Brighthouse Financial, Inc. 10-Q

Item 2. 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 Executive Summary 48 Industry Trends 49 Summary of Critical Accounting Estimates 51 Non-GAAP and Other Financial Disclosures 51 Results of Operations 53 Investments 67 Derivatives 77 Off-Balance Sheet Arrangements 78 Policyholder Liabilities 79 Liquidity and Capital Resources 82 Note Regarding Forward-Looking Statements 90 47 Table of Contents Introduction For purposes of this discussion, unless otherwise mentioned or unless the context indicates otherwise, “Brighthouse,” “Brighthouse Financial,” the “Company,” “we,” “our” and “us” refer to Brighthouse Financial, Inc. a corporation incorporated in Delaware in 2016, and its subsidiaries. We use the term “BHF” to refer solely to Brighthouse Financial, Inc., and not to any of its subsidiaries. Until August 4, 2017, BHF was a wholly-owned subsidiary of MetLife, Inc. (together with its subsidiaries and affiliates, “MetLife”). Following this summary is a discussion addressing the consolidated results of operations and financial condition of the Company for the periods indicated. This Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 ended December 31, 2019, filed with the U.S. Securities and Exchange Commission (“SEC”) on February 26, 2020 (the “2019 Annual Report”); (iii) our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (the “First Quarter Form 10-Q”) filed with the SEC on May 11, 2020; (iv) our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 (the “Second Quarter Form 10-Q” and, together with the First Quarter Form 10-Q, the “Quarterly Reports”) filed with the SEC on August 7, 2020 and (v) our current reports on Form 8-K filed in 2020. Presentation Prior to discussing our Results of Operations, we present background information and definitions that we believe are useful to understanding the discussion of our financial results. This information precedes the Results of Operations and is most beneficial when read in the sequence presented. A summary of key informational sections is as follows: • “Executive Summary” provides information regarding our business, segments and results as discussed in the Results of Operations. • “Industry Trends” discusses updates and changes to a number of trends and uncertainties included in our 2019 Annual Report, as amended or supplemented by our subsequent Quarterly Reports on Form 10-Q, that we believe may materially affect our future financial condition, results of operations or cash flows, including from the worldwide pandemic sparked by the novel coronavirus (the “COVID-19 pandemic”). • “Summary of Critical Accounting Estimates” explains the most critical estimates and judgments applied in determining our results in accordance with accounting principles generally accepted in the United States of America (“GAAP”). • “Non-GAAP and Other Financial Disclosures” defines key financial measures presented in the Results of Operations that are not calculated in accordance with GAAP but are used by management in evaluating company and segment performance. As described in this section, adjusted earnings is presented by key business activities which are derived from, but different than, the line items presented in the GAAP statement of operations. This section also refers to certain other terms used to describe our insurance business and financial and operating metrics, but is not intended to be exhaustive. Certain amounts presented in prior periods within the foregoing discussions of our financial results have been reclassified to conform with the current year presentation. Executive Summary We are one of the largest providers of annuity and life insurance products in the United States through multiple independent distribution channels and marketing arrangements with a diverse network of distribution partners. For operating purposes, we have established three segments: (i) Annuities, (ii) Life and (iii) Run-off, which consists of operations relating to products we are not actively selling and which are separately managed. In addition, we report certain of our results of operations in Corporate & Other. This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of operations, financial condition and cash flows of Brighthouse for the periods indicated. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Summary — Overview,” and “Business — Segments and Corporate & Other” included in our 2019 Annual Report along with Note 2 of the Notes to the Interim Condensed Consolidated Financial Statements for further information on our segments and Corporate & Other. 48 Table of Contents Net income (loss) available to shareholders and adjusted earnings, a non-GAAP financial measure, were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In millions) Income (loss) available to shareholders before provision for income tax $ (3,862) $ 795 $ (148) $ 302 Less: Provision for income tax expense (benefit) (850) 119 (88) (14) Net income (loss) available to shareholders (1) $ (3,012) $ 676 $ (60) $ 316 Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends $ (921) $ (273) $ (663) $ 304 Less: Provision for income tax expense (benefit) (232) (104) (196) (13) Adjusted earnings $ (689) $ (169) $ (467) $ 317 __________________ (1) We use the term “net income (loss) available to shareholders” to refer to “net income (loss) available to Brighthouse Financial, Inc.’s common shareholders” throughout the results of operations discussions. For the three months ended September 30, 2020, we had a net loss available to shareholders of $3.0 billion and an adjusted loss of $689 million compared to net income available to shareholders of $676 million and an adjusted loss of $169 million for the three months ended September 30, 2019. Net loss available to shareholders for the three months ended September 30, 2020 primarily reflects an unfavorable impact from our annual actuarial review (“AAR”) and net unfavorable changes in the estimated fair value of our guaranteed minimum living benefits (“GMLB”) riders (“GMLB Riders”) due to higher equity markets, lower interest rates and tightening credit spreads. For the nine months ended September 30, 2020, we had a net loss available to shareholders of $60 million and an adjusted loss of $467 million compared to net income available to shareholders of $316 million and adjusted earnings of $317 million for the nine months ended September 30, 2019. Net loss available to shareholders for the nine months ended September 30, 2020 was driven primarily by a net unfavorable impact from our AAR, which was largely offset by a favorable impact of declining long-term interest rates on the estimated fair value of the universal life with secondary guarantees (“ULSG”) hedge program. See “— Non-GAAP and Other Financial Disclosures.” For a detailed discussion of our results see “— Results of Operations.” See Note 1 of the Notes to the Interim Condensed Consolidated Financial Statements for information regarding the adoption of new accounting pronouncements in 2020. Administrative System Conversion As we continue to execute on our strategy to leverage emerging technology and outsource our policy administration functions, during the third quarter of 2020, we completed the conversion of a significant portion of our in-force annuity business to a single third-party service provider. Following the conversion, a number of our customers and distribution partners experienced delays and service interruptions. While these issues have been largely resolved, there can be no assurance that in connection with this or any future conversion we will not incur unanticipated expenses or experience other economic or reputational harm, or be subject to litigation or regulatory investigations and actions, any of which could have a material adverse effect on our business, financial condition, and results of operations. See “Risk Factors — Risks Related to Our Business — The failure of third parties to provide various services, or any failure of the practices and procedures that these third parties use to provide services to us, could have a material adverse effect on our business,” “Risk Factors — General Risks — We may experience difficulty in marketing and distributing products through our distribution channels” and “Risk Factors — Regulatory and Legal Risks — Litigation and regulatory investigations are common in our businesses and may result in significant financial losses and/or harm to our reputation” in our 2019 Annual Report. Industry Trends Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we discuss a number of trends and uncertainties that we believe may materially affect our future financial condition, results of operations or cash flows. Where these trends or uncertainties are specific to a particular aspect of our business, we often include such a 49 Table of Contents discussion under the relevant caption of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, as part of our broader analysis of that area of our business. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends and Uncertainties” included in our 2019 Annual Report, as amended or supplemented by our subsequent Quarterly Reports on Form 10-Q, for a comprehensive discussion of some of the key general trends and uncertainties that have influenced the development of our business and our historical financial performance and that we believe will continue to influence our business and results of operations in the future. In addition, significant changes or updates in certain of these trends and uncertainties are discussed below. COVID-19 Pandemic We continue to closely monitor developments related to the COVID-19 pandemic, which has negatively impacted us in certain respects, including as discussed below. At this time, it is not 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 timetable for the development and implementation, and the efficacy, of any therapeutic treatment or vaccine for COVID-19. 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, results of operations, financial condition and prospects, including the impact on our investment portfolio and our ratings, or the need for us in the future to revisit or revise targets previously provided to the markets and/or aspects of our business model. See “Risk Factors — The ongoing COVID-19 pandemic may materially adversely affect our business, results of operations and financial condition, including capitalization and liquidity” in our First Quarter Form 10-Q. In March, in response to this extraordinary event, management promptly implemented our business continuity plans, and quickly and successfully shifted all our employees to a work-from-home 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 are closely monitoring 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 it is impossible to predict if the COVID-19 pandemic will have a material adverse impact on our business, results of operations or financial condition. 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. Increased economic uncertainty and increased unemployment resulting from the economic impacts of the COVID-19 pandemic have also impacted sales of certain of our products and have prompted us to take actions to provide relief to customers affected by adverse circumstances due to the COVID-19 pandemic, as previously disclosed in “— Regulatory Developments” in our First Quarter Form 10-Q. While the relief granted to customers to date has not had a material impact on our financial condition or results of operations, it is not possible to estimate the potential impact of any future relief. Circumstances resulting from the COVID-19 pandemic have also impacted the incidents of claims and may have impacted 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 the third quarter of 2020. Additionally, circumstances resulting from the COVID-19 pandemic have not materially impacted services we receive from third-party vendors, nor have such circumstances led to the identification of new loss contingencies or any increases in existing loss contingencies. However, 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 have been, and are expected to continue to 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 “— Investments — Current Environment — Selected Sector Investments,” “— Investments — Mortgage Loans — Loan Modifications Related to the COVID-19 Pandemic” and Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements. 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 credit rating based on their overall view of our industry. For example, during the second quarter of 2020, Fitch revised the rating outlook for BHF and certain of its subsidiaries 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 the U.S. life insurance industry to negative. Downgrades in our ratings or changes to our rating outlooks could have a material adverse effect on our results of operations and financial condition, including capitalization and liquidity. There can be no assurance that Fitch will not take 50 Table of Contents further adverse action with respect to our ratings or that other rating agencies will not take similar actions in the future. Each rating should be evaluated independently of any other rating. Regulatory Developments Our life insurance companies are regulated primarily at the state level, with some products and services also subject to federal regulation. In addition, BHF and its subsidiaries are subject to regulation under the insurance holding company laws of various U.S. jurisdictions. Furthermore, some of our operations, products and services are subject to 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 2019 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 — Industry Trends — Regulatory Developments.” 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 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”); • investment credit losses; • 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 2019 Annual Report. Non-GAAP and Other Financial Disclosures Our definitions of the non-GAAP and other financial measures may differ from those used by other companies. Non-GAAP Financial Disclosures Adjusted Earnings In this report, we present adjusted earnings, which excludes net income (loss) attributable to noncontrolling interests and preferred stock dividends, as a measure of our performance that is not calculated in accordance with GAAP. We believe that this non-GAAP financial measure highlights our results of operations and the underlying profitability drivers of our business, as well as enhances the understanding of our performance by the investor community. However, adjusted earnings should not be viewed as a substitute for net income (loss) available to Brighthouse Financial, Inc.’s common shareholders, which is the most directly comparable financial measure calculated in accordance with GAAP. See “— Results of Operations” for a reconciliation of adjusted earnings to net income (loss) available to Brighthouse Financial, Inc.’s common shareholders. Adjusted earnings, which may be positive or negative, is used by management to evaluate performance, allocate resources and facilitate comparisons to industry results. This financial measure focuses on our primary businesses principally by excluding the impact of market volatility, which could distort trends. The following are significant items excluded from total revenues, net of income tax, in calculating adjusted earnings: • Net investment gains (losses); 51 Table of Contents • 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 (“GMIBs”) fees (“GMIB Fees”). The following are significant items excluded from total expenses, net of income tax, 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. The tax impact of the adjustments mentioned 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. Adjusted Net Investment Income We present adjusted net investment income, which is not calculated in accordance with GAAP. We present adjusted net investment income to measure our performance for management purposes, and we believe it enhances the understanding of our investment portfolio results. Adjusted net investment income represents net investment income including Investment Hedge Adjustments. For a reconciliation of adjusted net investment income to net investment income, the most directly comparable GAAP measure, see footnote 3 to the summary yield table located in “— Investments — Current Environment — Investment Portfolio Results.” 