certain ceded reinsurance is
determined based on the change in estimated fair value of the underlying assets held by the Company in a reference portfolio
backing the funds withheld liability. The estimated fair value of the underlying assets is determined as previously described
in “— Securities, Short-term Investments, Loans to MetLife, Inc., and Long-term Debt of CSEs — FVO.” The estimated
fair value of these embedded derivatives is included, along with their funds withheld hosts, in other liabilities on the
consolidated and combined balance sheets with changes in estimated fair value recorded in net derivative gains (losses).
Changes in the credit spreads on the underlying assets, interest rates and market volatility may result in significant fluctuations
in the estimated fair value of these embedded derivatives that could materially affect net income.
234
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
8. Fair Value (continued)
The Company issues certain annuity contracts which allow the policyholder to participate in returns from equity indices.
These equity indexed features are embedded derivatives which are measured at estimated fair value separately from the
host fixed annuity contract, with changes in estimated fair value reported in net derivative gains (losses). These embedded
derivatives are classified within policyholder account balances on the consolidated and combined balance sheets.
The estimated fair value of the embedded equity indexed derivatives, based on the present value of future equity returns
to the policyholder using actuarial and present value assumptions including expectations concerning policyholder behavior,
is calculated by the Company’s actuarial department. The calculation is based on in-force business and uses standard capital
market techniques, such as Black-Scholes, to calculate the value of the portion of the embedded derivative for which the
terms are set. The portion of the embedded derivative covering the period beyond where terms are set is calculated as the
present value of amounts expected to be spent to provide equity indexed returns in those periods. The valuation of these
embedded derivatives also includes the establishment of a risk margin, as well as changes in nonperformance risk.
Transfers between Levels
Overall, transfers between levels occur when there are changes in the observability of inputs and market activity. Transfers
into or out of any level are assumed to occur at the beginning of the period.
Transfers between Levels 1 and 2:
For assets and liabilities measured at estimated fair value and still held at December 31, 2017 and 2016, transfers
between Levels 1 and 2 were not significant.
Transfers into or out of Level 3:
Assets and liabilities are transferred into Level 3 when a significant input cannot be corroborated with market observable
data. This occurs when market activity decreases significantly and underlying inputs cannot be observed, current prices are
not available, and/or when there are significant variances in quoted prices, thereby affecting transparency. Assets and
liabilities are transferred out of Level 3 when circumstances change such that a significant input can be corroborated with
market observable data. This may be due to a significant increase in market activity, a specific event, or one or more
significant input(s) becoming observable.
235
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
8. Fair Value (continued)
Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)
The following table presents certain quantitative information about the significant unobservable inputs used in the fair
value measurement, and the sensitivity of the estimated fair value to changes in those inputs, for the more significant asset
and liability classes measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at:
Valuation Techniques
Significant
Unobservable Inputs
Range
Weighted
Average (1)
Range
Weighted
Average (1)
December 31, 2017
December 31, 2016
Fixed maturity securities (3)
U.S. corporate and foreign
• Matrix pricing
• Offered quotes (4)
corporate
RMBS
CMBS
ABS
Derivatives
Interest rate
Credit
• Market pricing
• Quoted prices (4)
• Consensus pricing
• Offered quotes (4)
• Market pricing
• Quoted prices (4)
• Market pricing
• Quoted prices (4)
• Consensus pricing
• Offered quotes (4)
• Market pricing
• Quoted prices (4)
• Consensus pricing
• Offered quotes (4)
• Present value
techniques
• Present value
techniques
• Repurchase rates (7)
• Credit spreads (8)
• Consensus pricing
• Offered quotes (9)
111
77
95
88
105
101
100
93
—
3
8
105
100
100
—
—
-
-
-
-
-
-
-
142
443
107
104
105
104
100
- —
- —
18
13
37
38
20
99
94
98
(44)
97
-
-
-
-
-
-
-
-
-
-
138
700
109
111
104
99
106
100
18
98
104
99
85
91
104
99
100
99
Impact of
Increase in Input
on Estimated
Fair Value (2)
Increase
Increase
Increase
Increase (5)
Increase (5)
Increase (5)
Increase (5)
Increase (5)
Decrease (6)
Decrease (6)
Equity market
• Present value
• Volatility (10)
11% -
31%
14% -
32%
Increase (6)
techniques or
option pricing
models
• Correlation (11)
10% -
30%
40% -
40%
Embedded derivatives
Direct, assumed and ceded
guaranteed minimum
benefits
• Option pricing
techniques
• Mortality rates:
Ages 0 - 40
Ages 41 - 60
Ages 61 - 115
• Lapse rates:
0%
- 0.09%
0.04% - 0.65%
0.26% -
100%
0%
-
0.09%
0.04% -
0.65%
0.26% -
100%
Durations 1 - 10
0.25% -
100%
0.25% -
100%
Durations 11 - 20
Durations 21 - 116
• Utilization rates
• Withdrawal rates
• Long-term equity
volatilities
2%
2%
0%
-
-
-
0.25% -
17.40% -
100%
100%
25%
10%
25%
2%
2%
0%
-
-
-
0.25% -
17.40% -
100%
100%
25%
10%
25%
Decrease (12)
Decrease (12)
Decrease (12)
Decrease (13)
Decrease (13)
Decrease (13)
Increase (14)
(15)
Increase (16)
• Nonperformance risk
0.64% - 1.43%
0.04% -
0.57%
Decrease (17)
spread
__________________
(1)
(2)
The weighted average for fixed maturity securities is determined based on the estimated fair value of the securities.
The impact of a decrease in input would have the opposite impact on estimated fair value. For embedded derivatives,
changes to direct and assumed guaranteed minimum benefits are based on liability positions; changes to ceded guaranteed
minimum benefits are based on asset positions.
(3)
Significant increases (decreases) in expected default rates in isolation would result in substantially lower (higher)
valuations.
(4) Range and weighted average are presented in accordance with the market convention for fixed maturity securities of
dollars per hundred dollars of par.
(5) Changes in the assumptions used for the probability of default is accompanied by a directionally similar change in the
assumption used for the loss severity and a directionally opposite change in the assumptions used for prepayment rates.
236
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
8. Fair Value (continued)
(6) Changes in estimated fair value are based on long U.S. dollar net asset positions and will be inversely impacted for short
U.S. dollar net asset positions.
(7) Ranges represent different repurchase rates utilized as components within the valuation methodology and are presented
in basis points.
(8) Represents the risk quoted in basis points of a credit default event on the underlying instrument. Credit derivatives with
significant unobservable inputs are primarily comprised of written credit default swaps.
(9) At December 31, 2017 and 2016, independent non-binding broker quotations were used in the determination of 1% and
3% of the total net derivative estimated fair value, respectively.
(10) Ranges represent the underlying equity volatility quoted in percentage points. Since this valuation methodology uses a
range of inputs across multiple volatility surfaces to value the derivative, presenting a range is more representative of the
unobservable input used in the valuation.
(11) Ranges represent the different correlation factors utilized as components within the valuation methodology. Presenting
a range of correlation factors is more representative of the unobservable input used in the valuation. Increases (decreases)
in correlation in isolation will increase (decrease) the significance of the change in valuations.
(12) Mortality rates vary by age and by demographic characteristics such as gender. Mortality rate assumptions are based on
company experience. A mortality improvement assumption is also applied. For any given contract, mortality rates vary
throughout the period over which cash flows are projected for purposes of valuing the embedded derivative.
(13) Base lapse rates are adjusted at the contract level based on a comparison of the actuarially calculated guaranteed values
and the current policyholder account value, as well as other factors, such as the applicability of any surrender charges.
A dynamic lapse function reduces the base lapse rate when the guaranteed amount is greater than the account value as in
the money contracts are less likely to lapse. Lapse rates are also generally assumed to be lower in periods when a surrender
charge applies. For any given contract, lapse rates vary throughout the period over which cash flows are projected for
purposes of valuing the embedded derivative.
(14) The utilization rate assumption estimates the percentage of contract holders with a GMIB or lifetime withdrawal benefit
who will elect to utilize the benefit upon becoming eligible. The rates may vary by the type of guarantee, the amount by
which the guaranteed amount is greater than the account value, the contract’s withdrawal history and by the age of the
policyholder. For any given contract, utilization rates vary throughout the period over which cash flows are projected for
purposes of valuing the embedded derivative.
(15) The withdrawal rate represents the percentage of account balance that any given policyholder will elect to withdraw from
the contract each year. The withdrawal rate assumption varies by age and duration of the contract, and also by other factors
such as benefit type. For any given contract, withdrawal rates vary throughout the period over which cash flows are
projected for purposes of valuing the embedded derivative. For GMWBs, any increase (decrease) in withdrawal rates
results in an increase (decrease) in the estimated fair value of the guarantees. For GMABs and GMIBs, any increase
(decrease) in withdrawal rates results in a decrease (increase) in the estimated fair value.
(16) Long-term equity volatilities represent equity volatility beyond the period for which observable equity volatilities are
available. For any given contract, long-term equity volatility rates vary throughout the period over which cash flows are
projected for purposes of valuing the embedded derivative.
(17) Nonperformance risk spread varies by duration and by currency. For any given contract, multiple nonperformance risk
spreads will apply, depending on the duration of the cash flow being discounted for purposes of valuing the embedded
derivative.
237
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
8. Fair Value (continued)
The following is a summary of the valuation techniques and significant unobservable inputs used in the fair value
measurement of assets and liabilities classified within Level 3 that are not included in the preceding table. Generally, all other
classes of securities classified within Level 3, including those within separate account assets and embedded derivatives within
funds withheld related to certain assumed reinsurance, use the same valuation techniques and significant unobservable inputs
as previously described for Level 3 securities. This includes matrix pricing and discounted cash flow methodologies, inputs
such as quoted prices for identical or similar securities that are less liquid and based on lower levels of trading activity than
securities classified in Level 2, as well as independent non-binding broker quotations. The sensitivity of the estimated fair
value to changes in the significant unobservable inputs for these other assets and liabilities is similar in nature to that described
in the preceding table.
238
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
8. Fair Value (continued)
The following tables summarize the change of all assets and (liabilities) measured at estimated fair value on a recurring
basis using significant unobservable inputs (Level 3):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Fixed Maturity Securities
Corporate (1)
Structured
Securities
State and
Political
Subdivision
Foreign
Government
Equity
Securities
Short Term
Investments
Net
Derivatives
(2)
Net
Embedded
Derivatives
Separate
Account
Assets (4)
(In millions)
Balance, January 1, 2016
$
2,485
$
2,032
$
13
$
26
$
97
$
47
$
(232)
$
32
$
146
Total realized/unrealized
gains (losses) included in
net income (loss) (5) (6)
Total realized/unrealized
gains (losses) included in
AOCI
Purchases (7)
Sales (7)
Issuances (7)
Settlements (7)
Transfers into Level 3 (8)
Transfers out of Level 3 (8)
Balance, December 31,
2016
Total realized/unrealized
gains (losses) included in
net income (loss) (5) (6)
Total realized/unrealized
gains (losses) included in
AOCI
Purchases (7)
Sales (7)
Issuances (7)
Settlements (7)
Transfers into Level 3 (8)
Transfers out of Level 3 (8)
Balance, December 31,
2017
Changes in unrealized gains
(losses) included in net
income (loss) for the
instruments still held at
December 31, 2015: (9)
Changes in unrealized gains
(losses) included in net
income (loss) for the
instruments still held at
December 31, 2016: (9)
Changes in unrealized gains
(losses) included in net
income (loss) for the
instruments still held at
December 31, 2017: (9)
Gains (Losses) Data for the
year ended
December 31, 2015:
Total realized/unrealized
gains (losses) included in
net income (loss) (5) (6)
Total realized/unrealized
gains (losses) included in
AOCI
__________________
$
$
$
$
$
$
(380)
(5)
(26)
2,391
1,711
(3)
28
(11)
30
(25)
603
(448)
—
—
120
(333)
131
441
(223)
—
—
178
(918)
20
601
(604)
—
—
12
52
107
(535)
—
—
11
—
—
—
—
—
—
9
—
—
—
—
—
—
—
17
—
—
—
—
—
—
—
—
—
—
5
—
—
—
—
—
—
(11)
—
(26)
—
—
131
(54)
137
(3)
—
3
(13)
—
—
—
—
—
—
3
(1)
—
—
—
(47)
2
—
—
14
(1)
—
—
—
(1)
(703)
(1,842)
4
10
—
—
(33)
—
—
—
—
—
—
(573)
—
—
(954)
(2,383)
92
—
4
—
—
579
—
—
1,078
—
—
—
—
(355)
—
—
(144)
(17)
1,997
$
1,230
$
— $
5
$
124
$
14
$
(279)
$
(1,660)
$
—
—
2
(134)
—
—
—
(4)
10
—
—
2
(4)
—
(1)
2
(4)
5
11
$
21
$
— $
— $
— $
— $
(64)
$
(248)
$
—
2
$
29
$
— $
— $
— $
— $
(687)
$
(1,952)
$
—
1
$
23
$
— $
— $
— $
— $
(52)
$
966
$
—
16
$
22
$
— $
— $
11
$
— $
(74)
$
(133)
$
(6)
(123)
$
(14)
$
— $
(3)
$
(10)
$
— $
2
$
— $
—
(1) Comprised of U.S. and foreign corporate securities.
(2)
Freestanding derivative assets and liabilities are presented net for purposes of the rollforward.
239
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
8. Fair Value (continued)
(3)
(4)
Embedded derivative assets and liabilities are presented net for purposes of the rollforward.
Investment performance related to separate account assets is fully offset by corresponding amounts credited to contract
holders within separate account liabilities. Therefore, such changes in estimated fair value are not recorded in net income
(loss). For the purpose of this disclosure, these changes are presented within net investment gains (losses).
(5) Amortization of premium/accretion of discount is included within net investment income. Impairments charged to net
income (loss) on securities are included in net investment gains (losses). Lapses associated with net embedded derivatives
are included in net derivative gains (losses). Substantially all realized/unrealized gains (losses) included in net income
(loss) for net derivatives and net embedded derivatives are reported in net derivatives gains (losses).
(6)
(7)
Interest and dividend accruals, as well as cash interest coupons and dividends received, are excluded from the rollforward.
Items purchased/issued and then sold/settled in the same period are excluded from the rollforward. Fees attributed to
embedded derivatives are included in settlements.
(8) Gains and losses, in net income (loss) and OCI, are calculated assuming transfers into and/or out of Level 3 occurred at
the beginning of the period. Items transferred into and then out of Level 3 in the same period are excluded from the
rollforward.
(9) Changes in unrealized gains (losses) included in net income (loss) relate to assets and liabilities still held at the end of
the respective periods. Substantially all changes in unrealized gains (losses) included in net income (loss) for net derivatives
and net embedded derivatives are reported in net derivative gains (losses).
Fair Value Option
The following table presents information for certain assets and liabilities of CSEs, which are accounted for under the
FVO. These assets and liabilities were initially measured at fair value.
Assets (1)
Unpaid principal balance
Difference between estimated fair value and unpaid principal balance
Carrying value at estimated fair value
Liabilities (1)
Contractual principal balance
Difference between estimated fair value and contractual principal balance
Carrying value at estimated fair value
__________________
December 31,
2017
2016
(In millions)
$
$
$
$
70
45
115
10
1
11
$
$
$
$
88
48
136
22
1
23
(1)
These assets and liabilities are comprised of commercial mortgage loans and long-term debt. Changes in estimated fair
value on these assets and liabilities and gains or losses on sales of these assets are recognized in net investment gains
(losses). Interest income on commercial mortgage loans held by CSEs — FVO is recognized in net investment income.
Interest expense from long-term debt of CSEs — FVO is recognized in other expenses.
Fair Value of Financial Instruments Carried at Other Than Fair Value
The following tables provide fair value information for financial instruments that are carried on the balance sheet at amounts
other than fair value. These tables exclude the following financial instruments: cash and cash equivalents, accrued investment
income, payables for collateral under securities loaned and other transactions, and those short-term investments that are not
securities, such as time deposits, and therefore are not included in the three level hierarchy table disclosed in the “— Recurring
Fair Value Measurements” section. The estimated fair value of the excluded financial instruments, which are primarily classified
in Level 2, approximates carrying value as they are short-term in nature such that the Company believes there is minimal risk
of material changes in interest rates or credit quality. All remaining balance sheet amounts excluded from the tables below are
not considered financial instruments subject to this disclosure.
240
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
8. Fair Value (continued)
The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair
value hierarchy, are summarized as follows at:
December 31, 2017
Fair Value Hierarchy
Carrying
Value
Level 1
Level 2
Level 3
(In millions)
Total
Estimated
Fair Value
Assets
Mortgage loans
Policy loans
Real estate joint ventures
Other limited partnership interests
Premiums, reinsurance and other receivables
Liabilities
Policyholder account balances
Long-term debt
Collateral financing arrangement
Other liabilities
Separate account liabilities
Assets
Mortgage loans
Policy loans
Real estate joint ventures
Other limited partnership interests
Premiums, reinsurance and other receivables
Liabilities
Policyholder account balances
Long-term debt
Collateral financing arrangement
Other liabilities
Separate account liabilities
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
10,627
1,523
5
36
1,758
$
$
$
$
$
15,791
3,601
$
$
— $
$
$
314
1,210
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
$
781
— $
— $
$
128
10,871
959
22
28
1,985
$
$
$
$
$
3,039
— $
$
— $
$
$
100
1,210
15,927
600
$
$
— $
$
— $
214
10,871
1,740
22
28
2,113
15,927
3,639
—
314
1,210
December 31, 2016
Fair Value Hierarchy
Carrying
Value
Level 1
Level 2
Level 3
(In millions)
Total
Estimated
Fair Value
9,242
1,517
12
44
2,789
16,226
1,887
2,797
323
1,114
$
$
$
$
$
$
$
$
$
$
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
$
780
— $
— $
$
834
9,387
978
44
42
2,449
$
$
$
$
$
2,117
— $
$
— $
$
$
110
1,114
17,457
$
— $
$
$
— $
2,797
213
9,387
1,758
44
42
3,283
17,457
2,117
2,797
323
1,114
The methods, assumptions and significant valuation techniques and inputs used to estimate the fair value of financial
instruments are summarized as follows:
Mortgage Loans
The estimated fair value of mortgage loans is primarily determined by estimating expected future cash flows and
discounting them using current interest rates for similar mortgage loans with similar credit risk, or is determined from pricing
for similar loans.
241
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
8. Fair Value (continued)
Policy Loans
Policy loans with fixed interest rates are classified within Level 3. The estimated fair values for these loans are determined
using a discounted cash flow model applied to groups of similar policy loans determined by the nature of the underlying
insurance liabilities. These cash flows are discounted using current risk-free interest rates with no adjustment for borrower
credit risk, as these loans are fully collateralized by the cash surrender value of the underlying insurance policy. Policy loans
with variable interest rates are classified within Level 2 and the estimated fair value approximates carrying value due to the
absence of borrower credit risk and the short time period between interest rate resets, which presents minimal risk of a material
change in estimated fair value due to changes in market interest rates.
Real Estate Joint Ventures and Other Limited Partnership Interests
The estimated fair values of these cost method investments are generally based on the Company’s share of the NAV as
provided on the financial statements of the investees. In certain circumstances, management may adjust the NAV by a premium
or discount when it has sufficient evidence to support applying such adjustments.
Premiums, Reinsurance and Other Receivables
Premiums, reinsurance and other receivables are principally comprised of certain amounts recoverable under reinsurance
agreements, amounts on deposit with financial institutions to facilitate daily settlements related to certain derivatives and
amounts receivable for securities sold but not yet settled.
Amounts recoverable under ceded reinsurance agreements, which the Company has determined do not transfer significant
risk such that they are accounted for using the deposit method of accounting, have been classified as Level 3. The valuation
is based on discounted cash flow methodologies using significant unobservable inputs.
The amounts on deposit for derivative settlements, classified within Level 2, essentially represent the equivalent of demand
deposit balances and amounts due for securities sold are generally received over short periods such that the estimated fair
value approximates carrying value.
Policyholder Account Balances
These policyholder account balances include investment contracts which primarily include certain funding agreements,
fixed deferred annuities, modified guaranteed annuities, fixed term payout annuities and total control accounts. The valuation
of these investment contracts is based on discounted cash flow methodologies using significant unobservable inputs. The
estimated fair value is determined using current market risk-free interest rates adding a spread to reflect the nonperformance
risk in the liability.
Long-term Debt and Collateral Financing Arrangement
The estimated fair values of long-term debt and the collateral financing arrangement are principally determined using
market standard valuation methodologies.
Valuations of instruments classified as Level 2 are based primarily on quoted prices in markets that are not active or using
matrix pricing that use standard market observable inputs such as quoted prices in markets that are not active and observable
yields and spreads in the market.
Valuations of instruments classified as Level 3 are based primarily on discounted cash flow methodologies that utilize
unobservable discount rates that can vary significantly based upon the specific terms of each individual arrangement. The
determination of estimated fair value of the collateral financing arrangement incorporates valuations obtained from the
counterparties to the arrangement, as part of the collateral management process.
Other Liabilities
Other liabilities consist primarily of interest payable, amounts due for securities purchased but not yet settled, and funds
withheld amounts payable, which are contractually withheld by the Company in accordance with the terms of the reinsurance
agreements. The Company evaluates the specific terms, facts and circumstances of each instrument to determine the appropriate
estimated fair values, which are not materially different from the carrying values.
242
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
8. Fair Value (continued)
Separate Account Liabilities
Since separate account liabilities are fully funded by cash flows from the separate account assets which are recognized
at estimated fair value as described in the section “— Recurring Fair Value Measurements,” the value of those assets
approximates the estimated fair value of the related separate account liabilities. The valuation techniques and inputs for separate
account liabilities are similar to those described for separate account assets.
9. Long-term Debt and Collateral Financing Arrangement
Long-term debt and collateral financing arrangement outstanding were as follows:
Interest Rate
Maturity
2017
2016
December 31,
Senior notes — unaffiliated (1)
Senior notes — unaffiliated (1)
Surplus notes — affiliated with MetLife, Inc.
Surplus note — affiliated with MetLife, Inc.
Surplus note — affiliated with MetLife, Inc.
Long-term debt — unaffiliated (2)
Term loan — unaffiliated (3)
Total long-term debt
3.700%
4.700%
8.595%
5.130%
6.000%
7.028%
LIBOR plus 1.5%
2027
2047
2038
2032
2033
2030
2019
Collateral financing arrangement
3-month LIBOR plus 0.70%
2037
__________________
(In millions)
$
1,489
$
1,477
—
—
—
35
600
—
—
750
750
350
37
—
$
$
3,601
$
1,887
— $
2,797
(1)
Includes unamortized debt issuance costs and debt discount totaling $34 million for the senior notes due 2027 and 2047
on a combined basis at December 31, 2017.
(2) Represents non-recourse debt for which creditors have no access, subject to customary exceptions, to the general assets
of the Company other than recourse to certain investment companies.
(3)
Excludes $11 million and $23 million of long-term debt related to CSEs at December 31, 2017 and 2016, respectively.
See Note 6 for more information regarding CSEs.
The aggregate maturities of long-term debt at December 31, 2017 were $2 million in 2018, $602 million in 2019, $2 million
in each of 2020, 2021 and 2022, and $3.0 billion thereafter.
Interest expense related to long-term debt of $135 million, $133 million and $134 million for the years ended December 31,
2017, 2016 and 2015, respectively, is included in other expenses.
Certain of the Company’s debt instruments, credit and committed facilities, and the reinsurance financing arrangement contain
administrative, reporting, legal and financial covenants, including requirements to maintain specified minimum consolidated net
worth and to maintain a ratio of indebtedness to total capitalization not in excess of a specified percentage and limitations on the
dollar amount of indebtedness that may be incurred by subsidiaries of Brighthouse Financial, Inc. The Company is not aware of
any non-compliance with these covenants at December 31, 2017.
Senior Notes
On June 22, 2017, Brighthouse Financial, Inc. issued $1.5 billion of senior notes due June 2027, which bear interest at a
fixed rate of 3.70%, payable semi-annually, and $1.5 billion of senior notes due June 2047, which bear interest at a fixed rate of
4.70%, payable semi-annually (collectively, the “Senior Notes”). In connection with the issuance of the Senior Notes, Brighthouse
Financial, Inc. capitalized debt issuance costs of $23 million and debt discounts of $12 million, which are amortized over the
term of the related debt instrument as a component of interest expense.
243
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
9. Long-term Debt and Collateral Financing Arrangement (continued)
Surplus Notes
On June 16, 2017, MetLife, Inc. forgave Brighthouse Life Insurance Company’s obligation to pay the principal amount of
$750 million, 8.595% surplus notes held by MetLife, Inc., which were originally issued in 2008. The forgiveness of the surplus
notes was treated as a capital transaction and recorded as an increase to additional paid-in-capital.
On April 28, 2017, two surplus note obligations due to MetLife, Inc. totaling $1.1 billion, which were originally issued in
2012 and 2013, were due on September 30, 2032 and December 31, 2033 and bore interest at 5.13% and 6.00%, respectively,
were satisfied in a non-cash exchange for $1.1 billion of loans due from MetLife, Inc.
Credit Facilities
On December 2, 2016, Brighthouse Financial, Inc. entered into a $2.0 billion five-year senior unsecured revolving credit
facility (the “Revolving Credit Facility”) and a $3.0 billion three-year term loan facility (the “2016 Term Loan Facility”) with a
syndicate of banks. In connection with entering into these credit facilities, MetLife, Inc. paid $16 million of debt issuance costs
on the Company’s behalf. The Company capitalized these costs, which are included in other assets, and reimbursed MetLife, Inc.
in 2017. Such debt issuance costs are amortized over the terms of the facilities, which is included in other expenses.
On July 21, 2017, Brighthouse Financial, Inc. entered into a new term loan agreement (the “2017 Term Loan Agreement”)
with respect to a new $600 million unsecured delayed draw term loan facility due December 2, 2019 (the “2017 Term Loan
Facility”). Debt issuance costs incurred related to the 2017 Term Loan Facility were not significant. On August 2, 2017, Brighthouse
Financial, Inc. borrowed $500 million under the 2017 Term Loan Facility in connection with the Separation. On August 14, 2017,
Brighthouse Financial, Inc. borrowed the remaining $100 million available under the 2017 Term Loan Facility.
On July 21, 2017, concurrently with entering into the 2017 Term Loan Agreement, the 2016 Term Loan Facility was terminated
without penalty. As a result of this termination, $7 million of unamortized debt issuance costs were written off and included in
other expenses.
At December 31, 2017, there were no drawdowns under the Revolving Credit Facility and there was $600 million outstanding
under the 2017 Term Loan Facility, resulting in unused commitments totaling $2.0 billion in comparison to the maximum capacity
of $2.6 billion under these facilities.
Committed Facilities, Collateral Financing Arrangement and Reinsurance Financing Arrangement
The Company previously had access to an unsecured revolving credit facility and certain committed facilities through the
Company’s former parent, MetLife, Inc. These facilities were used for collateral for certain of the Company’s affiliated reinsurance
liabilities.
In connection with the affiliated reinsurance company restructuring, effective April 28, 2017, MetLife, Inc.’s then existing
affiliated reinsurance subsidiaries that supported the business interests of Brighthouse Financial, Inc. became a part of Brighthouse
Financial, Inc. Simultaneously with the affiliated reinsurance company restructuring, the existing reserve financing arrangements
of the affected reinsurance subsidiaries, as well as Brighthouse Financial, Inc.’s access to MetLife Inc.’s revolving credit facility
and certain committed facilities, including outstanding letters of credit, were terminated and replaced with a single reinsurance
financing arrangement, which is discussed in more detail below. The terminated committed facilities included a $3.5 billion
committed facility for the benefit of MRSC and a $4.3 billion committed facility for the benefit of MRV Cell.
For the years ended December 31, 2017, 2016 and 2015, the Company recognized fees of $19 million, $55 million and
$61 million, respectively, in other expenses associated with these committed facilities.
In 2007, MetLife, Inc. and MRSC entered into a 30-year collateral financing arrangement with an unaffiliated financial
institution that provided up to $3.5 billion of statutory reserve support for MRSC associated with reinsurance obligations under
affiliated reinsurance agreements. Proceeds from this collateral financing arrangement, which resulted in a drawdown of
$2.8 billion on the aforementioned $3.5 billion committed facility, were placed in trusts to support MRSC’s statutory obligations
associated with the reinsurance of secondary guarantees (see Note 6 for additional information regarding MRSC invested assets).
At December 31, 2016, the amount outstanding under this collateral financing arrangement was $2.8 billion. On April 28, 2017,
MetLife, Inc. and MRSC terminated this collateral financing arrangement. As a result, the $2.8 billion collateral financing
arrangement obligation outstanding was extinguished utilizing $2.8 billion of assets held in trust, which had been repositioned
into short-term investments and cash equivalents. The remaining assets held in trust of $590 million were returned to MetLife,
Inc., resulting in a decrease in shareholder’s net investment.
244
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
9. Long-term Debt and Collateral Financing Arrangement (continued)
For the years ended December 31, 2017, 2016 and 2015, the Company recognized interest expense of $19 million, $39 million
and $28 million, respectively, related to this collateral financing arrangement, which is included in other expenses.
On April 28, 2017, BRCD entered into a new $10.0 billion financing arrangement with a pool of highly rated third-party
reinsurers. This financing arrangement consists of credit-linked notes that each have a term of 20 years. At December 31, 2017,
there were no drawdowns on this facility and there was $8.3 billion of funding available under this arrangement. Fees associated
with this financing arrangement were not significant.
