BRIGHTHOUSE FINANCIAL, INC. – 10-K – 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
Page
Introduction 61
Executive Summary 62
Risk Management Strategies 62
Industry Trends and Uncertainties 65
Summary of Critical Accounting Estimates 66
Non-GAAP and Other Financial Disclosures 70
Results of Operations 72
Investments 84
Derivatives 92
Policyholder Liabilities 94
Liquidity and Capital Resources 97
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-------------------------------------------------------------------------------- Table of Contents 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 Summary of Risk Factors" and "Risk Factors." This Management's Discussion and Analysis of Financial Condition and Results of Operations should also be read in conjunction with "Quantitative and Qualitative Disclosures About Market Risk" and our consolidated financial statements included elsewhere herein.
Introduction
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 ofBrighthouse Financial for the periods indicated. In addition toBrighthouse 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"), our largest insurance subsidiary, domiciled inDelaware and licensed to write business in allU.S. states (exceptNew York ), theDistrict of Columbia , theBahamas ,Guam ,Puerto Rico , theBritish Virgin Islands and theU.S. Virgin Islands ;
•NELICO, domiciled in
states and the
•BHNY, domiciled in
which is a subsidiary of
•BRCD, our reinsurance subsidiary domiciled and licensed in
subsidiary of
•Brighthouse Advisers, serving as investment advisor to certain proprietary funds that are underlying investments under our and MetLife's variable insurance products;
•Brighthouse Services, LLC, an internal services and payroll company;
•Brighthouse Securities, registered as a broker-dealer with theSEC , approved as a member ofFINRA and registered as a broker-dealer and licensed as an insurance agency in all required states; and
•Brighthouse Holdings, LLC ("
of
Prior to discussing our results of operations, we present information that we believe is useful to understanding the discussion of our financial results. This information precedes our results of operations discussion and is most beneficial when read in the sequence presented. A summary of key informational sections is as follows:
•"Executive Summary" provides summarized information regarding our business,
segments and financial results.
•"Risk Management Strategies" describes the Company's risk management strategy to protect against capital markets risks specific to our variable annuity and ULSG businesses. •"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 results in accordance with GAAP.
•"Non-GAAP and Other Financial Disclosures" defines key financial measures presented in our results of operations discussion 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, but different, from 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.
•"Results of Operations" begins with a discussion of our AAR, including a
summary of the changes made to the key assumptions in 2022 and 2021, as well as
the resulting impact on net income (loss) available to shareholders in each
period.
Our Results of Operations discussion and analysis presents a review for the
years ended
these years. Our Results of Operations discussion and analysis for the year
ended
comparisons between the years ended December
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31, 2021 and 2020 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 (our "2021 Annual Report"), which was filed with theSEC onFebruary 24, 2022 , and such discussions are incorporated herein by reference.
Executive Summary
We are one of the largest providers of annuity and life insurance products in theU.S. through multiple independent distribution channels and marketing arrangements with a diverse network of distribution partners. We are organized into three segments: (i) Annuities, (ii) Life and (iii) Run-off, which consists of products that are no longer actively sold and are separately managed. In addition, we report certain of our results of operations in Corporate & Other. See "Business - Segments and Corporate & Other" and Note 2 of the Notes to the Consolidated Financial Statements for further information regarding our segments and Corporate & Other.
Net income (loss) available to shareholders and adjusted earnings, a non-GAAP
financial measure, were as follows:
Years Ended December 31,
2022 2021
(In millions)
Income (loss) available to shareholders before provision for income
tax
$ (281) $ (302) Less: Provision for income tax expense (benefit) (182) (105) Net income (loss) available to shareholders (1) $
(99)
Pre-tax adjusted earnings, less net income (loss) attributable to
noncontrolling interests and preferred stock dividends
$ 675 $ 1,961 Less: Provision for income tax expense (benefit) 18 368 Adjusted earnings$ 657 $ 1,593 __________________
(1)We use the term "net income (loss) available to shareholders" to refer to
"net income (loss) available to
shareholders" throughout the results of operations discussions.
For the year endedDecember 31, 2022 , we had a net loss available to shareholders of$99 million and adjusted earnings of$657 million , compared to a net loss available to shareholders of$197 million and adjusted earnings of$1.6 billion for the year endedDecember 31, 2021 . Net loss available to shareholders for the year endedDecember 31, 2022 was primarily due to increasing long-term interest rates, which resulted in an unfavorable change in the estimated fair value of the freestanding interest rate derivatives we use to hedge our ULSG business and net investment losses reflecting net losses on sales of fixed maturity securities. These unfavorable impacts were partially offset by net favorable changes in the estimated fair value of our guaranteed minimum living benefits ("GMLB") riders ("GMLB Riders") due to market factors and favorable pre-tax adjusted earnings. See "- Non-GAAP and Other Financial Disclosures." See "- Results of Operations" for a detailed discussion of our results. See Note 1 of the Notes to the Consolidated Financial Statements for information regarding the adoption of new accounting pronouncements in 2022.
Risk Management Strategies
We employ risk management strategies to protect against capital markets risk.
These strategies are specific to our variable annuity and ULSG businesses, and
they also include a macro hedge strategy to manage our exposure to interest rate
risk.
Interest Rate Hedging
We are exposed to interest rate risk in most of our products, with the more
significant longer dated exposure residing in our in-force variable annuity
guarantees and ULSG business. Historically, we individually managed the interest
rate risk in these two blocks with hedge targets based on statutory metrics
designed principally to protect the capital of our largest insurance subsidiary,
BLIC.
Since the adoption of VA Reform, the capital metric of combined RBC ratio aligns
with our management metrics and more holistically captures interest rate risk.
We manage the interest rate risk in our variable annuity and ULSG businesses
together, although individual hedge targets still exist for variable annuities
and ULSG. Accordingly, the related portfolio of interest rate derivatives are
managed in the aggregate with rebalancing and trade executions determined by the
net exposure.
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By managing the interest rate exposure on a net basis, we expect to more efficiently manage the derivative portfolio, protect capital and reduce costs. We refer to this aggregated approach to managing interest rate risk as our macro interest rate hedging program. This program may also include hybrid options that have other risk exposure in addition to interest rate exposure.
The gross notional amount and estimated fair value of the derivatives held in
our macro interest rate hedging program were as follows at:
December 31, 2022 December 31, 2021
Gross Notional Estimated Fair Value Gross Notional Estimated Fair Value
Instrument Type Amount (1) Assets Liabilities Amount (1) Assets Liabilities
(In millions)
Interest rate swaps $ 2,330 $ 38 $ 46 $ 1,780 $ 229 $ 17
Interest rate options 28,688 22 232 8,050 83 -
Interest rate forwards 16,848 35 2,387 9,808 627 109
Hybrid options - - - 900 8 -
Total $ 47,866 $ 95 $ 2,665 $ 20,538 $ 947 $ 126
_______________
(1)The gross notional amounts presented do not necessarily represent the
relative economic coverage provided by derivative instruments because certain
positions were closed out by entering into offsetting positions that are not
netted in the above table.
The aggregate interest rate derivatives are then allocated to the variable
annuity guarantee and ULSG businesses based on the hedge targets of the
respective programs as of the balance sheet date. Allocations are primarily for
purposes of calculating certain product specific metrics needed to run the
business which in some cases are still individually measured and to facilitate
the quarterly settlement of reinsurance activity associated with BRCD. We intend
to maintain an adequate amount of liquid investments in the investment
portfolios supporting these businesses to cover any contingent collateral
posting requirements from this hedging strategy.
Variable Annuity Exposure Risk Management
With the adoption of VA Reform, our management of and our hedging strategy associated with our variable annuity business aligns with the regulatory framework. Given this alignment and the fact that we have a large non-variable annuity business, we manage capital metrics on a combined RBC ratio. In support of our target combined RBC ratio of 400% to 450% in normal market conditions, we expect to maintain a capital and exposure risk management program that targets total assets supporting our variable annuity contracts at or above the CTE98 level in normal market conditions. We refer to our target level of assets as our Variable Annuity Target Funding Level. With our risk management focus on the core drivers of our combined RBC ratio, we can also better manage our RBC in stressed market scenarios. See "Glossary" for the definition of CTE98. When setting our hedge target, 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. Shield Annuities are included with variable annuities in our statutory reserve requirements, as well as in our CTE estimates. See "Glossary" for the definition of CTE. 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, as well as on our statutory distributable earnings. We utilize a combination of short-term and longer-term derivative instruments to establish a layered maturity of protection, which we believe will reduce rollover risk during periods of market disruption or higher volatility. We continually review our hedging strategy in the context of our overall capitalization targets as well as monitor the capital markets for opportunities to adjust our derivative positions to manage our variable annuity exposure, as appropriate. Under this strategy, we plan to operate with a first loss position of no more than$500 million . The first loss position is relative to our Variable Annuity Target Funding Level such that the impact on reserves and thus total adjusted capital could be greater than the first loss position. However, under such a scenario there would be an offset in required statutory capital.
We believe the level of our capital protection in down markets provides us
financial flexibility and supports deploying capital for growing long-term,
sustainable shareholder value. However, because our hedging strategy places a
lower priority on offsetting changes to GAAP liabilities, GAAP net income
volatility will likely result when markets are volatile and over
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time potentially impact stockholders' equity. See "Risk Factors - Risks Related to Our Business - Our variable annuity exposure risk management strategy may not be effective, may result in significant volatility in our profitability measures and may negatively affect our statutory capital" and "- Summary of Critical Accounting Estimates."
The gross notional amount and estimated fair value of the derivatives held in
our variable annuity hedging program, as well as the interest rate hedges
allocated from our macro interest rate hedging program, were as follows at:
December 31, 2022 December 31, 2021
Gross Notional Estimated Fair Value Gross Notional Estimated Fair Value
Instrument Type Amount (1) Assets Liabilities Amount (1) Assets Liabilities
(In millions)
Equity index options $ 13,862 $ 525 $ 350 $ 20,695 $ 889 $ 876
Equity total return swaps 32,909 520 747 32,719 493 588
Equity variance swaps - - - 281 9 1
Interest rate swaps 2,330 38 46 1,780 229 17
Interest rate options 27,088 21 126 7,450 28 -
Interest rate forwards 10,565 35 1,255 4,440 218 13
Hybrid options - - - 900 8 -
Total $ 86,754 $ 1,139 $ 2,524 $ 68,265 $ 1,874 $ 1,495
_______________
(1)The gross notional amounts presented do not necessarily represent the
relative economic coverage provided by option instruments because certain
positions were closed out by entering into offsetting positions that are not
netted in the above table.
ULSG Market Risk Exposure Management
The ULSG block includes the business retained by our insurance subsidiaries and the portion of it that is ceded to BRCD for providing redundant, non-economic reserve financing support. The primary market risk associated with our ULSG block is the uncertainty around the future levels ofU.S. interest rates and bond yields. To help ensure we have sufficient assets to meet future ULSG policyholder obligations, we have employed an actuarial approach based upon ULSG CFT to set our ULSG asset requirement target for BRCD, which reinsures the majority of the ULSG business written by our insurance subsidiaries. For the business retained by our insurance subsidiaries, 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 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 include scenarios that are more conservative than those required under GAAP, which assumes a long-term upward mean reversion of interest rates and best estimate actuarial assumptions without additional provisions for adverse deviation. 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 supporting statutory reserves and capital in the ULSG portfolios of our insurance subsidiaries and BRCD and (ii) interest rate derivative instruments allocated from the macro interest rate hedging program to mitigate ULSG interest rate exposures. The net statutory reserves for the ULSG business in our insurance subsidiaries and BRCD (which is in part supported by reserve financings) were$23.4 billion and$22.8 billion for the years endedDecember 31, 2022 and 2021, respectively. Our ULSG Target is sensitive to the actual and future expected level of long-termU.S. interest rates. If interest rates fall, our ULSG Target increases. Likewise, if interest rates rise, our ULSG Target declines. The interest rate derivatives allocated to ULSG Assets 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. We closely monitor the sensitivity of our ULSG Assets and ULSG Target to changes in interest rates. We seek to maintain ULSG Assets above the ULSG Target across a wide range of interest rate scenarios. AtDecember 31, 2022 , BRCD assets exceeded the ULSG CFT requirement. In addition, our macro interest rate hedging program is designed to help us maintain ULSG Assets above the ULSG Target when interest rates decline. Maintaining ULSG Assets that closely match our ULSG Target supports our target combined RBC ratio of 400% to 450% in normal market conditions. 64
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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.
Changes in Accounting Standards
Our financial statements are subject to the application of GAAP, which is
periodically revised by the FASB. The FASB issued an accounting standards update
("ASU"), effective January 1, 2023 , that results in significant changes to the
accounting for long-duration insurance contracts, including a requirement that
all variable annuity guarantees be considered market risk benefits and measured
at fair value. LDTI is expected to change the pattern and market sensitivity of
the Company's earnings. See Note 1 of the Notes to the Consolidated Financial
Statements for a discussion of the estimated impacts. See also "Risk Factors -
Risks Related to Our Business - Changes in accounting standards issued by the
Financial Accounting Standards Board may adversely affect our financial
statements."
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 or financial asset classes can have an adverse effect on us. 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 profitability for variable annuities and 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 ofU.S. economic activity. A sustained or material increase in inflation could also affect our business in several ways. During inflationary periods, the value of fixed income investments falls which could increase realized and unrealized losses. Interest rates have increased and may continue to increase due to central bank policy responses to combat inflation, which may positively impact our business in certain respects, but could also increase the risk of a recession or an equity market downturn and could negatively impact various portions of our business, including our investment portfolio. Inflation also increases our expenses (including, among others, for labor and third-party services), potentially putting pressure on profitability if such costs cannot be passed through to policyholders 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 and inhibit revenue growth. See "Risk Factors - Economic Environment and Capital Markets-Related Risks - If difficult conditions in the capital markets and theU.S. economy generally persist or are perceived to persist, they may materially adversely affect our business and results of operations" and "Risk Factors - Risks Related to our Investment Portfolio - Our investment portfolio is subject to significant financial risks both in theU.S. and global financial markets, including credit risk, interest rate risk, inflation risk, market valuation risk, liquidity risk, real estate risk, derivatives risk, and other factors outside our control, the occurrence of any of which could have a material adverse effect on our financial condition and results of operations." The above factors affect our expectations regarding future margins. We review our long-term assumptions about capital markets returns and interest rates, along with other assumptions such as contract holder behavior, as part of our annual actuarial review. As additional company specific 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.
COVID-19 Pandemic
We continue to closely monitor developments related to the COVID-19 pandemic,
which has negatively impacted us in certain respects, as discussed below. At
this time, it continues to not be possible to estimate the severity, duration
and frequency of any additional "waves" or emerging variants of COVID-19. It
likewise remains not possible to predict or estimate the longer-term effects of
the pandemic, or any actions taken to contain or address the pandemic, on the
economy at large and on our business, financial condition, results of operations
and prospects, including the impact on our investment portfolio and our ratings,
or the need for us to revisit or revise any targets we may provide to the
markets or any aspects of our business model.
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We continue to closely monitor all aspects of our business, including but not limited to, levels of sales and claims activity, policy lapses or surrenders, and payments of premiums. We have observed varying degrees of impact in these areas, and we have taken prudent and proportionate measures to address such impacts, though such impacts have not been material throughDecember 31, 2022 . Additionally, while circumstances resulting from the COVID-19 pandemic have not materially impacted services we receive from third-party vendors or led to the identification of new loss contingencies or any increases in existing loss contingencies, there can be no assurance that any future impact from the COVID-19 pandemic, including, without limitation, with respect to revenues and expenses associated with our products, services we receive from third-party vendors, or loss contingencies, will not be material. We continue to closely monitor this evolving situation as we remain focused on ensuring the health and safety of our employees, on supporting our partners and customers as usual and on mitigating potential adverse impacts to our business.
