What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-06 compared with 2021-05-10 · 384 added, 166 removed, 990 unchanged (36% of the section changed)

18 unchanged sentences

Securities and Exchange Commission (“SEC”) on February 24, 2021 (the “2020 Annual Report”);

and (iii) our current reports on Form 8-K filed in 2021.

(iii) our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 (the “First Quarter Form 10-Q”) filed with the SEC on May 10, 2021;

and (iv) our current reports on Form 8-K filed in 2021.

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.

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Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

(In millions)

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Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends

$ 539 $ 14 $ 1,002 $ 258

Provision for income tax expense (benefit) 104 3 182 36

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(1) We use the term “net income (loss) available to shareholders” to refer to “net income (loss) available to Brighthouse Financial, Inc.’s common shareholders” throughout the results of operations discussions.

For the three months ended March 31, 2021, we had a net loss available to shareholders of $610 million and adjusted earnings of $385 million compared to net income available to shareholders of $5.0 billion and adjusted earnings of $211 million for the three months ended March 31, 2020.

The net loss available to shareholders for the three months ended March 31, 2021 primarily reflects net unfavorable changes in the estimated fair value of our derivatives due to market factors.

Higher interest rates and higher equity markets resulted in unfavorable changes to the freestanding derivatives that hedge our variable annuity business, which were partially offset by the favorable impact to the variable annuity embedded derivative liabilities.

Higher equity markets also unfavorably impacted the estimated fair value of the embedded derivative liabilities associated with Shield Level Annuities (“Shield”), which are referred to herein as “Shield liabilities.” In addition, the impact of narrowing credit spreads resulted in an unfavorable adjustment for non-performance risk related to the variable annuity embedded derivative liabilities.

Higher long-term interest rates resulted in unfavorable changes in the estimated fair value of freestanding interest-rate derivatives that we use to hedge our universal life with secondary guarantees (“ULSG”) business.

For the three months ended June 30, 2021, we had net income available to shareholders of $10 million and adjusted earnings of $435 million compared to a net loss available to shareholders of $2.0 billion and adjusted earnings of $11 million for the three months ended June 30, 2020.

Net income available to shareholders for the three months ended June 30, 2021 primarily reflects a favorable impact from pre-tax adjusted earnings.

Additionally, decreasing long-term interest rates resulted in favorable changes in the estimated fair value of freestanding interest rate derivatives we use to hedge our universal life with secondary guarantees (“ULSG”) business.

These favorable impacts were partially offset by net unfavorable changes in the estimated fair value of our guaranteed minimum living benefits (“GMLB”) riders (“GMLB Riders”) due to market factors.

Favorable equity markets and lower interest rates resulted in net unfavorable changes in variable annuity embedded derivative liabilities and the freestanding derivatives that hedge our variable annuity business.

Favorable equity markets also unfavorably impacted the estimated fair value of the embedded derivative liabilities associated with Shield Level Annuities (“Shield”), which are referred to herein as “Shield liabilities.” In addition, the impact of widening credit spreads resulted in a favorable adjustment for non-performance risk related to variable annuity embedded derivative liabilities.

For the six months ended June 30, 2021, we had a net loss available to shareholders of $600 million and adjusted earnings of $820 million compared to net income available to shareholders of $3.0 billion and adjusted earnings of $222 million for the six months ended June 30, 2020.

Net loss available to shareholders for the six months ended June 30, 2021 primarily reflects net unfavorable changes in the estimated fair value of our GMLB Riders due to market factors.

Favorable equity markets and higher interest rates resulted in unfavorable changes to the freestanding derivatives that hedge our variable annuity business, net of favorable impacts to the underlying embedded derivative liabilities.

Favorable equity markets also unfavorably impacted the estimated fair value of Shield liabilities.

GMLB Riders were also unfavorably impacted by the adjustment for non-performance risk resulting from narrowing credit spreads.

Increasing long-term interest rates resulted in unfavorable changes in the estimated fair value of freestanding interest rate derivatives we use to hedge our ULSG business.

These unfavorable impacts were partially offset by favorable pre-tax adjusted earnings.

See “— Non-GAAP and Other Financial Disclosures.” For a detailed discussion of our results, see “— Results of Operations.”

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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.

Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends and Uncertainties” included in our 2020 Annual Report for a comprehensive discussion of some of the key general trends and uncertainties that have influenced the development of our business and our historical financial performance and that we believe will continue to influence our business and results of operations in the future.

operations in the future.

In addition, significant changes or updates in certain of these trends and uncertainties are discussed below.

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It is likewise not possible to predict or estimate the longer-term effects of the pandemic, or any actions taken to contain or address the pandemic, on the economy at large and on our business, financial condition, results of operations and prospects, including the impact on our investment portfolio and our ratings, or the need for us in the future to revisit or revise aspects of our business model or targets previously provided to the markets.

of Financial Condition and Results of Operations — Industry Trends — COVID-19 Pandemic” included in our 2020 Annual Report, as well as “— Investments — Current Environment — Selected Sector Investments,” “— Investments — Mortgage Loans — Loan Modifications Related to the COVID-19 Pandemic” and Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements.

See “Business — Regulation,” “Risk Factors — Risks Related to Our Business — The ongoing COVID-19 pandemic could materially adversely affect our business, financial condition and results of operations, including our capitalization and liquidity” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends — COVID-19 Pandemic” included in our 2020 Annual Report, as well as “— Investments — Current Environment — Selected Sector Investments,” “— Investments — Mortgage Loans — Loan Modifications Related to the COVID-19 Pandemic” and Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements.

Regulatory Developments

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Furthermore, some of our operations, products and services are subject to the Employee Retirement Income Security Act of 1974, consumer protection laws, securities, broker-dealer and investment advisor regulations, as well as environmental and unclaimed property laws and regulations.

See “Business — Regulation,” as well as “Risk Factors — Regulatory and Legal Risks” included in our 2020 Annual Report, as may be amended or supplemented by our subsequent Quarterly Reports under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends — Regulatory Developments.”

See “Business — Regulation,” as well as “Risk Factors — Regulatory and Legal Risks” included in our 2020 Annual Report, as amended or supplemented herein.

Surplus and Capital;

Risk-Based Capital

The National Association of Insurance Commissioners (“NAIC”) is an organization whose mission is to assist state insurance regulatory authorities in serving the public interest and achieving the insurance regulatory goals of its members, the state insurance regulatory officials.

Through the NAIC, state insurance regulators establish standards and best practices, conduct peer reviews, and coordinate their regulatory oversight.

The NAIC provides standardized insurance industry accounting and reporting guidance through its Accounting Practices and Procedures Manual (the “Manual”), which states have largely adopted by regulation.

However, statutory accounting principles continue to be established by individual state laws, regulations and permitted practices, which may differ from the Manual.

Changes to the Manual or modifications by the various states may impact our statutory capital and surplus.

The NAIC has established regulations that provide minimum capitalization requirements based on risk-based capital (“RBC”) formulas for insurance companies.

Insurers are required to maintain their capital and surplus at or above minimum levels.

Regulators have discretionary authority, in connection with the continued licensing of an insurer, to limit or prohibit the insurer’s sales to policyholders if, in their judgment, the regulators determine that such insurer has not maintained the minimum surplus or capital or that the further transaction of business will be hazardous to policyholders.

Each of our insurance subsidiaries is subject to RBC requirements and other minimum statutory capital and surplus requirements imposed under the laws of its respective jurisdiction of domicile.

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 and is calculated on an annual basis.

