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BRIGHTHOUSE LIFE INSURANCE CO – 10-Q – 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 48
Overview 48
Regulatory Developments 48
Summary of Critical Accounting Estimates 49
Non-GAAP Disclosures 49
Results of Operations 51
Liquidity and Capital Resources 55
Note Regarding Forward-Looking Statements 57
47
-------------------------------------------------------------------------------- Table of Contents Introduction For purposes of this discussion, unless otherwise mentioned or unless the context indicates otherwise, "BLIC," the "Company," "we," "our" and "us" refer toBrighthouse Life Insurance Company , aDelaware corporation originally incorporated inConnecticut in 1863, and its subsidiaries.Brighthouse Life Insurance Company is a wholly-owned subsidiary ofBrighthouse Holdings, LLC and an indirect wholly-owned subsidiary of Brighthouse Financial, Inc. (together with its subsidiaries and affiliates, "Brighthouse Financial"). Management's narrative analysis of the results of operations is presented pursuant to General Instruction H(2)(a) of Form 10-Q. This narrative analysis should be read in conjunction with (i) the Interim Condensed Consolidated Financial Statements and related notes included elsewhere herein; (ii) our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theU.S. Securities and Exchange Commission ("SEC") onMarch 3, 2021 (the "2020 Annual Report"); (iii) our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2021 (the "First Quarter Form 10-Q") filed with theSEC onMay 11, 2021 ; (iv) our Quarterly Report on Form 10-Q for the quarter endedJune 30, 2021 (the "Second Quarter Form 10-Q" and, together with the First Quarter Form 10-Q, the "Quarterly Reports") filed with theSEC onAugust 9, 2021 ; and (v) our current reports on Form 8-K filed in 2021. Overview We offer a range of individual annuities and individual life insurance products. We are licensed and regulated in eachU.S. jurisdiction where we conduct insurance business.Brighthouse Life Insurance Company is licensed to issue insurance products in allU.S. states (exceptNew York ), theDistrict of Columbia , theBahamas ,Guam ,Puerto Rico , theBritish Virgin Islands and theU.S. Virgin Islands . Our insurance subsidiary,Brighthouse Life Insurance Company of NY ("BHNY"), is only licensed to issue insurance products inNew York . For operating purposes, we have established 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" included in our 2020 Annual Report, as well as Note 2 of the Notes to the Interim Condensed Consolidated Financial Statements for further information regarding our segments and Corporate & Other. COVID-19 Pandemic We continue to closely monitor developments related to the worldwide pandemic sparked by the novel coronavirus ("COVID-19 pandemic"), which has negatively impacted us in certain respects. At this time, it continues to not be possible to estimate the severity or duration of the pandemic, including the severity, duration and frequency of any additional "waves" of the pandemic or the efficacy of any therapeutic treatments and vaccines for COVID-19, including their efficacy with respect to variants of COVID-19 that have emerged or could emerge in the future. It is likewise 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 aspects of our business model or targets previously provided to the markets. See "Business - Regulation," "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 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview - COVID-19 Pandemic" included in our 2020 Annual Report, as well as Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements. Regulatory Developments We, including our insurance subsidiary, BHNY, and our reinsurance subsidiary,Brighthouse Reinsurance Company of Delaware , are regulated primarily at the state level, with some products and services also subject to federal regulation. In addition,Brighthouse Life Insurance Company and its affiliates 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 the Employee Retirement Income Security Act of 1974, 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" included in our 2020 Annual Report, as amended or supplemented by our subsequent Quarterly Reports under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Developments." 48 -------------------------------------------------------------------------------- Table of Contents Summary of Critical Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America ("GAAP") requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported on the Interim Condensed Consolidated Financial Statements. The most critical estimates include those used in determining: •liabilities for future policy benefits; •amortization of deferred policy acquisition costs ("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 in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Summary of Critical Accounting Estimates" and Note 1 of the Notes to the Consolidated Financial Statements included in our 2020 Annual Report. Non-GAAP Disclosures Our definitions of the non-GAAP 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, allocate resources 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 its 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 principally 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 guaranteed minimum income benefits ("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 and market value adjustments associated with surrenders or terminations of contracts ("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), (iii) GMIB Fees and GMIB Costs and (iv) Market Value Adjustments. 49 -------------------------------------------------------------------------------- Table of Contents 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 (excluding other revenues associated with related party reinsurance) 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), (c) GMIB Fees and GMIB Costs and (d) Market Value
Adjustments).
(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 Interim Condensed Consolidated
Financial Statements.