Demographics
We believe that demographic trends in theU.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. By focusing our product development and marketing efforts to meeting the needs of certain targeted customer segments identified as part of our strategy, we will be able to focus on offering a smaller number of products that we believe are appropriately priced given current economic conditions. We believe this strategy will benefit our expense ratio thereby increasing our profitability.
Competitive Environment
The life insurance industry remains highly fragmented and competitive. See "Business - Competition." 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 insurance subsidiaries and BRCD are regulated primarily at the state level, with some products and services also subject to federal regulation. In addition, BHF and its insurance subsidiaries are subject to regulation under the insurance holding company laws of variousU.S. jurisdictions. Furthermore, some of our operations, products and services are subject to ERISA, consumer protection laws, securities, broker-dealer and investment advisor regulations, as well as environmental and unclaimed property laws and regulations. See "Business - Regulation," as well as "Risk Factors - Regulatory and Legal Risks."
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 Financial Statements.
The most critical estimates include those used in determining:
•liabilities for future policy benefits;
•amortization of DAC;
•estimated fair values of freestanding derivatives and the recognition and
estimated fair value of embedded derivatives requiring bifurcation; and
•measurement of income taxes and the valuation of deferred tax assets.
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 Financial Statements.
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Liability for Future Policy Benefits
Future policy benefits for traditional long-duration insurance contracts (term, whole life insurance and income annuities) are payable over an extended period of time and the related liabilities are equal to the present value of future expected benefits to be paid, reduced by the present value of future expected net premiums. Assumptions used to measure the liability are based on the Company's experience and include a margin for adverse deviation. The most significant assumptions used in the establishment of liabilities for future policy benefits are mortality, benefit election and utilization, withdrawals, policy lapse and investment returns. 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 are not updated unless a premium deficiency exists. Utilizing these assumptions, liabilities are established for each line of business. If experience is less favorable than assumed and a premium deficiency exists, DAC may be reduced, or additional insurance liabilities established, resulting in a reduction in earnings. Future policy benefit liabilities for GMDBs and certain GMIBs relating to 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. The most significant assumptions for variable annuity guarantees included in future policyholder benefits are projected general account and separate account investment returns, as well as policyholder behavior, including mortality, benefit election and utilization, and withdrawals. Future policy benefit liabilities for ULSG are determined by estimating the expected value of death benefits payable when the account balance is projected to be zero using a range of scenarios and recognizing those benefits ratably over the contract period based on total expected assessments. The Company also maintains a profit followed by losses reserve on universal life insurance with secondary guarantees, determined by projecting future earnings and establishing a liability to offset losses that are expected to occur in later years. The most significant assumptions used in estimating our ULSG liabilities are the general account rate of return, premium persistency, mortality and lapses, which are reviewed and updated at least annually. The measurement of our ULSG liabilities can be significantly impacted by changes in our expected general account rate of return, which is driven by our assumption for long-term treasury yields. Our practice of projecting treasury yields uses a mean reversion approach that assumes that long-term interest rates are less influenced by short-term fluctuations and are only changed when sustained interim deviations are expected. As part of our 2022 AAR, we increased our projected long-term general account earned rate, as well as our mean reversion rate over a period of ten years from 3.00% to 3.50%, which resulted in a decrease in our ULSG liabilities of$107 million . We also updated other assumptions related to ULSG, see "- Results of Operations - Annual Actuarial Review" for more information. We regularly review our assumptions supporting our estimates of all actuarial liabilities for future policy benefits. For universal life insurance and variable annuity product guarantees, assumptions are updated periodically, whereas for traditional long-duration insurance contracts, assumptions are established at inception and not updated unless a premium deficiency exists. We also review our liability projections 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. We aggregate insurance contracts by product and segment in assessing whether a premium deficiency or profits followed by losses exists. Differences between actual experience and the assumptions used in pricing our policies and guarantees, as well as adjustments to the related liabilities, result in changes to earnings. See Note 1 of the Notes to the Consolidated Financial Statements for additional information on our accounting policy relating to variable annuity guarantees and the liability for future policy benefits.
Deferred Policy Acquisition Costs
DAC represents deferred costs that relate directly to the successful acquisition or renewal of insurance contracts. The recovery of DAC is dependent upon the future profitability of the related business. DAC related to deferred annuities and universal life insurance contracts is amortized based on expected future gross profits, which is determined by using assumptions consistent with measuring the related liabilities. DAC balances and amortization for variable annuity and universal life insurance contracts can be significantly impacted by changes in expected future gross profits related to projected separate account rates of return. Our practice of determining changes in projected separate account returns assumes that long-term appreciation in equity markets is not changed by short-term market fluctuations and 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 amortization with an offset to our unearned revenue liability which nets to approximately$260 million . We use a mean reversion approach to separate 67
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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 variable annuity and variable universal life insurance contracts is in the 6.00-7.00% range. We also generally review other long-term assumptions underlying the projections of expected future gross profits on an annual basis. These assumptions primarily relate to general account investment returns, mortality, in-force or persistency, benefit elections and utilization, and withdrawals. Assumptions used in the calculation of expected future gross profits which have significantly changed are updated annually. If the update of assumptions causes expected future gross profits to increase, DAC 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 DAC balances are also impacted by replacing expected future gross profits with actual gross profits in each reporting period, including changes in annuity embedded derivatives and the related nonperformance risk. When the change in expected future 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 Notes 1 and 4 of the Notes to the Consolidated Financial Statements for
additional information relating to DAC accounting policy and amortization.
Derivatives
We use freestanding derivative instruments to hedge various capital markets 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) available to shareholders 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 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 Financial Statements for additional information on significant inputs into the OTC derivative pricing models and credit risk adjustment.
Embedded Derivatives in Variable Annuity Guarantees
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 markets scenarios using observable risk-free rates and implied equity volatilities. 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 markets inputs, as well as changes in our nonperformance risk may result in significant fluctuations in the estimated fair value of the guarantees that could have a material impact on 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 Financial Statements for additional information relating to the determination of the accounting model.
Risk margins are established to capture the non-capital markets 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
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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.
Assumptions for embedded derivatives are reviewed at least annually, and if they
change significantly, the estimated fair value is adjusted by a cumulative
charge or credit to net income.
See Notes 7 and 8 of the Notes to the Consolidated Financial Statements for
additional information on our embedded derivatives and the determination of
their fair values.
Embedded Derivatives in Index-Linked Annuities
The Company issues and assumes through reinsurance index-linked annuities that contain equity crediting rates accounted for as an embedded derivative. The crediting rates are measured at estimated fair value which is determined using a combination of an option pricing methodology and an option-budget approach. The estimated fair value includes capital markets and actuarial policyholder behavior and biometric assumptions, including expectations for renewals at the end of the term period. Market conditions, including interest rates and implied volatilities, and variations in actuarial assumptions and risk margins, as well as changes in our nonperformance risk adjustment may result in significant fluctuations in the estimated fair value that could have a material impact on net income.
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 is captured as a spread over the
risk-free rate in determining the discount rate to discount the cash flows of
the liability.
The spread over the risk-free rate is based on our creditworthiness taking into
consideration publicly available information relating to spreads in the
secondary market for BHF'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 BHF.
The following table illustrates the impact that a range of reasonably likely
variances in BHF's credit spread would have on our consolidated 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
consolidated 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.
Balance Sheet Carrying Value at
December 31, 2022
Policyholder
Account Balances DAC and VOBA
(In millions)
100% increase in our credit spread $ 1,064 $ 46
As reported $ 1,455 $ 219
50% decrease in our credit spread $ 1,733 $ 343
Income Taxes
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
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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 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.
See Notes 1 and 13 of the Notes to the Consolidated Financial Statements for
additional information on our income taxes.
Non-GAAP and Other Financial Disclosures
Our definitions of non-GAAP and other financial measures may differ from those
used by other companies.
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. Adjusted earnings is used by management to evaluate performance and facilitate comparisons to industry results. We believe the presentation of adjusted earnings, as the Company measures it for management purposes, enhances the understanding of our performance by the investor community by highlighting the results of operations and the underlying profitability drivers of our business. Adjusted earnings should not be viewed as a substitute for net income (loss) available toBrighthouse Financial, Inc.'s common shareholders, 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) available toBrighthouse Financial, Inc.'s common shareholders. Adjusted earnings, which may be positive or negative, focuses on our primary businesses by excluding the impact of market volatility, which could distort trends.
The following are significant items excluded from total revenues in calculating
adjusted earnings:
•Net investment gains (losses);
•Net derivative gains (losses) except earned income 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
•Certain variable annuity GMIB fees ("GMIB Fees").
The following are significant items excluded from total expenses in calculating
adjusted earnings:
•Amounts associated with benefits related to GMIBs ("GMIB Costs");
•Amounts associated with periodic crediting rate adjustments based on the total
return of a contractually referenced pool of assets ("Market Value
Adjustments"); and
•Amortization of DAC and value of business acquired ("VOBA") related to (i) net
investment gains (losses), (ii) net derivative gains (losses) and (iii) GMIB
Fees and GMIB Costs.
The tax impact of the adjustments discussed above is calculated net of the
statutory tax rate, which could differ from our effective tax rate.
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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 (i) Universal life and investment-type product 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 and amortization of
deferred gains on reinsurance.
(ii) Net investment spread (ii) Net investment 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)
Insurance-related activities (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
gains on reinsurance) plus the pass through of performance
of ceded separate account assets.
(iv) Amortization of DAC and VOBA (iv) Amortization of DAC and VOBA (excluding amounts related to
(a) net investment gains (losses), (b) net derivative gains
(losses) and (c) GMIB Fees and GMIB Costs).
(v) Other expenses, net of DAC capitalization (v)
Other expenses reduced by capitalization of DAC.
(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 Financial
Statements.
Adjusted Net Investment Income
We present adjusted net investment income to measure our performance for management purposes, and we believe it enhances the understanding of our investment portfolio results. Adjusted net investment income represents GAAP net investment income plus Investment Hedge Adjustments. For a reconciliation of adjusted net investment income to net investment income, the most directly comparable GAAP measure, see table note (3) to the summary yield table located in "- Investments - Current Environment - Investment Portfolio Results."
Other Financial Disclosures
Similar to adjusted net investment income, we present net investment income
yields as a performance measure we believe enhances the understanding of our
investment portfolio results. Net investment income yields are calculated on
adjusted net investment income as a percentage of average quarterly asset
carrying values. Asset carrying values exclude unrealized gains (losses),
collateral received in connection with our securities lending program,
freestanding derivative assets and collateral received from derivative
counterparties. Investment fee and expense yields are calculated as a percentage
of average quarterly asset estimated fair values. Asset estimated fair values
exclude collateral received in connection with our securities lending program,
freestanding derivative assets and collateral received from derivative
counterparties.
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Results of Operations
Index to Results of Operations
Page
Annual Actuarial Review 73
Consolidated Results for the Years Ended December 31, 2022 and 2021 74
Reconciliation of Net Income (Loss) Available to Shareholders to Adjusted
Earnings
76
Consolidated Results for the Years Ended
Earnings
77
Segments and Corporate & Other Results for the Years Ended
2021 - Adjusted Earnings
78 GMLB Riders for the Years EndedDecember 31, 2022 and 2021 83 72
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Annual Actuarial Review
We typically conduct our AAR in the third quarter of each year. As a result of the 2022 AAR, we increased the long-term general account earned rate, driven by an increase in our mean reversion rate from 3.00% to 3.50%, which had the largest impact on our ULSG business. For our variable annuity business, in addition to the update to the long-term general account earned rate, we updated fund allocations, market volatility and maintenance expenses, as well as assumptions regarding policyholder behavior, including mortality, lapses and withdrawals. For our life business, in addition to the update to the long-term general account earned rate, we updated assumptions regarding policyholder behavior, including mortality, premium persistency, lapses, withdrawals and maintenance expenses. In 2021, the most significant impact from our AAR was updating assumptions regarding policyholder behavior, including mortality, premium persistency, lapses, withdrawals and maintenance expenses. We also increased our long-term general account earned rate, while maintaining our mean reversion rate at 3.00%. These updates had the largest impact on our ULSG business. For our variable annuity business, we updated our annuitization and separate account assumptions, including fund fees, allocations and volatility, in addition to the policyholder behavior assumptions described above.
The impact of the AAR on income (loss) available to shareholders before
provision for income tax was as follows:
Years Ended December 31,
2022 2021
(In millions)
GMLBs $ (94) $ (42)
Included in pre-tax adjusted earnings:
Other annuity business (57) 4
Life business (25) 15
Run-off 162 (113)
Total included in pre-tax adjusted earnings 80 (94)
Total impact on income (loss) available to shareholders before
provision for income tax $ (14) $ (136)
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Consolidated Results for the Years Ended
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.
Years Ended December 31,
2022 2021
(In millions)
Revenues
Premiums $ 662 $ 707
Universal life and investment-type product policy fees 3,141 3,636
Net investment income 4,138 4,881
Other revenues 476 446
Net investment gains (losses) (248) (59)
Net derivative gains (losses) 304 (2,469)
Total revenues 8,473 7,142
Expenses
Policyholder benefits and claims 4,165 3,443 Interest credited to policyholder account balances 1,439 1,312 Capitalization of DAC (425) (493) Amortization of DAC and VOBA 956 144 Interest expense on debt 153 163 Other expenses 2,357 2,781 Total expenses 8,645 7,350 Income (loss) before provision for income tax (172) (208) Provision for income tax expense (benefit) (182) (105) Net income (loss) 10 (103) Less: Net income (loss) attributable to noncontrolling interests 5 5 Net income (loss) attributable to Brighthouse Financial, Inc. 5 (108) Less: Preferred stock dividends 104 89
Net income (loss) available to
shareholders
The components of net income (loss) available to shareholders were as follows:
Years Ended December 31,
2022 2021
(In millions)
GMLB Riders $ 1,028 $ (2,166)
Other derivative instruments (1,814) (57)
Net investment gains (losses) (248) (59)
Other adjustments 78 19
Pre-tax adjusted earnings, less net income (loss) attributable to
noncontrolling interests and preferred stock dividends
675 1,961
Income (loss) available to shareholders before provision for income
tax
(281) (302) Provision for income tax expense (benefit) (182) (105) Net income (loss) available to shareholders
GMLB Riders. The guaranteed minimum living benefits reflect (i) changes in the
carrying value of GMLB liabilities, including GMIBs, GMWBs and GMABs, as well as
Shield Annuities; (ii) changes in the estimated fair value of the related
hedges, as well as any ceded reinsurance of the liabilities; (iii) the fees
earned from the GMLB liabilities; and (iv) the effects of DAC amortization
related to the preceding components.
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 estimated fair value are recognized in net derivative gains (losses).
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Freestanding Derivatives. We have freestanding derivatives that economically hedge certain invested assets and insurance liabilities. The majority of this hedging activity, excluding the GMLB Riders, is focused in the following areas:
•as part of the Company's macro interest rate hedging program, the use of
interest rate swaps, swaptions and interest rate forwards in connection with
ULSG;
•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 interest rate forwards hedging reinvestment risk from maturing assets with higher yields than currently available in the market that support long-dated liabilities;
•use of foreign currency swaps when we hold fixed maturity securities
denominated in foreign currencies that are matching insurance liabilities
denominated in
•use of equity index options to hedge index-linked annuity products against
adverse changes in equity markets.
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.