52 Table of Contents Other Financial Disclosures Similar to adjusted net investment income, we present net investment income yields as a performance measure we believe enhances the understanding of our investment portfolio results. Net investment income yields are calculated on adjusted net investment income as a percent of average quarterly asset carrying values. Asset carrying values exclude unrealized gains (losses), collateral received in connection with our securities lending program, freestanding derivative assets and collateral received from derivative counterparties. Results of Operations Annual Actuarial Review We typically conduct our AAR in the third quarter of each year. As a result of the 2020 AAR, we lowered 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 to 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 expenses. In 2019, 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 4.25% to 3.75%, which primarily impacted 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 separate account fund allocations and volatility, as well as maintenance expenses. In our life business, we updated assumptions related to mortality and expenses. The following table presents the impact of the AAR on pre-tax adjusted earnings and income (loss) available to shareholders before provision for income tax for the nine months ended September 30, 2020 and 2019. The impact related to GMLBs is included in income (loss) available to shareholders before provision for income tax, but is not included in pre-tax adjusted earnings. See “— Non-GAAP and Other Financial Disclosures.” Nine Months Ended September 30, 2020 2019 (In millions) GMLBs $ (1,431) $ 84 Included in pre-tax adjusted earnings: Other annuity business 128 (38) Life business (11) 24 Run-off (1,484) (545) Total included in pre-tax adjusted earnings (1,367) (559) Total impact on income (loss) available to shareholders before provision for income tax $ (2,798) $ (475) 53 Table of Contents Consolidated Results for the Three Months and Nine Months Ended September 30, 2020 and 2019 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. Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In millions) Revenues Premiums $ 184 $ 214 $ 575 $ 673 Universal life and investment-type product policy fees 882 867 2,595 2,630 Net investment income 996 928 2,564 2,681 Other revenues 99 94 294 282 Net investment gains (losses) 5 27 (48) 79 Net derivative gains (losses) (1,857) 1,057 2,392 (97) Total revenues 309 3,187 8,372 6,248 Expenses Policyholder benefits and claims 3,047 1,319 5,073 2,936 Interest credited to policyholder account balances 281 272 816 795 Capitalization of DAC (90) (93) (279) (274) Amortization of DAC and VOBA 244 181 922 373 Interest expense on debt 47 49 139 144 Other expenses 623 655 1,814 1,954 Total expenses 4,152 2,383 8,485 5,928 Income (loss) before provision for income tax (3,843) 804 (113) 320 Provision for income tax expense (benefit) (850) 119 (88) (14) Net income (loss) (2,993) 685 (25) 334 Less: Net income (loss) attributable to noncontrolling interests 2 2 4 4 Net income (loss) attributable to Brighthouse Financial, Inc. (2,995) 683 (29) 330 Less: Preferred stock dividends 17 7 31 14 Net income (loss) available to Brighthouse Financial, Inc.’s common shareholders $ (3,012) $ 676 $ (60) $ 316 54 Table of Contents The components of net income (loss) available to shareholders were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In millions) GMLB Riders $ (2,739) $ 419 $ (833) $ (1,144) Other derivative instruments (174) 636 1,462 1,116 Net investment gains (losses) 5 27 (48) 79 Other adjustments (33) (14) (66) (53) Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends (921) (273) (663) 304 Income (loss) available to shareholders before provision for income tax (3,862) 795 (148) 302 Provision for income tax expense (benefit) (850) 119 (88) (14) Net income (loss) available to shareholders $ (3,012) $ 676 $ (60) $ 316 Three Months Ended September 30, 2020 Compared with the Three Months Ended September 30, 2019 Loss available to shareholders before provision for income tax was $3.9 billion ($3.0 billion, net of income tax), a decrease of $4.7 billion ($3.7 billion, net of income tax) from income before provision for income tax of $795 million ($676 million, net of income tax) in the prior period. The decrease in income before provision for income tax was driven by the following key unfavorable items: • losses from GMLB Riders in the current period, compared to gains in the prior period, see “— GMLB Riders for the Three Months and Nine Months Ended September 30, 2020 and 2019”; • losses on other derivative instruments reflecting: ◦ losses on interest rate derivatives used to manage interest rate exposure in our ULSG business due to the benchmark long-term interest rate increasing in the current period and decreasing in the prior period; and ◦ an unfavorable impact from foreign currency swaps due to the U.S. dollar mostly weakening in the current period and strengthening in the prior period; and • lower pre-tax adjusted earnings, discussed in greater detail below. The provision for income tax, expressed as a percentage of income (loss) before provision for income tax, resulted in an effective tax rate of 22% in the current period compared to 15% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions and tax credits. Nine Months Ended September 30, 2020 Compared with the Nine Months Ended September 30, 2019 Loss available to shareholders before provision for income tax was $148 million ($60 million, net of income tax), a decrease of $450 million ($376 million, net of income tax) from income before provision for income tax of $302 million ($316 million, net of income tax) in the prior period. The decrease in income before provision for income tax was driven by the following key unfavorable items: • lower pre-tax adjusted earnings, discussed in greater detail below; and • lower net investment gains (losses) reflecting: ◦ net losses on sales of fixed maturity securities compared to prior period net gains; ◦ current period mark-to-market losses on equity securities compared to prior period net gains; ◦ net losses due to an increase in mortgage loan reserves; and ◦ higher impairments on fixed maturity securities in the current period. 55 Table of Contents The decrease in income before provision for income tax was partially offset by the following key net favorable items: • long-term interest rates declining more and equity markets increasing less in the current period than in the prior period resulted in: ◦ current period gains on interest rate derivatives used to manage interest rate exposure in our ULSG business; and ◦ a favorable change in the estimated fair value of the embedded derivatives associated with our fixed indexed annuity business; partially offset by ◦ an unfavorable impact from equity options; and • lower losses from GMLB Riders in the current period, see “— GMLB Riders for the Three Months and Nine Months Ended September 30, 2020 and 2019.” The provision for income tax, expressed as a percentage of income (loss) before provision for income tax, resulted in an effective tax rate of 78% in the current period compared to 5% in the prior period. The increase in the effective tax rate in the current period is driven by lower pre-tax adjusted earnings, discussed in greater detail below. Certain one-time tax adjustments recognized in the prior period, primarily due to the revaluation of certain liabilities related to our separation from MetLife (“separation-related liabilities”), resulted in an unusually low effective tax rate in the prior period. In addition to such one-time tax adjustments, our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions and tax credits. Reconciliation of Net Income (Loss) Available to Shareholders to Adjusted Earnings The reconciliation of net income (loss) available to shareholders to adjusted earnings was as follows: Three Months Ended September 30, 2020 Annuities Life Run-off Corporate & Other Total (In millions) Net income (loss) available to shareholders $ (2,398) $ 78 $ (1,141) $ 449 $ (3,012) Add: Provision for income tax expense (benefit) 92 18 (460) (500) (850) Income (loss) available to shareholders before provision for income tax (2,306) 96 (1,601) (51) (3,862) Less: GMLB Riders (2,739) — — — (2,739) Less: Other derivative instruments (54) (4) (115) (1) (174) Less: Net investment gains (losses) 37 6 (39) 1 5 Less: Other adjustments (29) — (4) — (33) Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends 479 94 (1,443) (51) (921) Less: Provision for income tax expense (benefit) 92 18 (304) (38) (232) Adjusted earnings $ 387 $ 76 $ (1,139) $ (13) $ (689) 56 Table of Contents Three Months Ended September 30, 2019 Annuities Life Run-off Corporate & Other Total (In millions) Net income (loss) available to shareholders $ 576 $ 92 $ 234 $ (226) $ 676 Add: Provision for income tax expense (benefit) 52 18 (116) 165 119 Income (loss) available to shareholders before provision for income tax 628 110 118 (61) 795 Less: GMLB Riders 419 — — — 419 Less: Other derivative instruments (43) 1 678 — 636 Less: Net investment gains (losses) (2) 18 (4) 15 27 Less: Other adjustments (1) — (13) — (14) Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends 255 91 (543) (76) (273) Less: Provision for income tax expense (benefit) 52 18 (117) (57) (104) Adjusted earnings $ 203 $ 73 $ (426) $ (19) $ (169) Nine Months Ended September 30, 2020 Annuities Life Run-off Corporate & Other Total (In millions) Net income (loss) available to shareholders $ 67 $ 79 $ 80 $ (286) $ (60) Add: Provision for income tax expense (benefit) 199 32 (344) 25 (88) Income (loss) available to shareholders before provision for income tax 266 111 (264) (261) (148) Less: GMLB Riders (833) — — — (833) Less: Other derivative instruments 72 (64) 1,456 (2) 1,462 Less: Net investment gains (losses) (3) 8 (18) (35) (48) Less: Other adjustments (43) — (23) — (66) Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends 1,073 167 (1,679) (224) (663) Less: Provision for income tax expense (benefit) 199 32 (355) (72) (196) Adjusted earnings $ 874 $ 135 $ (1,324) $ (152) $ (467) Nine Months Ended September 30, 2019 Annuities Life Run-off Corporate & Other Total (In millions) Net income (loss) available to shareholders $ (434) $ 186 $ 924 $ (360) $ 316 Add: Provision for income tax expense (benefit) 165 38 (305) 88 (14) Income (loss) available to shareholders before provision for income tax (269) 224 619 (272) 302 Less: GMLB Riders (1,144) — — — (1,144) Less: Other derivative instruments (78) 22 1,173 (1) 1,116 Less: Net investment gains (losses) 15 8 85 (29) 79 Less: Other adjustments (1) — (52) — (53) Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends 939 194 (587) (242) 304 Less: Provision for income tax expense (benefit) 176 38 (127) (100) (13) Adjusted earnings $ 763 $ 156 $ (460) $ (142) $ 317 57 Table of Contents Consolidated Results for the Three Months and Nine Months Ended September 30, 2020 and 2019 — Adjusted Earnings The components of adjusted earnings were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In millions) Fee income $ 914 $ 893 $ 2,693 $ 2,713 Net investment spread 474 433 1,075 1,227 Insurance-related activities (1,589) (796) (2,345) (1,361) Amortization of DAC and VOBA (158) (183) (414) (433) Other expenses, net of DAC capitalization (543) (611) (1,637) (1,824) Less: Net income (loss) attributable to noncontrolling interests and preferred stock dividends 19 9 35 18 Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends (921) (273) (663) 304 Provision for income tax expense (benefit) (232) (104) (196) (13) Adjusted earnings $ (689) $ (169) $ (467) $ 317 Three Months Ended September 30, 2020 Compared with the Three Months Ended September 30, 2019 Adjusted earnings were a loss of $689 million, a decrease of $520 million. Key net unfavorable impacts were: • higher net costs associated with insurance-related activities due to: ◦ a net increase in liability balances resulting from changes in connection with the AAR in our Run-off and Annuities segments; partially offset by ◦ a one-time adjustment in the current period related to modeling improvements resulting from an actuarial system conversion, primarily in our Life segment; Key net favorable impacts were: • lower other expenses due to: ◦ the exit of various transition service agreements with MetLife; ◦ interest expense recognized in the prior period on a tax liability associated with our separation from MetLife; and ◦ lower asset-based variable annuity expenses resulting from lower average separate account balances, a portion of which are offset in fee income; • higher net investment spread reflecting: ◦ 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 ◦ 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; • lower net amortization of DAC and VOBA due to: ◦ a favorable change in our variable annuity business from changes in actual to expected experience in our in-force blocks; partially offset by 58 Table of Contents ◦ a net unfavorable impact resulting from changes in connection with the AAR in our Annuities and Life segments; and • higher net fee income due to: ◦ higher unearned revenue amortization from changes in maintenance expense and policyholder behavior assumptions in connection with the AAR, primarily in our Life segment; partially offset by ◦ lower asset-based fees from lower average separate account balances, a portion of which is offset in other expenses. The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 26% in the current period compared to 38% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions and tax credits. Nine Months Ended September 30, 2020 Compared with the Nine Months Ended September 30, 2019 Adjusted earnings were a loss of $467 million, a decrease of $784 million. Key net unfavorable impacts were: • higher net costs associated with insurance-related activities due to: ◦ a net increase in liability balances resulting from changes in connection with the AAR in our Run-off and Annuities segments; partially offset by ◦ a one-time adjustment in the current period related to modeling improvements resulting from an actuarial system conversion, primarily in our Life segment; • lower net investment spread due to: ◦ lower returns on other limited partnerships for the comparative measurement period; and ◦ 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; partially offset by ◦ higher average invested assets resulting from positive net flows in the general account; • lower net fee income due to: ◦ lower asset-based fees from lower average separate account balances, a portion of which is offset in other expenses; partially offset by ◦ higher unearned revenue amortization from changes in maintenance expense and policyholder behavior assumptions made in connection with the AAR, primarily in our Life segment. Key net favorable impacts were: • lower other expenses due to: ◦ the exit of various transition service agreements with MetLife; ◦ lower asset-based variable annuity expenses resulting from lower average separate account balances, a portion of which are offset in fee income; and ◦ interest expense recognized in the prior period on a tax liability associated with our separation from MetLife; • lower net amortization of DAC and VOBA due to: ◦ a favorable change in our variable annuity business from changes in actual to expected experience in our in-force blocks; 59 Table of Contents partially offset by ◦ a net unfavorable impact resulting from changes in connection with the AAR in our Annuities and Life segments. The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 31% in the current period compared to 4% in the prior period. Certain one-time tax adjustments recognized in the prior period, primarily due to the revaluation of certain separation-related liabilities, resulted in an unusually low effective tax rate in the prior period. In addition to such one-time tax adjustments, our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions and tax credits. Segments and Corporate & Other Results for the Three Months and Nine Months Ended September 30, 2020 and 2019 — Adjusted Earnings Annuities The components of adjusted earnings for our Annuities segment were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In millions) Fee income $ 654 $ 675 $ 1,917 $ 1,977 Net investment spread 257 268 720 789 Insurance-related activities 68 (60) (140) (179) Amortization of DAC and VOBA (127) (211) (322) (421) Other expenses, net of DAC capitalization (373) (417) (1,102) (1,227) Pre-tax adjusted earnings 479 255 1,073 939 Provision for income tax expense (benefit) 92 52 199 176 Adjusted earnings $ 387 $ 203 $ 874 $ 763 A significant portion of our adjusted earnings is driven by separate account balances related to our variable annuity business. Most directly, these balances determine asset-based fee income, but they also impact DAC amortization and asset-based commissions. The changes in our variable annuities separate account balances are presented in the table below. Variable annuities separate account balances increased for the three months ended September 30, 2020 driven by positive equity markets partially offset by negative net flows and policy charges. Variable annuities separate account balances decreased for the nine months ended September 30, 2020 driven by negative net flows and policy charges partially offset by positive equity market performance. Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020 (In millions) Balance, beginning of period $ 92,211 $ 99,498 Deposits 443 1,210 Withdrawals, surrenders and benefits (1,755) (5,679) Net flows (1,312) (4,469) Investment performance 5,337 2,636 Policy charges (630) (1,789) Net transfers from (to) general account (145) (415) Balance, end of period $ 95,461 $ 95,461 Average balance $ 95,718 $ 92,927 Three Months Ended September 30, 2020 Compared with the Three Months Ended September 30, 2019 Adjusted earnings were $387 million for the current period, an increase of $184 million. Key net favorable impacts were: 60 Table of Contents • lower costs associated with insurance-related activities due to: ◦ a decrease in guaranteed minimum death benefit (“GMDB”) liabilities and a favorable adjustment to deferred sales inducements (“DSI”) resulting from changes in connection with the AAR; and ◦ a decrease in GMDB liabilities resulting from favorable equity market performance in the current period; • lower amortization of DAC and VOBA due to: ◦ a favorable impact in the current period resulting primarily from changes in policyholder behavior and long-term general account earned rate assumptions made in connection with the AAR; and ◦ a favorable change in our variable annuity business from changes in actual to expected experience in our in-force blocks; and • lower other expenses due to: ◦ the exit of various transition service agreements with MetLife; and ◦ lower asset-based variable annuity expenses resulting from lower average separate account balances, a portion of which are offset in fee income. Key net unfavorable impacts were: • lower asset-based fees from lower average separate account balances, a portion of which is offset in other expenses; and • lower net investment spread due to: ◦ higher interest credited on average policyholder account balances resulting from positive net flows; and ◦ 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; partially offset by ◦ higher average invested assets resulting from positive net flows in the general account; and ◦ higher returns on other limited partnerships for the comparative measurement period. 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 20% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions. Nine Months Ended September 30, 2020 Compared with the Nine Months Ended September 30, 2019 Adjusted earnings were $874 million for the current period, an increase of $111 million. Key net favorable impacts were: • lower other expenses due to: ◦ the exit of various transition service agreements with MetLife; and ◦ lower asset-based variable annuity expenses resulting from lower average separate account balances, a portion of which are offset in fee income; • lower amortization of DAC and VOBA due to: ◦ a favorable impact in the current period resulting primarily from changes in policyholder behavior and long-term general account earned rate assumptions made in connection with the AAR; and ◦ a favorable change in our variable annuity business from changes in actual to expected experience in our in-force blocks net of the impact on estimated gross profits from lower separate account returns; and • lower costs associated with insurance-related activities due to: 61 Table of Contents ◦ a decrease in GMDB liabilities and a favorable adjustment to DSI resulting from changes in connection with the AAR; partially offset by ◦ an increase in GMDB liabilities resulting from less favorable equity market performance in the current period, net of lower income annuity benefit payments. Key net unfavorable impacts were: • lower net investment spread due to: ◦ 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 ◦ lower returns on other limited partnerships for the comparative measurement period; partially offset by ◦ higher average invested assets resulting from positive net flows in the general account; and • lower asset-based fees from lower average separate account balances, a portion of which is offset in other expenses. The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 19% in both the current and prior periods. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions. Life The components of adjusted earnings for our Life segment were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In millions) Fee income $ 90 $ 60 $ 271 $ 185 Net investment spread 53 52 126 155 Insurance-related activities 48 (1) (4) 5 Amortization of DAC and VOBA (50) 31 (104) (1) Other expenses, net of DAC capitalization (47) (51) (122) (150) Pre-tax adjusted earnings 94 91 167 194 Provision for income tax expense (benefit) 18 18 32 38 Adjusted earnings $ 76 $ 73 $ 135 $ 156 Three Months Ended September 30, 2020 Compared with the Three Months Ended September 30, 2019 Adjusted earnings were $76 million for the current period, an increase of $3 million. Key favorable impacts were: • lower costs associated with insurance-related activities due to: ◦ a one-time adjustment in the current period related to modeling improvements resulting from an actuarial system conversion; and ◦ lower paid claims, net of reinsurance; and • higher fee income due to higher unearned revenue amortization from changes in maintenance expense and policyholder behavior assumptions made in connection with the AAR. Key net unfavorable impacts were: • higher net amortization of DAC and VOBA due to: ◦ changes in maintenance expense and policyholder assumptions in connection with the AAR; and 62 Table of Contents ◦ a one-time adjustment in the current period related to modeling improvements resulting from an actuarial system conversion; partially offset by ◦ the impact on gross profits from higher separate account returns. 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 20% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions. Nine Months Ended September 30, 2020 Compared with the Nine Months Ended September 30, 2019 Adjusted earnings were $135 million for the current period, a decrease of $21 million. Key net unfavorable impacts were: • higher amortization of DAC and VOBA due to: ◦ changes in maintenance expense and policyholder assumptions in connection with the AAR; and ◦ a one-time adjustment in the current period related to modeling improvements resulting from an actuarial system conversion; • lower net investment spread due to: ◦ 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 ◦ lower returns on other limited partnerships for the comparative measurement period; and • higher costs associated with insurance-related activities due to: ◦ higher paid claims, net of reinsurance; partially offset by ◦ a one-time adjustment in the current period related to modeling improvements resulting from an actuarial system conversion. Key favorable impacts were: • higher fee income due to: ◦ higher unearned revenue amortization from changes in maintenance expense and policyholder behavior assumptions made in connection with the AAR; and ◦ lower ongoing net reinsurance costs as a result of reinsurance recaptured in prior periods; and • lower other expenses due to the exit of various transition services agreements with MetLife. 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 20% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions. 63 Table of Contents Run-off The components of adjusted earnings for our Run-off segment were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In millions) Fee income $ 170 $ 157 $ 505 $ 544 Net investment spread 149 90 179 226 Insurance-related activities (1,718) (740) (2,226) (1,210) Amortization of DAC and VOBA — — — — Other expenses, net of DAC capitalization (44) (50) (137) (147) Pre-tax adjusted earnings (1,443) (543) (1,679) (587) Provision for income tax expense (benefit) (304) (117) (355) (127) Adjusted earnings $ (1,139) $ (426) $ (1,324) $ (460) Three Months Ended September 30, 2020 Compared with the Three Months Ended September 30, 2019 Adjusted earnings were a loss of $1.1 billion for the current period, a higher loss of $713 million. Key unfavorable impacts were: • higher costs associated with insurance-related activities, primarily in our ULSG business, due to: ◦ an increase in liability balances resulting primarily from changes in the long-term general account earned rate assumptions made in connection with the AAR; and ◦ higher paid claims, net of reinsurance in the current period. Key favorable impacts were: • higher net investment spread due to higher returns on other limited partnerships for the comparative measurement period; and • higher fee income in our ULSG business due to higher unearned revenue amortization resulting from changes in premium assumptions made 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 21% in the current period compared to 22% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions. Nine Months Ended September 30, 2020 Compared with the Nine Months Ended September 30, 2019 Adjusted earnings were a loss of $1.3 billion for the current period, a higher loss of $864 million. Key net unfavorable impacts were: • higher costs associated with insurance-related activities, primarily in our ULSG business, due to: ◦ an increase in liability balances resulting primarily from changes in the long-term general account earned rate assumptions made in connection with the AAR; and ◦ higher paid claims, net of reinsurance in the current period; • lower net investment spread due to lower returns on other limited partnerships for the comparative measurement period, net of decreases in average crediting rates in connection with the low interest rate environment; and • lower net fee income in our ULSG business due to: ◦ a decline in the net cost of insurance fees driven by the aging in-force business; and ◦ a decrease in policyholder fees consistent with lower average account balances; partially offset by 64 Table of Contents ◦ higher unearned revenue amortization resulting from changes in premium assumptions made 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 21% in the current period compared to 22% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions and tax credits. Corporate & Other The components of adjusted earnings for Corporate & Other were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In millions) Fee income $ — $ 1 $ — $ 7 Net investment spread 15 23 50 57 Insurance-related activities 13 5 25 23 Amortization of DAC and VOBA 19 (3) 12 (11) Other expenses, net of DAC capitalization (79) (93) (276) (300) Less: Net income (loss) attributable to noncontrolling interests and preferred stock dividends 19 9 35 18 Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends (51) (76) (224) (242) Provision for income tax expense (benefit) (38) (57) (72) (100) Adjusted earnings $ (13) $ (19) $ (152) $ (142) Three Months Ended September 30, 2020 Compared with the Three Months Ended September 30, 2019 Adjusted earnings were a loss of $13 million, a lower loss of $6 million from the prior period. Key favorable impacts were: • lower amortization of DAC and VOBA due to a one-time adjustment in the current period related to modeling improvements resulting from an actuarial system conversion; and • lower other expenses driven by interest expense recognized in the prior period on a tax liability associated with our separation from MetLife. The lower adjusted loss was partially offset by the timing of our preferred stock dividend payments. The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 119% in the current period compared to 75% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions and tax credits. We believe the effective tax rate for Corporate & Other is not generally meaningful, neither on a standalone basis nor for comparison to prior periods, since taxes for Corporate & Other are derived from the difference between the overall consolidated effective tax rate and total taxes for the combined operating segments. Nine Months Ended September 30, 2020 Compared with the Nine Months Ended September 30, 2019 Adjusted earnings were a loss of $152 million, a higher loss of $10 million from the prior period. The higher adjusted loss was primarily due to the timing of our preferred stock dividend payments. Key favorable impacts were: • lower other expenses driven by: ◦ lower establishment costs in the current period related to planned technology expenses; and ◦ interest expense recognized in the prior period on a tax liability associated with our separation from MetLife; and 65 Table of Contents • lower amortization of DAC and VOBA due to a one-time adjustment in the current period related to modeling improvements resulting from an actuarial system conversion. The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 38% in the current period compared to 41% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions and tax credits. We believe the effective tax rate for Corporate & Other is not generally meaningful, neither on a standalone basis nor for comparison to prior periods, since taxes for Corporate & Other are derived from the difference between the overall consolidated effective tax rate and total taxes for the combined operating segments. GMLB Riders for the Three Months and Nine Months Ended September 30, 2020 and 2019 The overall impact to income (loss) available to shareholders before provision for income tax from the performance of GMLB Riders, which includes (i) changes in carrying value of the GAAP liabilities, (ii) the mark-to-market of hedges and reinsurance, (iii) fees and (iv) associated DAC offsets, was as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In millions) Liabilities $ (1,787) $ (810) $ (3,591) $ (1,856) Hedges (1,078) 948 2,538 (51) Ceded reinsurance (3) 50 101 75 Fees (1) 223 228 621 628 GMLB DAC (94) 3 (502) 60 Total GMLB Riders $ (2,739) $ 419 $ (833) $ (1,144) __________________ (1) Excludes living benefit fees, included as a component of adjusted earnings, of $15 million and $44 million for the three months and nine months ended September 30, 2020, respectively, and $16 million and $48 million for the three months and nine months ended September 30, 2019, respectively. Three Months Ended September 30, 2020 Compared with the Three Months Ended September 30, 2019 Comparative results from GMLB Riders were unfavorable by $3.2 billion. The AAR resulted in unfavorable changes in the current period primarily due to higher reserves and higher 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 Shield Annuity liabilities, net of favorable changes to the estimated fair value of the related hedges; • unfavorable changes to the estimated fair value of variable annuity liability reserves; and • unfavorable changes in GMLB DAC. Higher relative equity markets in the current period resulted in the following significant impacts: • unfavorable changes to the estimated fair value of our GMLB hedges; and • unfavorable changes to the estimated fair value of Shield Annuity liabilities, net of favorable changes to the estimated fair value of the related hedges; partially offset by • favorable changes to the estimated fair value of variable annuity liability reserves; and • favorable changes to GMLB DAC. 66 Table of Contents Interest rates increasing in the current period, compared to decreasing in the prior period, resulted in the following impacts: • unfavorable changes to the estimated fair value of our GMLB hedges; and • unfavorable changes to GMLB DAC; partially offset by • favorable changes to the estimated fair value of variable annuity liability reserves. The narrowing of credit default swap spreads in the current period resulted in an unfavorable change in the adjustment for nonperformance risk, net of an offsetting favorable change in GMLB DAC. Nine Months Ended September 30, 2020 Compared with the Nine Months Ended September 30, 2019 Comparative results from GMLB Riders were favorable by $311 million, primarily driven by: • favorable changes in our GMLB hedges; and • favorable changes to the estimated fair value of Shield Annuity liabilities, net of unfavorable changes to the estimated fair value of the related hedges; partially offset by • unfavorable changes to the estimated fair value of variable annuity liability reserves; and • unfavorable changes in GMLB DAC. Equity markets increasing less in the current period than in the prior period resulted in the following significant impacts: • favorable changes to the estimated fair value of our GMLB hedges; • favorable changes to the estimated fair value of Shield Annuity liabilities, net of unfavorable changes to the estimated fair value of the related hedges; and • favorable changes to GMLB DAC; partially offset by • unfavorable changes to the estimated fair value of the variable annuity liability reserves. Lower interest rates in the current period resulted in the following significant impacts: • favorable changes to the estimated fair value of our GMLB hedges; • favorable changes to the estimated fair value of Shield Annuity liabilities, net of unfavorable changes to the estimated fair value of the related hedges; and • favorable changes to GMLB DAC; partially offset by • unfavorable changes to the estimated fair value of the variable annuity liability reserves. The widening of credit default swap spreads combined with a larger increase in the underlying variable annuity liability reserves in the current period resulted in a favorable change in the adjustment for nonperformance risk, net of an unfavorable change in GMLB DAC. The AAR resulted in unfavorable changes in the current period primarily due to higher reserves and higher DAC amortization recognized in the current period. Investments Investment Risks Our primary investment objective is to optimize risk-adjusted net investment income and risk-adjusted total return while appropriately matching assets and liabilities. In addition, the investment process is designed to ensure that the portfolio has an appropriate level of liquidity, quality and diversification. 