The major categories of risk involved are asset risk, insurance risk, interest rate risk, market risk and business risk, including equity, interest rate and expense recovery risks associated with variable annuities that contain guaranteed minimum death and living benefits.

The RBC framework is used as an early warning regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally.

State insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose total adjusted capital (“TAC”) does not meet or exceed certain RBC levels.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and “Risk Factors — Regulatory and Legal Risks — A decrease in the RBC ratio (as a result of a reduction in statutory surplus or increase in RBC requirements) of our insurance subsidiaries could result in increased scrutiny by insurance regulators and rating agencies and could have a material adverse effect on

our financial condition and results of operations” and Note 10 of the Notes to the Consolidated Financial Statements in our 2020 Annual Report.

In June 2021, the NAIC adopted changes to the RBC factors for bonds and real estate and created a new set of RBC charges for longevity risk.

These changes will become effective on December 31, 2021.

The modified bond and real estate factors, in the aggregate, are expected to have a minimal impact on our RBC ratios.

In December 2020, the NAIC adopted a group capital calculation tool that uses an RBC aggregation methodology for all entities within an insurance holding company system.

The NAIC has stated that the calculation will be a tool to assist regulators in assessing group risks and capital adequacy and does not constitute a minimum capital requirement or standard, however, there is no guarantee that will be the case in the future.

It is unclear how the group capital calculation will interact with existing capital requirements for insurance companies in the United States.

In August 2018, the NAIC adopted the framework for variable annuity reserve and capital reform (“VA Reform”).

The revisions, which have resulted in substantial changes in reserves, statutory surplus and capital requirements, are designed to mitigate the incentive for insurers to engage in captive reinsurance transactions by making improvements to Actuarial Guideline 43 and the Life Risk Based Capital C3 Phase II capital requirements.

VA Reform is intended to (i) mitigate the asset-liability accounting mismatch between hedge instruments and statutory instruments and statutory liabilities, (ii) remove the non-economic volatility in statutory capital charges and the resulting solvency ratios and (iii) facilitate greater harmonization across insurers and their products for greater comparability.

VA Reform became effective as of January 1, 2020, with early adoption permitted as of December 31, 2019.

Brighthouse elected to early adopt the changes effective December 31, 2019.

Further changes to this framework, including changes resulting from work currently underway by the NAIC to find a suitable replacement for the Economic Scenario Generators developed by the American Academy of Actuaries, could negatively impact our statutory surplus and required capital.

See “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” included in our 2020 Annual Report.

Summary of Critical Accounting Estimates

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Results of Operations

Consolidated Results for the Three Months Ended March 31, 2021 and 2020

Consolidated Results for the Three Months and Six Months Ended June 30, 2021 and 2020

Unless otherwise noted, all amounts in the following discussions of our results of operations are stated before income tax except for adjusted earnings, which are presented net of income tax.

Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

(In millions)

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Net income (loss) attributable to Brighthouse Financial, Inc.

31 (1,991) (554) 2,966

Preferred stock dividends 21 7 46 14

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Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

(In millions)

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Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends

539 14 1,002 258

Income (loss) available to shareholders before provision for income tax — (2,529) (795) 3,714

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$ 10 $ (1,998) $ (600) $ 2,952

Three Months Ended March 31, 2021 Compared with the Three Months Ended March 31, 2020

Loss available to shareholders before provision for income tax was $795 million ($610 million, net of income tax), a decrease of $7.0 billion ($5.6 billion, net of income tax) from income before provision for income tax of $6.2 billion ($5.0 billion, net of income tax) in the prior period.

Three Months Ended June 30, 2021 Compared with the Three Months Ended June 30, 2020

Income available to shareholders before provision for income tax was $0 ($10 million, net of income tax), an increase of $2.5 billion ($2.0 billion, net of income tax) from a loss available to shareholders before provision for income tax of $2.5 billion ($2.0 billion, net of income tax) in the prior period.

The increase in income before provision for income tax was driven by the following favorable items:

• lower losses from GMLB Riders, see “— GMLB Riders for the Three Months and Six Months Ended June 30, 2021 and 2020”;

• current period gains on interest rate derivatives used to manage interest rate exposure in our ULSG business due to the decrease in the long-term benchmark interest rate;

• higher pre-tax adjusted earnings, as discussed in greater detail below.

The increase in income before provision for income tax was partially offset by lower policyholder benefits and claims, included in other adjustments, resulting from the adjustment for market performance related to participating products in our Run-off segment.

The provision for income tax, expressed as a percentage of income (loss) before provision for income tax, resulted in an effective tax rate of 48% in the current period compared to 21% in the prior period.

The increase in the effective tax rate is driven by higher pre-tax adjusted earnings, as discussed in greater detail below.

Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deduction and tax credits.

Six Months Ended June 30, 2021 Compared with the Six Months Ended June 30, 2020

Loss available to shareholders before provision for income tax was $795 million ($600 million, net of income tax), a decrease of $4.5 billion ($3.6 billion, net of income tax) from income available to shareholders before provision for income tax of $3.7 billion ($3.0 billion, net of income tax) in the prior period.

The decrease in income before provision for income tax was driven by the following unfavorable items:

• losses from guaranteed minimum living benefits (“GMLB”) riders (“GMLB Riders”), see “— GMLB Riders for the Three Months Ended March 31, 2021 and 2020”;

• current period losses on interest rate derivatives that we use to hedge our ULSG business due to the increase in the benchmark long-term interest rate, which unfavorably impacted bond forwards and interest rate swaps.

• losses from GMLB Riders in the current period compared to gains in the prior period, see “— GMLB Riders for the Three Months and Six Months Ended June 30, 2021 and 2020”;

• current period losses on interest rate derivatives used to manage interest rate exposure in our ULSG business due to the decrease in the long-term benchmark interest rate.

The decrease in income before provision for income tax was partially offset by the following favorable items:

• higher pre-tax adjusted earnings, discussed in greater detail below;

• higher pre-tax adjusted earnings, as discussed in greater detail below;

• lower policyholder benefits and claims, included in other adjustments, resulting from the adjustment for market performance related to participating products in our Run-off segment;

• higher net investment gains (losses) reflecting:

◦ lower current period mark-to-market losses on equity securities;

◦ lower current period write-downs on fixed maturity securities;

◦ net gains due to a release in mortgage loan reserves in the current period compared to an increase in reserves in the prior period;

◦ higher gains on sales of fixed maturity securities.

• lower net investment losses reflecting:

◦ lower current period net losses on changes in mortgage loans and fixed maturity security reserves;

◦ current period net mark-to-market gains on equity securities compared to prior period net losses.

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 21% in the prior period.

The increase in the effective tax rate in the current period is driven by higher pre-tax adjusted earnings, discussed in greater detail below.

The increase in the effective tax rate is driven by higher pre-tax adjusted earnings, as discussed in greater detail below.

Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deduction and tax credits.