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 estimated fair value recognized in net income (loss) in the period in which they occur. In addition, the changes in liability values of our fixed index-linked annuity products that result from changes in the underlying equity index are accounted for as embedded derivatives.
Pre-tax Adjusted Earnings. See "- Non-GAAP and Other Financial Disclosures -
Non-GAAP Financial Disclosures - Adjusted Earnings."
Year Ended
Loss available to shareholders before provision for income tax was$281 million ($99 million , net of income tax), a lower loss of$21 million ($98 million , net of income tax) from a loss available to shareholders before provision for income tax of$302 million ($197 million , net of income tax) in the prior period.
The increase in income before provision for income tax was driven by the
following favorable item:
•gains from GMLB Riders, see "- GMLB Riders for the Years Ended
2022
The increase in income before provision for income tax was partially offset by
the following unfavorable items:
•the unfavorable impact of long-term benchmark interest rates on interest rate derivatives used to manage interest rate exposure in our ULSG business, as the long-term benchmark interest rate increased more in the current period than in the prior period;
•lower pre-tax adjusted earnings, as discussed in greater detail below; and
•net investment losses reflecting higher current period net losses on sales of
fixed maturity securities.
The provision for income tax, expressed as a percentage of income (loss) before
provision for income tax, resulted in an effective tax rate of 106% in the
current period compared to 50% in the prior period. The increase in the
effective tax rate was driven by lower pre-tax adjusted earnings, as discussed
in greater detail below. Our effective tax rate differs from the statutory tax
rate primarily due to the impacts of the dividends received deduction, tax
credits and current period non-recurring items.
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Reconciliation of Net Income (Loss) Available to Shareholders to Adjusted
Earnings
The reconciliation of net income (loss) available to shareholders to adjusted
earnings was as follows:
Year Ended December 31, 2022
Corporate &
Annuities Life Run-off Other Total
(In millions)
Net income (loss) available to shareholders
Add: Provision for income tax expense
(benefit)
208 1 470 (861) (182) Income (loss) available to shareholders before provision for income tax 1,969 (7) (2,182) (61) (281) Less: GMLB Riders 1,028 - - - 1,028 Less: Other derivative instruments (36) 2 (1,823) 43 (1,814) Less: Net investment gains (losses) (149) (32) (78) 11 (248) Less: Other adjustments (8) - 86 - 78 Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends 1,134 23 (367) (115) 675 Less: Provision for income tax expense (benefit) 208 1 (78) (113) 18 Adjusted earnings$ 926 $ 22 $ (289) $ (2)$ 657 Year Ended December 31, 2021 Corporate & Annuities Life Run-off Other Total (In millions)
Net income (loss) available to shareholders
Add: Provision for income tax expense
(benefit)
347 75 (538) 11 (105) Income (loss) available to shareholders before provision for income tax (294) 367 150 (525) (302) Less: GMLB Riders (2,166) - - - (2,166) Less: Other derivative instruments 140 7 (221) 17 (57) Less: Net investment gains (losses) (72) - 114 (101) (59) Less: Other adjustments 8 (2) 13 - 19 Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends 1,796 362 244 (441) 1,961 Less: Provision for income tax expense (benefit) 347 75 53 (107) 368 Adjusted earnings$ 1,449 $ 287 $ 191 $ (334) $ 1,593 76
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Consolidated Results for the Years Ended
Earnings
The components of adjusted earnings were as follows:
Years Ended December 31,
2022 2021
(In millions)
Fee income $ 3,375 $ 3,836
Net investment spread 2,054 2,858
Insurance-related activities (2,093) (1,970)
Amortization of DAC and VOBA (467) (218)
Other expenses, net of DAC capitalization (2,085) (2,451)
Less: Net income (loss) attributable to noncontrolling interests
and preferred stock dividends
109 94
Pre-tax adjusted earnings, less net income (loss) attributable to
noncontrolling interests and preferred stock dividends
675 1,961 Provision for income tax expense (benefit) 18 368 Adjusted earnings $ 657$ 1,593
Year Ended
Adjusted earnings were
million
Key net unfavorable impacts were:
•lower net investment spread due to:
•lower returns on other limited partnerships compared to the prior period;
partially offset by
•higher average invested assets resulting from positive net flows in the general
account; and
•higher average invested long-term assets from funding agreements issued in
connection with our institutional spread margin business;
•lower net fee income due to:
•lower asset-based fees resulting from lower average separate account balances,
a portion of which is offset in other expenses;
•higher ceded cost of insurance fees consistent with unfavorable equity market
returns in our Life segment, which is mostly offset in other expenses; and
•an adjustment in the prior period related to modeling improvements resulting
from an actuarial system conversion in our Life segment;
partially offset by
•higher unearned revenue amortization resulting from changes made in connection
with the AAR in our Life segment;
•higher net amortization of DAC and VOBA due to:
•the impact on future gross profits from lower separate account returns and
unfavorable equity market performance;
•an unfavorable impact resulting from changes in assumptions made in connection
with the AAR in our Life and Annuities segments; and
•an adjustment in the prior period related to modeling improvements resulting
from an actuarial system conversion in our Annuities segment;
partially offset by
•an adjustment in the current period related to actuarial model refinements in
Corporate & Other; and
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•higher net costs associated with insurance-related activities due to:
•higher paid claims, net of reinsurance, in our Annuities and Run-off segments;
•a net increase in GMDB liabilities resulting from unfavorable equity market
performance; and
•higher liabilities in our ULSG business resulting from the impact of new
reinsurance agreements entered into in the current period;
partially offset by
•a net decrease in liability balances resulting from changes made in connection
with the AAR in our Run-off and Annuities segments;
•an adjustment in the prior period related to modeling improvements resulting
from an actuarial system conversion in our Run-off segment; and
•an adjustment in the current period related to actuarial model refinements in
Corporate & Other.
Key net favorable impacts were:
•lower other expenses due to:
•lower asset-based variable annuity expenses resulting from lower average
separate account balances, a portion of which is mostly offset in fee income;
•higher premium paid in excess of debt principal related to the repurchase of
senior notes in the prior period;
•lower transition services agreement expenses;
•higher ceded cost of insurance expenses consistent with unfavorable equity
market returns in our Life segment, which is offset in fee income;
•lower interest expenses in the current period related to prior year tax
matters;
•lower establishment costs; and
•lower deferred compensation and operational expenses;
partially offset by
•the settlement of a reinsurance-related matter in the current period.
The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 2% in the current period compared to 18% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deduction, tax credits and current period non-recurring items.
Segments and Corporate & Other Results for the Years Ended
2021 - Adjusted Earnings
Annuities
The components of adjusted earnings for our Annuities segment were as follows:
Years Ended December 31,
2022 2021
(In millions)
Fee income $ 2,487 $ 2,857
Net investment spread 1,207 1,188
Insurance-related activities (792) (410)
Amortization of DAC and VOBA (351) (185)
Other expenses, net of DAC capitalization (1,417)
(1,654)
Pre-tax adjusted earnings 1,134
1,796
Provision for income tax expense (benefit) 208 347 Adjusted earnings $ 926$ 1,449 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- 78
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based commissions. The changes in our variable annuities separate account balances are presented in the table below. Variable annuities separate account balances decreased for the year endedDecember 31, 2022 , driven by unfavorable investment performance, negative net flows and policy charges. Year Ended December 31, 2022 (1) (In millions) Balance, beginning of period $ 105,197 Premiums and deposits 1,240 Withdrawals, surrenders and contract benefits (7,619) Net flows (6,379) Investment performance (18,583) Policy charges (2,285) Net transfers from (to) general account (152) Balance, end of period $ 77,798 Average balance $ 86,467 _______________
(1)Includes income annuities for which separate account balances at
2022
Year Ended
Adjusted earnings were
million
Key unfavorable impacts were:
•higher costs associated with insurance-related activities due to:
•a net increase in GMDB liabilities resulting from unfavorable equity market
performance;
•higher volume and severity of GMDB claims; and
•an increase in GMDB liabilities, partially offset by a favorable adjustment to deferred sales inducements, resulting primarily from changes in policyholder behavior and capital markets assumptions, as well as model refinements, made in connection with the AAR;
•lower asset-based fees resulting from lower average separate account balances,
a portion of which is offset in other expenses; and
•higher amortization of DAC and VOBA due to:
•an adjustment in the prior period related to modeling improvements resulting
from an actuarial system conversion;
•the impact on future gross profits from lower separate account returns and
unfavorable equity market performance; and
•an unfavorable impact primarily resulting from changes in policyholder behavior and capital markets assumptions, as well as model refinements made in connection with the AAR. Key favorable impacts were:
•lower other expenses due to:
•lower asset-based variable annuity expenses resulting from lower average
separate account balances, a portion of which is offset in fee income;
•lower deferred compensation expenses; and
•lower transition services agreement expenses.
The provision for income tax, expressed as a percentage of pre-tax adjusted
earnings, resulted in an effective tax rate of 18% in the current period
compared to 19% in the prior period. Our effective tax rate differs from the
statutory tax rate primarily due to the impact of the dividends received
deduction.
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Life
The components of adjusted earnings for our Life segment were as follows:
Years Ended December 31,
2022 2021
(In millions)
Fee income $ 248 $ 335
Net investment spread 141 360
Insurance-related activities (121) (131)
Amortization of DAC and VOBA (127) (22)
Other expenses, net of DAC capitalization (118)
(180)
Pre-tax adjusted earnings 23
362
Provision for income tax expense (benefit) 1 75 Adjusted earnings $ 22$ 287
Year Ended
Adjusted earnings were
million
Key net unfavorable impacts were:
•lower net investment spread due to lower returns on other limited partnerships
compared to the prior period;
•higher amortization of DAC and VOBA due to:
•an unfavorable impact primarily resulting from changes in policyholder behavior and capital markets assumptions, as well as model refinements made in connection with the AAR; and
•the impact on gross profits from lower separate account returns;
partially offset by
•an adjustment in the prior period related to modeling improvements resulting
from an actuarial system conversion; and
•lower net fee income due to:
•higher ceded cost of insurance fees consistent with unfavorable equity market
returns, which is mostly offset in other expenses;
•an adjustment in the prior period related to modeling improvements resulting
from an actuarial system conversion; and
•higher ceded cost of insurance fees resulting from the impact of new
reinsurance agreements entered into in the current period;
partially offset by
•higher unearned revenue amortization primarily resulting from changes in
policyholder behavior assumptions made in connection with the AAR.
Key favorable impacts were:
•lower other expenses due to:
•higher ceded cost of insurance expenses consistent with unfavorable equity
market returns, which is mostly offset in fee income;
•lower transition services agreement expenses; and
•lower deferred compensation and operational expenses.
The provision for income tax, expressed as a percentage of pre-tax adjusted
earnings, resulted in an effective tax rate of 4% in the current period compared
to 21% in the prior period. Our effective tax rate differs from the statutory
tax rate primarily due to the impact of the dividends received deduction.
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Run-off
The components of adjusted earnings for our Run-off segment were as follows:
Years Ended December 31,
2022 2021
(In millions)
Fee income $ 640 $ 644
Net investment spread 521 1,236
Insurance-related activities (1,235) (1,445)
Amortization of DAC and VOBA - -
Other expenses, net of DAC capitalization (293)
(191)
Pre-tax adjusted earnings (367)
244
Provision for income tax expense (benefit) (78) 53 Adjusted earnings $ (289)$ 191
Year Ended
Adjusted earnings were a loss of
of
Key net unfavorable impacts were:
•lower net investment spread due to lower returns on other limited partnerships
compared to the prior period; and
•higher other expenses due to:
•the settlement of a reinsurance-related matter in the current period;
partially offset by
•lower transition services agreement expenses.
Key net favorable impacts were:
•lower net costs associated with insurance-related activities, primarily in our
ULSG business, due to:
•a decrease in liability balances primarily resulting from changes in
policyholder behavior and capital markets assumptions, as well as model
refinements made in connection with the AAR; and
•an adjustment in the prior period related to modeling improvements resulting
from an actuarial system conversion;
partially offset by
•higher liabilities resulting from the impact of new reinsurance agreements on
certain ULSG business entered into in the current period; and
•higher paid claims, net of reinsurance.
The provision for income tax, expressed as a percentage of pre-tax adjusted
earnings, resulted in an effective tax rate of 21% in the current period
compared to 22% in the prior period. Our effective tax rate differs from the
statutory tax rate primarily due to the impact of the dividends received
deduction.
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Corporate & Other
The components of adjusted earnings for Corporate & Other were as follows:
Years Ended December 31,
2022 2021
(In millions)
Fee income $ - $ -
Net investment spread 185 74
Insurance-related activities 55 16
Amortization of DAC and VOBA 11 (11)
Other expenses, net of DAC capitalization (257) (426)
Less: Net income (loss) attributable to noncontrolling interests
and preferred stock dividends
109 94
Pre-tax adjusted earnings, less net income (loss) attributable to
noncontrolling interests and preferred stock dividends
(115) (441) Provision for income tax expense (benefit) (113) (107) Adjusted earnings$ (2) $ (334)
Year Ended
Adjusted earnings were a loss of
of
Key favorable impacts were:
•lower other expenses due to:
•higher premium paid in excess of debt principal related to the repurchase of
senior notes in the prior period;
•lower interest expenses in the current period related to prior year tax
matters; and
•lower establishment costs;
•higher net investment spread due to higher average invested long-term assets
from funding agreements issued in connection with our institutional spread
margin business;
•lower costs associated with insurance-related activities due to:
•an adjustment in the current period related to actuarial model refinements; and
•lower paid claims, net of reinsurance; and
•lower amortization of DAC and VOBA due to an adjustment in the current period
related to actuarial model refinements.
Key unfavorable impact was:
•higher preferred stock dividends in the current period.
The provision for income tax, expressed as a percentage of pre-tax adjusted
earnings, resulted in a higher effective tax rate in the current period compared
to the prior period. Our effective tax rate differs from the statutory tax rate
primarily due to the impacts of the dividends received deduction, tax credits
and current period non-recurring items. We believe the effective tax rate for
Corporate & Other is not generally meaningful, neither on a standalone basis nor
for comparison to prior periods, since taxes for Corporate & Other are derived
from the difference between the overall consolidated effective tax rate and
total taxes for the combined operating segments.
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GMLB Riders for the Years Ended
The overall impact on income (loss) available to shareholders before provision
for income tax from the performance of GMLB Riders, which includes (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, was as follows:
Years Ended December 31,
2022 2021
(In millions)
Liabilities $ 2,292 $ (1,832)
Hedges (1,551) (1,130)
Ceded reinsurance (66) (96)
Fees (1) 834 828
GMLB DAC (481) 64
Total GMLB Riders $ 1,028 $ (2,166)
_______________
(1)Excludes living benefit fees, included as a component of adjusted earnings,
of $51 million and $60 million for the years ended December 31, 2022 and 2021,
respectively.
GMLB Liabilities. Liabilities reported as part of GMLB Riders ("GMLB
Liabilities") include (i) guarantee rider benefits accounted for as embedded
derivatives, (ii) guarantee rider benefits accounted for as insurance and (iii)
Shield Annuities embedded derivatives. Liabilities related to guarantee rider
benefits 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
or sustained downturns in equity markets, increased equity volatility, or
reduced interest rates could result in an increase in the valuation of these
liabilities. An increase in these liabilities would result in a decrease to our
net income (loss) available to shareholders, which could be significant. Shield
Annuities provide the contract holder the ability to participate in the
appreciation of certain financial markets up to a stated level, while offering
protection from a portion of declines in the applicable indices or benchmark. We
believe that Shield Annuities provide us with risk offset to liabilities related
to guarantee rider benefits.