67 Table of Contents We are exposed to the following primary sources of investment risks, which may be heightened or exacerbated by the factors discussed in “— Industry Trends — COVID-19 Pandemic”: • credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest, which will likely result in a higher allowance for credit losses and write-offs for uncollectible balances for certain investments; • interest rate risk, relating to the market price and cash flow variability associated with changes in market interest rates. Changes in market interest rates will impact the net unrealized gain or loss position of our fixed income investment portfolio and the rates of return we receive on both new funds invested and reinvestment of existing funds; • market valuation risk, relating to the variability in the estimated fair value of investments associated with changes in market factors such as credit spreads and equity market levels. A widening of credit spreads will adversely impact the net unrealized gain (loss) position of the fixed income investment portfolio and will increase losses associated with credit-based non-qualifying derivatives where we assume credit exposure. Credit spread tightening will reduce net investment income associated with new purchases of fixed maturity securities and will favorably impact the net unrealized gain (loss) position of the fixed income investment portfolio; • liquidity risk, relating to the diminished ability to sell certain investments, in times of strained market conditions; • real estate risk, relating to commercial, agricultural and residential real estate, and stemming from factors, which include, but are not limited to, market conditions, including the demand and supply of leasable commercial space, creditworthiness of borrowers and their tenants and joint venture partners, capital markets volatility and inherent interest rate movements; • currency risk, relating to the variability in currency exchange rates for non-U.S. dollar denominated investments; and • financial and operational risks related to using external investment managers. We manage these risks through asset-type allocation and industry and issuer diversification. Risk limits are also used to promote diversification by asset sector, avoid concentrations in any single issuer and limit overall aggregate credit and equity risk exposure. Real estate risk is managed through geographic and property type and product type diversification. Interest rate risk is managed as part of our Asset Liability Management (“ALM”) strategies. Product design, such as the use of market value adjustment features and surrender charges, is also utilized to manage interest rate risk. These strategies include maintaining an investment portfolio that targets a weighted average duration that reflects the duration of our estimated liability cash flow profile. For certain of our liability portfolios, it is not possible to invest assets to the full liability duration, thereby creating some asset/liability mismatch. We also use certain derivatives in the management of currency, credit, interest rate, and equity market risks. Investment Management Agreements Other than our derivatives trading, which we manage in-house, we have engaged a select group of experienced external asset management firms to manage the investment of the assets comprising our general account portfolio and certain separate account assets of our insurance subsidiaries, as well as assets of BHF and our reinsurance subsidiary, Brighthouse Reinsurance Company of Delaware (“BRCD”). Current Environment Our business and results of operations are materially affected by conditions in capital markets and the economy, generally. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends and Uncertainties — Financial and Economic Environment” included in our 2019 Annual Report. As a U.S. insurance company, we are affected by the monetary policy of the Federal Reserve Board in the United States. The Federal Reserve may increase or decrease the federal funds rate in the future, which may have an impact on the pricing levels of risk-bearing investments and may adversely impact the level of product sales. We are also affected by the monetary policy of central banks around the world due to the diversification of our investment portfolio. 68 Table of Contents Selected Sector Investments Recent elevated levels of market volatility have affected the performance of various asset classes. Contributing factors include concerns about lower energy and oil prices impacting the energy sector and the COVID-19 pandemic. See “Risk Factors — The ongoing COVID-19 pandemic may materially adversely affect our business, results of operations and financial condition, including capitalization and liquidity” in our First Quarter Form 10-Q. There has been an increased market focus on energy sector investments as a result of lower energy and oil prices. We maintain a diversified energy sector fixed maturity securities portfolio across sub-sectors and issuers. Our exposure to energy sector fixed maturity securities was $3.0 billion, of which 91% were investment grade, with net unrealized gains (losses) of $236 million at September 30, 2020. There has also been an increased market focus on retail sector investments as a result of the COVID-19 pandemic and uncertainty regarding its outcome. Our exposure to retail sector corporate fixed maturity securities was $1.9 billion, of which 97% were investment grade, with net unrealized gains (losses) of $213 million at September 30, 2020. In addition to the fixed maturity securities disclosed above, we have exposure to mortgage loans and certain residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and asset-backed securities (“ABS”) (collectively, “Structured Securities”) that may be impacted by the COVID-19 pandemic. Our investment managers are actively working with borrowers who are experiencing short-term financial or operational problems as a result of the COVID-19 pandemic to provide temporary relief. See “— Investments — Mortgage Loans” and Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements for information on mortgage loans, including credit quality by portfolio segment and commercial mortgage loans by property type. Additionally, see “— Investments — Structured Securities” for information on Structured Securities, including security type, risk profile and ratings profile. We monitor direct and indirect investment exposure across sectors and asset classes and adjust our level of investment exposure, as appropriate. At this time, we do not expect that our general account investments in these sectors and asset classes will have a material adverse effect on our results of operations or financial condition. Investment Portfolio Results The following summary yield table presents the yield and adjusted net investment income for our investment portfolio for the periods indicated. As described below, this table reflects certain differences from the presentation of net investment income presented in the GAAP statement of operations. This summary yield table presentation is consistent with how we measure our investment performance for management purposes, and we believe it enhances understanding of our investment portfolio results. Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Yield % Amount Yield % Amount Yield % Amount Yield % Amount (Dollars in millions) Investment income (1) 4.56 % $ 1,036 4.62 % $ 951 4.04 % $ 2,676 4.56 % $ 2,757 Investment fees and expenses (2) (0.14) (35) (0.10) (23) (0.13) (99) (0.12) (76) Adjusted net investment income (3) 4.42 % $ 1,001 4.52 % $ 928 3.91 % $ 2,577 4.44 % $ 2,681 _______________ (1) Investment income yields are calculated as investment income as a percent of average quarterly asset carrying values. Investment income excludes recognized gains and losses and reflects the adjustments presented in footnote 3 below to arrive at adjusted net investment income. Asset carrying values exclude unrealized gains (losses), collateral received in connection with our securities lending program, freestanding derivative assets and collateral received from derivative counterparties. (2) Investment fee and expense yields are calculated as investment fees and expenses as a percent of average quarterly asset estimated fair values. Asset estimated fair values exclude collateral received in connection with our securities lending program, freestanding derivative assets and collateral received from derivative counterparties. 69 Table of Contents (3) Adjusted net investment income presented in the yield table varies from the most directly comparable GAAP measure due to certain reclassifications, as presented below. Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In millions) Net investment income $ 996 $ 928 $ 2,564 $ 2,681 Less: Investment hedge adjustments (5) — (13) — Adjusted net investment income — in the above yield table $ 1,001 $ 928 $ 2,577 $ 2,681 See “— Results of Operations — Consolidated Results for the Three Months and Nine Months Ended September 30, 2020 and 2019 — Adjusted Earnings” for an analysis of the period over period changes in net investment income. Fixed Maturity Securities Available-for-sale (“AFS”) Fixed maturity securities held by type (public or private) were as follows at: September 30, 2020 December 31, 2019 Estimated Fair Value % of Total Estimated Fair Value % of Total (Dollars in millions) Publicly-traded $ 65,812 83.0 % $ 58,099 81.8 % Privately-placed 13,526 17.0 12,937 18.2 Total fixed maturity securities $ 79,338 100.0 % $ 71,036 100.0 % Percentage of cash and invested assets 69.3 % 72.0 % See Note 6 of the Notes to the Interim Condensed Consolidated Financial Statements for further information on our valuation controls and procedures including our formal process to challenge any prices received from independent pricing services that are not considered representative of estimated fair value. See Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements for further information about fixed maturity securities by sector, contractual maturities, continuous gross unrealized losses and the allowance for credit losses. Fixed Maturity Securities Credit Quality — Ratings See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Investments — Fixed Maturity AFS — Fixed Maturity Securities Credit Quality — Ratings” included in our 2019 Annual Report for a discussion of the credit quality ratings assigned by Nationally Recognized Statistical Rating Organizations (“NRSRO”), credit quality designations assigned by and methodologies used by the Securities Valuation Office of the National Association of Insurance Commissioners (“NAIC”) for fixed maturity securities and the methodologies adopted by the NAIC for certain Structured Securities. 70 Table of Contents The following table presents total fixed maturity securities by NRSRO rating and the applicable NAIC designation from the NAIC published comparison of NRSRO ratings to NAIC designations, except for certain Structured Securities, which are presented using the NAIC methodologies, as well as the percentage, based on estimated fair value that each NAIC designation is comprised of at: September 30, 2020 December 31, 2019 NAIC Designation NRSRO Rating Amortized Cost Allowance for Credit Losses Unrealized Gain (Loss) Estimated Fair Value % of Total Amortized Cost Allowance for Credit Losses Unrealized Gain (Loss) Estimated Fair Value % of Total (Dollars in millions) 1 Aaa/Aa/A $ 43,320 $ — $ 8,752 $ 52,072 65.7 % $ 41,463 $ — $ 5,252 $ 46,715 65.8 % 2 Baa 21,534 — 2,503 24,037 30.3 19,838 — 1,610 21,448 30.2 Subtotal investment grade 64,854 — 11,255 76,109 96.0 61,301 — 6,862 68,163 96.0 3 Ba 2,290 — 33 2,323 2.9 2,015 — 72 2,087 2.9 4 B 802 1 (2) 799 1.0 673 — 23 696 1.0 5 Caa and lower 115 3 (5) 107 0.1 90 — — 90 0.1 6 In or near default — — — — — — — — — — Subtotal below investment grade 3,207 4 26 3,229 4.0 2,778 — 95 2,873 4.0 Total fixed maturity securities $ 68,061 $ 4 $ 11,281 $ 79,338 100.0 % $ 64,079 $ — $ 6,957 $ 71,036 100.0 % The following tables present total fixed maturity securities, based on estimated fair value, by sector classification and by NRSRO rating and the applicable NAIC designations from the NAIC published comparison of NRSRO ratings to NAIC designations, except for certain Structured Securities, which are presented using the NAIC methodologies as described above: Fixed Maturity Securities — by Sector & Credit Quality Rating NAIC Designation 1 2 3 4 5 6 Total Estimated Fair Value NRSRO Rating Aaa/Aa/A Baa Ba B Caa and Lower In or Near Default (In millions) September 30, 2020 U.S. corporate $ 17,758 $ 15,782 $ 1,673 $ 630 $ 63 $ — $ 35,906 Foreign corporate 3,325 6,659 530 140 6 — 10,660 RMBS 8,376 15 19 12 27 — 8,449 U.S. government and agency 8,836 99 — — — — 8,935 CMBS 6,287 127 2 9 — — 6,425 State and political subdivision 4,236 185 1 — 7 — 4,429 ABS 2,400 298 12 4 — — 2,714 Foreign government 854 872 86 4 4 — 1,820 Total fixed maturity securities $ 52,072 $ 24,037 $ 2,323 $ 799 $ 107 $ — $ 79,338 December 31, 2019 U.S. corporate $ 15,313 $ 13,770 $ 1,479 $ 556 $ 42 $ — $ 31,160 Foreign corporate 3,162 6,113 466 90 13 — 9,844 RMBS 9,020 59 15 3 21 — 9,118 U.S. government and agency 7,303 93 — — — — 7,396 CMBS 5,612 126 6 11 — — 5,755 State and political subdivision 3,863 185 — — 9 — 4,057 ABS 1,696 240 19 — — — 1,955 Foreign government 746 862 102 36 5 — 1,751 Total fixed maturity securities $ 46,715 $ 21,448 $ 2,087 $ 696 $ 90 $ — $ 71,036 U.S. and Foreign Corporate Fixed Maturity Securities We maintain a diversified portfolio of corporate fixed maturity securities across industries and issuers. Our portfolio does not have any exposure to any single issuer in excess of 1% of total investments, and the top ten holdings in aggregate 71 Table of Contents comprise 2% of total investments at both September 30, 2020 and December 31, 2019. Our U.S. and foreign corporate fixed maturity securities holdings by industry were as follows at: September 30, 2020 December 31, 2019 Estimated Fair Value % of Total Estimated Fair Value % of Total (Dollars in millions) Industrial $ 14,575 31.3 % $ 12,633 30.9 % Consumer 10,981 23.6 9,719 23.7 Finance 10,614 22.8 9,448 23.0 Utility 7,069 15.2 6,247 15.2 Communications 3,327 7.1 2,957 7.2 Total $ 46,566 100.0 % $ 41,004 100.0 % Structured Securities We held $17.6 billion and $16.8 billion of Structured Securities, at estimated fair value, at September 30, 2020 and December 31, 2019, respectively, as presented in the RMBS, CMBS and ABS sections below. RMBS Our RMBS holdings are diversified by security type, risk profile and ratings profile, which were as follows at: September 30, 2020 December 31, 2019 Estimated Fair Value % of Total Net Unrealized Gains (Losses) Estimated Fair Value % of Total Net Unrealized Gains (Losses) (Dollars in millions) Security type: Collateralized mortgage obligations $ 4,913 58.1 % $ 516 $ 4,857 53.3 % $ 360 Pass-through securities 3,536 41.9 127 4,261 46.7 66 Total RMBS $ 8,449 100.0 % $ 643 $ 9,118 100.0 % $ 426 Risk profile: Agency $ 6,659 78.8 % $ 507 $ 7,216 79.2 % $ 256 Prime 128 1.5 2 141 1.5 9 Alt-A 822 9.7 65 883 9.7 96 Sub-prime 840 10.0 69 878 9.6 65 Total RMBS $ 8,449 100.0 % $ 643 $ 9,118 100.0 % $ 426 Ratings profile: Rated Aaa $ 6,843 81.0 % $ 7,329 80.4 % Designated NAIC 1 $ 8,376 99.1 % $ 9,020 98.9 % Historically, our exposure to sub-prime RMBS holdings has been managed by focusing primarily on senior tranche securities, stress-testing the portfolio with severe loss assumptions and closely monitoring the performance of the portfolio. Our sub-prime RMBS portfolio consists predominantly of securities that were purchased after 2012 at significant discounts to par value and discounts to the expected principal recovery value of these securities. The vast majority of these securities are investment grade under the NAIC designations (e.g., NAIC 1 and NAIC 2). The estimated fair value of our sub-prime RMBS holdings purchased since 2012 was $816 million and $851 million at September 30, 2020 and December 31, 2019, with unrealized gains (losses) of $66 million and $61 million at September 30, 2020 and December 31, 2019, respectively. 