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The reconciliation of net income (loss) available to shareholders to adjusted earnings was as follows:

Three Months Ended March 31, 2021

Three Months Ended June 30, 2021

Annuities Life Run-off Corporate & Other Total

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Adjusted earnings $ 338 $ 68 $ 122 $ (93) $ 435

Three Months Ended March 31, 2020

Three Months Ended June 30, 2020

Annuities Life Run-off Corporate & Other Total

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Adjusted earnings $ 171 $ 48 $ (115) $ (93) $ 11

Consolidated Results for the Three Months Ended March 31, 2021 and 2020 — Adjusted Earnings

Six Months Ended June 30, 2021

Annuities Life Run-off Corporate & Other Total

(In millions)

Net income (loss) available to shareholders $ (585) $ 106 $ 61 $ (182) $ (600)

Provision for income tax expense (benefit) 157 27 (314) (65) (195)

Income (loss) available to shareholders before provision for income tax

(428) 133 (253) (247) (795)

GMLB Riders (1,286) — — — (1,286)

Other derivative instruments 42 2 (557) — (513)

Net investment gains (losses) (24) (5) 65 (56) (20)

Other adjustments 9 (1) 14 — 22

Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends

831 137 225 (191) 1,002

Provision for income tax expense (benefit) 157 27 27 (29) 182

Adjusted earnings $ 674 $ 110 $ 198 $ (162) $ 820

Six Months Ended June 30, 2020

Annuities Life Run-off Corporate & Other Total

(In millions)

Net income (loss) available to shareholders $ 2,465 $ 1 $ 1,221 $ (735) $ 2,952

Provision for income tax expense (benefit) 107 14 116 525 762

Income (loss) available to shareholders before provision for income tax

2,572 15 1,337 (210) 3,714

GMLB Riders 1,906 — — — 1,906

Other derivative instruments 126 (60) 1,571 (1) 1,636

Net investment gains (losses) (40) 2 21 (36) (53)

Other adjustments (14) — (19) — (33)

Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends

594 73 (236) (173) 258

Provision for income tax expense (benefit) 107 14 (51) (34) 36

Adjusted earnings $ 487 $ 59 $ (185) $ (139) $ 222

Consolidated Results for the Three Months and Six Months Ended June 30, 2021 and 2020 — Adjusted Earnings

The components of adjusted earnings were as follows:

Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

(In millions)

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Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends

539 14 1,002 258

Provision for income tax expense (benefit) 104 3 182 36

Adjusted earnings $ 435 $ 11 $ 820 $ 222

Three Months Ended March 31, 2021 Compared with the Three Months Ended March 31, 2020

Three Months Ended June 30, 2021 Compared with the Three Months Ended June 30, 2020

Adjusted earnings were $435 million, an increase of $424 million.

Key net favorable impacts were:

• higher net investment spread due to:

• higher net investment spread reflecting:

◦ higher returns on other limited partnerships for the comparative measurement period;

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partially offset by

◦ higher interest credited to policyholders in our Life segment due to higher imputed interest on insurance liabilities;

◦ lower investment yields on our fixed income portfolio, as proceeds from maturing investments and the growth in the investment portfolio were invested at lower yields than the portfolio average;

• higher fee income due to:

◦ higher interest credited to policyholders due to higher imputed interest on insurance liabilities related to modeling improvements resulting from an actuarial system conversion in our Life segment in the fourth quarter of 2020;

• higher asset-based fees resulting from higher average separate account balances, a portion of which is offset in other expenses;

◦ lower paid claims, net of reinsurance in our Life segment;

• lower net costs associated with insurance-related activities due to:

◦ lower income annuity benefit payments and a decrease in guaranteed minimum death benefits (“GMDB”) liabilities resulting from favorable equity market performance;

• lower net amortization of DAC and VOBA due to the impact on gross profits from less favorable equity markets in our Annuities segment and lower separate account returns in our Life segment.

Key net unfavorable impacts were:

• higher net costs associated with insurance-related activities due to:

◦ higher paid claims, net of reinsurance, in our Run-off and Life segments;

partially offset by

◦ lower underwriting margin in our Run-off segment;

◦ an increase in GMDB death claims.

◦ lower income annuity benefit payments and a decrease in guaranteed minimum death benefit (“GMDB”) liabilities resulting from less favorable equity market performance;

• higher other expenses due to:

◦ higher asset-based variable annuity expenses resulting from lower average separate account balances, a portion of which are offset in fee income;

◦ a one-time credit in the prior period from the exit of various transition services agreements with MetLife;

◦ underwriting fees associated with funding agreements issued in connection with our institutional spread margin business;

partially offset by

◦ lower legal reserves;

◦ lower establishment costs;

• the timing of our preferred stock dividend payments.

The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 19% in the current period compared to 21% 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.

Six Months Ended June 30, 2021 Compared with the Six Months Ended June 30, 2020

Adjusted earnings were $820 million, an increase of $598 million.

Key net favorable impacts were:

• higher net investment spread due to:

◦ higher returns on other limited partnerships for the comparative measurement period;

◦ higher average invested assets resulting from positive net flows in the general account;

partially offset by

◦ lower investment yields on our fixed income portfolio, as proceeds from maturing investments and the growth in the investment portfolio were invested at lower yields than the portfolio average;

• higher asset-based fees resulting from higher average separate account balances, a portion of which is offset in other expenses.

Key net unfavorable impacts were:

• higher net amortization of DAC and VOBA in our Annuities segment;

• higher net costs associated with insurance-related activities due to:

◦ higher paid claims, net of reinsurance, in our Run-off and Life segments;

partially offset by

◦ a decrease in GMDB liabilities resulting from favorable equity market performance and lower income annuity benefit payments;

• higher other expenses due to:

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◦ lower expenses resulting from the exit of various transition services agreements with MetLife;

• higher net amortization of DAC and VOBA in our Annuities segment;

• the timing of our preferred stock dividend payments.

The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 17% in the current period compared to 14% in the prior period.

Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deduction and tax credits.

Segments and Corporate & Other Results for the Three Months Ended March 31, 2021 and 2020 — Adjusted Earnings

Segments and Corporate & Other Results for the Three Months and Six Months Ended June 30, 2021 and 2020 — Adjusted Earnings

The components of adjusted earnings for our Annuities segment were as follows:

Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

(In millions)

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The changes in our variable annuities separate account balances are presented in the table below.

Variable annuities separate account balances increased for the three months ended March 31, 2021 driven by positive equity market performance, partially offset by negative net flows and policy charges.

Three Months Ended March 31, 2021 (1)

Variable annuities separate account balances increased for the three months and the six months ended June 30, 2021 driven by favorable equity market performance, partially offset by negative net flows and policy charges.

Three Months Ended June 30, 2021 (1)

Six Months Ended June 30, 2021 (1)

(In millions)

Balance, beginning of period $ 103,539 $ 103,450

Deposits 552 1,056

Withdrawals, surrenders and benefits (2,588) (5,053)

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_______________

(1) Includes income annuities for which separate account balances at March 31, 2021 were $141 million.

Three Months Ended March 31, 2021 Compared with the Three Months Ended March 31, 2020

(1) Includes income annuities for which separate account balances at June 30, 2021 were $149 million.

Three Months Ended June 30, 2021 Compared with the Three Months Ended June 30, 2020

Adjusted earnings were $338 million for the current period, an increase of $167 million.

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• higher net investment spread due to:

◦ higher returns on other limited partnerships for the comparative measurement period;

◦ higher average invested assets resulting from positive net flows in the general account;

partially offset by

◦ lower investment yields on our fixed income portfolio, as proceeds from maturing investments and the growth in the investment portfolio were invested at lower yields than the portfolio average;

• higher asset-based fees resulting from lower average separate account balances, a portion of which is offset in other expenses;

• lower amortization of DAC and VOBA driven by the net decrease in future gross profits from less favorable equity markets;

• lower costs associated with insurance-related activities due to:

◦ a decrease in GMDB death claims;

◦ a decrease in GMDB liabilities resulting from favorable equity market performance.

Key net unfavorable impacts were:

• higher other expenses due to:

◦ higher asset-based variable annuity expenses resulting from higher average separate account balances, a portion of which are offset in fee income;

partially offset by

◦ a one-time credit in the prior period from 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 17% in the prior period.

Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deduction.