GMLB Hedges and Reinsurance. We enter into freestanding derivatives to hedge the
market risks inherent in the GMLB Liabilities. Generally, the same market
factors that impact the estimated fair value of the guarantee rider embedded
derivatives impact the value of the hedges, though in the opposite direction.
However, the changes in value of the GMLB Liabilities and related hedges may not
be symmetrical and the divergence could be significant due to certain factors,
such as the guarantee riders accounted for as insurance are not recognized at
estimated fair value and there are unhedged risks within the GMLB Liabilities.
We may also use reinsurance to manage our exposure related to the GMLB
Liabilities.
GMLB Fees. We earn fees from the guarantee rider benefits, 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 guarantee riders to fund the reserves, future claims and costs associated
with the hedges of market risks inherent in these liabilities. For guarantee
rider embedded derivatives, the future fees are included in the estimated fair
value of the embedded derivative liabilities, with changes recorded in net
derivative gains (losses). For guarantee rider benefits accounted for as
insurance, while the related fees do affect the valuation of these liabilities,
they are not included in the resulting liability values, but are recorded
separately in universal life and investment-type product policy fees.
GMLB DAC. Changes in the estimated fair value of GMLB Liabilities that are
accounted for as embedded derivatives result in a corresponding recognition of
DAC amortization that generally has an inverse effect on net income (loss),
which we refer to as the DAC offset. While the DAC offset is generally the most
significant driver of GMLB DAC, it can be impacted by other adjustments
including amortization related to guarantee benefit riders accounted for as
insurance.
See "- Risk Management Strategies - Variable Annuity Exposure Risk Management"
for discussion of our management of and our hedging strategy associated with our
variable annuity business.
Year Ended
Comparative results from GMLB Riders were favorable by
driven by:
•favorable changes to the estimated fair value of Shield liabilities;
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partially offset by
•unfavorable changes to the estimated fair value of variable annuity liability
reserves;
•unfavorable changes to GMLB DAC; and
•unfavorable changes to the estimated fair value of our GMLB hedges.
Lower equity markets resulted in the following impacts:
•favorable changes to the estimated fair value of Shield liabilities;
•favorable changes to the estimated fair value of our GMLB hedges; and
•favorable changes in ceded reinsurance;
partially offset by
•unfavorable changes to the estimated fair value of variable annuity liability
reserves; and
•unfavorable changes to GMLB DAC.
Higher interest rates resulted in the following impacts:
•unfavorable changes to the estimated fair value of our GMLB hedges;
•unfavorable changes to the estimated fair value of Shield liabilities;
•unfavorable changes to GMLB DAC; and
•unfavorable changes in ceded reinsurance;
partially offset by
•favorable changes to the estimated fair value of variable annuity liability
reserves.
There was a favorable change in the adjustment for nonperformance risk in the
current period.
Investments
Investment Risk Management Strategy
We manage the risks related to our investment portfolio through asset-type
allocation as well as industry and issuer diversification. We also use risk
limits to promote diversification by asset sector, avoid concentrations in any
single issuer and limit overall aggregate credit and equity risk exposure. We
manage real estate risk through geographic, property type and product type
diversification and asset allocation. Interest rate risk is managed as part of
our Asset Liability Management ("ALM") strategies. We also utilize product
design, such as the use of market value adjustment features and surrender
charges to manage interest rate risk. These ALM strategies include maintaining
an investment portfolio 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 for the full liability
duration, thereby creating some asset/liability mismatch. We also use certain
derivatives in the management of credit, interest rate, equity market and
foreign currency exchange rate risks.
Investment Management Agreements
Other than our derivatives trading, which we manage in-house, we have engaged a select group of experienced external asset management firms to manage the investment of the assets comprising our general account portfolio and certain separate account assets of our insurance subsidiaries, as well as assets of BHF and our reinsurance subsidiary, BRCD.
Current Environment
Our business and results of operations are materially affected by conditions in capital markets and the economy, generally. As aU.S. insurance company, we are affected by the monetary policy of theFederal Reserve in theU.S. TheFederal Reserve may increase or decrease the federal funds rate 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 and Uncertainties - Financial and Economic Environment." In 2022, theFederal Reserve increased the target range for the federal funds rate seven times, from between 0% and 0.25% to between 4.25% and 4.50% as ofDecember 31, 2022 . OnFebruary 1, 2023 , theFederal Reserve further increased the target range for the federal funds rate from between 4.25% and 4.50% to between 4.50% and 4.75%. TheFederal Reserve 84
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has indicated further increases to the target range for the federal funds rate could occur. These target range increases have contributed to a decrease in the net unrealized gains in our investment portfolio, and any additional target increases could similarly contribute to further decreases. We are also affected by the monetary policy of central banks around the world due to the diversification of our investment portfolio.
In the current period, as a result of rising interest rates, the unrealized
losses on our fixed maturity securities exceeded the unrealized gains. If
interest rates continue to rise, our unrealized gains would decrease, and our
unrealized losses would increase, perhaps substantially.
See "Risk Factors - Risks Related to Our Investment Portfolio - Our investment portfolio is subject to significant financial risks both in theU.S. and global financial markets, including credit risk, interest rate risk, inflation risk, market valuation risk, liquidity risk, real estate risk, derivatives risk, and other factors outside our control, the occurrence of any of which could have a material adverse effect on our financial condition and results of operations."
Selected Sector Investments
Recent elevated levels of market volatility have affected the performance of various asset classes. See "Risk Factors - Risks Related to Our Investment Portfolio - Our investment portfolio is subject to significant financial risks both in theU.S. and global financial markets, including credit risk, interest rate risk, inflation risk, market valuation risk, liquidity risk, real estate risk, derivatives risk, and other factors outside our control, the occurrence of any of which could have a material adverse effect on our financial condition and results of operations," and "Risk Factors - Risks Related to Our Investment Portfolio - Ongoing military actions, the continued threat of terrorism, climate change as well as other catastrophic events may adversely affect the value of our investment portfolio and the level of claim losses we incur."
There has been an increased market focus on retail sector investments as a
result of evolving consumer habits. Our exposure to retail sector corporate
fixed maturity securities was
of
In addition to the fixed maturity securities discussed above, we have retail sector exposure through mortgage loans and certainStructured Securities . See "Risk Factors - Risks Related to Our Investment Portfolio - Our investment portfolio is subject to significant financial risks both in theU.S. and global financial markets, including credit risk, interest rate risk, inflation risk, market valuation risk, liquidity risk, real estate risk, derivatives risk, and other factors outside our control, the occurrence of any of which could have a material adverse effect on our financial condition and results of operations," "- Investments - Mortgage Loans" and Note 6 of the Notes to the Consolidated Financial Statements for information on mortgage loans, including credit quality by portfolio segment and commercial mortgage loans by property type. Additionally, see "- Investments - Fixed Maturity Securities Available-for-sale -Structured Securities " for information onStructured Securities , including security type, risk profile and ratings profile. We monitor direct and indirect investment exposure across sectors and asset classes and adjust our level of investment exposure, as appropriate. At this time, we do not expect that our general account investments in these sectors and asset classes will have a material adverse effect on our results of operations or financial condition. Investment Portfolio Results The following summary yield table presents the yield and adjusted net investment income for our investment portfolio for the periods indicated. 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. Years Ended December 31, 2022 2021 2020 Yield % Amount Yield % Amount Yield % Amount (Dollars in millions) Investment income (1) 3.96 %$ 4,363 5.13 %$ 5,046 4.21 %$ 3,755 Investment fees and expenses (2) (0.14) (154) (0.13) (144) (0.14) (136) Adjusted net investment income (3) 3.82 %$ 4,209 5.00 %$ 4,902 4.07 %$ 3,619 _______________ (1)Investment income yields are calculated as investment income as a percentage of average quarterly asset carrying values. Investment income excludes recognized gains and losses and reflects the adjustments discussed in table note (3) below to 85
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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 and collateral received from derivative counterparties.
(2)Investment fee and expense yields are calculated as a percentage of average
quarterly asset estimated fair values. Asset estimated fair values exclude
collateral received in connection with our securities lending program,
freestanding derivative assets and collateral received from derivative
counterparties.
(3)Adjusted net investment income presented in the yield table varies from the
most directly comparable GAAP measure due to certain reclassifications, as
presented below.
Years Ended December 31,
2022 2021 2020
(In millions)
Net investment income $ 4,138 $ 4,881 $ 3,601
Less: Investment hedge adjustments (71) (21) (18)
Adjusted net investment income - in the above yield table
$ 4,902 $ 3,619
See "- Results of Operations - Consolidated Results for the Years Ended
31, 2022
Condition and Results of Operations - Results of Operations - Consolidated
Results for the Years Ended
Report for an analysis of the year over year changes in net investment income.
Fixed Maturity Securities Available-for-sale
Fixed maturity securities held by type (public or private) were as follows at:
December 31, 2022 December 31, 2021
Estimated Fair Estimated Fair
Value % of Total Value % of Total
(Dollars in millions)
Publicly-traded $ 62,199 82.3 % $ 72,925 83.3 %
Privately-placed 13,378 17.7 14,657 16.7
Total fixed maturity securities $ 75,577 100.0 % $ 87,582 100.0 %
Percentage of cash and invested assets 67.1 % 71.4 %
See Note 8 of the Notes to the Consolidated 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.
See Notes 1 and 6 of the Notes to the Consolidated Financial Statements for
further information about fixed maturity securities by sector, contractual
maturities, continuous gross unrealized losses and the allowance for credit
losses.
Fixed Maturity Securities Credit Quality - Ratings
Rating agency ratings are based on availability of applicable ratings from rating agencies on the NAIC credit rating provider list, including Moody's, S&P, Fitch,Dominion Bond Rating Service andKroll Bond Rating Agency . If no rating is available from a rating agency, then an internally developed rating is used. The NAIC has methodologies to assess credit quality for certainStructured Securities comprised of non-agency RMBS, CMBS and ABS. The NAIC's objective with these methodologies is to increase the accuracy in assessing expected losses, and to use the improved assessment to determine a more appropriate capital requirement for suchStructured Securities . The methodologies reduce regulatory reliance on rating agencies and allow for greater regulatory input into the assumptions used to estimate expected losses fromStructured Securities . In 2021, these methodologies were updated to only apply to thoseStructured Securities issued prior to 2013. We apply the NAIC methodologies toStructured Securities held by our insurance subsidiaries and BRCD. The NAIC's present methodology is to evaluateStructured Securities held by insurers on an annual basis. If our insurance subsidiaries and BRCD acquireStructured 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. 86
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The following table presents total fixed maturity securities by nationally
statistical rating organizations ("NRSRO") rating and the applicable NAIC
designation from the NAIC published comparison of NRSRO ratings to NAIC
designations, except for certain
using the NAIC methodologies, as well as the percentage, based on estimated fair
value that each NAIC designation is comprised of at:
December 31, 2022 December 31, 2021
Allowance
Amortized for Credit Unrealized Estimated % of Amortized Allowance for Unrealized Estimated % of
NAIC Designation NRSRO Rating Cost Losses Gain (Loss) Fair Value Total Cost Credit Losses Gain (Loss) Fair Value Total
(Dollars in millions)
1 Aaa/Aa/A $ 53,935 $ 2 $ (4,870) $ 49,063 64.9 % $ 49,729 $ - $ 6,133 $ 55,862 63.8 %
2 Baa 27,269 - (3,546) 23,723 31.4 25,493 - 2,142 27,635 31.6
Subtotal investment grade 81,204 2 (8,416) 72,786 96.3 % 75,222 - 8,275 83,497 95.4 %
3 Ba 2,343 - (232) 2,111 2.8 2,634 - 65 2,699 3.1
4 B 677 1 (88) 588 0.8 1,244 3 12 1,253 1.4
5 Caa and lower 120 4 (24) 92 0.1 142 8 (4) 130 0.1
6 In or near default - - - - - 4 - (1) 3 -
Subtotal below investment grade 3,140 5 (344) 2,791 3.7 % 4,024 11 72 4,085 4.6 %
Total fixed maturity securities $ 84,344 $ 7 $ (8,760) $ 75,577 100.0 % $ 79,246 $ 11 $ 8,347 $ 87,582 100.0 %
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:
Fixed
NAIC Designation 1 2 3 4 5 6 Total
Caa and In or Near Estimated
NRSRO Rating Aaa/Aa/A Baa Ba B Lower Default Fair Value
(In millions)
December 31, 2022
U.S. corporate $ 14,697 $ 15,683 $ 1,671 $ 499 $ 57 $ - $ 32,607
Foreign corporate 3,758 6,377 373 68 - - 10,576
U.S. government and agency 7,887 129 - - - - 8,016
RMBS 7,490 14 12 2 10 - 7,528
CMBS 6,240 351 9 7 4 - 6,611
ABS 4,648 672 17 12 10 - 5,359
State and political subdivision 3,682 105 1 - 11 - 3,799
Foreign government 661 392 28 - - - 1,081
Total fixed maturity securities $ 49,063 $ 23,723 $ 2,111 $ 588 $ 92 $ - $ 75,577
December 31, 2021
U.S. corporate $ 17,828 $ 18,074 $ 2,008 $ 1,103 $ 68 $ - $ 39,081
Foreign corporate 3,518 7,478 554 125 31 - 11,706
U.S. government and agency 9,160 147 - - - - 9,307
RMBS 9,179 46 15 5 11 3 9,259
CMBS 6,882 391 1 5 3 - 7,282
ABS 3,686 550 19 15 10 - 4,280
State and political subdivision 4,646 181 1 - 7 - 4,835
Foreign government 963 768 101 - - - 1,832
Total fixed maturity securities
87,582
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We maintain a diversified portfolio of corporate fixed maturity securities across industries and issuers. Our 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 of 1% and 2% of total investments atDecember 31, 2022 and 2021, respectively. OurU.S. and foreign corporate fixed maturity securities holdings by industry were as follows at: December 31, 2022 December 31, 2021 Estimated Estimated Fair % of Fair % of Value Total Value Total (Dollars in millions) Industrial $ 13,290 30.7 % $ 16,131 31.8 % Finance 11,988 27.8 12,430 24.4 Consumer 9,459 21.9 11,650 22.9 Utility 5,767 13.4 7,146 14.1 Communications 2,679 6.2 3,430 6.8 Total $ 43,183 100.0 % $ 50,787 100.0 %Structured Securities We held$19.5 billion and$20.8 billion ofStructured Securities , at estimated fair value, atDecember 31, 2022 and 2021, respectively, as presented in the RMBS, CMBS and ABS sections below.
RMBS
Our RMBS holdings are diversified by security type, risk profile and ratings
profile, which were as follows at:
December 31, 2022 December
31, 2021
Estimated % of Net Unrealized Estimated % of
Net Unrealized
Fair Value Total Gains (Losses) Fair Value Total Gains (Losses)
(Dollars in millions)
Security type:
Pass-through securities $ 3,846 51.1 % $ (590) $ 4,688 50.6 % $ 29
Collateralized mortgage obligations 3,682 48.9 (311) 4,571 49.4 352
Total RMBS $ 7,528 100.0 % $ (901) $ 9,259 100.0 % $ 381
Risk profile:
Agency $ 6,137 81.5 % $ (842) $ 7,563 81.7 % $ 264
Prime 149 2.0 (20) 192 2.1 4
Alt-A 788 10.5 (37) 801 8.6 60
Sub-prime 454 6.0 (2) 703 7.6 53
Total RMBS $ 7,528 100.0 % $ (901) $ 9,259 100.0 % $ 381
Ratings profile:
Rated Aaa $ 6,643 88.2 % $ 7,905 85.4 %
Designated NAIC 1 $ 7,490 99.5 % $ 9,179 99.1 %
Historically, our exposure to sub-prime RMBS holdings has been managed 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).