50
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Table of Contents
Results of Operations
Annual Actuarial Review
We typically conduct our annual actuarial review ("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. This update had the largest impact on our
universal life with secondary guarantees ("ULSG") business. We also increased
our long-term general account earned rate, while maintaining our mean reversion
rate at 3.00%. 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.
Consolidated Results for the Nine Months Ended September 30, 2021 and 2020
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.
Nine Months Ended
September 30,
2021 2020
(In millions)
Revenues
Premiums $ 526 $ 549
Universal life and investment-type product policy fees 2,240 2,114
Net investment income 3,629 2,508
Other revenues 262 224
Net investment gains (losses) (37) (46)
Net derivative gains (losses) (2,049) 2,227
Total revenues 4,571 7,576
Expenses
Policyholder benefits and claims 2,420 5,094 Interest credited to policyholder account balances 978 792 Capitalization of DAC (360) (276) Amortization of DAC and VOBA (14) 833 Interest expense on debt 50 51 Other expenses 1,634 1,551 Total expenses 4,708 8,045 Income (loss) before provision for income tax (137) (469) Provision for income tax expense (benefit) (68) (145) Net income (loss) (69) (324) Less: Net income (loss) attributable to noncontrolling interests 1 1
Net income (loss) attributable to
Company
$ (70) $ (325)
The components of net income (loss) were as follows:
Nine Months Ended
September 30,
2021 2020
(In millions)
GMLB Riders $ (1,412) $ (933)
Other derivative instruments (407) 1,461
Net investment gains (losses) (37) (46)
Other adjustments 19 (65)
Pre-tax adjusted earnings, less net income (loss) attributable to
noncontrolling interests
1,699 (887)
Income (loss) attributable to
before provision for income tax
(138) (470) Provision for income tax expense (benefit) (68) (145)
Net income (loss) attributable to
51 -------------------------------------------------------------------------------- Table of Contents Nine Months EndedSeptember 30, 2021 Compared with the Nine Months EndedSeptember 30, 2020 Loss before provision for income tax was$138 million ($70 million , net of income tax), a lower loss of$332 million ($255 million , net of income tax) from a loss before provision for income tax of$470 million ($325 million , 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 policyholder benefits and claims, included in other adjustments, resulting from the adjustment for market performance related to participating products in our run-off business. 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; and •higher losses from guaranteed minimum living benefits ("GMLB") riders ("GMLB Riders"), see "- GMLB Riders for the Nine Months EndedSeptember 30, 2021 and 2020. The provision for income tax, expressed as a percentage of income (loss) before provision for income tax, resulted in an effective tax rate of 50% in the current period compared to 31% in the prior period. The increase in the effective tax rate is driven by higher 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 and tax credits. Reconciliation of Net Income (Loss) to Adjusted Earnings The reconciliation of net income (loss) attributable toBrighthouse Life Insurance Company to adjusted earnings was as follows: Nine Months EndedSeptember 30, 2021 2020
(In millions)
Net income (loss) attributable to
Company
$ (70) $ (325) Add: Provision for income tax expense (benefit) (68) (145)
Income (loss) attributable to
Company
(138) (470) Less: GMLB Riders (1,412) (933) Less: Other derivative instruments (407) 1,461 Less: Net investment gains (losses) (37) (46) Less: Other adjustments 19 (65)
Pre-tax adjusted earnings, less net income (loss) attributable
to noncontrolling interests
1,699 (887) Less: Provision for income tax expense (benefit) 316 (232) Adjusted earnings$ 1,383 $ (655) 52
-------------------------------------------------------------------------------- Table of Contents Consolidated Results for the Nine Months EndedSeptember 30, 2021 and 2020 - Adjusted Earnings The components of adjusted earnings were as follows: Nine Months Ended September 30, 2021 2020 (In millions) Fee income$ 2,321 $ 2,149 Net investment spread 2,137 1,060 Insurance-related activities (1,301) (2,448) Amortization of DAC and VOBA (133) (358) Other expenses, net of DAC capitalization (1,324) (1,289) Less: Net income (loss) attributable to noncontrolling interests 1 1
Pre-tax adjusted earnings, less net income (loss) attributable to
noncontrolling interests