72 Table of Contents CMBS Our CMBS holdings are diversified by vintage year, which were as follows at: September 30, 2020 December 31, 2019 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value (In millions) 2003 - 2010 $ 94 $ 113 $ 109 $ 123 2011 114 115 223 223 2012 146 148 138 141 2013 214 217 199 205 2014 342 362 332 346 2015 954 1,031 938 977 2016 462 500 480 497 2017 701 777 683 717 2018 1,660 1,897 1,580 1,700 2019 920 1,001 818 826 2020 258 264 — — Total $ 5,865 $ 6,425 $ 5,500 $ 5,755 The estimated fair value of CMBS rated Aaa using rating agency ratings was $4.8 billion, or 75.2% of total CMBS, and designated NAIC 1 was $6.3 billion, or 97.9% of total CMBS, at September 30, 2020. CMBS Aaa rating agency ratings was $4.3 billion, or 74.9% of total CMBS, and designated NAIC 1 was $5.6 billion, or 97.5% of total CMBS at December 31, 2019. ABS Our ABS holdings are diversified by both collateral type and issuer. Our ABS holdings by collateral type and ratings profile were as follows at: September 30, 2020 December 31, 2019 Estimated Fair Value % of Total Net Unrealized Gains (Losses) Estimated Fair Value % of Total Net Unrealized Gains (Losses) (Dollars in millions) Collateral type: Collateralized obligations $ 1,647 60.7 % $ (5) $ 1,058 54.2 % $ (8) Student loans 202 7.4 1 196 10.0 2 Consumer loans 239 8.8 5 171 8.7 2 Automobile loans 99 3.7 4 114 5.8 2 Credit card loans 58 2.1 7 60 3.1 3 Other loans 469 17.3 21 356 18.2 9 Total $ 2,714 100.0 % $ 33 $ 1,955 100.0 % $ 10 Ratings profile: Rated Aaa $ 1,443 53.2 % $ 879 45.0 % Designated NAIC 1 $ 2,400 88.4 % $ 1,696 86.8 % Allowance for Credit Losses for Fixed Maturity Securities See Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements for information about the evaluation of fixed maturity securities for an allowance for credit losses or write-offs due to uncollectability. Securities Lending We participate in a securities lending program whereby securities are loaned to third parties, primarily brokerage firms and commercial banks. We obtain collateral, usually cash, in an amount generally equal to 102% of the estimated fair value of the securities loaned, which is obtained at the inception of a loan and maintained at a level greater than or equal to 100% 73 Table of Contents for the duration of the loan. The estimated fair value of the securities loaned is monitored on a daily basis with additional collateral obtained as necessary throughout the duration of the loan. Securities loaned under such transactions may be sold or re-pledged by the transferee. We are liable to return to our counterparties the cash collateral under our control. Security collateral received from counterparties may not be sold or re-pledged, unless the counterparty is in default, and is not reflected in the financial statements. These transactions are treated as financing arrangements and the associated cash collateral liability is recorded at the amount of the cash received. See “— Liquidity and Capital Resources — The Company — Primary Uses of Liquidity and Capital — Securities Lending” and Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements for information regarding our securities lending program. Mortgage Loans Our mortgage loans are principally collateralized by commercial, agricultural and residential properties. Information regarding mortgage loans by portfolio segment was summarized as follows at: September 30, 2020 December 31, 2019 Amortized Cost % of Total Allowance for Credit Losses % of Amortized Cost Amortized Cost % of Total Allowance for Credit Losses % of Amortized Cost (Dollars in millions) Commercial $ 9,830 62.1 % $ 44 0.5 % $ 9,721 61.5 % $ 47 0.5 % Agricultural 3,380 21.3 % 16 0.5 % 3,388 21.4 % 10 0.3 % Residential 2,626 16.6 % 30 1.1 % 2,708 17.1 % 7 0.3 % Total $ 15,836 100.0 % $ 90 0.6 % $ 15,817 100.0 % $ 64 0.4 % Our mortgage loan portfolio is diversified by both geographic region and property type to reduce the risk of concentration. The percentage of our commercial and agricultural mortgage loan portfolios collateralized by properties located in the U.S. were 97% at both September 30, 2020 and December 31, 2019, and the remainder was collateralized by properties located outside of the U.S. The carrying value as a percentage of total commercial and agricultural mortgage loans for the top three states in the U.S. was as follows at: September 30, 2020 California 24% New York 12% Florida 8% Additionally, we manage risk when originating commercial and agricultural mortgage loans by generally lending up to 75% of the estimated fair value of the underlying real estate collateral. Our residential mortgage loan portfolio is managed in a similar manner to reduce risk of concentration. All residential mortgage loans were collateralized by properties located in the U.S. at both September 30, 2020 and December 31, 2019. The carrying value as a percentage of total residential mortgage loans for the top three states in the U.S. was as follows at: September 30, 2020 California 37% Florida 10% New York 7% 74 Table of Contents Commercial Mortgage Loans by Geographic Region and Property Type . Commercial mortgage loans are the largest component of the mortgage loan invested asset class. The diversification across geographic regions and property types of commercial mortgage loans was as follows at: September 30, 2020 December 31, 2019 Amount % of Total Amount % of Total (Dollars in millions) Geographic Region: Pacific $ 2,648 26.9 % $ 2,666 27.4 % South Atlantic 1,939 19.7 1,887 19.4 Middle Atlantic 1,872 19.0 1,875 19.3 West South Central 802 8.2 809 8.3 Mountain 697 7.1 668 6.9 East North Central 608 6.2 555 5.7 International 494 5.0 494 5.1 New England 463 4.7 412 4.2 West North Central 123 1.3 125 1.3 East South Central 84 0.9 85 0.9 Multi-Region and Other 100 1.0 145 1.5 Total recorded investment 9,830 100.0 % 9,721 100.0 % Less: allowance for credit losses 44 47 Carrying value, net of allowance for credit losses $ 9,786 $ 9,674 Property Type: Office $ 3,803 38.7 % $ 3,839 39.5 % Apartment 2,200 22.4 2,181 22.4 Retail 2,103 21.4 2,115 21.8 Hotel 928 9.4 930 9.6 Industrial 766 7.8 626 6.4 Other 30 0.3 30 0.3 Total recorded investment 9,830 100.0 % 9,721 100.0 % Less: allowance for credit losses 44 47 Carrying value, net of allowance for credit losses $ 9,786 $ 9,674 Mortgage Loan Credit Quality — Monitoring Process. Our mortgage loan investments are monitored on an ongoing basis, including a review of loans that are current, past due, restructured and under foreclosure. Quarterly, we conduct a formal review of the portfolio with our investment managers. See Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements for information on mortgage loans by credit quality indicator, past due status, nonaccrual status and modified mortgage loans. Our commercial mortgage loans are reviewed on an ongoing basis. These reviews may include an analysis of the property financial statements and rent roll, lease rollover analysis, property inspections, market analysis, estimated valuations of the underlying collateral, loan-to-value ratios, debt-service coverage ratios and tenant creditworthiness. The monitoring process focuses on higher risk loans, which include those that are classified as restructured, delinquent or in foreclosure, as well as loans with higher loan-to-value ratios and lower debt-service coverage ratios. The monitoring process for agricultural mortgage loans is generally similar, with a focus on higher risk loans, such as loans with higher loan-to-value ratios, including reviews on a geographic and sector basis. Our residential mortgage loans are reviewed on an ongoing basis. See Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements for information on our evaluation of residential mortgage loans and related valuation allowance methodology. Loan-to-value ratios and debt-service coverage ratios are common measures in the assessment of the quality of commercial mortgage loans. Loan-to-value ratios are a common measure in the assessment of the quality of agricultural mortgage loans. Loan-to-value ratios compare the amount of the loan to the estimated fair value of the underlying collateral. 75 Table of Contents A loan-to-value ratio greater than 100% indicates that the loan amount is greater than the collateral value. A loan-to-value ratio of less than 100% indicates an excess of collateral value over the loan amount. Generally, the higher the loan-to-value ratio, the higher the risk of experiencing a credit loss. The debt-service coverage ratio compares a property’s net operating income to amounts needed to service the principal and interest due under the loan. Generally, the lower the debt-service coverage ratio, the higher the risk of experiencing a credit loss. For our commercial mortgage loans, our average loan-to-value ratio was 56% and 53% at September 30, 2020 and December 31, 2019, respectively, and our average debt-service coverage ratio was 2.2x at both September 30, 2020 and December 31, 2019. The debt-service coverage ratio, as well as the values utilized in calculating the ratio, is updated annually on a rolling basis, with a portion of the portfolio updated each quarter. In addition, the loan-to-value ratio is routinely updated for all but the lowest risk loans as part of our ongoing review of our commercial mortgage loan portfolio. For our agricultural mortgage loans, our average loan-to-value ratio was 47% at both September 30, 2020 and December 31, 2019. The values utilized in calculating the agricultural mortgage loan loan-to-value ratio are developed in connection with the ongoing review of the agricultural loan portfolio and are routinely updated. Loan Modifications Related to the COVID-19 Pandemic. Our underwriting and credit management practices are proactively refined to meet the changing economic environment. To actively mitigate losses and enhance borrower support across the mortgage loan portfolio segments, we have expanded loan modification and customer assistance infrastructures. Since March 1, 2020, we have completed loan modifications and have provided waivers to certain covenants, including the furniture, fixture and expense reserves, tenant rent payment deferrals or lease modifications, rate reductions, maturity date extensions, and other actions with a number of our borrowers impacted by the COVID-19 pandemic. A subset of these modifications included short-term principal and interest forbearance. At September 30, 2020, the recorded investment on mortgage loans where borrowers were offered debt service forbearance and were not making payments was $700 million, comprised of $581 million commercial mortgage loans, $24 million of agricultural mortgage loans and $95 million of residential mortgage loans. These types of modifications are generally not considered troubled debt restructurings (“TDRs”) due to the relief granted by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). For more information on TDRs, see Note 4 to the Interim Condensed Consolidated Financial Statements. Mortgage Loan Allowance for Credit Losses . See Notes 4 and 6 of the Notes to the Interim Condensed Consolidated Financial Statements for information about how the allowance for credit losses is established and monitored and activity in and balances of the allowance for credit losses for the nine months ended September 30, 2020 and 2019. Limited Partnerships and Limited Liability Companies The carrying value of our limited partnerships and limited liability companies (“LLCs”) was as follows at: September 30, 2020 December 31, 2019 (In millions) Other limited partnerships interests $ 2,125 $ 1,941 Real estate limited partnerships and LLCs (1) 437 439 Total $ 2,562 $ 2,380 __________________ (1) The estimated fair value of real estate limited partnerships and LLCs was $502 million and $529 million at September 30, 2020 and December 31, 2019, respectively. Cash distributions on these investments are generated from investment gains, operating income from the underlying investments of the funds and liquidation of the underlying investments of the funds. We estimate that the underlying investment of the private equity funds will typically be liquidated over the next 10 to 20 years. 76 Table of Contents Other Invested Assets The carrying value of our other invested assets by type was as follows at: September 30, 2020 December 31, 2019 Carrying Value % of Total Carrying Value % of Total (Dollars in millions) Freestanding derivatives with positive estimated fair values $ 4,831 95.9 % $ 3,021 93.9 % FHLB stock 81 1.6 39 1.2 Tax credit renewable energy partnership 63 1.3 82 2.6 Leveraged leases, net of non-recourse debt 51 1.0 64 2.0 Other 12 0.2 10 0.3 Total $ 5,038 100.0 % $ 3,216 100.0 % Derivatives Derivative Risks We are exposed to various risks relating to our ongoing business operations, including interest rate, foreign currency exchange rate, credit and equity market. We use a variety of strategies to manage these risks, including the use of derivatives. See Note 5 of the Notes to the Interim Condensed Consolidated Financial Statements: • Information about the gross notional amount, estimated fair value, and primary underlying risk exposure of our derivatives by type of hedge designation, excluding embedded derivatives held at September 30, 2020 and December 31, 2019. • The statement of operations effects of derivatives in cash flow, fair value or non-qualifying hedge relationships for the three months and nine months ended September 30, 2020 and 2019. See “Business — Segments and Corporate & Other — Annuities,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management Strategies — ULSG Market Risk Exposure Management” and “— Annual Actuarial Review” included in our 2019 Annual Report for more information about our use of derivatives by major hedging programs. Fair Value Hierarchy See Note 6 of the Notes to the Interim Condensed Consolidated Financial Statements for derivatives measured at estimated fair value on a recurring basis and their corresponding fair value hierarchy, as well as a rollforward of the fair value measurements for derivatives measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs as discussed below. The valuation of Level 3 derivatives involves the use of significant unobservable inputs and generally requires a higher degree of management judgment or estimation than the valuations of Level 1 and Level 2 derivatives. Although Level 3 inputs are unobservable, management believes they are consistent with what other market participants would use when pricing such instruments and are considered appropriate given the circumstances. The use of different inputs or methodologies could have a material effect on the estimated fair value of Level 3 derivatives and could materially affect net income. Derivatives categorized as Level 3 at September 30, 2020 include: credit default swaps priced using unobservable credit spreads, or that are priced through independent broker quotations; equity variance swaps with unobservable volatility inputs; foreign currency swaps with certain unobservable inputs and equity index options with unobservable correlation inputs. Credit Risk See Note 5 of the Notes to the Interim Condensed Consolidated Financial Statements for information about how we manage credit risk related to derivatives and for the estimated fair value of our net derivative assets and net derivative liabilities after the application of master netting agreements and collateral. Our policy is not to offset the fair value amounts recognized for derivatives executed with the same counterparty under the same master netting agreement. This policy applies to the recognition of derivatives in the balance sheets and does not affect our legal right of offset. 