Six Months Ended June 30, 2021 Compared with the Six Months Ended June 30, 2020

Adjusted earnings were $674 million for the current period, an increase of $187 million.

Key net favorable impacts were:

• higher net investment spread due to:

◦ higher returns on other limited partnerships for the comparative measurement period;

◦ higher average invested assets resulting from positive net flows in the general account;

partially offset by

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• higher asset-based fees resulting from higher average separate account balances, a portion of which is offset in other expenses;

• lower net costs associated with insurance-related activities due to:

◦ lower income annuity benefit payments and a decrease in GMDB liabilities resulting from favorable equity market performance;

partially offset by

◦ an increase in GMDB death claims.

Key net unfavorable impacts were:

• higher amortization of DAC and VOBA as the increase in equity market performance compared to the prior period resulted in an unfavorable change in our Shield business, which more than offset the favorable change in our variable annuity business;

• lower costs associated with insurance-related activities due to a decrease in GMDB liabilities and deferred sales inducements (“DSI”) resulting from favorable equity market performance.

Key unfavorable impacts were:

• higher other expenses due to:

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◦ higher deferred compensation expenses;

partially offset by

◦ lower establishment costs related to planned technology expenses;

◦ lower expenses resulting from 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 both the current and prior periods.

• higher amortization of DAC and VOBA driven by the net decrease in future gross profits from favorable equity market performance.

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 18% in the prior period.

Our effective tax rate differs from the statutory tax rate primarily due to the impact of the dividends received deduction.

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Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

(In millions)

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Adjusted earnings $ 68 $ 48 $ 110 $ 59

Three Months Ended March 31, 2021 Compared with the Three Months Ended March 31, 2020

Three Months Ended June 30, 2021 Compared with the Three Months Ended June 30, 2020

Adjusted earnings were $68 million for the current period, an increase of $20 million.

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partially offset by

◦ higher interest credited to policyholders due to higher imputed interest on insurance liabilities;

• higher fee income due to lower paid claims, net of reinsurance;

• lower amortization of DAC and VOBA due to:

◦ the impact on gross profits from higher separate account returns;

Key unfavorable impacts were:

• higher costs associated with insurance-related activities due to higher paid claims, net of reinsurance;

• higher net amortization of DAC and VOBA due to the impact on gross profits from lower separate account returns.

The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 20% in both the current period and prior periods.

Our effective tax rate differs from the statutory tax rate primarily due to the impact of the dividends received deduction.

Six Months Ended June 30, 2021 Compared with the Six Months Ended June 30, 2020

Adjusted earnings were $110 million for the current period, an increase of $51 million.

Key net favorable impacts were:

• higher net investment spread due to:

◦ higher returns on other limited partnerships for the comparative measurement period;

partially offset by

◦ an adjustment in the current period related to modeling improvements resulting from an actuarial system conversion.

The increase in adjusted earnings was partially offset by higher other expenses driven by higher deferred compensation expenses.

• higher fee income due to an adjustment in the current period related to modeling improvements resulting from an actuarial system conversion;

Key unfavorable impacts were:

• higher costs associated with insurance-related activities due to higher paid claims, net of reinsurance;

• higher other expenses due to higher deferred compensation expenses.

The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 20% in the current period compared to 19% in the prior period.

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Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

(In millions)

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Adjusted earnings $ 122 $ (115) $ 198 $ (185)

Three Months Ended March 31, 2021 Compared with the Three Months Ended March 31, 2020

Three Months Ended June 30, 2021 Compared with the Three Months Ended June 30, 2020

Adjusted earnings were $122 million for the current period, an increase of $237 million.

The increase in adjusted earnings was driven by higher net investment spread due to higher returns on other limited partnerships for the comparative measurement period.

The increase in adjusted earnings was partially offset by higher costs associated with insurance-related activities driven by lower underwriting margin.

The increase in adjusted earnings was driven by higher net investment spread due to higher returns on other limited partnerships for the comparative measurement period, partially offset by higher costs associated with insurance-related activities driven by an increase in paid claims, net of reinsurance.

The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 13% in the current period compared to 21% 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.

Our effective tax rate differs from the statutory tax rate primarily due to the impact of the dividends received deduction.

Six Months Ended June 30, 2021 Compared with the Six Months Ended June 30, 2020

Adjusted earnings were $198 million for the current period, an increase of $383 million.

The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 12% in the current period compared to 22% in the prior period.

Our effective tax rate differs from the statutory tax rate primarily due to the impact of the dividends received deduction.

Corporate & Other

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Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

(In millions)

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Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends

(103) (105) (191) (173)

Provision for income tax expense (benefit) (10) (12) (29) (34)

Adjusted earnings $ (93) $ (93) $ (162) $ (139)

Three Months Ended March 31, 2021 Compared with the Three Months Ended March 31, 2020

Adjusted earnings were a loss of $69 million, a higher loss of $23 million from the prior period.

Key unfavorable impacts were:

• timing of our preferred stock dividend payments;

• lower net investment spread due to lower returns from short-term investments.

Three Months Ended June 30, 2021 Compared with the Three Months Ended June 30, 2020

Adjusted earnings were a loss of $93 million for the current period.

There was no change in adjusted earnings.

Lower expenses from a decline in establishment costs, lower legal reserves and lower media spend, were partially offset by underwriting fees associated with funding agreements issued in connection with our institutional spread margin business and the timing of our preferred stock dividend payments.

The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 12% in the current period compared to 11% in the prior period.

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We believe the effective tax rate for Corporate & Other is not generally meaningful, neither on a standalone basis nor for comparison to prior periods, since taxes for Corporate & Other are derived from the difference between the overall consolidated effective tax rate and total taxes for the combined operating segments.

GMLB Riders for the Three Months Ended March 31, 2021 and 2020

Six Months Ended June 30, 2021 Compared with the Six Months Ended June 30, 2020

Adjusted earnings were a loss of $162 million, a higher loss of $23 million from the prior period.

Key net unfavorable impacts were:

• the timing of our preferred stock dividend payments;

• lower net investment spread due to:

◦ lower returns from short-term investments;

◦ 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 returns on other limited partnerships for the comparative measurement period;

◦ higher average invested long-term assets from funding agreements issued in connection with our institutional spread margin business.

The increase in adjusted earnings was partially offset by lower expenses due to lower establishment costs and lower legal reserves.

The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 20% 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.

GMLB Riders for the Three Months and Six Months Ended June 30, 2021 and 2020

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:

Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

(In millions)

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(1) Excludes living benefit fees, included as a component of adjusted earnings, of $14 million for both the three months ended March 31, 2021 and 2020.

Three Months Ended March 31, 2021 Compared with the Three Months Ended March 31, 2020

(1) Excludes living benefit fees, included as a component of adjusted earnings, of $15 million for both the three months ended June 30, 2021 and 2020 and $29 million for both the six months ended June 30, 2021 and 2020.

Three Months Ended June 30, 2021 Compared with the Three Months Ended June 30, 2020

Comparative results from GMLB Riders were favorable by $1.5 billion, primarily driven by:

• favorable changes in our GMLB hedges;

• favorable changes to the estimated fair value of Shield liabilities;

partially offset by

• unfavorable changes to the estimated fair value of variable annuity liability reserves;

• unfavorable changes in GMLB DAC.

Less favorable equity markets resulted in the following impacts:

• favorable changes in our GMLB hedges;

• favorable changes to the estimated fair value of Shield liabilities;

• favorable changes to GMLB DAC;

partially offset by

• unfavorable changes to the estimated fair value of variable annuity liability reserves.