10. Equity
Shareholder’s Net Investment Transactions
The following sections summarize certain transactions that occurred prior to and including the Separation and affected
shareholder’s net investment. In connection with the Separation, on August 4, 2017, the Company reclassified $12.4 billion
from shareholder’s net investment to common stock and additional paid-in capital.
Common Stock
On August 4, 2017, Brighthouse Financial, Inc. issued an additional 119,673,106 shares of common stock to MetLife,
Inc. Also on August 4, 2017, MetLife, Inc. distributed 96,776,670 of its 119,773,106 shares of Brighthouse Financial, Inc.
common stock, representing 80.8% of MetLife Inc.’s interest in Brighthouse Financial, Inc., to holders of MetLife, Inc. common
stock. MetLife, Inc. retained the remaining 22,996,436 shares, representing 19.2% of Brighthouse Financial, Inc.’s common
stock.
Capital Contributions
During the third quarter of 2017, the Company recognized a $1.1 billion non-cash tax charge and corresponding capital
contribution from MetLife, Inc. This tax obligation was in connection with the Separation and MetLife, Inc. is responsible
for this obligation through a Tax Separation Agreement. See Note 13.
During the second quarter of 2017, MetLife, Inc. forgave Brighthouse Life Insurance Company’s obligation to pay the
principal amount of $750 million of surplus notes held by MetLife, Inc. The forgiveness of these notes was a non-cash capital
contribution. See Note 9.
During the first quarter of 2017, the Company sold an operating joint venture to a former affiliate and the resulting
$202 million gain was treated as a cash capital contribution. See Note 6.
During the years ended December 31, 2016 and 2015, the Company received cash capital contributions of $1.6 billion
and $10 million, respectively, from MetLife, Inc.
In December 2015 and 2014, the Company accrued capital contributions from MetLife, Inc. of $120 million and
$385 million, respectively, in premiums, reinsurance and other receivables and shareholder’s net investment, which were
settled for cash in 2016 and 2015, respectively.
MetLife, Inc. has made payments and received collections on behalf of the Company. Such net amounts, as well as
amortization of deferred credit and committed facility structuring costs and debt issuance costs incurred by MetLife, Inc. on
behalf of the Company, are recorded as non-cash net contributions of capital. During the years ended December 31, 2017,
2016 and 2015, MetLife, Inc. made non-cash net capital contributions of $60 million, $47 million and $14 million, respectively,
in the forms of payment of letters of credit fees and amortization of deferred credit and committed facility structuring costs
and debt issuance costs incurred on the Company’s behalf, partially offset by investment income, net of interest expense,
related to the MRSC collateral financing arrangement collected on the Company’s behalf. See Note 9.
Prior to the Separation, certain transactions related to expense allocations were settled through shareholder’s net
investment.
Cash Distributions
On August 3, 2017, Brighthouse Financial, Inc. made a cash distribution in an aggregate amount of $1.8 billion to MetLife,
Inc., the sole holder of Brighthouse Financial, Inc. common stock as of the record date for the distribution.
In April 2017, MetLife, Inc. and MRSC terminated a collateral financing arrangement and the obligation outstanding was
extinguished utilizing assets held in trust. The remaining assets held in trust of $590 million were returned to MetLife, Inc.,
resulting in a decrease in shareholder’s net investment. See Note 9.
245
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
10. Equity (continued)
During the years ended December 31, 2017, 2016 and 2015, dividends totaling $0, $556 million and $699 million,
respectively, were paid to MetLife, Inc. or one of its subsidiaries by Brighthouse Life Insurance Company and NELICO,
resulting in a decrease in shareholder’s net investment.
The Company paid cash distributions to certain MetLife affiliates related to a profit sharing agreement with Brighthouse
Advisers of $40 million, $78 million and $72 million, for the years ended December 31, 2017, 2016 and 2015, respectively.
Noncontrolling Interests
On June 20, 2017, BH Holdings issued $50 million aggregate liquidation preference of fixed rate cumulative preferred units
to MetLife, Inc., which MetLife subsequently resold to unaffiliated third parties. These preferred units are reported as
noncontrolling interests on the consolidated and combined balance sheets.
On April 28, 2017, BRCD issued $15 million of fixed to floating rate cumulative preferred stock, Series A preferred stock,
to an affiliate of MetLife, Inc. These Series A preferred stock are reported as noncontrolling interests on the consolidated and
combined balance sheets.
Stock-Based Compensation Plans
The Company does not currently issue equity awards. However, on August 9, 2017, equity awards were authorized to be
made to the Company’s executive officers, independent non-employee members of the Board of Directors and certain other
employees of the Company, which were converted into a number of restricted stock units based upon the closing price of the
Company’s common stock on September 8, 2017 (the “Founders’ Grants”). All long-term equity awards, including the Founders’
Grants, were made pursuant to an equity compensation plan that is subject to approval of the Company’s stockholders. No
compensation expense has been recognized for these awards.
Statutory Equity and Income
The states of domicile of the Company’s insurance subsidiaries impose risk-based capital (“RBC”) requirements that were
developed by the National Association of Insurance Commissioners (“NAIC”). Regulatory compliance is determined by a ratio
of a company’s total adjusted capital, calculated in the manner prescribed by the NAIC (“TAC”) to its authorized control level
RBC, calculated in the manner prescribed by the NAIC (“ACL RBC”), based on the statutory-based filed financial statements.
Companies below specific trigger levels or ratios are classified by their respective levels, each of which requires specified
corrective action. The minimum level of TAC before corrective action commences is twice ACL RBC. The RBC ratios for the
Company’s insurance subsidiaries were each in excess of 400% for all periods presented.
The Company’s insurance subsidiaries prepare statutory-basis financial statements in accordance with statutory accounting
practices prescribed or permitted by the insurance department of the state of domicile.
Statutory accounting principles differ from GAAP primarily by charging policy acquisition costs to expense as incurred,
establishing future policy benefit liabilities using different actuarial assumptions, reporting of reinsurance agreements and valuing
investments and deferred tax assets on a different basis. The Company’s insurance subsidiaries have no material state prescribed
accounting practices.
The tables below present amounts from the Company’s insurance subsidiaries, which are derived from the statutory-basis
financial statements as filed with the insurance regulators.
Statutory net income (loss) was as follows:
Company
State of Domicile
2017
2016
2015
Brighthouse Life Insurance Company
New England Life Insurance Company
(In millions)
Delaware
Massachusetts
$
$
(425) $
68
$
1,186
109
$
$
(1,022)
157
Years Ended December 31,
246
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
10. Equity (continued)
Statutory capital and surplus was as follows at:
Company
Brighthouse Life Insurance Company
New England Life Insurance Company
December 31,
2017
2016
(In millions)
5,594
483
$
$
4,374
455
$
$
The Company has a reinsurance subsidiary, BRCD that was formed in 2017 as the result of the merger of certain other
affiliated captive reinsurance subsidiaries. BRCD reinsures risks including level premium term life and ULSG assumed from
other Brighthouse Life Insurance Company subsidiaries. BRCD, with the explicit permission of the Delaware Commissioner,
has included, as admitted assets, the value of credit-linked notes, serving as collateral, which resulted in higher statutory capital
and surplus of $8.3 billion for the year ended December 31, 2017. BRCD’s RBC would have triggered a regulatory event without
the use of the state prescribed practice.
Prior to the formation of BRCD and related merger, the legacy MetLife captive reinsurance subsidiaries included in the
statutory merger and formation of BRCD had certain state prescribed accounting practices. MRV Cell with the explicit permission
of the Commissioner of Insurance of the State of Vermont, included, as admitted assets, the value of letters of credit serving as
collateral for reinsurance credit taken by various affiliated cedants, in connection with reinsurance agreements entered into
between MRV Cell and the various affiliated cedants, which resulted in higher statutory capital and surplus of $3.0 billion for
the year ended December 31, 2016. MRV Cell’s RBC would have triggered a regulatory event without the use of the state
prescribed practice. MRD, with the explicit permission of the Delaware Commissioner, previously included, as admitted assets,
the value of letters of credit issued to MRD, serving as collateral, which resulted in higher statutory capital and surplus of
$260 million for the year ended December 31, 2016. MRD’s RBC would not have triggered a regulatory event without the use
of the state prescribed practice.
The statutory net income (loss) of the Company’s affiliate reinsurance companies was ($1.6) billion, ($363) million and
($372) million for the years ended December 2017, 2016 and 2015, respectively, and the combined statutory capital and surplus,
including the aforementioned prescribed practices, were $972 million and $2.6 billion at December 31, 2017 and 2016,
respectively.
Dividend Restrictions
The table below sets forth the dividends permitted to be paid by the Company’s insurance companies without insurance
regulatory approval and dividends paid:
Company
Brighthouse Life Insurance Company
New England Life Insurance Company
______________
2018
2017
2016
Permitted Without
Approval (1)
$
$
Paid (2)
Paid (2)
(In millions)
84
65
$
$
— $
106
$
261
295 (3)
(1) Reflects dividend amounts that may be paid during 2018 without prior regulatory approval. However, because dividend
tests may be based on dividends previously paid over rolling 12-month periods, if paid before a specified date during
2018, some or all of such dividends may require regulatory approval.
(2) Reflects all amounts paid, including those requiring regulatory approval.
(3) An extraordinary cash dividend paid to its former parent, MetLife, Inc.
Under the Delaware Insurance Code, Brighthouse Life Insurance Company is permitted, without prior insurance regulatory
clearance, to pay a stockholder dividend as long as the amount of the dividend when aggregated with all other dividends in the
247
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
10. Equity (continued)
preceding 12 months does not exceed the greater of: (i) 10% of its surplus to policyholders as of the end of the immediately
preceding calendar year; or (ii) its net statutory gain from operations for the immediately preceding calendar year (excluding
realized capital gains), not including pro rata distributions of Brighthouse Life Insurance Company’s own securities. Brighthouse
Life Insurance Company will be permitted to pay a stockholder dividend in excess of the greater of such two amounts only if
it files notice of the declaration of such a dividend and the amount thereof with the Delaware Commissioner and the Delaware
Commissioner either approves the distribution of the dividend or does not disapprove the distribution within 30 days of its filing.
In addition, any dividend that exceeds earned surplus (defined as “unassigned funds (surplus)”) as of the immediately preceding
calendar year requires insurance regulatory approval. Under the Delaware Insurance Code, the Delaware Commissioner has
broad discretion in determining whether the financial condition of a stock life insurance company would support the payment
of such dividends to its stockholders.
Under the Massachusetts State Insurance Law, NELICO is permitted, without prior insurance regulatory clearance, to pay
a stockholder dividend as long as the aggregate amount of the dividend, when aggregated with all other dividends paid in the
preceding 12 months, does not exceed the greater of: (i) 10% of its surplus to policyholders as of the end of the immediately
preceding calendar year; or (ii) its statutory net gain from operations for the immediately preceding calendar year, not including
pro rata distributions of NELICO’s own securities. NELICO will be permitted to pay a dividend in excess of the greater of such
two amounts only if it files notice of the declaration of such a dividend and the amount thereof with the Massachusetts
Commissioner of Insurance (the “Massachusetts Commissioner”) and the Massachusetts Commissioner either approves the
distribution of the dividend or does not disapprove the distribution within 30 days of its filing. In addition, any dividend that
exceeds earned surplus (defined as “unassigned funds (surplus)”) as of the last filed annual statutory statement requires insurance
regulatory approval. Under the Massachusetts State Insurance Law, the Massachusetts Commissioner has broad discretion in
determining whether the financial condition of a stock life insurance company would support the payment of such dividends to
its stockholders.
Under BRCD’s plan of operations, no dividend or distribution may be made by BRCD without the prior approval of the
Delaware Commissioner. During the year ended December 31, 2017, BRCD paid an extraordinary cash dividend of $535 million
to Brighthouse Life Insurance Company.
248
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
10. Equity (continued)
Accumulated Other Comprehensive Income (Loss)
Information regarding changes in the balances of each component of AOCI was as follows:
Balance at December 31, 2014
OCI before reclassifications
Deferred income tax benefit (expense)
AOCI before reclassifications, net of income tax
Amounts reclassified from AOCI
Deferred income tax benefit (expense)
Amounts reclassified from AOCI, net of income tax
Balance at December 31, 2015
OCI before reclassifications
Deferred income tax benefit (expense)
AOCI before reclassifications, net of income tax
Amounts reclassified from AOCI
Deferred income tax benefit (expense)
Amounts reclassified from AOCI, net of income tax
Balance at December 31, 2016
OCI before reclassifications
Deferred income tax benefit (expense)
AOCI before reclassifications, net of income tax
Amounts reclassified from AOCI
Deferred income tax benefit (expense) (2)
Amounts reclassified from AOCI, net of income tax
Balance at December 31, 2017
__________________
Unrealized
Investment Gains
(Losses), Net of
Related Offsets (1)
Unrealized
Gains (Losses)
on Derivatives
Foreign
Currency
Translation
Adjustments
Defined
Benefit
Plans
Adjustment
Total
(In millions)
$
2,555
$
(1,975)
692
1,272
77
(27)
50
1,322
(465)
158
1,015
44
(15)
29
1,044
276
(94)
1,226
60
286
346
190
102
(36)
256
(7)
2
(5)
251
71
(25)
297
(45)
16
(29)
268
(157)
55
166
(18)
6
(12)
$
(15) $
(15) $
2,715
(25)
8
(32)
—
—
—
(32)
1
—
(31)
—
—
—
(31)
10
(3)
(24)
—
—
—
(10)
4
(21)
4
(1)
3
(18)
2
(1)
(17)
1
—
1
(16)
(19)
14
(21)
—
(5)
(5)
(1,908)
668
1,475
74
(26)
48
1,523
(391)
132
1,264
—
1
1
1,265
110
(28)
1,347
42
287
329
$
1,572
$
154
$
(24) $
(26) $
1,676
(1)
(2)
See Note 6 for information on offsets to investments related to future policy benefits, DAC, VOBA and DSI.
Includes the $306 million and ($5) million impacts of the Tax Act related to unrealized investments gains (losses), net of
related offsets and defined benefit plans adjustment, respectively. See Note 1 for more information.
249
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
10. Equity (continued)
Information regarding amounts reclassified out of each component of AOCI was as follows:
AOCI Components
Net unrealized investment gains (losses):
Net unrealized investment gains (losses)
Net unrealized investment gains (losses)
Net unrealized investment gains (losses)
Net unrealized investment gains (losses), before
income tax
Income tax (expense) benefit
Net unrealized investment gains (losses), net of
income tax
Unrealized gains (losses) on derivatives - cash flow
hedges:
Interest rate swaps
Interest rate swaps
Interest rate forwards
Interest rate forwards
Foreign currency swaps
Credit forwards
Gains (losses) on cash flow hedges, before
income tax
Income tax (expense) benefit
Gains (losses) on cash flow hedges, net of
income tax
Defined benefit plans adjustment:
Amortization of net actuarial gains (losses)
Amortization of prior service (costs) credit
Amortization of defined benefit plan items, before
income tax
Income tax (expense) benefit
Amortization of defined benefit plan items, net of
income tax
$
$
$
$
Consolidated and Combined
Statements of Operations and
Comprehensive Income (Loss)
Locations
Amounts Reclassified from AOCI
Years Ended December 31,
2017
2016
2015
(In millions)
`
$
(15) $
(51) $
(79) Net investment gains (losses)
3
(48)
(60)
(286)
3
4
(44)
15
(346) $
(29) $
13 Net investment income
(11) Net derivative gains (losses)
(77)
27
(50)
— $
33
$
1 Net derivative gains (losses)
3
2
3
10
—
18
(6)
3
2
2
5
—
45
(16)
12
$
29
$
— $
(1) $
—
—
5
5
—
(1)
—
(1)
1 Net investment income
2 Net derivative gains (losses)
2 Net investment income
— Net derivative gains (losses)
1 Net investment income
7
(2)
5
(2)
(2)
(4)
1
(3)
(48)
Total reclassifications, net of income tax
$
(329) $
(1) $
250
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
11. Other Expenses
Information on other expenses was as follows:
Compensation
Commissions
Volume-related costs
Related party expenses on ceded and assumed reinsurance
Capitalization of DAC
Interest expense on debt
Goodwill impairment (1)
Premium taxes, licenses and fees
Professional services
Rent and related expenses
Other
Total other expenses
__________________
Years Ended December 31,
2017
2016
2015
(In millions)
$
$
287
806
486
36
(260)
153
—
64
292
13
606
$
400
637
562
22
(334)
175
161
63
89
47
462
$
2,483
$
2,284
$
455
715
552
17
(399)
170
—
76
65
56
413
2,120
(1) Based on a quantitative analysis performed for the Run-off reporting unit, it was determined that the goodwill associated
with this reporting unit was not recoverable and resulted in the impairment of the entire goodwill balance.
Capitalization of DAC
See Note 4 for additional information on the capitalization of DAC.
Interest Expense on Debt
See Note 9 for attribution of interest expense by debt issuance. Interest expense on debt includes interest expense related
to CSEs.
Related Party Expenses
See Note 16 for a discussion of related party expenses included in the table above.
12. Employee Benefit Plans
Pension
NELICO sponsors a qualified and a nonqualified defined benefit pension plan, as well as unfunded other postretirement
benefit plans. Effective December 31, 2014, the NELICO sponsored pension and other postretirement plans were amended to
eliminate benefit accruals prospectively and are closed to new entrants. All benefit payments related to the nonqualified defined
benefit pension plan and other postretirement benefit plans are subject to reimbursement annually, on an after tax basis, by
MetLife.
Formerly, the Company’s employees, sales representatives and retirees participated in defined benefit pension plans
sponsored by MLIC, a former affiliate. The Company also provided postemployment and postretirement medical and life
insurance benefits for certain retired employees through plans sponsored by MLIC. Participation in these plans ended December
31, 2016. These plans also included participants from other affiliates of MLIC. The Company accounted for these plans as
multiemployer benefit plans and as a result the assets, obligations and other comprehensive gains and losses of these benefit
plans were not included in the accompanying combined balance sheets or the additional disclosure below. The Company’s share
of pension expense was $0, $31 million and $24 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The pension expense associated with its employees that participate in the plans is included in other expenses.
251
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
12. Employee Benefit Plans (continued)
Obligations and Funded Status
December 31,
2017
2016
Pension
Benefits (1)
Other
Postretirement
Benefits
Pension
Benefits (1)
Other
Postretirement
Benefits
(In millions)
Change in benefit obligations:
Benefit obligations at January 1,
Interest costs
Plan participants’ contributions
Net actuarial (gains) losses
Change in benefits and other
Benefits paid
Benefit obligations at December 31,
Change in plan assets:
Estimated fair value of plan assets at January 1,
Actual return on plan assets
Plan participants’ contributions
Employer contributions
Benefits paid
Estimated fair value of plan assets at December 31,
Over (under) funded status at December 31,
Amounts recognized in the consolidated balance sheets:
Other assets
Other liabilities
Net amount recognized
AOCI:
Net actuarial (gains) losses
Prior service costs (credit)
AOCI, before income tax
Accumulated benefit obligation
__________________
$
219
$
37
$
213
$
9
—
11
5
(11)
233
155
17
—
4
(11)
165
2
3
6
—
(8)
40
—
—
3
5
(8)
—
9
—
5
—
(8)
219
148
11
—
4
(8)
155
$
$
$
$
$
$
(68) $
(40) $
(64) $
3
$
(71)
(68) $
$
$
31
—
31
233
— $
(40)
(40) $
3
—
3
$
$
N/A $
2
$
(66)
(64) $
$
$
28
—
28
219
32
2
2
(2)
9
(6)
37
—
—
2
4
(6)
—
(37)
—
(37)
(37)
(3)
—
(3)
N/A
(1)
Includes nonqualified unfunded plan, for which the aggregate projected benefit obligation (PBO) was $71 million and
$66 million at December 31, 2017 and 2016, respectively.
Information for pension plans with accumulated benefit obligations in excess of plan assets was as follows at:
Projected benefit obligations
Accumulated benefit obligations
Estimated fair value of plan assets
December 31,
2017
2016
(In millions)
71
71
$
$
— $
66
66
—
$
$
$
The PBO exceeded assets for only the nonqualified unfunded pension plan at both December 31, 2017 and 2016.
252
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
12. Employee Benefit Plans (continued)
The estimated net actuarial (gains) losses and prior service costs (credit) for the defined benefit pension plans and other
postretirement benefit plans that will be amortized from AOCI into net periodic benefit costs over the next year are not
significant.
Assumptions
The assumptions used in determining benefit obligations were 3.9% and 4.3% at December 31, 2017 and 2016, respectively,
using the weighted average discount rate.
Assumptions used in determining net periodic benefit costs were as follows:
Pension Benefits
Weighted average discount rate
Weighted average expected rate of return on plan assets (1)
Rate of compensation increase
__________________
Years Ended December 31,
2017
4.30%
5.75%
N/A
2016
4.42%
5.75%
N/A
2015
4.10%
5.75%
N/A
(1) The weighted expected return on plan assets is currently anticipated to be between 4.75% and 5.75%, which will be
determined when the Brighthouse benefit plan investment committee reviews and approves the entirety of the investment
policy including the future investment allocation targets on a post-Separation basis.
The weighted average discount rate is determined annually based on the yield, measured on a yield to worst basis, of a
hypothetical portfolio constructed of high quality debt instruments available on the valuation date, which would provide the
necessary future cash flows to pay the aggregate PBO when due.
The weighted average expected rate of return on plan assets is based on anticipated performance of the various asset
sectors in which the plan invests, weighted by target allocation percentages. Anticipated future performance is based on long-
term historical returns of the plan assets by sector, adjusted for the Company’s long-term expectations on the performance of
the markets. While the precise expected rate of return derived using this approach will fluctuate from year to year, the Company’s
policy is to hold this long-term assumption constant as long as it remains within reasonable tolerance from the derived rate.
Plan Assets
The asset of the qualified pension plan (the “Invested Plan”) are managed by MetLife Separate Accounts in accordance
with investment policies consistent with the longer-term nature of related benefit obligations and within prudent risk parameters.
Specifically, investment policies are oriented toward (i) maximizing the Invested Plan’s funded status; (ii) minimizing the
volatility of the Invested Plan’s funded status; (iii) generating asset returns that exceed liability increases; and (iv) targeting
rates of return in excess of a custom benchmark and industry standards over appropriate reference time periods. These goals
are expected to be met through identifying appropriate and diversified asset classes and allocations, ensuring adequate liquidity
to pay benefits and expenses when due and controlling the costs of administering and managing the Invested Plan’s investments.
Independent investment consultants are periodically used to evaluate the investment risk of Invested Plan’s assets relative to
liabilities, analyze the economic and portfolio impact of various asset allocations and management strategies and to recommend
asset allocations.
253
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
12. Employee Benefit Plans (continued)
Derivative contracts may be used to reduce investment risk, to manage duration and to replicate the risk/return profile of
an asset or asset class. Derivatives may not be used to leverage a portfolio in any manner, such as to magnify exposure to an
asset, asset class, interest rates or any other financial variable. Derivatives are also prohibited for use in creating exposures
to securities, currencies, indices or any other financial variable that is otherwise restricted. The table below summarizes the
actual weighted average allocation of the estimated fair value of total plan assets by asset class at December 31 for the years
indicated and the approved target allocation by major asset class at December 31, 2017 for the Invested Plan:
Asset Class
Fixed maturity securities
Equity securities
Total assets
__________________
December 31,
2017
Target (1)
Actual
Allocation
2016
Actual
Allocation
80%
20%
100%
100%
—%
100%
79%
21%
100%
(1) In an effort to limit variability during the Separation, MetLife changed the actual allocation to 100% fixed maturity securities,
which was permitted under the approved investment policy so long as the change did not remain in place without action by
the appropriate governing body with respect thereto for a period of more than one year. Brighthouse’s benefit plan investment
committee is in the process of reviewing the entirety of the investment policy including the future investment allocation
targets on a post-Separation basis and update the policy as appropriate.
Estimated Fair Value
The pension benefit plan assets are categorized into a three-level fair value hierarchy, as described in Note 8.
The pension plan assets measured at estimated fair value on a recurring basis and their corresponding placement in the
fair value hierarchy are summarized as follows:
Assets
Interest in insurance company separate accounts
Insurance company general accounts
Total assets
December 31, 2017
Fair Value Hierarchy
Level 1
Level 2
Level 3
(In millions)
Total
Estimated
Fair
Value
$
$
45
—
45
$
$
102
—
102
$
$
— $
18
18
$
147
18
165
254
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
12. Employee Benefit Plans (continued)
Assets
Interest in insurance company separate accounts
Insurance company general accounts
Total assets
December 31, 2016
Fair Value Hierarchy
Level 1
Level 2
Level 3
(In millions)
Total
Estimated
Fair
Value
$
$
72
—
72
$
$
83
—
83
$
$
— $
—
— $
155
—
155
For each of the years ended December 31, 2017 and 2016, the changes to pension plan assets invested in insurance
company separate and general accounts measured at estimated fair value on a recurring basis using significant
unobservable (Level 3) inputs were $18 million and not significant, respectively.
Expected Future Contributions and Benefit Payments
It is the Company’s practice to make contributions to the qualified pension plan to comply with minimum funding
requirements of ERISA, the Pension Protection Act of 2006, the Code and the applicable rules and regulations. In accordance
with such practice, no contributions are required for 2018. The Company expects to make no discretionary contributions to
the qualified pension plan in 2018. For information on employer contributions, see “— Obligations and Funded Status.”
Benefit payments due under the nonqualified pension and unfunded postretirement plans are primarily funded from the
Company’s general assets as they become due under the provision of the plans. As a result, benefit payments equal employer
and employee contributions for these plans. The Company does not expect contributions to be material in 2018. As stated
above, all benefit payments related to the nonqualified defined pension plan and other postretirement benefit plans are subject
to reimbursement annually, on an after tax basis, by MetLife.
Gross benefit payments for the next 10 years before MetLife reimbursement on an after tax basis are expected to be as
follows:
2018
2019
2020
2021
2022
2023-2027
Pension Benefits
Other Postretirement Benefits
(In millions)
11
11
12
13
13
68
$
$
$
$
$
$
4
4
4
4
3
14
$
$
$
$
$
$
Defined Contribution Plans
Brighthouse Services sponsors qualified and nonqualified defined contribution plans. For the year ended December 31,
2017 the total employer match for the qualified defined contribution plan was $8 million and the total accrual for the nonqualified
deferred compensation plan was $2 million.
255
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
13. Income Tax
The provision for income tax was as follows:
Provision for income tax expense (benefit)
$
The reconciliation of the income tax provision at the U.S. statutory rate to the provision for income tax as reported was as
follows:
Current:
Federal
State and local
Foreign
Subtotal
Deferred:
Federal
State and local
Foreign
Subtotal
Tax provision at U.S. statutory rate
Tax effect of:
Excess loss account - Separation from MetLife (1)
Rate revaluation due to tax reform (2)
Sale of subsidiaries
Dividend received deduction
Other tax credits
Goodwill impairment
Other, net
Years Ended December 31,
2017
2016
(In millions)
2015
$
406
$
(305) $
6
18
430
(667)
—
—
(667)
(237) $
—
—
(305)
(1,461)
—
—
(1,461)
(1,766) $
Years Ended December 31,
2017
2016
(In millions)
2015
$
(215) $
(1,647) $
511
1,088
(803)
(138)
(130)
(30)
—
(9)
—
—
—
(123)
(18)
4
18
33
—
—
33
310
—
—
310
343
—
—
—
(144)
(13)
—
(11)
343
Provision for income tax expense (benefit)
$
(237) $
(1,766) $
__________________
(1) For the year ended December 31, 2017, the Company recognized a $1.1 billion non-cash charge to provision for income
tax expense and corresponding capital contribution from MetLife. This tax obligation was in connection with the Separation
and MetLife, Inc. is responsible for this obligation through a Tax Separation Agreement.
(2) For the year ended December 31, 2017, the Company recognized a $725 million benefit in net income from remeasurement
of net deferred tax liabilities in connection with the Tax Act discussed in Note 1. Additionally, as a result of the reduction
in the statutory tax rate under the Tax Act, the liability to MetLife under the Tax Receivables Agreement (as defined below)
was reduced by $222 million, which is included in other revenues and is non-taxable. As the Company completes the analysis
of data relevant to the Tax Act, as well as interprets any additional guidance issued by the Internal Revenue Service (“IRS”),
U.S. Department of the Treasury, or other relevant organizations, it may make adjustments to these amounts.
256
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
13. Income Tax (continued)
Deferred income tax represents the tax effect of the differences between the book and tax bases of assets and liabilities. Net
deferred income tax assets and liabilities consisted of the following at:
Deferred income tax assets:
Tax credit carryforwards
Net operating loss carryforwards
Employee benefit
Intangibles
Investments, including derivatives
Other
Total deferred income tax assets
Less: valuation allowance
Total net deferred income tax assets
Deferred income tax liabilities:
Policyholder liabilities and receivables
Net unrealized investment gains
DAC
Total deferred income tax liabilities
Net deferred income tax asset (liability)
$
December 31,
2017
2016
(In millions)
$
202
422
3
227
302
95
1,251
11
1,240
819
459
889
2,167
199
—
54
2
347
72
674
—
674
525
712
1,493
2,730
$
(927) $
(2,056)
At December 31, 2017, the Company had net operating loss carryforwards of approximately $2.0 billion and the Company
had recorded a related deferred tax asset of $422 million which expires in years 2033-2037.