77 Table of Contents Credit Derivatives The gross notional amount and estimated fair value of credit default swaps were as follows at: September 30, 2020 December 31, 2019 Gross Notional Amount Estimated Fair Value Gross Notional Amount Estimated Fair Value (In millions) Written $ 1,793 $ 26 $ 1,635 $ 36 Purchased 18 — 18 — Total $ 1,811 $ 26 $ 1,653 $ 36 The maximum amount at risk related to our written credit default swaps is equal to the corresponding gross notional amount. In a replication transaction, we pair an asset on our balance sheet with a written credit default swap to synthetically replicate a corporate bond, a core asset holding of life insurance companies. Replications are entered into in accordance with the guidelines approved by state insurance regulators and the NAIC and are an important tool in managing the overall corporate credit risk within the Company. In order to match our long-dated insurance liabilities, we seek to buy long-dated corporate bonds. In some instances, these may not be readily available in the market, or they may be issued by corporations to which we already have significant corporate credit exposure. For example, by purchasing Treasury bonds (or other high-quality assets) and associating them with written credit default swaps on the desired corporate credit name, we can replicate the desired bond exposures and meet our ALM needs. This can expose the Company to changes in credit spreads as the written credit default swap tenor is shorter than the maturity of Treasury bonds. Off-Balance Sheet Arrangements Collateral for Securities Lending and Derivatives We have a securities lending program for the purpose of enhancing the total return on our investment portfolio. Periodically we receive non-cash collateral for securities lending from counterparties, which cannot be sold or re-pledged, and which is not recorded on our consolidated balance sheets. The amount of this collateral was $ 6 million at estimated fair value at September 30, 2020. The Company did not hold non-cash collateral at December 31, 2019. See Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements, as well as “— Investments — Securities Lending” for discussion of our securities lending program, the classification of revenues and expenses, and the nature of the secured financing arrangement and associated liability. We enter into derivatives to manage various risks relating to our ongoing business operations. We have non-cash collateral from counterparties for derivatives, which can be sold or re-pledged subject to certain constraints, and which has not been recorded on our consolidated balance sheets. The amount of this non-cash collateral was $784 million and $593 million at September 30, 2020 and December 31, 2019, respectively. See Note 5 of the Notes to the Interim Condensed Consolidated Financial Statements for information regarding the earned income and the gross notional amount, estimated fair value of assets and liabilities and primary underlying risk exposure of our derivatives. Guarantees See “Guarantees” in Note 11 of the Notes to the Interim Condensed Consolidated Financial Statements. Other Additionally, we enter into commitments for the purpose of enhancing the total return on our investment portfolio: mortgage loan commitments and commitments to fund partnership investments, bank credit facilities and private corporate bond investments. See “Commitments” in Note 11 of the Notes to the Interim Condensed Consolidated Financial Statements. For further information on commitments to fund partnership investments, mortgage loans, bank credit facilities and private corporate bond investments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — The Company — Contractual Obligations” included in our 2019 Annual Report. 78 Table of Contents Policyholder Liabilities We establish, and carry as liabilities, actuarially determined amounts that are calculated to meet policy obligations or to provide for future annuity payments. Amounts for actuarial liabilities are computed and reported in the financial statements in conformity with GAAP. For more details on policyholder liabilities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Policyholder Liabilities” included in our 2019 Annual Report. Except as otherwise discussed below, there have been no material changes to our actuarial liabilities. Future Policy Benefits We establish liabilities for amounts payable under insurance policies. See Note 3 of the Notes to the Interim Condensed Consolidated Financial Statements. A discussion of future policy benefits by segment, as well as Corporate & Other, can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Policyholder Liabilities” included in our 2019 Annual Report. Policyholder Account Balances Policyholder account balances (“PABs”) are generally equal to the account value, which includes accrued interest credited, but excludes the impact of any applicable charge that may be incurred upon surrender. See Note 3 of the Notes to the Interim Condensed Consolidated Financial Statements. A discussion of PABs by segment, as well as Corporate & Other, can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Policyholder Liabilities” included in our 2019 Annual Report. Variable Annuity Guarantees We issue certain variable annuity products with guaranteed minimum benefits that provide the policyholder a minimum return based on their initial deposit (i.e., the Benefit Base) less withdrawals. In some cases, the Benefit Base may be increased by additional deposits, bonus amounts, accruals or optional market value step-ups. See Note 3 of the Notes to the Interim Condensed Consolidated Financial Statements. See also “Quantitative and Qualitative Disclosures About Market Risk — Market Risk - Fair Value Exposures — Interest Rates” and “Business — Segments and Corporate & Other — Annuities — Overview — Current Products — Variable Annuities” included in our 2019 Annual Report for additional information. Select information that management considers relevant to understanding our variable annuity risk management strategy has been included below. Net Amount at Risk The net amount at risk (“NAR”) for the net GMDB is the amount of death benefit in excess of the account value (if any) as of the balance sheet date. It represents the amount of the claim we would incur if death claims were made on all contracts on the balance sheet date and includes any additional contractual claims associated with riders purchased to assist with covering income taxes payable upon death. The NAR for the guaranteed minimum withdrawal benefits (“GMWB”) and guaranteed minimum accumulation benefits (“GMAB”) is the amount of guaranteed benefits in excess of the account values (if any) as of the balance sheet date. The NAR assumes utilization of benefits by all contract holders as of the balance sheet date. For the GMWB benefits, only a small portion of the Benefit Base is available for withdrawal on an annual basis. For the GMAB, the NAR would not be available until the GMAB maturity date. The NAR for the GMWB with lifetime payments (“GMWB4L”) is the amount (if any) that would be required to be added to the total account value to purchase a lifetime income stream based on current annuity rates, equal to the lifetime amount provided under the guaranteed benefit. For contracts where the GMWB4L provides for a guaranteed cumulative dollar amount of payments, the NAR is based on the purchase of a lifetime with period certain income stream where the period certain ensures payment of this cumulative dollar amount. The NAR represents our potential economic exposure to such guarantees in the event all contract holders were to begin lifetime withdrawals on the balance sheet date regardless of age. Only a small portion of the Benefit Base is available for withdrawal on an annual basis. The NAR for the GMIB is the amount (if any) that would be required to be added to the total account value to purchase a lifetime income stream, based on current annuity rates, equal to the minimum amount provided under the guaranteed benefit. This amount represents our potential economic exposure to such guarantees in the event all contract holders were to annuitize on the balance sheet date, even though the guaranteed amount under the contracts may not be annuitized until after the waiting period of the contract. 79 Table of Contents A detailed description of NAR by type of guaranteed minimum benefit can be found in “Business — Segments and Corporate & Other — Annuities — Overview — Net Amount at Risk” included in our 2019 Annual Report. The account values and NAR of contract holders by type of guaranteed minimum benefit for variable annuity contracts were as follows at: September 30, 2020 (1) December 31, 2019 (1) Account Value Death Benefit NAR (1) Living Benefit NAR (1) % of Account Value In-the-Money (2) Account Value Death Benefit NAR (1) Living Benefit NAR (1) % of Account Value In-the-Money (2) (Dollars in millions) GMIB $ 39,330 $ 2,693 $ 7,705 59.4 % $ 41,302 $ 2,302 $ 4,722 42.0 % GMIB Max with EDB (3) 10,943 3,435 207 21.8 % 11,807 2,673 23 2.3 % GMIB Max without EDB 6,249 10 44 10.0 % 6,750 2 5 0.8 % GMWB4L (FlexChoice SM ) 5,050 12 194 40.1 % 4,130 3 25 13.4 % GMAB 670 1 2 1.7 % 672 1 1 0.6 % GMWB 2,589 44 11 7.5 % 2,783 39 8 1.4 % GMWB4L 14,063 106 1,022 38.6 % 14,904 71 509 23.7 % EDB Only 3,652 763 — N/A 3,740 609 — N/A GMDB Only (Other than EDB) 17,925 990 — N/A 18,183 971 — N/A Total $ 100,471 $ 8,054 $ 9,185 $ 104,271 $ 6,671 $ 5,293 __________________ (1) The “Death Benefit NAR” and “Living Benefit NAR” are not additive at the contract level. (2) In-the-money is defined as any contract with a living benefit NAR in excess of zero. (3) EDB is defined as enhanced death benefits. Reserves Under GAAP, certain of our variable annuity guarantee features are accounted for as insurance liabilities and reported on the consolidated balance sheets in future policy benefits with changes reported in policyholder benefits and claims. These liabilities are accounted for using long-term assumptions of equity and bond market returns and the level of interest rates. Therefore, these liabilities, valued at $6.2 billion at September 30, 2020, are less sensitive than derivative instruments to periodic changes to equity and fixed income market returns and the level of interest rates. Guarantees accounted for in this manner include GMDBs, as well as the life contingent portion of GMIBs and certain GMWBs. All other variable annuity guarantee features are accounted for as embedded derivatives and reported on the consolidated balance sheets in PABs with changes reported in net derivative gains (losses). These liabilities, valued at $3.9 billion at September 30, 2020, are accounted for at estimated fair value. Guarantees accounted for in this manner include GMABs, GMWBs and the non-life contingent portions of GMIBs. In some cases, a guarantee will have multiple features or options that require separate accounting such that the guarantee is not fully accounted for under only one of the accounting models (known as “split accounting”). Additionally, the index protection and accumulation features of Shield Annuities are accounted for as embedded derivatives, reported on the consolidated balance sheets in PABs with changes reported in net derivative gains (losses) and valued at $2.2 billion at September 30, 2020. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates” included in our 2019 Annual Report. 80 Table of Contents The GAAP variable annuity reserve balances by guarantee type and accounting model were as follows at: Reserves September 30, 2020 December 31, 2019 Future Policy Benefits Policyholder Account Balances Total Reserves Future Policy Benefits Policyholder Account Balances Total Reserves (In millions) GMDB $ 1,346 $ — $ 1,346 $ 1,362 $ — $ 1,362 GMIB 3,692 3,111 6,803 2,677 1,844 4,521 GMIB Max 859 269 1,128 560 (84) 476 GMAB — 3 3 — (17) (17) GMWB — 55 55 — 6 6 GMWB4L 269 342 611 258 (93) 165 GMWB4L (FlexChoice SM ) — 73 73 — — — Total $ 6,166 $ 3,853 $ 10,019 $ 4,857 $ 1,656 $ 6,513 Derivatives Hedging Variable Annuity Guarantees The gross notional amount and estimated fair value of the derivatives held in our macro interest rate hedging program were as follows at: September 30, 2020 December 31, 2019 Instrument Type Gross Notional Amount (1) Estimated Fair Value Gross Notional Amount (1) Estimated Fair Value Assets Liabilities Assets Liabilities (In millions) Interest rate swaps $ 2,845 $ 593 $ — $ 7,344 $ 798 $ 29 Interest rate options 22,570 1,481 178 29,750 782 187 Interest rate forwards 7,332 1,179 25 5,418 94 114 Total $ 32,747 $ 3,253 $ 203 $ 42,512 $ 1,674 $ 330 __________________ (1) The gross notional amounts presented do not necessarily represent the relative economic coverage provided by option instruments because certain positions were closed out by entering into offsetting positions that are not netted in the above table. 81 Table of Contents The gross notional amount and estimated fair value of the derivatives in our variable annuity hedging program were as follows at: September 30, 2020 December 31, 2019 Instrument Type Gross Notional Amount (1) Estimated Fair Value Gross Notional Amount (1) Estimated Fair Value Assets Liabilities Assets Liabilities (In millions) Equity index options $ 33,361 $ 727 $ 991 $ 46,968 $ 814 $ 1,713 Equity total return swaps 12,997 63 222 7,723 2 367 Equity variance swaps 1,098 13 22 2,136 69 69 Interest rate swaps 2,845 593 — 7,344 798 29 Interest rate options 21,370 1,203 178 27,950 712 176 Interest rate forwards 2,774 308 9 — — — Total $ 74,445 $ 2,907 $ 1,422 $ 92,121 $ 2,395 $ 2,354 __________________ (1) The gross notional amounts presented do not necessarily represent the relative economic coverage provided by option instruments because certain positions were closed out by entering into offsetting positions that are not netted in the above table. Period to period changes in the estimated fair value of these hedges affect our net income, as well as stockholders’ equity and these effects can be material in any given period. See “Risk Factors — Risks Related to Our Business — Our variable annuity exposure risk management strategy may not be effective, may result in significant volatility in our profitability measures and may negatively affect our statutory capital,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management Strategies” all included in our 2019 Annual Report. Liquidity and Capital Resources Our business and results of operations are materially affected by conditions in the global capital markets and the economy generally. Stressed conditions, volatility or disruptions in global capital markets, particular markets or financial asset classes can impact us adversely, in part because we have a large investment portfolio and our insurance liabilities and derivatives are sensitive to changing market factors. Changing conditions in the global capital markets and the economy may affect our financing costs and market interest rates for our debt or equity securities. For further information regarding market factors that could affect our ability to meet liquidity and capital needs, including those related to the COVID-19 pandemic, see “— Industry Trends — COVID-19 Pandemic,” “— Investments — Current Environment” herein, as well as (i) “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends and Uncertainties” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Investments — Current Environment” in our 2019 Annual Report and (ii) “Risk Factors — The ongoing COVID-19 pandemic may materially adversely affect our business, results of operations and financial condition, including capitalization and liquidity” in our First Quarter Form 10-Q. 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 under current market conditions and certain stress scenarios. Our Board of Directors and senior management are directly involved in the governance of the capital management process, including proposed changes to the annual capital plan and capital targets. We are targeting a debt-to-capital ratio commensurate with our parent company credit ratings and our insurance subsidiaries’ financial strength ratings. 