Brighthouse Financial, Inc. 10-K

Item 7. 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 67 Executive Summary 68 Risk Management Strategies 69 Industry Trends and Uncertainties 72 Summary of Critical Accounting Estimates 73 Non-GAAP and Other Financial Disclosures 77 Results of Operations 79 Effects of Inflation 91 Investments 91 Derivatives 100 Off-Balance Sheet Arrangements 101 Policyholder Liabilities 102 Liquidity and Capital Resources 105 Glossary 115 66 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 Delaware corporation, 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 financial conditions and results of operations 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 “Note Regarding Forward-Looking Statements and Summary of Risk Factors,” “Risk Factors,” “Quantitative and Qualitative Disclosures About Market Risk” and the Company’s consolidated financial statements included elsewhere herein. The term “Separation” refers to the separation of MetLife, Inc.’s former Brighthouse Financial segment from MetLife’s other businesses and the creation of a separate, publicly-traded company, BHF, as well as the 2017 distribution by MetLife, Inc. of approximately 80.8% of the then outstanding shares of BHF common stock to holders of MetLife, Inc. common stock as of the record date for the distribution. The term “MetLife Divestiture” refers to the disposition by MetLife, Inc. on June 14, 2018 of all its remaining shares of BHF common stock. Effective with the MetLife Divestiture, MetLife, Inc. and its subsidiaries and affiliates were no longer considered related parties to BHF and its subsidiaries and affiliates. See Note 1 of the Notes to the Consolidated Financial Statements. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this report, particularly in “Note Regarding Forward-Looking Statements and Summary of Risk Factors” and “Risk Factors.” 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” contains the following sub-sections: ◦ “Overview” provides information regarding our business, segments and results as discussed in the Results of Operations. ◦ “Background” presents details of the Company’s legal entity structure. • “Risk Management Strategies” describes the Company’s risk management strategy to protect against capital market risks specific to our variable annuity and universal life with secondary guarantees (“ULSG”) businesses. • “Industry Trends and Uncertainties” discusses updates and changes to a number of trends and uncertainties that we believe may materially affect our future financial condition, results of operations or cash flows, 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 GAAP results. • “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. • “Results of Operations” begins with a discussion of our “Annual Actuarial Review.” Annual actuarial review (the “AAR”) describes the changes in key assumptions applied in 2020 and 2019, respectively, resulting in an unfavorable impact on net income (loss) available to shareholders in each period. Certain amounts presented in prior periods within the following discussions of our financial results have been reclassified to conform with the current year presentation. 67 Table of Contents Our Results of Operations discussion and analysis presents a review for the years ended December 31, 2020 and 2019 and year-to-year comparisons between these years. Our results of operations discussion and analysis for the year ended December 31, 2019, including a review of the 2019 AAR and year-to-year comparisons between the years ended December 31, 2019 and 2018 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2019 (our “2019 Annual Report”), which was filed with the SEC on February 26, 2020, and such discussions are incorporated herein by reference. Executive Summary Overview 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 products that are no longer actively sold and are separately managed. In addition, we report certain of our results of operations in Corporate & Other. See “Business — Segments and Corporate & Other” and Note 2 of the Notes to the Consolidated Financial Statements for further information regarding our segments and Corporate & Other. Net income (loss) available to shareholders and adjusted earnings, a non-GAAP financial measure, were as follows: Years Ended December 31, 2020 2019 (In millions) Income (loss) available to shareholders before provision for income tax $ (1,468) $ (1,078) Less: Provision for income tax expense (benefit) (363) (317) Net income (loss) available to shareholders (1) $ (1,105) $ (761) Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends $ (421) $ 644 Less: Provision for income tax expense (benefit) (143) 45 Adjusted earnings $ (278) $ 599 __________________ (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 year ended December 31, 2020, we had a net loss of $1.1 billion and an adjusted loss of $278 million, as compared to a net loss of $761 million and adjusted earnings of $599 million for the year ended December 31, 2019. The net loss for the year ended December 31, 2020 was driven primarily by a net unfavorable impact from our AAR and unfavorable changes in the estimated fair value of our guaranteed minimum living benefits (“GMLB”) riders (“GMLB Riders”) due to equity markets increasing less in the current period than in the prior period, net of declining interest rates and widening credit spreads, which was partially offset by the favorable impact of declining long-term interest rates on the estimated fair value of the ULSG hedge program and pre-tax adjusted earnings. 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 Consolidated Financial Statements for information regarding the adoption of new accounting pronouncements in 2020. Background 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. In addition to Brighthouse Financial, Inc., the companies and businesses included in the results of operations, financial condition and cash flows are: • Brighthouse Life Insurance Company (together with its subsidiaries and affiliates, “BLIC”), our largest insurance subsidiary, domiciled in Delaware and licensed to write business in all U.S. states (except New York), the District of Columbia, the Bahamas, Guam, Puerto Rico, the British Virgin Islands and the U.S. Virgin Islands; 68 Table of Contents • New England Life Insurance Company (“NELICO”), domiciled in Massachusetts and licensed to write business in all U.S. states and the District of Columbia; • Brighthouse Life Insurance Company of NY (“BHNY”), domiciled in New York and licensed to write business in New York, which is a subsidiary of Brighthouse Life Insurance Company; • Brighthouse Reinsurance Company of Delaware (“BRCD”), our reinsurance subsidiary domiciled and licensed in Delaware, which is a subsidiary of Brighthouse Life Insurance Company; • Brighthouse Investment Advisers, LLC (“Brighthouse Advisers”), serving as investment advisor to certain proprietary mutual funds that are underlying investments under our and MetLife’s variable insurance products; • Brighthouse Services, LLC (“Brighthouse Services”), an internal services and payroll company; • Brighthouse Securities, LLC (“Brighthouse Securities”), registered as a broker-dealer with the SEC, approved as a member of FINRA and registered as a broker-dealer and licensed as an insurance agency in all required states; and • Brighthouse Holdings, LLC (“BH Holdings”), a direct holding company subsidiary of Brighthouse Financial, Inc. domiciled in Delaware. Risk Management Strategies The Company employs risk management strategies to protect against capital markets risk. These strategies are specific to our variable annuity and ULSG businesses, and they also include a macro hedge strategy to manage the Company’s exposure to interest rate risk. Interest Rate Hedging The Company is exposed to interest rate risk in most of its products with the more significant longer dated exposure residing in our in-force variable annuity guarantees and ULSG. Historically, we individually managed the interest rate risk in these two blocks with hedge targets based on statutory metrics designed principally to protect the capital of our largest insurance subsidiary, BLIC. Since the adoption of VA Reform, the capital metric of combined RBC ratio aligns with our management metrics and more holistically captures interest rate risk. We manage the interest rate risk in our variable annuity and ULSG businesses together, although individual hedge targets still exist for variable annuities and ULSG. Accordingly, the related portfolio of interest rate derivatives will be managed in the aggregate with rebalancing and trade executions determined by the net exposure. By managing the interest rate exposure on a net basis, we expect to more efficiently manage the derivative portfolio, protect capital and reduce costs. We refer to this aggregated approach to managing interest rate risk as our macro interest rate hedging program. The gross notional amount and estimated fair value of the derivatives held in our macro interest rate hedging program were as follows at: December 31, 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 $ 2,180 $ 358 $ — $ 7,344 $ 798 $ 29 Interest rate options 25,980 712 121 29,750 782 187 Interest rate forwards 8,086 851 78 5,418 94 114 Total $ 36,246 $ 1,921 $ 199 $ 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. The aggregate interest rate derivatives are then allocated to the variable annuity guarantee and ULSG businesses based on the hedge targets of the respective programs as of the balance sheet date. Allocations are primarily for purposes of calculating certain product specific metrics needed to run the business which in some cases are still individually measured and to facilitate the quarterly settlement of reinsurance activity associated with BRCD. We intend to maintain an adequate 69 Table of Contents amount of liquid investments in the investment portfolios supporting these businesses to cover any contingent collateral posting requirements from this hedging strategy. Variable Annuity Exposure Risk Management With the adoption of VA Reform, our management of and hedging strategy associated with our variable annuity business aligns with the regulatory framework. Given this alignment and the fact that we have a large non-variable annuity business, we are focused on the capital metrics of a combined RBC ratio. In support of our target combined RBC ratio between 400% and 450% in normal market conditions, we expect to continue to maintain a capital and exposure risk management program that targets total assets supporting our variable annuity contracts at or above the CTE98 level in normal market conditions. 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 a target floor level of CTE95 and CTE98. CTE95 and CTE98 are defined in “— Glossary.” Our exposure risk management program seeks to mitigate the potential adverse effects of changes in capital markets, specifically equity markets and interest rates, on our Variable Annuity Target Funding Level, as well as on our statutory distributable earnings. We utilize a combination of short-term and longer-term derivative instruments to establish a layered maturity of protection, which we believe will reduce rollover risk during periods of market disruption or higher volatility. When setting our hedge target, we consider the fact that our obligations under Shield Annuity (“Shield” and “Shield Annuity”) contracts decrease in falling equity markets when variable annuity guarantee obligations increase, and increase in rising equity markets when variable annuity guarantee obligations decrease. Shield Annuities are included with variable annuities in our statutory reserve requirements, as well as in our CTE95 and CTE98 estimates. We continually review our hedging strategy in the context of our overall capitalization targets as well as monitor the capital markets for opportunities to adjust our derivative positions to manage our variable annuity exposure, as appropriate. Our hedging strategy after the Separation initially focused on option-based derivatives protecting against larger market movements and reducing hedge losses in rising market scenarios. Given recent robust equity market returns from the Separation through 2019 and the related increase in our statutory capital, we re-assessed our hedging strategy in late 2019. As a result of this review, we revised our hedging strategy to reduce the use of options and move to more swap-based instruments to protect statutory capital against smaller market moves. This revised strategy is designed to preserve distributable earnings across more market scenarios. While we have experienced lower time decay expense as a result of adopting this revised strategy, we also expect to incur larger hedge mark-to-market losses in rising equity markets as compared to our previous strategy. We intend to maintain an adequate amount of liquid investments in our variable annuity investment portfolio to support any contingent collateral posting requirements from this hedging strategy. Under our revised strategy, we plan to operate with a first loss position of no more than $500 million. The first loss position is relative to our Variable Annuity Target Funding Level such that the impact on reserves and thus total adjusted capital could be greater than the first loss position. However, under such a scenario there would be an offset in required statutory capital. We believe the increased capital protection in down markets increases our financial flexibility and supports deploying capital for growing long-term, sustainable shareholder value. However, because our hedging strategy places a low priority on offsetting changes to GAAP liabilities, GAAP net income volatility will likely result when markets are volatile and over time potentially impact stockholders’ equity. See “Risk Factors — Risks Related to Our Business — Our variable annuity exposure risk management strategy may not be effective, may result in significant volatility in our profitability measures and may negatively affect our statutory capital” and “— Summary of Critical Accounting Estimates.” 70 Table of Contents The gross notional amount and estimated fair value of the derivatives held in our variable annuity hedging program as well as the interest rate hedges allocated from our macro interest rate hedging program were as follows at: December 31, 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 $ 28,955 $ 942 $ 838 $ 46,968 $ 814 $ 1,713 Equity total return swaps 15,056 143 822 7,723 2 367 Equity variance swaps 1,098 13 20 2,136 69 69 Interest rate swaps 2,180 358 — 7,344 798 29 Interest rate options 24,780 531 121 27,950 712 176 Interest rate forwards 3,466 208 26 — — — Total $ 75,535 $ 2,195 $ 1,827 $ 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. ULSG Market Risk Exposure Management The ULSG block includes the business retained by our insurance subsidiaries and the portion of it that is ceded to BRCD for providing redundant, non-economic reserve financing support. The primary market risk associated with our ULSG block is the uncertainty around the future levels of U.S. interest rates and bond yields. To help ensure we have sufficient assets to meet future ULSG policyholder obligations, we have employed an actuarial approach based upon NY Regulation 126 Cash Flow Testing (“ULSG CFT”) to set our ULSG asset requirement target for BRCD, which reinsures the majority of the ULSG business written by our insurance subsidiaries. For the business retained by our insurance subsidiaries, we set our ULSG asset requirement target to equal the actuarially determined statutory reserves, which, taken together with our ULSG asset requirement target of BRCD, comprises our total ULSG asset requirement target (“ULSG Target”). Under the ULSG CFT approach, we assume that interest rates remain flat or lower than current levels and our actuarial assumptions include a provision for adverse deviation. These underlying assumptions used in ULSG CFT are more conservative than those required under GAAP, which assumes a long-term upward mean reversion of interest rates and best estimate actuarial assumptions without additional provisions for adverse deviation. We seek to mitigate interest rate exposures associated with these liabilities by holding ULSG Assets to closely match our ULSG Target under different interest rate environments. “ULSG Assets” are defined as (i) total general account assets supporting statutory reserves and capital in the ULSG portfolios of our insurance subsidiaries and BRCD and (ii) interest rate derivative instruments allocated from the macro interest rate hedging program to mitigate ULSG interest rate exposures. The net statutory reserves for the ULSG business in our insurance subsidiaries and BRCD (which is in part supported by reserve financings) were $22.1 billion and $21.2 billion for the years ended December 31, 2020 and 2019, respectively. Our ULSG Target is sensitive to the actual and future expected level of long-term U.S. interest rates. If interest rates fall, our ULSG Target increases. Likewise, if interest rates rise, our ULSG Target declines. The interest rate derivatives allocated to ULSG Assets prioritizes the ULSG Target (comprised of ULSG CFT and statutory considerations), with less emphasis on mitigating GAAP net income volatility. This could increase the period to period volatility of net income and equity due to differences in the sensitivity of the ULSG Target and GAAP liabilities to the changes in interest rates. We closely monitor the sensitivity of our ULSG Assets and ULSG Target to changes in interest rates. We seek to maintain ULSG Assets above the ULSG Target across a wide range of interest rate scenarios. At December 31, 2020, BRCD assets exceeded the ULSG CFT requirement. In addition, our macro interest rate hedging program is designed to help us maintain ULSG Assets above the ULSG Target when interest rates decline. Maintaining ULSG Assets that closely match our ULSG Target supports our target combined RBC ratio of between 400% and 450% in normal market conditions. 