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BRIGHTHOUSE LIFE INSURANCE CO OF NY – 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 41
Overview 41
Regulatory Developments 41
Summary of Critical Accounting Estimates 41
Non-GAAP Disclosures 42
Results of Operations 44
Note Regarding Forward-Looking Statements 47
40
-------------------------------------------------------------------------------- Table of Contents Introduction For purposes of this discussion, unless otherwise mentioned or unless the context indicates otherwise, "BHNY," the "Company," "we," "our" and "us" refer toBrighthouse Life Insurance Company of NY, aNew York domiciled life insurance company. BHNY is 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 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 4, 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 12, 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 10, 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 inNew York . For operating purposes, we have established two segments: Annuities and Life. 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 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 Financial Statements. Regulatory Developments We are domiciled inNew York and regulated by theNew York State Department of Financial Services . We are regulated primarily at the state level, with some products and services also subject to federal regulation. In addition, BHNY 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." 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 Financial Statements. The most critical estimates include those used in determining: •liabilities for future policy benefits; •amortization of deferred policy acquisition costs ("DAC"); 41 -------------------------------------------------------------------------------- Table of Contents •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 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 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), 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). 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 related to (i) net investment gains (losses), (ii) net derivative gains (losses), (iii) GMIB Fees and GMIB Costs and (iv) Market Value Adjustments. The tax impact of the adjustments discussed above is calculated net of the statutory tax rate, which could differ from our effective tax rate. 42 -------------------------------------------------------------------------------- Table of Contents 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 (iv) Amortization of DAC (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 Financial
Statements.
43
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Table of Contents
Results of Operations
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 $ 10 $ 16
Universal life and investment-type product policy fees 78 70
Net investment income 116 100
Other revenues (72) (62)
Net investment gains (losses) - 13
Net derivative gains (losses) (46) 178
Total revenues 86 315
Expenses
Policyholder benefits and claims (8)
20
Interest credited to policyholder account balances 48 29 Capitalization of DAC (44) (29) Amortization of DAC 6 58 Other expenses 101 86 Total expenses 103 164 Income (loss) before provision for income tax (17)
151
Provision for income tax expense (benefit) (5) 30 Net income (loss)$ (12) $ 121
The components of net income (loss) were as follows:
Nine Months Ended
September 30,
2021 2020
(In millions)
GMLB Riders $ (6) $ 107
Other derivative instruments 2
2
Net investment gains (losses) - 13 Other adjustments (2) - Pre-tax adjusted earnings (11) 29 Income (loss) before provision for income tax (17)
151
Provision for income tax expense (benefit) (5) 30 Net income (loss)$ (12) $ 121 Nine Months EndedSeptember 30, 2021 Compared with the Nine Months EndedSeptember 30, 2020 Loss before provision for income tax was$17 million ($12 million , net of income tax), a decrease of$168 million ($133 million , net of income tax) from income before provision for income tax of$151 million ($121 million , net of income tax) in the prior period. The decrease in income before provision for income tax was driven by the following net unfavorable items: •a net unfavorable change in guaranteed minimum living benefits ("GMLB") riders ("GMLB Riders") from higher relative equity markets and higher interest rates resulting in: •an unfavorable change in ceded reinsurance; and 44 -------------------------------------------------------------------------------- Table of Contents •unfavorable changes to the estimated fair value of the embedded derivative liabilities associated with Shield Level Annuities ("Shield"); partially offset by •favorable changes in our GMLB hedges; •a favorable change to the estimated fair value of variable annuity liability reserves; •a favorable change in GMLB DAC; and •favorable changes in DAC amortization and reserves recognized in the current period resulting from the annual actuarial review ("AAR"); •lower pre-tax adjusted earnings, as discussed in greater detail below; and •lower net investment gains reflecting lower net gains on sales of fixed maturity securities. The provision for income tax resulted in an effective tax rate of 29% in the current period compared to 20% in the prior period. The increase in the effective tax rate is driven by lower pre-tax adjusted earnings, as discussed in greater detail below. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deduction and tax credits. Reconciliation of Net Income (Loss) to Adjusted Earnings The reconciliation of net income (loss) to adjusted earnings was as follows: Nine Months Ended September 30, 2021 2020 (In millions) Net income (loss)$ (12) $ 121 Add: Provision for income tax expense (benefit) (5)
30
Income (loss) before provision for income tax (17)
151
Less: GMLB Riders (6)
107
Less: Other derivative instruments 2
2
Less: Net investment gains (losses) - 13 Less: Other adjustments (2) - Pre-tax adjusted earnings (11) 29 Less: Provision for income tax expense (benefit) (3) 4 Adjusted earnings$ (8) $ 25 45
-------------------------------------------------------------------------------- Table of Contents 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$ 102 $ 95 Net investment spread 53 56 Insurance-related activities (77) (38) Amortization of DAC (32) (27) Other expenses, net of DAC capitalization (57)
(57)
Pre-tax adjusted earnings (11)
29
Provision for income tax expense (benefit) (3) 4 Adjusted earnings$ (8) $ 25 Nine Months EndedSeptember 30, 2021 Compared with the Nine Months EndedSeptember 30, 2020 Adjusted earnings were a loss of$8 million in the current period, a decrease of$33 million . Key net unfavorable impacts were: •higher costs associated with insurance-related activities driven by higher paid claims, net of reinsurance; •higher amortization of DAC for Shield driven by an increase in equity market performance compared to the prior period; and •lower net investment spread due to: •higher interest credited resulting from changes in interest accrual assumptions in connection with the AAR and the related modeling changes in our annuities business; partially offset by •higher average invested assets resulting from positive net flows in the general account. The decrease in adjusted earnings was partially offset by higher asset-based fees resulting from higher average separate account balances, a portion of which is offset in other expenses. The provision for income tax resulted in an effective tax rate of 27% in the current period compared to 14% 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. 46 -------------------------------------------------------------------------------- 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 BHNY. 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; •the impact on earnings, capitalization and statutory capital and greater volatility of our results due to guarantees within certain of our products; •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; •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; 47 -------------------------------------------------------------------------------- Table of Contents •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 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. 48
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Table of Contents
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