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 $5.6 billion and $2.8 billion at September 30, 2020 and December 31, 2019, 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. 82 Table of Contents An integral part of our liquidity management includes managing our level of liquid assets, which was $50.5 billion and $42.6 billion at September 30, 2020 and December 31, 2019, 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, derivatives and assets held on deposit or in trust. The Company Liquidity Liquidity refers to our ability to generate adequate cash flows from our normal operations to meet the cash requirements of our operating, investing and financing activities. We determine our liquidity needs based on a rolling 12-month forecast by portfolio of invested assets which we monitor daily. We adjust the general account asset and derivatives mix and general account asset maturities based on this rolling 12-month forecast. To support this forecast, we conduct cash flow and stress testing, which reflect the impact of various scenarios, including (i) the potential increase in our requirement to pledge additional collateral or return collateral to our counterparties, (ii) a reduction in new business sales, and (iii) the risk of early contract holder and policyholder withdrawals, as well as lapses and surrenders of existing policies and contracts. We include provisions limiting withdrawal rights in many of our products, which deter the customer from making withdrawals prior to the maturity date of the product. If significant cash is required beyond our anticipated liquidity needs, we have various alternatives available depending on market conditions and the amount and timing of the liquidity need. These available alternative sources of liquidity include cash flows from operations, sales of liquid assets and funding sources including secured funding agreements, unsecured credit facilities and secured committed facilities. Under certain adverse market and economic conditions, our access to liquidity may deteriorate, or the cost to access liquidity may increase. Capital We manage our capital position to maintain our financial strength and credit ratings. Our capital position is supported by our ability to generate cash flows within our insurance companies, our ability to effectively manage the risks of our businesses and our expected ability to borrow funds and raise additional capital to meet operating and growth needs in the event of adverse market and economic conditions. We target to maintain a debt-to-capital ratio of approximately 25%, which we monitor using an average of our key leverage ratios as calculated by A.M. Best, Fitch, Moody’s and S&P. As such, we may opportunistically look to pursue additional financing over time, which may include the incurrence of additional term loans, borrowings under credit facilities, the issuance of debt, equity or hybrid securities or the refinancing of existing indebtedness. There can be no assurance that we will be able to complete any such financing transactions on terms and conditions favorable to us or at all. In support of our target combined risk-based capital (“RBC”) ratio between 400% and 450%, we expect to continue to maintain a capital and exposure risk management program that targets total assets supporting our variable annuity contracts at or above the average of the worst two percent of a set of capital market scenarios over the life of the contracts (“CTE98”) level in normal market conditions. We refer to our target level of assets as our “Variable Annuity Target Funding Level.” While total assets supporting our variable annuity capital may exceed the CTE98 level, under stressed conditions, we intend to allow such assets supporting our variable annuity contracts to range between CTE98 and a target floor level of CTE95 (the average of the worst five percent of a set of capital market scenarios over the life of the contracts). On February 6, 2020, we authorized the repurchase of up to $500 million of our common stock, which is in addition to the $600 million aggregate stock repurchase authorizations announced in May 2019 and August 2018. On May 11, 2020, we announced that we had temporarily suspended repurchases of our common stock. On August 24, 2020, we resumed repurchases of our common stock, as was announced on August 21, 2020. Repurchases made under the February 6, 2020 authorization may be made through open market purchases, including pursuant to 10b5-1 plans or pursuant to accelerated stock repurchase plans, or through privately negotiated transactions, from time to time at management’s discretion in accordance with applicable legal requirements. Common stock repurchases are dependent upon several factors, including our capital position, liquidity, financial strength and credit ratings, general market conditions, the market price of our common stock compared to management’s assessment of the stock’s underlying value and applicable regulatory approvals, as well as other legal and accounting factors. We currently have no plans to declare and pay dividends on our common stock. Any future declaration and payment of dividends or other distributions or returns of capital will be at the discretion of our Board of Directors and will depend on and be subject to our financial condition, results of operations, cash needs, regulatory and other constraints, capital 83 Table of Contents requirements (including capital requirements of our subsidiaries), contractual restrictions and any other factors that our Board of Directors deems relevant in making such a determination. Therefore, there can be no assurance that we will pay any dividends or make other distributions or returns of capital on our common stock, or as to the amount of any such dividends, distributions or returns of capital. Sources and Uses of Liquidity and Capital Our primary sources and uses of liquidity and capital were as follows at: Nine Months Ended September 30, 2020 2019 (In millions) Sources: Operating activities, net $ 515 $ 1,322 Changes in policyholder account balances, net 5,591 3,668 Changes in payables for collateral under securities loaned and other transactions, net 2,598 234 Long-term debt issued 614 1,000 Preferred stock issued, net of issuance costs 390 412 Financing element on certain derivative instruments and other derivative related transactions, net — 179 Total sources 9,708 6,815 Uses: Investing activities, net 4,184 5,699 Long-term debt repaid 1,001 601 Dividends on preferred stock 31 14 Treasury stock acquired in connection with share repurchases 376 314 Financing element on certain derivative instruments and other derivative related transactions, net 764 — Other, net 40 43 Total uses 6,396 6,671 Net increase (decrease) in cash and cash equivalents $ 3,312 $ 144 Cash Flows from Operating Activities The principal cash inflows from our insurance activities come from insurance premiums, annuity considerations and net investment income. The principal cash outflows are the result of various annuity and life insurance products, operating expenses and income tax, as well as interest expense. The primary liquidity concern with respect to these cash flows is the risk of early contract holder and policyholder withdrawal. Cash Flows from Investing Activities The principal cash inflows from our investment activities come from repayments of principal, proceeds from maturities and sales of investments, as well as settlements of freestanding derivatives. The principal cash outflows relate to purchases of investments and settlements of freestanding derivatives. We typically can have a net cash outflow from investing activities because cash inflows from insurance operations are reinvested in accordance with our ALM discipline to fund insurance liabilities. We closely monitor and manage these risks through our comprehensive investment risk management process. The primary liquidity concerns with respect to these cash flows are the risk of default by debtors and market disruption. Cash Flows from Financing Activities The principal cash inflows from our financing activities come from issuances of debt and equity securities, deposits of funds associated with policyholder account balances and lending of securities. The principal cash outflows come from repayments of debt, common stock repurchases, preferred stock dividends, withdrawals associated with policyholder account balances and the return of securities on loan. The primary liquidity concerns with respect to these cash flows are market disruption and the risk of early policyholder withdrawal. 84 Table of Contents Primary Sources of Liquidity and Capital In addition to the summary description of liquidity and capital sources discussed in “— Sources and Uses of Liquidity and Capital,” the following additional information is provided regarding our primary sources of liquidity and capital: Funding Sources Liquidity is provided by a variety of funding sources, including secured funding agreements, unsecured credit facilities and secured committed facilities. Capital is provided by a variety of funding sources, including issuances of debt and equity securities, as well as borrowings under our credit facilities. We maintain a shelf registration statement with the SEC that permits the issuance of public debt, equity and hybrid securities. As a “Well-Known Seasoned Issuer” under SEC rules, our shelf registration statement provides for automatic effectiveness upon filing and has no stated issuance capacity. The diversity of our funding sources enhances our funding flexibility, limits dependence on any one market or source of funds and generally lowers the cost of funds. Our primary funding sources include: Preferred Stock In May 2020, BHF issued depositary shares (the “Series B Depositary Shares”), each representing a 1/1,000th ownership interest in a share of its perpetual 6.750% non-cumulative preferred stock, Series B (the “Series B Preferred Stock”) and in the aggregate representing 16,100 shares of Series B Preferred Stock, with a stated amount of $25,000 per share, for aggregate net cash proceeds of $390 million. Under the terms of the Series B Preferred Stock, our ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, shares of our common stock or shares of any other class or series of our capital stock (if any) that ranks junior to the Series B Preferred Stock will be subject to certain restrictions in the event that we do not declare and pay (or set aside) full dividends on the Series B Preferred Stock for the latest completed dividend period, and our ability to declare and pay full dividends on our perpetual 6.600% non-cumulative preferred stock, Series A or any other series of preferred stock that ranks equally with the Series B Preferred Stock (if any) will be subject to certain limitations in the event we do not declare and pay full dividends on the Series B Preferred Stock. See Note 8 of the Notes to the Interim Condensed Consolidated Financial Statements. Federal Home Loan Bank Funding Agreements, Reported in Policyholder Account Balances Brighthouse Life Insurance Company is a member of the Federal Home Loan Bank (“FHLB”) of Atlanta, where we maintain an active funding agreement program, along with inactive funding agreement programs with certain other FHLBs. On April 2, 2020, Brighthouse Life Insurance Company issued funding agreements for an aggregate collateralized borrowing of $1.0 billion (the “April 2020 funding agreements”) to provide a readily available source of contingent liquidity. Brighthouse Life Insurance Company had obligations outstanding under funding agreements of $1.6 billion and $595 million at September 30, 2020 and December 31, 2019, respectively. During the nine months ended September 30, 2020, there were the aforementioned $1.0 billion of issuances and no repayments under funding agreements. During the nine months ended September 30, 2019, there were no issuances or repayments under funding agreements. Upon maturity on October 9, 2020, Brighthouse Life Insurance Company repaid $250 million borrowed under the April 2020 funding agreements with the remainder maturing in December 2020. For additional information regarding the funding agreement program, see Note 3 of the Notes to the Consolidated Financial Statements included in our 2019 Annual Report. Farmer Mac Funding Agreements, Reported in Policyholder Account Balances Brighthouse Life Insurance Company has a funding agreement program with the Federal Agricultural Mortgage Corporation and its affiliate Farmer Mac Mortgage Securities Corporation (“Farmer Mac”), pursuant to which the parties may enter into funding agreements in an aggregate amount of up to $500 million. At September 30, 2020, there were no borrowings under this funding agreement program. Debt Issuances During the second quarter of 2020, BHF issued $615 million aggregate principal amount of 5.625% unsecured senior notes due 2030 (the “2030 Senior Notes”) for aggregate net cash proceeds of $614 million. See Note 7 of the Notes to the Interim Condensed Consolidated Financial Statements. Credit Facilities We maintain a $1.0 billion senior unsecured revolving credit facility (the “Revolving Credit Facility”) scheduled to mature in May 2024, all of which may be used for revolving loans and/or letters of credit. At September 30, 2020, there were no borrowings or letters of credit outstanding under the Revolving Credit Facility. In connection with the 85 Table of Contents repayment of all outstanding borrowings under our $1.0 billion unsecured term loan facility (the “Term Loan Facility”), the Term Loan Facility was terminated without penalty on June 2, 2020, as discussed further in “— Primary Uses of Liquidity and Capital — Debt Repayments.” Committed Facilities Repurchase Facility Brighthouse Life Insurance Company maintains a secured committed repurchase facility (the “Repurchase Facility”) with a financial institution, pursuant to which Brighthouse Life Insurance Company may enter into repurchase transactions in an aggregate amount of up to $2.0 billion. The Repurchase Facility has a term ending on July 31, 2021. Under the Repurchase Facility, Brighthouse Life Insurance Company may sell certain eligible securities at a purchase price based on the market value of the securities less an applicable margin based on the types of securities sold, with a concurrent agreement to repurchase such securities at a predetermined future date (ranging from two weeks to three months) and at a price which represents the original purchase price plus interest. At September 30, 2020, there were no borrowings under the Repurchase Facility. Reinsurance Financing Arrangement Our reinsurance subsidiary, BRCD, was formed to manage our capital and risk exposures and to support our term and ULSG businesses through the use of affiliated reinsurance arrangements and related reserve financing. BRCD maintains a financing arrangement with a pool of highly rated third-party reinsurers consisting of credit-linked notes. On June 11, 2020, BRCD, with the explicit permission of the Delaware Commissioner of Insurance, amended its financing arrangement to increase the maximum amount from $10.0 billion to $12.0 billion and to extend the term by two years to 2039. At September 30, 2020, there were no borrowings and there was $10.8 billion of funding available under this financing arrangement. BRCD is capitalized with cash and invested assets, including funds withheld (“Minimum Initial Target Assets”) at a level we believe to be sufficient to satisfy its future cash obligations assuming a permanent level yield curve, consistent with NAIC cash flow testing scenarios. BRCD utilizes the above referenced financing arrangement to cover the difference between full required statutory assets (i.e., NAIC Valuation of Life Insurance Policies Model Regulation (Regulation XXX) and NAIC Actuarial Guideline 38 (Guideline AXXX) reserves plus target risk margin appropriate to meet capital needs) and Minimum Initial Target Assets. An admitted deferred tax asset could also serve to reduce the amount of funding required under the above referenced financing arrangement. Outstanding Long-term Debt Our outstanding long-term debt was as follows at: September 30, 2020 December 31, 2019 (In millions) Senior notes (1) $ 3,585 $ 2,970 Term loan — 1,000 Junior subordinated debentures (1) 363 363 Other long-term debt (2) 31 32 Total long-term debt $ 3,979 $ 4,365 __________________ (1) Includes unamortized debt issuance costs, discounts and premiums, as applicable, totaling $42 million at both September 30, 2020 and December 31, 2019 for senior notes and junior subordinated debentures on a combined basis. (2) Represents non-recourse debt for which creditors have no access, subject to customary exceptions, to the general assets of the Company other than recourse to certain investment companies. Debt and Facility Covenants Our debt instruments and credit and committed facilities contain certain administrative, reporting and legal covenants. Additionally, our Revolving Credit Facility contains financial covenants, including requirements to maintain a specified minimum adjusted consolidated net worth, to maintain a ratio of total indebtedness to total capitalization not in excess of a specified percentage and that place limitations on the dollar amount of indebtedness that we may incur, which could restrict our operations and use of funds. At September 30, 2020, we were in compliance with these financial covenants. 