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CMBS
Our CMBS holdings are diversified by vintage year, which were as follows at:
December 31, 2022 December 31, 2021
Estimated Estimated
Amortized Cost Fair Value Amortized Cost Fair Value
(In millions)
2003 - 2011 $ 90 $ 82 $ 95 $ 106
2012 41 38 141 140
2013 204 197 209 213
2014 322 294 322 334
2015 966 879 953 997
2016 463 421 465 485
2017 732 667 707 751
2018 1,668 1,538 1,675 1,827
2019 1,021 879 1,044 1,079
2020 534 426 555 544
2021 821 748 810 806
2022 462 442 - -
Total $ 7,324 $ 6,611 $ 6,976 $ 7,282
The estimated fair value of CMBS rated Aaa using rating agency ratings was $4.6
billion , or 70.0% of total CMBS, and designated NAIC 1 was $6.2 billion , or
94.4% of total CMBS, at December 31, 2022 . The estimated fair value of CMBS Aaa
rating agency ratings was $5.0 billion , or 69.1% of total CMBS, and designated
NAIC 1 was $6.9 billion , or 94.5% of total CMBS, at December 31, 2021 .
ABS
Our ABS holdings are diversified by both collateral type and issuer. Our ABS
holdings by collateral type and ratings profile were as follows at:
December 31, 2022 December 31, 2021
Estimated % of Net Unrealized Estimated % of Net Unrealized
Fair Value Total Gains (Losses) Fair Value Total Gains (Losses)
(Dollars in millions)
Collateral type:
Collateralized obligations $ 3,239 60.5 % $ (124) $ 2,659 62.1 % $ (1)
Consumer loans 420 7.8 (36) 342 8.0 -
Student loans 393 7.3 (34) 384 9.0 6
Automobile loans 216 4.0 (9) 151 3.5 2
Credit card loans 158 3.0 (10) 132 3.1 4
Other loans 933 17.4 (80) 612 14.3 8
Total $ 5,359 100.0 % $ (293) $ 4,280 100.0 % $ 19
Ratings profile:
Rated Aaa $ 2,300 42.9 % $ 1,837 42.9 %
Designated NAIC 1 $ 4,648 86.7 % $ 3,686 86.1 %
Allowance for Credit Losses for
See Note 6 of the Notes to the Consolidated Financial Statements for information about the evaluation of fixed maturity securities for an allowance for credit losses or write-offs due to uncollectibility.
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%
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for the duration of the loan. The estimated fair value of the securities loaned is monitored 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 re-pledged 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 re-pledged, 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 - Primary Uses of Liquidity and Capital - Securities Lending" and Note 6 of the Notes to the Consolidated Financial Statements for information regarding our securities lending program.
Mortgage Loans
Our mortgage loans are principally collateralized by commercial, agricultural
and residential properties. Information regarding mortgage loans by portfolio
segment is summarized as follows at:
December 31, 2022 December 31, 2021
% of % of
Recorded % of Valuation Recorded Recorded % of Valuation Recorded
Investment Total Allowance Investment Investment Total Allowance Investment
(Dollars in millions)
Commercial $ 13,574 58.9 % $ 49 0.4 % $ 12,187 61.0 % $ 67 0.5 %
Agricultural 4,365 18.9 15 0.3 % 4,163 20.9 12 0.3 %
Residential 5,116 22.2 55 1.1 % 3,623 18.1 44 1.2 %
Total $ 23,055 100.0 % $ 119 0.5 % $ 19,973 100.0 % $ 123 0.6 %
Our mortgage loan portfolio is diversified by both geographic region and
property type to reduce the risk of concentration. The percentage of our
commercial and agricultural mortgage loan portfolios collateralized by
properties located in the U.S. were 98% and 97% at December 31, 2022 and 2021,
respectively. The remainder was collateralized by properties located outside of
the U.S. At December 31, 2022 , the carrying value as a percentage of total
commercial and agricultural mortgage loans for the top three states in the U.S.
was 18% for California , 11% for Texas and 10% for New York . 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.
Our residential mortgage loan portfolio is managed 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, 2022 and 2021. At
December 31, 2022 , the carrying value as a percentage of total residential
mortgage loans for the top three states in the U.S. was 39% for California , 11%
for Florida and 7% for New York .
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Commercial Mortgage Loans byGeographic Region and Property Type. Commercial mortgage loans are the largest component of the mortgage loan invested asset class. The diversification across geographic regions and property types of commercial mortgage loans was as follows at: December 31, 2022 December 31, 2021 % of % of Amount Total Amount Total (Dollars in millions) Geographic region: South Atlantic$ 3,026 22.3 %$ 2,383 19.6 % Pacific 2,765 20.4 2,601 21.3 Middle Atlantic 2,344 17.3 2,115 17.3 West South Central 1,642 12.1 1,425 11.7 Mountain 1,140 8.4 1,062 8.7 East North Central 794 5.8 717 5.9 New England 741 5.4 789 6.5 International 390 2.9 495 4.1 West North Central 361 2.7 318 2.6 East South Central 306 2.2 217 1.8 Multi-region and Other 65 0.5 65 0.5 Total recorded investment 13,574 100.0 % 12,187 100.0 % Less: allowance for credit losses 49 67 Carrying value, net of allowance for credit losses$ 13,525 $ 12,120 Property type: Apartment$ 5,366 39.5 %$ 3,895 32.0 % Office 3,375 24.9 3,566 29.3 Industrial 2,051 15.1 1,847 15.1 Retail 1,934 14.3 1,863 15.3 Hotel 848 6.2 1,016 8.3 Total recorded investment 13,574 100.0 % 12,187 100.0 % Less: allowance for credit losses 49 67 Carrying value, net of allowance for credit losses$ 13,525 $ 12,120 Mortgage Loan Credit Quality - Monitoring Process. Our mortgage loan investments are monitored on an ongoing basis, including a review of loans that are current, past due, restructured and under foreclosure. Quarterly, we conduct a formal review of the portfolio with our investment managers. See Note 6 of the Notes to the Consolidated Financial Statements for information on mortgage loans by credit quality indicator, past due status, nonaccrual status and modified mortgage loans. Our commercial mortgage loans are reviewed 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 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. Our residential mortgage loans are reviewed on an ongoing basis. See Note 6 of the Notes to the Consolidated Financial Statements for information on our evaluation of residential mortgage loans and related measurement of allowance for credit losses. 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 91
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coverage ratio, the higher the risk of experiencing a credit loss. For our commercial mortgage loans, our average loan-to-value ratio was 57% and 58% atDecember 31, 2022 and 2021, respectively, and our average debt-service coverage ratio was 2.2x at bothDecember 31, 2022 and 2021. 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 48% and 46% atDecember 31, 2022 and 2021, 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 Allowance for Credit Losses. See Note 6 of the Notes to the Consolidated Financial Statements for information about how the allowance for credit losses is established and monitored, as well as activity in and balances of the allowance for credit losses for the years endedDecember 31, 2022 and 2021.
Limited Partnerships and Limited Liability Companies
The carrying values of our limited partnerships and limited liability companies
("LLC") were as follows at:
December 31, 2022 December 31, 2021
(In millions)
Other limited partnerships $ 3,941 $ 3,786
Real estate limited partnerships and LLCs (1) 834 485
Total $ 4,775 $ 4,271
_______________
(1)The estimated fair value of real estate limited partnerships and LLCs was
Cash distributions on these investments are generated from investment gains, operating income from the underlying investments of the funds and liquidation of the underlying investments of the funds. We estimate that the underlying investment of the private equity funds will typically be liquidated over the next 10 to 20 years. Other Invested Assets
The carrying value of our other invested assets by type was as follows at:
December 31, 2022 December 31, 2021
Carrying % of Carrying % of
Value Total Value Total
(Dollars in millions)
Freestanding derivatives with positive estimated fair
values
$ 2,284 80.1 %$ 3,126 94.3 % Company-owned life insurance 250 8.8 - - FHLB stock 201 7.0 70 2.1 Tax credit and renewable energy partnerships 55 1.9 59 1.8 Leveraged leases, net of non-recourse debt 48 1.7 49 1.5 Other 14 0.5 12 0.3 Total$ 2,852 100.0 %$ 3,316 100.0 % 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 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
•The statement of operations effects of derivatives in cash flow, fair value, or
non-qualifying hedge relationships for
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the years ended
See "Business - Segments and Corporate & Other - Annuities" and "- Risk Management Strategies" for more information about our use of derivatives by major hedging programs, as well as "- Results of Operations - Annual Actuarial Review" and "Risk Factors - Risks Related to our Investment Portfolio - Our investment portfolio is subject to significant financial risks both in theU.S. and global financial markets, including credit risk, interest rate risk, inflation risk, market valuation risk, liquidity risk, real estate risk, derivatives risk, and other factors outside our control, the occurrence of any of which could have a material adverse effect on our financial condition and results of operations." Fair Value Hierarchy See Note 8 of the Notes to the Consolidated Financial Statements for derivatives measured at estimated fair value on a recurring basis and their corresponding fair value hierarchy, as well as a rollforward of the fair value measurements for derivatives measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs as discussed below. 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
swaps priced using unobservable credit spreads, or that are priced through
independent broker quotations; and foreign currency swaps with certain
unobservable inputs.
Credit Risk
See Note 7 of the Notes to the Consolidated 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. See "Risk Factors - Risks Related to our Investment Portfolio - Our investment portfolio is subject to significant financial risks both in theU.S. and global financial markets, including credit risk, interest rate risk, inflation risk, market valuation risk, liquidity risk, real estate risk, derivatives risk, and other factors outside our control, the occurrence of any of which could have a material adverse effect on our financial condition and results of operations." 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 sheet and does not affect our legal right of offset.
Credit Derivatives
The gross notional amount and estimated fair value of credit default swaps were
as follows at:
December 31, 2022 December 31, 2021
Estimated Fair Estimated Fair
Gross Notional Amount Value Gross Notional Amount Value
(In millions)
Written $ 1,757 $ 16 $ 1,724 $ 38
Purchased - - - -
Total $ 1,757 $ 16 $ 1,724 $ 38
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 state insurance regulators and the NAIC 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 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 can replicate
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the desired bond exposures and meet our ALM needs. This can expose the Company to changes in credit spreads as the written credit default swap tenor is shorter than the maturity ofTreasury bonds.
Embedded Derivatives
See Note 8 of the Notes to the Consolidated Financial Statements for (i) information about embedded derivatives measured at estimated fair value on a recurring basis and their corresponding fair value hierarchy and (ii) 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 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.
Policyholder Liabilities
We establish, and carry as liabilities, actuarially determined amounts that are calculated to meet policy obligations or to provide for future annuity and life insurance benefit payments. Amounts for actuarial liabilities are computed and reported in the financial statements in conformity with GAAP. See "- Summary of Critical Accounting Estimates" for more details on policyholder liabilities. 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, financial condition and results of operations. 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, financial condition and results of operations. Moreover, the impact of climate change could cause changes in the frequency or severity of outbreaks of certain diseases. Due to their nature, we cannot predict the incidence, timing, severity or amount of losses from catastrophes, acts of terrorism or climate change, but we make broad use of catastrophic and non-catastrophic reinsurance to manage risk from these perils.
Future Policy Benefits
We establish liabilities for future 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 Financial Statements. A discussion of future policy benefits by segment, as well as Corporate & Other follows.
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 term, whole, 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 settlements
and pension risk transfer contracts. There is no interest rate crediting
flexibility on the liabilities for immediate annuities. As a result, a sustained
low interest rate
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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 long-term care and
workers' compensation business reinsured through 100% quota share reinsurance
agreements.
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," "Quantitative and Qualitative Disclosures About Market Risk - Market Risk - Fair Value Exposures - Interest Rates" and Notes 1 and 3 of the Notes to the Consolidated Financial Statements for additional information. Policyholder account balances also include amounts associated with funding agreements issued for additional liquidity or in connection with our institutional spread margin business. See "- Liquidity and Capital Resources - The Company - Primary Sources of Liquidity and Capital - Funding Sources - Funding Agreements." A discussion of policyholder account balances by segment 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 interest rate derivative positions, as part of the Company's macro interest rate hedging program, 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:
December 31, 2022 December 31, 2021
Account Account Value at Account Account Value at
Value (1) Guarantee (1) Value (1) Guarantee (1)
(In millions)
Greater than 0% but less than 2% $ 7,302 $ 864 $ 3,783 $ 802
Equal to 2% but less than 4% $ 11,598 $
10,870
Equal to or greater than 4%
$ 525 $ 525$ 431 $ 431 _______________
(1)These amounts are not adjusted for policy loans.
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$225 million and$241 million atDecember 31, 2022 and 2021, respectively.
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 to partially mitigate the risks associated with such a
scenario.
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The following table presents the breakdown of account value subject to minimum
guaranteed crediting rates for Life at:
December 31, 2022 December 31, 2021
Account Account Value at Account Account Value at
Value (1) Guarantee (1) Value (1) Guarantee (1)
(In millions)
Greater than 0% but less than 2% $ 221 $ 50 $ 184 $ 58
Equal to 2% but less than 4% $ 1,065 $ 490 $ 1,080 $ 497
Equal to or greater than 4% $ 1,657 $ 1,657 $ 1,705 $ 1,705
_______________
(1)These amounts are not adjusted for policy loans.
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$43 million and$40 million atDecember 31, 2022 and 2021, respectively.
Run-off
Policyholder account balances in Run-off are comprised of ULSG, certain company-owned life insurance policies and certain funding agreements. Interest crediting rates vary by type of contract and can be fixed or variable. We are exposed to interest rate risks, when guaranteeing payment of interest and return on principal at the contractual maturity date. We 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 at:
December 31, 2022 December 31, 2021
Account Account Value at Account Account Value at
Value (1) Guarantee (1) Value (1) Guarantee (1)
(In millions)
Universal Life Secondary Guarantee
Greater than 0% but less than 2% $ - $ - $ - $ -
Equal to 2% but less than 4% $ 4,801 $ 1,389 $ 5,053 $ 1,471
Equal to or greater than 4% $ 527 $ 527 $ 552 $ 552
_______________
(1)These amounts are not adjusted for policy loans.
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$108 million and$106 million atDecember 31, 2022 and 2021, respectively.
Variable Annuity Guarantees
We issue 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, 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, resulting in the policyholder receiving 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
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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 GMWBs and the portion of GMIBs
that require annuitization, as well as the life contingent portion of the
expected annuitization when the policyholder is required to annuitize 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 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 markets 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 markets 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. See Note 8 of the Notes to the Consolidated Financial Statements for more information on the determination of estimated fair value.
Liquidity and Capital Resources
Our business and results of operations are materially affected by conditions in the global capital markets and the economy generally. Stressed conditions, volatility or disruptions in global capital markets, particular markets or financial asset classes can impact us adversely, in part because we have a large investment portfolio and our insurance liabilities and derivatives are sensitive to changing market factors. Changing conditions in the global capital markets and the economy may affect our financing costs and market interest rates for our debt or equity securities. For further information regarding market factors that could affect our ability to meet liquidity and capital needs, see "- Industry Trends and Uncertainties - Financial and Economic Environment," as well as "Risk Factors - Economic Environment and Capital Markets-Related Risks" and "Risk Factors - Risks Related to Our Investment Portfolio."