71 Table of Contents Industry Trends and Uncertainties Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we discuss a number of trends and uncertainties that we believe may materially affect our future financial condition, results of operations or cash flows. Where these trends or uncertainties are specific to a particular aspect of our business, we often include such a discussion under the relevant caption of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, as part of our broader analysis of that area of our business. In addition, the following factors represent some of the key general trends and uncertainties that have influenced the development of our business and our historical financial performance and that we believe will continue to influence our business and results of operations in the future. COVID-19 Pandemic We continue to closely monitor developments related to the COVID-19 pandemic, which has negatively impacted us in certain respects, as discussed below. At this time, it 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 implementation, and the efficacy, of any therapeutic treatments and vaccines for COVID-19, including their efficacy with respect to variants of COVID-19 that have emerged or could emerge in the future. It is likewise not possible to predict or estimate the longer-term effects of the pandemic, or any actions taken to contain or address the pandemic, on the economy at large and on our business, financial condition, results of operations and prospects, including the impact on our investment portfolio and our ratings, or the need for us in the future to revisit or revise targets previously provided to the markets or aspects of our business model. See “Risk Factors — Risks Related to Our Business — The ongoing COVID-19 pandemic could materially adversely affect our business, financial condition and results of operations, including our capitalization and liquidity.” In March 2020, in response to the COVID-19 pandemic, 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, financial condition or results of operations. We continue to closely monitor this evolving situation as we remain focused on ensuring the health and safety of our employees, on supporting our partners and customers as usual and on mitigating potential adverse impacts to our business. 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 disclosed in “— Regulatory Developments.” 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 incidence 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 year-end 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 may 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 6 of the Notes to the 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. Changes in Accounting Standards Our financial statements are subject to the application of GAAP, which is periodically revised by the FASB. 72 Table of Contents The FASB issued an accounting standards update (“ASU”), effective January 1, 2023, that will result in significant changes to the accounting for long-duration insurance contracts, including a requirement that all variable annuity guarantees be considered market risk benefits and measured at fair value. The Company is evaluating the new guidance and therefore is unable to estimate the impact on its financial statements. The ASU will have a significant impact on our results of operations, including our net income, and at current market interest rate levels would ultimately result in a material decrease in our stockholders’ equity. Financial and Economic Environment Our business and results of operations are materially affected by conditions in the capital markets and the economy generally. Stressed conditions, volatility and disruptions in the capital markets or financial asset classes can have an adverse effect on us. The impact on capital markets and the economy generally of the priorities and policies of the Biden administration is uncertain. See “Risk Factors — Economic Environment and Capital Markets-Related Risks — If difficult conditions in the capital markets and the U.S. economy generally persist or are perceived to persist, they may materially adversely affect our business and results of operations.” Equity market performance can affect our profitability for variable annuities and other separate account products as a result of the effects it has on product demand, revenues, expenses, reserves and our risk management effectiveness. The level of long-term interest rates and the shape of the yield curve can have a negative effect on the profitability for variable annuities and the demand for, and the profitability of, spread-based products such as fixed annuities, index-linked annuities and universal life insurance. Low interest rates and risk premium, including credit spread, affect new money rates on invested assets and the cost of product guarantees. Insurance premium growth and demand for our products is impacted by the general health of U.S. economic activity. The above factors affect our expectations regarding future margins, which in turn, affect the amortization of certain of our intangible assets such as DAC. Significantly lower expected margins may cause us to accelerate the amortization of DAC, thereby reducing net income in the affected reporting period. We review our long-term assumptions about capital market returns and interest rates, along with other assumptions such as contract holder behavior, as part of our annual actuarial review. As additional company specific or industry information on contract holder behavior becomes available, related assumptions may change and may potentially have a material impact on liability valuations and net income. Demographics We believe that demographic trends in the U.S. population, the increase in under-insured individuals, the potential risk to governmental social safety net programs and the shifting of responsibility for retirement planning and financial security from employers and other institutions to individuals, highlight the need of individuals to plan for their long-term financial security and will create opportunities to generate significant demand for our products. By focusing our product development and marketing efforts to meeting the needs of certain targeted customer segments identified as part of our strategy, we will be able to focus on offering a smaller number of products that we believe are appropriately priced given current economic conditions. We believe this strategy will benefit our expense ratio thereby increasing our profitability. Competitive Environment The life insurance industry remains highly fragmented and competitive. See “Business — Segments and Corporate & Other” for each of our segments. In particular, we believe that financial strength and financial flexibility are highly relevant differentiators from the perspective of customers and distributors. We believe we are adequately positioned to compete in this environment. Regulatory Developments Our insurance subsidiaries and BRCD are regulated primarily at the state level, with some products and services also subject to federal regulation. In addition, BHF and its insurance subsidiaries are subject to regulation under the insurance holding company laws of various U.S. jurisdictions. Furthermore, some of our operations, products and services are subject to ERISA, consumer protection laws, securities, broker-dealer and investment advisor regulations, as well as environmental and unclaimed property laws and regulations. See “Business — Regulation,” as well as “Risk Factors — Regulatory and Legal Risks.” Summary of Critical Accounting Estimates The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported on the Consolidated Financial Statements. The most critical estimates include those used in determining: 73 Table of Contents • liabilities for future policy benefits; • amortization of DAC; • estimated fair values of freestanding derivatives and the recognition and estimated fair value of embedded derivatives requiring bifurcation; and • measurement of income taxes and the valuation of deferred tax assets. In applying our accounting policies, we make subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our business and operations. Actual results could differ from these estimates. The above critical accounting estimates are described below and in Note 1 of the Notes to the Consolidated Financial Statements. Liability for Future Policy Benefits Future policy benefits for traditional long-duration insurance contracts (term, whole life insurance and income annuities) are payable over an extended period of time and the related liabilities are equal to the present value of future expected benefits to be paid, reduced by the present value of future expected net premiums. Assumptions used to measure the liability are based on the Company’s experience and include a margin for adverse deviation. The most significant assumptions used in the establishment of liabilities for future policy benefits are mortality, benefit election and utilization, withdrawals, policy lapse and investment returns. These assumptions, intended to estimate the experience for the period the policy benefits are payable, are established at the time the policy is issued and are not updated unless a premium deficiency exists. Utilizing these assumptions, liabilities are established for each line of business. If experience is less favorable than assumed and a premium deficiency exists, DAC may be reduced, or additional insurance liabilities established, resulting in a reduction in earnings. Future policy benefit liabilities for GMDBs and certain GMIBs relating to variable annuity contracts are based on estimates of the expected value of benefits in excess of the projected account balance, recognizing the excess ratably over the accumulation period based on total expected assessments. The most significant assumptions for variable annuity guarantees included in future policyholder benefits are projected general account and separate account investment returns, as well as policyholder behavior, including mortality, benefit election and utilization, and withdrawals. Future policy benefit liabilities for ULSG are determined by estimating the expected value of death benefits payable when the account balance is projected to be zero using a range of scenarios and recognizing those benefits ratably over the contract period based on total expected assessments. The Company also maintains a profit followed by losses reserve on universal life insurance with secondary guarantees, determined by projecting future earnings and establishing a liability to offset losses that are expected to occur in later years. The most significant assumptions used in estimating our ULSG liabilities are the general account rate of return, premium persistency, mortality and lapses, which are reviewed and updated at least annually. The measurement of our ULSG liabilities can be significantly impacted by changes in our expected general account rate of return, which is driven by our assumption for long-term treasury yields. Our practice of projecting treasury yields uses a mean reversion approach that assumes that long-term interest rates are less influenced by short-term fluctuations and are only changed when sustained interim deviations are expected. Our current projections assume reversion to a ten-year treasury rate of 3% over a period of ten years. As part of our 2020 AAR, we lowered our projected long-term treasury rate from 3.75% to 3.00%, which reduced our general account earned rate, resulting in an increase in our ULSG liabilities of $1.2 billion. We also updated other assumptions related to ULSG, see “— Results of Operations — Annual Actuarial Review” for more information. We regularly review our assumptions supporting our estimates of all actuarial liabilities for future policy benefits. For universal life insurance and variable annuity product guarantees, assumptions are updated periodically, whereas for traditional long-duration insurance contracts, assumptions are established at inception and not updated unless a premium deficiency exists. We also review our liability projections to determine if profits are projected in earlier years followed by losses projected in later years, which could require us to establish an additional liability. We aggregate insurance contracts by product and segment in assessing whether a premium deficiency or profits followed by losses exists. Differences between actual experience and the assumptions used in pricing our policies and guarantees, as well as adjustments to the related liabilities, result in changes to earnings. 74 Table of Contents See Note 1 of the Notes to the Consolidated Financial Statements for additional information on our accounting policy relating to variable annuity guarantees and the liability for future policy benefits. Deferred Policy Acquisition Costs DAC represents deferred costs that relate directly to the successful acquisition or renewal of insurance contracts. The recovery of DAC is dependent upon the future profitability of the related business. DAC related to deferred annuities and universal life insurance contracts is amortized based on expected future gross profits, which is determined by using assumptions consistent with measuring the related liabilities. DAC balances and amortization for variable annuity and universal life insurance contracts can be significantly impacted by changes in expected future gross profits related to projected separate account rates of return. Our practice of determining changes in projected separate account returns assumes that long-term appreciation in equity markets is not changed by short-term market fluctuations and is only changed when sustained interim deviations are expected. We monitor these events and only change the assumption when our long-term expectation changes. The effect of an increase (decrease) by 100 basis points in the assumed future rate of return is reasonably likely to result in a decrease (increase) in the DAC amortization with an offset to our unearned revenue liability which nets to approximately $245 million. We use a mean reversion approach to separate account returns where the mean reversion period is five years with a long-term separate account return after the five-year reversion period is over. The current long-term rate of return assumption for variable annuity and variable universal life insurance contracts is in the 6-7% range. We also generally review other long-term assumptions underlying the projections of expected future gross profits on an annual basis. These assumptions primarily relate to general account investment returns, mortality, in-force or persistency, benefit elections and utilization, and withdrawals. Assumptions used in the calculation of expected future gross profits which have significantly changed are updated annually. If the update of assumptions causes expected future gross profits to increase, DAC amortization will generally decrease, resulting in a current period increase to earnings. The opposite result occurs when the assumption update causes expected future gross profits to decrease. Our DAC balances are also impacted by replacing expected future gross profits with actual gross profits in each reporting period, including changes in annuity embedded derivatives and the related nonperformance risk. When the change in expected future gross profits principally relates to the difference between actual and estimates in the current period, an increase in profits will generally result in an increase in amortization and a decrease in profits will generally result in a decrease in amortization. See Notes 1 and 4 of the Notes to the Consolidated Financial Statements for additional information relating to DAC accounting policy and amortization. Derivatives We use freestanding derivative instruments to hedge various capital market risks in our products, including: (i) certain guarantees, some of which are reported as embedded derivatives; (ii) current or future changes in the fair value of our assets and liabilities; and (iii) current or future changes in cash flows. All derivatives, whether freestanding or embedded, are required to be carried on the balance sheet at fair value with changes reflected in either net income (loss) available to shareholders or in other comprehensive income (“OCI”), depending on the type of hedge. Below is a summary of critical accounting estimates by type of derivative. Freestanding Derivatives The determination of the estimated fair value of freestanding derivatives, when quoted market values are not available, is based on market standard valuation methodologies and inputs that management believes are consistent with what other market participants would use when pricing such instruments. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, default risk, nonperformance risk, volatility, liquidity and changes in estimates and assumptions used in the pricing models. See Note 7 of the Notes to the Consolidated Financial Statements for additional information on significant inputs into the OTC derivative pricing models and credit risk adjustment. Embedded Derivatives in Variable Annuity Guarantees We issue variable annuity products with guaranteed minimum benefits, some of which are embedded derivatives measured at estimated fair value separately from the host variable annuity product, with changes in estimated fair value reported in net derivative gains (losses). The estimated fair values of these embedded derivatives are determined based on the present value of projected future benefits minus the present value of projected future fees attributable to the guarantee. The projections of future benefits and future fees require capital markets and actuarial assumptions, including expectations 75 Table of Contents concerning policyholder behavior. A risk neutral valuation methodology is used under which the cash flows from the guarantees are projected under multiple capital market scenarios using observable risk-free rates and implied equity volatilities. Market conditions, including, but not limited to, changes in interest rates, equity indices, market volatility and variations in actuarial assumptions, including policyholder behavior, mortality and risk margins related to non-capital market inputs, as well as changes in our nonperformance risk may result in significant fluctuations in the estimated fair value of the guarantees that could have a material impact on net income. Changes to actuarial assumptions, principally related to contract holder behavior such as annuitization utilization and withdrawals associated with GMIB riders, can result in a change of expected future cash outflows of a guarantee between the accrual-based model for insurance liabilities and the fair value-based model for embedded derivatives. See Note 1 of the Notes to the Consolidated Financial Statements for additional information relating to the determination of the accounting model. Risk margins are established to capture the non-capital market risks of the instrument which represent the additional compensation a market participant would require to assume the risks related to the uncertainties in certain actuarial assumptions. The establishment of risk margins requires the use of significant management judgment, including assumptions of the amount and cost of capital needed to cover the guarantees. Assumptions for embedded derivatives are reviewed at least annually, and if they change significantly, the estimated fair value is adjusted by a cumulative charge or credit to net income. See Notes 7 and 8 of the Notes to the Consolidated Financial Statements for additional information on our embedded derivatives and the determination of their fair values. Embedded Derivatives in Index-Linked Annuities The Company issues and assumes through reinsurance index-linked annuities that contain equity crediting rates accounted for as an embedded derivative. The crediting rates are measured at estimated fair value which is determined using a combination of an option pricing methodology and an option-budget approach. The estimated fair value includes capital market and actuarial policyholder behavior and biometric assumptions, including expectations for renewals at the end of the term period. Market conditions, including interest rates and implied volatilities, and variations in actuarial assumptions and risk margins, as well as changes in our nonperformance risk adjustment may result in significant fluctuations in the estimated fair value that could have a material impact on net income. Nonperformance Risk Adjustment The valuation of our embedded derivatives includes an adjustment for the risk that we fail to satisfy our obligations, which we refer to as our nonperformance risk. The nonperformance risk adjustment is captured as a spread over the risk-free rate in determining the discount rate to discount the cash flows of the liability. The spread over the risk-free rate is based on our creditworthiness taking into consideration publicly available information relating to spreads in the secondary market for BHF’s debt. These observable spreads are then adjusted, as necessary, to reflect the financial strength ratings of the issuing insurance subsidiaries as compared to the credit rating of BHF. The following table illustrates the impact that a range of reasonably likely variances in BHF’s credit spread would have on our consolidated balance sheet, excluding the effect of income tax, related to the embedded derivative valuation on certain variable annuity products measured at estimated fair value. Even when credit spreads do not change, the impact of the nonperformance risk adjustment on fair value will change when the cash flows within the fair value measurement change. The table only reflects the impact of changes in credit spreads on the consolidated balance sheet and not these other potential changes. In determining the ranges, we have considered current market conditions, as well as the market level of spreads that can reasonably be anticipated over the near-term. Balance Sheet Carrying Value at December 31, 2020 Policyholder Account Balances DAC and VOBA (In millions) 100% increase in our credit spread $ 2,039 $ (38) As reported $ 2,920 $ 361 50% decrease in our credit spread $ 3,501 $ 626 76 Table of Contents Income Taxes We provide for federal and state income taxes currently payable, as well as those deferred due to temporary differences between the financial reporting and tax bases of assets and liabilities. Our accounting for income taxes represents our best estimate of various events and transactions. Tax laws are often complex and may be subject to differing interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various taxing jurisdictions. In establishing a liability for unrecognized tax benefits, assumptions may be made in determining whether, and to what extent, a tax position may be sustained. Once established, unrecognized tax benefits are adjusted when there is more information available or when events occur requiring a change. Valuation allowances are established against deferred tax assets, particularly those arising from carryforwards, when management determines, based on available information, that it is more likely than not that deferred income tax assets will not be realized. The realization of deferred tax assets related to carryforwards depends upon the existence of sufficient taxable income within the carryforward periods under the tax law in the applicable tax jurisdiction. Significant judgment is required in projecting future taxable income to determine whether valuation allowances should be established, as well as the amount of such allowances. See Note 1 of the Notes to the Consolidated Financial Statements for additional information relating to our determination of such valuation allowances. We may be required to change our provision for income taxes when estimates used in determining valuation allowances on deferred tax assets significantly change, or when new information indicates the need for adjustment in valuation allowances. Additionally, future events, such as changes in tax laws, tax regulations, or interpretations of such laws or regulations, could have an impact on the provision for income tax and the effective tax rate. Any such changes could significantly affect the amounts reported in the financial statements in the year these changes occur. See Notes 1 and 13 of the Notes to the Consolidated Financial Statements for additional information on our income taxes. Non-GAAP and Other Financial Disclosures Our definitions of 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); • Net derivative gains (losses) except earned income and amortization of premium on derivatives that are hedges of investments or that are used to replicate certain investments, but do not qualify for hedge accounting treatment (“Investment Hedge Adjustments”); and • Certain variable annuity GMIB fees (“GMIB Fees”). The following are significant items excluded from total expenses, net of income tax, in calculating adjusted earnings: • Amounts associated with benefits related to GMIBs (“GMIB Costs”); 77 Table of Contents • 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 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.” Other Financial Disclosure s 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. 78 Table of Contents Results of Operations Index to Results of Operations Page Annual Actuarial Review 80 Consolidated Results for the Years Ended December 31, 2020 and 2019 81 Reconciliation of Net Income (Loss) Available to Shareholders to Adjusted Earnings 83 Consolidated Results for the Years Ended December 31, 2020 and 2019 - Adjusted Earnings 84 Segments and Corporate & Other Results for the Years Ended December 31, 2020 and 2019 - Adjusted Earnings 85 GMLB Riders for the Years Ended December 31, 2020 and 2019 90 79 Table of Contents 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 on our ULSG business. For our variable annuity business, in addition to the update in the long-term general account earned rate, we updated assumptions regarding policyholder behavior, mortality, separate account fund allocations and volatility, as well as maintenance expenses. In our life business, we updated assumptions related to policyholder behavior, mortality and 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 years ended December 31, 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.” Years Ended December 31, 2020 2019 (In millions) GMLBs $ (1,431) $ 22 Included in pre-tax adjusted earnings: Other annuity business 128 17 Life business (17) 24 Run-off (1,484) (545) Total included in pre-tax adjusted earnings (1,373) (504) Total impact on income (loss) available to shareholders before provision for income tax $ (2,804) $ (482) 80 Table of Contents Consolidated Results for the Years Ended December 31, 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. Years Ended December 31, 2020 2019 (In millions) Revenues Premiums $ 766 $ 882 Universal life and investment-type product policy fees 3,463 3,580 Net investment income 3,601 3,579 Other revenues 413 389 Net investment gains (losses) 278 112 Net derivative gains (losses) (18) (1,988) Total revenues 8,503 6,554 Expenses Policyholder benefits and claims 5,711 3,670 Interest credited to policyholder account balances 1,092 1,063 Capitalization of DAC (408) (369) Amortization of DAC and VOBA 766 382 Interest expense on debt 184 191 Other expenses 2,577 2,669 Total expenses 9,922 7,606 Income (loss) before provision for income tax (1,419) (1,052) Provision for income tax expense (benefit) (363) (317) Net income (loss) (1,056) (735) Less: Net income (loss) attributable to noncontrolling interests 5 5 Net income (loss) attributable to Brighthouse Financial, Inc. (1,061) (740) Less: Preferred stock dividends 44 21 Net income (loss) available to Brighthouse Financial, Inc.’s common shareholders $ (1,105) $ (761) The components of net income (loss) available to shareholders were as follows: Years Ended December 31, 2020 2019 (In millions) GMLB Riders $ (2,421) $ (2,482) Other derivative instruments 1,139 639 Net investment gains (losses) 278 112 Other adjustments (43) 9 Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends (421) 644 Income (loss) available to shareholders before provision for income tax (1,468) (1,078) Provision for income tax expense (benefit) (363) (317) Net income (loss) available to shareholders $ (1,105) $ (761) GMLB Riders. The guaranteed minimum living benefits reflect (i) changes in the carrying value of GMLB liabilities, including GMIBs, GMWBs and GMABs, and Shield Annuities; (ii) changes in the estimated fair value of the related hedges, as well as any ceded reinsurance of the liabilities; (iii) the fees earned from the GMLB liabilities; and (iv) the effects of DAC amortization related to the preceding components. Other Derivative Instruments. We have other derivative instruments, in addition to the hedges and embedded derivatives included in the GMLB Riders, for which changes in estimated fair value are recognized in net derivative gains (losses). 81 Table of Contents Freestanding Derivatives. We have freestanding derivatives that economically hedge certain invested assets and insurance liabilities. The majority of this hedging activity, excluding the GMLB Riders, is focused in the following areas: • as part of the Company’s macro interest rate hedging program, the use of interest rate swaps, swaptions, and interest rate forwards in connection with ULSG; • use of interest rate swaps when we have duration mismatches where suitable assets with maturities similar to those of our long-dated liabilities are not readily available in the market and use of interest rate forwards hedging reinvestment risk from maturing assets with higher yields than currently available in the market that support long-dated liabilities; • use of foreign currency swaps when we hold fixed maturity securities denominated in foreign currencies that are matching insurance liabilities denominated in U.S. dollars; and • use of equity index options to hedge index-linked annuity products against adverse changes in equity markets. The market impacts on the hedges are accounted for in net income (loss) while the offsetting economic impact on the items they are hedging are either not recognized or recognized through OCI in equity. Embedded Derivatives. Certain ceded reinsurance agreements in our Life and Run-off segments are written on a coinsurance with funds withheld basis. The funds withheld component is accounted for as an embedded derivative with changes in the estimated fair value recognized in net income (loss) in the period in which they occur. In addition, the changes in liability values of our fixed index-linked annuity products that result from changes in the underlying equity index are accounted for as embedded derivatives. Pre-tax Adjusted Earnings. As more fully described in “— Non-GAAP and Other Financial Disclosures,” we use adjusted earnings, which does not equate to net income (loss) available to shareholders, as determined in accordance with GAAP. We believe that the presentation of adjusted earnings, as we measure it for management purposes, enhances the understanding of our performance by highlighting the results of operations and the underlying profitability drivers of the business. Adjusted earnings and other financial measures based on adjusted earnings allow analysis of our performance relative to our business plan and facilitate comparisons to industry results. Adjusted earnings should not be viewed as a substitute for net income (loss). Year Ended December 31, 2020 Compared with the Year Ended December 31, 2019 Loss available to shareholders before provision for income tax was $1.5 billion ($1.1 billion, net of income tax), an increased loss of $390 million ($344 million, net of income tax) from a loss available to shareholders before provision for income tax of $1.1 billion ($761 million, net of income tax) in the prior period. The decrease in income before provision for income tax was driven by lower pre-tax adjusted earnings, discussed in greater detail below. 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 index annuity business; partially offset by ◦ an unfavorable impact from equity options; • higher net investment gains (losses) reflecting: ◦ higher net gains on sales of fixed maturity securities compared to prior period; partially offset by ◦ 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 ◦ lower net gains on real estate joint ventures in the current period; and 82 Table of Contents • lower losses from GMLB Riders in the current period, see “— GMLB Riders for the Years Ended December 31, 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 26% in the current period compared to 29% in the prior period. The decrease in the effective tax rate in the current period is driven by lower pre-tax adjusted earnings, discussed in greater detail below. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deduction and tax credits. Reconciliation of Net Income (Loss) Available to Shareholders to Adjusted Earnings The reconciliation of net income (loss) available to shareholders to adjusted earnings was as follows: Year Ended December 31, 2020 Annuities Life Run-off Corporate & Other Total (In millions) Net income (loss) available to shareholders $ (1,214) $ 92 $ 466 $ (449) $ (1,105) Add: Provision for income tax expense (benefit) 266 34 (689) 26 (363) Income (loss) available to shareholders before provision for income tax (948) 126 (223) (423) (1,468) Less: GMLB Riders (2,421) — — — (2,421) Less: Other derivative instruments 52 (72) 1,152 7 1,139 Less: Net investment gains (losses) 23 9 295 (49) 278 Less: Other adjustments (35) 7 (15) — (43) Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends 1,433 182 (1,655) (381) (421) Less: Provision for income tax expense (benefit) 266 34 (356) (87) (143) Adjusted earnings $ 1,167 $ 148 $ (1,299) $ (294) $ (278) Year Ended December 31, 2019 Annuities Life Run-off Corporate & Other Total (In millions) Net income (loss) available to shareholders $ (1,486) $ 300 $ 640 $ (215) $ (761) Add: Provision for income tax expense (benefit) 224 57 (449) (149) (317) Income (loss) available to shareholders before provision for income tax (1,262) 357 191 (364) (1,078) Less: GMLB Riders (2,482) — — — (2,482) Less: Other derivative instruments (113) 54 711 (13) 639 Less: Net investment gains (losses) 26 15 106 (35) 112 Less: Other adjustments 44 — (46) 11 9 Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends 1,263 288 (580) (327) 644 Less: Provision for income tax expense (benefit) 235 57 (126) (121) 45 Adjusted earnings $ 1,028 $ 231 $ (454) $ (206) $ 599 83 Table of Contents Consolidated Results for the Years Ended December 31, 2020 and 2019 - Adjusted Earnings The components of adjusted earnings were as follows: Years Ended December 31, 2020 2019 (In millions) Fee income $ 3,606 $ 3,694 Net investment spread 1,599 1,650 Insurance-related activities (2,731) (1,648) Amortization of DAC and VOBA (538) (535) Other expenses, net of DAC capitalization (2,308) (2,491) Less: Net income (loss) attributable to noncontrolling interests and preferred stock dividends 49 26 Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends (421) 644 Provision for income tax expense (benefit) (143) 45 Adjusted earnings $ (278) $ 599 Year Ended December 31, 2020 Compared with the Year Ended December 31, 2019 Adjusted earnings were a loss of $278 million, a decrease of $877 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; ◦ higher paid claims, net of reinsurance in our Life and Run-off segments; and ◦ an increase in GMDB liabilities resulting from less favorable equity market performance in the current period, net of lower income annuity benefit payments; 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 fee income due to: ◦ a decline in the net cost of insurance fees driven by the aging in-force business and a favorable adjustment resulting from a recapture transaction in the prior year in our Run-off segment; and ◦ lower asset-based fees from lower average separate account balances, a portion of which is offset in other expenses in our Annuities segment; partially offset by ◦ higher unearned revenue amortization resulting from changes in maintenance expense and policyholder behavior assumptions made in connection with the AAR, primarily in our Life segment; • lower net investment spread due to: ◦ higher interest credited to policyholders in our Annuities and Life segments; net of lower interest credited to policyholders in our Run-off segment; 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; ◦ higher returns on other limited partnerships for the comparative measurement period; and • higher net amortization of DAC and VOBA due to: 84 Table of Contents ◦ a net unfavorable impact resulting from changes in connection with the AAR in our Annuities and Life segments; partially offset by ◦ a favorable change in our variable annuity business from changes in actual to expected experience in our in-force blocks. Key favorable impacts were: • lower other expenses due to: ◦ the exit of various transition services 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. 