The following table sets forth the general business credits, foreign tax credits, and other credit carryforwards for tax purposes
at December 31, 2017.
Expiration
2018-2022
2023-2027
2028-2032
2033-2037
Indefinite
Tax Credit Carryforwards
General Business
Credits
Foreign Tax
Credits
(In millions)
Other
$
$
— $
— $
—
—
10
—
10
$
14
—
—
—
14
$
—
—
—
—
178
178
The Company’s liability for unrecognized tax benefits may increase or decrease in the next 12 months. A reasonable estimate
of the increase or decrease cannot be made at this time. However, the Company continues to believe that the ultimate resolution
of the pending issues will not result in a material change to its combined and consolidated financial statements, although the
resolution of income tax matters could impact the Company’s effective tax rate for a particular future period.
257
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
13. Income Tax (continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:
Balance at January 1,
Additions for tax positions of prior years
Reductions for tax positions of prior years
Additions for tax positions of current year
Reductions for tax positions of current year
Settlements with tax authorities
Balance at December 31,
Unrecognized tax benefits that, if recognized would impact the effective rate
Years Ended December 31,
2017
2016
(In millions)
2015
$
$
$
58
—
(4)
3
(2)
(32)
23
23
$
$
$
64
$
2
(9)
5
—
(4)
58
58
$
$
60
5
—
3
—
(4)
64
53
The Company classifies interest accrued related to unrecognized tax benefits in interest expense, included within other
expenses, while penalties are included in income tax expense. Interest related to unrecognized tax benefits was not significant.
The Company had no penalties for each of the years ended December 31, 2017, 2016 and 2015.
The dividend received deduction reduces the amount of dividend income subject to tax and is a significant component of
the difference between the actual tax expense and expected amount determined using the federal statutory tax rate. The Tax Act
has changed the dividend received deduction amount applicable to insurance companies to a 70% company share and a 50%
dividend received deduction for eligible dividends.
For the years ended December 31, 2017, 2016, and 2015, the Company recognized an income tax benefit of $137 million,
$101 million and $154 million, respectively, related to the separate account dividend received deduction. The 2017 benefit
included a benefit of $7 million related to a true-up of the 2016 tax return. The 2016 benefit included an expense of $21 million
related to a true-up of the 2015 tax return. The 2015 benefit included a benefit of $11 million related to a true-up of the 2014
tax return.
The Company is under continuous examination by the IRS and other tax authorities in jurisdictions in which the Company
has significant business operations. The income tax years under examination vary by jurisdiction and subsidiary. The Company
is no longer subject to U.S. federal, state or local income tax examinations for years prior to 2007, except for 2006 where the
IRS disallowance relates to policyholder liability deductions and the Company is engaged with IRS appeals. Management
believes it has established adequate tax liabilities, and final resolution of the audit for the years 2006 and forward is not expected
to have a material impact on the Company’s combined and consolidated financial statements.
Tax Sharing Agreements
For the periods prior to the Separation from MetLife, Brighthouse Financial, Inc. and its subsidiaries will file a consolidated
U.S. life and non-life federal income tax return in accordance with the provisions of the Internal Revenue Code of 1986, as
amended (the “Code”). Current taxes (and the benefits of tax attributes such as losses) are allocated to Brighthouse Financial,
Inc., and its includable subsidiaries, under the consolidated tax return regulations and a tax sharing agreement with MetLife.
This tax sharing agreement states that federal taxes will be computed on a modified separate return basis with benefits for losses.
For periods after the Separation, Brighthouse Financial, Inc. and its subsidiaries entered into two separate tax sharing
agreements. Brighthouse Life Insurance Company and any directly owned life insurance and reinsurance subsidiaries (including
BHNY and BRCD) entered in a tax sharing agreement to join a life consolidated federal income tax return. Brighthouse Financial,
Inc. and its includable subsidiaries entered into a tax sharing agreement to join a nonlife consolidated federal income tax return.
NELICO and the nonlife subsidiaries of Brighthouse Life Insurance Company will file their own U.S. federal income tax returns.
The tax sharing agreements state that federal taxes are generally allocated to the Company as if each entity were filing its own
separate company tax return, except that net operating losses and certain other tax attributes are characterized as realized (or
realizable) when those tax attributes are realized (or realizable) by the Company.
258
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
13. Income Tax (continued)
Related Party Income Tax Transactions
In connection with the Separation, the Company entered into a tax receivables agreement (the “Tax Receivables Agreement”)
with MetLife that provides MetLife with the right to receive as partial consideration for its contribution of assets to Brighthouse
Financial, Inc. future payments from Brighthouse Financial, Inc., equal to 86% of the amount of cash savings, if any, in U.S.
federal income tax that Brighthouse Financial, Inc. and its subsidiaries actually, or are deemed to, realize as a result of the
utilization of Brighthouse Financial, Inc. and its subsidiaries’ net operating losses, capital losses, tax basis and amortization or
depreciation deductions in respect of certain tax benefits it may realize as a result of certain transactions involved in the Separation.
In the third quarter of 2017, in connection with the Tax Receivables Agreement, the Company recorded a payable to MetLife
of $553 million in other liabilities, offset with a decrease to additional paid-in capital.
As a result of the reduction in the statutory tax rates under the Tax Act, the liability to MetLife under the Tax Receivables
Agreement was reduced to $331 million at December 31, 2017.
The Company also entered into a tax separation agreement with MetLife (the “Tax Separation Agreement”). Among other
things, the Tax Separation Agreement governs the allocation between MetLife and us of the responsibility for the taxes of the
MetLife group. The Tax Separation Agreement also allocates rights, obligations and responsibilities in connection with certain
administrative matters relating to the preparation of tax returns and control of tax audits and other proceedings relating to taxes.
In October 2017, MetLife paid $729 million to Brighthouse under the Tax Separation Agreement. At December 31, 2017, the
current income tax recoverable included $873 million related to this agreement.
14. Earnings Per Common Share
The following table sets forth the calculation of basic earnings per share (“EPS”) based on net income (loss) divided by the
basic weighted average number of common shares.
Net income (loss)
Weighted average common shares outstanding:
Basic
Earnings per common share:
Basic
__________________
Years Ended December 31,
2017
Pro forma
2016 (1)
Pro forma
2015 (1)
(In millions, except share and per share data)
(378) $
(2,939) $
1,119
119,773,106
119,773,106
119,773,106
(3.16) $
(24.54) $
9.34
$
$
(1) On August 4, 2017, following the completion of the Separation, 119,773,106 shares of Brighthouse Financial, Inc. common
stock were outstanding. This number of shares remained outstanding at December 31, 2017 and is utilized to calculate
EPS for the years ended December 31, 2016 and 2015.
259
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
15. Contingencies, Commitments and Guarantees
Contingencies
Litigation
The Company is a defendant in a number of litigation matters. In some of the matters, large and/or indeterminate amounts,
including punitive and treble damages, are sought. Modern pleading practice in the U.S. permits considerable variation in the
assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought
or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. In addition,
jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible verdicts in the
jurisdiction for similar matters. This variability in pleadings, together with the actual experience of the Company in litigating
or resolving through settlement numerous claims over an extended period of time, demonstrates to management that the
monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value.
Due to the vagaries of litigation, the outcome of a litigation matter and the amount or range of potential loss at particular
points in time may normally be difficult to ascertain. Uncertainties can include how fact finders will evaluate documentary
evidence and the credibility and effectiveness of witness testimony, and how trial and appellate courts will apply the law in
the context of the pleadings or evidence presented, whether by motion practice, or at trial or on appeal. Disposition valuations
are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and
applicable law.
The Company establishes liabilities for litigation and regulatory loss contingencies when it is probable that a loss has
been incurred and the amount of the loss can be reasonably estimated. It is possible that some matters could require the
Company to pay damages or make other expenditures or establish accruals in amounts that could not be estimated at December
31, 2017.
Matters as to Which an Estimate Can Be Made
For some loss contingency matters, the Company is able to estimate a reasonably possible range of loss. For such
matters where a loss is believed to be reasonably possible, but not probable, no accrual has been made. As of December 31,
2017, the Company estimates the aggregate range of reasonably possible losses in excess of amounts accrued for these
matters to be $0 to $10 million.
Matters as to Which an Estimate Cannot Be Made
For other matters, the Company is not currently able to estimate the reasonably possible loss or range of loss. The
Company is often unable to estimate the possible loss or range of loss until developments in such matters have provided
sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand
from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or
appeals, analysis by experts, and the progress of settlement negotiations. On a quarterly and annual basis, the Company
reviews relevant information with respect to litigation contingencies and updates its accruals, disclosures and estimates of
reasonably possible losses or ranges of loss based on such reviews.
Diversified Lending Group Litigations
Hartshorne v. NELICO, et al. (Los Angeles County Superior Court, filed March 25, 2015)
Plaintiffs have named NELICO, MetLife, Inc. and MetLife Securities, Inc. in twelve related lawsuits in California state
court alleging various causes of action including multiple negligence and statutory claims relating to the Diversified Lending
Group Ponzi scheme. All but one of the plaintiffs have resolved their claims with the defendants. The Company intends to
vigorously defend the remaining claim.
Sales Practices Claims
Over the past several years, the Company has faced claims and regulatory inquiries and investigations, alleging improper
marketing or sales of individual life insurance policies, annuities, mutual funds or other products. The Company continues
to defend vigorously against the claims in these matters. The Company believes adequate provision has been made in its
combined and consolidated financial statements for all probable and reasonably estimable losses for sales practices matters.
260
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
15. Contingencies, Commitments and Guarantees (continued)
Unclaimed Property Litigation
Total Asset Recovery Services, LLC on its own behalf and on behalf of the State of New York v. Brighthouse Financial,
Inc. et al (Supreme Court, New York County, NY, second amended complaint filed November 17, 2017). Total Asset
Recovery Services, LLC. (the “Relator”) has brought a qui tam action against Brighthouse Financial, Inc. and its subsidiaries
and affiliates under the New York False Claims Act seeking to recover damages on behalf of the State of New York. The
action originally was filed under seal on or about December 3, 2010. The State of New York declined to intervene in the
action, and the Relator is now prosecuting the action. The Relator alleges that from on or about April 1, 1986 and continuing
annually through on or about September 10, 2017, the defendants violated New York State Finance Law Section 189 (1)
(g) by failing to timely report and deliver unclaimed insurance property to the State of New York. The Relator is seeking,
among other things, treble damages, penalties, expenses and attorneys’ fees and prejudgment interest. No specific dollar
amount of damages is specified by the Relator who also is suing numerous insurance companies and John Doe
defendants. The Brighthouse defendants intend to defend this action vigorously.
Summary
Various litigation, claims and assessments against the Company, in addition to those discussed previously and those
otherwise provided for in the Company’s combined and consolidated financial statements, have arisen in the course of the
Company’s business, including, but not limited to, in connection with its activities as an insurer, investor and taxpayer.
Further, state insurance regulatory authorities and other federal and state authorities regularly make inquiries and conduct
investigations concerning the Company’s compliance with applicable insurance and other laws and regulations.
It is not possible to predict the ultimate outcome of all pending investigations and legal proceedings. In some of the
matters referred to previously, large and/or indeterminate amounts, including punitive and treble damages, are sought.
Although in light of these considerations it is possible that an adverse outcome in certain cases could have a material effect
upon the Company’s financial position, based on information currently known by the Company’s management, in its opinion,
the outcomes of such pending investigations and legal proceedings are not likely to have such an effect. However, given
the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it
is possible that an adverse outcome in certain matters could, from time to time, have a material effect on the Company’s
combined and consolidated net income or cash flows in particular quarterly or annual periods.
Insolvency Assessments
Most of the jurisdictions in which the Company is admitted to transact business require insurers doing business within
the jurisdiction to participate in guaranty associations, which are organized to pay contractual benefits owed pursuant to
insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, up to prescribed limits,
on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers
in the lines of business in which the impaired, insolvent or failed insurer engaged. Some states permit member insurers to
recover assessments paid through full or partial premium tax offsets.
Assets and liabilities held for insolvency assessments were as follows:
Other Assets:
Premium tax offset for future discounted and undiscounted assessments
Premium tax offsets currently available for paid assessments
Total
Other Liabilities:
Insolvency assessments
261
December 31,
2017
2016
(In millions)
$
$
$
14
$
5
19
$
18
$
13
9
22
17
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
15. Contingencies, Commitments and Guarantees (continued)
Commitments
Mortgage Loan Commitments
The Company commits to lend funds under mortgage loan commitments. The amounts of these mortgage loan
commitments were $388 million and $348 million at December 31, 2017 and 2016, respectively.
Commitments to Fund Partnership Investments, Bank Credit Facilities, Bridge Loans and Private Corporate Bond
Investments
The Company commits to fund partnership investments and to lend funds under bank credit facilities and private corporate
bond investments. The amounts of these unfunded commitments were $1.4 billion and $1.3 billion at December 31, 2017 and
2016, respectively.
Other Commitments
The Company had entered into collateral arrangements with former affiliates, which required the transfer of collateral in
connection with secured demand notes. These arrangements expired during the first quarter of 2017 and the Company is no
longer transferring collateral to custody accounts. At December 31, 2016, the Company had agreed to fund up to $20 million
of cash upon the request by these former affiliates and had transferred collateral consisting of various securities with a fair
market value of $25 million to custody accounts to secure the demand notes. Each of these former affiliates was permitted by
contract to sell or re-pledge this collateral.
Guarantees
In the normal course of its business, the Company has provided certain indemnities, guarantees and commitments to third
parties such that it may be required to make payments now or in the future. In the context of acquisition, disposition, investment
and other transactions, the Company has provided indemnities and guarantees, including those related to tax, environmental and
other specific liabilities and other indemnities and guarantees that are triggered by, among other things, breaches of
representations, warranties or covenants provided by the Company. In addition, in the normal course of business, the Company
provides indemnifications to counterparties in contracts with triggers similar to the foregoing, as well as for certain other liabilities,
such as third-party lawsuits. These obligations are often subject to time limitations that vary in duration, including contractual
limitations and those that arise by operation of law, such as applicable statutes of limitation. In some cases, the maximum potential
obligation under the indemnities and guarantees is subject to a contractual limitation ranging from less than $1 million to
$203 million, with a cumulative maximum of $209 million, while in other cases such limitations are not specified or applicable.
Since certain of these obligations are not subject to limitations, the Company does not believe that it is possible to determine
the maximum potential amount that could become due under these guarantees in the future. Management believes that it is
unlikely the Company will have to make any material payments under these indemnities, guarantees, or commitments.
In addition, the Company indemnifies its directors and officers as provided in its charters and by-laws. Also, the Company
indemnifies its agents for liabilities incurred as a result of their representation of the Company’s interests. Since these indemnities
are generally not subject to limitation with respect to duration or amount, the Company does not believe that it is possible to
determine the maximum potential amount that could become due under these indemnities in the future.
The Company’s recorded liabilities were $2 million at both December 31, 2017 and 2016 for indemnities, guarantees and
commitments.
16. Related Party Transactions
The Company had not historically operated as a standalone business prior to the Separation, and as a result had various
existing arrangements with MetLife for services necessary to conduct its activities. Subsequent to the Separation, certain of such
services continued, as provided for under a master service agreement and various transition services agreements entered into in
connection with the Separation.
262
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
16. Related Party Transactions (continued)
Non-Broker-Dealer Transactions
The following table summarizes income and expense from transactions with MetLife (excluding broker-dealer transactions)
for the years indicated:
Income
Expense
Years Ended December 31,
2017
2016
(In millions)
2015
$
$
(606)
378
$
$
(280)
332
$
$
(178)
802
The following table summarizes assets and liabilities from transactions with MetLife (excluding broker-dealer transactions)
at:
Assets
Liabilities
December 31,
2017
2016
(In millions)
2,907
2,178
$
$
4,805
7,763
$
$
The material arrangements between the Company and MetLife are as follows:
Reinsurance Agreements
The Company has reinsurance agreements with certain of MetLife, Inc.’s subsidiaries. See Note 5 for further discussion
of the related party reinsurance agreements.
Financing Arrangements
Prior to the Separation, the Company had surplus notes outstanding to MetLife, Inc., as well as a collateral financing
arrangement with a third party that involved MetLife, Inc. See Note 9 for more information.
Investment Transactions
Prior to the Separation, the Company had extended loans to certain subsidiaries of MetLife, Inc. Additionally, in the
ordinary course of business, the Company had previously transferred invested assets, primarily consisting of fixed maturity
securities, to and from former affiliates. See Note 6 for further discussion of the related party investment transactions.
Shared Services and Overhead Allocations
MetLife provides the Company certain services, which include, but are not limited to, treasury, financial planning and
analysis, legal, human resources, tax planning, internal audit, financial reporting, and information technology. In 2017, the
Company is charged for these services through a transition services agreement and allocated to the legal entities and products
within the Company. When specific identification to a particular legal entity and/or product is not practicable, an allocation
methodology based on various performance measures or activity-based costing, such as sales, new policies/contracts issued,
reserves, and in-force policy counts is used. The bases for such charges are modified and adjusted by management when
necessary or appropriate to reflect fairly and equitably the actual incidence of cost incurred by the Company and/or affiliate.
Management believes that the methods used to allocate expenses under these arrangements are reasonable. Expenses incurred
with MetLife related to these arrangements, recorded in other expenses, were $390 million, $868 million and $1.1 billion for
the years ended December 31, 2017, 2016 and 2015, respectively.
Employee Matters Agreement
On August 4, 2017, an employee matters agreement (“EMA”) between Brighthouse Financial, Inc. and MetLife, Inc.
became effective. Under this agreement, MetLife, Inc. has agreed to reimburse Brighthouse Financial, Inc. on an annual basis
for any and all payments of benefits required by underfunded plans made by any legal entity owned by Brighthouse Financial,
Inc. related to certain NELICO employee benefit plan liabilities. At December 31, 2017, the Company’s receivable from
MetLife, Inc. under the EMA was $192 million, and is included in premiums, reinsurance and other receivables.
263
Brighthouse Financial, Inc.
Notes to the Consolidated and Combined Financial Statements (continued)
16. Related Party Transactions (continued)
Broker-Dealer Transactions
Beginning in March 2017, Brighthouse Securities, LLC, a registered broker-dealer affiliate, began distributing certain of
the Company’s existing and future variable insurance products, and the MetLife broker-dealers discontinued such distributions.
Prior to March 2017, the Company recognized related party revenues and expenses arising from transactions with MetLife
broker-dealers that previously sold the Company’s variable annuity and life products. The related party expense for the Company
was commissions collected on the sale of variable products by the Company and passed through to the broker-dealer. The related
party revenue for the Company was fee income from trusts and mutual funds whose shares serve as investment options of
policyholders of the Company.
The following table summarizes income and expense from transactions with MetLife broker-dealers for the years indicated:
Fee income
Commission expense
Years Ended December 31,
2017
2016
2015
(In millions)
$
$
43
129
$
$
216
649
$
$
235
652
The following table summarizes assets and liabilities from transactions with MetLife broker-dealers at:
Fee income receivables
Secured demand notes
17. Quarterly Results of Operations (Unaudited)
December 31,
2017
2016
(In millions)
— $
— $
21
20
$
$
The unaudited quarterly results of operations for 2017 and 2016 are summarized in the table below:
2017
Total revenues
Total expenses
Net income (loss)
Basic earnings per common share (1)
2016
Total revenues
Total expenses
Net income (loss)
Basic earnings per common share (1)
__________________
March 31,
Three Months Ended
June 30,
September 30,
(In millions, except per share data)
December 31,
$
$
$
$
$
$
$
$
$
965
$
1,555
(349) $
(2.91) $
2,389
1,825
407
3.40
$
$
$
$
2,025
1,704
246
2.05
$
$
$
$
(584) $
$
1,656
(1,423) $
(11.88) $
$
1,972
$
2,096
(943) $
(7.87) $
1,766
$
$
2,018
(158) $
(1.32) $
1,880
2,102
668
5.57
(553)
2,224
(1,765)
(14.74)
(1) See Note 14 for additional information on the calculation of EPS.
264
Brighthouse Financial, Inc.
Schedule I
Consolidated and Combined Summary of Investments —
Other Than Investments in Related Parties
December 31, 2017
(In millions)
Types of Investments
Fixed maturity securities:
Bonds:
U.S. government and agency securities
State and political subdivision securities
Public utilities
Foreign government securities
All other corporate bonds
Total bonds
Mortgage-backed and asset-backed securities
Redeemable preferred stock
Total fixed maturity securities
Equity securities:
Non-redeemable preferred stock
Common stock:
Industrial, miscellaneous and all other
Public utilities
Total equity securities
Mortgage loans
Policy loans
Real estate joint ventures
Other limited partnership interests
Short-term investments
Other invested assets
Total investments
______________
Cost or
Amortized Cost (1)
Estimated Fair
Value
Amount at
Which Shown on
Balance Sheet
$
$
$
$
$
$
14,548
3,635
2,145
1,152
25,510
46,990
12,945
238
60,173
129
83
—
212
10,742
1,523
433
1,669
312
2,436
77,500
16,292
4,181
2,447
1,309
27,190
51,419
13,229
343
64,991
138
92
2
232
$
$
16,292
4,181
2,447
1,309
27,190
51,419
13,229
343
64,991
138
92
2
232
10,742
1,523
433
1,669
312
2,436
82,338
(1) Cost or amortized cost for fixed maturity securities and mortgage loans represents original cost reduced by repayments,
valuation allowances and impairments from other-than-temporary declines in estimated fair value that are charged to
earnings and adjusted for amortization of premiums or accretion of discounts; for equity securities, cost represents original
cost reduced by impairments from other-than-temporary declines in estimated fair value; for real estate joint ventures and
other limited partnership interests, cost represents original cost reduced for impairments or original cost adjusted for
equity in earnings and distributions.
265
Brighthouse Financial, Inc.
Schedule II
Condensed Financial Information
(Parent Company Only)
December 31, 2017 and 2016
(In thousands, except share and per share data)
Condensed Balance Sheets
Assets
Investments:
Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $238,948 and $0,
respectively)
Investment in subsidiaries
Total investments
Cash and cash equivalents
Accrued investment income
Receivable from former affiliate
Current income tax recoverable
Other assets
Total assets
Liabilities and Stockholders’ Equity
Liabilities
Long-term and short-term debt
Payable to former affiliate
Deferred income tax liability
Other liabilities
Total liabilities
Stockholders’ Equity
Common stock, par value $0.01 per share; 1,000,000,000 and 100,000 shares authorized, respectively;
119,773,106 and 100,000 shares issued and outstanding, respectively
Additional paid-in capital
Retained earnings (deficit)
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
2017
2016
$
236,946
$
17,810,226
18,047,172
325,528
945
191,570
20,714
8,205
$ 18,594,134
$
$ 3,702,071
$
333,148
33,166
10,083
—
—
—
1
—
—
306
15,870
16,177
—
16,745
—
—
4,078,468
16,745
1,198
12,432,449
405,853
1,676,166
14,515,666
1
—
(569)
—
(568)
$ 18,594,134
$
16,177
See accompanying notes to the condensed financial information.
266
Brighthouse Financial, Inc.
Schedule II
Condensed Financial Information (continued)
(Parent Company Only)
For the Year Ended December 31, 2017, and
For the Period from August 1, 2016 (Date of Inception) to December 31, 2016
(In thousands)
Condensed Statements of Operations
Revenues
Equity in earnings (losses) of subsidiaries
Net investment income
Other revenues
Net investment gains (losses)
Net derivative gains (losses)
Total revenues
Expenses
Credit facility fees
Other expenses
Total expenses
Income (loss) before provision for income tax
Provision for income tax expense (benefit)
Net income (loss)
Comprehensive income (loss)
See accompanying notes to the condensed financial information.
2017
2016
$
(565,979) $
5,573
221,834
(237)
1,729
(337,080)
16,014
75,921
91,935
(429,015)
(50,897)
$
$
(378,118) $
33,000
$
—
—
—
—
—
—
875
—
875
(875)
(306)
(569)
(569)
267
Brighthouse Financial, Inc.
Schedule II
Condensed Financial Information (continued)
(Parent Company Only)
For the Year Ended December 31, 2017, and
For the Period from August 1, 2016 (Date of Inception) to December 31, 2016
(In thousands)
Condensed Statements of Cash Flows
Cash flows from operating activities
Net income (loss)
Equity in (earnings) losses of subsidiaries
Distribution from subsidiary
Other, net
Net cash provided by (used in) operating activities
Cash flows from investing activities
Sales of fixed maturity securities
Purchases of fixed maturity securities
Capital contributions to subsidiaries
Net cash provided by (used in) investing activities
Cash flows from financing activities
Long-term and short-term debt issued
Debt issuance costs
Issuance of common stock
Distribution to MetLife, Inc.
Credit facility fees
Net cash provided by (used in) financing activities
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosures of cash flow information
Net cash paid (received) for:
Interest
Income tax:
Cash received from MetLife, Inc. for income tax
Income tax paid by Brighthouse Financial, Inc.
Net cash paid (received) for income tax
2017
2016
(378,118) $
565,979
50,000
(252,310)
(14,449)
(569)
—
—
569
—
509,814
(748,972)
(1,300,000)
(1,539,158)
3,724,375
(39,187)
—
(1,798,000)
(8,054)
1,879,134
325,527
1
325,528
$
67,135
$
(40) $
888
848
$
—
—
—
—
—
—
1
—
—
1
1
—
1
—
—
—
—
$
$
$
$
$
See accompanying notes to the condensed financial information.
268
Brighthouse Financial, Inc.
Schedule II
Notes to the Condensed Financial Information
(Parent Company Only)
1. Basis of Presentation
The condensed financial information of Brighthouse Financial, Inc. (the “Parent Company”) should be read in conjunction
with the consolidated financial statements of Brighthouse Financial, Inc. and its subsidiaries and the notes thereto (the
“Consolidated Financial Statements”). These condensed unconsolidated financial statements reflect the results of operations,
financial position and cash flows for Brighthouse Financial, Inc. Investments in subsidiaries are accounted for using the equity
method of accounting.
The preparation of these condensed unconsolidated financial statements in conformity with GAAP requires management
to adopt accounting policies and make certain estimates and assumptions. The most important of these estimates and assumptions
relate to the fair value measurements, identifiable intangible assets and the provision for potential losses that may arise from
litigation and regulatory proceedings and tax audits, which may affect the amounts reported in the condensed unconsolidated
financial statements and accompanying notes. Actual results could differ from these estimates.
2. Investment in Subsidiaries
Contribution of Brighthouse Holdings, LLC
On July 28, 2017, MetLife, Inc. contributed to Brighthouse Financial, Inc. all of the common interests in BH Holdings in
exchange for (i) the assumption by Brighthouse Financial, Inc. of certain liabilities of MetLife, Inc. including, among other
things, liabilities relating to the operation of Brighthouse Financial, Inc.’s business (including from periods prior to the separation)
and certain liabilities related to Brighthouse Financial, Inc.’s employees, liabilities relating to Brighthouse Financial, Inc.’s assets
and outstanding contractual and non-contractual relationships with customers, vendors and others (including obligations under
leases for Brighthouse Financial, Inc.’s corporate headquarters in Charlotte, North Carolina, as well as certain other locations),
and liabilities relating to certain historical operations of MetLife, Inc.; (ii) a cash distribution; (iii) the issuance of additional
shares of Brighthouse Financial, Inc. common stock; and (iv) the entry into certain other agreements between MetLife, Inc. and
Brighthouse Financial, Inc.
During the year ended December 31, 2017, Brighthouse Financial, Inc. paid cash capital contributions of $1.3 billion to
BH Holdings.
During the year ended December 31, 2017, Brighthouse Financial, Inc. received a $50 million cash distribution from BH
Holdings.
3. Long-term and Short-term Debt
Long-term and short-term debt outstanding was as follows:
Senior notes — unaffiliated (1)
Senior notes — unaffiliated (1)
Term loan — unaffiliated
Total long-term debt
Short-term intercompany loans
Total long-term and short-term debt
_______________
Interest Rate
Maturity
2017
2016
December 31,
3.70%
4.70%
LIBOR plus 1.5%
2027
2047
2019
(In millions)
$
1,489
$
1,477
600
3,566
136
$
3,702
$
—
—
—
—
—
—
(1) Includes unamortized debt issuance costs and debt discount totaling $34 million for the senior notes due 2027 and 2047 on
a combined basis at December 31, 2017.
Interest expense related to long-term and short-term debt of $75 million for the year ended December 31, 2017 is included
in other expenses.
269
Brighthouse Financial, Inc.
Schedule II
Notes to the Condensed Financial Information (continued)
(Parent Company Only)
The aggregate maturities of long-term and short-term debt at December 31, 2017 for the next five years and thereafter are
$136 million in 2018, $600 million in 2019, $0 in each of 2020, 2021 and 2022, and $3.0 billion thereafter.
Senior Notes
See Note 9 of the Notes to the Consolidated and Combined Financial Statements for information regarding the unaffiliated
senior notes.
Credit Facilities
See Note 9 of the Notes to the Consolidated and Combined Financial Statements for information regarding Brighthouse
Financial, Inc.’s credit facilities, including the unaffiliated term loan.
At December 31, 2016, Brighthouse Financial, Inc. owed MetLife, Inc. $17 million for debt issuance costs and credit facility
fees paid on Brighthouse Financial Inc.’s behalf, which is included in payable to former affiliate. Brighthouse Financial, Inc.
reimbursed MetLife, Inc. for such costs during 2017.