Liquidity and Capital Management
Based upon our capitalization, expectations regarding maintaining our business mix, ratings and funding sources available to us, we believe we have sufficient liquidity to meet business requirements in current market conditions and certain stress scenarios. 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. We continuously monitor and adjust our liquidity and capital plans in light of market conditions, as well as changing needs and opportunities. We maintain a substantial short-term liquidity position, which was$3.6 billion and$3.8 billion atDecember 31, 2022 and 2021, respectively. Short-term liquidity is comprised of cash and cash equivalents and short-term investments, excluding assets that are pledged or otherwise committed. Assets pledged or otherwise committed include amounts received in connection with securities lending, derivatives and assets held on deposit or in trust. 97
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An integral part of our liquidity management includes managing our level of liquid assets, which was$40.8 billion and$54.9 billion atDecember 31, 2022 and 2021, respectively. Liquid assets are comprised of 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 securities lending, funding agreements, derivatives and assets held on deposit or in trust.
The Company
Liquidity
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. 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 reflect the impact of various scenarios, including (i) the potential increase in our requirement to pledge additional collateral or return collateral to our counterparties, (ii) a reduction in new business sales, and (iii) the risk of early contract holder and policyholder withdrawals, as well as lapses and surrenders of existing policies and contracts. We include provisions limiting withdrawal rights in many of our products, which deter the customer from making withdrawals prior to the maturity date of the product. If significant cash is required beyond our anticipated liquidity needs, we have various alternatives available depending on market conditions and the amount and timing of the liquidity need. These available alternative sources of liquidity include cash flows from operations, sales of liquid assets and funding sources including secured funding agreements, unsecured credit facilities and secured committed facilities. Under certain adverse market and economic conditions, our access to liquidity may deteriorate, or the cost to access liquidity may increase. See "Risk Factors - 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."
Capital
We manage our capital position to maintain our financial strength and credit ratings. Our capital position is supported by our ability to generate cash flows within our insurance companies, our ability to effectively manage the risks of our businesses and our expected ability to borrow funds and raise additional capital to meet operating and growth needs under a variety of market and economic conditions. We monitor our debt-to-capital ratio using an average of our key leverage ratios as calculated byA.M. Best , Fitch, Moody's and S&P, and we aim to maintain a ratio commensurate with our financial strength and credit ratings. As such, we may opportunistically look to pursue additional financing over time, which may include borrowings under credit facilities, the issuance of debt, equity or hybrid securities, the incurrence of term loans, or the refinancing or extinguishment of existing indebtedness. There can be no assurance that we will be able to complete any such financing transactions on terms and conditions favorable to us or at all. In support of our target combined RBC ratio of 400% to 450% in normal market conditions, we expect to continue to maintain a capital and exposure risk management program that targets total assets supporting our variable annuity contracts at or above the CTE98 level in normal market conditions. With our risk management focus on the core drivers of our combined RBC ratio, we can better manage our RBC in stressed market scenarios. OnAugust 2, 2021 , we authorized the repurchase of up to$1.0 billion of our common stock, which was in addition to our prior and subsequently fully utilized$200 million repurchase authorization announced onFebruary 10, 2021 . Repurchases under theAugust 2, 2021 authorization, of which$293 million was remaining atDecember 31, 2022 , may be made through open market purchases, including pursuant to 10b5-1 plans or pursuant to accelerated stock repurchase plans, or through privately negotiated transactions, from time to time at management's discretion in accordance with applicable legal requirements. Common stock repurchases are dependent upon several factors, including our capital position, liquidity, financial strength and credit ratings, general market conditions, the market price of our common stock compared to management's assessment of the stock's underlying value and applicable regulatory approvals, as well as other legal and accounting factors. We currently have no plans to declare and pay dividends on our common stock. Any future declaration and payment of dividends or other distributions or returns 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, cash needs, regulatory and other constraints, capital requirements (including capital requirements of our insurance subsidiaries), contractual restrictions and any other factors that our Board of Directors deems relevant in making such a determination. Therefore, there can be no assurance that we 98
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will pay any dividends or make other distributions or returns of capital on our
common stock, or as to the amount of any such dividends, distributions or
returns of capital.
Rating Agencies
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 our 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. 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 and long-term issuer credit ratings as of the
date of this filing were as follows:
A.M. Best (1) Fitch (2) Moody's (3) S&P (4)
Current outlook Stable Stable Stable Stable
Financial Strength Ratings:
Brighthouse Life Insurance Company A A A3 A+
New England Life Insurance Company A A A3 A+
Brighthouse Life Insurance Company A NR NR A+
of NY
Long-term Issuer Credit Ratings: Brighthouse Financial, Inc. bbb+ BBB+ Baa3 BBB+ Brighthouse Holdings, LLC bbb+ BBB+ Baa3 BBB+ _______________ (1)A.M. Best's financial strength ratings for insurance companies range from "A++ (Superior)" to "S (Suspended)."A.M. Best's long-term issuer credit ratings range from "aaa (exceptional)" to "s (suspended)." (2)Fitch's financial strength ratings for insurance companies range from "AAA (highest rating)" to "C (distressed)." Fitch's long-term issuer credit ratings range from "AAA (highest rating)" to "D (default)."
(3)Moody's financial strength ratings for insurance companies and long-term
issuer credit ratings range from "Aaa (highest quality)" to "C (lowest rated)."
(4)S&P's financial strength ratings for insurance companies and long-term issuer credit ratings range from "AAA (extremely strong)" to "SD (selective default)" or "D (default)." NR = Not rated Rating agencies may continue to review and adjust our ratings. See "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 a description of the impact of a potential ratings downgrade. 99
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Sources and Uses of Liquidity and Capital
Our primary sources and uses of liquidity and capital were as follows at:
Years Ended
2022 2021 2020
(In millions)
Sources:
Operating activities, net $ - $ 746 $ 888
Changes in policyholder account balances, net 11,573 11,824 6,825
Changes in payables for collateral under securities loaned
and other transactions, net
- 1,017 861 Long-term debt issued - 400 615 Preferred stock issued, net of issuance costs - 339 948 Total sources 11,573 14,326 10,137 Uses: Operating activities, net 1,151 - - Investing activities, net 8,276 12,238 5,843
Changes in payables for collateral under securities loaned
and other transactions, net
1,709 - - Long-term debt repaid 3 680 1,552 Dividends on preferred stock 104 89 44Treasury stock acquired in connection with share repurchases 488 499 473
Financing element on certain derivative instruments and
other derivative related transactions, net
185 368 948 Other, net 16 86 46 Total uses 11,932 13,960 8,906
Net increase (decrease) in cash and cash equivalents
Cash Flows from Operating Activities
The principal cash inflows from our insurance activities come from insurance premiums, annuity considerations and net investment income. The principal cash outflows are the result of various annuity and life insurance products, operating expenses and income tax, as well as interest expense. The primary liquidity concern with respect to these cash flows is the risk of early contract holder and policyholder withdrawal.
Cash Flows from Investing Activities
The principal cash inflows from our investment activities come from repayments of principal, proceeds from maturities and sales of investments, as well as settlements of freestanding derivatives. The principal cash outflows relate to purchases of investments and settlements of freestanding derivatives. We typically can 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. We closely monitor and manage these risks through our comprehensive investment risk management process. The primary liquidity concerns with respect to these cash flows are the risk of default by debtors and market disruption.
Cash Flows from Financing Activities
The principal cash inflows from our financing activities come from issuances of
debt and equity securities, deposits of funds associated with policyholder
account balances and lending of securities. The principal cash outflows come
from repayments of debt, common stock repurchases, preferred stock dividends,
withdrawals associated with policyholder account balances and the return of
securities on loan. The primary liquidity concerns with respect to these cash
flows are market disruption and the risk of early policyholder withdrawal.
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Primary Sources of Liquidity and Capital
In addition to the summary description of liquidity and capital sources
discussed in "- Sources and Uses of Liquidity and Capital," the following
additional information is provided regarding our primary sources of liquidity
and capital:
Funding Sources Liquidity is provided by a variety of funding sources, including secured and unsecured funding agreements, unsecured credit facilities and secured committed facilities. Capital is provided by a variety of funding sources, including issuances of debt and equity securities, as well as borrowings under our credit facilities. We maintain a shelf registration statement with theSEC that permits the issuance of public debt, equity and hybrid securities. As a "Well-Known Seasoned Issuer" underSEC rules, our shelf registration statement provides for automatic effectiveness upon filing and has no stated issuance capacity. 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. Our primary funding sources include:
Preferred Stock
See Note 10 of the Notes to the Consolidated Financial Statements for
information on preferred stock issuances.
Funding Agreements
From time to time,Brighthouse Life Insurance Company issues funding agreements and uses the proceeds from such issuances for spread lending purposes in connection with our institutional spread margin business or to provide additional liquidity. The institutional spread margin business is comprised of funding agreements issued in connection with the programs described in more detail below. See "Obligations Under Funding Agreements" in Note 3 of the Notes to the Consolidated Financial Statements.
Funding Agreement-Backed Commercial Paper Program
InJuly 2021 ,Brighthouse Life Insurance Company established a funding agreement-backed commercial paper program (the "FABCP Program") for spread lending purposes, pursuant to which a special purpose limited liability company (the "SPLLC") may issue commercial paper and deposit the proceeds withBrighthouse Life Insurance Company under a funding agreement issued byBrighthouse Life Insurance Company to the SPLLC. The maximum aggregate principal amount permitted to be outstanding at any one time under the FABCP Program is$3.0 billion . Activity related to this funding agreement is reported in Corporate & Other.
Funding Agreement-Backed Notes Program
InApril 2021 ,Brighthouse Life Insurance Company established a funding agreement-backed notes program (the "FABN Program"), pursuant to whichBrighthouse Life Insurance Company may issue funding agreements to a special purpose statutory trust for spread lending purposes. The maximum aggregate principal amount permitted to be outstanding at any one time under the FABN Program was increased from$5.0 billion to$7.0 billion inAugust 2022 . Activity related to these funding agreements is reported in Corporate & Other.
Federal Home Loan Bank Funding Agreements
Brighthouse Life Insurance Company is a member of theFederal Home Loan Bank ("FHLB") ofAtlanta , where it maintains a secured funding agreement program, under which funding agreements may be issued either (i) for spread lending purposes or (ii) to provide additional liquidity. Activity related to these funding agreements is reported in Corporate & Other.
Farmer Mac Funding Agreements
Brighthouse Life Insurance Company has a secured funding agreement program with the Federal Agricultural Mortgage Corporation and its affiliateFarmer Mac Mortgage Securities Corporation ("Farmer Mac") pursuant to which the parties may enter into funding agreements either (i) for spread lending purposes or (ii) to provide additional liquidity. InSeptember 2022 ,Brighthouse Life Insurance Company amended this program to (i) extend the term fromDecember 31, 2023 toDecember 1, 2026 and (ii) increase the maximum aggregate principal amount permitted to be outstanding from$500 million to$750 million . Activity related to these funding agreements is reported in Corporate & Other. 101
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Information regarding funding agreements issued for spread lending purposes is
as follows:
Aggregate Principal Amount
Outstanding Issuances Repayments
December 31, Years Ended December 31,
2022 2021 2022 2021 2020 2022 2021 2020
(In millions)
FABCP Program $ 2,097 $ 1,848 $ 12,682 $ 2,939 $ - $ 12,433 $ 1,091 $ -
FABN Program 3,450 2,900 550 2,900 - - - -
FHLB Funding Agreements (1) 3,900 900 6,275 1,352 - 3,275 452 -
Farmer Mac Funding
Agreements 700 125 600 125 - 25 - -
Total $ 10,147 $ 5,773 $ 20,107 $ 7,316 $ - $ 15,733 $ 1,543 $ -
_______________
(1) Additionally, in
funding agreements for an aggregate collateralized borrowing of
provide a readily available source of contingent liquidity and repaid such
borrowing during the fourth quarter of 2020.
Debt Issuances
See Note 9 of the Notes to the Consolidated Financial Statements for information
on debt issuances.
Credit and Committed Facilities
See Notes 9 and 10 of the Notes to the Consolidated Financial Statements for
information regarding our credit and committed facilities.
We have no reason to believe that our lending counterparties would be unable to fulfill their respective contractual obligations under these facilities. As commitments under our credit and committed facilities may expire unused, these amounts do not necessarily reflect our actual future cash funding requirements. Our Revolving Credit Facility contains financial covenants, including requirements to maintain a specified minimum adjusted consolidated net worth, to maintain a ratio of total indebtedness to total capitalization not in excess of a specified percentage and that place limitations on the dollar amount of indebtedness that may be incurred by our subsidiaries, which could restrict our operations and use of funds. AtDecember 31, 2022 , we were in compliance with these financial covenants.
Primary Uses of Liquidity and Capital
In addition to the summarized description of liquidity and capital uses
discussed in "- Sources and Uses of Liquidity and Capital," the following
additional information is provided regarding our primary uses of liquidity and
capital:
Common Stock Repurchases See Note 10 of the Notes to the Consolidated Financial Statements for information relating to authorizations to repurchase BHF common stock, amounts of common stock repurchased pursuant to such authorizations and the amount remaining under such authorizations atDecember 31, 2022 . In 2023, throughFebruary 17, 2023 , BHF repurchased an additional 595,076 shares of its common stock through open market purchases, pursuant to a 10b5-1 plan, for$32 million .
Preferred Stock Dividends
See Notes 10 and 16 of the Notes to the Consolidated Financial Statements for
information relating to dividends declared and paid on our preferred stock.
"Dividend Stopper" Provisions in BHF's Preferred Stock and Junior Subordinated
Debentures
Terms applicable to our junior subordinated debentures may restrict our ability
to pay interest on those debentures in certain circumstances. Suspension of
payments of interest on our junior subordinated debentures, whether required
under the relevant indenture or optional, could cause "dividend stopper"
provisions applicable under those and other instruments to restrict our ability
to pay dividends, if any, on our common stock and repurchase our common stock in
various situations, including situations where we may be experiencing financial
stress, and may restrict our ability to pay dividends or interest on our
preferred stock and junior subordinated debentures as well. Similarly, the terms
of our outstanding preferred stock contain restrictions on our ability to
repurchase our common stock or pay dividends thereon
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if we have not fulfilled our dividend obligations under such preferred stock or other preferred securities. In addition, the terms of the agreements governing any preferred stock, debt or other financial instruments that we may issue in the future, may limit or prohibit the payment of dividends on our common stock or preferred stock, or the payment of interest on our junior subordinated debentures.
Debt Repayments, Repurchases, Redemptions and Exchanges
See Note 9 of the Notes to the Consolidated Financial Statements for information on debt repayments and repurchases, as well as debt maturities and the terms of our outstanding long-term debt. We may from time to time seek to retire or purchase our outstanding indebtedness through cash purchases or exchanges for other securities, purchases in the open market, 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, as well as applicable regulatory, legal and accounting factors. Whether or not we repurchase any debt and the size and timing of any such repurchases will be determined at our discretion.
Insurance Liabilities
Liabilities arising from our insurance activities primarily relate to benefit payments under various annuity and life insurance products, as well as payments for policy surrenders, withdrawals and loans. AtDecember 31, 2022 , our insurance liabilities, excluding obligations under our institutional spread margin business, totaled$109.6 billion and the related future estimated cash payments totaled$166.3 billion , of which$9.2 billion is due in the next twelve months. These estimated cash payments are based on assumptions related to mortality, morbidity, policy lapses, withdrawals, surrender charges, annuitization, future interest credited and other assumptions comparable with our experience and expectations of future payment patterns, as well as other contingent events as appropriate for the respective product type. These amounts are undiscounted and, therefore, exceed the liabilities included on the consolidated balance sheet. Actual cash payments on insurance liabilities may differ significantly from future estimated cash payments due to differences between actual experience and the assumptions used in the establishment of the liabilities and the estimation of the future cash payments. All future estimated cash payments are presented gross of any reinsurance recoverable. AtDecember 31, 2022 , obligations under our institutional spread margin business totaled$10.2 billion and the related future estimated cash payments, including interest, totaled$10.6 billion , of which$5.1 billion is due in the next twelve months. Pledged Collateral We enter into derivatives to manage various risks relating to our ongoing business operations. We pledge collateral to, and have collateral pledged to us by, counterparties in connection with our derivatives. AtDecember 31, 2022 , we pledged$7 million of cash collateral to counterparties. AtDecember 31, 2021 , we did not pledge any cash collateral to counterparties. AtDecember 31, 2022 and 2021, we were obligated to return cash collateral pledged to us by counterparties of$829 million and$1.7 billion , respectively. The timing of the return of the derivatives collateral is uncertain. We also pledge collateral from time to time in connection with our funding agreements. We receive non-cash collateral from counterparties for derivatives, which can be sold or re-pledged subject to certain constraints, and which is not recorded on our consolidated balance sheets. The amount of this non-cash collateral at estimated fair value was$1.0 billion and$593 million atDecember 31, 2022 and 2021, respectively.
See Note 7 of the Notes to the Consolidated Financial Statements for additional
information regarding pledged collateral.
Securities Lending
We have a securities lending program that aims to enhance the total return on our investment portfolio, 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. Generally, our securities lending contracts expire within twelve months of issuance. We were liable for cash collateral under our control of$3.7 billion and$4.6 billion atDecember 31, 2022 and 2021, respectively. We receive non-cash collateral for securities lending from counterparties, which cannot be sold or re-pledged, and which is not recorded on our consolidated balance sheets. There was no non-cash collateral atDecember 31, 2022 . The amount of this non-cash collateral was$2 million at estimated fair value atDecember 31, 2021 .
See Note 6 of the Notes to the Consolidated Financial Statements for further
discussion of our securities lending program.
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Contingencies, Commitments and Guarantees
We establish liabilities for litigation, regulatory and other loss contingencies when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. See "Contingencies" in Note 15 of the Notes to the Consolidated Financial Statements. We enter into commitments for the purpose of enhancing the total return on our investment portfolio consisting of commitments to fund partnership investments, bank credit facilities and private corporate bond investments, as well as commitments to lend funds under mortgage loan commitments. We anticipate these commitments could be invested any time over the next five years. See Note 6 of the Notes to the Consolidated Financial Statements. See "Commitments" in Note 15 of the Notes to the Consolidated Financial Statements. In the normal course of our business, we have provided certain indemnities, guarantees and commitments to third parties such that we may be required to make payments now or in the future. See "Guarantees" in Note 15 of the Notes to the Consolidated Financial Statements.
Liquidity and Capital
In evaluating liquidity, it is important to distinguish the cash flow needs of the parent company from the cash flow needs of the combined group of companies. BHF is largely dependent on cash flows from its insurance subsidiaries to meet its obligations. Constraints on BHF's liquidity may occur as a result of operational demands or as a result of compliance with regulatory requirements. See "Risk Factors - Risks Related to Our Business - As a holding company, BHF depends on the ability of its subsidiaries to pay dividends," "Risk Factors - 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 "Risk Factors - Regulatory and Legal Risks - Our insurance business is highly regulated, and changes in regulation and in supervisory and enforcement policies or interpretations thereof may materially impact our capitalization or cash flows, reduce our profitability and limit our growth."
Short-term Liquidity and Liquid Assets
AtDecember 31, 2022 and 2021, BHF and certain of its non-insurance subsidiaries had short-term liquidity of$1.0 billion and$1.6 billion , respectively. Short-term liquidity is comprised of cash and cash equivalents and short-term investments, excluding assets that are pledged or otherwise committed. Assets pledged or otherwise committed include assets held in trust. AtDecember 31, 2022 and 2021, BHF and certain of its non-insurance subsidiaries had liquid assets of$1.0 billion and$1.6 billion , respectively, of which$987 million and$1.5 billion , respectively, was held by BHF. Liquid assets are comprised of 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 assets held in trust.
The NAIC and state insurance departments have established regulations that
provide minimum capitalization requirements based on RBC formulas for insurance
companies. 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, including asset risk,
insurance risk, interest rate risk, market risk and business risk and is
calculated on an annual basis. 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 TAC
does not meet or exceed the amounts required to attain certain RBC levels. As of
the date of the most recent annual statutory financial statements filed with
insurance regulators, the TAC of each of our insurance subsidiaries subject to
these requirements was in excess of the amounts required to attain each of those
RBC levels.
The amount of dividends that our insurance subsidiaries can ultimately pay to
BHF through their various parent entities provides an additional margin for risk
protection and investment in our businesses. Such dividends are constrained by
the amount of surplus our insurance subsidiaries hold to maintain their ratings,
which is generally higher than minimum RBC requirements. We proactively take
actions to maintain capital consistent with these ratings objectives, which may
include adjusting dividend amounts and deploying financial resources from
internal or external sources of capital. Certain of these activities may require
regulatory approval. Furthermore, the payment of dividends and other
distributions by our insurance subsidiaries is governed by insurance laws and
regulations. See Note 10 of the Notes to the Consolidated Financial Statements.
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Normalized Statutory Earnings
Normalized statutory earnings (loss) is used by management to measure our insurance companies' ability to pay future distributions and is reflective of whether our hedging program functions as intended. Normalized statutory earnings (loss) is calculated as statutory pre-tax net gain (loss) from operations adjusted for the favorable or unfavorable impacts of (i) net realized capital gains (losses), (ii) the change in total asset requirement at CTE98, net of the change in our variable annuity reserves, and (iii) unrealized gains (losses) associated with our variable annuities and Shield hedging programs and other equity risk management strategies. See "Glossary" for the definition of CTE98. In the first quarter of 2022, we revised the calculation of normalized statutory earnings to better align with VA Reform and therefore our combined RBC ratio, where the relevant CTE measure is CTE98 rather than CTE95. Normalized statutory earnings (loss) may be further adjusted for certain unanticipated items that impact our results in order to help management and investors better understand, evaluate and forecast those results. Our variable annuity block has been managed by funding the balance sheet with assets equal to or greater than a CTE98 level. We have also managed market-related risks of increases in these asset requirements by hedging the market sensitivity of the CTE98 level to changes in the capital markets. By including hedge gains and losses related to our variable annuity risk management strategy in our calculation of normalized statutory earnings (loss), we are able to fully reflect the change in value of the hedges, as well as the change in the value of the underlying CTE98 total asset requirement level. We believe this allows us to determine whether our hedging program is providing the desired level of protection. See "- Risk Management Strategies - Variable Annuity Exposure Risk Management" for additional details regarding our hedge program. The following table presents the components of combined normalized statutory earnings forBrighthouse Life Insurance Company andNew England Life Insurance Company : Year Ended December 31, 2022 (In billions) Statutory net gain (loss) from operations, pre-tax $ 1.0 Add: net realized capital gains (losses) 0.4
Add: change in total asset requirement at CTE98, net of the change in
variable annuity reserves
0.7
Add: unrealized gains (losses) on variable annuity & Shield hedging
programs and other equity risk management strategies
(1.6) Add: impact of actuarial items and other insurance adjustments 0.4 Add: other adjustments, net 0.1 Normalized statutory earnings (loss) $ 1.0
Primary Sources and Uses of Liquidity and Capital
The principal sources of funds available to BHF include distributions fromBH Holdings , dividends and returns of capital from its insurance subsidiaries and BRCD, capital markets issuances, as well as its own cash and cash equivalents and short-term investments. 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. The primary uses of liquidity of BHF include debt service obligations (including interest expense and debt repayments), preferred stock dividends, capital contributions to subsidiaries, common stock repurchases and payment of general operating expenses. Based on our analysis and comparison of our current and future cash inflows from the dividends we receive from subsidiaries that are permitted to be paid without prior insurance regulatory approval, our investment portfolio and other cash flows and anticipated access to the capital markets, we believe there will be sufficient liquidity and capital to enable BHF to make payments on debt, pay preferred stock dividends, contribute capital to its subsidiaries, repurchase its common stock, pay all general operating expenses and meet its cash needs. 105
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In addition to the liquidity and capital sources discussed in "- The Company - Primary Sources of Liquidity and Capital" and "- The Company - Primary Uses of Liquidity and Capital," the following additional information is provided regarding BHF's primary sources and uses of liquidity and capital:
Distributions from and Capital Contributions to
See Note 2 of Schedule II - Condensed Financial Information (Parent Company
Only) for information relating to distributions from and capital contributions
to
Short-term Intercompany Loans and Intercompany Liquidity Facilities
See Note 3 of Schedule II - Condensed Financial Information (Parent Company
Only) for information relating to short-term intercompany loans and our
intercompany liquidity facilities including obligations outstanding, issuances
and repayments.
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,Finance 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 Committee ("BSC"). The BSC is responsible for periodically reviewing all material financial risks to us and, in the event risks exceed desired tolerances, informs theFinance 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 BSC considers industry best practices and the current economic environment. The BSC 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 theInvestment Department . OurFinance Department and ourInvestment Department , together with Risk Management, are responsible for coordinating our ALM strategies throughout the enterprise. The membership of the BSC is comprised of the following members of senior management: Chief Executive Officer,Chief Risk Officer , Chief Financial Officer, Chief Investment Officer and Head of Product Strategy and Pricing.
Our significant market risk management practices include, but are not limited
to, the following:
Managing Interest Rate Risk We manage interest rate risk as part of our asset and liability management strategies, which include (i) maintaining an investment portfolio that has a weighted average duration approximately equal to the duration of our estimated liability cash flow profile, and (ii) maintaining hedging programs, including a macro interest rate 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 other mismatch mitigation 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 completely the interest rate or other mismatch risk of our fixed income investments relative to our interest rate 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 financial condition and results of operations.
We also employ product design and pricing strategies to mitigate the potential
effects of interest rate movements. These strategies include the use of
surrender charges or restrictions on withdrawals in some products and the
ability to reset crediting rates for certain products.
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.
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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 Risk Management, Investment andFinance 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 futures, equity index options contracts, 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 andFinance 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 price, credit spreads 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 market prices 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 estimated fair value resulting from changes in interest rates, equity market prices, credit spreads and foreign currency exchange rates. We may have additional financial impacts other than changes in estimated fair value, which are beyond the scope of this discussion. See "Risk Factors" for additional disclosure regarding our market risk and related sensitivities.
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 includingU.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, forwards and options to mitigate the exposure related to interest rate risks from our product liabilities.
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 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 theU.S. dollar results from our holdings in non-U.S. dollar denominated fixed maturity 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. 107
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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 100 basis point change (increase or decrease) in interest rates, or a 10% change in equity market prices or foreign currency exchange rates. We believe that these changes in market rates and prices are reasonably possible in the near-term. In performing the analysis summarized below, we used market rates as ofDecember 31, 2022 . 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 estimated fair value of our interest rate sensitive exposures resulting
from a 100 basis point 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
•theU.S. dollar equivalent of estimated fair values of our foreign currency exposures due to a 10% change (increase in the value of theU.S. dollar compared to the foreign currencies or decrease in the value of theU.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$45.0 billion of insurance contracts atDecember 31, 2022 , 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.
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The potential loss in the estimated fair value of our interest rate sensitive
financial instruments due to a 100 basis point increase in the yield curve by
type of asset and liability was as follows at:
December 31, 2022
100 Basis
Estimated Point Increase
Notional Fair in the Yield
Amount Value (1) Curve
(In millions)
Financial assets with interest rate risk
Fixed maturity securities $ 75,577 $ (5,287)
Mortgage loans $ 20,816 (1,218)
Policy loans $ 1,393 (85)
Premiums, reinsurance and other receivables $ 6,230 (111)
Embedded derivatives within asset host contracts (2) $ 117 (32)
Increase (decrease) in estimated fair value of assets (6,733)
Financial liabilities with interest rate risk (3)
Policyholder account balances $ 30,942 98
Long-term debt $ 2,703 189
Other liabilities $ 943 (7)
Embedded derivatives within liability host contracts (2) $ 5,387 500
(Increase) decrease in estimated fair value of liabilities 780
Derivative instruments with interest rate risk
Interest rate contracts $ 59,661 $ (2,498) (1,792)
Equity contracts $ 50,138 $ 119 6
Foreign currency contracts $ 5,335 $ 727 (57)
Increase (decrease) in estimated fair value of derivative
instruments (1,843)
Net change $ (7,796)
_______________
(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 on the consolidated balance sheet in the
same caption as the host contract.
(3)Excludes$45.0 billion of liabilities at carrying value pursuant to insurance contracts reported within future policy benefits and other policy-related balances on the consolidated balance sheet atDecember 31, 2022 . 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 rate sensitive assets.
Sensitivity Summary
Sensitivity to a 100 basis point rise in interest rates decreased by$1.1 billion , or 12%, to$7.8 billion atDecember 31, 2022 from$8.9 billion atDecember 31, 2021 , primarily as a result of a decrease in the estimated fair value of our fixed maturity securities due to higher interest rates, in line with management expectation.
Sensitivity to a 10% rise in equity prices decreased by
As discussed above, we economically hedge substantially all of our foreign
currency exposure such that sensitivity to changes in foreign currencies is
minimal.
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Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements, Notes and Schedules
Page
Report of Independent Registered Public Accounting Firm 111
Financial Statements at
2022
Consolidated Balance Sheets 114 Consolidated Statements of Operations 115 Consolidated Statements of Comprehensive Income (Loss) 116 Consolidated Statements of Equity 117 Consolidated Statements of Cash Flows 118 Notes to the Consolidated Financial Statements
Note 1 - Business, Basis of Presentation and Summary of Significant Accounting
Policies
120 Note 2 - Segment Information 130 Note 3 - Insurance 134 Note 4 - Deferred Policy Acquisition Costs, Value of Business Acquired and Deferred Sales Inducements 138 Note 5 - Reinsurance 138 Note 6 - Investments 141 Note 7 - Derivatives 153 Note 8 - Fair Value 158 Note 9 - Long-term Debt 168 Note 10 - Equity 170 Note 11 - Other Revenues and Other Expenses 178 Note 12 - Employee Benefit Plans 179 Note 13 - Income Tax 180 Note 14 - Earnings Per Common Share 183 Note 15 - Contingencies, Commitments and Guarantees 184 Note 16 - Subsequent Event 186
Financial Statement Schedules at
Schedule I - Consolidated Summary of Investments - Other Than Investments in Related
Parties
187
Schedule II - Condensed Financial Information (Parent Company Only) 188
Schedule III - Consolidated Supplementary Insurance Information 193
Schedule IV - Consolidated Reinsurance 195
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-------------------------------------------------------------------------------- Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets ofBrighthouse Financial, Inc. and subsidiaries (the "Company") as ofDecember 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period endedDecember 31, 2022 , and the related notes and the schedules listed in the Index to Consolidated 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 ofDecember 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period endedDecember 31, 2022 , in conformity with accounting principles generally accepted inthe United States of America . We have also audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States ) (PCAOB), the Company's internal control over financial reporting as ofDecember 31, 2022 , based on criteria established in Internal Control - Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of theTreadway Commission and our report datedFebruary 23, 2023 , expressed an unqualified opinion on the Company's internal control over financial reporting.
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 PCAOB and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities 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. 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 that 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. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Liability for Future Policy Benefits - Refer to Notes 1 and 3 to the
consolidated financial statements
Critical Audit Matter Description
As ofDecember 31, 2022 , the liability for future policy benefits totaled$41.6 billion , and included benefits related to variable annuity contracts with guaranteed benefit riders and universal life insurance contracts with secondary guarantees. Management regularly reviews its assumptions supporting the estimates of these actuarial liabilities and differences between actual experience and the assumptions used in pricing the policies and guarantees may require a change to the assumptions 111
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recorded at inception as well as an adjustment to the related liabilities.
Updating such assumptions can result in variability of profits or the
recognition of losses.
Given the future policy benefit obligation for these contracts is sensitive to changes in the assumptions related to general account and separate account investment returns, and policyholder behavior including mortality, lapses, premium persistency, benefit election and utilization, and withdrawals, auditing management's selection of these assumptions involves an especially high degree of estimation.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the updating of assumptions by management
included the following, among others:
•We tested the effectiveness of management's controls over the assumption review process, including those over the selection of the significant assumptions used related to general account and separate account investment returns, and policyholder behavior including mortality, lapses, premium persistency, benefit election and utilization, and withdrawals. •With the assistance of our actuarial specialists, we evaluated the appropriateness of the significant assumptions used, developed an independent estimate of the future policy benefit liability for a sample of policies, and compared our estimates to management's estimates. •We tested the completeness and accuracy of the underlying data that served as the basis for the actuarial analysis, including experience studies, to test that the inputs to the actuarial estimate were reasonable.
•We evaluated the methods and significant assumptions used by management to
identify potential bias.
•We evaluated whether the significant assumptions used were consistent with
evidence obtained in other areas of the audit.
Deferred Policy Acquisition Costs (DAC) - Refer to Notes 1 and 4 to the
consolidated financial statements
Critical Audit Matter Description
The Company incurs and defers certain costs in connection with acquiring new and renewal insurance business. These deferred costs, amounting to$5.7 billion as ofDecember 31, 2022 , are amortized over the expected life of the policy contract in proportion to actual and expected future gross profits, premiums, or margins. For deferred annuities and universal life contracts, expected future gross profits utilized in the amortization calculation are derived using assumptions such as separate account and general account investment returns, mortality, in-force or persistency, benefit elections and utilization, and withdrawals. The assumptions used in the calculation of expected future gross profits are reviewed at least annually. Given the significance of the estimates and uncertainty associated with the long-term assumptions utilized in the determination of expected future gross profits, auditing management's determination of the appropriateness of the assumptions used in the calculation of DAC amortization involves an especially high degree of estimation.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management's determination of DAC amortization
included the following, among others:
•We tested the effectiveness of management's controls related to the
determination of expected future gross profits, including those over
management's review that the significant assumptions utilized related to
separate account and general account investment returns, mortality, in-force or
persistency, benefit elections and utilization, and withdrawals represented a
reasonable estimate.
•With assistance from our actuarial specialists, we evaluated the data included
in the estimate provided by the Company's actuaries and the methodology
utilized, and evaluated the process used by the Company to determine whether the
significant assumptions used were reasonable estimates based on the Company's
own experience and industry studies.
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•We inquired of the Company's actuarial specialists whether there were any
changes in the methodology utilized during the year in the determination of
expected future gross profits.
•We inspected supporting documentation underlying the Company's experience studies and, utilizing our actuarial specialists, independently recalculated the amortization for a sample of policies, and compared our estimates to management's estimates. •We evaluated whether the significant assumptions used by the Company were consistent with evidence obtained in other areas of the audit and to identify potential bias.
•We evaluated the sufficiency of the Company's disclosures related to DAC
amortization.
Embedded Derivative Liabilities Related to Variable Annuity Guarantees - Refer
to Notes 1, 7, and 8 to the consolidated financial statements.
Critical Audit Matter Description
The Company sells index-linked annuities and variable annuity products with guaranteed minimum benefits, some of which are embedded derivatives that are required to be bifurcated from the host contract, separately accounted for, and measured at fair value. As ofDecember 31, 2022 , the fair value of the embedded derivative liability associated with certain of the Company's annuity contracts was$5.4 billion . Management utilizes various assumptions in order to measure the embedded liability including expectations concerning policyholder behavior, mortality and risk margins, as well as changes in the Company's own nonperformance risk. These assumptions are reviewed at least annually by management, and if they change significantly, the estimated fair value is adjusted by a cumulative charge or credit to net income.
Given the embedded derivative liability is sensitive to changes in these
assumptions, auditing management's selection of these assumptions involves an
especially high degree of estimation.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the assumptions selected by management for the
embedded derivative liability included the following, among others:
•We tested the effectiveness of management's controls over the embedded
derivative liability, including those over the selection of the significant
assumptions related to policyholder behavior, mortality, risk margins and the
Company's nonperformance risk.
•With the assistance of our actuarial specialists, we evaluated the
appropriateness of the significant assumptions, tested the completeness and
accuracy of the underlying data and the mathematical accuracy of the Company's
valuation model.
•We evaluated the reasonableness of the Company's assumptions by comparing those
selected by management to those independently derived by our actuarial
specialists, drawing upon standard actuarial and industry practice.
•We evaluated the methods and assumptions used by management to identify
potential bias in the determination of the embedded liability.
•We evaluated whether the assumptions used were consistent with evidence
obtained in other areas of the audit.
/s/DELOITTE & TOUCHE LLP Charlotte, North Carolina February 23, 2023
We have served as the Company's auditor since 2016.
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Brighthouse Financial, Inc.
Consolidated Balance Sheets
December 31, 2022 and 2021
(In millions, except share and per share data)
2022 2021
Assets
Investments:
Fixed maturity securities available-for-sale, at estimated fair value
(amortized cost:
credit losses of
$ 75,577 $ 87,582 Equity securities, at estimated fair value 89 101
Mortgage loans (net of allowance for credit losses of
22,936 19,850 Policy loans 1,282 1,264 Limited partnerships and limited liability companies 4,775 4,271 Short-term investments, principally at estimated fair value 1,081 1,841
Other invested assets, principally at estimated fair value (net of
allowance for credit losses of
2,852 3,316 Total investments 108,592 118,225 Cash and cash equivalents 4,115 4,474 Accrued investment income 885 724
Premiums, reinsurance and other receivables (net of allowance for
credit losses of
19,266 16,094 Deferred policy acquisition costs and value of business acquired 5,659 5,377 Current income tax recoverable 38 - Deferred income tax asset 1,618 - Other assets 442 482 Separate account assets 84,965 114,464 Total assets$ 225,580 $ 259,840 Liabilities and Equity Liabilities Future policy benefits$ 41,569 $ 43,807 Policyholder account balances 74,836 66,851 Other policy-related balances 3,400 3,457
Payables for collateral under securities loaned and other transactions
4,560 6,269 Long-term debt 3,156 3,157 Current income tax payable - 62 Deferred income tax liability - 1,062 Other liabilities 7,056 4,504 Separate account liabilities 84,965 114,464 Total liabilities 219,542 243,633
Contingencies, Commitments and Guarantees (Note 15)
Equity
Brighthouse Financial, Inc.'s stockholders' equity:
Preferred stock, par value $0.01 per share; $1,753 aggregate
liquidation preference
- -
Common stock, par value $0.01 per share; 1,000,000,000 shares
authorized; 122,153,422 and 121,513,442 shares issued, respectively;
68,278,068 and 77,870,072 shares outstanding, respectively
1 1 Additional paid-in capital 14,075 14,154 Retained earnings (deficit) (637) (642)
(2,042) (1,543)
Accumulated other comprehensive income (loss) (5,424) 4,172
Total Brighthouse Financial, Inc.'s stockholders' equity 5,973 16,142
Noncontrolling interests 65 65
Total equity 6,038 16,207
Total liabilities and equity $ 225,580 $ 259,840
See accompanying notes to the consolidated financial statements.
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Brighthouse Financial, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2022, 2021 and 2020
(In millions, except per share data)
2022 2021 2020
Revenues
Premiums $ 662 $ 707 $ 766
Universal life and investment-type product policy fees 3,141 3,636 3,463
Net investment income 4,138 4,881 3,601
Other revenues 476 446 413
Net investment gains (losses) (248) (59) 278
Net derivative gains (losses) 304 (2,469) (18)
Total revenues 8,473 7,142 8,503
Expenses
Policyholder benefits and claims 4,165 3,443 5,711 Interest credited to policyholder account balances 1,439 1,312 1,092 Amortization of deferred policy acquisition costs and value of business acquired 956 144 766 Other expenses 2,085 2,451 2,353 Total expenses 8,645 7,350 9,922 Income (loss) before provision for income tax (172) (208) (1,419) Provision for income tax expense (benefit) (182) (105) (363) Net income (loss) 10 (103) (1,056)
Less: Net income (loss) attributable to noncontrolling
interests
5 5 5 Net income (loss) attributable to Brighthouse Financial, Inc. 5 (108) (1,061) Less: Preferred stock dividends 104 89 44
Net income (loss) available to
common shareholders
$ (99) $ (197) $ (1,105) Earnings per common share Basic $ (1.36) $ (2.36) $ (11.58) Diluted $ (1.36) $ (2.36) $ (11.58)
See accompanying notes to the consolidated financial statements.
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Brighthouse Financial, Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2022, 2021 and 2020
(In millions)
2022 2021 2020
Net income (loss) $ 10 $ (103) $ (1,056)
Other comprehensive income (loss):
Unrealized investment gains (losses), net of related offsets (12,443) (2,107) 3,208
Unrealized gains (losses) on derivatives 309 156 (72)
Foreign currency translation adjustments (22) 1 20
Defined benefit plans adjustment 8 (4) (13)
Other comprehensive income (loss), before income tax (12,148) (1,954) 3,143
Income tax (expense) benefit related to items of other
comprehensive income (loss)
2,552 410 (667) Other comprehensive income (loss), net of income tax (9,596) (1,544) 2,476 Comprehensive income (loss) (9,586) (1,647) 1,420 Less: Comprehensive income (loss) attributable to noncontrolling interests, net of income tax 5 5 5
Comprehensive income (loss) attributable to
Financial, Inc.
$ (9,591) $ (1,652) $ 1,415
See accompanying notes to the consolidated financial statements.
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Brighthouse Financial, Inc.
Consolidated Statements of Equity
For the Years Ended December 31, 2022, 2021 and 2020
(In millions)
Accumulated
Retained Other Brighthouse Financial,
Additional Earnings Treasury Comprehensive Inc.'s Stockholders' Noncontrolling Total
Preferred Stock Common Stock Paid-in Capital (Deficit) Stock at Cost Income (Loss) Equity Interests Equity
Balance at December 31, 2019 $ - $ 1
$ 12,908 $ 585 $ (562) $
3,240 $ 16,172 $ 65 $ 16,237 Cumulative effect of change in accounting principle, net of income tax (14) 3 (11) (11) Balance at January 1, 2020 - 1 12,908 571 (562) 3,243 16,161 65 16,226 Preferred stock issuance - 948 948 948Treasury stock acquired in connection with share repurchases (473) (473) (473) Share-based compensation - 22 (3) 19 19 Dividends on preferred stock (44) (44) (44) Change in noncontrolling interests - (5) (5) Net income (loss) (1,061) (1,061) 5 (1,056) Other comprehensive income (loss), net of income tax 2,473 2,473 2,473 Balance at December 31, 2020 - 1 13,878 (534) (1,038) 5,716 18,023 65 18,088 Preferred stock issuances - 339 339 339Treasury stock acquired in connection with share repurchases (499) (499) (499) Share-based compensation - 26 (6) 20 20 Dividends on preferred stock (89) (89) (89) Change in noncontrolling interests - (5) (5) Net income (loss) (108) (108) 5 (103) Other comprehensive income (loss), net of income tax (1,544) (1,544) (1,544) Balance at December 31, 2021 - 1 14,154 (642) (1,543) 4,172 16,142 65 16,207Treasury stock acquired in connection with share repurchases (488) (488) (488) Share-based compensation - 25 (11) 14 14 Dividends on preferred stock (104) (104) (104) Change in noncontrolling interests - (5) (5) Net income (loss) 5 5 5 10 Other comprehensive income (loss), net of income tax (9,596) (9,596) (9,596) Balance at December 31, 2022 $ - $ 1 $ 14,075 $ (637) $ (2,042) $ (5,424) $ 5,973 $ 65 $ 6,038 See accompanying notes to the consolidated financial statements. 117
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Brighthouse Financial, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2022, 2021 and 2020
(In millions)
2022 2021 2020
Cash flows from operating activities
Net income (loss) $ 10 $ (103) $ (1,056)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Amortization of premiums and accretion of discounts associated
with investments, net (233) (254) (260)
(Gains) losses on investments, net 248 59 (278)
(Gains) losses on derivatives, net (153) 2,120 424
(Income) loss from equity method investments, net of dividends
and distributions
110 (987) (54) Interest credited to policyholder account balances 1,439 1,312 1,092 Universal life and investment-type product policy fees (3,141) (3,636) (3,463) Change in accrued investment income (113) (44) (9) Change in premiums, reinsurance and other receivables (3,106) 56 (1,346) Change in deferred policy acquisition costs and value of business acquired, net 531 (349) 358 Change in income tax (234) (210) (243) Change in other assets 1,780 2,086 1,968 Change in future policy benefits and other policy-related balances 1,501 741 3,395 Change in other liabilities 178 (153) 285 Other, net 32 108 75 Net cash provided by (used in) operating activities (1,151) 746 888 Cash flows from investing activities Sales, maturities and repayments of: Fixed maturity securities 10,728 12,616 8,459 Equity securities 53 129 68 Mortgage loans 2,079 2,900 1,935 Limited partnerships and limited liability companies 252 271 177 Purchases of: Fixed maturity securities (15,799) (21,158) (14,401) Equity securities (37) (18) (23) Mortgage loans (5,321) (6,913) (2,076) Limited partnerships and limited liability companies (814) (837) (581) Cash received in connection with freestanding derivatives 4,480 3,965 6,356 Cash paid in connection with freestanding derivatives (4,275) (4,592) (4,515) Net change in policy loans (18) 27 1 Net change in short-term investments 772 1,397 (1,271) Net change in other invested assets (376) (25) 28 Net cash provided by (used in) investing activities $
(8,276) $ (12,238) $ (5,843)
See accompanying notes to the consolidated financial statements.
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Brighthouse Financial, Inc.
Consolidated Statements of Cash Flows (continued)
For the Years Ended December 31, 2022, 2021 and 2020
(In millions)
2022 2021 2020
Cash flows from financing activities
Policyholder account balances:
Deposits $ 31,623 $ 16,059 $ 10,095
Withdrawals (20,050) (4,235) (3,270)
Net change in payables for collateral under securities loaned
and other transactions (1,709) 1,017 861
Long-term debt issued - 400 615
Long-term debt repaid (3) (680) (1,552)
Preferred stock issued, net of issuance costs - 339 948
Dividends on preferred stock (104) (89) (44)
(499) (473)
Financing element on certain derivative instruments and other
derivative related transactions, net
(185) (368) (948) Other, net (16) (86) (46) Net cash provided by (used in) financing activities 9,068 11,858 6,186 Change in cash, cash equivalents and restricted cash (359) 366 1,231
Cash, cash equivalents and restricted cash, beginning of year 4,474
4,108 2,877 Cash, cash equivalents and restricted cash, end of year $ 4,115 $ 4,474 $ 4,108 Supplemental disclosures of cash flow information Net cash paid (received) for: Interest $ 152 $ 160 $ 186 Income tax $ 44 $ 103 $ (100) Non-cash transactions: Transfer of mortgage loans to affiliates $ 95
$ - $ -
Transfer of limited partnerships and limited liability
companies from affiliates
$ 99 $ - $ -
See accompanying notes to the consolidated financial statements.
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Brighthouse Financial, Inc.
Notes to the Consolidated Financial Statements
1. Business, Basis of Presentation and Summary of Significant Accounting
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