BRIGHTHOUSE LIFE INSURANCE CO – 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
Overview 46
Summary of Critical Accounting Estimates 47
Non-GAAP Financial Disclosures 50
Results of Operations 52
Policyholder Liabilities 57
Liquidity and Capital Resources 57
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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.
Overview
We offer a range of annuity and life insurance products to individuals and deliver our products 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.
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 or duration
of the pandemic, including (i) the severity, duration and frequency of any
additional "waves" or emerging variants of COVID-19 and (ii) the efficacy or
utilization of any therapeutic treatments and vaccines for COVID-19 or variants
thereof. 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 in the future to revisit or revise
any targets we may provide to the markets or aspects of our business model. See
"Risk Factors - Risks Related to Our Business - The ongoing COVID-19 pandemic
could materially adversely affect our business, financial condition and results
of operations, including our capitalization and liquidity."
In response to the COVID-19 pandemic, management promptly implemented our
business continuity plans, and we shifted all our employees to a remote work
environment, where they currently remain. Our sales and support teams remain
fully operational, and the COVID-19 pandemic has not interrupted our ability to
service our distribution partners and customers. Additionally, 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, payments of
premiums, sources and uses of liquidity, the valuation of our investments and
the performance of our derivatives programs. We have observed varying degrees of
impact in these areas, and we have taken prudent and proportionate measures to
address such impacts; however, at this time we continue to be unable to predict
if the COVID-19 pandemic will have a material adverse impact on our business,
financial condition or results of operations. 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.
Economic uncertainty resulting from the COVID-19 pandemic continues to impact
sales of certain of our products, and we are providing relief to customers
affected by adverse circumstances due to the COVID-19 pandemic, as disclosed in
"Business - Regulation - Insurance Regulation." While the relief granted to
customers to date has not had a material impact on our financial condition or
results of operations, it continues to not be possible to estimate the potential
impact of any future relief. Circumstances resulting from the COVID-19 pandemic
have also impacted the incidence of claims, the utilization of benefits, lapses
or surrenders of policies and payments on insurance premiums, though such
impacts have not been material through the end of 2021. 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.
Certain sectors of our investment portfolio may have been, and may in the future
be, adversely affected as a result of the impact of the COVID-19 pandemic on
capital markets and the global economy, as well as uncertainty regarding its
duration and outcome. See Note 6 of the Notes to the Consolidated Financial
Statements.
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Credit rating agencies may continue to review and adjust their ratings for the companies that they rate, including us. The credit rating agencies also evaluate the insurance industry as a whole and may change our financial strength rating based on their overall view of our industry. See "Risk Factors - Risks Related to Our Business - A downgrade or a potential downgrade in our financial strength ratings could result in a loss of business and materially adversely affect our financial condition and results of operations" and "- Liquidity and Capital Resources - Rating Agencies."
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.
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.
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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. Our current projections assume reversion to a ten-year treasury rate of 3.00% over a period of ten years. As part of our 2021 AAR, we increased our projected long-term general account earned rate, while maintaining our mean reversion rate at 3.00%, which resulted in a decrease in our ULSG liabilities of$12 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$205 million . We use a mean reversion approach to separate account returns where the mean reversion period is five years with a long-term separate account return after the five-year reversion period is over. The current long-term rate of return assumption for 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.
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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) attributable toBrighthouse Life Insurance Company 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 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.
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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 BHF's 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 our financial strength ratings as compared to the credit rating of BHF. 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 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 12 of the Notes to the Consolidated Financial Statements for
additional information on our income taxes.
Non-GAAP Financial Disclosures
Our definitions of non-GAAP financial measures may differ from those used by
other companies.
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 and contract holders 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) attributable toBrighthouse Life Insurance Company , 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) attributable toBrighthouse Life Insurance Company . 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);
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•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.
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 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
gain 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
gain 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.
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Table of Contents Results of Operations Annual Actuarial Review We typically conduct our AAR in the third quarter of each year. As a result of the 2021 AAR, we updated 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 noted above. In 2020, the most significant impact from our AAR was decreasing the long-term general account earned rate, driven by a reduction in our mean reversion rate from 3.75% to 3.00%, which had the largest impact on our ULSG business. For our variable annuity business, in addition to the update in the long-term general account earned rate, we updated assumptions regarding policyholder behavior, mortality, separate account fund allocations and volatility, as well as maintenance expenses. In our life business, we updated assumptions related to policyholder behavior, mortality and maintenance expenses.