Short-term Intercompany Loans
On October 23, 2017, Brighthouse Financial, Inc., as borrower, entered into a short-term intercompany loan agreement with
certain of its non-insurance subsidiaries, as lenders, for the purposes of facilitating the management of the available cash of the
borrower and the lenders on a consolidated basis. Each loan entered into under this intercompany loan agreement has a term not
more than 364 days and bears interest on the unpaid principal amount at a variable rate, payable monthly.
During the fourth quarter of 2017, Brighthouse Financial, Inc. borrowed $80 million aggregate principal amount from
Brighthouse Services, and $56 million aggregate principal amount from BH Holdings. The weighted average interest rate on
these short-term intercompany loans was 0.73% at December 31, 2017 and interest expense was not significant for the year
ended December 31, 2017.
Intercompany Liquidity Facilities
We have established an intercompany liquidity facility with certain of our insurance and non-insurance company subsidiaries
to provide short-term liquidity within and across the combined group of companies. Under the facility, which is comprised of
a series of revolving loan agreements among Brighthouse Financial, Inc. and its participating subsidiaries, each company may
lend to or borrow from each other, subject to certain maximum limits for a term not more than 364 days. For each insurance
subsidiary, the borrowing and lending limit is 3% of the respective insurance subsidiary’s statutory admitted assets as of the
previous year end. For Brighthouse Financial, Inc. and each non-insurance subsidiary, the borrowing and lending limit is based
on a formula tied to the statutory admitted assets of the respective non-insurance subsidiaries. Brighthouse Financial, Inc. made
no loans to, and received no borrowings from, any of its subsidiaries under this liquidity facility during the year ended
December 31, 2017.
4. Income Tax
In connection with the Separation, the Company entered into a tax receivable agreement (the “Tax Receivables Agreement”)
with MetLife that provides MetLife with the right to receive as partial consideration for its contribution of assets to Brighthouse
Financial, Inc. future payments from Brighthouse Financial, Inc., equal to 86% of the amount of cash savings, if any, in U.S.
federal income tax that Brighthouse Financial, Inc. and its subsidiaries actually, or are deemed to, realize as a result of the
utilization of Brighthouse Financial, Inc. and its subsidiaries’ net operating losses, capital losses, tax basis and amortization or
depreciation deductions in respect of certain tax benefits it may realize as a result of certain transactions involved in the Separation.
In the third quarter of 2017, in connection with the Tax Receivables Agreement, the Company recorded a payable to MetLife
of $553 million in other liabilities, offset with a decrease to additional paid-in capital.
In the fourth quarter of 2017, as a result of the reduction in the statutory tax rates under the Tax Act, the liability to MetLife
under the Tax Receivables Agreement was reduced by $222 million, which is included in other revenues.
At December 31, 2017 and 2016, Brighthouse Financial, Inc. owed MetLife $333 million and $0, respectively, included in
payable to former affiliate, primarily in connection with the Tax Receivables Agreement.
270
Brighthouse Financial, Inc.
Schedule II
Notes to the Condensed Financial Information — (continued)
(Parent Company Only)
5. Related Party Transactions
MetLife, Inc. provides Brighthouse Financial, Inc. certain services, which include, but are not limited to, treasury, financial
planning and analysis, legal, human resources, tax planning, internal audit, financial reporting and information technology. In
2017, the Company is charged for these services through a transition services agreement and allocated to the products within
the Company. When specific identification is not practicable, an allocation methodology based on various performance measures
or activity-based costing, such as sales, new policies/contracts issued, reserves, and in-force policy counts is used. The bases
for such charges are modified and adjusted by management when necessary or appropriate to reflect fairly and equitably the
actual incidence of cost incurred by Brighthouse Financial, Inc. Management believes that the methods used to allocate expenses
under these arrangements are reasonable. Expenses incurred with MetLife, Inc. related to these arrangements, recorded in other
expenses, were $4 million for the year ended December 31, 2017. There were no expenses related to these arrangements for the
period from August 1, 2016 (date of inception) to December 31, 2016.
At December 31, 2017 and 2016, MetLife, Inc. owed Brighthouse Financial, Inc. $192 million and $0, respectively, included
in receivable from former affiliate, related to employee benefit plan liabilities. See Note 16 of the Notes to the Consolidated and
Combined Financial Statements for information regarding this agreement.
271
Brighthouse Financial, Inc.
Schedule III
Consolidated and Combined Supplementary Insurance Information
December 31, 2017 and 2016
(In millions)
Segment
2017
Annuities
Life
Run-off
Corporate & Other
Total
2016
Annuities
Life
Run-off
Corporate & Other
Total
______________
DAC
and
VOBA
Future Policy
Benefits and Other
Policy-Related
Balances
Policyholder
Account
Balances
Unearned
Premiums (1)(2)
Unearned
Revenue (1)
$
$
$
$
5,047
$
8,347
$
25,934
$
— $
1,106
5
128
6,286
4,878
1,261
6
148
$
$
5,200
18,521
7,533
39,601
7,724
4,951
16,313
7,429
$
$
3,342
8,506
1
37,783
25,431
3,588
8,506
1
$
$
6,293
$
36,417
$
37,526
$
14
—
5
19
$
— $
14
—
6
20
$
96
278
95
—
469
89
363
79
—
531
(1) Amounts are included within the future policy benefits and other policy-related balances column.
(2)
Includes premiums received in advance.
272
Brighthouse Financial, Inc.
Schedule III
Consolidated and Combined Supplementary Insurance Information (continued)
December 31, 2017, 2016 and 2015
(In millions)
Segment
2017
Annuities
Life
Run-off
Corporate & Other
Total
2016
Annuities
Life
Run-off
Corporate & Other
Total
2015
Annuities
Life
Run-off
Corporate & Other
Total
______________
Premiums and
Universal Life
and Investment-Type
Product Policy Fees
Net
Investment
Income (1)
Policyholder Benefits
and Claims and
Interest Credited
to Policyholder
Account Balances
Amortization of
DAC and VOBA
Other
Expenses
$
$
$
$
$
$
3,000
$
1,252
$
2,130
$
(23) $
1,565
951
714
96
4,761
3,259
739
878
128
5,004
3,856
752
793
288
$
$
$
$
327
1,358
141
3,078
1,329
350
1,341
187
3,207
1,156
352
1,461
130
$
$
$
$
820
1,735
62
4,747
2,347
681
1,953
87
5,068
2,359
650
1,301
218
$
$
$
$
223
7
20
265
279
374
227
$
2,483
(896) $
1,248
282
961
24
371
523
169
65
24
$
$
273
437
326
2,284
1,301
276
284
259
5,689
$
3,099
$
4,528
$
781
$
2,120
(1)
See Note 2 of the Notes to the Consolidated and Combined Financial Statements for the basis of allocation of net investment
income.
273
Brighthouse Financial, Inc.
Schedule IV
Consolidated and Combined Reinsurance
December 31, 2017, 2016 and 2015
(Dollars in millions)
Gross Amount
Ceded
Assumed
Net Amount
% Amount
Assumed to Net
$
$
$
$
$
$
$
$
$
629,367
$
206,304
$
6,879
$
429,942
1.6%
1,557
$
238
1,795
$
711
232
943
$
$
11
—
11
$
$
857
6
863
1.3%
—%
1.3%
653,270
$
465,841
$
7,006
$
194,435
3.6%
2,067
$
229
$
929
224
2,296
$
1,153
$
76
$
3
79
$
1,214
8
1,222
6.3%
37.5%
6.5%
637,410
$
483,569
$
94,863
$
248,704
38.1%
2,229
$
243
855
235
288
$
9
2,472
$
1,090
$
297
$
1,662
17
1,679
17.3%
52.9%
17.7%
2017
Life insurance in-force
Insurance premium
Life insurance (1)
Accident & health insurance
Total insurance premium
2016
Life insurance in-force
Insurance premium
Life insurance (1)
Accident & health insurance
Total insurance premium
2015
Life insurance in-force
Insurance premium
Life insurance (1)
Accident & health insurance
Total insurance premium
______________
(1)
Includes annuities with life contingencies.
For the year ended December 31, 2017, reinsurance ceded and assumed included related party transactions for life insurance
in-force of $17.1 billion and $6.9 billion, respectively, and life insurance premiums of $537 million and $11 million, respectively.
For the year ended December 31, 2016, reinsurance ceded and assumed included related party transactions for life insurance in-
force of $266.4 billion and $7.0 billion, respectively, and life insurance premiums of $766 million and $34 million, respectively.
For the year ended December 31, 2015, reinsurance ceded and assumed included related party transactions for life insurance in-
force of $278.5 billion and $86.4 billion, respectively, and life insurance premiums of $687 million and $227 million, respectively.
274
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e)
under the Exchange Act, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of December 31,
2017.
Historically, the Company relied on certain financial, administrative and other resources of MetLife, Inc. to operate our
business until the Separation on August 4, 2017. In connection with the Separation, the Company redesigned several business
processes and continues to change business processes as a standalone entity. The Company identifies, documents and evaluates
controls to ensure controls over our financial reporting are effective. MetLife, through services agreements, continues to provide
certain services on a transitional basis. We consider these to be a material change in our internal control over financial reporting.
Other than as noted above, there were no changes to the Company’s internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2017 that have
materially affected, or are reasonably likely to materially affect, these internal controls over financial reporting.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This annual report does not include a report of management’s assessment regarding internal control over financial reporting
or an attestation report of the Company’s registered public accounting firm due to a transition period established by rules of the
SEC for newly public companies.
275
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information about our Directors is incorporated by reference from the discussion under the heading Proposal 1 — Election
of three (3) Class I Directors for a two-year term ending at the 2020 Annual Meeting of Stockholders in Brighthouse Financial,
Inc.’s Proxy Statement for the 2018 Annual Meeting of Stockholders (the “2018 Proxy Statement”).
Information about compliance with Section 16(a) of the Exchange Act is incorporated by reference from the discussion
under the heading Security Ownership of Directors and Executive Officers — Section 16(a) Beneficial Ownership Reporting
Compliance in our 2018 Proxy Statement.
Information about the Brighthouse Financial, Inc. Code of Conduct for Financial Management (the “Financial Management
Code”), which applies to any employee that may obtain access to any financial records covered by the Financial Management
Code, including the Chief Executive Officer, the Chief Financial Officer and the Chief Accounting Officer, as well as the
Brighthouse Financial, Inc. Code of Conduct for Directors, which applies to all members of our Board of Directors, including
the Chief Executive Officer, and the Brighthouse Financial, Inc. Code of Conduct for Employees, which applies to all of our
employees and officers, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer is
incorporated by reference from the discussions under the heading Board and Corporate Governance Practices — Codes of
Conduct in our 2018 Proxy Statement. The Ethics Codes are available on the Company’s website at http://
investor.brighthousefinancial.com/corporate-governance/governance-overview. We intend to disclose future amendments to
certain provisions of the Code, or waivers of such provisions granted to executive officers and directors, on the Company’s
website at the address given above within five business days following the date of such amendment or waiver.
Information regarding the procedures by which our stockholders may recommend nominees to our Board of Directors is
incorporated by reference from the discussion under the headings “Board and Corporate Governance Practices — Building our
Board of Directors” and “The Annual Meeting, Voting and Other Information — Other Information— Proposals for the 2019
Annual Meeting of Stockholders” in our 2018 Proxy Statement.
Information about our Audit Committee, including the members of the Committee, and our Audit Committee financial
expert, is incorporated by reference from the discussion under the heading Board and Corporate Governance Practices —
Information about our Board Committees — Audit Committee in our 2018 Proxy Statement.
The information called for by this Item pertaining to Executive Officers appears in “Business — Executive Officers” in this
Annual Report on Form 10-K.
Item 11. Executive Compensation
NOTE: Terms defined in the Compensation Discussion and Analysis and accompanying tables relate only to the disclosure
included in the Compensation Discussion and Analysis and accompanying tables and not to any other disclosure included
elsewhere in this Annual Report on Form 10-K.
Compensation Discussion and Analysis
The Compensation Discussion and Analysis (“CD&A”) describes Brighthouse Financial, Inc.’s (“Brighthouse,” “the
Company,” “we,” “us,” or “our”) executive compensation philosophy, policies, practices and objectives in the context of our
compensation decisions for our named executive officers (the “NEOs”) for the period from August 5, 2017, the first day following
the date MetLife, Inc. (“MetLife”) distributed our common stock, through December 31, 2017. We refer to this period as “Fiscal
2017” throughout the CD&A. Prior to August 5, 2017, compensation to our NEOs and all other employees was paid by one of
MetLife’s subsidiaries. Following the completion of MetLife’s spin-off of Brighthouse through the distribution of approximately
80.8% of MetLife’s interest in Brighthouse to holders of MetLife common stock (the “Separation”), our NEOs and other
employees were compensated by Brighthouse Services, LLC (“Brighthouse Services”) as a subsidiary of Brighthouse and not
a subsidiary of MetLife. Brighthouse Services is a payroll and services company and is the employer of all our NEOs and other
employees. Please note that, except to the extent an amount is specified as relating to calendar year 2017, all compensation
figures and amounts reported in this CD&A, and in the tabular disclosures following, reflect compensation paid and/or granted
during Fiscal 2017 only and does not include compensation paid prior to the Separation.
276
For Fiscal 2017, our NEOs are comprised of our Chief Executive Officer, Chief Financial Officer and the next three most
highly compensated executive officers whose names appear below:
Name
Eric T. Steigerwalt
Anant Bhalla
John L. Rosenthal
Peter M. Carlson
Christine M. DeBiase
_______________
Title
President and Chief Executive Officer
Executive Vice President and Chief Financial Officer
Executive Vice President and Chief Investment Officer
Executive Vice President and Chief Operating Officer
Executive Vice President, General Counsel and Corporate Secretary (*)
(*) Effective February 2, 2018, Ms. DeBiase’s title was changed to Executive Vice President, Chief Administrative Officer and
General Counsel. As of that date, Ms. DeBiase ceased serving as the Company’s Corporate Secretary.
The CD&A is organized into four sections:
•
•
•
•
Section 1 — Executive Summary
Section 2 — Features of our Fiscal 2017 Executive Compensation Program
Section 3 — The Brighthouse Vision and Strategy — Establishing the 2018 Executive Compensation Program
Section 4 — Additional Compensation Practices and Policies
Section 1 — Executive Summary
The Brighthouse Story
Brighthouse became an independent, publicly-traded company following the completion of the Separation on August
4, 2017, culminating with the listing of Brighthouse’s stock on the NASDAQ Stock Market on August 7, 2017. Since our
first day as an independent company, we have been a major provider of life insurance and annuity solutions in the United
States. Our mission is to assist our customers to achieve financial security by offering annuity and life insurance solutions.
Compensation Approach
Prior to the Separation, our executive officers were officers or employees of MetLife and its subsidiaries, although
some or all of the work they performed prior to the Separation related to us or our subsidiaries.
On August 9, 2017, at its first meeting after the Separation, the Compensation Committee of our Board of Directors
(the “Board”) met and determined the compensation arrangements for our NEOs. The Compensation Committee approved
compensation arrangements for our NEOs that are rooted in a pay-for-performance philosophy.
Our executive compensation program has been designed to:
•
Provide competitive “Target Total Compensation” opportunities (defined as base salary plus short- and long-term
incentive compensation opportunities) to enable Brighthouse to attract, motivate and retain high-performing
executives;
• Align our compensation plans and programs with our short- and long-term business strategies and objectives;
• Align the interests of our NEOs with those of our stockholders by delivering a substantial portion of our NEO’s
compensation in the form of variable, at-risk incentives, with a particular emphasis on stock-based incentives,
where payouts are based on Company and individual performance. The Company intends to seek stockholder
approval of the Brighthouse Financial, Inc. 2017 Stock and Incentive Compensation Plan (the “Employee Plan”)
at Brighthouse’s first annual meeting of stockholders in 2018 (the “2018 Annual Meeting”); and
•
Incorporate strong risk management practices to avoid creating incentives for executives to take excessive risks,
encourage prudent decision-making, and capture the results of risk-based decisions in awards and payouts.
Our pay-for-performance philosophy is intended to align the interests and incentives of our NEOs with those of our
stockholders by tying a substantial portion of our NEO’s compensation to the achievement of performance metrics that are
aligned with the core elements of our strategy.
277
Fiscal 2017 Compensation Highlights
Calendar year 2017 was a year of transformation for Brighthouse. Throughout 2017, our employees were focused on
completing the Separation and establishing Brighthouse as an independent public company. Accordingly, the Fiscal 2017
compensation program was established to support these objectives.
Highlights of our Fiscal 2017 compensation program are described below.
Compensation Highlight
Base Salary and Target Total Compensation
Synopsis
Post-Separation base salaries and Target
Total Compensation opportunities were
established.
Annual Variable Incentive Plan (“AVIP”)
Separation Bonus
Founders’ Grants
Temporary Incentive Deferred
Compensation
AVIP pool for calendar year 2017 was
funded at 105% of target level, with NEO
payout percentages determined based on
individual performance.
A one-time 25% bonus enhancement for all
Brighthouse employees eligible for AVIP
awards.
Shortly following the Separation, these
Brighthouse equity awards were issued to
all employees of the Company who
participate in the Employee Plan. Awards
were issued as Restricted Stock Units
(“RSUs”) that 100% cliff vest a short time
after the anniversary of the grant date,
subject to the achievement of one or more
performance goals. Founders’ Grants are
subject to stockholder approval of the
Employee Plan at the 2018 Annual Meeting.
Deferred compensation credits under the
Temporary Incentive Deferred
Compensation Plan (the “Temporary Plan”)
to our NEOs as a “make-whole” for equity-
based compensation that was forfeited or
otherwise forgone as a result of the
Separation. Credits under the Temporary
Plan are subject to achievement of one or
more performance goals. The material terms
of the performance goals for certain credits
under the Temporary Plan are subject to
stockholder approval at the 2018 Annual
Meeting.
Rationale
Base salaries and Target Total Compensation
opportunities were determined by reference
to the market median of the Comparator
Group (as defined below) and established to
reflect the NEO’s responsibilities as top
executives of a standalone public company.
AVIP is our annual cash incentive plan. The
AVIP award pool was approved at slightly
above target levels to reflect the
Compensation Committee’s quantitative and
qualitative assessment of management’s
success in accomplishing the Separation.
Based on the successful Separation, our
NEOs and other employees received an
additional cash incentive bonus equal to 25%
of his or her respective calendar year 2017
bonus payout under AVIP (“Separation
Bonus”). The Separation Bonus was based
upon the Company’s achievement of critical
post-Separation transition milestones and
reflects the extraordinary efforts by all
employees to effectuate the Separation.
Founders’ Grants were used to accelerate
Brighthouse equity ownership by our
officers and to immediately align our NEOs’
interests with those of our stockholders.
Our NEOs and other employees received
deferred compensation credits under the
Temporary Plan to retain and motivate the
participating employees through the
Separation. These credits were equal to the
sum of: (i) outstanding MetLife equity
awards that were forfeited upon the
Separation, if any, and (ii) 2017 MetLife
equity grants that were forgone in light of
the planned Separation.
See “Section 3 — The Brighthouse Vision and Strategy — Establishing the 2018 Executive Compensation Program,” for
an overview of the key elements of our strategy and the ways in which our compensation program for 2018 is designed to
promote and reward achievement of goals that are central to our strategy.
Section 2 — Features of Our Fiscal 2017 Executive Compensation Program
Since the Separation, the Compensation Committee has been responsible for overseeing the development and
implementation of our executive compensation program. The Compensation Committee is guided by the following general
principles and practices:
•
paying for performance: variable compensation should be based on Company and individual performance and results
that drive stockholder value;
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•
•
•
•
aligning executives’ interests with stockholders’: a significant portion of our NEOs’ Target Total Compensation will
be delivered in the form of stock-based incentives;
encouraging long-term decision-making: our long-term incentive compensation programs should include awards
with multi-year, overlapping incentive performance or restriction periods;
avoiding problematic pay practices: we do not provide excessive perquisites, excessive change-in-control severance
pay, or excise tax gross-ups, and we will not reprice stock options without stockholder approval; and
reinforcing strong risk management: our compensation programs are intended to avoid incentives to take excessive
risks.
Key Executive Compensation Practices
Our executive compensation program reflects the following:
WHAT WE DO
Pay for Performance. A substantial portion of our NEOs’ Target Total Compensation is in the form of variable, at-risk elements
that reward our executives only if we achieve performance goals that create stockholder value.
Stock Ownership Guidelines. We have established stock ownership and retention guidelines to encourage our NEOs to obtain and
maintain significant stock ownership, thereby aligning their interests with those of our stockholders.
Minimum Vesting Requirements. Full value equity awards to our employees are generally subject to minimum vesting periods of
one year for awards subject to achievement of performance goals and three years (at a rate of not greater than 1/3rd per year) for
awards that vest based solely on continued service.
Stockholder Engagement. Since the Separation, we have actively engaged with our stockholders on various topics, including our
executive compensation program. We recognize the importance of our stockholders’ perspectives in the compensation setting
process and intend to incorporate their feedback into the design of our compensation programs.
Independent Compensation Consultant. Our Compensation Committee retained Semler Brossy Consulting Group (“SBCG”) as
its independent compensation consultant to advise on all aspects of our executive compensation program.
WHAT WE DON’T DO
Gross-ups on Excise Taxes. We do not provide tax gross up benefits in connection with a change in control.
Reprice Stock Options. Our equity incentive plans prohibit us from repricing stock options or stock appreciation rights without
stockholder approval.
Excessive Perquisites. We provide limited perquisites to our executive officers.
Hedging and Pledging. Our insider trading policy prohibits all employees and directors from engaging in hedging or pledging
transactions.
Fiscal 2017 Compensation Setting Process
Prior to the Separation, we were a subsidiary of MetLife and our NEOs and all other employees were compensated by
a subsidiary of MetLife based on MetLife’s compensation program for similarly-situated employees of MetLife and its
subsidiaries. In addition, because we were not yet an independent public company, we did not have a compensation committee
comprised of independent directors prior to the Separation. We and MetLife believed it would be appropriate for our post-
Separation Compensation Committee and Board to make determinations and decisions about how our NEOs should be
compensated.
Because the Separation occurred more than half-way through calendar year 2017, we believed it was appropriate for
our Human Resources department, in consultation with Willis Towers Watson (“WTW”), to be primarily responsible for
preparing compensation recommendations for Fiscal 2017 for our NEOs and other members of our senior management,
which we collectively refer to as the Senior Leadership Management Group (the “SLMG”). As described below, shortly
after the Separation, our newly formed Compensation Committee considered the compensation recommendations prepared
in the period leading up to the Separation and ultimately determined to adopt such recommendations for the NEOs and
other members of the SLMG. Going forward, our Compensation Committee, with input from Semler Brossy Consulting
Group, will be primarily responsible for reviewing and determining all elements of Total Compensation for our NEOs and
other members of the SLMG.
Our executive compensation program and accompanying pay positioning strategy have been designed to provide Target
Total Compensation that uses market median as an important reference point, but recognize that the positioning of individual
executives may vary from that strategy with consideration to a variety of factors, including criticality of role, skills,
experience, and strategic priorities. For compensation benchmarking purposes, we use a group of peer companies within
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our industry that are similar to us in terms of assets and revenues and with which we compete for executive talent (the
“Comparator Group”).
In anticipation of the Separation, our Human Resources department and WTW constructed the Comparator Group and
used the companies in the Comparator Group as the market reference for developing pay recommendations for our NEOs
and other members of the SLMG. The Comparator Group consists of fourteen publicly-traded companies in the insurance
industry with assets between 0.25 to 2.0 times those of Brighthouse and/or revenues between 0.4 to 2.5 times those of
Brighthouse. As Brighthouse markets its products solely in the U.S., comparably-sized insurers with significant global
operations (e.g., MetLife) were excluded from the Comparator Group.
In August 2017, shortly after the Separation, our Human Resources department recommended and the Compensation
Committee approved the following Comparator Group:
Aflac Incorporated
Lincoln National Corp.
American Equity Investment Life Holding Company
Principal Financial Group, Inc.
American National Insurance Company
Reinsurance Group of America, Inc.
Ameriprise Financial, Inc.
Assurant, Inc.
CNO Financial Group, Inc.
Genworth Financial, Inc.
Sun Life Financial Inc.
Torchmark Corp.
Unum Group
Voya Financial, Inc.
In connection with the construction of the Comparator Group, our Human Resources department consulted with WTW
to gather compensation data that was used to prepare Target Total Compensation recommendations for the SLMG, including
the NEOs. Target Total Compensation recommendations were prepared for each member of the SLMG by reference to the
compensation data and presented to the Compensation Committee at its first meeting on August 9, 2017. The Compensation
Committee reviewed the recommendation for our Chief Executive Officer and recommended that the independent members
of the Board approve the Target Total Compensation for our Chief Executive Officer, Mr. Steigerwalt. The independent
members of the Board, on the recommendation of the Compensation Committee, approved Mr. Steigerwalt’s Target Total
Compensation at their meeting on August 9, 2017. The Compensation Committee reviewed and approved the compensation
recommendations for all other members of the SLMG, including our NEOs. Our Chief Executive Officer was involved in
discussions with our Human Resources department and our Compensation Committee regarding Target Total Compensation
recommendations for members of the SLMG other than himself.
In November 2017, the Compensation Committee retained SBCG as its independent compensation consultant. From
such date, SBCG has advised, and will continue to advise, the Compensation Committee on the Company’s overall executive
compensation program, including executive pay levels and mix, design of our short- and long-term incentive programs, and
competitiveness of the Company’s executive compensation. See “Role of the Compensation Committee and Others in
Determining Compensation — Compensation Consultant’s Role,” below, for additional information regarding SBCG’s role
in our executive compensation program.
Fiscal 2017 Target Total Compensation Opportunities
The table below shows the post-Separation base salary, target annual incentive opportunity (as a percentage of base
salary) and target long-term equity incentive opportunity (as a percentage of base salary) for each NEO that the independent
members of the Board (for Mr. Steigerwalt) and the Compensation Committee (for all other NEOs) approved in August
2017. The base salary amounts became effective on August 15, 2017. The AVIP payouts, Separation Bonuses and Founders’
Grants values for our NEOs were based on the amounts in the below table.
Name
Eric T. Steigerwalt
Anant Bhalla
John L. Rosenthal
Peter M. Carlson
Christine M. DeBiase
Target Annual
Incentive (as %
of base salary)
200%
Target Long-
Term Incentive
(as % of Base
Salary)
500%
140%
195%
150%
110%
175%
200%
200%
175%
Target Total
Compensation
$7,200,000
$2,490,000
$2,722,500
$2,700,000
$2,213,750
Annual Base
Salary
$900,000
$600,000
$550,000
$600,000
$575,000
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The amount of each element of Target Total Compensation for our NEOs was informed by market data regarding senior
executive compensation at companies within the Comparator Group, as well as survey data from WTW’s proprietary database
of executive compensation at large diversified insurers. In preparing the recommendations, our Human Resources department
sought to provide Target Total Compensation to members of the SLMG, including the NEOs, based on Brighthouse’s median
pay positioning strategy and individual factors (including criticality of role, skills, experience, and strategic priorities) that
may influence positioning relative to the median. The Human Resources department did not specifically target individual
elements or overall levels of compensation at a specific percentage of the median. Instead, the Human Resources department
considered ranges for each element of compensation because it viewed market data as an approximation for the overall
market for a particular position, with ultimate recommendations based on the factors referenced above.
The Compensation Committee expects to periodically assess the competitiveness of our NEOs’ Target Total
Compensation against the Comparator Group and periodically review the composition of the Comparator Group to assess
whether it remains an appropriate source of comparison.
As shown in the graphs below, our CEO’s Target Total Compensation and the average Target Total Compensation for
our other NEOs as set in August 2017 is heavily weighted towards variable, at-risk elements.
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Elements of Fiscal 2017 Compensation
The elements of Fiscal 2017 compensation are as follows, each as discussed in greater detail below:
Component
Base Salary
Form
Cash (Fixed)
AVIP
Cash (Variable)
Separation Bonus
Cash (Variable); Non-
Recurring
Founders’ Grants
Equity (Variable); Non-
Recurring
Temporary Incentive
Deferred Compensation
Cash (Variable)
Purpose
Base salary is intended to provide a fixed amount of compensation for services
during the year. Base salary is determined based upon a variety of factors,
including scope of responsibilities, individual performance, and market data.
AVIP awards, which are annual cash incentive awards, were the primary
compensation arrangement for recognizing and rewarding each NEO’s
contribution to the Company’s overall performance in calendar year 2017.
Payouts were based upon the Company’s achievement of performance goals
tied to the Separation and establishment of Brighthouse as an independent
publicly-traded company. See discussion below for additional information
regarding AVIP.
Our NEOs and other employees received a Separation Bonus equal to 25% of
his or her calendar year 2017 payout under AVIP. The Separation Bonus was
based upon the Company’s achievement of critical post-Separation transition
milestones. See discussion below for additional information regarding the
Separation Bonus.
Founders’ Grants were awarded under the Employee Plan to our NEOs and
other employees eligible to participate in the Employee Plan in recognition of
their leadership through the Separation. In addition, Founders’ Grants are
intended to align our NEOs’ interests with those of our stockholders by
providing them with an equity interest in Brighthouse. Founders’ Grants are
subject to stockholder approval of the Employee Plan. See discussion below
for additional information regarding Founders’ Grants.
We provided deferred compensation credits to our NEOs and other employees
to compensate them for forfeiting and/or forgoing MetLife equity awards as a
result of the Separation. The deferred compensation credits are intended to
retain and motivate our NEOs during the process that culminated in the
Separation. The material terms of the performance goals for certain credits
under the Temporary Plan are subject to stockholder approval at the 2018
Annual Meeting. See discussion below for additional information about the
Temporary Plan.