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 7% in the prior period. Certain one-time tax adjustments recognized in the prior period, primarily due to the revaluation of certain liabilities related to the Separation, 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 deduction and tax credits. Segments and Corporate & Other Results for the Years Ended December 31, 2020 and 2019 - Adjusted Earnings Annuities The components of adjusted earnings for our Annuities segment were as follows: Years Ended December 31, 2020 2019 (In millions) Fee income $ 2,596 $ 2,641 Net investment spread 999 1,052 Insurance-related activities (213) (238) Amortization of DAC and VOBA (440) (516) Other expenses, net of DAC capitalization (1,509) (1,676) Pre-tax adjusted earnings 1,433 1,263 Provision for income tax expense (benefit) 266 235 Adjusted earnings $ 1,167 $ 1,028 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 year ended December 31, 2020, driven by positive equity market performance; partially offset by negative net flows and policy charges. 85 Table of Contents Year Ended December 31, 2020 (1) (In millions) Balance, beginning of period $ 99,498 Deposits 1,651 Withdrawals, surrenders and benefits (7,964) Net flows (6,313) Investment performance 13,226 Policy charges (2,412) Net transfers from (to) general account (549) Balance, end of period $ 103,450 Average balance $ 94,539 _______________ (1) Includes income annuities for which separate account balances at December 31, 2020 were $134 million. Year Ended December 31, 2020 Compared with the Year Ended December 31, 2019 Adjusted earnings were $1.2 billion for the current period, an increase of $139 million. Key net favorable impacts were: • lower other expenses due to: ◦ the exit of various transition services 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 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 ◦ 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; • lower costs associated with insurance-related activities due to: ◦ 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 net of interest credited on average policyholder account balances, 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. 86 Table of Contents 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 deduction. Life The components of adjusted earnings for our Life segment were as follows: Years Ended December 31, 2020 2019 (In millions) Fee income $ 341 $ 300 Net investment spread 194 211 Insurance-related activities (70) (7) Amortization of DAC and VOBA (107) (5) Other expenses, net of DAC capitalization (176) (211) Pre-tax adjusted earnings 182 288 Provision for income tax expense (benefit) 34 57 Adjusted earnings $ 148 $ 231 Year Ended December 31, 2020 Compared with the Year Ended December 31, 2019 Adjusted earnings were $148 million for the current period, a decrease of $83 million. Key net unfavorable impacts were: • higher amortization of DAC and VOBA due to: ◦ changes in maintenance expense and policyholder behavior assumptions made in connection with the AAR; and ◦ a one-time adjustment in the current period related to modeling improvements resulting from an actuarial system conversion, primarily in our Life segment; • 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, primarily in our Life segment; and • lower net investment spread due to: ◦ higher interest credited to policyholders in the current period due to higher imputed interest on insurance liabilities, related to modeling improvements resulting from an actuarial system conversion; partially offset by ◦ higher returns on other limited partnerships for the comparative measurement period. 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; • 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 deduction. 87 Table of Contents Run-off The components of adjusted earnings for our Run-off segment were as follows: Years Ended December 31, 2020 2019 (In millions) Fee income $ 667 $ 742 Net investment spread 342 312 Insurance-related activities (2,478) (1,434) Amortization of DAC and VOBA — — Other expenses, net of DAC capitalization (186) (200) Pre-tax adjusted earnings (1,655) (580) Provision for income tax expense (benefit) (356) (126) Adjusted earnings $ (1,299) $ (454) Year Ended December 31, 2020 Compared with the Year Ended December 31, 2019 Adjusted earnings were a loss of $1.3 billion for the current period, a higher loss of $845 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; 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 favorable adjustment resulting from a recapture transaction in the prior year; and ◦ a decrease in policyholder fees consistent with lower average account balances; partially offset by ◦ higher unearned revenue amortization resulting from changes in premium assumptions made in connection with the AAR. The higher adjusted loss was partially offset by higher net investment spread due to a decrease in average crediting rates in the current period in connection with the low interest rate environment and higher returns on other limited partnerships for the comparative measurement period, 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. The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 22% 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 deduction and tax credits. 88 Table of Contents Corporate & Other The components of adjusted earnings for Corporate & Other were as follows: Years Ended December 31, 2020 2019 (In millions) Fee income $ 2 $ 11 Net investment spread 64 75 Insurance-related activities 30 31 Amortization of DAC and VOBA 9 (14) Other expenses, net of DAC capitalization (437) (404) Less: Net income (loss) attributable to noncontrolling interests and preferred stock dividends 49 26 Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends (381) (327) Provision for income tax expense (benefit) (87) (121) Adjusted earnings $ (294) $ (206) Year Ended December 31, 2020 Compared with the Year Ended December 31, 2019 Adjusted earnings were a loss of $294 million for the current period, a higher loss of $88 million. Key net unfavorable impacts were: • higher other expenses driven by: ◦ a premium paid in excess of debt principal and the write off of unamortized debt issuance costs in connection with the repurchase of senior notes in the current period; and ◦ the allowance for credit losses recorded in the current period; partially offset by ◦ interest expense recognized in the prior period on a tax liability associated with our separation from MetLife; and • timing of our preferred stock dividend payments. The higher adjusted loss was partially offset by 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, primarily in our Life segment. 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 37% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deduction and tax credits. 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. 89 Table of Contents GMLB Riders for the Years Ended December 31, 2020 and 2019 The overall impact on income (loss) available to shareholders before provision for income tax from the performance of GMLB Riders, which includes (i) changes in carrying value of the GAAP liabilities, (ii) the mark-to-market of hedges and reinsurance, (iii) fees and (iv) associated DAC offsets, was as follows: Years Ended December 31, 2020 2019 (In millions) Liabilities $ (4,128) $ (1,826) Hedges 1,052 (1,592) Ceded reinsurance 63 (12) Fees (1) 825 839 GMLB DAC (233) 109 Total GMLB Riders $ (2,421) $ (2,482) _______________ (1) Excludes living benefit fees, included as a component of adjusted earnings, of $58 million and $64 million for the years ended December 31, 2020 and 2019, respectively. GMLB Liabilities. Liabilities reported as part of GMLB Riders (“GMLB Liabilities”) include (i) guarantee rider benefits accounted for as embedded derivatives, (ii) guarantee rider benefits accounted for as insurance and (iii) Shield Annuities embedded derivatives. Liabilities related to guarantee rider benefits represent our obligation to protect policyholders against the possibility that a downturn in the markets will reduce the specified benefits that can be claimed under the base annuity contract. Any periods of significant or sustained downturns in equity markets, increased equity volatility, or reduced interest rates could result in an increase in the valuation of these liabilities. An increase in these liabilities would result in a decrease to our net income (loss) available to shareholders, which could be significant. Shield Annuities currently offered provide the ability for the contract holder to participate in the appreciation of certain financial markets up to a stated level, while offering protection from a portion of declines in the applicable indices or benchmark. We believe that Shield Annuities provide us with risk offset to liabilities related to guarantee rider benefits. GMLB Hedges and Reinsurance. We enter into freestanding derivatives to hedge the market risks inherent in the GMLB Liabilities. Generally, the same market factors that impact the estimated fair value of the guarantee rider embedded derivatives impact the value of the hedges, though in the opposite direction. However, the changes in value of the GMLB Liabilities and related hedges may not be symmetrical and the divergence could be significant due to certain factors, such as the guarantee riders accounted for as insurance are not recognized at estimated fair value and there are unhedged risks within the GMLB Liabilities. We may also use reinsurance to manage our exposure related to the GMLB Liabilities. GMLB Fees. We earn fees from the guarantee rider benefits, which are calculated based on the policyholder’s Benefit Base. Fees calculated based on the Benefit Base are more stable in market downturns, compared to fees based on the account value because the Benefit Base excludes the impact of a decline in the market value of the policyholder’s account value. We use the fees directly earned from the guarantee riders to fund the reserves, future claims and costs associated with the hedges of market risks inherent in these liabilities. For guarantee rider embedded derivatives, the future fees are included in the estimated fair value of the embedded derivative liabilities, with changes recorded in net derivative gains (losses). For guarantee rider benefits accounted for as insurance, while the related fees do affect the valuation of these liabilities, they are not included in the resulting liability values, but are recorded separately in universal life and investment-type policy fees. GMLB DAC. Changes in the estimated fair value of GMLB Liabilities that are accounted for as embedded derivatives result in a corresponding recognition of DAC amortization that generally has an inverse effect on net income (loss), which we refer to as the DAC offset. While the DAC offset is generally the most significant driver of GMLB DAC, it can be impacted by other adjustments including amortization related to guarantee benefit riders accounted for as insurance. Year Ended December 31, 2020 Compared with the Year Ended December 31, 2019 Comparative results from GMLB Riders were favorable by $61 million, primarily driven by: • favorable changes in our GMLB hedges; and • favorable changes in our ceded reinsurance; partially offset by • unfavorable changes to the estimated fair value of variable annuity liability reserves; and 90 Table of Contents • unfavorable changes in GMLB DAC. Lower interest rates in the current period resulted in the following impacts: • favorable changes to the estimated fair value of our GMLB hedges; • favorable changes to the estimated fair value of Shield liabilities, net of unfavorable changes to the estimated fair value of the related hedges; • favorable changes to GMLB DAC; and • favorable changes in our ceded reinsurance; partially offset by • unfavorable changes to the estimated fair value of variable annuity liability reserves. Equity markets increasing less in the current period than in the prior period resulted in the following impacts: • unfavorable changes to the estimated fair value of variable annuity liability reserves driven by smaller gains in the current period; and • unfavorable changes to the estimated fair value of Shield liabilities resulting from larger losses in the current period, partially due to the continued growth in the block; partially offset by • favorable changes to the estimated fair value of our GMLB hedges; and • favorable changes to GMLB DAC. 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. Effects of Inflation Management believes that inflation has not had a material effect on the Company’s results of operations, except insofar as inflation may affect interest rates. An increase in inflation could affect our business in several ways. During inflationary periods, the value of fixed income investments falls which could increase realized and unrealized losses. Inflation also increases expenses for labor and other materials, potentially putting pressure on profitability if such costs cannot be passed through in our product prices. Prolonged and elevated inflation could adversely affect the financial markets and the economy generally and dispelling it may require governments to pursue a restrictive fiscal and monetary policy, which could constrain overall economic activity and inhibit revenue growth. 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. We are exposed to the following primary sources of investment risks, which may be heightened or exacerbated by the factors discussed in “Risk Factors — Risks Related to Our Business — The ongoing COVID-19 pandemic could materially adversely affect our business, financial condition and results of operations, including our capitalization and liquidity”: • 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 91 Table of Contents 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. See “Risk Factors — Economic Environment and Capital markets-Related Risks — We are exposed to significant financial and capital markets risks which may adversely affect our financial condition, results of operations and liquidity, and may cause our net investment income and our profitability measures to vary from period to period” and “Risk Factors —Investments-Related Risks.” 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, BRCD. Current Environment Our business and results of operations are materially affected by conditions in capital markets and the economy, generally. 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. See “— Industry Trends and Uncertainties — Financial and Economic Environment.” Selected Sector Investments Recent elevated levels of market volatility have affected the performance of various asset classes. Contributing factors include concerns about energy and oil prices impacting the energy sector and the COVID-19 pandemic. See “Risk Factors — Risks Related to Our Business — The ongoing COVID-19 pandemic could materially adversely affect our business, financial condition and results of operations, including our capitalization and liquidity.” There has been an increased market focus on energy sector investments as a result of volatile 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 $3.2 billion, of which 91% were investment grade, with net unrealized gains (losses) of $383 million at December 31, 2020. 92 Table of Contents There has also been an increased market focus on retail sector investments as a result of the COVID-19 pandemic and uncertainty regarding its duration and severity. 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 $265 million at December 31, 2020. In addition to the fixed maturity securities discussed 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 6 of the Notes to the Consolidated Financial Statements for information on mortgage loans, including credit quality by portfolio segment and commercial mortgage loans by property type. Additionally, see “— Investments — Fixed Maturity Securities AFS — 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. Years Ended December 31, 2020 2019 2018 Yield % Amount Yield % Amount Yield % Amount (Dollars in millions) Investment income (1) 4.21 % $ 3,755 4.52 % $ 3,686 4.62 % $ 3,465 Investment fees and expenses (2) (0.14) (136) (0.12) (101) (0.15) (113) Adjusted net investment income (3) 4.07 % $ 3,619 4.40 % $ 3,585 4.47 % $ 3,352 _______________ (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. (3) Adjusted net investment income presented in the yield table varies from the most directly comparable GAAP measure due to certain reclassifications, as presented below. Years Ended December 31, 2020 2019 2018 (In millions) Net investment income $ 3,601 $ 3,579 $ 3,338 Less: Investment hedge adjustments (18) (6) (14) Adjusted net investment income — in the above yield table $ 3,619 $ 3,585 $ 3,352 See “— Results of Operations — Consolidated Results for the Years Ended December 31, 2020 and 2019” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Consolidated Results for the Years Ended December 31, 2019 and 2018” in our 2019 Annual Report for an analysis of the year over year changes in net investment income. 