Higher interest rates resulted in the following impacts:

• unfavorable changes to the estimated fair value of variable annuity liability reserves;

• unfavorable changes to the estimated fair value of Shield liabilities;

partially offset by

• favorable changes in our GMLB hedges;

• favorable changes to GMLB DAC.

The widening of our credit default swap spreads combined with an increase in the underlying variable annuity liability reserves resulted in a favorable change in the adjustment for nonperformance risk, net of an unfavorable change in GMLB DAC.

Six Months Ended June 30, 2021 Compared with the Six Months Ended June 30, 2020

Comparative results from GMLB Riders were unfavorable by $3.2 billion, primarily driven by:

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• unfavorable changes to the estimated fair value of Shield liabilities;

• unfavorable changes to the estimated fair value of our GMLB hedges;

• unfavorable changes in our GMLB hedges;

• unfavorable changes in ceded reinsurance;

partially offset by

• favorable changes to the estimated fair value of the variable annuity liability reserves;

• favorable changes to the estimated fair value of variable annuity liability reserves;

• favorable changes to GMLB DAC.

Higher interest rates resulted in the following impacts:

• unfavorable changes to the estimated fair value of our GMLB hedges;

• unfavorable changes in our GMLB hedges;

• unfavorable changes to GMLB DAC;

• unfavorable changes in ceded reinsurance;

• unfavorable changes to the estimated fair value of Shield liabilities;

partially offset by

• favorable changes to the estimated fair value of the variable annuity liability reserves.

The narrowing of our credit default swap spreads combined with a larger decrease in the underlying variable annuity liability reserves resulted in an unfavorable change in the adjustment for nonperformance risk, net of a favorable change in GMLB DAC.

• favorable changes to the estimated fair value of variable annuity liability reserves.

The narrowing of our credit default swap spreads combined with a decrease in the underlying variable annuity liability reserves resulted in an unfavorable change in the adjustment for nonperformance risk, net of a favorable change in GMLB DAC.

Investment Risks

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• interest rate risk, relating to the market price and cash flow variability associated with changes in market interest rates.

Changes in market interest rates will impact the net unrealized gain or loss position of our fixed income investment portfolio and the rates of return we receive on both new funds invested and reinvestment of existing funds;

Changes in market interest rates will impact the net unrealized gain or loss position of our fixed income

investment portfolio and the rates of return we receive on both new funds invested and reinvestment of existing funds;

• market valuation risk, relating to the variability in the estimated fair value of investments associated with changes in market factors such as credit spreads and equity market levels.

A widening of credit spreads will adversely impact the net unrealized gain (loss) position of the fixed income investment portfolio and will increase losses associated with credit-based non-qualifying derivatives where we assume credit exposure.

Credit spread tightening will reduce

net investment income associated with new purchases of fixed maturity securities and will favorably impact the net unrealized gain (loss) position of the fixed income investment portfolio;

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;

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We maintain a diversified energy sector fixed maturity securities portfolio across sub-sectors and issuers.

Our exposure to energy sector fixed maturity securities was $3.0 billion, of which 90% were investment grade, with net unrealized gains (losses) of $219 million at March 31, 2021.

Our exposure to

energy sector fixed maturity securities was $3.2 billion, of which 90% were investment grade, with net unrealized gains (losses) of $333 million at June 30, 2021.

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 $1.8 billion, of which 96% were investment grade, with net unrealized gains (losses) of $129 million at March 31, 2021.

Our exposure to retail sector corporate fixed maturity securities was $1.9 billion, of which 96% were investment grade, with net unrealized gains (losses) of $211 million at June 30, 2021.

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.

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Three Months Ended

Yield % Amount Yield % Amount

June 30, Six Months Ended

2021 2020 2021 2020

Yield % Amount Yield % Amount Yield % Amount Yield % Amount

(Dollars in millions)

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Three Months Ended

June 30, Six Months Ended

2021 2020 2021 2020

(In millions)

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Adjusted net investment income — in the above yield table $ 1,217 $ 656 $ 2,409 $ 1,576

See “— Results of Operations — Consolidated Results for the Three Months Ended March 31, 2021 and 2020 for an analysis of the period over period changes in net investment income.

See “— Results of Operations — Consolidated Results for the Three Months and Six Months Ended June 30, 2021 and 2020 for an analysis of the period over period changes in net investment income.

Fixed Maturity Securities Available-for-sale

Fixed maturity securities held by type (public or private) were as follows at:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Fair Value % of

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Fixed Maturity Securities Credit Quality — Ratings

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Investments — Fixed Maturity Securities AFS — Fixed Maturity Securities Credit Quality — Ratings” included in our 2020 Annual Report for a discussion of the credit quality ratings assigned by Nationally Recognized Statistical Rating Organizations (“NRSRO”), credit quality designations assigned by and methodologies used by the Securities Valuation Office of the National Association of Insurance Commissioners (“NAIC”) for fixed maturity securities and the methodologies adopted by the NAIC for certain Structured Securities.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Investments — Fixed Maturity Securities AFS — Fixed Maturity Securities Credit Quality — Ratings” included in our 2020 Annual Report for a discussion of the credit quality ratings assigned by Nationally Recognized Statistical Rating Organizations (“NRSRO”), credit quality designations assigned by and methodologies used by the Securities Valuation Office of the NAIC for fixed maturity securities and the methodologies adopted by the NAIC for certain Structured Securities.

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:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Designation NRSRO Rating Amortized

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(In millions)

March 31, 2021

June 30, 2021

corporate $ 17,586 $ 17,642 $ 1,826 $ 817 $ 46 $ — $ 37,917

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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 both March 31, 2021 and December 31, 2020.

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 both June 30, 2021 and December 31, 2020.

and foreign corporate fixed maturity securities holdings by industry were as follows at:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Fair Value % of

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Structured Securities

We held $17.5 billion and $18.0 billion of Structured Securities, at estimated fair value, at March 31, 2021 and December 31, 2020, respectively, as presented in the RMBS, CMBS and ABS sections below.

We held $19.1 billion and $18.0 billion of Structured Securities, at estimated fair value, at June 30, 2021 and December 31, 2020, respectively, as presented in the RMBS, CMBS and ABS sections below.

Our RMBS holdings are diversified by security type, risk profile and ratings profile, which were as follows at:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Fair Value % of

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Our CMBS holdings are diversified by vintage year, which were as follows at:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value

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Total $ 6,545 $ 6,998 $ 6,207 $ 6,790

The estimated fair value of CMBS rated Aaa using rating agency ratings was $4.8 billion, or 71.4% of total CMBS, and designated NAIC 1 was $6.3 billion, or 94.4% of total CMBS, at March 31, 2021.

The estimated fair value of CMBS rated Aaa using rating agency ratings was $4.9 billion, or 70.0% of total CMBS, and designated NAIC 1 was $6.6 billion, or 93.9% of total CMBS, at June 30, 2021.

The estimated fair value of CMBS Aaa 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.

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Our ABS holdings by collateral type and ratings profile were as follows at:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Fair Value % of

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Information regarding mortgage loans by portfolio segment is summarized as follows at:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Amortized Cost % of

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The percentage of our commercial and agricultural mortgage loan portfolios collateralized by properties located in the U.S.

were 96% at both March 31, 2021 and December 31, 2020.

were 96% at both June 30, 2021 and December 31, 2020.

The remainder was collateralized by properties located outside of the U.S.

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was as follows at:

March 31, 2021

June 30, 2021

California 22%

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All residential mortgage loans were collateralized by properties located in the U.S.

at both March 31, 2021 and December 31, 2020.

at both June 30, 2021 and December 31, 2020.