Base Salary
Base salary is intended to provide our NEOs a fixed level of compensation for their services during the year. Our
Target Total Compensation has been structured so that base salary is the smallest component.
Annual Incentives
Annual incentive awards are the primary compensation arrangement for differentiating and rewarding individual
performance during the year. For 2017, annual incentive awards were paid pursuant to the Brighthouse Services, LLC
Amended and Restated Annual Variable Incentive Plan. The purpose of AVIP is to align total annual pay with business
results, provide competitive levels of pay for performance and make a substantial portion of Target Total Compensation
variable based on both Company and individual performance. The amount of the payouts is tied to the Company’s and
the employee’s achievement of annual performance goals that contribute to our long-term success without creating an
incentive to take excessive risk.
Because 2017 was a year of transformation for the Company, the pre-Separation board of directors recognized it
would be difficult to establish performance goals for AVIP for the 2017 calendar year that related to traditional performance
metrics. In establishing performance goals for 2017, it was necessary to set qualitative goals that could be objectively
measured but also not expected to be unduly affected by the Separation. In addition, as further discussed under “Tax
Considerations” below, we intended to structure our 2017 AVIP awards to qualify for the then-available performance-
based compensation deduction under Section 162(m) of the Internal Revenue Code, which limited our ability to make
adjustments or reflect changing circumstances. Therefore, the performance goals established for AVIP awards focused
on measuring the Company’s overall performance during the pre- and post-Separation portions of calendar year 2017,
with a particular emphasis on successfully separating from MetLife and establishing Brighthouse as a standalone public
company.
At its first post-Separation meeting in August 2017, the Compensation Committee ratified the performance goals
adopted by the pre-Separation board of directors.
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In order for AVIP funding to occur for 2017, the Company needed to achieve one or more of the pre-established
performance goals outlined below:
•
•
•
Positive GAAP Operating Earnings (we now refer to Operating Earnings as “Adjusted Earnings”);
Positive GAAP Operating ROE (we now refer to Operating ROE as “Adjusted ROE”);
Improvement in Variable Annuity (“VA”) Target Funding adequacy level;
• Combined Risk Based Capital Ratio of at least 400% on an authorized control level;
•
•
Positive Value of New Business for Annuity Segment; or
Insurer financial strength ratings of at least “A-” from one or more credit rating agencies.
In January 2018, the Compensation Committee certified that the Company achieved an insurer financial strength
rating of A- from one or more credit rating agencies, allowing the AVIP to be funded.
In determining the actual AVIP funding level, the Compensation Committee considered the Company’s performance
against the pre-established performance goals above, the Company’s performance overall and the efforts made by our
NEOs and employees to effectuate the Separation. Although the Separation ultimately occurred in August 2017, multiple
potential Separation dates were considered beginning in 2016. As a consequence of the uncertain timing, there were many
internal processes and engagements that were established, periodically paused, and then restarted throughout the period
leading up to the Separation.
In addition, the Compensation Committee considered several other factors that it viewed as integral to the Company’s
future success, including developing relationships with key distributors of our products, implementing an overall risk
management framework for our business, and establishing and implementing the Brighthouse culture.
With consideration to these factors, our Human Resources department recommended, and the Compensation
Committee ultimately approved, funding of the AVIP at 105% of target to reflect both the work required to complete the
Separation, but also the financial, operational, and strategic results achieved despite the additional workstreams associated
with the transition to a standalone public company.
Separation Bonus
In addition to awards under AVIP, our NEOs and all other administrative (non-wholesaler) employees were eligible
to receive a Separation Bonus equal to 25% of each employee’s calendar year 2017 AVIP award based upon the Company’s
achievement of performance goals and milestones in connection with the Separation and the establishment of Brighthouse
as a standalone public company. The Separation Bonus was awarded to all NEOs based upon the determination by the
Head of Compensation and Benefits that Brighthouse achieved each of the following pre-established objectives during
the period from the Separation through December 31, 2017:
• Achieved investor community confidence through an insurer financial strength rating of at least “A-”;
• Met at least 90% of expected Transition Services Agreement (“TSA”) transition targets scheduled for 2017;
•
•
Implemented separate Human Resources and payroll systems by January 1, 2018; and
Implemented key risk mitigation measures.
Fiscal 2017 AVIP and Separation Bonus Decisions for Our NEOs
Prior to the Separation, Mr. Steigerwalt and members of our Human Resources department established general
performance goals that would be used to assess Mr. Steigerwalt’s performance during calendar year 2017, and in particular,
Fiscal 2017. These goals were reviewed and ratified by our Compensation Committee in November 2017 following the
Separation. For Fiscal 2017, Mr. Steigerwalt’s goals were a mix of strategic and operational objectives that were intended
to assess Mr. Steigerwalt’s performance in leading the Company through the Separation and establishing Brighthouse as
an independent public company.
In November, the Compensation Committee ratified the following 2017 calendar year goals for Mr. Steigerwalt:
•
•
Separate and stabilize Brighthouse as an independent company;
Increase relevance within value-creating distribution channels;
• Grow book value;
283
• Oversee implementation of Brighthouse’s risk management framework;
• Establish the Brighthouse culture and core values; and
• Complete recruitment and hiring of senior leadership team.
In February 2018, the Compensation Committee and the independent members of our Board considered the
Company’s performance overall, Mr. Steigerwalt’s performance against the performance goals listed above, as well as a
self-assessment of accomplishments provided by Mr. Steigerwalt. In completing the recruitment of his SLMG, Mr.
Steigerwalt was able to drive the Company toward the following accomplishments:
•
•
•
Successfully separated and established Brighthouse as an independent public company;
Increased relevance within value-creating distribution channels, despite a Fitch ratings downgrade and other
inherent challenges associated with the Separation, during which period annuity sales outpaced planned target
by approximately 11%;
Protected and grew book value to approximately $12.4 billion (excluding accumulated other comprehensive
income, or AOCI), by increased annuity sales, maintaining positive adjusted earnings, and modifying the hedging
program to enhance downside protection;
•
Implemented a risk management framework; and
• Established Brighthouse culture and values, by implementing ongoing coaching and feedback training programs,
launching a performance management program, and consistent communication efforts to substantiate our culture
and values across the organization.
Based on the foregoing achievements, the Compensation Committee recommended, and the independent members
of the Board approved, the following AVIP and Separation Bonus payments to Mr. Steigerwalt:
Name
Eric T. Steigerwalt
_______________
AVIP Payout
Percentage
105%
Calendar Year
2017 AVIP
Payment
$1,890,000
Fiscal 2017 AVIP
Payment (1)
$771,534
Separation
Bonus Payment
(1)
$472,500
(1) This amount represents the portion of Mr. Steigerwalt’s AVIP payout earned in respect of service during Fiscal 2017 (i.e.,
the period post-Separation). The Separation bonus represents 25% of Mr. Steigerwalt’s calendar year 2017 AVIP payout.
See the footnotes and narrative disclosure accompanying the Summary Compensation Table for additional information
about the AVIP payment made to Mr. Steigerwalt.
Beginning in 2018, the Compensation Committee with SBCG’s input and assistance expects to establish qualitative
and quantitative goals against which Mr. Steigerwalt’s performance will be assessed.
Also in February 2018, the Compensation Committee considered the overall performance of each of the other NEOs,
including against their 2017 performance goals referenced below. Mr. Steigerwalt also provided the Compensation
Committee with his assessment of the NEOs’ 2017 performance, including the material performance highlights
summarized below.
Anant Bhalla, Executive Vice President and Chief Financial Officer:
2017 Goals
• Execute on separation from MetLife and establishment of Brighthouse;
• Establish and run standalone finance processes for Brighthouse;
• Build new capabilities; and
• Embed the Brighthouse culture and develop talent.
2017 Performance Highlights
• Demonstrated strong financial skills, analytics, and innovative financial modeling that supported the successful
separation effort;
• Effectively managed the challenges that rose from the Separation, including regulatory and reserve matters; and
• Drove the establishment of a new hedging strategy and played an important role in our successful initial debt offering.
284
John L. Rosenthal, Executive Vice President and Chief Investment Officer:
2017 Goals
• Establish robust asset management capability;
• Deliver foundational components of the target operating model;
•
Partner with finance and product to create an effective asset liability management and pricing process;
• Capital preservation;
•
Partner with risk and finance functions;
• Ensure appropriate risk-based returns; and
• Build a cohesive investments department.
2017 Performance Highlights
• Established an appropriate Investments department structure and determined where to build versus outsource;
• Effectively partnered with Treasury on VA hedging strategy; and
• Made strategic asset allocation decisions for Brighthouse and continues to oversee the Asset Manager selection
process.
Peter M. Carlson, Executive Vice President and Chief Operating Officer:
2017 Goals
•
•
Serve as the primary liaison with MetLife Senior Management for post-Separation activities;
Serve as Lead Director of the New England Life Insurance Company and Brighthouse Life Insurance Company of
New York subsidiary boards;
• Establish solid processes for all critical finance functions;
• Define an efficient and effective operating model to oversee operations through MetLife and outsourced partners;
• Ensure compliance with the Brighthouse Board process; and
• Reinforce Brighthouse cultural values through the Chief Operating Officer organization.
2017 Performance Highlights
Provided strategic oversight and leadership guidance over the Finance department;
Spearheaded partnering effort with MetLife and Mr. Steigerwalt on oversight of the multiple work streams involved
in disaffiliation; and
Played an integral role in TSA negotiation and management to facilitate Separation from MetLife.
•
•
•
Christine M. DeBiase, Executive Vice President, General Counsel and Corporate Secretary (during 2017):
2017 Goals
• Establish the Law Group;
• Develop and temporarily lead the Human Resource function;
• Advise and facilitate the legal separation from MetLife;
• Advise on stabilizing and establishing an independent public company;
• Embed the Brighthouse culture and develop Law Group associates; and
•
Support the product development through legal advice and government relations activities.
2017 Performance Highlights
•
Strong collaboration with the senior leadership team during the Separation;
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• Assumed management of Human Resources in addition to her other groups during a critical time for the company:
Legal, Compliance, Office of Corporate Secretary, Corporate Communications, and Government Relations; and
•
Proactive leadership in the General Counsel capacity throughout the Separation.
The Compensation Committee considered the foregoing accomplishments and, based on Mr. Steigerwalt’s
recommendations, approved the following AVIP and Separation Bonus payments to our other NEOs:
Name
Anant Bhalla
John L. Rosenthal
Peter M. Carlson
Christine M. DeBiase
_______________
AVIP Payout
Percentage
100%
105%
99%
112%
Calendar Year
2017 AVIP
Payment
$840,000
$1,126,000
$891,000
$709,000
Fiscal 2017 AVIP
Payment (1)
$342,904
Separation
Bonus Payment
(1)
$210,000
$459,655
$363,723
$289,427
$281,500
$222,750
$177,250
(1) The amounts in this column represent the portion of each NEO’s AVIP payout in respect of service during Fiscal 2017 (i.e.,
the period post-Separation). The Separation Bonus represents 25% of each NEO’s calendar year 2017 AVIP payout. See
the footnotes and narrative disclosure accompanying the Summary Compensation Table for additional information about
the AVIP payment made to the NEOs.
The AVIP and Separation Bonus amounts paid to all of our NEOs in respect of Fiscal 2017 are reported in the “Non-
Equity Incentive Compensation Plan” column of the Summary Compensation Table on page 294.
Founders’ Grants
In Fiscal 2017, each NEO received a Founders’ Grant in the form of RSUs under the Employee Plan. The Founders’
Grants were authorized on August 9, 2017. The number of RSUs awarded was based on the amount of value being
delivered, divided by the closing price of the Company’s common stock on September 8, 2017 (the first Friday after one
month of public trading), which was $54.54. The September 8, 2017 award date was established at the August 9, 2017,
meeting and was determined to be the appropriate award date for the Founders’ Grants given the uncertainty of our stock
performance immediately following the Separation. Founders’ Grants are subject to and conditioned upon stockholder
approval of the Employee Plan, which the Company intends to seek at the 2018 Annual Meeting.
The Compensation Committee determined that it was appropriate to award Founders’ Grants in order to both align
the interests of our NEOs with those of our stockholders, and to reward NEOs and other employees for their contributions
toward the successful Separation and establishment of Brighthouse as an independent public company. The Founders’
Grant awarded to each NEO is equal to two times the NEO’s target long-term equity incentive opportunity approved for
each NEO in August 2017. Awarding Founders’ Grants with a value equal to two-times each NEO’s target annual long-
term incentive opportunity was intended to provide our NEOs with the ability to acquire a substantial ownership interest
in Brighthouse, while also delivering a substantial amount of Fiscal 2017 Total Compensation in the form of stock-based
incentives.
The table below shows the value of each NEO’s Founders’ Grant approved in August 2017 as well as the number of
the RSUs into which the value was converted based on the closing price of the Company’s common stock on September
8, 2017.
Name
Eric T. Steigerwalt
Anant Bhalla
John L. Rosenthal
Peter M. Carlson
Christine M. DeBiase
Founders’ Grant
Value
$9,000,000
Number of RSUs
165,016
$2,100,000
$2,200,000
$2,400,000
$2,012,500
38,503
40,337
44,004
36,899
Founders’ Grants awarded to our NEOs are subject to the Company’s achievement of one or more performance
criteria during the performance period that began on September 8, 2017 and ends on September 30, 2018 (the “Performance
Period”). The performance criteria, which are listed below, were established in order to qualify the Founders’ Grants as
performance-based compensation under Section 162(m) of the Internal Revenue Code.
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•
Improvement in the Company’s Statutory Surplus position over the Performance Period;
• Combined Risk Based Capital ratio of at least 400% as of the end of the Performance Period on an Authorized
Control Level;
Positive GAAP Operating ROE as of the end of the Performance Period;
Insurer Financial Strength Rating of at least “A-” from one or more credit rating agencies as of the end of the
Performance Period;
Positive Value of New Business sold during the Performance Period for the annuity segment of the Company
measured as of the end of the Performance Period; and
•
•
•
• Variable Annuity funding at a level of CTE 95 or above as of the end of the Performance Period.
In the event we achieve one or more of the foregoing performance goals, and subject further to stockholder approval
of the Employee Plan at the 2018 Annual Meeting, the RSUs subject to the Founders’ Grants will vest on September 30,
2018.
Founders’ Grants are not reported in the Summary Compensation Table, Grants of Plan-Based Awards Table or
Outstanding Equity Awards at Fiscal Year End Table because Founders’ Grants are subject to stockholder approval of the
Employee Plan, which the Company intends to seek at the 2018 Annual Meeting. If stockholders approve the Employee
Plan, the Founders’ Grants will be reported under Securities and Exchange Commission rules as compensation to our
NEOs for the fiscal year ending December 31, 2018. However, Founders’ Grants were intended to be a one-time award
and were a central element of the Total Compensation delivered to our NEOs in Fiscal 2017.
Temporary Incentive Deferred Compensation Plan
Prior to the Separation, many of our employees, including all of our NEOs, were employees of an affiliate of MetLife
and participated in benefit and compensation programs sponsored by MetLife or an affiliate. Certain employees, including
our NEOs, received equity awards from MetLife during their employment.
In anticipation of the Separation, certain employees, including all of our NEOs, who had been eligible to receive
equity awards from MetLife, ceased participating in MetLife’s equity compensation plan as of December 31, 2016 and,
therefore, did not receive long-term equity awards from MetLife during 2017. In addition, certain employees, including
some of our NEOs, forfeited their outstanding and unvested MetLife equity awards upon the Separation because these
employees did not satisfy certain age and service requirements under MetLife’s equity compensation plan that would
have allowed such employees’ outstanding equity awards to continue to vest.
As a result of the foregoing, and in order to attract, retain and motivate our employees who forfeited MetLife equity
awards and/or did not receive such awards in 2017, the Temporary Plan was established prior to the Separation. The
Temporary Plan allows us to provide affected employees, including our NEOs, cash-based deferred compensation credits
in respect of forgone 2017 MetLife equity awards and forfeited MetLife equity awards. Credits for forgone awards under
the Temporary Plan were established at the level consistent with the equity award the recipient would have been eligible
to receive from MetLife. Deferred compensation credited in respect of forgone 2017 MetLife equity awards vests over
three years from the grant date at a rate of one-third per year. Deferred compensation credited in respect of forfeited
MetLife equity is subject to the same vesting schedule as the forfeited award. Credits in respect of forfeited RSUs vest
one-third per year from the date of grant by MetLife, while credits in respect of forfeited stock options and forfeited
performance shares cliff vest on the third anniversary of the date of grant by MetLife. Amounts credited under the
Temporary Plan earn interest based upon the 120%AFR/Long Term/Monthly rate, which is reset effective December 1.
For calendar year 2017, including Fiscal 2017, amounts under the Temporary Plan were credited with interest at a rate
of 3.2%. In the event of a change of control, no amendments can be made to the Temporary Plan after a change of control
that would decrease the amount of deferred compensation credited to participants under the Temporary Plan as of the
date of the change of control or modify the time or form of distributions under the Temporary Plan.
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The table below shows the amount of each type of deferred compensation credited to each NEO under the Temporary
Plan:
Name
Eric T. Steigerwalt
Anant Bhalla
John L. Rosenthal
Peter M. Carlson
Christine M. DeBiase
Credit for
Forfeited
MetLife Equity
Awards -
Performance
Shares
$—
Credit for
Forfeited
MetLife Equity
Awards - RSUs
$—
Credit for
Forfeited
MetLife Equity
Awards - Stock
Options
$—
$300,000
$150,000
$—
$—
$—
$—
$1,187,500
$398,000
$507,373
$—
$—
$—
Credit in Lieu of
2017 MetLife
Equity Award
$1,200,000
$368,000
$700,200
$—
$307,100
Total Temporary
Plan Credits
$1,200,000
$818,000
$700,200
$2,092,873
$307,100
Awards to our NEOs under the Temporary Plan are further subject to the achievement of one or more performance
goals, which were established in order to qualify such awards as performance-based compensation under Section 162(m)
of the Internal Revenue Code. For the performance period ended December 31, 2017, the performance goals were:
•
•
•
Positive Operating GAAP Earnings;
Positive GAAP Operating ROE;
Improvement in Variable Annuity Target Funding adequacy level;
• Combined Risk Based Capital Ratio of at least 400% on an authorized control level;
•
Positive Value of New Business for Annuity Segment;
• Termination of at least 20% of TSAs with MetLife measured by expenses; and
•
Insurer financial strength ratings of at least “A-” from one or more credit rating agencies.
In January 2018, the Compensation Committee certified that the Company maintained an insurer financial strength
rating of at least A- from one or more credit rating agencies for the 2017 performance period. As a result, we made
payments to our NEOs under the Temporary Plan in respect of Fiscal 2017. The payments in respect of Fiscal 2017 made
to our NEOs under the Temporary Plan are reported in the “Non-Equity Incentive Compensation Plan” column of the
Summary Compensation Table on page 294. In addition, payments under the Temporary Plan may be made to our NEOs
in connection with certain terminations of employment. See the Potential Payments Upon Termination or Change in
Control table and accompanying narrative disclosure below for additional information.
At the 2018 Annual Meeting, we intend to seek stockholder approval of the material terms of the performance goals
under the Temporary Plan for credits to our NEOs under the Temporary Plan paid after our annual meeting of stockholders
in 2019.
Role of the Compensation Committee and Others in Determining Compensation
Compensation Committee’s Role
The Compensation Committee is responsible for establishing and implementing our executive compensation
philosophy. Pursuant to its written charter, the responsibilities of the Compensation Committee include, among other
things:
• Assisting the Board in fulfilling its responsibility to oversee the development and administration of compensation
programs for our executives and other employees;
• Approving the goals and objectives relevant to our CEO’s compensation, evaluating at least annually our CEO’s
performance in light of such goals and objectives, and endorsing, for approval by the independent directors, the
CEO’s annual compensation based on such evaluation;
• Reviewing and approving on an annual basis the compensation of the other executive officers of the Company
(as determined by the Compensation Committee);
• Reviewing and approving our equity and non-equity incentive compensation plans and arrangements, and where
appropriate or required, recommending such plans and arrangements to the Board for approval, including by
stockholders of the Company; and
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• Reviewing incentive compensation arrangements to confirm that incentive pay does not encourage unnecessary
risk taking and reviewing and discussing the relationship between risk management policies and practices,
corporate strategy and senior executive compensation.
As discussed above, in November 2017, the Compensation Committee retained SBCG as its independent
compensation consultant. The Compensation Committee assessed SBCG’s independence in light of SEC standards and
determined that no conflicts of interest or independence concerns exist. SBCG reports directly to the Compensation
Committee, and the Compensation Committee has the sole authority to approve the fees and other terms of the retention
of SBCG as its independent compensation consultant. SBCG is expected to attend all Compensation Committee meetings
and to provide advice to the Compensation Committee on all aspects of the Company’s executive compensation program,
including the form, mix and amount of Target Total Compensation.
Management’s Role
As discussed above, prior to the Separation, members of our Human Resources department worked with the
Company’s compensation consultant, WTW, to gather and review compensation information from companies within the
Comparator Group, as well as data from WTW’s proprietary diversified insurance survey database. Based on information
from WTW, the Human Resources department prepared compensation recommendations for each member of the SLMG,
including each NEO. Given that the Separation occurred more than half way through 2017, and also due to the fact that
we did not have a Compensation Committee comprised of independent directors until the Separation, our Human Resources
department, with assistance from WTW, was primarily responsible for preparing Fiscal 2017 compensation
recommendations for all members of the SLMG, including each NEO. The compensation recommendations were provided
to the members of our Compensation Committee in advance of its first post-Separation meeting in August 2017, and the
Compensation Committee ultimately adopted the recommendations at its first post-Separation meeting in August 2017.
As part of our year-end compensation process that began in December 2017, our Chief Executive Officer met with
each of our other NEOs and members of the SLMG to review performance during calendar year 2017. Based on the
CEO’s assessment of each of our other NEO’s performance, he provided recommendations to the Compensation
Committee as to the amount and form of the compensation of our NEOs other than himself.
Compensation Consultant’s Role
Under its written charter, the Compensation Committee has the authority to retain advisers to assist it in the discharge
of its duties. Since its retention in November 2017 shortly after the Separation, SBCG has attended Compensation
Committee meetings and assisted the Compensation Committee in its implementation of our compensation principles
and practices. SBCG has advised the Compensation Committee on the development of the Company’s 2018 short- and
long-term incentive compensation arrangements, including the short- and long-term incentive plan metrics for 2018 and
the forms of equity-based incentives awarded to members of the SLMG in 2018. See “2018 Compensation-Setting Process
— 2018 Compensation Decisions,” below, for additional information.
In 2017, our Human Resources department retained WTW to provide assistance related to our executive compensation
program that was implemented in August 2017 in connection with the Separation. It is expected that WTW will continue
to advise our Human Resources department on matters related to our executive compensation program. Details of WTW’s
role are set forth above under the heading “Management’s Role.”
Section 3 — The Brighthouse Vision and Strategy — Establishing the 2018 Executive Compensation Program
Brighthouse Financial is a focused provider of annuities and life insurance products. Brighthouse’s mission is to help
people achieve financial security. The products that we offer, particularly annuities, have historically been considered complex
and costly. We intend to achieve our mission by offering simpler, more transparent, and valuable protection solutions. Our
business goal is to build a focused, best-in-cost culture that creates value. We believe that by embedding best-in-cost into our
culture at the outset of our existence as an independent public company, we will drive value for all our stakeholders, including
our stockholders, community, employees, insurance customers, and our distribution partners.
On February 2, 2018, the Board and senior management, including our NEOs, engaged in constructive dialogue and
feedback regarding our strategic and financial plan. The topics discussed covered all aspects of our business, including our
mission and vision, our best-in-cost culture, the competitive landscape, our sales strategy and growth projections, our annuity
and life insurance product strategy, our business process outsourcing strategy, our path to expense optimization, our capital
return goals, and our financial plan through 2020 in a variety of economic scenarios.
As a result of these strategic sessions, on February 2, 2018, the Compensation Committee focused on establishing
performance metrics that aligned all aspects of the Company’s strategy: sales, expense management, and cashflow. Adjusted
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Statutory Earnings was deemed an appropriate 2018 short-term incentive (“STI”) award metric that aligns to our ability as an
independent company to return cash to stockholders. These conversations became the basis for establishing our 2018
compensation program. On February 16, 2018, the Compensation Committee approved the 2018 compensation program that
applies to the NEOs and the SLMG. The 2018 compensation program will be discussed in detail in the proxy statement related
to the 2019 annual meeting of stockholders. Due to the mid-year timing of the Separation, the 2018 compensation program
is the first compensation program for Brighthouse that relates to a full annual performance period(s) as an independent public
company. Accordingly, we believe it is appropriate to preview the 2018 compensation program and articulate the alignment
to the Company’s strategic and financial plan.
2018 Short-Term Incentive Metrics
The Compensation Committee approved metrics for the 2018 STI award that directly align with Brighthouse’s strategic
plans. This is consistent with our pay-for-performance philosophy and will ensure that the NEOs are compensated relative
to the achievement of the business goals set forth in the strategic plan. A brief summary of each of the three equally-weighted
metrics and the rationale for selecting each follow.
2018 STI Metric
TSA Exits
Weighting
1/3rd
Annuity Sales
Adjusted Statutory
Earnings
1/3rd
1/3rd
Performance Link
Exiting our TSAs with MetLife is a key driver in 2018 of establishing a cost-competitive
company. We also believe that TSA Exits in 2018 represent a key directional indicator for
reducing corporate expenses in 2019 and 2020.
Annuity sales are vital to our growth prospects and franchise stability.
Adjusted Statutory Earnings measure Brighthouse’s ability to pay future distributions and
are reflective of whether our hedging program functions as intended. As an STI metric, it
also reflects factors that the broad population of STI participants are most able to directly
impact and influence.
Each 2018 STI metric has a threshold (50%), target (100%) and maximum (150%) level of performance. Short-term
incentive plan payouts, if any, will be based upon the Company’s achievement of the metrics specified above, as well as
qualitative factors the Compensation Committee deems appropriate, including each SLMG member’s accomplishments
during 2018. We believe the underlying goals for each STI metric are appropriately rigorous. If earned, STI awards for 2018
will be paid in calendar year 2019.
2018 Long-Term Incentive Awards
In February 2018, the independent members of the Board, on the recommendation of the Compensation Committee,
approved a long-term equity incentive (“LTI”) award for Mr. Steigerwalt, and the Compensation Committee approved LTI
awards for our other NEOs. The table below shows the breakdown of award vehicles chosen for 2018 long-term equity
incentive awards.
Type of Award
Performance Share Units
(“PSUs”)
Nonqualified Stock
Options
Percentage of
Total LTI Value Vesting
1/3rd
1/3rd
Cliff vest after year 3, subject to achievement of pre-established performance goals over
the 2018-2020 performance period
Ratable vesting over 3 years (1/3rd vests at each anniversary; 10-year term; exercise price
is closing price on grant date)
Restricted Stock Units
1/3rd
Ratable vesting over 3 years (1/3rd vests at each anniversary)
The decision to use PSUs, and the mix of PSUs relative to the other long-term equity elements, was carefully considered
by the Compensation Committee in light of the challenges of setting long-term performance goals as a new public company.
The Compensation Committee will consider a heavier weighting of PSUs in future awards as the Company matures and
gains historical data that makes long-term goal setting more precise. The 2018 long-term equity incentive awards are subject
to stockholder approval of the Employee Plan, which will be presented at the 2018 Annual Meeting.
The 2018 PSUs measure Brighthouse’s performance over the 2018-2020 performance period. The actual number of
shares issued, if any, at the end of the performance period will depend on the Company’s actual performance. We believe
the underlying goals for each PSU metric are appropriately rigorous. A brief summary of the PSU metrics, the weighting
and the rationale for each follow.
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2018 PSU Metrics
Corporate Expense
Reduction
Weighting
60%
Capital Return
40%
Performance Link
Expense reduction by 2020 aligns with Brighthouse’s outlook, as previously disclosed in
public filings. As a result of Brighthouse’s mid-year separation from MetLife, the
comparative measurement period is July 1, 2017 - June 30, 2018 versus annualized
expenses from July 1, 2020 - December 31, 2020.
Capital returns are a key metric evaluated by stockholders. Capital return is often the best
way to demonstrate alignment to stockholders’ interests, especially if the stock trades
below book value. Return on stockholders’ capital, in the form of dividends or stock
buybacks, for example, would demonstrate such an alignment, and goals will align with
stockholder communications.
2018 Target Total Compensation Opportunities
With the exception of the changes described below to Ms. DeBiase’s Target Total Compensation opportunity, no
adjustments were made to the Target Total Compensation opportunities of the CEO or any of the other NEOs. In February
2018, Ms. DeBiase was named the Company’s Chief Administrative Officer, in addition to her position as the Company’s
General Counsel. In connection with Ms. DeBiase’s expanded role as the Chief Administrative Officer, the Compensation
Committee adjusted Ms. DeBiase’s base salary to $600,000 from $575,000 and also increased Ms. DeBiase’s target annual
incentive opportunity to 120% of her base salary from 110%. Her long-term incentive opportunity was unchanged.
Section 4 — Additional Compensation Practices and Policies
Stock Ownership and Retention Guidelines
We have implemented stock ownership and retention guidelines for members of the SLMG, including our NEOs,
effective January 1, 2018. The guidelines are intended to align the interests of the SLMG members with those of our
stockholders by requiring the executives subject to the guidelines to obtain and maintain significant ownership in our stock.