1,699 (887) Provision for income tax expense (benefit) 316 (232) Adjusted earnings$ 1,383 $ (655) Nine Months EndedSeptember 30, 2021 Compared with the Nine Months EndedSeptember 30, 2020 Adjusted earnings were$1.4 billion in the current period, an increase of$2.0 billion . Key net favorable impacts were: •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; and •an adjustment in the prior period related to modeling improvements resulting from an actuarial system conversion, primarily in our life business; •higher net investment spread due to: •higher returns on other limited partnerships for the comparative measurement period; and •higher average invested assets resulting from positive net flows in the general account; partially offset by •higher interest credited resulting from changes in interest accrual assumptions in connection with the AAR and the related modeling changes in our annuities business; •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; 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 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 •higher asset-based fees resulting from higher average separate account balances, a portion of which is offset in other expenses. 53 -------------------------------------------------------------------------------- Table of Contents Key net unfavorable impacts were: •higher other expenses due to: •higher asset-based variable annuity expenses resulting from higher average separate account balances, a portion of which is offset in fee income; and •higher corporate spending related to distribution and operations; partially offset by •lower establishment costs related to planned technology expenses. The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 19% in the current period compared to 26% 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 Nine Months EndedSeptember 30, 2021 and 2020 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: Nine Months Ended September 30, 2021 2020 (In millions) Liabilities$ (875) $ (3,710) Hedges (1,216) 2,538 Ceded reinsurance (76) 99 Fees (1) 610 608 GMLB DAC 145 (468) Total GMLB Riders$ (1,412) $ (933) ______________ (1)Excludes living benefit fees, included as a component of adjusted earnings, of$45 million and$43 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Nine Months EndedSeptember 30, 2021 Compared with the Nine Months EndedSeptember 30, 2020 Comparative results from GMLB Riders were unfavorable by$479 million . 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 Level 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 equity markets resulted in the following impacts: •unfavorable changes to the estimated fair value of Shield liabilities; •unfavorable changes to the estimated fair value of our GMLB hedges; and •unfavorable changes in ceded reinsurance; partially offset by 54 -------------------------------------------------------------------------------- Table of Contents •favorable changes to the estimated fair value of variable annuity liability reserves; and •favorable changes to GMLB DAC. Interest rates increasing in the current period resulted in the following impacts: •unfavorable changes to the estimated fair value of our GMLB hedges; •unfavorable changes to GMLB DAC; •unfavorable changes in ceded reinsurance; and •unfavorable changes to the estimated fair value of Shield liabilities; partially offset by •favorable changes to the estimated fair value of variable annuity liability reserves. 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. 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 "- Overview - COVID-19 Pandemic." Rating Agencies Credit rating agencies may continue to review and adjust our ratings. For example, inApril 2020 , Fitch revised the rating outlook forBrighthouse Life Insurance Company and certain affiliates 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 certain affiliates 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" included in our 2020 Annual Report for an in-depth description of the impact of a potential ratings downgrade. Sources and Uses of Liquidity and Capital In addition to the summary description of liquidity and capital sources discussed in "- Sources and Uses of Liquidity and Capital" in our 2020 Annual Report, 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 active funding agreements issued in connection with the programs described in more detail below. The activity under all such funding agreements is reported in policyholder account balances. See Note 3 of the Notes to the Consolidated Financial Statements included in our 2020 Annual Report for additional information on funding agreements. 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. 55 -------------------------------------------------------------------------------- Table of Contents 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 is$5.0 billion . 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 we maintain an active 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 AgreementsBrighthouse Life Insurance Company has a 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$500 million either (i) for spread lending purposes or (ii) to provide additional liquidity. Activity related to these funding agreements is reported in Corporate & Other. Information regarding funding agreements issued for spread lending purposes is as follows: Aggregate Principal Amount Issuances Repayments Outstanding Nine Months Ended September 30, September 30, 2021 December 31, 2020 2021 2020 2021 2020 (In millions) FABCP Program$ 1,663 $ -$ 1,989 $ -$ 326 $ - FABN Program 2,400 - 2,400 - - - FHLB Funding Agreements (1) 600 - 951 - 351 - Farmer Mac Funding Agreements 25 - 25 - - - Total$ 4,688 $ -$ 5,365 $ -$ 677 $ - __________________
(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.