93 Table of Contents Fixed Maturity Securities AFS Fixed maturity securities held by type (public or private) were as follows at: December 31, 2020 December 31, 2019 Estimated Fair Value % of Total Estimated Fair Value % of Total (Dollars in millions) Publicly-traded $ 68,328 82.8 % $ 58,099 81.8 % Privately-placed 14,167 17.2 12,937 18.2 Total fixed maturity securities $ 82,495 100.0 % $ 71,036 100.0 % Percentage of cash and invested assets 72.6 % 72.0 % See Note 8 of the Notes to the Consolidated Financial Statements for further information on our valuation controls and procedures including our formal process to challenge any prices received from independent pricing services that are not considered representative of estimated fair value. See Notes 1 and 6 of the Notes to the Consolidated Financial Statements for further information about fixed maturity securities by sector, contractual maturities, continuous gross unrealized losses and the allowance for credit losses. Fixed Maturity Securities Credit Quality — Ratings Rating agency ratings are based on availability of applicable ratings from rating agencies on the NAIC credit rating provider list, including Moody’s, S&P, Fitch, Dominion Bond Rating Service and Kroll Bond Rating Agency. If no rating is available from a rating agency, then an internally developed rating is used. The NAIC has methodologies to assess credit quality for certain Structured Securities comprised of non-agency RMBS, CMBS and ABS. The NAIC’s objective with these methodologies is to increase the accuracy in assessing expected losses, and to use the improved assessment to determine a more appropriate capital requirement for such Structured Securities. The methodologies reduce regulatory reliance on rating agencies and allow for greater regulatory input into the assumptions used to estimate expected losses from Structured Securities. We apply the NAIC methodologies to Structured Securities held by our insurance subsidiaries and BRCD. The NAIC’s present methodology is to evaluate Structured Securities held by insurers on an annual basis. If our insurance subsidiaries and BRCD, acquire Structured Securities that have not been previously evaluated by the NAIC but are expected to be evaluated by the NAIC in the upcoming annual review, an internally developed designation is used until a final designation becomes available. The following table presents total fixed maturity securities by NRSRO rating and the applicable NAIC designation from the NAIC published comparison of NRSRO ratings to NAIC designations, except for 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: December 31, 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 $ 44,189 $ — $ 8,492 $ 52,681 63.8 % $ 41,463 $ — $ 5,252 $ 46,715 65.8 % 2 Baa 23,022 — 3,338 26,360 32.0 19,838 — 1,610 21,448 30.2 Subtotal investment grade 67,211 — 11,830 79,041 95.8 61,301 — 6,862 68,163 96.0 3 Ba 2,408 — 118 2,526 3.1 2,015 — 72 2,087 2.9 4 B 814 — 20 834 1.0 673 — 23 696 1.0 5 Caa and lower 91 2 — 89 0.1 90 — — 90 0.1 6 In or near default 5 — — 5 — — — — — — Subtotal below investment grade 3,318 2 138 3,454 4.2 2,778 — 95 2,873 4.0 Total fixed maturity securities $ 70,529 $ 2 $ 11,968 $ 82,495 100.0 % $ 64,079 $ — $ 6,957 $ 71,036 100.0 % 94 Table of Contents 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) December 31, 2020 U.S. corporate $ 18,201 $ 17,303 $ 1,706 $ 646 $ 50 $ — $ 37,906 Foreign corporate 3,520 7,286 572 124 9 — 11,511 U.S. government and agency 8,481 157 — — — — 8,638 RMBS 8,204 40 19 11 20 — 8,294 CMBS 6,450 176 109 44 6 5 6,790 State and political subdivision 4,450 188 2 — — — 4,640 ABS 2,549 319 12 4 — — 2,884 Foreign government 826 891 106 5 4 — 1,832 Total fixed maturity securities $ 52,681 $ 26,360 $ 2,526 $ 834 $ 89 $ 5 $ 82,495 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 U.S. government and agency 7,303 93 — — — — 7,396 RMBS 9,020 59 15 3 21 — 9,118 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 comprise 2% of total investments at December 31, 2020 and 2019. Our U.S. and foreign corporate fixed maturity securities holdings by industry were as follows at: December 31, 2020 December 31, 2019 Estimated Fair Value % of Total Estimated Fair Value % of Total (Dollars in millions) Industrial $ 15,541 31.5 % $ 12,633 30.9 % Consumer 11,535 23.3 9,719 23.7 Finance 11,452 23.2 9,448 23.0 Utility 7,412 15.0 6,247 15.2 Communications 3,477 7.0 2,957 7.2 Total $ 49,417 100.0 % $ 41,004 100.0 % Structured Securities We held $18.0 billion and $16.8 billion of Structured Securities, at estimated fair value, at December 31, 2020 and 2019, respectively, as presented in the RMBS, CMBS and ABS sections below. 95 Table of Contents RMBS Our RMBS holdings are diversified by security type, risk profile and ratings profile, which were as follows at: December 31, 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 $ 4,852 58.5 % $ 484 $ 4,857 53.3 % $ 360 Pass-through securities 3,442 41.5 157 4,261 46.7 66 Total RMBS $ 8,294 100.0 % $ 641 $ 9,118 100.0 % $ 426 Risk profile: Agency $ 6,519 78.6 % $ 502 $ 7,216 79.2 % $ 256 Prime 167 2.0 5 141 1.5 9 Alt-A 793 9.6 67 883 9.7 96 Sub-prime 815 9.8 67 878 9.6 65 Total RMBS $ 8,294 100.0 % $ 641 $ 9,118 100.0 % $ 426 Ratings profile: Rated Aaa $ 6,738 81.2 % $ 7,329 80.4 % Designated NAIC 1 $ 8,204 98.9 % $ 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). CMBS Our CMBS holdings are diversified by vintage year, which were as follows at: December 31, 2020 December 31, 2019 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value (In millions) 2003 - 2010 $ 93 $ 115 $ 109 $ 123 2011 66 66 223 223 2012 146 148 138 141 2013 214 218 199 205 2014 347 367 332 346 2015 956 1,035 938 977 2016 472 515 480 497 2017 701 781 683 717 2018 1,664 1,906 1,580 1,700 2019 990 1,072 818 826 2020 558 567 $ — $ — Total $ 6,207 $ 6,790 $ 5,500 $ 5,755 The estimated fair value of CMBS rated Aaa using rating agency ratings was $5.0 billion, or 73.4% of total CMBS, and designated NAIC 1 was $6.5 billion, or 95.0% of total CMBS, at December 31, 2020. The estimated fair value of 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. 96 Table of Contents ABS Our ABS holdings are diversified by both collateral type and issuer. Our ABS holdings by collateral type and ratings profile were as follows at: December 31, 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 $ 1,762 61.1 % $ 5 $ 1,058 54.2 % $ (8) Consumer loans 250 8.7 6 171 8.7 2 Student loans 247 8.6 5 196 10.0 2 Automobile loans 92 3.2 5 114 5.8 2 Credit card loans 53 1.8 7 60 3.1 3 Other loans 480 16.6 22 356 18.2 9 Total $ 2,884 100.0 % $ 50 $ 1,955 100.0 % $ 10 Ratings profile: Rated Aaa $ 1,512 52.4 % $ 879 45.0 % Designated NAIC 1 $ 2,549 88.4 % $ 1,696 86.8 % Allowance for Credit Losses for Fixed Maturity Securities See Note 6 of the Notes to the Consolidated Financial Statements for information about the evaluation of fixed maturity securities for an allowance for credit losses or write-offs due to uncollectibility. Securities Lending We participate in a securities lending program whereby securities are loaned to third parties, primarily brokerage firms and commercial banks. We obtain collateral, usually cash, in an amount generally equal to 102% of the estimated fair value of the securities loaned, which is obtained at the inception of a loan and maintained at a level greater than or equal to 100% for the duration of the loan. The estimated fair value of the securities loaned is monitored on a daily basis with additional collateral obtained as necessary throughout the duration of the loan. Securities loaned under such transactions may be sold or re-pledged by the transferee. We are liable to return to our counterparties the cash collateral under our control. Security collateral received from counterparties may not be sold or re-pledged, unless the counterparty is in default, and is not reflected in the financial statements. These transactions are treated as financing arrangements and the associated cash collateral liability is recorded at the amount of the cash received. See “— Liquidity and Capital Resources — The Company — Primary Uses of Liquidity and Capital — Securities Lending” and Note 6 of the Notes to the Consolidated Financial Statements for information regarding our securities lending program. Mortgage Loans Our mortgage loans are principally collateralized by commercial, agricultural and residential properties. Information regarding mortgage loans by portfolio segment is summarized as follows at: December 31, 2020 December 31, 2019 Recorded Investment % of Total Valuation Allowance % of Recorded Investment Recorded Investment % of Total Valuation Allowance % of Recorded Investment (Dollars in millions) Commercial $ 9,714 61.1 % $ 44 0.5 % $ 9,721 61.5 % $ 47 0.5 % Agricultural 3,538 22.2 15 0.4 % 3,388 21.4 10 0.3 % Residential 2,650 16.7 35 1.3 % 2,708 17.1 7 0.3 % Total $ 15,902 100.0 % $ 94 0.6 % $ 15,817 100.0 % $ 64 0.4 % 97 Table of Contents 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 96% and 97% at December 31, 2020 and 2019, respectively. 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: December 31, 2020 California 24% New York 12% Texas 7% Additionally, we manage risk when originating commercial and agricultural mortgage loans by generally lending up to 75% of the estimated fair value of the underlying real estate collateral. Our residential mortgage loan portfolio is managed in a similar manner to reduce risk of concentration. All residential mortgage loans were collateralized by properties located in the U.S. at both December 31, 2020 and 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: December 31, 2020 California 35% Florida 10% New York 8% 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: December 31, 2020 December 31, 2019 Amount % of Total Amount % of Total (Dollars in millions) Geographic region: Pacific $ 2,670 27.5 % $ 2,666 27.4 % Middle Atlantic 1,861 19.1 1,875 19.3 South Atlantic 1,832 18.9 1,887 19.4 West South Central 802 8.2 809 8.3 Mountain 736 7.6 668 6.9 East North Central 596 6.1 555 5.7 International 506 5.2 494 5.1 New England 453 4.7 412 4.2 West North Central 113 1.2 125 1.3 East South Central 80 0.8 85 0.9 Multi-region and Other 65 0.7 145 1.5 Total recorded investment 9,714 100.0 % 9,721 100.0 % Less: allowance for credit losses 44 47 Carrying value, net of allowance for credit losses $ 9,670 $ 9,674 Property type: Office $ 3,788 39.0 % $ 3,839 39.5 % Apartment 2,072 21.3 2,181 22.4 Retail 2,068 21.3 2,115 21.8 Hotel 934 9.6 930 9.6 Industrial 822 8.5 626 6.4 Other 30 0.3 30 0.3 Total recorded investment 9,714 100.0 % 9,721 100.0 % Less: allowance for credit losses 44 47 Carrying value, net of allowance for credit losses $ 9,670 $ 9,674 98 Table of Contents Mortgage Loan Credit Quality — Monitoring Process. Our mortgage loan investments are monitored on an ongoing basis, including a review of loans that are current, past due, restructured and under foreclosure. Quarterly, we conduct a formal review of the portfolio with our investment managers. See Note 6 of the Notes to the Consolidated Financial Statements for information on mortgage loans by credit quality indicator, past due status, nonaccrual status and modified mortgage loans. Our commercial mortgage loans are reviewed on an ongoing basis. These reviews may include an analysis of the property financial statements and rent roll, lease rollover analysis, property inspections, market analysis, estimated valuations of the underlying collateral, loan-to-value ratios, debt-service coverage ratios and tenant creditworthiness. The monitoring process focuses on higher risk loans, which include those that are classified as restructured, delinquent or in foreclosure, as well as loans with higher loan-to-value ratios and lower debt-service coverage ratios. The monitoring process for agricultural mortgage loans is generally similar, with a focus on higher risk loans, such as loans with higher loan-to-value ratios, including reviews on a geographic and sector basis. Our residential mortgage loans are reviewed on an ongoing basis. See Note 6 of the Notes to the Consolidated Financial Statements for information on our evaluation of residential mortgage loans and related measurement of allowance for credit losses. Loan-to-value ratios and debt-service coverage ratios are common measures in the assessment of the quality of commercial mortgage loans. Loan-to-value ratios are a common measure in the assessment of the quality of agricultural mortgage loans. Loan-to-value ratios compare the amount of the loan to the estimated fair value of the underlying collateral. A loan-to-value ratio greater than 100% indicates that the loan amount is greater than the collateral value. A loan-to-value ratio of less than 100% indicates an excess of collateral value over the loan amount. Generally, the higher the loan-to-value ratio, the higher the risk of experiencing a credit loss. The debt-service coverage ratio compares a property’s net operating income to amounts needed to service the principal and interest due under the loan. Generally, the lower the debt-service coverage ratio, the higher the risk of experiencing a credit loss. For our commercial mortgage loans, our average loan-to-value ratio was 57% and 53% at December 31, 2020 and 2019, respectively, and our average debt-service coverage ratio was 2.3x and 2.2x at December 31, 2020 and 2019, respectively. The debt-service coverage ratio, as well as the values utilized in calculating the ratio, is updated annually on a rolling basis, with a portion of the portfolio updated each quarter. In addition, the loan-to-value ratio is routinely updated for all but the lowest risk loans as part of our ongoing review of our commercial mortgage loan portfolio. For our agricultural mortgage loans, our average loan-to-value ratio was 48% and 47% at December 31, 2020 and 2019, respectively. The values utilized in calculating the agricultural mortgage loan loan-to-value ratio are developed in connection with the ongoing review of the agricultural loan portfolio and are routinely updated. Loan Modifications Related to the COVID-19 Pandemic. Our investment managers’ 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 our loan modification and customer assistance programs. 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 December 31, 2020, the recorded investment on mortgage loans where borrowers were offered debt service forbearance and were not making payments was $299 million, comprised of $197 million commercial mortgage loans, $23 million of agricultural mortgage loans and $79 million of residential mortgage loans. These types of modifications are generally not considered troubled debt restructurings (“TDRs”) due to certain relief granted by U.S. federal legislation in March 2020. For more information on TDRs, see Note 6 of the Notes to the Consolidated Financial Statements. Mortgage Loan Allowance for Credit Losses. See Notes 6 and 8 of the Notes to the Consolidated Financial Statements for information about how the allowance for credit losses is established and monitored, as well as activity in and balances of the allowance for credit losses for the years ended December 31, 2020 and 2019. 99 Table of Contents Limited Partnerships and Limited Liability Companies The carrying values of our limited partnerships and limited liability companies (“LLCs”) were as follows at: December 31, 2020 December 31, 2019 (In millions) Other limited partnerships interests $ 2,373 $ 1,941 Real estate limited partnerships and LLCs (1) 437 439 Total $ 2,810 $ 2,380 _______________ (1) The estimated fair value of real estate limited partnerships and LLCs was $501 million and $529 million at December 31, 2020 and 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. Other Invested Assets The carrying value of our other invested assets by type was as follows at: December 31, 2020 December 31, 2019 Carrying Value % of Total Carrying Value % of Total (Dollars in millions) Freestanding derivatives with positive estimated fair values $ 3,582 95.6 % $ 3,021 93.9 % Tax credit renewable energy partnerships 64 1.7 82 2.6 Leveraged leases, net of non-recourse debt 50 1.3 64 2.0 FHLB Stock 39 1.1 39 1.2 Other 12 0.3 10 0.3 Total $ 3,747 100.0 % $ 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 7 of the Notes to the Consolidated Financial Statements: • A comprehensive description of the nature of our derivatives, including the strategies for which derivatives are used in managing various risks. • Information about the gross notional amount, estimated fair value, and primary underlying risk exposure of our derivatives by type of hedge designation, excluding embedded derivatives held at December 31, 2020 and 2019. • The statement of operations effects of derivatives in cash flow, fair value, or non-qualifying hedge relationships for the years ended December 31, 2020, 2019 and 2018. See “— Risk Management Strategies” and “Business — Segments and Corporate & Other — Annuities” for more information about our use of derivatives by major hedging programs, as well as “— Results of Operations — Annual Actuarial Review.” Fair Value Hierarchy See Note 8 of the Notes to the Consolidated Financial Statements for derivatives measured at estimated fair value on a recurring basis and their corresponding fair value hierarchy. 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. 100 Table of Contents Derivatives categorized as Level 3 at December 31, 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. See Note 8 of the Notes to Consolidated Financial Statements for a rollforward of the fair value measurements for derivatives measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs. Credit Risk See Note 7 of the Notes to the Consolidated Financial Statements for information about how we manage credit risk related to derivatives and for the estimated fair value of our net derivative assets and net derivative liabilities after the application of master netting agreements and collateral. Our policy is not to offset the fair value amounts recognized for derivatives executed with the same counterparty under the same master netting agreement. This policy applies to the recognition of derivatives on the balance sheets and does not affect our legal right of offset. Credit Derivatives The gross notional amount and estimated fair value of credit default swaps were as follows at: December 31, 2020 December 31, 2019 Gross Notional Amount Estimated Fair Value Gross Notional Amount Estimated Fair Value (In millions) Purchased $ 18 $ — $ 18 $ — Written 1,755 41 1,635 36 Total $ 1,773 $ 41 $ 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. Embedded Derivatives See Note 8 of the Notes to the Consolidated Financial Statements for information about embedded derivatives measured at estimated fair value on a recurring basis and their corresponding fair value hierarchy. See Note 8 of the Notes to the Consolidated Financial Statements for a rollforward of the fair value measurements for net embedded derivatives measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs. See Note 7 of the Notes to the Consolidated Financial Statements for information about the nonperformance risk adjustment included in the valuation of guaranteed minimum benefits accounted for as embedded derivatives. See “— Summary of Critical Accounting Estimates — Derivatives” for further information on the estimates and assumptions that affect embedded derivatives. 