The ownership guidelines are set as a multiple of the executive’s base salary as in effect on January 1, 2018, which is then
converted into a number of shares of common stock based upon the closing price of our common stock on January 2, 2018,
which was $57.67. The ownership levels applicable to our NEOs are as follows.
Name
Eric T. Steigerwalt
Anant Bhalla
John L. Rosenthal
Peter M. Carlson
Christine M. DeBiase
Multiple of Base
Salary
6x
Number of
Shares
93,637
3x
3x
3x
3x
31,213
28,612
31,213
29,912
Executives subject to the guidelines must retain at least 50% of the net after-tax shares acquired from settlement or
exercise of stock-based awards until the applicable ownership level is achieved. Executives are expected to meet the
applicable stock ownership guideline within five years of becoming subject to the guidelines. Shares that are included in
determining an executive’s stock ownership level include shares owned outright (or jointly with a spouse or in a trust over
which an executive has investment control), net shares received from exercise and/or settlement of stock-based awards
under the Employee Plan, and shares acquired pursuant to the Company’s Employee Stock Purchase Plan. Shares underlying
unvested equity awards are not included in determining an executive’s ownership level.
Benefit Plans
Brighthouse Savings Plan and Auxiliary Savings Plan
Our employees, including our NEOs, are eligible to participate in the Brighthouse Services, LLC Savings Plan and
Trust (the “Brighthouse Savings Plan”), which is a tax-qualified 401(k) plan. In addition, certain of our employees,
including our NEOs, are eligible to participate in the Brighthouse Services, LLC Auxiliary Savings Plan (the “Auxiliary
Plan”). Participants in the Auxiliary Plan receive company matching and profit sharing contributions that would have
been made to the Brighthouse Savings Plan except that the participant’s compensation exceeds certain tax qualified plan
limits imposed under the Internal Revenue Code. Employees who elect to participate in the Brighthouse Savings Plan
and who also elect to participate in the Brighthouse Services, LLC Voluntary Deferred Compensation Plan (“VDCP”)
will be eligible to receive matching contributions in the Auxiliary Plan on amounts deferred into the VDCP equal to the
amount of matching contributions that would have been made to the Brighthouse Savings Plan. As explained below, the
VDCP was not in effect during Fiscal 2017. For the Company matching and profit sharing contributions made under the
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Brighthouse Savings Plan and Auxiliary Plan in respect of Fiscal 2017, see the “All Other Compensation” column in the
Summary Compensation Table, below. Company matching and profit sharing contributions in the Brighthouse Savings
Plan and the Auxiliary Plan become 100% vested after the participant completes two years of service. Under the Auxiliary
Plan, in the event of a change of control, all participants will be fully vested in all contributions, including earnings, under
the Auxiliary Plan. In addition, no amendments can be made to the Auxiliary Plan after a change of control that would
decrease the value of benefits accrued to any participant under the Auxiliary Plan as of the date of the change of control
or change the time or form of distribution under the Auxiliary Plan to eliminate lump sum distributions or further defer
the time of payment.
Voluntary Deferred Compensation Plan
In December 2017, Brighthouse Services adopted the VDCP, which is a non-qualified deferred compensation plan.
Effective January 1, 2018, the VDCP allows a select group of management the opportunity to defer between 10% and
50% of eligible base salary and from 10% to 80% of STI awards. Amounts deferred are notionally invested in investment
tracking funds selected by the participant. Participants can elect to have deferred compensation accounts paid, or begin
to be paid, in a specific year, which cannot be earlier than May of the third calendar year following the year the compensation
was earned, and may elect to receive distributions in either a single lump sum or up to 15 annual installments. In the event
of a participant’s death before distributions commence or are completed, the participant’s account balance will be paid
in a single lump sum to the participant’s beneficiary. In the event of a change of control, no amendments can be made to
the VDCP after a change of control that would decrease the amount in a participant’s deferred compensation account
accrued under the VDCP as of the date of the change of control or modify the time or form of distributions under the
VDCP.
Termination and Change in Control Benefits
As of December 31, 2017, we had no employment agreements or offer letters with any of our NEOs that provide for
severance or change in control benefits. As we previously disclosed, we intend to provide severance pay and related
benefits to employees discontinued due to job elimination in order to encourage a focus on transition to other opportunities
and allow us to obtain a release of employment-related claims, and to adopt change-in-control arrangements in order to
retain senior executive officers while a transaction is pending and encourage them to act in the best interests of stockholders,
promoting maximum stockholder value without impinging on flexibility to engage in a transaction.
During Fiscal 2017, we did not have any outstanding equity awards because we did not have a stockholder-approved
equity compensation plan. We intend to submit the Employee Plan for stockholder approval at the 2018 Annual Meeting.
Awards under the Employee Plan may become payable in the event of an NEO’s termination, retirement, or death, or
upon the occurrence of a change in control of Brighthouse. Under the Auxiliary Plan, in the event of a change of control,
all participants will be fully vested in all contributions, including earnings, under the Auxiliary Plan. As of December
31, 2017, all of our NEOs were fully vested in their account balances under the Auxiliary Plan. See the Fiscal 2017
Nonqualified Deferred Compensation table on page 297 for each NEO’s aggregate account balance as of December 31,
2017.
Certain amounts credited to our NEOs under the Temporary Plan may vest and become payable in the event of the
NEO’s death or termination on or following the date the NEO satisfies the “rule of 65” (generally, an age and service
requirement). See the Potential Payments Upon Termination or Change in Control table, below, for additional information
about amounts that would be payable to our NEOs under the Temporary Plan.
Stock-Based Award Timing Practices
Stock-based long-term incentive awards are expected to be granted on an annual basis to our executive officers,
including the NEOs, in connection with Board and Compensation Committee meetings occurring in the first quarter of
each year, although stock-based awards may be granted from time-to-time in connection with the hiring or change in
responsibilities of an executive officer.
Tax Deductibility of Executive Compensation
For 2017, Section 162(m) of the Internal Revenue Code placed a $1 million limit on the compensation that could be
deducted for our chief executive officer and next three most highly compensated NEOs, except for compensation that
qualified as performance-based compensation under Section 162(m). Certain elements of the compensation we provided
in 2017 were intended to qualify for the performance-based compensation exception to Section 162(m), although the
Compensation Committee retained discretion to pay non-deductible compensation if it determined doing so was in our best
interest. The Tax Cuts and Jobs Act (TCJA), which was signed into law on December 22, 2017, eliminated the exception
for performance based compensation under Section 162(m), although the TCJA does include a provision that grandfathers
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certain binding contracts in effect on November 2, 2017 that are not materially modified after that date. In light of the change
in law, beginning in 2018 any compensation paid to our NEOs in excess of $1 million will not be deductible, except with
respect to such grandfathered contracts.
Hedging and Pledging Prohibition
Our insider trading policy prohibits all directors and employees, including our NEOs, from engaging in short sales,
hedging, and trading in put and call options, with respect to the Company’s securities. The insider trading policy also
prohibits directors and employees, including our NEOs, from pledging Company securities.
Clawback Policy
We expect to adopt a performance-based compensation recoupment policy that would allow us to seek recoupment of
performance-based compensation if an employee engages in or contributes to fraudulent or other wrongful conduct that
causes financial or reputational harm to Brighthouse or its affiliates. All awards granted under our Employee Plan are subject
to any performance-based compensation recoupment policy in effect from time to time.
Risk Assessment
At its March 2018 meeting, the Compensation Committee reviewed the results of a 2017 annual compensation risk
assessment prepared by SBCG and developed in consultation with management. Such assessment highlighted the inherently
risk-balancing and risk-mitigating nature of the Company’s largely discretionary compensation program in 2017, other risk-
mitigating features of the compensation program (such as caps on incentive payouts and balance in pay mix), and the
associated compensation governance policies and Board-level controls in place to manage compensation-related risk.
Following a discussion of such assessment and findings, the Compensation Committee concluded that the risks arising from
the Company’s compensation programs are not reasonably likely to have a material adverse impact on the Company.
Compensation Committee Report
The Compensation Committee has reviewed the Compensation Discussion and Analysis and discussed the CD&A with
management. Based on the Compensation Committee’s review and discussion with management, the Compensation
Committee recommended to the Board that the CD&A be included in the Company’s annual report on Form 10-K and in
the Company’s Proxy Statement.
This report is provided by the following independent members of the Board, who comprise the Compensation
Committee:
Diane E. Offereins, Chair
Irene Chang Britt
Paul M. Wetzel
Fiscal 2017 Compensation Tables
The information reported in the Summary Compensation Table is for the period from August 5, 2017, which is the first
day following the Separation, to December 31, 2017. We refer to this period as “Fiscal 2017.” The footnotes to the Summary
Compensation Table and the accompanying narrative disclosure discuss the manner in which the Fiscal 2017 compensation
for our NEOs was calculated.
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Fiscal 2017 Summary Compensation Table
Name and Title
Eric T. Steigerwalt, President and Chief Executive
Officer
Anant Bhalla, Executive Vice President and Chief
Financial Officer
John L. Rosenthal, Executive Vice President and
Chief Investment Officer
Peter M. Carlson, Executive Vice President and
Chief Operating Officer
Christine M. DeBiase, Executive Vice President,
General Counsel and Corporate Secretary (*)
_______________
Year
Salary (1)
Non-Equity
Incentive Plan
Compensation
(2)(3)
All Other
Compensation
(4)
Total
2017
2017
2017
2017
2017
$349,049
$1,507,192
$115,853
$1,972,094
$233,641
$688,444
$63,753
$985,838
$218,109
$894,708
$75,297
$1,188,114
$237,862
$771,139
$55,044
$1,064,045
$224,232
$534,024
$50,041
$808,297
(*) Effective February 2, 2018, Ms. DeBiase’s title was changed to Executive Vice President, Chief Administrative Officer and
General Counsel. As of that date, Ms. DeBiase ceased serving as the Company’s Corporate Secretary.
(1) The amounts in this column report the actual amount of base salary paid to each NEO during Fiscal 2017. Each NEO’s base
salary as approved on August 9, 2017 is $900,000 for Mr. Steigerwalt, $600,000 for Mr. Bhalla, $550,000 for Mr. Rosenthal,
$600,000 for Mr. Carlson, and $575,000 for Ms. DeBiase.
(2) The amount in this column includes (i) the portion of each NEO’s award under the Brighthouse Services, LLC Amended
and Restated Annual Variable Incentive Plan earned in respect of each NEO’s service to Brighthouse during Fiscal 2017,
(ii) the Separation Bonus paid to each NEO, and (iii) the pro-rated portion of the aggregate payments, including interest,
received by each NEO under the Temporary Plan in respect of service to Brighthouse during Fiscal 2017. The terms of AVIP
and the Separation Bonus are summarized under “Compensation Discussion and Analysis — Elements of Compensation
— Annual Variable Incentive Plan” and “Separation Bonus” above. The terms of the Temporary Plan are summarized below
in the narrative disclosure accompanying the “Grants of Plan-Based Awards” table.
The table below shows the amount earned by each NEO in Fiscal 2017 under the AVIP, the Separation Bonus and the
Temporary Plan.
Name
Eric T. Steigerwalt
Anant Bhalla
John L. Rosenthal
Peter M. Carlson
Christine M. DeBiase
Annual Variable
Incentive Plan
$771,534
$342,904
$459,655
$363,723
$289,427
Separation
Bonus
$472,500
$210,000
$281,500
$222,750
$177,250
Temporary
Incentive
Deferred
Compensation
Plan
$263,158
$135,540
$153,553
$184,666
$67,347
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The table below shows the amount, including interest, paid to each NEO for Fiscal 2017 in respect of the different types of
credits under the Temporary Plan.
Name
Eric T. Steigerwalt
Anant Bhalla
John L. Rosenthal
Peter M. Carlson
Christine M. DeBiase
Fiscal 2017
Payment for
Credit for
Forfeited
MetLife Equity
Awards -
Performance
Shares
$—
$29,796
$—
$76,973
$—
Fiscal 2017
Payment for
Credit for
Forfeited
MetLife Equity
Awards - RSUs
$—
$24,726
$—
$71,378
$—
Fiscal 2017
Payment for
Credit for
Forfeited
MetLife Equity
Awards - Stock
Options
$—
$—
$—
$36,315
$—
Fiscal 2017
Payment for
Credit in Lieu of
2017 MetLife
Equity Award
$263,158
$80,702
$153,553
$—
$67,347
(3) The full amount received by each NEO under the Temporary Plan for calendar year 2017, including interest, is $409,712
for Mr. Steigerwalt, $378,815 for Mr. Bhalla, $239,067 for Mr. Rosenthal, $777,964 for Mr. Carlson, and $104,852 for Ms.
DeBiase. The full amount of each NEO’s AVIP award for calendar year 2017 is $1,890,000 for Mr. Steigerwalt, $840,000
for Mr. Bhalla, $1,126,000 for Mr. Rosenthal, $891,000 for Mr. Carlson, and $709,000 for Ms. DeBiase.
(4) The amounts reported in this column include for each NEO Company contributions in respect of Fiscal 2017 to the
Brighthouse Savings Plan and the Auxiliary Plan, in the following amounts:
Name
Eric T. Steigerwalt
Anant Bhalla
John L. Rosenthal
Peter M. Carlson
Christine M. DeBiase
Brighthouse
Savings Plan
$7,221
$12,214
$9,061
$12,384
$8,895
Auxiliary Plan
$108,632
$51,539
$66,236
$42,660
$41,146
Fiscal 2017 Grants of Plan-Based Awards
Prior to the Separation, many of our employees, including all of our NEOs, were employees of MetLife. In anticipation
of the Separation, we established the Temporary Plan to provide a means of compensating such employees in respect of
forgone 2017 equity awards from MetLife and/or MetLife equity awards that were forfeited due to the Separation. The
amounts credited to our NEOs under the Temporary Plan for Fiscal 2017 are reported in the table below.
The dollar value reported in the Non-Equity Incentive Plan column of the Summary Compensation Table for payments
under the Temporary Plan has been pro-rated to show the portion of such payments that were made in respect of our NEOs
service during Fiscal 2017. Prior to August 5, 2017, Brighthouse Services, which is the entity that employs our employees,
was a wholly-owned subsidiary of MetLife, and as a result, compensation received prior to August 5, 2017 is not reportable
under Securities and Exchange Commission rules as compensation paid by Brighthouse. The total Temporary Plan credits
awarded to our NEOs is disclosed above under the heading “Compensation Discussion and Analysis — Features of our
Fiscal 2017 Executive Compensation Program — Elements of Fiscal 2017 Compensation — Temporary Incentive Deferred
Compensation Plan.”
The amounts reported in the table below awarded under the Temporary Plan are not subject to stockholder approval
due to the spin-off transition rules under Section 162(m) of the Internal Revenue Code. We intend to submit the material
terms of the performance goals for certain future tranches payable under the Temporary Plan for stockholder approval at
the 2018 Annual Meeting.
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Estimated future payouts under
non-equity incentive plan awards
Grant Date
Threshold
Target
Name
Eric T. Steigerwalt
Anant Bhalla
John L. Rosenthal
Peter M. Carlson
Christine M. DeBiase
_______________
Grant Type
AVIP
Separation Bonus
Temporary Plan - Credit in Lieu
of 2017 MetLife Equity Award
8/9/17
AVIP
Separation Bonus
Temporary Plan - Credit in Lieu
of 2017 MetLife Equity Award
Temporary Plan - Credit for
Forfeited 2015 MetLife RSUs
Temporary Plan - Credit for
Forfeited 2016 MetLife RSUs
Temporary Plan - Credit for
Forfeited 2015 MetLife
Performance Shares
AVIP
Separation Bonus
3/28/17
8/7/17
8/7/17
8/7/17
Temporary Plan - Credit in Lieu
of 2017 MetLife Equity Award
3/28/17
AVIP
Separation Bonus
Temporary Plan - Credit for
Forfeited 2015 MetLife RSUs
Temporary Plan - Credit for
Forfeited 2016 MetLife RSUs
Temporary Plan - Credit for
Forfeited 2017 MetLife RSUs
Temporary Plan - Credit for
Forfeited 2015 MetLife
Performance Shares
Temporary Plan - Credit for
Forfeited 2015 MetLife Stock
Options
AVIP
Separation Bonus
8/7/17
8/7/17
8/7/17
8/7/17
8/7/17
Temporary Plan - Credit in Lieu
of 2017 MetLife Equity Award
3/28/17
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
$1,800,000
$450,000
$263,158(1)
$840,000
$210,000
$80,702(1)
$9,932(2)
$14,794(3)
$29,796(4)
$1,072,500
$268,125
$153,553(1)
$900,000
$225,000
$12,832(2)
$19,735(3)
$38,811(5)
$76,973(4)
$36,315(6)
$632,500
$177,250
$67,347(1)
Maximum
$7,000,000
$—
$—
$7,000,000
$—
$—
$—
$—
$—
$7,000,000
$—
$—
$7,000,000
$—
$—
$—
$—
$—
$—
$7,000,000
$—
$—
(1) Represents a pro-rated portion, including interest, of the credit under the Temporary Plan awarded in respect of forgone
2017 equity awards from MetLife. This first tranche of the credit vests on March 28, 2018 and was subject to the achievement
of one or more performance goals established for purposes of Section 162(m) of the Code.
(2) Represents a pro-rated portion, including interest, of the credit under the Temporary Plan award in respect of a MetLife
restricted stock unit award granted by MetLife in 2015 that was forfeited as a result of the Separation. This credit vested
on February 24, 2018 and was subject to the achievement of one or more performance goals established for purposes of
Section 162(m) of the Code.
(3) Represents a pro-rated portion, including interest, of the credit under the Temporary Plan award in respect of a MetLife
restricted stock unit award granted by MetLife in 2016 that was forfeited as a result of the Separation. This portion of the
credit in respect of this award vested on March 1, 2018 and was subject to the achievement of one or more performance
goals established for purposes of Section 162(m) of the Code.
(4) Represents a pro-rated portion, including interest, of the credit under the Temporary Plan award in respect of MetLife
performance shares granted by MetLife in 2015 that were forfeited as a result of the Separation. This credit vested on
296
February 24, 2018 and was subject to the achievement of one or more performance goals established for purposes of Section
162(m) of the Code.
(5) Represents the pro-rated portion, including interest, of the credit under the Temporary Plan award in respect of a MetLife
restricted stock unit award granted by MetLife in 2017 that was forfeited as a result of the Separation. This portion of the
credit vested on March 1, 2018 and was subject to the achievement of one or more performance goals established for
purposes of Section 162(m) of the Code.
(6) Represents a pro-rated portion, including interest, of the credit under the Temporary Plan awarded in respect of a MetLife
stock option award granted by MetLife in 2015 that was forfeited as a result of the Separation. This credit vested on February
24, 2018 and was subject to the achievement of one or more performance goals established for purposes of Section 162(m)
of the Code.
Fiscal 2017 Nonqualified Deferred Compensation
Name
Eric T. Steigerwalt
Anant Bhalla
John L. Rosenthal
Peter M. Carlson
Plan Name
Auxiliary Plan
Auxiliary Plan
Auxiliary Plan
Auxiliary Plan
Christine M. DeBiase
Auxiliary Plan
_______________
Executive
contributions in
last Fiscal Year
$—
Registrant
contributions in
last Fiscal Year
(1)
$108,632
Aggregate
earnings in last
Fiscal Year
$2,110
$—
$—
$—
$—
$51,539
$66,236
$42,660
$41,146
$1,536
$1,367
$209
$610
Aggregate
withdrawals/
distributions
Aggregate
balance at last
Fiscal Year end
$—
$—
$—
$—
$—
$257,469
$100,018
$177,677
$74,775
$80,164
(1) Amounts in this column are reported as components of employer contributions to the Auxiliary Plan for Fiscal 2017 in the
“All Other Compensation” column of the Summary Compensation Table above.
Auxiliary Plan
NEOs and other eligible employees who elected to contribute a portion of their eligible compensation under the tax-
qualified Brighthouse Savings Plan in 2017 received a Company matching contribution which is equal to 100% of the first
6% of their eligible compensation in that plan in 2017. In addition, a non-elective Company contribution equal to 3% of
the compensation is allocated to eligible employees in that plan in 2017. Amounts reported in the Nonqualified Deferred
Compensation table have been pro-rated to reflect the portion of the employer contributions to the Auxiliary Plan that relate
to each NEO’s service during Fiscal 2017.
The U.S. Internal Revenue Code limits compensation that is eligible for employer contributions under the Brighthouse
Savings Plan. In 2017, the Company could not make contributions based on compensation over $270,000. NEOs and other
eligible employees who elected to participate in the Brighthouse Savings Plan during 2017 were credited with a percentage
of their eligible compensation beyond that limit. The Company contribution, both the matching and non-elective contribution,
was determined using the same employee contribution rate and Company contribution rate as applied under the Brighthouse
Savings Plan. This Company contribution is credited to an account established for the employee under the nonqualified
Auxiliary Plan.
Auxiliary Plan balances are paid in a lump sum as soon as administratively practicable after termination of employment.
Amounts in the Auxiliary Plan are subject to the requirements of Section 409A. Payments to the top 50 highest paid
officers that are due upon separation from service are delayed for six months following their separation, in compliance with
Section 409A.
Employees may choose from a number of simulated investments for their Auxiliary Plan accounts. These simulated
investments were identical to the core funds offered under the Brighthouse Savings Plan in 2017. Employees may change
the simulated investments for new Company contributions to their Auxiliary Plan accounts at any time.
297
The following table shows the simulated investment return for each of the alternatives under the Auxiliary Plan for
calendar year 2017.
Fund Name
Schwab Government Money Fund - Investor Shares
Western Asset Core Bond Fund Class Investor Shares
Vanguard Inflation-Protected Securities Fund Admiral Shares
Vanguard Value Index Fund Admiral Shares
Vanguard 500 Index Fund Admiral Shares
Vanguard Mid-Cap Index Fund Admiral Shares
Vanguard Small Cap Index Fund Admiral Shares
Fidelity Nasdaq Composite Index
Fidelity Overseas Fund
Vanguard Emerging Markets Stock Index Fund Admiral Shares
Cohen & Steers Real Estate Securities Fund, Inc. Class Institutional
American Funds 2010 Target Date Retirement Fund - Class R6
American Funds 2015 Target Date Retirement Fund - Class R6
American Funds 2020 Target Date Retirement Fund - Class R6
American Funds 2025 Target Date Retirement Fund - Class R6
American Funds 2030 Target Date Retirement Fund - Class R6
American Funds 2035 Target Date Retirement Fund - Class R6
American Funds 2040 Target Date Retirement Fund - Class R6
American Funds 2045 Target Date Retirement Fund - Class R6
American Funds 2050 Target Date Retirement Fund - Class R6
American Funds 2055 Target Date Retirement Fund - Class R6
American Funds 2060 Target Date Retirement Fund - Class R6
Potential Payments Upon Termination or Change in Control
Temporary Incentive Deferred Compensation Plan
2017 Return
0.50%
5.23%
2.91%
17.13%
21.79%
19.25%
16.24%
29.25%
29.65%
31.38%
8.09%
10.41%
11.19%
12.87%
15.33%
18.40%
21.04%
21.98%
22.44%
22.61%
22.63%
22.49%
Our NEOs may be eligible to receive payments under the Temporary Plan in the event of a termination of employment
under certain circumstances, as described below.
Credits in Respect of Forfeited MetLife Equity Awards
The following provisions apply to NEOs who received credits under the Temporary Plan in respect of MetLife equity
awards that were forfeited as a result of the Separation:
Termination followed by entry into a separation agreement with Brighthouse Services. If Brighthouse Services
agrees to enter into a separation agreement with the NEO under a severance program of Brighthouse Services and the
separation agreement is effective no later than March 15th of the year after the separation agreement is offered to the
NEOs, the NEO’s outstanding Temporary Plan credits in respect of forfeited MetLife equity awards will vest when the
separation agreement becomes final. Payments will be made as soon as administratively practicable following the
original vesting date(s), subject to the achievement of the Section 162(m) performance metrics established for each
year. There is currently no, and during Fiscal 2017 there was no, severance program in which our NEOs are eligible
to participate.
Death. In the event of an NEO’s termination due to death, the NEO’s credits in respect of forfeited MetLife equity
awards will vest immediately prior to such termination. Payments in respect of such credits will be made as soon as
administratively practicable following the original vesting date(s), without regard to the requirement that the Section
162(m) performance metrics established for each year are achieved.
All other terminations. In the event of an NEO’s termination for any other reason, all unvested credits in respect
of forfeited MetLife equity awards will be forfeited, provided that if an NEO is terminated for “Cause,” all outstanding
credits, whether vested or unvested, will be forfeited.
298
Credits in Respect of Forgone 2017 MetLife Equity Awards
The following provisions apply to NEOs who received credits under the Temporary Plan in respect of forgone 2017
equity awards from MetLife:
Rule of 65. If an NEO’s employment terminates on or after the NEO’s “Rule of 65 Date” (other than a termination
for “Cause”), the tranche(s) of the credits in respect of forgone 2017 MetLife equity awards that have not yet vested
will become vested as of immediately after the termination, and will be paid as soon as administratively practicable
after six months following the original vesting date for each such tranche, subject to the achievement of the Section
162(m) performance metrics established for such tranche. “Rule of 65 Date” means the date that the sum of a participant’s
age plus years of service equals or exceed 65, provided the participant has at least five (5) years of service.
Termination followed by entry into a separation agreement with Brighthouse Services. If Brighthouse Services
agrees to enter into a separation agreement with the NEO under a severance program of Brighthouse Services and the
separation agreement is effective no later than March 15th of the year after the separation agreement is offered to the
NEOs, the tranche(s) of the credits in respect of forgone 2017 MetLife equity awards that have not yet vested will
become vested when the separation agreement becomes final, and will be paid as soon as administratively practicable
after six months following the original vesting date(s) for each such tranche, subject to the achievement of the Section
162(m) performance metrics established for each year. There is currently no, and during Fiscal 2017 there was no,
severance program in which our NEOs are eligible to participate.
Death. In the event of an NEO’s termination due to death, all unvested tranche(s) of the credits in respect of
forgone 2017 MetLife equity awards that have not yet vested will become vested as of immediately after the termination.
Payment will be made as soon as administratively practicable following the original vesting date(s), without regard to
the requirement that the Section 162(m) performance metrics established for each year are achieved.
All other terminations. In the event of an NEO’s termination for any other reason, all unvested credits in respect
of forgone 2017 MetLife equity awards will be forfeited provided that if an NEO is terminated for “Cause,” all
outstanding credits, whether vested or unvested, will be forfeited.
Under the Temporary Plan, “Cause” generally means: (i) willful failure to substantially perform duties (other than
due to physical or mental illness) after reasonable notice of such failure; (ii) engaging in serious misconduct that is
injurious to Brighthouse or any affiliate in any way, including damage to reputation or standing; (iii) being convicted of,
or entering a plea of nolo contendere to, a felony; or (iv) breach of any written covenant or agreement with Brighthouse
or any affiliate not to disclose or misuse any information pertaining to, or misuse and property of Brighthouse or any
affiliate or not to complete or interfere with Brighthouse or any affiliate.
The Temporary Plan does not provide for any payments upon or following the occurrence of a change in control of
Brighthouse or any of its affiliates, including Brighthouse Services.
The following table summarizes estimated payments and benefits that would be provided to our NEOs under the
Temporary Plan in connection with a termination of employment under various scenarios described above, assuming such
event occurred on December 31, 2017.
Credits in Respect of Forfeited MetLife Equity Awards
Name
Anant Bhalla
Trigger and Amount
Death - $450,000, plus interest
Peter M. Carlson
Death - $2,092,873, plus interest
Credits in Respect of Forgone 2017 MetLife Equity Awards
Name
Trigger and Amount
Eric T. Steigerwalt
Rule of 65 - $400,000, plus interest
Death - $1,200,000, plus interest
Anant Bhalla
Death - $368,000, plus interest
John L. Rosenthal
Christine M. DeBiase
Rule of 65 - $233,400, plus interest
Death - $700,200, plus interest
Rule of 65 - $102,367, plus interest
Death - $307,100, plus interest
299
Director Compensation
In August 2017, shortly after the completion of the Separation, the Board, on the recommendation of the Nominating
and Governance Committee, established a compensation program for the independent members of the Board. In establishing
this compensation program, the Board considered benchmarking data for non-management director compensation at
companies in our Comparator Group provided by the Company’s compensation consultant, Willis Towers Watson, prior to
the Separation.
Our director compensation program is intended to compensate our independent directors fairly for their work as members
of the Board and to align their interests with those of our stockholders by delivering half of the annual retainer in the form
of equity-based awards. Annual equity-based awards are expected to be granted at the Board meeting held around the time
of the annual meeting of stockholders and will be eligible to vest on the earlier of the first anniversary of the grant date and
the date of the next annual meeting of stockholders.
The table below sets forth the details of the compensation program for independent members of the Board. Each element
of the program is described in greater detail in the narrative following the table.