The carrying value as a percentage of total residential mortgage loans for the top three states in the U.S.

was as follows at:

March 31, 2021

June 30, 2021

California 34%

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The diversification across geographic regions and property types of commercial mortgage loans was as follows at:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Total Amount % of

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Retail 1,954 19.0 2,068 21.3

Hotel 933 9.7 934 9.6

Industrial 1,025 10.0 822 8.5

Hotel 933 9.1 934 9.6

Other 28 0.3 30 0.3

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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 58% and 57% at March 31, 2021 and December 31, 2020, respectively, and our average debt-service coverage ratio was 2.2x and 2.3x at March 31, 2021 and December 31, 2020, respectively.

For our commercial mortgage loans, our average loan-to-value ratio was 58% and 57% at June 30, 2021 and December 31, 2020, respectively, and our average debt-service coverage ratio was 2.3x at both June 30, 2021 and December 31, 2020.

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 49% and 48% at March 31, 2021 and December 31, 2020, respectively.

For our agricultural mortgage loans, our average loan-to-value ratio was 48% at both June 30, 2021 and December 31, 2020.

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.

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A subset of these modifications included short-term principal and interest forbearance.

At March 31, 2021, the recorded investment on mortgage loans where borrowers were offered debt-service forbearance and were not making payments was $250 million, comprised of $155 million commercial mortgage loans, $23 million of agricultural mortgage loans and $72 million of residential mortgage loans.

At June 30, 2021, the recorded investment on mortgage loans where borrowers were offered debt-service forbearance and were not making payments was $205 million, comprised of $102 million commercial mortgage loans, $53 million of agricultural mortgage loans and $50 million of residential mortgage loans.

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.

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Mortgage Loan Allowance for Credit Losses .

See Notes 4 and 6 of the Notes to the Interim Condensed Consolidated Financial Statements for information about how the allowance for credit losses is established and monitored, as well as activity in and balances of the allowance for credit losses for the three months ended March 31, 2021 and 2020.

Limited Partnerships and Limited Liability Companies

The carrying values of our limited partnerships and limited liability companies (“LLCs”) were as follows at:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

(In millions)

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__________________

(1) The estimated fair value of real estate limited partnerships and LLCs was $507 million and $501 million at March 31, 2021 and December 31, 2020, respectively.

(1) The estimated fair value of real estate limited partnerships and LLCs was $528 million and $501 million at June 30, 2021 and December 31, 2020, 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.

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The carrying value of our other invested assets by type was as follows at:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Total Carrying

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$ 2,681 93.6 % $ 3,582 95.6 %

FHLB stock 63 2.2 39 1.1

Tax credit renewable energy partnerships 58 2.0 64 1.7

Leveraged leases, net of non-recourse debt 49 1.7 50 1.3

FHLB Stock 40 1.8 39 1.1

Other 12 0.5 12 0.3

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See Note 5 of the Notes to the Interim Condensed Consolidated Financial Statements:

• Information about the gross notional amount, estimated fair value, and primary underlying risk exposure of our derivatives by type of hedge designation, excluding embedded derivatives held at March 31, 2021 and December 31, 2020.

• The statement of operations effects of derivatives in cash flow, fair value or non-qualifying hedge relationships for the three months ended March 31, 2021 and 2020.

• The statement of operations effects of derivatives in cash flow, fair value or non-qualifying hedge relationships for the three months and six months ended June 30, 2021 and 2020.

See “Business — Segments and Corporate & Other — Annuities,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management Strategies — ULSG Market Risk Exposure Management” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Annual Actuarial Review” included in our 2020 Annual Report for more information about our use of derivatives by major hedging programs.

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The use of different inputs or methodologies could have a material effect on the estimated fair value of Level 3 derivatives and could materially affect net income.

Derivatives categorized as Level 3 at March 31, 2021 include:

Derivatives categorized as Level 3 at June 30, 2021 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.

equity variance swaps with unobservable volatility inputs and foreign currency swaps with certain unobservable inputs.

See Note 5 of the Notes to the Interim Condensed Consolidated Financial Statements for information about how we manage credit risk related to derivatives and for the estimated fair value of our net derivative assets and net derivative liabilities after the application of master netting agreements and collateral.

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The gross notional amount and estimated fair value of credit default swaps were as follows at:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Gross Notional

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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 March 31, 2021 or December 31, 2020.

The amount of this non-cash collateral was $ 7 million at estimated fair value at June 30, 2021.

The Company did not hold non-cash collateral at December 31, 2020.

See Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements, as well as “— Investments — Securities Lending” for discussion of our securities lending program, the classification of revenues and expenses, and the nature of the secured financing arrangement and associated liability.

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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 $70 million and $898 million at March 31, 2021 and December 31, 2020, respectively.

The amount of this non-cash collateral was $448 million and $898 million at June 30, 2021 and December 31, 2020, respectively.

See Note 5 of the Notes to the Interim Condensed 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.

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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 Note 3 of the Notes to the Interim Condensed Consolidated Financial Statements, as well as “— Liquidity and Capital Resources — The Company — Primary Sources of Liquidity and Capital — Funding Sources — Funding Agreements.” A discussion of policyholder account balances by segment, as well as Corporate & Other, can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Policyholder Liabilities” included in our 2020 Annual Report.

See Note 3 of the Notes to the Consolidated Financial Statements included in our 2020 Annual Report.

A discussion of policyholder account balances by segment, as well as Corporate & Other, can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Policyholder Liabilities” included in our 2020 Annual Report.

Policyholder account balances also include amounts associated with funding agreements issued in connection with our institutional spread margin business.

See “— Liquidity and Capital Resources — The Company — Primary Sources of Liquidity and Capital — Funding Sources — Funding Agreements.”

Variable Annuity Guarantees

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The net amount at risk (“NAR”) for the GMIB is the amount (if any) that would be required to be added to the total account value to purchase a lifetime income stream, based on current annuity rates, equal to the minimum amount provided under the guaranteed benefit.

This amount represents our potential economic exposure to such guarantees in the event all contract holders were to annuitize on the balance sheet date, even though the guaranteed amount under the contract may not be annuitized until after the waiting period of the contract.

This amount represents our potential economic exposure to such guarantees in the event all

contract holders were to annuitize on the balance sheet date, even though the guaranteed amount under the contract may not be annuitized until after the waiting period of the contract.

The NAR for the guaranteed minimum accumulation benefits (“GMAB”) and guaranteed minimum withdrawal benefits (“GMWB”) is the amount of guaranteed benefits in excess of the account values (if any) as of the balance sheet date.

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The variable annuity account values and NAR by type of guaranteed minimum benefit were as follows at:

March 31, 2021 (1)

June 30, 2021 (1)

December 31, 2020 (1)

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These liabilities are accounted for using long-term assumptions of equity and bond market returns and the level of interest rates.

Therefore, these liabilities, valued at $6.0 billion at March 31, 2021, are less sensitive than derivative instruments to periodic changes to equity and fixed income market returns and the level of interest rates.

Therefore, these liabilities, valued at $6.0 billion at June 30, 2021, are less sensitive than derivative instruments to periodic changes to equity and fixed income market returns and the level of interest rates.

Guarantees accounted for as insurance liabilities in future policy benefits include GMDBs, the life contingent portion of 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 required to annuitize upon depletion of their account value.

All other variable annuity guarantee features are accounted for as embedded derivatives and reported on the balance sheet in policyholder account balances with changes reported in net derivative gains (losses).

These liabilities, valued at $1.7 billion at March 31, 2021, are accounted for at estimated fair value.

These liabilities, valued at $2.0 billion at June 30, 2021, are accounted for at estimated fair value.