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 Company did not hold non-cash collateral at either December 31, 2020 or 2019. See Note 6 of the Notes to the 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. 101 Table of Contents 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 $898 million and $593 million at December 31, 2020 and 2019, respectively. See Note 7 of the Notes to the Consolidated Financial Statements for information regarding the earned income on 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 15 of the Notes to the 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 Note 6 of the Notes to the Consolidated Financial Statements for information on the investment income, investment expense, gains and losses from such investments. See also “— Investments — Fixed Maturity and Equity Securities AFS” and “— Investments — Mortgage Loans” for information on our investments in fixed maturity securities and mortgage loans. See “— Investments — Limited Partnerships and Limited Liability Companies” for information on our partnership investments. Other than the commitments disclosed in Note 15 of the Notes to the Consolidated Financial Statements, there are no other material obligations or liabilities arising from the commitments to fund mortgage loans, partnership investments, bank credit facilities and private corporate bond investments. For further information on commitments to fund partnership investments, mortgage loans, bank credit facilities and private corporate bond investments. See “— Liquidity and Capital Resources — The Company — Contractual Obligations.” 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 “— Summary of Critical Accounting Estimates.” Due to the nature of the underlying risks and the uncertainty associated with the determination of actuarial liabilities, we cannot precisely determine the amounts that will ultimately be paid with respect to these actuarial liabilities, and the ultimate amounts may vary from the estimated amounts, particularly when payments may not occur until well into the future. We periodically review the assumptions supporting our estimates of actuarial liabilities for future policy benefits. We revise estimates, to the extent permitted or required under GAAP, if we determine that future expected experience differs from assumptions used in the development of actuarial liabilities. We charge or credit changes in our liabilities to expenses in the period the liabilities are established or re-estimated. If the liabilities originally established for future benefit payments prove inadequate, we must increase them. Such an increase could adversely affect our earnings and have a material adverse effect on our business, financial condition and results of operations. We have experienced, and will likely in the future experience, catastrophe losses and possibly acts of terrorism, as well as turbulent financial markets that may have an adverse impact on our business, financial condition and results of operations. Due to their nature, we cannot predict the incidence, timing, severity or amount of losses from catastrophes and acts of terrorism, but we make broad use of catastrophic and non-catastrophic reinsurance to manage risk from these perils. Future Policy Benefits We establish liabilities for amounts payable under insurance policies. See “— Summary of Critical Accounting Estimates — Liability for Future Policy Benefits” and Notes 1 and 3 of the Notes to the Consolidated Financial Statements. A discussion of future policy benefits by segment, as well as Corporate & Other follows. Annuities Future policy benefits for the annuities business are comprised mainly of liabilities for life contingent income annuities, and liabilities for the variable annuity guaranteed minimum benefits accounted for as insurance. Life Future policy benefits for the life business are comprised mainly of liabilities for traditional life and for universal and variable life insurance contracts. In order to manage risk, we have often reinsured a portion of the mortality risk on life 102 Table of Contents insurance policies. The reinsurance programs are routinely evaluated, and this may result in increases or decreases to existing coverage. We have entered into various derivative positions, primarily interest rate swaps, to mitigate the risk that investment of premiums received and reinvestment of maturing assets over the life of the policy will be at rates below those assumed in the original pricing of these contracts. Run-off Future policy benefits primarily include liabilities for structured settlement annuities and pension risk transfers. There is no interest rate crediting flexibility on the liabilities for payout annuities. As a result, a sustained low interest rate environment could negatively impact earnings; however, we mitigate our risks by applying various ALM strategies, including the use of derivative positions, primarily interest rate swaps, to mitigate the risks associated with such a scenario. Corporate & Other Future policy benefits primarily include liabilities for long-term care and workers’ compensation business reinsured through 100% quota share reinsurance agreements. Policyholder Account Balances Policyholder account balances are generally equal to the account value, which includes accrued interest credited, but excludes the impact of any applicable charge that may be incurred upon surrender. See “— Variable Annuity Guarantees” and “Quantitative and Qualitative Disclosures About Market Risk — Market Risk - Fair Value Exposures — Interest Rates.” See Notes 1 and 3 of the Notes to the Consolidated Financial Statements for additional information. A discussion of policyholder account balances by segment, as well as Corporate & Other, follows. Annuities Policyholder account balances for annuities are held for fixed deferred annuities, the fixed account portion of variable annuities, and non-life contingent income annuities. Interest is credited to the policyholder’s account at interest rates we determine which are influenced by current market rates, subject to specified minimums. A sustained low interest rate environment could negatively impact earnings as a result of the minimum credited rate guarantees present in most of these policyholder account balances. We have various interest rate derivative positions, as part of the Company’s macro interest rate hedging program, to partially mitigate the risks associated with such a scenario. Additionally, policyholder account balances are held for variable annuity guaranteed minimum living benefits that are accounted for as embedded derivatives. The following table presents the breakdown of account value subject to minimum guaranteed crediting rates for Annuities at: December 31, 2020 December 31, 2019 Account Value (1) Account Value at Guarantee (1) Account Value (1) Account Value at Guarantee (1) (In millions) Greater than 0% but less than 2% $ 3,756 $ 816 $ 1,287 $ 770 Equal to 2% but less than 4% $ 13,029 $ 12,314 $ 13,495 $ 12,808 Equal to or greater than 4% $ 461 $ 461 $ 489 $ 489 _______________ (1) These amounts are not adjusted for policy loans. As a result of acquisitions, we establish additional liabilities known as excess interest reserves for policies with credited rates in excess of market rates as of the applicable acquisition dates. Excess interest reserves for Annuities were $254 million and $262 million at December 31, 2020 and 2019, respectively. Life Life policyholder account balances are held for retained asset accounts, universal life policies and the fixed account of universal variable life insurance policies. Interest is credited to the policyholder’s account at interest rates we determine which are influenced by current market rates, subject to specified minimums. A sustained low interest rate environment could negatively impact earnings as a result of the minimum credited rate guarantees present in most of these policyholder account balances. We have various derivative positions to partially mitigate the risks associated with such a scenario. 103 Table of Contents The following table presents the breakdown of account value subject to minimum guaranteed crediting rates for Life at: December 31, 2020 December 31, 2019 Account Value (1) Account Value at Guarantee (1) Account Value (1) Account Value at Guarantee (1) (In millions) Greater than 0% but less than 2% $ 115 $ 64 $ 88 $ 74 Equal to 2% but less than 4% $ 1,116 $ 496 $ 1,111 $ 509 Equal to or greater than 4% $ 1,786 $ 1,786 $ 1,851 $ 1,851 _______________ (1) These amounts are not adjusted for policy loans. As a result of acquisitions, we establish additional liabilities known as excess interest reserves for policies with credited rates in excess of market rates as of the applicable acquisition dates. Excess interest reserves for Life were $36 million and $33 million at December 31, 2020 and 2019, respectively. Run-off Policyholder account balances in Run-off are comprised of ULSG funding agreements and COLI. Interest crediting rates vary by type of contract and can be fixed or variable. We are exposed to interest rate risks, when guaranteeing payment of interest and return on principal at the contractual maturity date. We mitigate our risks by applying various ALM strategies. The following table presents the breakdown of account value subject to minimum guaranteed crediting rates for Run-off at: December 31, 2020 December 31, 2019 Account Value (1) Account Value at Guarantee (1) Account Value (1) Account Value at Guarantee (1) (In millions) Universal Life Secondary Guarantee Greater than 0% but less than 2% $ — $ — $ — $ — Equal to 2% but less than 4% $ 5,262 $ 1,552 $ 5,440 $ 1,802 Equal to or greater than 4% $ 562 $ 562 $ 578 $ 578 _______________ (1) These amounts are not adjusted for policy loans. As a result of acquisitions, we establish additional liabilities known as excess interest reserves for policies with credited rates in excess of market rates as of the applicable acquisition dates. Excess interest reserves for Run-off were $99 million and $95 million at December 31, 2020 and 2019, respectively. Variable Annuity Guarantees We issue certain variable annuity products with guaranteed minimum benefits that provide the policyholder a minimum return based on their initial deposit (i.e., the Benefit Base) less withdrawals. In some cases, the Benefit Base may be increased by additional deposits, bonus amounts, accruals or optional market value step-ups. Certain of our variable annuity guarantee features are accounted for as insurance liabilities and recorded in future policy benefits while others are accounted for at fair value as embedded derivatives and recorded in policyholder account balances. Generally speaking, a guarantee is accounted for as an insurance liability if the guarantee is paid only upon either (i) the occurrence of a specific insurable event, or (ii) annuitization. Alternatively, a guarantee is accounted for as an embedded derivative if a guarantee is paid without requiring (i) the occurrence of specific insurable event, or (ii) the policyholder to annuitize, that is, the policyholder can receive the guarantee on a net basis. In certain cases, a guarantee may have elements of both an insurance liability and an embedded derivative and in such cases the guarantee is split and accounted for under both models. Further, changes in assumptions, principally involving behavior, can result in a change of expected future cash outflows of a guarantee between portions accounted for as insurance liabilities and portions accounted for as embedded derivatives. 104 Table of Contents Guarantees accounted for as insurance liabilities in future policy benefits include GMDBs, the life contingent portion of the GMWBs and the portion of the GMIBs that require annuitization, as well as the life contingent portion of the expected annuitization when the policyholder is forced into an annuitization upon depletion of their account value. These insurance liabilities are accrued over the accumulation phase of the contract in proportion to actual and future expected policy assessments based on the level of guaranteed minimum benefits generated using multiple scenarios of separate account returns. The scenarios are based on best estimate assumptions consistent with those used to amortize DAC. When current estimates of future benefits exceed those previously projected or when current estimates of future assessments are lower than those previously projected, liabilities will increase, resulting in a current period charge to net income. The opposite result occurs when the current estimates of future benefits are lower than those previously projected or when current estimates of future assessments exceed those previously projected. At each reporting period, we update the actual amount of business remaining in-force, which impacts expected future assessments and the projection of estimated future benefits resulting in a current period charge or increase to earnings. See Note 3 of the Notes to the Consolidated Financial Statements for additional details of guarantees accounted for as insurance liabilities. Guarantees accounted for as embedded derivatives in policyholder account balances include the non-life contingent portion of GMWBs, GMABs, and for GMIBs the non-life contingent portion of the expected annuitization when the policyholder is forced into an annuitization upon depletion of their account value, as well as the Guaranteed Principal Option. The estimated fair values of guarantees accounted for as embedded derivatives are determined based on the present value of projected future benefits minus the present value of projected future fees. At policy inception, we attribute to the embedded derivative a portion of the projected future guarantee fees to be collected from the policyholder equal to the present value of projected future guaranteed benefits. Any additional fees represent “excess” fees and are reported in universal life and investment-type product policy fees. In valuing the embedded derivative, the percentage of fees included in the fair value measurement is locked-in at inception. The projections of future benefits and future fees require capital market and actuarial assumptions including expectations concerning policyholder behavior. A risk neutral valuation methodology is used to project the cash flows from the guarantees under multiple capital market scenarios to determine an economic liability. The reported estimated fair value is then determined by taking the present value of these risk-free generated cash flows using a discount rate that incorporates a spread over the risk-free rate to reflect our nonperformance risk and adding a risk margin. For more information on the determination of estimated fair value. See Note 8 of the Notes to the Consolidated Financial Statements. 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 “Risk Factors — Risks Related to Our Business — The ongoing COVID-19 pandemic could materially adversely affect our business, financial condition and results of operations, including our capitalization and liquidity,” “— Industry Trends and Uncertainties — COVID-19 Pandemic” and “— Investments — Current Environment.” Liquidity and Capital Management Based upon our capitalization, expectations regarding maintaining our business mix, ratings and funding sources available to us, we believe we have sufficient liquidity to meet business requirements in current market conditions and certain stress scenarios. Our Board of Directors and senior management are directly involved in the governance of the capital management process, including proposed changes to the annual capital plan and capital targets. We continuously monitor and adjust our liquidity and capital plans in light of market conditions, as well as changing needs and opportunities. We maintain a substantial short-term liquidity position, which was $4.5 billion and $2.8 billion at December 31, 2020 and 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. 105 Table of Contents An integral part of our liquidity management includes managing our level of liquid assets, which was $52.0 billion and $42.6 billion at December 31, 2020 and 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. See “Risk Factors — Economic Environment and Capital Markets-Related Risks — Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs and our access to capital.” Capital We manage our capital position to maintain our financial strength and credit ratings. Our capital position is supported by our ability to generate cash flows within our insurance companies, our ability to effectively manage the risks of our businesses and our expected ability to borrow funds and raise additional capital to meet operating and growth needs under a variety of market and economic conditions. We 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 borrowings under credit facilities, the issuance of debt, equity or hybrid securities, the incurrence of term loans, 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% in normal market conditions, we expect to continue to maintain a capital and exposure risk management program that targets total assets supporting our variable annuity contracts at or above the CTE98 level in normal market conditions. 