Description
Pay for Board Service:
Annual retainer
Pay for Service as Chair of the Board or a Board Committee:
Chairman of the Board retainer
Audit Committee
Compensation Committee
Nominating and Corporate Governance Committee
Finance and Risk Committee
Investment Committee
Amount
Form
$240,000
50% cash and 50% equity
$200,000
50% cash and 50% equity
$22,500
$17,500
$17,500
$17,500
$17,500
100% cash
100% cash
100% cash
100% cash
100% cash
Annual Equity Awards: In connection with the approval of our independent director compensation program, the Board
approved annual RSU awards for our independent members of the Board. Beginning in 2018, each independent member
of the Board continuing in service at the annual meeting of stockholders will receive an award of RSUs. Annual awards to
independent members of the Board generally vest on the earlier of the first anniversary of the grant date and the date of the
next annual meeting of stockholders. The number of RSUs to be granted to each independent member of the Board will be
determined by dividing the value of the equity portion of the annual retainer ($120,000) by the closing price of the Company’s
common stock on the date of grant. The annual RSU grants will be made pursuant to the Brighthouse Financial, Inc. 2017
Non-Management Director Stock Compensation Plan (the “Director Plan”), subject to stockholder approval of the Director
Plan, which the Company intends to seek at the 2018 Annual Meeting.
Director Founders’ Grants: To further align the interests of our independent directors with our stockholders, the Board,
on the recommendation of the Nominating and Corporate Governance Committee, authorized an equity award in the form
of RSUs to each of the six independent members of the Board (the “Director Founders’ Grants”) on August 9, 2017. The
number of RSUs subject to each Director Founders’ Grant was determined by dividing $120,000 by the closing price of
Brighthouse common stock on September 8, 2017 ($54.54), resulting in each independent member of the Board receiving
2,200 RSUs. The Director Founders’ Grants were made pursuant to the Director Plan and are subject to stockholder approval
of the Director Plan. If stockholders approve the Director Plan, the RSUs granted pursuant to the Director Founders’ Grants
will vest on September 30, 2018. If stockholders do not approve the Director Plan, the Director Founders’ Grants will be
void.
300
Fiscal 2017 Director Compensation Table
Name
Irene Chang Britt
C. Edward (“Chuck”) Chaplin
Diane E. Offereins
Patrick J. Shouvlin
William F. Wallace
Paul M. Wetzel
_______________
Fees Earned or
Paid in Cash
$68,750
Stock Awards (1)
$—
All Other
Compensation
$—
$118,750
$68,750
$71,250
$68,750
$60,000
$—
$—
$—
$—
$—
$—
$—
$—
$—
$—
Total
$68,750
$118,750
$68,750
$71,250
$68,750
$60,000
(1) On August 9, 2017, the Board authorized a Director Founders’ Grant to each of the six independent members of the Board.
The number of RSUs subject to the Director Founders’ Grants was 2,200, which was determined by dividing $120,000
(which is equal to 50% of the annual retainer for independent members of the Board) by the closing price of Brighthouse
common stock on September 8, 2017, which was $54.54. The Director Founders’ Grants were made pursuant to the Director
Plan and are subject to stockholder approval of the Director Plan at the 2018 Annual Meeting. Because the Director Founders’
Grants are subject to stockholder approval and will be void if stockholder approval is not obtained, no value is included in
the Stock Awards column since the grant date fair value calculated under ASC Topic 718 cannot be determined.
Fees Earned or Paid in Cash
Each of the six independent members of the Board is entitled to receive an annual cash retainer of $120,000. We
provide additional retainers to the Chairman of the Board and to each director who serves as the Chair of a standing Board
committee, the amounts of which are set forth above under the heading “Director Compensation.” All cash retainers are
paid in quarterly installments in arrears. For Fiscal 2017, each independent member of the Board received two installments
of the annual cash retainer, and if applicable, the additional retainer.
Director Stock Ownership Guidelines
In February 2018, the Board, on the recommendation of the Nominating and Corporate Governance Committee,
established stock ownership and retention guidelines for the independent members of the Board. Pursuant to the guidelines,
each independent director is expected to acquire ownership of a number of shares of our common stock equal to at least
four times the equity portion of the director’s annual retainer, including for Mr. Chaplin the portion of his annual Chairman
of the Board retainer paid in the form of RSUs. Directors are expected to achieve the applicable ownership level within
five years from the later of the date the guidelines became effective (January 1, 2018) and the date the director commences
service. Directors are expected to retain at least 50% of the net shares acquired upon vesting of equity awards until the
ownership guideline is satisfied.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item will be set forth in the 2018 Proxy Statement, which information is hereby incorporated
by reference.
Item 13. Certain Relationships and Related Person Transactions
The Separation from MetLife
On August 4, 2017, MetLife completed the spin-off of Brighthouse Financial, Inc. through a distribution of 96,776,670 of
the 119,773,106 shares of the Company’s common stock, representing 80.8% of MetLife’s interest in Brighthouse, to holders
of MetLife common stock.
Relationship with MetLife Following the Separation and Distribution
Prior to the completion of the Distribution, we were a wholly-owned subsidiary of MetLife, Inc., and were part of MetLife’s
consolidated business operations. Following the Distribution, MetLife, Inc. and its affiliates held approximately 19.2% of our
outstanding common stock. Under the Master Separation Agreement, MetLife granted us a proxy to vote the shares of our
common stock that MetLife retains immediately after the Distribution and that are distributed to certain of its subsidiaries in the
Distribution in proportion to the votes cast by our other stockholders. This proxy, however, will be automatically revoked as to
a particular share upon any sale or transfer of such share from MetLife to a person other than MetLife, and neither the agreement
setting forth this arrangement nor the proxy will limit or prohibit any such sale or transfer. We have in effect a written related
301
person transaction approval policy pursuant to which the Nominating and Corporate Governance Committee of our Board, or
for so long as any member of the Nominating and Corporate Governance Committee is not an “independent director,” a committee
of our Board consisting of the independent members of the Nominating and Corporate Governance Committee, will review and
approve or take such other action as it may deem appropriate with respect to related person transactions, including transactions
involving MetLife for so long as MetLife owns more than 5% of our outstanding common stock. See “— Related Person
Transaction Approval Policy.”
Agreements Between Us and MetLife
As part of the Distribution, we entered into a Master Separation Agreement and several other agreements with MetLife to
effect the Separation and to provide a framework for our relationship with MetLife after the Distribution. These agreements
include, among others, the agreements described below. See “Risk Factors — Risks Related to Our Separation from, and
Continuing Relationship with, MetLife — We have agreed under the Master Separation Agreement with MetLife to indemnify
MetLife, its directors, officers and employees and certain of its agents for liabilities relating to, arising out of or resulting from
certain events relating to our business.”
Certain of the agreements summarized in this section have been filed with the SEC, and the following summaries of those
agreements are qualified in their entirety by reference to those agreements.
Master Separation Agreement
On August 4, 2017, we entered into a Master Separation Agreement with MetLife, which sets forth our agreements with
MetLife relating to the ownership of certain assets and the allocation of certain liabilities in connection with the Separation of
Brighthouse from MetLife. It also sets forth other agreements governing our relationship with MetLife after the Distribution,
including certain payment obligations between the parties.
The separation of our business
The Master Separation Agreement generally allocates certain assets and liabilities between us and MetLife according to the
business to which such assets and liabilities primarily relate, which is consistent with the basis of presentation of our historical
financial statements. To the extent not previously transferred to us or one of our subsidiaries prior to the completion of the
Distribution, the Master Separation Agreement provides that MetLife would transfer and assign to us certain assets related to
our business owned by them. The Master Separation Agreement also provides that we would transfer and assign to MetLife
certain assets related to its business owned by us. We will perform, discharge and fulfill certain liabilities related to our businesses
(which, in the case of tax matters, are governed in part by the Tax Separation Agreement and Tax Receivables Agreement (each,
as described below)). The Master Separation Agreement also provides for the transfer of certain information and records among
us and MetLife and rights to, and access to, certain information and records following the Separation. Additionally, the Master
Separation Agreement grants us (i) a transitional license to use the “MetLife” name for a limited period of time following the
Distribution, in certain limited circumstances for use as part of a marketing tag line in connection with the sale and marketing
of our products, and (ii) the option, for up to eighteen (18) months following our entry into the Master Separation Agreement,
to purchase through one of our subsidiaries from the applicable subsidiary of MetLife certain telecommunications equipment.
Except as expressly set forth in the Master Separation Agreement or in any other agreement entered into in connection with
the Separation (the “transaction documents”), neither we nor MetLife made any representation or warranty as to:
•
•
•
•
•
any assets or liabilities allocated under the Master Separation Agreement;
the value of or freedom from any security interests of, or any other matter concerning, any assets or liabilities of
such party;
the legal sufficiency of any assignment, document or instrument to convey title to any asset;
any consents or approvals required in connection with any transfer of assets or assumptions of liabilities; or
the absence of any defenses or right of set-off or freedom from counterclaim with respect to any claim of either
us or MetLife.
Except as expressly set forth in any transaction document, in connection with the transactions through which we were
formed, all assets were transferred to us on an “as is,” “where is” basis, and we have agreed to bear the economic and legal risks
that any conveyance was insufficient to vest in us good title, free and clear of any security interest, and that any necessary
consents or approvals were not or are not obtained or that any requirements of law or judgments were not or are not complied
with.
302
Provisions relating to indemnification and liability insurance
The Master Separation Agreement includes certain provisions related to indemnification of (i) MetLife and certain affiliated
persons by us and (ii) us and certain of our affiliated persons by MetLife. The Master Separation Agreement also includes certain
provisions related to the procurement of certain liability insurance coverage.
Subject to certain exceptions, we agreed to indemnify, hold harmless and defend MetLife (excluding any member of
Brighthouse) and certain related persons from and against all liabilities relating to, arising out of or resulting from:
•
•
•
•
•
•
•
•
•
•
•
us, including the operations, liabilities and obligations of our business, or the failure by us to pay, perform or
otherwise promptly discharge any liabilities or contractual obligations of our businesses, in each case arising before
or after the completion of the Distribution other than the specified liabilities described below;
except to the extent it relates to a liability assumed by MetLife, any guarantee, indemnification obligation, surety
bond or other credit support arrangement by MetLife for our benefit that survived the Distribution;
certain specified liabilities including liabilities relating to certain historical businesses, liabilities for our products
or distribution and sales thereof, certain employee related liabilities and certain other specified liabilities, as well
as our share of certain shared liabilities;
any breach by us of the Master Separation Agreement, the other transaction documents, or documents entered into
in connection with the Restructuring or our certificate of incorporation or bylaws;
any untrue statement of, or omission to state, a material fact in MetLife’s public filings to the extent it was as a
result of information that we, or certain persons who, following the Distribution, were our employees, furnished
to MetLife or which MetLife incorporated by reference from our public filings, if that statement or omission was
made or occurred after the completion of the Distribution;
any distribution or servicing agreements assigned, in whole or in part (and if in part, solely relating to, arising out
of or resulting from such part), to us by MetLife in connection with the Distribution, from and after the effective
date of such assignment;
any untrue statement of, or omission to state, a material fact in the Form 10, except to the extent the statement was
made or omitted in reliance upon information provided to us by MetLife or (other than certain of MetLife’s
employees who became our employees at or prior to the Distribution) expressly for use in such Form 10;
any losses related to liabilities assumed by us from MetLife pursuant to the terms of the Master Separation
Agreement or the failure by us to obtain any required consent, approval, release, substitution or amendment in
connection with the novation of assumed liabilities;
any liabilities of MetLife under or relating to the applicable NELICO Plans, including pursuant to any guarantee
made by MetLife thereunder or in respect thereof; provided that we may set off against any such indemnification
obligation thereunder any unpaid amounts due from MetLife in respect of the payments by MetLife with respect
to NELICO Plans as contemplated by one of the transaction documents;
in the case of any applicable NELICO Plan where services continue to be provided by a third party through a
contract with MetLife after Separation, any breach by us of such third-party contract;
the failure by us to timely provide employment termination information to MetLife, as required by one of the
transaction agreements, but only where such failure results in the imposition of penalties under Section 409A of
the Code; and
•
the provision of certain information by MetLife to us pursuant to the employee matters agreement (“EMA”).
Subject to certain exceptions, MetLife agreed to indemnify, hold harmless and defend us, and certain related persons from
and against all liabilities relating to, arising out of or resulting from:
• MetLife and its affiliates (other than Brighthouse), including the operations, liabilities and obligations of their
businesses, or the failure by MetLife or its affiliates (other than Brighthouse) to pay, perform or otherwise promptly
discharge any liabilities or contractual obligations of MetLife’s or its affiliates’ (other than Brighthouse) businesses,
in each case arising before or after the completion of the Distribution other than the specified liabilities described
below;
•
except to the extent it relates to a liability assumed by us, any guarantee, indemnification obligation, surety bond
or other credit support arrangement by us for MetLife’s benefit that survived the Distribution;
303
•
•
•
•
•
•
•
•
•
•
certain specified liabilities including liabilities relating to certain historical businesses, liabilities for MetLife’s
products or distribution and sales thereof, certain employee related liabilities relating to MetLife providing
administrative services and other services for certain benefit plans and specified statutory obligations, and certain
other specified liabilities, as well as MetLife’s share of certain shared liabilities;
any breach by MetLife or any of its affiliates (other than Brighthouse) of the Master Separation Agreement, any
of the other transaction documents or documents entered into in connection with the Restructuring or its certificate
of incorporation or bylaws;
any untrue statement of, or omission to state, a material fact in our public filings to the extent it was as a result of
information that MetLife, or certain persons who, following the Distribution, were MetLife’s employees, furnished
to us or which we incorporated by reference from MetLife’s public filings, if that statement or omission was made
or occurred after the completion of the Distribution;
any losses related to liabilities to be retained by MetLife pursuant to the terms of the Master Separation Agreement
or the failure by MetLife to obtain any required consent, approval, release, substitution or amendment in connection
with such retained liabilities;
any untrue statement of, or omission to state, a material fact in the Form 10, except to the extent the statement was
made or omitted in reliance upon information provided to MetLife by us (other than certain of our employees who
became our employees at or prior to the Distribution) expressly for use in such Form 10;
the failure by MetLife to timely provide or to provide timely access, in each case as required by the Master Separation
Agreement, to us of the applicable records of the applicable NELICO Plans and certain other plans as provided in
the Master Separation Agreement;
the provision of certain information by us to MetLife pursuant to the EMA;
the sale of Brighthouse Life Insurance Company’s interest in a Chinese joint venture (“ML China”) to MLIC;
any obligation pursuant to any abandoned property, unclaimed property, escheatment or similar law in connection
with, relating to, arising out of, or resulting from the delivery of the shares of our common stock distributed in the
Distribution, due to a determination by an unclaimed property regulator or a court that the dormancy period
applicable to the underlying MetLife common stock, as opposed to the issue date of our common stock, should
have been applied to the shares of our common stock distributed in the Distribution; and
any action in respect of any event or series of events occurring prior to the completion of the Distribution brought
by any insurance regulatory authority with jurisdiction over Brighthouse Life Insurance Company related to the
simplified issue term business sold through MetLife’s U.S. direct business organization and issued by Brighthouse
Life Insurance Company prior to the to the completion of the Distribution.
The Master Separation Agreement also requires us to procure a dedicated six year run-off tail policy for (i) any director,
officer or employee of MetLife, (ii) any person designated by MetLife as a director and who serves in such capacity, (iii) such
individuals, directly or indirectly engaged by MetLife as its agent on a project basis with respect to a distribution of securities
of Brighthouse during the term of the Master Separation Agreement and having a binding, written agreement with MetLife that
obligates MetLife to indemnify such individual on the terms set forth in clauses (x) and (y) below, as applicable, or (iv) any
person who, with such person’s consent, is named in any registration statement of Brighthouse under the Securities Act as about
to become a director of Brighthouse in respect of: (a) director and officer liability coverage; (b) coverage for liabilities under
U.S. federal and state securities laws; (c) fiduciary liability coverage in respect of pension plans covering employees; and
(d) professional liability/errors & omission liability coverage including cyber liability and employment practices liability
coverage in respect of our operations, assets and liabilities; provided that in any event such tail insurance policy will provide
for (x) policy limits in an amount no less than, and (y) deductible or retentions in an amount no higher than, an aggregate of
$200 million and $25 million, respectively, in the case of the clauses (a) and (b) together, $20 million and $500,000, respectively,
in the case of clause (c), and $100 million and $10 million, respectively, in the case of clause (d).
Claims
The Master Separation Agreement provides for the allocation between MetLife and us of known claims, and allocates
responsibility among the parties with respect to any claims (including litigation or regulatory actions or investigations) in a
manner generally consistent, subject to certain modifications, with the indemnification obligations described above. The Master
Separation Agreement also provides for certain procedural requirements between MetLife and us in connection with any such
claim.
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Dispute resolution procedures
The Master Separation Agreement provides that neither party will commence any court action to resolve any dispute or
claim arising out of or relating to the Master Separation Agreement or the other transaction documents (excluding the Registration
Rights Agreement, the Tax Receivables Agreement and the Tax Separation Agreement). Instead, any dispute that is not resolved
in the normal course of business will be submitted to mediation by written notice. If a dispute subject to the mediation process
has not been resolved within a specified period after the date of the written notice beginning the mediation process, the dispute
shall be resolved by binding arbitration.
Each party shall bear its own costs in both the mediation and the arbitration; however, the parties shall share the fees and
expenses of both the mediators and the arbitrators equally.
These dispute resolution procedures do not apply to any dispute or claim arising under a registration rights agreement we
entered into with MetLife to provide MetLife with registration rights relating to shares of our common stock held by MetLife
(the “Registration Rights Agreement”), including any dispute related to MetLife’s rights as a holder of our common stock and
both parties will submit to the exclusive jurisdiction of the Delaware courts for resolution of any such dispute. In addition, both
parties are permitted to seek injunctive or other equitable relief from any court with jurisdiction over the parties in the event of
any actual or threatened breach of the provisions of the Master Separation Agreement or the other transaction documents
(excluding the Registration Rights Agreement, the Tax Receivables Agreement and the Tax Separation Agreement).
Release under certain agreements
Except for each party’s obligations under the Master Separation Agreement, the other transaction documents and certain
other specified agreements and liabilities, we and MetLife, on behalf of ourselves and each of our respective affiliates, released
and discharged the other and its respective affiliates from all liabilities existing or arising between us on or before the completion
of the Distribution, in connection with intercompany agreements terminated in connection with the Separation (as well as a
release by MetLife in favor of us under the agreements relating to the investment in ML China). Except as specified in the Master
Separation Agreement, the release does not extend to obligations or liabilities under any agreements between us and MetLife
that remain in effect following the Distribution, including ordinary course liabilities for products and services.
Restrictive covenants
Subject to earlier termination in the case of MetLife in connection with certain transformational transactions at Brighthouse,
until eighteen (18) months after the date of the Master Separation Agreement, neither MetLife nor Brighthouse will solicit any
then current employee of the other party or any of its affiliates with a title of vice president or higher or similar position based
on practices in effect at the time of the Distribution with respect to employment by such party; provided that nothing precludes
either MetLife or Brighthouse from soliciting any such employee of the other party (i) who has ceased to be employed by such
other party or its affiliates prior to commencement of the earlier of such solicitation or employment discussions between the
first party and such employee, (ii) pursuant to a generalized solicitation for employees through the use of media advertisements,
professional search firms or otherwise that does not target or have the effect of targeting such employees, or (iii) who contacts
a party on such person’s own initiative and without any prohibited solicitation.
Credit support obligations
In the ordinary course of our business, we enter into agreements (including leases) which require guarantees, indemnification
obligations, other credit support or other support obligations (collectively the “Credit Support Obligations”). Prior to the
Distribution, MetLife agreed to be primary obligor on most of our currently outstanding Credit Support Obligations. We and
MetLife will cooperate to replace certain Credit Support Obligations and we will secure the release or replacement of the liability
of MetLife, as applicable and necessary, under certain Credit Support Obligations that were not novated prior to completion of
the Distribution and, subject to applicable regulatory approval or non-objection, within a certain period following the date of
the Master Separation Agreement, release MetLife of its obligations under certain guarantees with third parties.
To the extent that the Credit Support Obligations were not novated prior to completion of the Distribution, MetLife will
maintain in full force and effect each Credit Support Obligation which was issued and outstanding as of the date of the Distribution
until the earlier of: (i) such time as the contract, or all of the obligations of us or our applicable affiliate(s) thereunder, to which
such Credit Support Obligation relates, terminates; and (ii) such time as such Credit Support Obligation expires in accordance
with its terms or is otherwise released.
Covenants relating to existing agreements
Pursuant to the Master Separation Agreement, each of MetLife and we agreed that, for a period of one year after the
Separation, each party will not take or fail to take any actions that reasonably could result in the other party (or its respective
subsidiaries) being in breach of or in default under any agreement (i) that provides that actions of one party or its subsidiaries
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may result in breach of or default under such agreement by the other party or its subsidiaries, (ii) to which MetLife or we are a
party or (iii) under which MetLife or we have performed any obligations on or prior to the date of the Master Separation
Agreement.
We agreed to, and to cause our subsidiaries to, provide any services, facilities, equipment or software pursuant to the
Transition Services Agreement entered into in connection with the sale of the MPCG and MetLife Securities to MassMutual, to
the extent we or our subsidiaries provided such prior to the date of the Master Separation Agreement. The Master Separation
Agreement provides that MetLife will, upon our request and at our expense, seek to enforce any obligation of MassMutual for
our benefit under that certain purchase agreement entered into in connection with the sale of the MPCG and MetLife Securities.
In addition, the Master Separation Agreement provides for reimbursements between us and MetLife, as applicable, for
payments of renewal commissions or trail commissions to former producers of the other party pursuant to previously existing
contractual obligations, and that we and MetLife shall work together to make any such payments through a registered broker-
dealer and member of FINRA. The Master Separation Agreement also includes provisions for agreement among us and MetLife
on how to process bundled payments received from an unaffiliated registered investment company by one of our or MetLife’s
insurance company subsidiaries that include proceeds for the other party’s insurance company subsidiaries, in connection with
investments of contract owners’ assets in separate accounts in such a company by either our or MetLife’s insurance company
subsidiaries. The Master Separation Agreement includes provisions providing requirements that (i) we will perform all of our
obligations under certain reinsurance agreements with third party reinsurers that reinsure our liabilities arising under policies
reinsured by MetLife or which inure to the benefit of the reinsured arrangement, and (ii) MetLife will perform all of its obligations
under certain reinsurance agreements with third party reinsurers that reinsure MetLife’s liabilities arising under policies reinsured
by us or which inure to the benefit of the reinsured arrangement.
Covenants relating to General American Life Insurance Company
The Master Separation Agreement contains certain provisions relating to the guarantee by General American Life Insurance
Company (“GALIC’) of certain policies and products of certain of our insurance company subsidiaries, including relating to
the future release of the guarantee or assignment to an entity having sufficient financial strength, credit-worthiness, or claims-
paying ability rating, procedures for delivery of financial and other information necessary for our public filings, and cooperation
with a potential future buyback or exchange of affected products.
Investment Management Agreements
On January 1, 2017, MLIA, a subsidiary of MetLife, entered into investment management agreements with our insurance
company subsidiaries, pursuant to which MLIA manages the investment of the assets comprising the general account portfolio
of such insurance company subsidiaries and provides certain portfolio management services, including services relating to the
use of derivatives. MLIA also entered into an investment management agreement with Brighthouse Financial, Inc. and certain
of its non-insurance company subsidiaries, including Brighthouse Services, and separately entered into an investment
management agreement with BRCD. In return for providing such services, MLIA is entitled to receive a management fee
determined generally by the amount of the assets under management and is also entitled to reimbursement for certain expenses.
Each agreement has an initial term that continues until 18 months after the date on which MetLife ceases to own at least fifty
percent (50%) or more of our common stock, after which period either party to the agreement is permitted to terminate upon
notice to the other party (although termination prior to the end of the initial term is permitted under certain circumstances).
MLIA also entered into related investment finance services agreements with each of the entities described above, including
BRCD, pursuant to which MLIA provides, or will provide, certain investment finance and reporting services in respect of the
assets allocated to it under each respective investment management agreement.
On January 1, 2017, MLIA also entered into separate investment management agreements with certain of the same entities
described above, pursuant to which MLIA provides investment and portfolio management services, including services relating
to the use of derivatives, in respect of certain separate account assets of each respective entity. The terms of each separate account
investment management agreement are substantially similar to those contained in the general account investment management
agreements. MLIA also provides investment finance and reporting services under related investment finance services agreements
with each insurer in respect of the separate account assets allocated to it under each respective separate account investment
management agreement.
Registration Rights Agreement
We entered into the Registration Rights Agreement to provide MetLife with registration rights relating to shares of our
common stock held by MetLife. MetLife and its permitted transferees may require us to register under the Securities Act, all or
any portion of these shares, a so-called “demand request.” The demand request is subject to certain limitations as to minimum
value and frequency.
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MetLife and its permitted transferees also have “piggyback” registration rights, such that MetLife and its permitted
transferees may include their respective shares in any future registrations of our equity securities, whether or not that registration
relates to a primary offering by us or a secondary offering by or on behalf of any of our shareholders. The demand registration
rights and piggyback registration rights are each subject to market cut-back exceptions.
The Registration Rights Agreement sets forth customary registration procedures, including an agreement by us to make our
management reasonably available to participate in road show presentations in connection with any underwritten offerings. We
also agreed to indemnify MetLife and its permitted transferees with respect to liabilities resulting from untrue statements or
omissions in any registration statement used in any such registration, other than untrue statements or omissions resulting from
information furnished to us for use in a registration statement by MetLife or any permitted transferee.
The rights of MetLife and its permitted transferees under the Registration Rights Agreement will remain in effect with
respect to the shares covered by the agreement until those shares:
•
•
•
have been sold pursuant to an effective registration statement under the Securities Act;
have been sold to the public pursuant to Rule 144 under the Securities Act;
have been transferred in a transaction where subsequent public distribution of the shares would not require
registration under the Securities Act; or
•
are no longer outstanding.
In addition, the registration rights under the agreement will cease to apply to a holder when such holder holds less than a
certain threshold of the then outstanding common shares and such shares are eligible for sale without restriction pursuant to
Rule 144 under the Securities Act.
Transition Services Agreement
Prior to the Distribution, Brighthouse Services, Brighthouse Financial, Inc. (but only with respect to certain provisions),
MetLife Services and Solutions, LLC (“MSS”), a direct, wholly-owned subsidiary of MetLife, and MetLife, Inc. (but only with
respect to certain provisions) entered into a transition services agreement effective as of January 1, 2017 (the “Transition Services
Agreement”). Each of Brighthouse Financial, Inc. and MetLife, Inc. is a party to the Transition Services Agreement solely with
respect to taking actions necessary to cause their respective affiliates to perform obligations under the Transition Services
Agreement to the extent required thereunder. Under the Transition Services Agreement, for a transitional period, generally up
to thirty-six months, with certain services to be made available for several years, MSS has agreed to perform, directly or through
affiliates with which it has an arrangement, a range of administrative and other services that Brighthouse Services and we require
in support of our operations. Among other services, MSS has agreed to perform certain finance, treasury, compliance, operations,
call center and technology support services. Moreover, MSS has agreed to provide facilities and equipment to the extent requested
by Brighthouse Services for its own benefit or ours. Brighthouse Services agreed to pay MSS fees to be calculated in accordance
with schedules to the Transition Services Agreement, which vary depending on the nature of the services and facilities and
equipment provided. Brighthouse Services, in turn, allocates to us any expense incurred under the Transition Services Agreement
for the benefit of subsidiaries or affiliates of Brighthouse. In addition to the services that MSS provides to Brighthouse Services,
Brighthouse Services performs a more limited scope of services for the benefit of MSS and its affiliates.
Other Services Agreements
Prior to the Distribution, Brighthouse Life Insurance Company and NELICO entered into an Administrative Services
Agreement with MLIC (the “MLIC TPA Agreement”) and entered into a Global Services Agreement with MSS, as billing
intermediary, for certain third-party administration services (“TPA Services”) performed by MetLife Global Operations Support
Center Private Limited (“MGOSC”) (the “MSS Global Services Agreement”). Under the MLIC TPA Agreement and the MSS
Global Services Agreement, once MLIC and MGOSC cease to be affiliates of Brighthouse Life Insurance Company, MLIC and
MGOSC (by way of MSS as billing intermediary) will continue to perform certain TPA Services that Brighthouse Life Insurance
Company and NELICO may require in support of their operations for a transitional period. Such TPA Services may include, but
are not limited to, claims processing, premium collection and underwriting.
MSS is currently in the process of obtaining all necessary licenses to directly perform TPA Services. When MSS is properly
licensed and otherwise capable of providing such services, the MLIC TPA Agreement will terminate and MSS will provide
certain TPA Services to Brighthouse Life Insurance Company and NELICO for a transitional period. Brighthouse Life Insurance
Company and NELICO will enter into Administrative Services Agreements with MSS (the “MSS TPA Agreement”). Under the
MSS TPA Agreement, MSS will agree to perform TPA Services that Brighthouse Life Insurance Company and NELICO may
require in support of their operations.
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Prior to the Distribution, various Brighthouse and MetLife entities entered into additional services agreements providing
for the provision of support services, including, among other things, an administrative services agreement among Brighthouse
Advisers and MetLife’s insurance company subsidiaries and participation agreements between Brighthouse Securities and our
insurance company subsidiaries. One such agreement is the Long-Term Data Access Agreement, which sets forth standards for
the access to and maintenance of data that was and will continue to be exchanged by Brighthouse and MetLife prior to and
following the Separation.
As of January 1, 2017, Brighthouse Services provided certain services to our insurance company subsidiaries, including
providing instruction and direction to MLIA as to MLIA’s services under the Investment Management Agreements between
MLIA and our insurance subsidiaries (“Subsidiary IMAs”). Additionally, Brighthouse Services provides instruction and direction
to MLIA as to MLIA’s services under the Investment Management Agreement among MLIA and Brighthouse Financial, Inc.
and certain of its non-insurance company subsidiaries (the “Brighthouse IMA”). Brighthouse Services is not a party to the
Subsidiary IMAs and is not obligated to compensate MLIA for services under the Subsidiary IMAs. However, Brighthouse
Services is a party to the Brighthouse IMA and is obligated to compensate MLIA for services thereunder.