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,
2021 2020
(In millions)
Revenues
Premiums $ 687 $ 736
Universal life and investment-type product policy fees 2,986 2,839
Net investment income 4,815 3,528
Other revenues 334 302
Net investment gains (losses) (63) 279
Net derivative gains (losses) (2,359) (132)
Total revenues 6,400 7,552
Expenses
Policyholder benefits and claims 3,213 5,689
Interest credited to policyholder account balances 1,286 1,061
Capitalization of DAC (492) (406)
Amortization of DAC and VOBA 105 696
Interest expense on debt 67 68
Other expenses 2,225 2,182
Total expenses 6,404 9,290
Income (loss) before provision for income tax (4) (1,738)
Provision for income tax expense (benefit) (71) (433)
Net income (loss) 67 (1,305)
Less: Net income (loss) attributable to noncontrolling interests 1 1
Net income (loss) attributable to Brighthouse Life Insurance
Company $ 66 $ (1,306)
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The components of net income (loss) were as follows:
Years Ended December 31,
2021 2020
(In millions)
GMLB Riders $ (2,067) $ (2,475)
Other derivative instruments (60) 1,130
Net investment gains (losses) (63) 279
Other adjustments 23 (54)
Pre-tax adjusted earnings, less net income (loss) attributable to
noncontrolling interests
2,162 (619)
Income (loss) attributable to
before provision for income tax
(5) (1,739) Provision for income tax expense (benefit) (71) (433)
Net income (loss) attributable to
GMLB Riders. The guaranteed minimum living benefits ("GMLB") riders ("GMLB
Riders") 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).
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 ULSG businesses 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 Financial Disclosures - Adjusted
Earnings."
Year Ended
Loss before provision for income tax was$5 million (income of$66 million , net of income tax), a lower loss of$1.7 billion ($1.4 billion , net of income tax) from a loss before provision for income tax of$1.7 billion ($1.3 billion , net of income tax) in the prior period.
The increase in income before provision for income tax was driven by the
following favorable items:
•higher pre-tax adjusted earnings, as discussed in greater detail below; and
•lower losses from GMLB Riders, see "- GMLB Riders for the Years Ended
31, 2021
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The increase in income before provision for income tax was partially offset by
the following unfavorable items:
•losses on interest rate derivatives used to manage interest rate exposure in our ULSG business due to the long-term benchmark interest rate increasing in the current period and decreasing in the prior period, partially offset by favorable returns on equity options from equity markets increasing more in the current period than in the prior period; and
•net investment losses reflecting current period net losses on sales of fixed
maturity securities compared to prior period net gains.
The increase in income before provision for income tax 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 non-recurring
adjustments in the current period.
Reconciliation of Net Income (Loss) to Adjusted Earnings
The reconciliation of net income (loss) attributable to
Insurance Company
Years Ended December 31,
2021 2020
(In millions)
Net income (loss) attributable to
Company
$ 66$ (1,306) Add: Provision for income tax expense (benefit) (71) (433)
Income (loss) attributable to
Company
(5) (1,739) Less: GMLB Riders (2,067) (2,475) Less: Other derivative instruments (60) 1,130 Less: Net investment gains (losses) (63) 279 Less: Other adjustments 23 (54)
Pre-tax adjusted earnings, less net income (loss) attributable
to noncontrolling interests
2,162 (619) Less: Provision for income tax expense (benefit) 382 (198) Adjusted earnings$ 1,780 $ (421)
Consolidated Results for the Years Ended
Earnings
The components of adjusted earnings were as follows:
Years Ended December 31,
2021 2020
(In millions)
Fee income $ 3,078 $ 2,890
Net investment spread 2,844 1,579
Insurance-related activities (1,777) (2,790)
Amortization of DAC and VOBA (182) (498)
Other expenses, net of DAC capitalization (1,800) (1,799)
Less: Net income (loss) attributable to noncontrolling interests 1 1
Pre-tax adjusted earnings, less net income (loss) attributable to
noncontrolling interests
2,162 (619) Provision for income tax expense (benefit) 382 (198) Adjusted earnings$ 1,780 $ (421)
Year Ended
Adjusted earnings were
billion
Key net favorable impacts were:
•higher net investment spread due to:
•higher returns on other limited partnerships for the comparative measurement
period; and
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•higher average invested assets resulting from positive net flows in the general
account;
partially offset by
•lower investment yields on our fixed income portfolio, as proceeds from
maturing investments and the growth in the investment portfolio were invested at
lower yields than the portfolio average;
•higher interest credited resulting from changes in interest accrual assumptions in connection with the AAR and the related modeling changes in our annuities business; and
•higher interest credited to policyholders due to higher imputed interest on
insurance liabilities related to modeling improvements in the prior period
resulting from an actuarial system conversion in our life business;
•lower net costs associated with insurance-related activities due to:
•a net decrease in liability balances resulting primarily from changes in
assumptions made in connection with the AAR in our ULSG and annuities
businesses, which included changes in the long-term general account earned rate
and policyholder behavior assumptions;
partially offset by
•higher paid claims, net of reinsurance in our life business;
•lower amortization of DAC and VOBA due to:
•a favorable impact in our annuities and life businesses resulting from changes in assumptions, as well as model refinements made in connection with the AAR, which included changes in policyholder behavior and capital markets assumptions; and
•an adjustment in the current period related to modeling improvements resulting
from an actuarial system conversion in our annuities business; and
•higher net fee income resulting from:
•higher average separate account balances, a portion of which is offset in other
expenses;
partially offset by
•a decline in the net cost of insurance fees driven by the aging in-force
business; and
•lower unearned revenue amortization in our life business resulting from changes
in connection with the AAR.
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 32% in the prior period. Our effective tax rate differs from the
statutory tax rate primarily due to the impacts of the dividends received
deduction and tax credits.
GMLB Riders for the Years Ended
The overall impact on income (loss) 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,
2021 2020
(In millions)
Liabilities $ (1,722) $ (4,196)
Hedges (1,130) 1,052
Ceded reinsurance (100) 60
Fees (1) 818 812
GMLB DAC 67 (203)
Total GMLB Riders $ (2,067) $ (2,475)
_______________
(1) Excludes living benefit fees, included as a component of adjusted earnings,
of $59 million and $57 million for the years ended December 31, 2021 and 2020,
respectively.
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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), 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 benefits that provide the policyholder a minimum return based on their
initial deposit (the "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 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.
Year Ended
Comparative results from GMLB Riders were favorable by
The AAR primarily resulted in favorable changes in reserves and DAC amortization
recognized in the current period.
Results were also driven by:
•unfavorable changes in our GMLB hedges;
•unfavorable changes to the estimated fair value of embedded derivative
liabilities associated with Shield Annuities ("Shield liabilities"); and
•unfavorable changes in ceded reinsurance;
partially offset by
•favorable changes to the estimated fair value of variable annuity liability
reserves; and
•favorable changes in GMLB DAC.
Higher interest rates resulted in the following impacts:
•unfavorable changes to the estimated fair value of our GMLB hedges;
•unfavorable changes to GMLB DAC;
•unfavorable changes to the estimated fair value of Shield liabilities; and
•unfavorable changes in ceded reinsurance;
partially offset by
•favorable changes to the estimated fair value of variable annuity liability
reserves.
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Higher equity markets resulted in the following impacts:
•unfavorable changes to the estimated fair value of Shield liabilities;
partially offset by
•favorable changes to the estimated fair value of our GMLB hedges; and
•favorable changes to GMLB DAC.
The narrowing of our credit spreads in the current period combined with a decrease in the underlying variable annuity liability reserves resulted in an unfavorable change in the adjustment for nonperformance risk, net of a favorable change in GMLB DAC. 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.
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. For further information regarding market factors that could affect our ability to meet liquidity and capital needs, including those related to the COVID-19 pandemic, see "Risk Factors - Risks Related to Our Business - The ongoing COVID-19 pandemic could materially adversely affect our business, financial condition and results of operations, including our capitalization and liquidity" and "- Overview - COVID-19 Pandemic."
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. 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$2.1 billion and$2.7 billion atDecember 31, 2021 and 2020, 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. 57
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An integral part of our liquidity management includes managing our level of liquid assets, which was$52.4 billion and$49.3 billion atDecember 31, 2021 and 2020, 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.
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. The level and composition ofBrighthouse Life Insurance Company's and BHNY's regulatory capital are among the many factors considered in determining their respective financial strength 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 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 StableBrighthouse Life Insurance Company A A A3 A+Brighthouse Life Insurance Company of NY A NR NR A+ ______________
(1)
"A++ (Superior)" to "S (Suspended)."
(2)Fitch's financial strength ratings for insurance companies range from "
(highest rating)" to "C (distressed)."
(3)Moody's financial strength ratings for insurance companies range from "Aaa
(highest quality)" to "C (lowest rated)."
(4)S&P's financial strength ratings for insurance companies range from "
(extremely strong)" to "SD (selective default)" or "D (default)."
NR = Not rated
Rating agencies may continue to review and adjust our ratings. For example, inApril 2020 , Fitch revised the rating outlook forBrighthouse Life Insurance Company and an affiliate to negative from stable due to the disruption to economic activity and the financial markets from the COVID-19 pandemic. This action by Fitch followed its revision of the rating outlook on theU.S. life insurance industry to negative. InApril 2021 , Fitch revised the rating outlook forBrighthouse Life Insurance Company and an affiliate from negative back to stable. See "Risk Factors - Risks Related to Our Business - A downgrade or a potential downgrade in our financial strength 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.
Sources and Uses of Liquidity and Capital
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 Asset
Liability Management ("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.
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Cash Flows from Financing Activities
The principal cash inflows from our financing activities come from capital contributions from our parent,BH Holdings , issuances of debt, deposits of funds associated with policyholder account balances and lending of securities. The principal cash outflows come from repayments of debt, 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.
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 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
In
agreement-backed notes program (the "FABN Program"), pursuant to which
purpose statutory trust for spread lending purposes. The maximum aggregate
principal amount permitted to be outstanding at any one time under the FABN
Program is
reported in Corporate & Other.
Federal Home Loan Bank Funding Agreements
("FHLB") of
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") with a term ending onDecember 31, 2023 , pursuant to which the parties may enter into funding agreements in an aggregate amount of up to$500 million either (i) for spread lending purposes or (ii) to provide additional liquidity. Activity related to these funding agreements is reported in Corporate & Other. 59
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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,
2021 2020 2021 2020 2019 2021 2020 2019
(In millions)
FABCP Program $ 1,848 $ - $ 2,939 $ - $ - $ 1,091 $ - $ -
FABN Program 2,900 - 2,900 - - - - -
FHLB Funding Agreements (1) 900 - 1,352 - - 452 - -
Farmer Mac Funding
Agreements 125 - 125 - - - - -
Total $ 5,773 $ - $ 7,316 $ - $ - $ 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.
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 residential mortgage-backed securities, commercial mortgage-backed securities 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 us. The NAIC's present methodology is to evaluateStructured Securities held by insurers on an annual basis. If we 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. The following table presents total fixed maturity securities by NRSRO rating and the applicable NAIC designation from the NAIC published comparison of NRSRO ratings to NAIC designations, except for certainStructured Securities , which are presented using the NAIC methodologies, as well as the percentage, based on estimated fair value that each NAIC designation is comprised of at:December 31, 2021 December 31, 2020 Allowance Amortized Allowance for Unrealized Estimated % of Amortized for Credit Unrealized Estimated % of NAIC Designation NRSRO Rating Cost Credit Losses Gain (Loss) Fair Value Total Cost Losses Gain (Loss) Fair Value Total (Dollars in millions) 1 Aaa/Aa/A$ 49,226 $ -$ 6,065 $ 55,291 63.9 %$ 43,607 $ -$ 8,391 $ 51,998 64.0 % 2 Baa 25,110 - 2,112 27,222 31.5 22,635 - 3,290 25,925 31.9 Subtotal investment grade 74,336 - 8,177 82,513 95.4 66,242 - 11,681 77,923 95.9 3 Ba 2,584 - 67 2,651 3.1 2,345 - 117 2,462 3.0 4 B 1,221 3 12 1,230 1.4 800 - 20 820 1.0 5 Caa and lower 142 8 (4) 130 0.1 91 2 - 89 0.1 6 In or near default 4 - (1) 3 - 5 - - 5 - Subtotal below investment grade 3,951 11 74 4,014 4.6 3,241 2 137 3,376 4.1 Total fixed maturity securities$ 78,287 $ 11$ 8,251 $ 86,527 100.0 %$ 69,483 $ 2 $ 11,818 $ 81,299 100.0 % Debt Issuances
See Note 9 of the Notes to the Consolidated Financial Statements for information
on debt issuances.
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Committed Facilities
See Notes 9 and 10 of the Notes to the Consolidated Financial Statements for
information regarding our committed facilities.
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:
Dividends Paid toBH Holdings
See Note 10 of the Notes to the Consolidated Financial Statements for
information regarding dividends paid to
Intercompany Liquidity Facilities
See Note 9 of the Notes to the Consolidated Financial Statements for information
relating to our intercompany liquidity facilities including obligations
outstanding, issuances and repayments.
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. During the years endedDecember 31, 2021 , 2020 and 2019, general account surrenders and withdrawals totaled$4.5 billion ,$2.0 billion and$2.2 billion , respectively.
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. At bothDecember 31, 2021 and 2020, we did not pledge any cash collateral to counterparties and we were obligated to return cash collateral pledged to us by counterparties of$1.6 billion . We also pledge collateral from time to time in connection with certain 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$593 million and$840 million atDecember 31, 2021 and 2020, 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. We were liable for cash collateral under our control of$4.6 billion and$3.7 billion atDecember 31, 2021 and 2020, 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. The amount of this non-cash collateral was$2 million at estimated fair value atDecember 31, 2021 . The Company did not hold any non-cash collateral atDecember 31 2020 .
See Note 6 of the Notes to the Consolidated Financial Statements for further
discussion of our securities lending program.
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 13 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. See Note 6 of the
Notes to the Consolidated Financial Statements. See "Commitments" in Note 13 of
the Notes to the Consolidated Financial Statements.
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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 13 of the Notes to the
Consolidated Financial Statements.
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