In some cases, a guarantee will have multiple features or options that require separate accounting such that the guarantee is not fully accounted for under only one of the accounting models (known as “split accounting”).

Additionally, the index protection and accumulation features of Shield are accounted for as embedded derivatives and reported on the balance sheet in policyholder account balances with changes reported in net derivative gains (losses).

These liabilities, valued at $4.5 billion at March 31, 2021, are accounted for at estimated fair value.

These liabilities, valued at $5.4 billion at June 30, 2021, are accounted for at estimated fair value.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates” included in our 2020 Annual Report.

The variable annuity reserve balances by guarantee type were as follows at:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Future Policy Benefits Policyholder Account Balances Total Reserves Future Policy Benefits Policyholder Account Balances Total Reserves

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The gross notional amount and estimated fair value of the derivatives held in our macro interest rate hedging program were as follows at:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Instrument Type Gross Notional Amount (1) Estimated Fair Value Gross Notional Amount (1) Estimated Fair Value

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The gross notional amount and estimated fair value of the derivatives 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:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Instrument Type Gross Notional Amount (1) Estimated Fair Value Gross Notional Amount (1) Estimated Fair Value

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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 $3.9 billion and $4.5 billion at March 31, 2021 and December 31, 2020, respectively.

We maintain a substantial short-term liquidity position, which was $3.8 billion and $4.5 billion at June 30, 2021 and December 31, 2020, respectively.

Short-term liquidity is comprised of cash and cash equivalents and short-term investments, excluding assets that are pledged or otherwise committed.

Assets pledged or otherwise committed include amounts received in connection with securities lending, derivatives and assets held on deposit or in trust.

An integral part of our liquidity management includes managing our level of liquid assets, which was $48.9 billion and $52.0 billion at March 31, 2021 and December 31, 2020, respectively.

An integral part of our liquidity management includes managing our level of liquid assets, which was $53.3 billion and $52.0 billion at June 30, 2021 and December 31, 2020, respectively.

Liquid assets are comprised of cash and cash equivalents, short-term investments and publicly-traded securities, excluding assets that are pledged or otherwise committed.

Assets pledged or otherwise committed include amounts received in connection with securities lending, derivatives and assets held on deposit or in trust.

Assets pledged or otherwise committed include amounts received in connection with securities lending, funding agreements, derivatives and assets held on deposit or in trust.

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.

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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 average of the worst two percent of a set of capital market scenarios over the life of the contracts (“CTE98”) level in normal market conditions.

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 average of the worst two percent of a set of capital market scenarios over the life of the contracts (“CTE98”) level in normal market conditions.

We refer to our target level of assets as our Variable Annuity Target Funding Level.

While total assets supporting our variable annuity capital may exceed the CTE98 level, under stressed conditions, we intend to allow such assets supporting our variable annuity contracts to range between a target floor level of CTE95 (the average of the worst five percent of a set of capital market scenarios over the life of the contracts) and CTE98.

Repurchases made under the February 10, 2021 authorization may be made through open market purchases, including pursuant to 10b5-1 plans or pursuant to accelerated stock repurchase plans, or through privately negotiated transactions, from time to time at management’s discretion in accordance with applicable legal requirements.

On February 10, 2021, we authorized the repurchase of up to $200 million of our common stock, which is in addition to the $1.1 billion aggregate stock repurchase authorizations announced in February 2020, May 2019 and August 2018, and on August 2, 2021, we authorized the repurchase of up to an additional $1.0 billion of common stock.

Repurchases made under the February 10, 2021 and August 2, 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.

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Our primary sources and uses of liquidity and capital were as follows at:

Three Months Ended

Six Months Ended

(In millions)

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Changes in payables for collateral under securities loaned and other transactions, net — 3,485

Long-term debt issued — 614

Preferred stock issued, net of issuance costs — 390

Total sources 5,660 8,638

Operating activities, net 104 —

Investing activities, net 4,412 2,125

Changes in payables for collateral under securities loaned and other transactions, net 109 —

Long-term debt repaid 1 1,001

Dividends on preferred stock 46 14

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Funding Agreements

From time to time, Brighthouse Life Insurance Company issues funding agreements and uses the proceeds from such issuances to provide additional liquidity or for spread lending purposes.

From time to time, Brighthouse Life Insurance Company issues funding agreements and uses the proceeds from such issuances for spread lending purposes in connection with our institutional spread margin business or to provide additional liquidity.

The institutional spread margin business is comprised of active funding agreements issued in connection with the programs described in more detail below.

The activity under all such funding agreements is reported in policyholder account balances.

See Note 3 of the Notes to the Consolidated Financial Statements included in our 2020 Annual Report for additional information on funding agreements.

Funding Agreement-Backed Commercial Paper Program

In July 2021, Brighthouse Life Insurance Company established a funding agreement-backed commercial paper program (the “FABCP Program”) for spread lending purposes, pursuant to which a special purpose limited liability company (the “SPLLC”) may issue commercial paper and deposit the proceeds with Brighthouse Life Insurance Company under a funding agreement issued by Brighthouse Life Insurance Company to the SPLLC.

The maximum aggregate principal amount permitted to be outstanding at any one time under the FABCP Program is $3.0 billion.

Activity related to this funding agreement will be reported in Corporate & Other.

Funding Agreement-Backed Notes Program

In April 2021, Brighthouse Life Insurance Company established a funding agreement-backed notes program (the “FABN Program”), pursuant to which Brighthouse Life Insurance Company may issue funding agreements to a special purpose statutory trust (the “Trust”) for spread lending purposes.

The maximum aggregate principal amount permitted to be outstanding at any one time under the FABN Program is $5.0 billion.

On April 12, 2021, Brighthouse Life Insurance Company issued funding agreements to the Trust in an aggregate principal amount of $700 million.

Activity related to these funding agreements will be reported in Corporate & Other.

Activity related to these funding agreements is reported in Corporate & Other.

Federal Home Loan Bank Funding Agreements

Brighthouse Life Insurance Company is a member of the Federal Home Loan Bank (“FHLB”) of Atlanta, where it maintains an active funding agreement program, under which funding agreements may be issued either (i) to provide additional liquidity or (ii) for spread lending purposes.

At both March 31, 2021 and December 31, 2020, there were no obligations outstanding under this funding agreement program and, during both the three months ended March 31, 2021 and 2020, there were no issuances or repayments under this funding agreement program.

On April 19, 2021, Brighthouse Life Insurance Company issued funding agreements to the FHLB of Atlanta for spread lending purposes in an aggregate principal amount of $500 million.

Activity related to these funding agreements will be reported in Corporate & Other.

Brighthouse Life Insurance Company is a member of the Federal Home Loan Bank (“FHLB”) of Atlanta, where it maintains an active funding agreement program, under which funding agreements may be issued either (i) for spread lending purposes or (ii) to provide additional liquidity.

Activity related to these funding agreements is reported in Corporate & Other.

Farmer Mac Funding 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 either (i) to provide additional liquidity or (ii) for spread lending purposes.

At both March 31, 2021 and December 31, 2020, there were no borrowings under this funding agreement program.

On April 30, 2021, Brighthouse Life Insurance Company issued funding agreements to Farmer Mac for spread lending purposes in an

aggregate principal amount of $25 million.

Activity related to these funding agreements will be reported in Corporate & Other.

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 either (i) for spread lending purposes or (ii) to provide additional liquidity.

Activity related to these funding agreements is reported in Corporate & Other.