56 -------------------------------------------------------------------------------- Table of Contents Note Regarding Forward-Looking Statements This report, including Management's Discussion and Analysis of Financial Condition and Results of Operations, and other oral or written statements that we make from time to time may contain information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve substantial risks and uncertainties. We have tried, wherever possible, to identify such statements using words such as "anticipate," "estimate," "expect," "project," "may," "will," "could," "intend," "goal," "target," "guidance," "forecast," "preliminary," "objective," "continue," "aim," "plan," "believe" and other words and terms of similar meaning, or that are tied to future periods, in connection with a discussion of future operating or financial performance. In particular, these include, without limitation, statements relating to future actions, prospective services or products, financial projections, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, as well as trends in operating and financial results. Any or all forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining the actual future results of BLIC. These statements are based on current expectations and the current economic environment and involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance. Actual results could differ materially from those expressed or implied in the forward-looking statements due to a variety of known and unknown risks, uncertainties and other factors. Although it is not possible to identify all of these risks and factors, they include, among others: •differences between actual experience and actuarial assumptions and the effectiveness of our actuarial models; •higher risk management costs and exposure to increased market risk due to guarantees within certain of our products; •the effectiveness of our variable annuity exposure risk management strategy and the impact of such strategy on volatility in our profitability measures and negative effects on our statutory capital; •material differences from actual outcomes compared to the sensitivities calculated under certain scenarios and sensitivities that we may utilize in connection with our variable annuity risk management strategies; •the impact of interest rates on our future ULSG policyholder obligations and net income volatility; •the impact of the COVID-19 pandemic; •the potential material adverse effect of changes in accounting standards, practices or policies applicable to us, including changes in the accounting for long-duration contracts; •loss of business and other negative impacts resulting from a downgrade or a potential downgrade in our financial strength ratings; •the availability of reinsurance and the ability of the counterparties to our reinsurance or indemnification arrangements to perform their obligations thereunder; •heightened competition, including with respect to service, product features, scale, price, actual or perceived financial strength, claims-paying ratings, financial strength ratings, e-business capabilities and name recognition; •our ability to market and distribute our products through distribution channels; •any failure of third parties to provide services we need, any failure of the practices and procedures of such third parties and any inability to obtain information or assistance we need from third parties; •the adverse impact on liabilities for policyholder claims as a result of extreme mortality events; •the impact of adverse capital and credit market conditions, including with respect to our ability to meet liquidity needs and access capital; •the impact of economic conditions in the capital markets and theU.S. and global economy, as well as geo-political or catastrophic events, on our investment portfolio, including on realized and unrealized losses and impairments, net investment spread and net investment income; •the impact of events that adversely affect issuers, guarantors or collateral relating to our investments or our derivatives counterparties, on impairments, valuation allowances, reserves, net investment income and changes in unrealized gain or loss positions; 57 -------------------------------------------------------------------------------- Table of Contents •the impact of changes in regulation and in supervisory and enforcement policies on our insurance business or other operations; •the potential material negative tax impact of potential future tax legislation that could make some of our products less attractive to consumers; •the effectiveness of our policies and procedures in managing risk; •the loss or disclosure of confidential information, damage to our reputation and impairment of our ability to conduct business effectively as a result of any failure in cyber- or other information security systems; •whether all or any portion of the tax consequences of our separation from MetLife, Inc. (together with its subsidiaries and affiliates, "MetLife") are not as expected, leading to material additional taxes or material adverse consequences to tax attributes that impact us; •the uncertainty of the outcome of any disputes with MetLife over tax-related or other matters and agreements or disagreements regarding MetLife's or our obligations under our other agreements; and •other factors described in this report and from time to time in documents that we file with theSEC . For the reasons described above, we caution you against relying on any forward-looking statements, which should also be read in conjunction with the other cautionary statements included and the risks, uncertainties and other factors identified in our 2020 Annual Report, particularly in the sections entitled "Risk Factors" and "Quantitative and Qualitative Disclosures About Market Risk," as well as in our other subsequent filings with theSEC . Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as otherwise may be required by law. Item 4. Controls and Procedures Management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act"), as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that these disclosure controls and procedures were effective as ofSeptember 30, 2021 . MetLife provides certain services to the Company on a transitional basis through services agreements. The Company continues to change business processes, implement systems and establish new third-party arrangements, as a subsidiary of Brighthouse Financial, Inc. We consider these in aggregate to be material changes in our internal control over financial reporting. Other than as noted above, there were no changes to the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter endedSeptember 30, 2021 that have materially affected, or are reasonably likely to materially affect, these internal controls over financial reporting. Part II - Other Information Item 1. Legal Proceedings See Note 9 of the Notes to the Interim Condensed Consolidated Financial Statements. Item 1A. Risk Factors We discuss in this report, in our 2020 Annual Report and in our other filings with theSEC , various risks that may materially affect our business. In addition, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Note Regarding Forward-Looking Statements" included herein. There have been no material changes to our risk factors from the risk factors previously disclosed in our 2020 Annual Report. 58
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