All agreements between or among MetLife, Brighthouse and their respective affiliates that took effect prior to the Separation
and requiring the approval of applicable insurance regulatory authorities were approved by such regulatory authorities. Affiliate
transaction approvals were sought prior to the Separation for those agreements that took effect at the Separation to the extent
that such agreements required such approval. These agreements include third-party administrative service agreements and tax
allocation agreements.
Intellectual Property Arrangements
Intellectual Property License Agreement
We and MLIC entered into the Intellectual Property License Agreement, pursuant to which we granted each other a non-
exclusive, royalty-free, paid-up license for the U.S., to certain intellectual property rights that we each own. The intellectual
property rights being licensed (with no rights to sublicense except as described below) under the Intellectual Property License
Agreement may include invention disclosures, patents, patent applications, statutory invention registrations, copyrights, mask
work rights, database rights and design rights, trade secrets, trademarks, service marks, trade dress, logos, other source identifiers
or domain names, intellectual property made available under the Transition Services Agreement, and limited rights to certain
policies and materials owned by MLIC or its affiliates. The license allows us and MLIC and its affiliates to have access to and
to use certain intellectual property necessary for operations of our respective businesses. Brighthouse has agreed to sublicense
its rights in certain MetLife trademarks to market, sell, distribute and service products and services in connection with its business
as operated immediately following the Separation. MLIC has agreed to sublicense its rights in certain Brighthouse trademarks
in connection with providing services to Brighthouse pursuant to the transaction documents. Each party has agreed to only
sublicense its right in other intellectual property for (i) non-public distribution, dissemination or disclosure restricted to employees
of the licensee, its affiliates or their respective third party vendors under written obligations of confidentiality at least as stringent
as those required under the Intellectual Property License Agreement and/or (ii) public distribution, dissemination or disclosure
of such materials only to the extent such materials were publicly distributed, disseminated or disclosed prior to the distribution.
Each party can only assign its license rights to another party other than an affiliate upon the prior written consent of the other
party to the agreement. The Intellectual Property License Agreement with respect to trademarks continues until non-use of a
particular mark and is perpetual with respect to other intellectual property other than upon, material breach.
Tax Agreements
Due to a particular U.S. tax consolidation provision, Brighthouse Life Insurance Company and its subsidiaries cannot
immediately be included with Brighthouse in a consolidated tax group. Instead, following the Distribution (the “tax
deconsolidation date”), Brighthouse Life Insurance Company and any directly owned life insurance and reinsurance company
subsidiaries (including BHNY and BRCD) are expected to be included in Brighthouse Life Insurance Company’s consolidated
federal income tax return until 2023. In addition, following the tax deconsolidation date, NELICO will not be included in the
Brighthouse Life Insurance Company, consolidated federal income tax return and is expected to file its own U.S. federal income
tax return until 2023. Current taxes (and the benefits of tax attributes such as losses) of Brighthouse Life Insurance Company
and its life insurance/reinsurance company subsidiaries will be allocated among Brighthouse Life Insurance Company and its
subsidiaries under consolidated tax return regulations and a tax sharing agreement. Beginning in 2023, Brighthouse Life Insurance
Company, its directly owned life insurance and reinsurance company subsidiaries and NELICO are expected to join our U.S.
consolidated federal income tax return. Because Brighthouse Life Insurance Company, its directly owned life insurance and
reinsurance company subsidiaries and NELICO are not able to join our U.S. consolidated federal income tax return until 2023,
our U.S. consolidated federal income tax group and the separate groups of Brighthouse Life Insurance Company and NELICO
may owe more taxes than they would have owed if they had all been a single group immediately after the distribution.
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Tax Receivables Agreement
Immediately prior to the closing of the Distribution, we entered into a Tax Receivables Agreement with MetLife that provides
MetLife with the right to receive as partial consideration for its contribution of assets to us future payments from us, equal to
86% of the amount of cash savings, if any, in U.S. federal income tax that we and our subsidiaries actually realize (or are deemed
to realize in the case of an early termination by us, a breach of material obligations under the Tax Receivables Agreement, a
change of control or certain subsidiary dispositions, as discussed below) as a result of the utilization of our and our subsidiaries’
net operating losses, capital losses, tax basis and amortization or depreciation deductions in respect of certain tax benefits we
may realize as a result of certain transactions involved in the Separation together with interest accrued at a rate of one-year
LIBOR plus 100 basis points from the date the applicable tax return is due (without extension) until the date the applicable
payment is due. To the extent that we fail to make payments when due under the Tax Receivables Agreement for any reason,
other than as a result of certain exceptions, discussed below, such payments will accrue interest at a rate of one-year LIBOR
plus 650 basis points per annum until paid. These payment obligations are our obligations and we are obligated to use commercially
reasonable actions to cause our subsidiaries to pay dividends to us to the extent necessary for us to make payments under the
Tax Receivables Agreement.
For purposes of the Tax Receivables Agreement, cash savings in income tax are computed by comparing our actual income
tax liability to the amount of such taxes that we would have been required to pay had we not been able to utilize the tax benefits
subject to the Tax Receivables Agreement. The term of the Tax Receivables Agreement commenced upon the Separation and
will continue until all relevant tax benefits have been utilized or have expired.
Estimating the amount of payments that may be made under the Tax Receivables Agreement is by its nature imprecise,
insofar as the calculation of amounts payable depends on a variety of factors. The actual amount and utilization of net operating
losses, tax basis and other tax attributes, as well as the amount and timing of any payments under the Tax Receivables Agreement,
will vary depending upon a number of factors, including the amount, character and timing of our and our subsidiaries’ taxable
income in the future.
If we undergo a change of control, the Tax Receivables Agreement will terminate, and we will be required to make a lump
sum payment equal to the present value of future payments under the Tax Receivables Agreement, which payment would be
based on certain assumptions (the “valuation assumptions”), including those relating to our and our subsidiaries’ future taxable
income. Additionally, if we or a direct or indirect subsidiary transfers any asset to a corporation with which we do not file a
consolidated tax return, we will be treated as having sold that asset in a taxable transaction for purposes of determining the cash
savings in income tax under the Tax Receivables Agreement. If we sell or otherwise dispose of any of our subsidiaries in a
transaction that is not a change of control, we will be required to make a lump sum payment equal to the present value of future
payments under the Tax Receivables Agreement attributable to the tax benefits of such subsidiary that is sold or disposed of,
applying the valuation assumptions. Any such payment resulting from a change of control, asset transfer or subsidiary disposition
could be substantial and could exceed our actual cash tax savings.
The Tax Receivables Agreement provides that in the event that we breach any of our material obligations under it, whether
as a result of our failure to make any payment when due (subject to a three-month cure period), failure to honor any other material
obligation under it or by operation of law as a result of the rejection of it in a case commenced under the United States Bankruptcy
Code or otherwise, then all our payment and other obligations under the Tax Receivables Agreement will be accelerated and
will become due and payable, applying the same valuation assumptions discussed above, including those relating to our future
taxable income. Such payments could be substantial and could exceed our actual cash tax savings. Additionally, we generally
have the right to terminate the Tax Receivables Agreement. If we terminate the Tax Receivables Agreement, our payment and
other obligations under the Tax Receivables Agreement will be accelerated and will become due and payable, also applying the
valuation assumptions discussed above. Such payments could be substantial and could exceed our actual cash tax savings.
Tax Separation Agreement
Immediately prior to the Distribution, we entered into a tax separation agreement with MetLife (the “Tax Separation
Agreement”). Among other things, the Tax Separation Agreement governs the allocation between MetLife and us of the
responsibility for the taxes of the MetLife group. The Tax Separation Agreement also allocates rights, obligations and
responsibilities in connection with certain administrative matters relating to the preparation of tax returns and control of tax
audits and other proceedings relating to taxes.
Under the Tax Separation Agreement, MetLife is generally responsible for any and all taxes due with respect to any (i) tax
return filed on a consolidated, combined or unitary basis that includes at least one member of the MetLife group and one member
of Brighthouse Financial, Inc. and its subsidiaries and affiliates (the “Brighthouse group”) (a “Joint Return”) and (ii) any stand-
alone tax return filed by any member of the MetLife group that does not include any member of the Brighthouse group. However,
under the terms of the Tax Separation Agreement, we will pay to MetLife or receive a payment from MetLife with respect to
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taxes attributable to the Brighthouse group determined under the principles of MetLife’s current tax sharing agreement for taxable
periods ending on or prior to the Distribution for which tax returns have not been filed by such date. In addition, for pre-
Distribution taxable periods we are generally responsible for (x) taxes attributable to the members of the Brighthouse group
arising from any audit of any Joint Return, as determined under the principles of MetLife’s current tax sharing agreement as in
effect for the relevant taxable period, and (y) any and all taxes due with respect to any stand-alone tax returns filed by any
member of the Brighthouse group that does not include any member of the MetLife group.
The Tax Separation Agreement generally allocates the right to refunds of taxes to the party that would be liable under the
Tax Separation Agreement for the underlying taxes that are refunded.
The Tax Separation Agreement allocates between the parties the right to control, and to participate in, the preparation and
filing of tax returns and defense of tax audits or other proceedings relating to taxes, and requires the parties to cooperate with
each other in connection with preparing and filing tax returns and defending tax audits and other tax proceedings.
With the exception of obligations under other agreements entered into between MetLife and us in connection with the
Distribution (such as the Tax Receivables Agreement), upon entering into the Tax Separation Agreement, all other formal or
informal tax sharing arrangements between MetLife and us were terminated, and the Tax Separation Agreement now generally
governs all of our relationship with MetLife relating to tax returns and tax liabilities.
The Tax Separation Agreement generally allocates to MetLife any income taxes incurred in connection with the failure to
qualify for tax-free treatment of the Distribution and certain related preliminary internal transactions. Additionally, MetLife is
liable for tax losses that occur from a failure to qualify for tax free treatment if the failure to qualify for tax-free treatment results
from any action or inaction after the completion of the Distribution that is within MetLife’s control or if the failure results from
any direct or indirect transfer of MetLife’s stock after the Distribution. Under the Tax Separation Agreement, such income taxes
will generally be allocated to us if the failure to qualify for tax-free treatment results from any action or inaction after the
completion of the Distribution that is within our control or if the failure results from any direct or indirect transfer of our stock
after the Distribution. The Tax Separation Agreement includes a provision generally prohibiting us after the completion of the
Distribution from taking any action or failing to take action within our control that would cause the failure of such tax-free
treatment.
In addition, for the two-year period following the Separation, we agreed to continue to actively conduct the portion of our
business relied upon to qualify the Distribution as a tax-free transaction, and we have agreed that in a single transaction or series
of transactions we will not:
•
•
•
•
•
•
enter into or, to the extent we have the right to prohibit it, permit any transaction to occur, as a result of which one
or more persons would (directly or indirectly) acquire, or have the right to acquire, a number of shares of stock
that would, when combined with certain other changes in ownership of our stock, comprise 45% or more of the
value or total combined voting power of all of our outstanding shares of stock;
liquidate, merge or consolidate with any other person (whether that other person or such affiliate is the survivor)
that was not already wholly-owned by a member of our group prior to such transaction;
sell or transfer all or substantially all of the assets that were transferred to us as part of our formation or sell or
transfer (or cause or permit to be transferred) 33% or more of the gross assets of the business relied upon to qualify
the Distribution as a tax-free transaction or 33% or more of our consolidated gross assets;
redeem or otherwise repurchase (directly or through an affiliate) any of our stock, or rights to acquire our stock,
except to the extent such repurchases satisfy certain IRS guidelines;
amend our certificate of incorporation (or other organizational documents), or take any other action, whether
through a stockholder vote or otherwise, affecting the voting rights of our stock; or
take any other action or actions which in the aggregate would be reasonably likely to have the effect of causing or
permitting one or more persons (whether or not acting in concert) to acquire directly or indirectly stock representing
50% or more of the voting power or value of our stock or otherwise jeopardize the intended tax treatment of the
Distribution and certain steps that were part of the Separation.
We may, however, take the actions enumerated above during such two-year period if (a) we provide MetLife either a ruling
from the IRS or an unqualified tax opinion in form and substance reasonably satisfactory to MetLife to the effect that such action
will not negatively affect the applicable intended tax treatment of the Separation and Distribution transactions or (b) MetLife
waives the requirement to obtain such IRS ruling or tax opinion. Whether a ruling from the IRS or an unqualified tax opinion
would be forthcoming depends on the facts and circumstances of the applicable actions. For example, the Treasury Regulations
provide that an acquisition of our stock would not be considered to be “part of a plan” with the Distribution (and therefore would
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not cause there to be gain recognition under Code Section 355(e)) if there was no agreement, understanding, arrangement or
substantial negotiations regarding the acquisition or a similar acquisition at any time during the two-year period prior to the
Distribution.
We have agreed to indemnify MetLife and its affiliates against any and all tax-related liabilities incurred by them relating
to the Distribution to the extent caused by the actions summarized above. This indemnification applies even if MetLife has
permitted us to take an action that would otherwise have been prohibited under the tax-related restrictions as described above.
Any income taxes incurred in connection with the failure to qualify for tax-free treatment of the Distribution which are jointly
caused by us and MetLife shall be allocated between MetLife and us equally.
Collateral Agreement
Prior to the Distribution, we entered into a reinsurance trust agreement with GALIC pursuant to which Brighthouse Life
Insurance Company and GALIC collateralize their net exposure to one another under the following two reinsurance agreements
between such parties: (i) a reinsurance agreement whereby Brighthouse Life Insurance Company provides reinsurance coverage
to GALIC with respect to certain term and universal life policies issued by GALIC; and (ii) a reinsurance agreement whereby
GALIC provides reinsurance coverage to Brighthouse Life Insurance Company with respect to certain whole life policies issued
by Brighthouse Life Insurance Company.
Sublease Agreements
At or prior to the Distribution, we entered into arms-length sublease agreements with MetLife for our corporate headquarters
in Charlotte, North Carolina, as well as certain other locations.
Other Related Person Transactions
The Separation
We and MetLife have engaged, and expect to engage, in certain transactions in connection with the Separation, including
transactions that took place prior to the Distribution and transactions that will continue in effect after the completion of the
Distribution.
Reinsurance Arrangements
We have entered into reinsurance agreements with MetLife affiliated companies primarily as a cedent of insurance and also
as a reinsurer of some insurance products issued by those affiliated companies. We participate in reinsurance activities in order
to limit losses, minimize exposure to significant risks and provide additional capacity for future growth. While we terminated
certain of these arrangements in connection with the Separation, we retained and expect to retain certain of the reinsurance
agreements with MetLife affiliated companies following the Separation.
We currently benefit from a financing arrangement MetLife has with a third-party financial institution that is used to support
a MetLife reinsurance subsidiary’s obligations arising under a reinsurance agreement with Brighthouse Life Insurance Company.
Pursuant to the Master Separation Agreement, we pay MetLife 60% of the fees owed to the third party financial institution for
this financing arrangement.
Investment Transactions
Prior to the Distribution we extended loans and transferred certain invested assets, primarily consisting of fixed maturity
securities, to certain MetLife affiliates. At this time, there are no longer any outstanding loans between the companies and we
have stopped transferring invested assets between Brighthouse and MetLife affiliates.
Shared Services and Overhead Allocations
Prior to the Separation, MetLife provided us certain services, which included, but were not limited to, executive oversight,
treasury, finance, legal, human resources, tax planning, internal audit, financial reporting, information technology, sourcing/
procurement and investor relations. MetLife continues to provide certain of these services following the Separation under the
Transition Services Agreement. The financial information in this Annual Report on Form 10-K does not necessarily include all
the expenses that would have been incurred had we been a separate, standalone entity prior to the Distribution. MetLife charges
us for these services based on direct and indirect costs. When specific identification is not practicable, an allocation methodology
is used, primarily based on sales, in-force liabilities, or headcount.
Sourcing/Procurement
Prior to the Distribution, MetLife contracted for most of our strategic sourcing and procurement needs. Pursuant to a services
agreement, MetLife agreed, to the extent requested by an affiliated recipient, to perform certain services and make available its
311
facilities and equipment, including participating in and/or benefiting from arrangements made by MetLife with any of its affiliated
or third-party vendors. In consideration for these services, we are required to reimburse MetLife for its expenses attributable to
each affiliated recipient of ours for services provided to it under these arrangements. These arrangements cover a variety of
sourcing needs, including software licenses, information technology service and support, audit services and market data services.
We do not directly benefit from these arrangements following the Distribution, and we entered into direct contracts with vendors
at or prior to the Distribution, other than in respect of service to be provided under the Transition Services Agreement.
Stock-Based Compensation Plans
Prior to the Separation, our executive officers participated in MetLife stock-based compensation plans, the costs of which
were allocated to the Company and recorded in the combined statements of operations. The Separation constituted the end of
our employees’ employment with MetLife and its affiliates. Any MetLife stock compensation awards held by our employees
immediately prior to the Separation were retained or forfeited in accordance with their terms.
The Company has established a nonqualified deferred compensation plan to pay cash compensation, (the “Temporary Plan”)
to employees of the Company who forfeited MetLife stock compensation awards as a result of the Separation and/or did not
receive stock compensation awards from MetLife in 2017. The cash compensation for employees who forfeited MetLife stock
compensation awards is subject to service requirements that generally replicate the service requirements for the awards that
were forfeited as a result of the Separation. In addition, for our executive officers, cash compensation for forfeited awards is
subject to achievement of Company-specific performance criteria. The cash compensation for employees who did not receive
stock compensation awards from MetLife in 2017 is subject to service requirements and, for our executive officers, the
achievement of Company-specific performance criteria. The Company intends to seek shareholder approval of the material
terms of the performance goals under the Temporary Plan. The cost for this cash compensation is not expected to be material.
Broker-Dealer Transactions
Prior to the Distribution, we accrued related party revenues and expenses arising from interactions with MetLife’s broker-
dealers whereby the MetLife broker-dealers sell our variable annuity and life products. The affiliated revenue for us is fee income
from trusts and mutual funds whose shares serve as investment options of our policyholders. The affiliated expense for us is
commissions collected on the sale of variable products by us and passed through to the broker-dealer.
Revenues and Expenses Associated with Related Person Transactions
The approximate net earned revenues and incurred (expenses), or intercompany charges, for our various arrangements with
MetLife and its affiliates are presented in the table below.
Types of Related Persons Transactions
Financing arrangements
Transition services agreements with affiliates
Advisory and portfolio management agreement fees
Reinsurance transactions
Investment transactions
Stock-based compensation plans
Broker-dealer transactions
Other administrative services overhead allocations
Total
Related Person Transaction Approval Policy
Years Ended December 31,
2017
2016
(In millions)
2015
$
(69) $
(195) $
(330)
(159)
(300)
16
—
(206)
(60)
—
(99)
487
50
(10)
(434)
(868)
$
(1,108) $
(1,069) $
(186)
—
(80)
208
93
(8)
(417)
(1,059)
(1,449)
The Brighthouse Board has adopted a written related person transaction approval policy pursuant to which our Nominating
and Corporate Governance Committee, or for so long as any member of such committee is not an “independent director,” a
committee of the Brighthouse Board consisting of the independent members of the Nominating and Corporate Governance
Committee, will review and approve or take such other action as it may deem appropriate with respect to certain transactions.
312
Item 14. Principal Accountant Fees and Services
The information required by this Item will be set forth in the 2018 Proxy Statement, which information is hereby incorporated
by reference.
313
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
PART IV
1. Financial Statements: See “Index to Consolidated and Combined Financial Statements, Notes and Schedules.”
2. Financial Statement Schedules: See “Index to Consolidated and Combined Financial Statements, Notes and
Schedules.”
3. Exhibits: The exhibits are listed in the “Exhibit Index” below. Entries marked by the symbol # next to the exhibit’s
number identify management contracts or compensation plans or arrangements.
314
Exhibit Index
(Note Regarding Reliance on Statements in Our Contracts: In reviewing the agreements included as exhibits to this Annual
Report on Form 10-K, please remember that they are included to provide you with information regarding their terms and are not
intended to provide any other factual or disclosure information about Brighthouse Financial, Inc. and its subsidiaries or affiliates,
or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the
applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the
applicable agreement and (i) should not in all instances be treated as categorical statements of fact, but rather as a way of
allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) have been qualified by disclosures that
were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily
reflected in the agreement; (iii) may apply standards of materiality in a way that is different from what may be viewed as material
to investors; and (iv) were made only at the date of the applicable agreement or such other date or dates as may be specified in
the agreement and are subject to more recent developments. Accordingly, these representations and warranties may not describe
the actual state of affairs at the date they were made or at any other time. Additional information about Brighthouse Financial,
Inc. and its subsidiaries and affiliates may be found elsewhere in this Annual Report on Form 10-K and Brighthouse Financial,
Inc.’s other public filings, which are available without charge through the U.S. Securities and Exchange Commission website at
www.sec.gov.)
Exhibit No.
Description
2.1
3.1
3.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
Master Separation Agreement, dated as of August 4, 2017, by and between MetLife, Inc. and Brighthouse
Financial, Inc., is incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K, filed on
August 9, 2017 (File No. 001-37905).
Amended and Restated Certificate of Incorporation of Brighthouse Financial, Inc., is incorporated by
reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q, filed on August 15, 2017 (File No.
001-37905).
Amended and Restated Bylaws of Brighthouse Financial, Inc., is incorporated by reference to Exhibit 3.2 to
our Quarterly Report on Form 10-Q, filed on August 15, 2017 (File No. 001-37905).
Indenture, dated as of June 22, 2017, among Brighthouse Financial, Inc., MetLife, Inc., as Guarantor, and
U.S. Bank National Association, as Trustee, is incorporated by reference to Exhibit 4.1 to Amendment No. 4
to our Registration Statement on Form 10, filed on June 23, 2017 (File No. 001-37905).
Form of 3.700% Senior Note due 2027 and 4.700% Senior Note due 2047, is incorporated by reference to
Exhibit A and Exhibit B, respectively, to Exhibit 4.1 to Amendment No. 4 to our Registration Statement on
Form 10, filed on June 23, 2017 (File No. 001-37905).
Registration Rights Agreement, dated as of June 22, 2017, among Brighthouse Financial, Inc. and the initial
purchasers of the 3.700% Senior Note due 2027 and 4.700% Senior Note due 2047 named therein, is
incorporated by reference to Exhibit 4.2 to Amendment No. 4 to our Registration Statement on Form 10,
filed on June 23, 2017 (File No. 001-37905).
Transition Services Agreement, dated as of January 1, 2017, between MetLife Services and Solutions, LLC
and Brighthouse Services, LLC and for purposes of Article VIII only, MetLife, Inc. and Brighthouse
Financial, Inc., is incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on
August 9, 2017 (File No. 001-37905).
Registration Rights Agreement, dated as of August 4, 2017, between MetLife, Inc. and Brighthouse
Financial, Inc., is incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed on
August 9, 2017 (File No. 001-37905).
Investment Management Agreement, dated as of January 1, 2017, between MetLife Investment Advisors,
LLC and Brighthouse Life Insurance Company (formerly known as MetLife Insurance Company USA), is
incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K, filed on August 9, 2017 (File
No. 001-37905).
Intellectual Property License Agreement, dated as of August 4, 2017, by and among Metropolitan Life
Insurance Company, on behalf of itself and its Affiliates other than the Brighthouse Company Group, and
Brighthouse Services LLC, is incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K,
filed on August 9, 2017 (File No. 001-37905).
Tax Receivables Agreement, dated as of July 27, 2017, between MetLife, Inc. and Brighthouse Financial,
Inc., is incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K, filed on August 9, 2017
(File No. 001-37905).
Tax Separation Agreement, dated as of July 27, 2017, by and among MetLife, Inc. and its Affiliates and
Brighthouse Financial, Inc. and its Affiliates, is incorporated by reference to Exhibit 10.6 to our Current
Report on Form 8-K, filed on August 9, 2017 (File No. 001-37905).
315
10.7
10.8
10.9#
10.9.1#
10.9.2#*
10.10#
10.11#
Revolving Credit Agreement, dated as of December 2, 2016, among Brighthouse Financial, Inc., JP Morgan
Chase Bank, N.A., as administrative agent, and the other lenders named therein, is incorporated by reference
to Exhibit 10.8 to Amendment No. 1 to our Registration Statement on Form 10, filed on December 6, 2016
(File No. 001-37905).
Term Loan Agreement, dated as of July 21, 2017, among Brighthouse Financial, Inc., Bank of America,
N.A., as administrative agent, and the other lenders party thereto, is incorporated by reference to Exhibit 10.1
to our Current Report on Form 8-K, filed on July 21, 2017 (File No. 001-37905).
Brighthouse Services, LLC Auxiliary Savings Plan, is incorporated by reference to Exhibit 10.8 to our
Quarterly Report on Form 10-Q, filed on August 15, 2017 (File No. 001-37905).
Amendment Number One to the Brighthouse Services, LLC Auxiliary Savings Plan, is incorporated by
reference to Exhibit 10.9 to our Quarterly Report on Form 10-Q, filed on August 15, 2017 (File No.
001-37905).
Amendment Number Two to the Brighthouse Services, LLC Auxiliary Savings Plan.
Amended and Restated Brighthouse Services, LLC Annual Variable Incentive Plan, is incorporated by
reference to Exhibit 10.10 to our Quarterly Report on Form 10-Q, filed on August 15, 2017 (File No.
001-37905).
Brighthouse Services, LLC Voluntary Deferred Compensation Plan, effective January 1, 2018, is
incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on December 28, 2017
(File No. 001-37905).
10.11.1#*
21.1*
Amendment Number One to the Brighthouse Services, LLC Voluntary Deferred Compensation Plan.
List of Subsidiaries as of December 31, 2017.
31.1*
31.2*
32.1*
32.2*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
XBRL Instance Document.
101.SCH*
XBRL Taxonomy Extension Schema Document.
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document.
* Filed herewith
# Denotes management contracts or compensation plans or arrangements.
316
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Brighthouse Financial, Inc.
By
Name:
/s/ Anant Bhalla
Anant Bhalla
Executive Vice President and Chief Financial Officer
Title:
Date: March 15, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ Eric T. Steigerwalt
/s/ Anant Bhalla
/s/ Lynn A. Dumais
Chief Accounting Officer
(Principal Accounting Officer)
/s/ Irene Chang Britt
Director
Director, President and Chief Executive Officer
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
March 15, 2018
Date
March 15, 2018
March 15, 2018
March 15, 2018
/s/ C. Edward Chaplin
Chairman of the Board of Directors
March 15, 2018
/s/ John D. McCallion
Director
/s/ Diane E. Offereins
Director
/s/ Patrick J. Shouvlin
Director
/s/ William F. Wallace
Director
/s/ Paul M. Wetzel
Director
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
317
Board of Directors
Irene Chang Britt
C. Edward (“Chuck”) Chaplin, Chairman of the Board
John D. McCallion
Diane E. Offereins
Patrick J. (“Pat”) Shouvlin
Eric T. Steigerwalt, President and Chief Executive Officer
William F. (“Bill”) Wallace
Paul M. Wetzel
Executive Officers
Eric T. Steigerwalt
President and Chief Executive Officer
Myles J. Lambert
Executive Vice President and Chief Distribution and Marketing Officer
Anant Bhalla
Executive Vice President and Chief Financial Officer
Conor Murphy
Executive Vice President and Chief Product and Strategy Officer
Peter M. Carlson
Executive Vice President and Chief Operating Officer
John L. Rosenthal
Executive Vice President and Chief Investment Officer
Christine M. DeBiase
Executive Vice President, Chief Administrative Officer and General Counsel
Stock Exchange
The common stock of Brighthouse Financial, Inc. is listed on The Nasdaq Stock Market LLC stock exchange
(Symbol: BHF).
Registrar and Transfer Agent
Questions and communications regarding transfer of stock, dividends, cost-basis information, and address
changes should be directed to our transfer agent and registrar, Computershare Trust Company, N.A., at the address
below. Stockholders of record may enroll in electronic delivery of stockholder communications from our transfer
agent at Computershare’s website listed below.
Stockholder correspondence should be mailed to:
Brighthouse Financial Shareholder Services
c/o Computershare
P.O. Box 505000
Louisville, KY 40233-5000
Overnight correspondence should be mailed to:
Brighthouse Financial Shareholder Services
c/o Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
Telephone:
Within the U.S.: 1 (888) 670-4771
Outside the U.S.: 1 (781) 575-2921
Hearing Impaired (TDD): 1 (781) 575-4592
Website: www.computershare.com/brighthouse
Electronic Delivery of Stockholder Communications
Stockholders are encouraged to enroll in electronic delivery to receive proxy voting materials by visiting
https://enroll.icsdelivery.com/BHF.
Principal Executive Offices
The address of our principal executive offices and corporate headquarters is Brighthouse Financial, Inc., 11225
North Community House Road, Charlotte, NC 28277.
Investor Relations Website
Copies of our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for
the year ended December 31, 2017 and the 2018 Proxy Statement are available on our investor relations website at
http://investor.brighthousefinancial.com.
Corporate Website
www.brighthousefinancial.com
INSIDE BACK COVER
Brighthouse Financial, Inc.
11225 North Community House Road
Charlotte, NC 28277
© 2018 BRIGHTHOUSE FINANCIAL, INC.