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 a target floor level of CTE95 and CTE98. 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, and on February 10, 2021, we authorized the repurchase of up to an additional $200 million of our common stock. 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 and February 10, 2021 authorizations 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 106 Table of Contents requirements (including capital requirements of our insurance subsidiaries), contractual restrictions and any other factors that our Board of Directors deems relevant in making such a determination. Therefore, there can be no assurance that we will pay any dividends or make other distributions or returns of capital on our common stock, or as to the amount of any such dividends, distributions or returns of capital. Rating Agencies The following financial strength ratings represent each rating agency’s current opinion of our insurance subsidiaries’ ability to pay obligations under insurance policies and contracts in accordance with their terms and are not evaluations directed toward the protection of investors in our securities. Financial strength ratings are not statements of fact nor are they recommendations to purchase, hold or sell any security, contract or policy. Each rating should be evaluated independently of any other rating. Our financial strength ratings as of the date of this filing are indicated in the following table. All financial strength ratings have a stable outlook unless otherwise indicated. A.M. Best Fitch Moody’s S&P “A++ (superior)” to “S (suspended)” “AAA (exceptionally strong)” to “C (distressed)” “Aaa (highest quality)” to “C (lowest rated)” “AAA (extremely strong)” to “SD (Selective Default)” or “D (Default)” Brighthouse Life Insurance Company A A (1) A3 A+ 3rd of 16 6th of 19 7th of 21 5th of 22 New England Life Insurance Company A A (1) A3 A+ 3rd of 16 6th of 19 7th of 21 5th of 22 Brighthouse Life Insurance Company of NY A NR NR A+ 3rd of 16 5th of 22 _______________ NR = Not rated (1) Negative outlook. Our long-term issuer credit ratings as of the date of this filing are indicated in the following table. All long-term issuer credit ratings have a stable outlook unless otherwise indicated. A.M. Best Fitch Moody’s S&P “aaa (Exceptional)” to “S (suspended)” “AAA (highest credit quality)” to “D (default)” “Aaa (highest quality)” to “C (lowest rated)” “AAA (extremely strong)” to “SD (Selective Default)” or “D (Default)” Brighthouse Financial, Inc. (1) bbb+ BBB+ (2) Baa3 BBB+ Brighthouse Holdings, LLC (1) bbb+ BBB+ (2) Baa3 BBB+ _______________ (1) Long-term Issuer Credit Rating refers to issuer credit rating, issuer default rating, long-term issuer rating and long-term counterparty credit rating for A.M. Best, Fitch, Moody’s and S&P, respectively. (2) Negative outlook. Additional information about financial strength ratings and credit ratings can be found on the respective websites of the rating agencies. Rating agencies may continue to review and adjust our ratings. For example, in April 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. See “Risk Factors — Risks Related to Our Business — A downgrade or a potential downgrade in our financial strength or credit ratings could result in a loss of business and materially adversely affect our financial condition and results of operations” for an in-depth description of the impact of a ratings downgrade. 107 Table of Contents Sources and Uses of Liquidity and Capital Our primary sources and uses of liquidity and capital were as follows at: Years Ended December 31, 2020 2019 2018 (In millions) Sources: Operating activities, net $ 888 $ 1,828 $ 3,062 Changes in policyholder account balances, net 6,825 4,823 2,986 Changes in payables for collateral under securities loaned and other transactions, net 861 — 888 Long-term debt issued 615 1,000 375 Preferred stock issued, net of issuance costs 948 412 — Total sources 10,137 8,063 7,311 Uses: Investing activities, net 5,843 7,341 4,538 Changes in payables for collateral under securities loaned and other transactions, net — 666 — Long-term debt repaid 1,552 602 9 Dividends on preferred stock 44 21 — Treasury stock acquired in connection with share repurchases 473 442 105 Financing element on certain derivative instruments and other derivative related transactions, net 948 203 303 Other, net 46 56 68 Total uses 8,906 9,331 5,023 Net increase (decrease) in cash and cash equivalents $ 1,231 $ (1,268) $ 2,288 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. 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: 108 Table of Contents 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 See Note 10 of the Notes to the Consolidated Financial Statements for information on preferred stock issuances. Federal Home Loan Bank Funding Agreements 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 regional banks in the FHLB system. Brighthouse Life Insurance Company had obligations outstanding under funding agreements of $595 million at both December 31, 2020 and 2019, respectively, which are reported in policyholder account balances. On April 2, 2020, Brighthouse Life Insurance Company issued funding agreements for an aggregate collateralized borrowing of $1.0 billion to provide a readily available source of contingent liquidity, which were repaid during the second half of 2020. During each of the years ended December 31, 2019 and 2018, there were no issuances or repayments under this funding agreement program. See Note 3 of the Notes to the Consolidated Financial Statements for additional information on FHLB funding agreements. Farmer Mac Funding Agreements 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”) with a term ending on December 31, 2023, pursuant to which the parties may enter into funding agreements in an aggregate amount of up to $500 million. Any such borrowings would be reported in policyholder account balances. At both December 31, 2020 and 2019, there were no borrowings under this funding agreement program. See Note 3 of the Notes to the Consolidated Financial Statements for additional information on Farmer Mac funding agreements. Debt Issuances See Note 9 of the Notes to the Consolidated Financial Statements for information on debt issuances. Credit and Committed Facilities See Note 9 of the Notes to the Consolidated Financial Statements for information regarding our credit and committed facilities. We have no reason to believe that our lending counterparties would be unable to fulfill their respective contractual obligations under these facilities. As commitments under our credit and committed facilities may expire unused, these amounts do not necessarily reflect our actual future cash funding requirements. Outstanding Long-term Debt Our outstanding long-term debt was as follows at: December 31, 2020 December 31, 2019 (In millions) Senior notes $ 3,042 $ 2,970 Term loan — 1,000 Junior subordinated debentures 363 363 Other long-term debt (1) 31 32 Total long-term debt (2) $ 3,436 $ 4,365 _______________ (1) 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. 109 Table of Contents (2) Includes unamortized debt issuance costs, discounts and premiums, as applicable, totaling net $35 million and $42 million at December 31, 2020 and 2019, respectively, for senior notes and junior subordinated debentures on a combined basis. See Note 9 of the Notes to the Consolidated Financial Statements for additional information regarding the terms of our long-term debt. Debt and Facility Covenants Our debt instruments and credit and committed facilities contain certain administrative, reporting and legal covenants. Additionally, our 2019 Revolving Credit Facility contains financial covenants, including requirements to maintain a specified minimum adjusted consolidated net worth, to maintain a ratio of total indebtedness to total capitalization not in excess of a specified percentage and that place limitations on the dollar amount of indebtedness that may be incurred by our subsidiaries, which could restrict our operations and use of funds. At December 31, 2020, we were in compliance with these financial covenants. Primary Uses of Liquidity and Capital In addition to the summarized description of liquidity and capital uses discussed in “— Sources and Uses of Liquidity and Capital,” and “— Contractual Obligations,” the following additional information is provided regarding our primary uses of liquidity and capital: Common Stock Repurchases See Note 10 of the Notes to the Consolidated Financial Statements for information relating to authorizations to repurchase BHF common stock, amounts of common stock repurchased pursuant to such authorizations and the amount remaining under such authorizations at December 31, 2020. In 2021, through February 22, 2021, BHF repurchased an additional 855,261 shares of its common stock through open market purchases, pursuant to 10b5-1 plans, for $34 million. See Note 17 of the Notes to the Consolidated Financial Statements for information relating to the authorization of share repurchases subsequent to December 31, 2020. Preferred Stock Dividends See Notes 10 and 17 of the Notes to the Consolidated Financial Statements for information relating to dividends declared and paid on our preferred stock. Debt Repayments See Note 9 of the Notes to the Consolidated Financial Statements for information on debt repayments. Debt Repurchases, Redemptions and Exchanges We may from time to time seek to retire or purchase our outstanding indebtedness through cash purchases or exchanges for other securities, purchases in the open market, privately negotiated transactions or otherwise. Any such repurchases or exchanges will be dependent upon several factors, including our liquidity requirements, contractual restrictions, general market conditions, 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. See Note 9 of the Notes to the Consolidated Financial Statements for additional information on debt repurchases. 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 years ended December 31, 2020, 2019 and 2018, general account surrenders and withdrawals totaled $2.1 billion, $2.3 billion and $3.0 billion, respectively, of which $1.4 billion, $2.1 billion and $2.4 billion, respectively, 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 December 31, 2020 and 2019, we did not pledge any cash collateral to counterparties. At December 31, 2020 and 2019, we were obligated to return cash collateral pledged to us by counterparties of $1.6 billion and $1.3 billion, respectively. See Note 7 of the Notes to the Consolidated Financial Statements for additional information about pledged collateral. We also pledge collateral from time to time in connection with funding agreements. 110 Table of Contents 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 $3.7 billion and $3.1 billion at December 31, 2020 and 2019, respectively. Of these amounts, $937 million and $1.3 billion at December 31, 2020 and 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 December 31, 2020 was $920 million, primarily comprised of U.S. government and agency securities that, if put back to us, could be immediately sold to satisfy the cash requirement. See Note 6 of the Notes to the Consolidated Financial Statements. 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 15 of the Notes to the Consolidated Financial Statements. Contractual Obligations Our major contractual obligations were as follows at December 31, 2020: Total One Year or Less More than One Year to Three Years More than Three Years to Five Years More than Five Years (In millions) Insurance liabilities $ 70,404 $ 4,191 $ 3,006 $ 3,272 $ 59,935 Policyholder account balances 52,023 5,494 10,105 8,098 28,326 Payables for collateral under securities loaned and other transactions 5,252 5,252 — — — Long-term debt 6,443 152 329 330 5,632 Investment commitments 1,871 1,871 — — — Other 4,698 4,624 — — 74 Total $ 140,691 $ 21,584 $ 13,440 $ 11,700 $ 93,967 Insurance Liabilities Insurance liabilities reflect future estimated cash flows and (i) are based on mortality, morbidity, lapse and other assumptions comparable with our experience and expectations of future payment patterns; and (ii) consider future premium receipts on current policies in-force. Additionally, the more than five years category includes estimated payments due for periods extending for more than 100 years. The total amount presented for insurance liabilities of $70.4 billion exceeds the sum of the liability amounts for future policy benefits and of $47.9 billion presented on the consolidated balance sheet principally due to (i) the time value of money, which accounts for a substantial portion of the difference; and (ii) differences in assumptions, most significantly mortality, between the date the liabilities were initially established and the current date; and are partially offset by liabilities related to accounting conventions (such as interest reserves and unearned revenue), or which are not contractually due, which are excluded. Actual cash payments on insurance liabilities may differ significantly from the liabilities as presented on the consolidated balance sheet and the estimated cash payments as presented in the table above due to differences between actual experience and the assumptions used in the establishment of the liabilities and the estimation of the cash payments. All estimated cash payments are presented gross of any reinsurance recoverable. 111 Table of Contents Policyholder Account Balances Policyholder account balances generally represent the estimated cash payments on customer deposits and are based on assumptions related to withdrawals, including unscheduled or partial withdrawals; policy lapses; surrender charges; annuitization; mortality; future interest credited; policy loans and other contingent events as appropriate for the respective product type. The total amount presented for policyholder account balances of $52.0 billion exceeds the liability amount of $54.5 billion presented on the consolidated balance sheet principally due to (i) the time value of money, which accounts for a substantial portion of the difference; (ii) differences in assumptions between the date the liabilities were initially established and the current date; and (iii) liabilities related to accounting conventions (such as interest reserves and embedded derivatives), or which are not contractually due, which are excluded. Actual cash payments on policyholder account balances may differ significantly from the liabilities as presented on the consolidated balance sheet and the estimated cash payments as presented in the table above due to differences between actual experience and the assumptions used in the establishment of the liabilities and the estimation of the cash payments. All estimated cash payments are presented gross of any reinsurance recoverable. Payables for Collateral Under Securities Loaned and Other Transactions We have accepted cash collateral in connection with securities lending and derivatives. As the securities lending transactions expire within the next year and the timing of the return of the derivatives collateral is uncertain, the return of the collateral has been included in the one year or less category in the table. We also held non-cash collateral, which is not reflected as a liability on the consolidated balance sheet of $840 million at December 31, 2020. Long-term Debt The total amount presented for long-term debt differs from the total amount presented on the consolidated balance sheet as the amounts presented herein do not include unamortized premiums or discounts and debt issuance costs incurred upon issuance and include future interest on such obligations for the period from January 1, 2021 through maturity. Future interest on variable rate debt was computed using prevailing rates at December 31, 2020 and, as such, does not consider the impact of future rate movements. Future interest on fixed rate debt was computed using the stated rate on the obligations. Investment Commitments Investment commitments primarily include commitments to lend funds under partnership investments, which we anticipate could be invested any time over the next five years; however, as the timing of the fulfillment of the obligation cannot be predicted, such obligations are presented in the one year or less category. See Note 15 of the Notes to the Consolidated Financial Statements and “— Off-Balance Sheet Arrangements.” Other Other obligations are principally comprised of (i) the estimated fair value of derivative obligations, (ii) amounts due under reinsurance agreements, (iii) obligations under deferred compensation arrangements, (iv) payables related to securities purchased but not yet settled and (v) other accruals and accounts payable for which the Company is contractually liable, which are reported in other liabilities on the consolidated balance sheet. If the timing of any of these other obligations is sufficiently uncertain, the amounts are included within the one year or less category. Separate account liabilities are excluded as they are fully funded by cash flows from the corresponding separate account assets and are set equal to the estimated fair value of separate account assets. 112 Table of Contents 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 or as a result of compliance with regulatory requirements. See “Risk Factors — Economic Environment and Capital Markets-Related Risks — Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs and our access to capital,” “Risk Factors — Regulatory and Legal Risks — Our insurance business is highly regulated, and changes in regulation and in supervisory and enforcement policies may materially impact our capitalization or cash flows, reduce our profitability and limit our growth” and “Risk Factors — Risks Related to Our Business — As a holding company, BHF depends on the ability of its subsidiaries to pay dividends.” Short-term Liquidity and Liquid Assets At December 31, 2020 and 2019, BHF and certain of its non-insurance subsidiaries had short-term liquidity of $1.6 billion and $723 million, respectively. Short-term liquidity is comprised of cash and cash equivalents and short-term investments. At December 31, 2020 and 2019, BHF and certain of its non-insurance subsidiaries had liquid assets of $1.7 billion and $767 million, respectively, of which $1.6 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 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 Note 10 of the Notes to the Consolidated Financial Statements. Normalized Statutory Earnings Normalized statutory earnings is used by management to measure our insurance companies’ ability to pay future distributions and is reflective of whether our hedging program functions as intended. Normalized statutory earnings is calculated as statutory pre-tax net gain from operations adjusted for the favorable or unfavorable impacts of (i) net realized capital gains (losses), (ii) the change in total asset requirement at CTE95, net of the change in our variable annuity reserves, and (iii) unrealized gains (losses) associated with our variable annuities risk management strategy. Normalized statutory earnings may be further adjusted for certain unanticipated items that impacted our results in order to help management and investors better understand, evaluate and forecast those results. Our variable annuity block is managed by funding the balance sheet with assets equal to or greater than a CTE95 level. We also manage market-related risks of increases in these asset requirements by hedging the market sensitivity of the CTE95 level to changes in the capital markets. By including hedge gains and losses related to our variable annuity risk management strategy in our calculation of normalized statutory earnings, we are able to fully reflect the change in value of the hedges, as well as the change in the value of the underlying CTE95 total asset requirement level. We believe this allows us to determine whether our hedging program is providing the desired level of protection. 113 Table of Contents The following table presents the components of normalized statutory earnings: Years Ended December 31, 2020 2019 (In millions) Statutory net gain from operations, pre-tax $ (0.5) $ 2.2 Add: net realized capital gains (losses) (0.4) (0.9) Add: change in total asset requirement at CTE95, net of the change in VA reserves (0.6) 1.2 Add: unrealized gains (losses) on VA hedging program 1.4 (0.8) Add: impact of NAIC VA capital reform and actuarial assumption update (0.6) 0.1 Add: other adjustments, net 0.3 0.1 Normalized statutory earnings $ (0.4) $ 1.9 Primary Sources and Uses of Liquidity and Capital The principal sources of funds available to BHF include distributions from BH Holdings, dividends and returns of capital from its insurance subsidiaries and BRCD, capital markets issuances, as well as its own cash and cash equivalents and short-term investments. These sources of funds may also be supplemented by alternate sources of liquidity either directly or indirectly through our insurance subsidiaries. For example, we have established internal liquidity facilities to provide liquidity within and across our regulated and non-regulated entities to support our businesses. The primary uses of liquidity of BHF include debt service obligations (including interest expense and debt repayments), preferred stock dividends, capital contributions to subsidiaries, common stock repurchases and payment of general operating expenses. Based on our analysis and comparison of our current and future cash inflows from the dividends we receive from subsidiaries that are permitted to be paid without prior insurance regulatory approval, our investment portfolio and other cash flows and anticipated access to the capital markets, we believe there will be sufficient liquidity and capital to enable BHF to make payments on debt, pay preferred stock dividends, contribute capital to its subsidiaries, repurchase its common stock, pay all general operating expenses and meet its cash needs. 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 See Note 2 of Schedule II — Condensed Financial Information (Parent Company Only) for information relating to distributions from and capital contributions to BH Holdings. Short-term Intercompany Loans and Intercompany Liquidity Facilities See Note 3 of Schedule II — Condensed Financial Information (Parent Company Only) for information relating to short-term intercompany loans and our intercompany liquidity facilities including obligations outstanding, issuances and repayments. 114 Table of Contents GLOSSARY Glossary of Selected Financial Terms Account value The amount of money in a policyholder’s account. The value increases with additional premiums and investment gains, and it decreases with withdrawals, investment losses and fees. Adjusted earnings See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP and Other Financial Disclosures.” Alternative investments General account investments in other limited partnership interests. Assets under management (“AUM”) General account investments and separate account assets. Conditional tail expectation (“CTE”) A statistical tail risk measure used to assess the adequacy of assets supporting variable annuity contract liabilities, which is calculated as the average amount of total assets required to satisfy obligations over the life of the contract or policy in the worst “x%” of scenarios. Represented as CTE (100 less x). Example: CTE95 represents the five worst percent of scenarios and CTE98 represents the two worst percent of scenarios. Credit loss on investments The difference between the amortized cost of the security and the present value of the cash flows expected to be collected that is attributed to credit risk, is recognized as an allowance on the balance sheet with a corresponding adjustment to earnings, or if deemed uncollectible, as a permanent write-off of book value. Deferred policy acquisition cost (“DAC”) Represents the incremental costs related directly to the successful acquisition of new and renewal insurance and annuity contracts and which have been deferred on the balance sheet as an asset. Deferred sales inducements (“DSI”) Represent amounts that are credited to a policyholder’s account balance that are higher than the expected crediting rates on similar contracts without such an inducement and that are an incentive to purchase a contract and also meet the accounting criteria to be deferred as an asset that is amortized over the life of the contract. General account assets All insurance company assets not allocated to separate accounts. Invested assets General account investments in fixed maturity securities, equity securities, mortgage loans, policy loans, other limited partnership interests, real estate limited partnerships and limited liability companies, short-term investments and other invested assets. Investment Hedge Adjustments 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. Market Value Adjustments 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. Net amount at risk (“NAR”) Represents the difference between a claim amount payable if a specific event occurs and the amount set aside to support the claim. The calculation of NAR can differ by policy type or guarantee. Net investment spread See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP and Other Financial Disclosures.” Normalized statutory earnings See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — The Parent Company — Liquidity and Capital — Normalized Statutory Earnings.” Reinsurance Insurance that an insurance company buys for its own protection. Reinsurance enables an insurance company to expand its capacity, stabilize its underwriting results, or finance its expanding volume. Risk-based capital (“RBC”) ratio The risk-based capital ratio is a method of measuring an insurance company’s capital, taking into consideration its relative size and risk profile, in order to ensure compliance with minimum regulatory capital requirements set by the National Association of Insurance Commissioners. When referred to as “combined,” represents that of our insurance subsidiaries as a whole. Total adjusted capital (“TAC”) Total adjusted capital primarily consists of statutory capital and surplus, as well as the statutory asset valuation reserve. When referred to as “combined,” represents that of our insurance subsidiaries as a whole. Value of business acquired (“VOBA”) Present value of projected future gross profits from in-force policies of acquired businesses. 115 Table of Contents Glossary of Product Terms Accumulation phase The phase of a variable annuity contract during which assets accumulate based on the policyholder’s lump sum or periodic deposits and reinvested interest, capital gains and dividends that are generally tax-deferred. Annuitant The person who receives annuity payments or the person whose life expectancy determines the amount of variable annuity payments upon annuitization of a life contingent annuity. Annuities Long-term, tax-deferred investments designed to help investors save for retirement. Annuitization The process of converting an annuity investment into a series of periodic income payments, generally for life. Annuity sales Annuity sales consist of 100 percent of direct statutory premiums, except for fixed index annuity sales distributed through MassMutual that consist of 90 percent of gross sales. Annuity sales exclude certain internal exchanges. Benefit Base A notional amount (not actual cash value) used to calculate the owner’s guaranteed benefits within an annuity contract. The death benefit and living benefit within the same contract may not have the same Benefit Base. Cash surrender value The amount an insurance company pays (minus any surrender charge) to the variable annuity owner when the contract is voluntarily terminated prematurely. Deferred annuity An annuity purchased with premiums paid either over a period of years or as a lump sum, for which savings accumulate prior to annuitization or surrender, and upon annuitization, such savings are exchanged for either a future lump sum or periodic payments for a specified period of time or for a lifetime. Deferred income annuity (“DIA”) An annuity that provides a pension-like stream of income payments after a specified deferral period. Dollar-for-dollar withdrawal A method of calculating the reduction of a variable annuity Benefit Base after a withdrawal in which the benefit is reduced by one dollar for every dollar withdrawn. Enhanced death benefit (“EDB”) An optional benefit that locks in investment gains annually, or every few years, or pays a minimum stated interest rate on purchase payments to the beneficiary. Fixed annuity An annuity that guarantees a set annual rate of return with interest at rates we determine, subject to specified minimums. Credited interest rates are guaranteed not to change for certain limited periods of time. Future policy benefits Future policy benefits for the annuities business are comprised mainly of liabilities for life contingent income annuities, and liabilities for the variable annuity guaranteed minimum benefits accounted for as insurance. Guaranteed minimum accumulation benefits (“GMAB”) An optional benefit (available for an additional cost) which entitles an annuitant to a minimum payment, typically in lump sum, after a set period of time, typically referred to as the accumulation period. The minimum payment is based on the Benefit Base, which could be greater than the underlying account value. Guaranteed minimum death benefits (“GMDB”) An optional benefit (available for an additional cost) that guarantees an annuitant’s beneficiaries are entitled to a minimum payment based on the Benefit Base, which could be greater than the underlying account value, upon the death of the annuitant. Guaranteed minimum income benefits (“GMIB”) An optional benefit (available for an additional cost) where an annuitant is entitled to annuitize the policy and receive a minimum payment stream based on the Benefit Base, which could be greater than the underlying account value. Guaranteed minimum living benefits (“GMLB”) A reference to all forms of guaranteed minimum living benefits, including GMIBs, GMWBs and GMABs (does not include GMDBs). Guaranteed minimum withdrawal benefit for life (“GMWB4L”) An optional benefit (available for an additional cost) where an annuitant is entitled to withdraw a maximum amount of their Benefit Base each year, for the duration of the contract holder’s life, regardless of account performance. Guaranteed minimum withdrawal benefit riders (“GMLB Riders”) Changes in the carrying value of GMLB liabilities, related hedges and reinsurance; the fees earned directly from the GMLB liabilities; and related DAC offsets. Guaranteed minimum withdrawal benefits (“GMWB”) An optional benefit (available for an additional cost) where an annuitant is entitled to withdraw a maximum amount of their Benefit Base each year, for which cumulative payments to the annuitant could be greater than the underlying account value. Guaranteed minimum benefits (“GMxB”) A general reference to all forms of guaranteed minimum benefits, inclusive of living benefits and death benefits. 116 Table of Contents Immediate annuity An annuity for which the owner pays a lump sum and receives periodic payments immediately or soon after purchase. Single premium immediate annuities (“SPIAs”) are single premium annuity products that provide a guaranteed level of income to the owner generally for a specified number of years or for the life of the annuitant. Index-linked annuity An annuity that provides for asset accumulation and asset distribution needs with an ability to share in the upside from certain financial markets such as equity indices, or an interest rate benchmark. The customer’s account value can grow or decline due to various external financial market indices performance. Life insurance sales Life insurance sales consist of 100 percent of annualized new premium for term life, first-year paid premium for whole life, universal life, and variable universal life, and total paid premium for indexed universal life. We exclude company-sponsored internal exchanges, corporate-owned life insurance, bank-owned life insurance, and private placement variable universal life. Living benefits Optional benefits (available at an additional cost) that guarantee that the owner will get back at least his original investment when the money is withdrawn. Mortality and expense risk fees (“M&E Fees”) Fees charged by insurance companies to compensate for the risk they take by issuing variable annuity contracts. Net flows Net change in customer account balances in a period including, but not limited to, new sales, full or partial exits and the net impact of clients utilizing or withdrawing their funds. It excludes the impact of markets on account balances. Period certain annuity An annuity that guarantees payment to the annuitant for a specified period of time and to the beneficiary if the annuitant dies before the period ends. Policyholder account balances Annuities: Policyholder account balances are held for fixed deferred annuities, the fixed account portion of variable annuities, and non-life contingent income annuities. Interest is credited to the policyholder’s account at interest rates we determine which are influenced by current market rates, subject to specified minimums. Life Insurance Policies: Policyholder account balances are held for retained asset accounts, universal life policies and the fixed account of universal variable life insurance policies. Interest is credited to the policyholder’s account at interest rates we determine which are influenced by current market rates, subject to specified minimums. Rider An optional feature or benefit that a variable annuity contract holder can purchase at an additional cost. Roll-up rate The guaranteed percentage that the Benefit Base increases by each year. Separate account An insurance company account, legally segregated from the general account, that holds the contract assets or subaccount investments that can be actively or passively managed and invest in stock, bonds or money market portfolios. Step-up An optional variable annuity feature (available at an additional cost) that can increase the Benefit Base amount if the variable annuity account value is higher than the Benefit Base on specified dates. Surrender charge A fee paid by a contract owner for the early withdrawal of an amount that exceeds a specific percentage or for cancellation of the contract within a specified amount of time after purchase. Term life Life insurance that provides a fixed death benefit in exchange for a guaranteed level premium over a specified period of time, usually ten to thirty years. Generally, term life insurance does not include any cash value, savings or investment components. Universal life Life insurance that provides a death benefit in return for payment of specified annual policy charges that are generally related to specific costs, which may change over time. To the extent that the policyholder chooses to pay more than the charges required in any given year to keep the policy in-force, the excess premium will be placed into the account value of the policy and credited with a stated interest rate on a monthly basis. Variable annuity An annuity that offers guaranteed periodic payments for a specified period of time or for a lifetime and gives owners the ability to invest in various markets though the underlying investment options, which may result in potentially higher, but variable, returns. 117 Table of Contents Variable universal life Universal life insurance where the excess amount paid over policy charges can be directed by the policyholder into a variety of separate account investment options. In the separate account investment options, the policyholder bears the entire risk and returns of the investment results. Whole life Life insurance that provides a guaranteed death benefit in exchange for a guaranteed level premium for a specified period of time in order to maintain coverage for the life of the insured. Whole life products also have guaranteed minimum cash surrender values. Although the primary purpose is protection, the policyholder can withdraw or borrow against the policy (sometimes on a tax favored basis).