86 Table of Contents Primary Uses of Liquidity and Capital In addition to the summarized description of liquidity and capital uses discussed in “— Sources and Uses of Liquidity and Capital,” the following additional information is provided regarding our primary uses of liquidity and capital: Common Stock Repurchases During the nine months ended September 30, 2020 and 2019, we repurchased 15,119,010 shares and 8,395,371 shares, respectively, of our common stock through open market purchases pursuant to 10b5-1 plans for $376 million and $314 million, respectively. On May 11, 2020, we announced that we had temporarily suspended repurchases of our common stock. On August 24, 2020, we resumed repurchases of our common stock, as was announced on August 21, 2020. Preferred Stock Dividends During the nine months ended September 30, 2020 and 2019, we paid dividends on our preferred stock of $31 million and $14 million, respectively. See Note 8 of the Notes to the Interim Condensed Consolidated Financial Statements. Debt Repayments During the second quarter of 2020, BHF used the aggregate net proceeds from the issuances of the 2030 Senior Notes and the Series B Depositary Shares to repay $1.0 billion of borrowings outstanding under the Term Loan Facility. See Notes 7 and 8 of the Notes to the Interim Condensed Consolidated Financial Statements. Debt Repurchases We may from time to time seek to retire or purchase our outstanding indebtedness through cash purchases and/or exchanges for other securities, purchases in the open market, privately negotiated transactions or otherwise. Any such repurchases or exchanges will be dependent upon several factors, including our liquidity requirements, contractual restrictions, general market conditions, and applicable regulatory, legal and accounting factors. Whether or not we repurchase any debt and the size and timing of any such repurchases will be determined at our discretion. Insurance Liabilities Liabilities arising from our insurance activities primarily relate to benefit payments under various annuity and life insurance products, as well as payments for policy surrenders, withdrawals and loans. Surrender or lapse behavior differs somewhat by product but tends to occur in the ordinary course of business. During the nine months ended September 30, 2020, general account surrenders and withdrawals totaled $1.5 billion, almost all of which was attributable to products within the Annuities segment. During the nine months ended September 30, 2019, general account surrenders and withdrawals totaled $1.7 billion, of which $1.5 billion was attributable to products within the Annuities segment. Pledged Collateral We pledge collateral to, and have collateral pledged to us by, counterparties in connection with our derivatives. At both September 30, 2020 and December 31, 2019, we did not pledge any cash collateral to counterparties. At September 30, 2020 and December 31, 2019, we were obligated to return cash collateral pledged to us by counterparties of $3.4 billion and $1.3 billion, respectively. See Note 5 of the Notes to the Interim Condensed Consolidated Financial Statements for additional information about pledged collateral. We also pledge collateral from time to time in connection with funding agreements. Securities Lending We have a securities lending program whereby securities are loaned to third parties, primarily brokerage firms and commercial banks. We obtain collateral, usually cash, from the borrower, which must be returned to the borrower when the loaned securities are returned to us. Under our securities lending program, we were liable for cash collateral under our control of $3.6 billion and $3.1 billion at September 30, 2020 and December 31, 2019, respectively. Of these amounts, $1.2 billion and $1.3 billion at September 30, 2020 and December 31, 2019, respectively, were on open, meaning that the related loaned security could be returned to us on the next business day requiring the immediate return of cash collateral we hold. The estimated fair value of the securities on loan related to the cash collateral on open at September 30, 2020 was $1.2 billion, primarily U.S. government and agency securities that, if put back to us, could be immediately sold to satisfy the cash requirement. See Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements. 87 Table of Contents Litigation Putative or certified class action litigation and other litigation, and claims and assessments against us, in addition to those discussed elsewhere herein and those otherwise provided for in the financial statements, have arisen in the course of our business, including, but not limited to, in connection with our activities as an insurer, employer, investor, investment advisor, and taxpayer. Further, state insurance regulatory authorities and other federal and state authorities regularly make inquiries and conduct investigations concerning our compliance with applicable insurance and other laws and regulations. See Note 11 of the Notes to the Interim Condensed Consolidated Financial Statements. The Parent Company Liquidity and Capital In evaluating liquidity, it is important to distinguish the cash flow needs of the parent company from the cash flow needs of the combined group of companies. BHF is largely dependent on cash flows from its insurance subsidiaries to meet its obligations. Constraints on BHF’s liquidity may occur as a result of operational demands and/or as a result of compliance with regulatory requirements. Short-term Liquidity and Liquid Assets At September 30, 2020 and December 31, 2019, BHF and certain of its non-insurance subsidiaries had short-term liquidity of $1.3 billion and $723 million, respectively. Short-term liquidity is comprised of cash and cash equivalents and short-term investments. At September 30, 2020 and December 31, 2019, BHF and certain of its non-insurance subsidiaries had liquid assets of $1.3 billion and $767 million, respectively, of which $1.3 billion and $715 million, respectively, was held by BHF. Liquid assets are comprised of cash and cash equivalents, short-term investments and publicly-traded securities. Statutory Capital and Dividends The NAIC and state insurance departments have established regulations that provide minimum capitalization requirements based on RBC formulas for insurance companies. RBC is based on a formula calculated by applying factors to various asset, premium, claim, expense and statutory reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk, market risk and business risk and is calculated on an annual basis. The formula is used as an early warning regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. State insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose total adjusted capital (“TAC”) does not meet or exceed certain RBC levels. As of the date of the most recent annual statutory financial statements filed with insurance regulators, the TAC of each of our insurance subsidiaries subject to these requirements was in excess of each of those RBC levels. The amount of dividends that our insurance subsidiaries can ultimately pay to BHF through their various parent entities provides an additional margin for risk protection and investment in our businesses. Such dividends are constrained by the amount of surplus our insurance subsidiaries hold to maintain their ratings, which is generally higher than minimum RBC requirements. We proactively take actions to maintain capital consistent with these ratings objectives, which may include adjusting dividend amounts and deploying financial resources from internal or external sources of capital. Certain of these activities may require regulatory approval. Furthermore, the payment of dividends and other distributions by our insurance subsidiaries is governed by insurance laws and regulations. See Notes 10 and 18 of the Notes to the Consolidated Financial Statements in our 2019 Annual Report. Primary Sources and Uses of Liquidity and Capital The principal sources of funds available to BHF include distributions from Brighthouse Holdings, LLC (“BH Holdings”), dividends and returns of capital from its insurance subsidiaries, capital markets issuances, as well as its own cash and cash equivalents and short-term investments. These sources of funds may also be supplemented by alternate sources of liquidity either directly or indirectly through our insurance subsidiaries. For example, we have established internal liquidity facilities to provide liquidity within and across our regulated and non-regulated entities to support our businesses. 88 Table of Contents The primary uses of liquidity of BHF include debt service obligations (including interest expense and debt repayments), preferred stock dividends, capital contributions to subsidiaries, common stock repurchases and payment of general operating expenses. Based on our analysis and comparison of our current and future cash inflows from the dividends we receive from subsidiaries that are permitted to be paid without prior insurance regulatory approval, our investment portfolio and other cash flows and anticipated access to the capital markets, we believe there will be sufficient liquidity and capital to enable BHF to make payments on debt, pay preferred stock dividends, contribute capital to its subsidiaries, repurchase its common stock, pay all general operating expenses and meet its cash needs. In addition to the liquidity and capital sources discussed in “— The Company — Primary Sources of Liquidity and Capital” and “— The Company — Primary Uses of Liquidity and Capital,” the following additional information is provided regarding BHF’s primary sources and uses of liquidity and capital: Distributions from and Capital Contributions to BH Holdings During the nine months ended September 30, 2020 and 2019, BHF received cash distributions of $988 million and $195 million, respectively, from BH Holdings and made cash capital contributions of $0 and $412 million, respectively, to BH Holdings. Distributions received in 2020 primarily relate to $800 million of ordinary cash dividends paid by Brighthouse Life Insurance Company to BH Holdings. Short-term Intercompany Loans As of September 30, 2020, BHF, as borrower, had a short-term intercompany loan agreement with certain of its non-insurance subsidiaries, as lenders, for the purposes of facilitating the management of the available cash of the borrower and the lenders on a short-term and consolidated basis. Such intercompany loan agreement allows management to optimize the efficient use of and maximize the yield on cash between BHF and its subsidiary lenders. Each loan entered into under this intercompany loan agreement has a term not more than 364 days and bears interest on the unpaid principal amount at a variable rate, payable monthly. During the nine months ended September 30, 2020 and 2019, BHF borrowed $454 million and $736 million, respectively, from certain of its non-insurance subsidiaries under short-term intercompany loan agreements and repaid $415 million and $837 million, respectively, to certain of its non-insurance company subsidiaries under short-term intercompany loan agreements. At September 30, 2020 and December 31, 2019, BHF had total obligations outstanding of $382 million and $343 million, respectively, under such agreements. Intercompany Liquidity Facilities As of September 30, 2020, we maintained intercompany liquidity facilities with certain of our insurance and non-insurance company subsidiaries to provide short-term liquidity within and across the combined group of companies. Under these facilities, which are comprised of a series of revolving loan agreements among BHF and its participating subsidiaries, each company may lend to or borrow from each other, subject to certain maximum limits for a term not more than 364 days. During both the nine months ended September 30, 2020 and 2019, there were no borrowings or repayments by BHF under intercompany liquidity facilities and, at both September 30, 2020 and December 31, 2019, BHF had no obligations outstanding under such facilities. 89 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 Brighthouse. These statements are based on current expectations and the current economic environment and involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance. Actual results could differ materially from those expressed or implied in the forward-looking statements due to a variety of known and unknown risks, uncertainties and other factors. Although it is not possible to identify all of these risks and factors, they include, among others: • the impact of the ongoing COVID-19 pandemic; • 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; • the reserves we are required to hold against our variable annuities as a result of actuarial guidelines; • the potential material adverse effect of changes in accounting standards, practices and/or policies applicable to us, including changes in the accounting for long-duration contracts; • our degree of leverage due to indebtedness; • 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 changes in regulation and in supervisory and enforcement policies on our insurance business or other operations; • the availability of reinsurance and the ability of the counterparties to our reinsurance or indemnification arrangements to perform their obligations thereunder; • the adverse impact to liabilities for policyholder claims as a result of extreme mortality events; • heightened competition, including with respect to service, product features, scale, price, actual or perceived financial strength, claims-paying ratings, credit ratings, e-business capabilities and name recognition; • 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 ability of our insurance subsidiaries to pay dividends to us, and our ability to pay dividends to our shareholders and repurchase our common stock; • the effectiveness of our policies and procedures in managing risk; • our ability to market and distribute our products through distribution channels; • whether all or any portion of the tax consequences of our separation from MetLife are not as expected, leading to material additional taxes or material adverse consequences to tax attributes that impact us; 90 Table of Contents • 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; • the potential material negative tax impact of potential future tax legislation that could make some of our products less attractive to consumers; and • other factors described in this report and from time to time in documents that we file with the SEC. For the reasons described above, we caution you against relying on any forward-looking statements, which should also be read in conjunction with the other cautionary statements included and the risks, uncertainties and other factors identified in our 2019 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 the SEC. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as otherwise may be required by law. Corporate Information We routinely use our Investor Relations website to provide presentations, press releases and other information that may be deemed material to investors. Accordingly, we encourage investors and others interested in the Company to review the information that we share at http://investor.brighthousefinancial.com. In addition, our Investor Relations website allows interested persons to sign up to automatically receive e-mail alerts when we post financial information. Information contained on or connected to any website referenced in this report or any of our other filings with the SEC is not incorporated by reference in this report or in any other report or document we file with the SEC, and any website references are intended to be inactive textual references only unless expressly noted.