Information regarding funding agreements issued for spread lending purposes is as follows:

Aggregate Principal Amount Outstanding Issuances

Six Months Ended June 30,

June 30, 2021 December 31, 2020 2021 2020

(In millions)

FABCP Program (1) $ — $ — $ — $ —

FABN Program 2,000 — 2,000 —

FHLB Funding Agreements (2) 600 — 600 —

Farmer Mac Funding Agreements 25 — 25 —

Total $ 2,625 $ — $ 2,625 $ —

__________________

(1) Subsequent to June 30, 2021 and through August 4, 2021, Brighthouse Life Insurance Company has received deposits of $1.7 billion under the FABCP Program, which was established in July 2021.

(2) Additionally, in April 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 and repaid such borrowing during the fourth quarter of 2020.

Debt Issuances

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Our outstanding long-term debt was as follows at:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

(In millions)

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(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.

(2) Includes unamortized debt issuance costs, discounts and premiums, as applicable, totaling net $35 million at both March 31, 2021 and December 31, 2020, for senior notes and junior subordinated debentures on a combined basis.

(2) Includes unamortized debt issuance costs, discounts and premiums, as applicable, totaling net $34 million and $35 million at June 30, 2021 and December 31, 2020, respectively, for senior notes and junior subordinated debentures on a combined basis.

See Note 9 of the Notes to the Consolidated Financial Statements included in our 2020 Annual Report for additional information regarding the terms of our long-term debt.

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Additionally, our Revolving Credit Facility contains financial covenants, including requirements to maintain a specified minimum adjusted consolidated net worth, to maintain a ratio of total indebtedness to total capitalization not in excess of a specified percentage and that place limitations on the dollar amount of indebtedness that may be incurred by our subsidiaries, which could restrict our operations and use of funds.

At March 31, 2021, we were in compliance with these financial covenants.

At June 30, 2021, we were in compliance with these financial covenants.

Primary Uses of Liquidity and Capital

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Common Stock Repurchases

See Note 7 of the Notes to the Interim Condensed 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 March 31, 2021.

Subsequent to March 31, 2021 and through May 6, 2021, BHF repurchased an additional 1,066,550 shares of its common stock through open market purchases, pursuant to 10b5-1 plans, for $49 million.

Subsequent to June 30, 2021 and through August 4, 2021, BHF repurchased an additional 1,133,120 shares of its common stock through open market purchases, pursuant to 10b5-1 plans, for $49 million.

See Note 11 of the Notes to the Interim Condensed Consolidated Financial Statements for information relating to the authorization of share repurchases subsequent to June 30, 2021.

Preferred Stock Dividends

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Surrender or lapse behavior differs somewhat by product but tends to occur in the ordinary course of business.

During the three months ended March 31, 2021 and 2020, general account surrenders and withdrawals totaled $712 million and $545 million, respectively, of which $612 million and $517 million, respectively, was attributable to products within the Annuities segment.

During the six months ended June 30, 2021 and 2020, general account surrenders and withdrawals totaled $1.4 billion and $1.1 billion, respectively, of which $1.2 billion and $1.0 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 March 31, 2021 and December 31, 2020, we did not pledge any cash collateral to counterparties.

At March 31, 2021 and December 31, 2020, we were obligated to return cash collateral pledged to us by counterparties of $951 million and $1.6 billion, respectively.

At both June 30, 2021 and December 31, 2020, we did not pledge any cash collateral to counterparties.

At June 30, 2021 and December 31, 2020, we were obligated to return cash collateral pledged to us by counterparties of $1.1 billion and $1.6 billion, respectively.

See Note 5 of the Notes to the Interim Condensed Consolidated Financial Statements for additional information about pledged collateral.

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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 $3.3 billion and $3.7 billion at March 31, 2021 and December 31, 2020, respectively.

Of these amounts, $907 million and $937 million at March 31, 2021 and December 31, 2020, 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 March 31, 2021 was $879 million, primarily comprised of U.S.

Under our securities lending program, we were liable for cash collateral under our control of $4.0 billion and $3.7 billion at June 30, 2021 and December 31, 2020, respectively.

Of these amounts, $1.3 billion and $937 million at June 30, 2021 and December 31, 2020, 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 June 30, 2021 was $1.2 billion, primarily comprised of U.S.

government and agency securities that, if put back to us, could be immediately sold to satisfy the cash requirement.

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Short-term Liquidity and Liquid Assets

At both March 31, 2021 and December 31, 2020, BHF and certain of its non-insurance subsidiaries had short-term liquidity of $1.6 billion.

Short-term liquidity is comprised of cash and cash equivalents and short-term investments.

At March 31, 2021 and December 31, 2020, BHF and certain of its non-insurance subsidiaries had liquid assets of $1.6 billion and $1.7 billion, respectively, of which $1.5 billion and $1.6 billion, respectively, was held by BHF.

Liquid assets are comprised of cash and cash equivalents, short-term investments and publicly-traded securities.

At both June 30, 2021 and December 31, 2020, BHF and certain of its non-insurance subsidiaries had short-term liquidity of $1.6 billion.

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 assets held in trust.

At June 30, 2021 and December 31, 2020, BHF and certain of its non-insurance subsidiaries had liquid assets of $1.6 billion and $1.7 billion, respectively, of which $1.6 billion was held by BHF at both June 30, 2021 and December 31, 2020.

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 assets held in trust.

Statutory Capital and Dividends

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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.

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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.

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 included in our 2020 Annual Report.

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Distributions from and Capital Contributions to BH Holdings

During the three months ended March 31, 2021 and 2020, BHF did not make any cash capital contributions to BH Holdings and received cash distributions of $0 and $488 million, respectively, from BH Holdings.

During the six months ended June 30, 2021 and 2020, BHF received cash distributions of $310 million and $988 million, respectively, from BH Holdings.

During both the six months ended June 30, 2021 and 2020, BHF did not make any cash capital contributions to BH Holdings.

Distributions received in 2021 and 2020 primarily relate to $250 million and $800 million, respectively, of ordinary cash dividends paid by Brighthouse Life Insurance Company to BH Holdings.

Short-term Intercompany Loans

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Each loan entered into under this intercompany loan agreement has a term not more than 364 days and bears interest on the unpaid principal amount at a variable rate, payable monthly.

During the three months ended March 31, 2021 and 2020, BHF borrowed $196 million and $165 million, respectively, from certain of its non-insurance subsidiaries and repaid $200 million and $315 million of such borrowings during the three months ended March 31, 2021 and 2020, respectively.

At March 31, 2021 and December 31, 2020, BHF had total obligations outstanding of $449 million and $453 million, respectively, under such agreements.

During the six months ended June 30, 2021 and 2020, BHF borrowed $352 million and $287 million, respectively, from certain of its non-insurance subsidiaries and repaid $481 million and $350 million of such borrowings during the six months ended June 30, 2021 and 2020, respectively.

At June 30, 2021 and December 31, 2020, BHF had total obligations outstanding of $324 million and $453 million, respectively, under such agreements.

Intercompany Liquidity Facilities

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Under these facilities, which are comprised of a series of revolving loan agreements among BHF and its participating subsidiaries, each company may lend to or borrow from each other, subject to certain maximum limits for a term not more than 364 days.

During both the three months ended March 31, 2021 and 2020, there were no borrowings or repayments by BHF under these facilities and, at both March 31, 2021 and December 31, 2020, BHF had no obligations outstanding under such facilities.

During both the six months ended June 30, 2021 and 2020, there were no borrowings or repayments by BHF under these facilities and, at both June 30, 2021 and December 31, 2020, BHF had no obligations outstanding under such facilities.

Note Regarding Forward-Looking Statements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis