Brighthouse Financial, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations Page Introduction 49 Executive Summary 49 Industry Trends 50 Summary of Critical Accounting Estimates 51 Non-GAAP and Other Financial Disclosures 52 Results of Operations 54 Investments 68 Derivatives 78 Off-Balance Sheet Arrangements 79 Policyholder Liabilities 80 Liquidity and Capital Resources 84 Note Regarding Forward-Looking Statements 92 48 Table of Contents Introduction For purposes of this discussion, unless otherwise mentioned or unless the context indicates otherwise, “Brighthouse,” “Brighthouse Financial,” the “Company,” “we,” “our” and “us” refer to Brighthouse Financial, Inc., a Delaware corporation, and its subsidiaries. We use the term “BHF” to refer solely to Brighthouse Financial, Inc., and not to any of its subsidiaries. Until August 4, 2017, BHF was a wholly-owned subsidiary of MetLife, Inc. (together with its subsidiaries and affiliates, “MetLife”). Following this summary is a discussion addressing the consolidated financial condition and results of operations of the Company for the periods indicated. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with (i) the Interim Condensed Consolidated Financial Statements and related notes included elsewhere herein; (ii) our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the U.S. Securities and Exchange Commission (“SEC”) on February 24, 2021 (the “2020 Annual Report”); (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; (iv) our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 (the “Second Quarter Form 10-Q” and, together with the First Quarter Form 10-Q, the “Quarterly Reports”) filed with the SEC on August 6, 2021; and (v) our current reports on Form 8-K filed in 2021. Presentation Prior to discussing our Results of Operations, we present background information and definitions that we believe are useful to understanding the discussion of our financial results. This information precedes the Results of Operations and is most beneficial when read in the sequence presented. A summary of key informational sections is as follows: • “Executive Summary” provides information regarding our business, segments and results as discussed in the Results of Operations. • “Industry Trends” discusses updates and changes to a number of trends and uncertainties included in our 2020 Annual Report that we believe may materially affect our future financial condition, results of operations or cash flows, including from the worldwide pandemic sparked by the novel coronavirus (the “COVID-19 pandemic”). • “Summary of Critical Accounting Estimates” explains the most critical estimates and judgments applied in determining our results in accordance with accounting principles generally accepted in the United States of America (“GAAP”). • “Non-GAAP and Other Financial Disclosures” defines key financial measures presented in the Results of Operations that are not calculated in accordance with GAAP but are used by management in evaluating company and segment performance. As described in this section, adjusted earnings is presented by key business activities which are derived from, but different than, the line items presented in the GAAP statement of operations. This section also refers to certain other terms used to describe our insurance business and financial and operating metrics, but is not intended to be exhaustive. Certain amounts presented in prior periods within the following discussions of our financial results have been reclassified to conform with the current year presentation. Executive Summary We are one of the largest providers of annuity and life insurance products in the United States through multiple independent distribution channels and marketing arrangements with a diverse network of distribution partners. For operating purposes, we have established three segments: (i) Annuities, (ii) Life and (iii) Run-off, which consists of products that are no longer actively sold and are separately managed. In addition, we report certain of our results of operations in Corporate & Other. This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of operations, financial condition and cash flows of Brighthouse for the periods indicated. See “Business — Segments and Corporate & Other” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Summary — Overview” included in our 2020 Annual Report, as well as Note 2 of the Notes to the Interim Condensed Consolidated Financial Statements for further information regarding our segments and Corporate & Other. 49 Table of Contents Net income (loss) available to shareholders and adjusted earnings, a non-GAAP financial measure, were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In millions) Income (loss) available to shareholders before provision for income tax $ 466 $ (3,862) $ (329) $ (148) Less: Provision for income tax expense (benefit) 105 (850) (90) (88) Net income (loss) available to shareholders (1) $ 361 $ (3,012) $ (239) $ (60) Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends $ 577 $ (921) $ 1,579 $ (663) Less: Provision for income tax expense (benefit) 127 (232) 309 (196) Adjusted earnings $ 450 $ (689) $ 1,270 $ (467) __________________ (1) We use the term “net income (loss) available to shareholders” to refer to “net income (loss) available to Brighthouse Financial, Inc.’s common shareholders” throughout the results of operations discussions. For the three months ended September 30, 2021, we had net income available to shareholders of $361 million and adjusted earnings of $450 million compared to a net loss available to shareholders of $3.0 billion and an adjusted loss of $689 million for the three months ended September 30, 2020. Net income available to shareholders for the three months ended September 30, 2021 primarily reflects favorable pre-tax adjusted earnings, partially offset by a net unfavorable impact from our annual actuarial review (“AAR”). For the nine months ended September 30, 2021, we had a net loss available to shareholders of $239 million and adjusted earnings of $1.3 billion compared to a net loss available to shareholders of $60 million and an adjusted loss of $467 million for the nine months ended September 30, 2020. Net loss available to shareholders for the nine months ended September 30, 2021 primarily reflects net unfavorable changes in the estimated fair value of our guaranteed minimum living benefits (“GMLB”) riders (“GMLB Riders”) due to market factors, and a net unfavorable impact from our AAR. Higher interest rates and favorable equity markets resulted in net unfavorable changes to the estimated fair value of embedded derivative liabilities associated with Shield Level Annuities (“Shield liabilities”) and the freestanding derivatives that hedge our variable annuity business. GMLB Riders were also unfavorably impacted by the adjustment for nonperformance risk resulting from narrowing credit spreads. Increasing long-term interest rates resulted in an unfavorable change in the estimated fair value of freestanding interest rate derivatives we use to hedge our universal life with secondary guarantees (“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.” Industry Trends Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we discuss a number of trends and uncertainties that we believe may materially affect our future financial condition, results of operations or cash flows. Where these trends or uncertainties are specific to a particular aspect of our business, we often include such a 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. In addition, significant changes or updates in certain of these trends and uncertainties are discussed below. 50 Table of Contents COVID-19 Pandemic We continue to closely monitor developments related to the COVID-19 pandemic, which has negatively impacted us in certain respects. At this time, it continues to not be possible to estimate the severity or duration of the pandemic, including the severity, duration and frequency of any additional “waves” of the pandemic or the efficacy of any therapeutic treatments and vaccines for COVID-19, including their efficacy with respect to variants of COVID-19 that have emerged or could emerge in the future. It is likewise not possible to predict or estimate the longer-term effects of the pandemic, or any actions taken to contain or address the pandemic, on the economy at large and on our business, financial condition, results of operations and prospects, including the impact on our investment portfolio and our ratings, or the need for us in the future to revisit or revise aspects of our business model or targets previously provided to the markets. See “Business — Regulation,” “Risk Factors — Risks Related to Our Business — The ongoing COVID-19 pandemic could materially adversely affect our business, financial condition and results of operations, including our capitalization and liquidity” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — 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 Our insurance subsidiaries and Brighthouse Reinsurance Company of Delaware (“BRCD”) are regulated primarily at the state level, with some products and services also subject to federal regulation. In addition, BHF and its insurance subsidiaries are subject to regulation under the insurance holding company laws of various U.S. jurisdictions. Furthermore, some of our operations, products and services are subject to the Employee Retirement Income Security Act of 1974, consumer protection laws, securities, broker-dealer and investment advisor regulations, as well as environmental and unclaimed property laws and regulations. See “Business — Regulation,” as well as “Risk Factors — Regulatory and Legal Risks” included in our 2020 Annual Report, as amended or supplemented by our subsequent Quarterly Reports under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends — Regulatory Developments.” Summary of Critical Accounting Estimates The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported on the Interim Condensed Consolidated Financial Statements. The most critical estimates include those used in determining: • liabilities for future policy benefits; • amortization of deferred policy acquisition costs (“DAC”); • estimated fair values of freestanding derivatives and the recognition and estimated fair value of embedded derivatives requiring bifurcation; and • measurement of income taxes and the valuation of deferred tax assets. In applying our accounting policies, we make subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our business and operations. Actual results could differ from these estimates. The above critical accounting estimates are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates” and Note 1 of the Notes to the Consolidated Financial Statements included in our 2020 Annual Report. 51 Table of Contents Non-GAAP and Other Financial Disclosures Our definitions of the non-GAAP and other financial measures may differ from those used by other companies. Non-GAAP Financial Disclosures Adjusted Earnings In this report, we present adjusted earnings as a measure of our performance that is not calculated in accordance with GAAP. Adjusted earnings is used by management to evaluate performance, allocate resources and facilitate comparisons to industry results. We believe the presentation of adjusted earnings, as the Company measures it for management purposes, enhances the understanding of its performance by the investor community by highlighting the results of operations and the underlying profitability drivers of our business. Adjusted earnings should not be viewed as a substitute for net income (loss) available to Brighthouse Financial, Inc.’s common shareholders, which is the most directly comparable financial measure calculated in accordance with GAAP. See “— Results of Operations” for a reconciliation of adjusted earnings to net income (loss) available to Brighthouse Financial, Inc.’s common shareholders. Adjusted earnings, which may be positive or negative, focuses on our primary businesses principally by excluding the impact of market volatility, which could distort trends. The following are significant items excluded from total revenues in calculating adjusted earnings: • Net investment gains (losses); • Net derivative gains (losses) except earned income and amortization of premium on derivatives that are hedges of investments or that are used to replicate certain investments, but do not qualify for hedge accounting treatment (“Investment Hedge Adjustments”); and • Certain variable annuity guaranteed minimum income benefits (“GMIB”) fees (“GMIB Fees”). The following are significant items excluded from total expenses in calculating adjusted earnings: • Amounts associated with benefits related to GMIBs (“GMIB Costs”); • Amounts associated with periodic crediting rate adjustments based on the total return of a contractually referenced pool of assets and market value adjustments associated with surrenders or terminations of contracts (“Market Value Adjustments”); and • Amortization of DAC and value of business acquired (“VOBA”) related to (i) net investment gains (losses), (ii) net derivative gains (losses), (iii) GMIB Fees and GMIB Costs and (iv) Market Value Adjustments. The tax impact of the adjustments discussed above is calculated net of the statutory tax rate, which could differ from our effective tax rate. 52 Table of Contents We present adjusted earnings in a manner consistent with management’s view of the primary business activities that drive the profitability of our core businesses. The following table illustrates how each component of adjusted earnings is calculated from the GAAP statement of operations line items: Component of Adjusted Earnings How Derived from GAAP (1) (i) Fee income (i) Universal life and investment-type policy fees (excluding (a) unearned revenue adjustments related to net investment gains (losses) and net derivative gains (losses) and (b) GMIB Fees) plus Other revenues (excluding other revenues associated with related party reinsurance) and amortization of deferred gain on reinsurance. (ii) Net investment spread (ii) Net investment income plus Investment Hedge Adjustments and interest received on ceded fixed annuity reinsurance deposit funds reduced by Interest credited to policyholder account balances and interest on future policy benefits. (iii) Insurance-related activities (iii) Premiums less Policyholder benefits and claims (excluding (a) GMIB Costs, (b) Market Value Adjustments, (c) interest on future policy benefits and (d) amortization of deferred gain on reinsurance) plus the pass through of performance of ceded separate account assets. (iv) Amortization of DAC and VOBA (iv) Amortization of DAC and VOBA (excluding amounts related to (a) net investment gains (losses), (b) net derivative gains (losses), (c) GMIB Fees and GMIB Costs and (d) Market Value Adjustments). (v) Other expenses, net of DAC capitalization (v) Other expenses reduced by capitalization of DAC. (vi) Provision for income tax expense (benefit) (vi) Tax impact of the above items. __________________ (1) Italicized items indicate GAAP statement of operations line items. Consistent with GAAP guidance for segment reporting, adjusted earnings is also our GAAP measure of segment performance. Accordingly, we report adjusted earnings by segment in Note 2 of the Notes to the Interim Condensed Consolidated Financial Statements. Adjusted Net Investment Income We present adjusted net investment income, which is not calculated in accordance with GAAP. We present adjusted net investment income to measure our performance for management purposes, and we believe it enhances the understanding of our investment portfolio results. Adjusted net investment income represents net investment income, including Investment Hedge Adjustments. For a reconciliation of adjusted net investment income to net investment income, the most directly comparable GAAP measure, see footnote 3 to the summary yield table located in “— Investments — Current Environment — Investment Portfolio Results.” Other Financial Disclosures Similar to adjusted net investment income, we present net investment income yields as a performance measure we believe enhances the understanding of our investment portfolio results. Net investment income yields are calculated on adjusted net investment income as a percent of average quarterly asset carrying values. Asset carrying values exclude unrealized gains (losses), collateral received in connection with our securities lending program, freestanding derivative assets and collateral received from derivative counterparties. 53 Table of Contents Results of Operations Annual Actuarial Review We typically conduct our AAR in the third quarter of each year. As a result of the 2021 AAR, we updated assumptions regarding policyholder behavior, including mortality, premium persistency, lapses, withdrawals and maintenance expenses. This update had the largest impact on our ULSG business. We also increased our long-term general account earned rate, while maintaining our mean reversion rate at 3.00%. For our variable annuity business, we updated our annuitization and separate account assumptions, including fund fees, allocations and volatility, in addition to the policyholder behavior assumptions noted above. As a result of the 2020 AAR, we lowered the long-term general account earned rate, driven by a reduction in our mean reversion rate from 3.75% to 3.00%, which had the largest impact on our ULSG business. For our variable annuity business, in addition to the update in the long-term general account earned rate, we updated assumptions regarding policyholder behavior, mortality, separate account fund allocations and volatility, as well as maintenance expenses. In our life business, we updated assumptions related to policyholder behavior, mortality and maintenance expenses. The following table presents the impact of the AAR on pre-tax adjusted earnings and income (loss) available to shareholders before provision for income tax for the nine months ended September 30, 2021 and 2020. The impact related to GMLBs is included in income (loss) available to shareholders before provision for income tax, but is not included in pre-tax adjusted earnings. See “— Non-GAAP and Other Financial Disclosures.” Nine Months Ended September 30, 2021 2020 (In millions) GMLBs $ (42) $ (1,431) Included in pre-tax adjusted earnings: Other annuity business 4 128 Life business 4 (11) Run-off (113) (1,484) Total included in pre-tax adjusted earnings (105) (1,367) Total impact on income (loss) available to shareholders before provision for income tax $ (147) $ (2,798) 54 Table of Contents Consolidated Results for the Three Months and Nine Months Ended September 30, 2021 and 2020 Unless otherwise noted, all amounts in the following discussions of our results of operations are stated before income tax except for adjusted earnings, which are presented net of income tax. Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In millions) Revenues Premiums $ 193 $ 184 $ 539 $ 575 Universal life and investment-type product policy fees 881 882 2,730 2,595 Net investment income 1,281 996 3,680 2,564 Other revenues 117 99 345 294 Net investment gains (losses) (16) 5 (36) (48) Net derivative gains (losses) 56 (1,857) (2,132) 2,392 Total revenues 2,512 309 5,126 8,372 Expenses Policyholder benefits and claims 1,112 3,047 2,620 5,073 Interest credited to policyholder account balances 413 281 997 816 Capitalization of DAC (126) (90) (360) (279) Amortization of DAC and VOBA (82) 244 17 922 Interest expense on debt 41 47 122 139 Other expenses 664 623 1,987 1,814 Total expenses 2,022 4,152 5,383 8,485 Income (loss) before provision for income tax 490 (3,843) (257) (113) Provision for income tax expense (benefit) 105 (850) (90) (88) Net income (loss) 385 (2,993) (167) (25) Less: Net income (loss) attributable to noncontrolling interests 2 2 4 4 Net income (loss) attributable to Brighthouse Financial, Inc. 383 (2,995) (171) (29) Less: Preferred stock dividends 22 17 68 31 Net income (loss) available to Brighthouse Financial, Inc.’s common shareholders $ 361 $ (3,012) $ (239) $ (60) The components of net income (loss) available to shareholders were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In millions) GMLB Riders $ (198) $ (2,739) $ (1,484) $ (833) Other derivative instruments 109 (174) (404) 1,462 Net investment gains (losses) (16) 5 (36) (48) Other adjustments (6) (33) 16 (66) Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends 577 (921) 1,579 (663) Income (loss) available to shareholders before provision for income tax 466 (3,862) (329) (148) Provision for income tax expense (benefit) 105 (850) (90) (88) Net income (loss) available to shareholders $ 361 $ (3,012) $ (239) $ (60) 55 Table of Contents Three Months Ended September 30, 2021 Compared with the Three Months Ended September 30, 2020 Income available to shareholders before provision for income tax was $466 million ($361 million, net of income tax), an increase of $4.3 billion ($3.4 billion, net of income tax) from a loss available to shareholders before provision for income tax of $3.9 billion ($3.0 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 Nine Months Ended September 30, 2021 and 2020”; • higher pre-tax adjusted earnings, as discussed in greater detail below; and • gains on other derivative instruments reflecting: ◦ gains on interest rate derivatives used to manage interest rate exposure in our ULSG business due to the long-term benchmark interest rate decreasing in the current period and increasing in the prior period; and ◦ a favorable impact from foreign currency swaps due to the U.S. dollar mostly strengthening in the current period and weakening in the prior period. The provision for income tax, expressed as a percentage of income (loss) before provision for income tax, resulted in an effective tax rate of 21% in the current period compared to 22% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deduction and tax credits. Nine Months Ended September 30, 2021 Compared with the Nine Months Ended September 30, 2020 Loss available to shareholders before provision for income tax was $329 million ($239 million, net of income tax), a higher loss of $181 million ($179 million, net of income tax) from a loss available to shareholders before provision for income tax of $148 million ($60 million, 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 on interest rate derivatives used to manage interest rate exposure in our ULSG business due to the long-term benchmark interest rate increasing in the current period and decreasing in the prior period; and • higher losses from GMLB Riders, see “— GMLB Riders for the Three Months and Nine Months Ended September 30, 2021 and 2020.” The decrease in income before provision for income tax was partially offset by the following favorable items: • higher pre-tax adjusted earnings, as discussed in greater detail below; and • lower policyholder benefits and claims, included in other adjustments, resulting from the adjustment for market performance related to participating products in our Run-off 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 35% in the current period compared to 78% in the prior period. The decrease 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. 56 Table of Contents Reconciliation of Net Income (Loss) Available to Shareholders to Adjusted Earnings The reconciliation of net income (loss) available to shareholders to adjusted earnings was as follows: Three Months Ended September 30, 2021 Annuities Life Run-off Corporate & Other Total (In millions) Net income (loss) available to shareholders $ 242 $ 117 $ 72 $ (70) $ 361 Add: Provision for income tax expense (benefit) 96 31 17 (39) 105 Income (loss) available to shareholders before provision for income tax 338 148 89 (109) 466 Less: GMLB Riders (198) — — — (198) Less: Other derivative instruments 80 4 20 5 109 Less: Net investment gains (losses) (17) 4 24 (27) (16) Less: Other adjustments (8) (1) 3 — (6) Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends 481 141 42 (87) 577 Less: Provision for income tax expense (benefit) 96 31 4 (4) 127 Adjusted earnings $ 385 $ 110 $ 38 $ (83) $ 450 Three Months Ended September 30, 2020 Annuities Life Run-off Corporate & Other Total (In millions) Net income (loss) available to shareholders $ (2,398) $ 78 $ (1,141) $ 449 $ (3,012) Add: Provision for income tax expense (benefit) 92 18 (460) (500) (850) Income (loss) available to shareholders before provision for income tax (2,306) 96 (1,601) (51) (3,862) Less: GMLB Riders (2,739) — — — (2,739) Less: Other derivative instruments (54) (4) (115) (1) (174) Less: Net investment gains (losses) 37 6 (39) 1 5 Less: Other adjustments (29) — (4) — (33) Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends 479 94 (1,443) (51) (921) Less: Provision for income tax expense (benefit) 92 18 (304) (38) (232) Adjusted earnings $ 387 $ 76 $ (1,139) $ (13) $ (689) Nine Months Ended September 30, 2021 Annuities Life Run-off Corporate & Other Total (In millions) Net income (loss) available to shareholders $ (343) $ 223 $ 133 $ (252) $ (239) Add: Provision for income tax expense (benefit) 253 58 (297) (104) (90) Income (loss) available to shareholders before provision for income tax (90) 281 (164) (356) (329) Less: GMLB Riders (1,484) — — — (1,484) Less: Other derivative instruments 122 6 (537) 5 (404) Less: Net investment gains (losses) (41) (1) 89 (83) (36) Less: Other adjustments 1 (2) 17 — 16 Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends 1,312 278 267 (278) 1,579 Less: Provision for income tax expense (benefit) 253 58 31 (33) 309 Adjusted earnings $ 1,059 $ 220 $ 236 $ (245) $ 1,270 57 Table of Contents Nine Months Ended September 30, 2020 Annuities Life Run-off Corporate & Other Total (In millions) Net income (loss) available to shareholders $ 67 $ 79 $ 80 $ (286) $ (60) Add: Provision for income tax expense (benefit) 199 32 (344) 25 (88) Income (loss) available to shareholders before provision for income tax 266 111 (264) (261) (148) Less: GMLB Riders (833) — — — (833) Less: Other derivative instruments 72 (64) 1,456 (2) 1,462 Less: Net investment gains (losses) (3) 8 (18) (35) (48) Less: Other adjustments (43) — (23) — (66) Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends 1,073 167 (1,679) (224) (663) Less: Provision for income tax expense (benefit) 199 32 (355) (72) (196) Adjusted earnings $ 874 $ 135 $ (1,324) $ (152) $ (467) Consolidated Results for the Three Months and Nine Months Ended September 30, 2021 and 2020 — Adjusted Earnings The components of adjusted earnings were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In millions) Fee income $ 937 $ 914 $ 2,891 $ 2,693 Net investment spread 690 474 2,150 1,075 Insurance-related activities (593) (1,589) (1,476) (2,345) Amortization of DAC and VOBA 146 (158) (165) (414) Other expenses, net of DAC capitalization (579) (543) (1,749) (1,637) Less: Net income (loss) attributable to noncontrolling interests and preferred stock dividends 24 19 72 35 Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends 577 (921) 1,579 (663) Provision for income tax expense (benefit) 127 (232) 309 (196) Adjusted earnings $ 450 $ (689) $ 1,270 $ (467) Three Months Ended September 30, 2021 Compared with the Three Months Ended September 30, 2020 Adjusted earnings were $450 million in the current period, an increase of $1.1 billion. Key net favorable impacts were: • lower net costs associated with insurance-related activities due to: ◦ a net decrease in liability balances resulting from changes in connection with the AAR in our Run-off and Annuities segments; partially offset by ◦ an adjustment in the prior period related to modeling improvements resulting from an actuarial system conversion, primarily in our Life segment; • lower amortization of DAC and VOBA due to: ◦ a favorable impact resulting from changes in assumptions made in connection with the AAR in our Annuities and Life segments; and ◦ an adjustment in the current period related to modeling improvements resulting from an actuarial system conversion in our Annuities segment; 58 Table of Contents • higher net investment spread reflecting: ◦ higher returns on other limited partnerships for the comparative measurement period; ◦ higher average invested assets resulting from positive net flows in the general account; and ◦ higher returns on real estate limited partnerships and limited liability companies (“LLC”); partially offset by ◦ higher interest credited resulting from changes in interest accrual assumptions in connection with the AAR and the related modeling changes in our Annuities segment; ◦ lower investment yields on our fixed income portfolio, as proceeds from maturing investments and the growth in the investment portfolio were invested at lower yields than the portfolio average; and • higher net fee income resulting from: ◦ higher average separate account balances, a portion of which is offset in other expenses; partially offset by ◦ lower unearned revenue amortization in our Life segment resulting from changes in connection with the AAR. Key net unfavorable impacts were: • higher other expenses due to: ◦ higher asset-based variable annuity expenses resulting from higher average separate account balances, a portion of which is offset in fee income; ◦ higher corporate spending related to distribution and operations; and ◦ higher establishment costs. The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 21% in the current period compared to 26% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deduction and tax credits. Nine Months Ended September 30, 2021 Compared with the Nine Months Ended September 30, 2020 Adjusted earnings were $1.3 billion in the current period, an increase of $1.7 billion. Key net favorable impacts were: • higher net investment spread due to: ◦ higher returns on other limited partnerships for the comparative measurement period; and ◦ higher average invested assets resulting from positive net flows in the general account; partially offset by ◦ higher interest credited resulting from changes in interest accrual assumptions in connection with the AAR and the related modeling changes in our Annuities segment; ◦ lower investment yields on our fixed income portfolio, as proceeds from maturing investments and the growth in the investment portfolio were invested at lower yields than the portfolio average; and ◦ higher interest credited to policyholders due to higher imputed interest on insurance liabilities related to modeling improvements in the prior period resulting from an actuarial system conversion in our Life segment; and • lower net costs associated with insurance-related activities due to: ◦ a net decrease in liability balances resulting from changes in connection with the AAR in our Run-off and Annuities segments; partially offset by 59 Table of Contents ◦ higher paid claims, net of reinsurance; and ◦ an adjustment in the prior period related to modeling improvements resulting from an actuarial system conversion, primarily in our Life segment; • lower amortization of DAC and VOBA due to: ◦ a favorable impact resulting from changes in assumptions made in connection with the AAR in our Annuities and Life segments; and ◦ an adjustment in the current period related to modeling improvements resulting from an actuarial system conversion in our Annuities segment; and • higher net fee income resulting from: ◦ higher average separate account balances, a portion of which is offset in other expenses; partially offset by ◦ lower unearned revenue amortization in our Life segment resulting from changes in connection with the AAR. Key unfavorable impacts were: • higher other expenses due to: ◦ higher asset-based variable annuity expenses resulting from higher average separate account balances, a portion of which is offset in fee income; ◦ higher corporate spending related to distribution and operations; and • higher preferred stock dividends due to new issuances during the second and fourth quarters of 2020. 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 31% 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 and Nine Months Ended September 30, 2021 and 2020 — Adjusted Earnings Annuities The components of adjusted earnings for our Annuities segment were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In millions) Fee income $ 735 $ 654 $ 2,153 $ 1,917 Net investment spread 224 257 857 720 Insurance-related activities (177) 68 (331) (140) Amortization of DAC and VOBA 114 (127) (136) (322) Other expenses, net of DAC capitalization (415) (373) (1,231) (1,102) Pre-tax adjusted earnings 481 479 1,312 1,073 Provision for income tax expense (benefit) 96 92 253 199 Adjusted earnings $ 385 $ 387 $ 1,059 $ 874 60 Table of Contents A significant portion of our adjusted earnings is driven by separate account balances related to our variable annuity business. Most directly, these balances determine asset-based fee income, but they also impact DAC amortization and asset-based commissions. The changes in our variable annuities separate account balances are presented in the table below. Variable annuities separate account balances decreased for the three months ended September 30, 2021, driven by negative net flows, policy charges and unfavorable investment performance. For the nine months ended September 30, 2021, variable annuities separate account balances decreased driven by negative net flows and policy charges, partially offset by favorable investment performance. Three Months Ended September 30, 2021 (1) Nine Months Ended September 30, 2021 (1) (In millions) Balance, beginning of period $ 106,756 $ 103,450 Deposits 549 1,604 Withdrawals, surrenders and benefits (2,494) (7,547) Net flows (1,945) (5,943) Investment performance (627) 8,111 Policy charges (671) (1,922) Net transfers from (to) general account (84) (267) Balance, end of period $ 103,429 $ 103,429 Average balance $ 106,714 $ 105,725 _______________ (1) Includes income annuities for which separate account balances at September 30, 2021 were $164 million. Three Months Ended September 30, 2021 Compared with the Three Months Ended September 30, 2020 Adjusted earnings were $385 million in the current period, a decrease of $2 million. Key net unfavorable impacts were: • higher net costs associated with insurance-related activities due to: ◦ an increase in guaranteed minimum death benefit (“GMDB”) liabilities, partially offset by a favorable adjustment to deferred sales inducements (“DSI”) resulting from changes in policyholder behavior assumptions made in connection with the AAR; ◦ an increase in income annuity benefit payments; and ◦ an increase in GMDB liabilities and DSI resulting from less favorable equity market performance; • higher other expenses due to: ◦ higher asset-based variable annuity expenses resulting from higher average separate account balances, a portion of which is offset in fee income; and ◦ higher corporate spending related to distribution and operations; • lower net investment spread due to: ◦ higher interest credited resulting from changes in interest accrual assumptions in connection with the AAR and the related modeling changes; and ◦ lower investment yields on our fixed income portfolio, as proceeds from maturing investments and the growth in the investment portfolio were invested at lower yields than the portfolio average; partially offset by ◦ higher average invested assets resulting from positive net flows in the general account; ◦ higher returns on other limited partnerships for the comparative measurement period; and ◦ higher returns on real estate limited partnerships and LLCs. 61 Table of Contents Key favorable impacts were: • lower amortization of DAC and VOBA due to: ◦ a favorable impact resulting primarily from the AAR, which included changes in policyholder behavior and capital markets assumptions, as well as model refinements; and ◦ an adjustment in the current period related to modeling improvements resulting from an actuarial system conversion; • higher asset-based fees resulting from higher average separate account balances, a portion of which is offset in other expenses. The provision for income tax, 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. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deduction. Nine Months Ended September 30, 2021 Compared with the Nine Months Ended September 30, 2020 Adjusted earnings were $1.1 billion in the current period, an increase of $185 million. Key net favorable impacts were: • higher asset-based fees resulting from higher average separate account balances, a portion of which is offset in other expenses; • lower amortization of DAC and VOBA due to: ◦ a favorable impact resulting primarily from the AAR, which included changes in policyholder behavior and capital markets assumptions, as well as model refinements; and ◦ an adjustment in the current period related to modeling improvements resulting from an actuarial system conversion; • 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; and ◦ higher returns on real estate limited partnerships and LLCs; partially offset by ◦ higher interest credited resulting from changes in interest accrual assumptions in connection with the AAR and the related modeling changes; and ◦ lower investment yields on our fixed income portfolio, as proceeds from maturing investments and the growth in the investment portfolio were invested at lower yields than the portfolio average. Key unfavorable impacts were: • higher costs associated with insurance-related activities due to: ◦ an increase in GMDB liabilities, partially offset by a favorable adjustment to DSI resulting from changes in policyholder behavior assumptions made in connection with the AAR; partially offset by ◦ a decrease in income annuity benefit payments; and ◦ a decrease in GMDB liabilities and DSI resulting from less favorable equity market performance; and • higher other expenses due to: ◦ higher asset-based variable annuity expenses resulting from higher average separate account balances, a portion of which is offset in fee income; and ◦ higher distribution and deferred compensation expenses. 62 Table of Contents The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 19% in both the current and prior periods. Our effective tax rate differs from the statutory tax rate primarily due to the impact of the dividends received deduction. Life The components of adjusted earnings for our Life segment were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In millions) Fee income $ 40 $ 90 $ 247 $ 271 Net investment spread 106 53 285 126 Insurance-related activities (5) 48 (107) (4) Amortization of DAC and VOBA 34 (50) (21) (104) Other expenses, net of DAC capitalization (34) (47) (126) (122) Pre-tax adjusted earnings 141 94 278 167 Provision for income tax expense (benefit) 31 18 58 32 Adjusted earnings $ 110 $ 76 $ 220 $ 135 Three Months Ended September 30, 2021 Compared with the Three Months Ended September 30, 2020 Adjusted earnings were $110 million in the current period, an increase of $34 million. Key net favorable impacts were: • lower amortization of DAC and VOBA due to: ◦ a favorable impact resulting primarily from changes in policyholder behavior assumptions made in connection with the AAR; and ◦ an adjustment in the prior period related to modeling improvements resulting from an actuarial system conversion; and • higher net investment spread due to higher returns on other limited partnerships for the comparative measurement period. Key unfavorable impacts were: • higher costs associated with insurance-related activities due to: ◦ an adjustment in the prior period related to modeling improvements resulting from an actuarial system conversion; and ◦ higher paid claims, net of reinsurance; • lower fee income due to lower unearned revenue amortization from changes in policyholder behavior assumptions made in connection with the AAR. The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 22% in the current period compared to 19% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impact of the dividends received deduction. Nine Months Ended September 30, 2021 Compared with the Nine Months Ended September 30, 2020 Adjusted earnings were $220 million in the current period, an increase of $85 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 63 Table of Contents ◦ higher interest credited to policyholders due to higher imputed interest on insurance liabilities related to modeling improvements in the prior period resulting from an actuarial system conversion; and • lower amortization of DAC and VOBA due to: ◦ a favorable impact resulting primarily from changes in policyholder behavior assumptions made in connection with the AAR; and ◦ an adjustment in the prior period related to modeling improvements resulting from an actuarial system conversion. Key net unfavorable impacts were: • higher costs associated with insurance-related activities due to: ◦ higher paid claims, net of reinsurance; and ◦ an adjustment in the prior period related to modeling improvements resulting from an actuarial system conversion; and • lower net fee income due to: ◦ lower unearned revenue amortization from changes in policyholder behavior assumptions made in connection with the AAR; partially offset by ◦ an adjustment in the current period related to modeling improvements resulting from an actuarial system conversion. The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 21% in the current period compared to 19% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impact of the dividends received deduction. Run-off The components of adjusted earnings for our Run-off segment were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In millions) Fee income $ 162 $ 170 $ 491 $ 505 Net investment spread 338 149 961 179 Insurance-related activities (413) (1,718) (1,050) (2,226) Amortization of DAC and VOBA — — — — Other expenses, net of DAC capitalization (45) (44) (135) (137) Pre-tax adjusted earnings 42 (1,443) 267 (1,679) Provision for income tax expense (benefit) 4 (304) 31 (355) Adjusted earnings $ 38 $ (1,139) $ 236 $ (1,324) Three Months Ended September 30, 2021 Compared with the Three Months Ended September 30, 2020 Adjusted earnings were $38 million in the current period, an increase of $1.2 billion. Key favorable impacts were: • lower costs associated with insurance-related activities, primarily in our ULSG business, due to a decrease in liability balances resulting primarily from changes in the long-term general account earned rate assumptions made in connection with the AAR; and • higher net investment spread due to higher returns on other limited partnerships for the comparative measurement period. 64 Table of Contents The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 10% 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 impact of the dividends received deduction. Nine Months Ended September 30, 2021 Compared with the Nine Months Ended September 30, 2020 Adjusted earnings were $236 million in the current period, an increase of $1.6 billion. Key favorable impacts were: • lower costs associated with insurance-related activities, primarily in our ULSG business, due to a decrease in liability balances resulting primarily from changes in the long-term general account earned rate assumptions made in connection with the AAR; and • higher net investment spread due to higher returns on other limited partnerships for the comparative measurement period. The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 12% 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 impact of the dividends received deduction. Corporate & Other The components of adjusted earnings for Corporate & Other were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In millions) Fee income $ — $ — $ — $ — Net investment spread 22 15 47 50 Insurance-related activities 2 13 12 25 Amortization of DAC and VOBA (2) 19 (8) 12 Other expenses, net of DAC capitalization (85) (79) (257) (276) Less: Net income (loss) attributable to noncontrolling interests and preferred stock dividends 24 19 72 35 Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends (87) (51) (278) (224) Provision for income tax expense (benefit) (4) (38) (33) (72) Adjusted earnings $ (83) $ (13) $ (245) $ (152) Three Months Ended September 30, 2021 Compared with the Three Months Ended September 30, 2020 Adjusted earnings were a loss of $83 million in the current period, a higher loss of $70 million. Key net unfavorable impacts were: • higher amortization of DAC and VOBA due to an adjustment in the prior period related to modeling improvements resulting from an actuarial system conversion; • higher costs associated with insurance-related activities due to higher paid claims, net of reinsurance; • higher other expenses due to: ◦ higher establishment and advertising costs; partially offset by ◦ an adjustment in the current period to underwriting fees associated with funding agreements issued in connection with our institutional spread margin business; and • higher preferred stock dividends due to a new issuance during the fourth quarter of 2020. The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 6% in the current period compared to 119% in the prior period. Our effective tax rate differs from the statutory tax rate 65 Table of Contents primarily due to the impacts of the dividends received deduction and tax credits. We believe the effective tax rate for Corporate & Other is not generally meaningful, neither on a standalone basis nor for comparison to prior periods, since taxes for Corporate & Other are derived from the difference between the overall consolidated effective tax rate and total taxes for the combined operating segments. Nine Months Ended September 30, 2021 Compared with the Nine Months Ended September 30, 2020 Adjusted earnings were a loss of $245 million in the current period, a higher loss of $93 million. Key unfavorable impacts were: • higher preferred stock dividends due to new issuances during the second and fourth quarters of 2020; • higher amortization of DAC and VOBA due to an adjustment in the prior period related to modeling improvements resulting from an actuarial system conversion; and • higher costs associated with insurance-related activities due to higher paid claims, net of reinsurance. The decrease in adjusted earnings was partially offset by lower other expenses due to lower interest expense and legal reserves. The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 16% in the current period compared to 38% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deduction and tax credits. We believe the effective tax rate for Corporate & Other is not generally meaningful, neither on a standalone basis nor for comparison to prior periods, since taxes for Corporate & Other are derived from the difference between the overall consolidated effective tax rate and total taxes for the combined operating segments. GMLB Riders for the Three Months and Nine Months Ended September 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 September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In millions) Liabilities $ (274) $ (1,787) $ (960) $ (3,591) Hedges (76) (1,078) (1,216) 2,538 Ceded reinsurance (11) (3) (74) 101 Fees (1) 219 223 620 621 GMLB DAC (56) (94) 146 (502) Total GMLB Riders $ (198) $ (2,739) $ (1,484) $ (833) __________________ (1) Excludes living benefit fees, included as a component of adjusted earnings, of $16 million and $45 million for the three months and nine months ended September 30, 2021, respectively, and $15 million and $44 million for the three months and nine months ended September 30, 2020, respectively. Three Months Ended September 30, 2021 Compared with the Three Months Ended September 30, 2020 Comparative results from GMLB Riders were favorable by $2.5 billion. The AAR primarily resulted in favorable changes in reserves and DAC amortization recognized in the current period. Results were also driven by: • favorable changes in our GMLB hedges; and • 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; and 66 Table of Contents • unfavorable changes in GMLB DAC. Less favorable equity markets resulted in the following impacts: • favorable changes to the estimated fair value of our GMLB hedges; and • 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; and • unfavorable changes to GMLB DAC. Interest rates increasing less in the current period resulted in the following impacts: • favorable changes to the estimated fair value of our GMLB hedges; and • favorable changes to GMLB DAC; partially offset by • unfavorable changes to the estimated fair value of variable annuity liability reserves. The narrowing of our credit spreads in the prior period resulted in a favorable change in the adjustment for nonperformance risk, net of an unfavorable change in GMLB DAC. Nine Months Ended September 30, 2021 Compared with the Nine Months Ended September 30, 2020 Comparative results from GMLB Riders were unfavorable by $651 million. The AAR primarily resulted in favorable changes in reserves and DAC amortization recognized in the current period. Results were also driven by: • unfavorable changes in our GMLB hedges; • unfavorable changes to the estimated fair value of Shield liabilities; and • unfavorable changes in ceded reinsurance; partially offset by • favorable changes to the estimated fair value of variable annuity liability reserves; and • favorable changes in GMLB DAC. Higher equity markets resulted in the following impacts: • unfavorable changes to the estimated fair value of Shield liabilities; • unfavorable changes to the estimated fair value of our GMLB hedges; and • unfavorable changes in ceded reinsurance; partially offset by • favorable changes to the estimated fair value of variable annuity liability reserves; and • favorable changes to GMLB DAC. Interest rates increasing in the current period resulted in the following impacts: • unfavorable changes to the estimated fair value of our GMLB hedges; • unfavorable changes to GMLB DAC; • unfavorable changes in ceded reinsurance; and • unfavorable changes to the estimated fair value of Shield liabilities; partially offset by • favorable changes to the estimated fair value of variable annuity liability reserves. 67 Table of Contents The narrowing of our credit spreads in the current period combined with a decrease in the underlying variable annuity liability reserves resulted in an unfavorable change in the adjustment for nonperformance risk, net of a favorable change in GMLB DAC. Investments Investment Risks Our primary investment objective is to optimize risk-adjusted net investment income and risk-adjusted total return while appropriately matching assets and liabilities. In addition, the investment process is designed to ensure that the portfolio has an appropriate level of liquidity, quality and diversification. We are exposed to the following primary sources of investment risks, which may be heightened or exacerbated by the factors discussed in “— Industry Trends — COVID-19 Pandemic”: • credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest, which will likely result in a higher allowance for credit losses and write-offs for uncollectible balances for certain investments; • interest rate risk, relating to the market price and cash flow variability associated with changes in market interest rates. Changes in market interest rates will impact the net unrealized gain or loss position of our fixed income investment portfolio and the rates of return we receive on both new funds invested and reinvestment of existing funds; • market valuation risk, relating to the variability in the estimated fair value of investments associated with changes in market factors such as credit spreads and equity market levels. A widening of credit spreads will adversely impact the net unrealized gain (loss) position of the fixed income investment portfolio and will increase losses associated with credit-based non-qualifying derivatives where we assume credit exposure. Credit spread tightening will reduce net investment income associated with new purchases of fixed maturity securities and will favorably impact the net unrealized gain (loss) position of the fixed income investment portfolio; • liquidity risk, relating to the diminished ability to sell certain investments, in times of strained market conditions; • real estate risk, relating to commercial, agricultural and residential real estate, and stemming from factors, which include, but are not limited to, market conditions, including the demand and supply of leasable commercial space, creditworthiness of borrowers and their tenants and joint venture partners, capital markets volatility and inherent interest rate movements; • currency risk, relating to the variability in currency exchange rates for non-U.S. dollar denominated investments; and • financial and operational risks related to using external investment managers. See also “Risk Factors — Economic Environment and Capital markets-Related Risks — We are exposed to significant financial and capital markets risks which may adversely affect our financial condition, results of operations and liquidity, and may cause our net investment income and our profitability measures to vary from period-to-period” and “Risk Factors — Investments-Related Risks” in our 2020 Annual Report. We manage these risks through asset-type allocation and industry and issuer diversification. Risk limits are also used to promote diversification by asset sector, avoid concentrations in any single issuer and limit overall aggregate credit and equity risk exposure. Real estate risk is managed through geographic and property type and product type diversification. Interest rate risk is managed as part of our Asset Liability Management (“ALM”) strategies. Product design, such as the use of market value adjustment features and surrender charges, is also utilized to manage interest rate risk. These strategies include maintaining an investment portfolio that targets a weighted average duration that reflects the duration of our estimated liability cash flow profile. For certain of our liability portfolios, it is not possible to invest assets to the full liability duration, thereby creating some asset/liability mismatch. We also use certain derivatives in the management of currency, credit, interest rate, and equity market risks. Investment Management Agreements Other than our derivatives trading, which we manage in-house, we have engaged a select group of experienced external asset management firms to manage the investment of the assets comprising our general account portfolio and certain separate account assets of our insurance subsidiaries, as well as assets of BHF and our reinsurance subsidiary BRCD. 68 Table of Contents Current Environment Our business and results of operations are materially affected by conditions in capital markets and the economy, generally. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends and Uncertainties — Financial and Economic Environment” included in our 2020 Annual Report. As a U.S. insurance company, we are affected by the monetary policy of the Federal Reserve Board in the United States. The Federal Reserve may increase or decrease the federal funds rate in the future, which may have an impact on the pricing levels of risk-bearing investments and may adversely impact the level of product sales. We are also affected by the monetary policy of central banks around the world due to the diversification of our investment portfolio. Selected Sector Investments Recent elevated levels of market volatility have affected the performance of various asset classes. Contributing factors include concerns about energy and oil prices impacting the energy sector, as well as the impact of the COVID-19 pandemic. See “Risk Factors — Risks Related to Our Business — The ongoing COVID-19 pandemic could materially adversely affect our business, financial condition and results of operations, including our capitalization and liquidity” included in our 2020 Annual Report. There has been an increased market focus on energy sector investments as a result of volatile energy and oil prices. We maintain a diversified energy sector fixed maturity securities portfolio across sub-sectors and issuers. Our exposure to energy sector fixed maturity securities was $3.3 billion, of which 89% were investment grade, with net unrealized gains (losses) of $318 million at September 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 $1.9 billion, of which 95% were investment grade, with net unrealized gains (losses) of $187 million at September 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. Our investment managers are actively working with borrowers who are experiencing short-term financial or operational problems as a result of the COVID-19 pandemic to provide temporary relief. See “— Investments — Mortgage Loans” and Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements for information on mortgage loans, including credit quality by portfolio segment and commercial mortgage loans by property type. Additionally, see “— Investments — Fixed Maturity Available-for-sale — Structured Securities” for information on Structured Securities, including security type, risk profile and ratings profile. We monitor direct and indirect investment exposure across sectors and asset classes and adjust our level of investment exposure, as appropriate. At this time, we do not expect that our general account investments in these sectors and asset classes will have a material adverse effect on our results of operations or financial condition. 69 Table of Contents Investment Portfolio Results The following summary yield table presents the yield and adjusted net investment income for our investment portfolio for the periods indicated. As described below, this table reflects certain differences from the presentation of net investment income presented in the GAAP statement of operations. This summary yield table presentation is consistent with how we measure our investment performance for management purposes, and we believe it enhances understanding of our investment portfolio results. Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Yield % Amount Yield % Amount Yield % Amount Yield % Amount (Dollars in millions) Investment income (1) 5.29 % $ 1,324 4.56 % $ 1,036 5.25 % $ 3,800 4.04 % $ 2,676 Investment fees and expenses (2) (0.13) (37) (0.14) (35) (0.13) (104) (0.13) (99) Adjusted net investment income (3) 5.16 % $ 1,287 4.42 % $ 1,001 5.12 % $ 3,696 3.91 % $ 2,577 _______________ (1) Investment income yields are calculated as investment income as a percent of average quarterly asset carrying values. Investment income excludes recognized gains and losses and reflects the adjustments presented in footnote 3 below to arrive at adjusted net investment income. Asset carrying values exclude unrealized gains (losses), collateral received in connection with our securities lending program, freestanding derivative assets and collateral received from derivative counterparties. (2) Investment fee and expense yields are calculated as investment fees and expenses as a percent of average quarterly asset estimated fair values. Asset estimated fair values exclude collateral received in connection with our securities lending program, freestanding derivative assets and collateral received from derivative counterparties. (3) Adjusted net investment income presented in the yield table varies from the most directly comparable GAAP measure due to certain reclassifications, as presented below. Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In millions) Net investment income $ 1,281 $ 996 $ 3,680 $ 2,564 Less: Investment hedge adjustments (6) (5) (16) (13) Adjusted net investment income — in the above yield table $ 1,287 $ 1,001 $ 3,696 $ 2,577 See “— Results of Operations — Consolidated Results for the Three Months and Nine Months Ended September 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: September 30, 2021 December 31, 2020 Estimated Fair Value % of Total Estimated Fair Value % of Total (Dollars in millions) Publicly-traded $ 72,674 83.5 % $ 68,328 82.8 % Privately-placed 14,400 16.5 14,167 17.2 Total fixed maturity securities $ 87,074 100.0 % $ 82,495 100.0 % Percentage of cash and invested assets 72.9 % 72.6 % See Note 6 of the Notes to the Interim Condensed Consolidated Financial Statements for further information on our valuation controls and procedures including our formal process to challenge any prices received from independent pricing services that are not considered representative of estimated fair value. 70 Table of Contents See Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements for further information about fixed maturity securities by sector, contractual maturities, continuous gross unrealized losses and the allowance for credit losses. Fixed Maturity Securities Credit Quality — Ratings See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Investments — Fixed Maturity 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. The following table presents total fixed maturity securities by NRSRO rating and the applicable NAIC designation from the NAIC published comparison of NRSRO ratings to NAIC designations, except for certain Structured Securities, which are presented using the NAIC methodologies, as well as the percentage, based on estimated fair value that each NAIC designation is comprised of at: September 30, 2021 December 31, 2020 NAIC Designation NRSRO Rating Amortized Cost Allowance for Credit Losses Unrealized Gain (Loss) Estimated Fair Value % of Total Amortized Cost Allowance for Credit Losses Unrealized Gain (Loss) Estimated Fair Value % of Total (Dollars in millions) 1 Aaa/Aa/A $ 49,347 $ 1 $ 6,209 $ 55,555 63.8 % $ 44,189 $ — $ 8,492 $ 52,681 63.8 % 2 Baa 25,101 — 2,343 27,444 31.5 23,022 — 3,338 26,360 32.0 Subtotal investment grade 74,448 1 8,552 82,999 95.3 67,211 — 11,830 79,041 95.8 3 Ba 2,655 — 95 2,750 3.2 2,408 — 118 2,526 3.1 4 B 1,165 1 14 1,178 1.3 814 — 20 834 1.0 5 Caa and lower 153 5 (6) 142 0.2 91 2 — 89 0.1 6 In or near default 4 — 1 5 — 5 — — 5 — Subtotal below investment grade 3,977 6 104 4,075 4.7 3,318 2 138 3,454 4.2 Total fixed maturity securities $ 78,425 $ 7 $ 8,656 $ 87,074 100.0 % $ 70,529 $ 2 $ 11,968 $ 82,495 100.0 % 71 Table of Contents The following tables present total fixed maturity securities, based on estimated fair value, by sector classification and by NRSRO rating and the applicable NAIC designations from the NAIC published comparison of NRSRO ratings to NAIC designations, except for certain Structured Securities, which are presented using the NAIC methodologies as described above: Fixed Maturity Securities — by Sector & Credit Quality Rating NAIC Designation 1 2 3 4 5 6 Total Estimated Fair Value NRSRO Rating Aaa/Aa/A Baa Ba B Caa and Lower In or Near Default (In millions) September 30, 2021 U.S. corporate $ 17,795 $ 17,948 $ 1,916 $ 956 $ 68 $ — $ 38,683 Foreign corporate 3,484 7,468 582 129 31 — 11,694 U.S. government and agency 9,329 151 — — — — 9,480 RMBS 9,392 71 23 10 16 5 9,517 CMBS 6,686 270 77 56 6 — 7,095 State and political subdivision 4,649 189 1 — 7 — 4,846 ABS 3,376 486 19 16 10 — 3,907 Foreign government 844 861 132 11 4 — 1,852 Total fixed maturity securities $ 55,555 $ 27,444 $ 2,750 $ 1,178 $ 142 $ 5 $ 87,074 December 31, 2020 U.S. corporate $ 18,201 $ 17,303 $ 1,706 $ 646 $ 50 $ — $ 37,906 Foreign corporate 3,520 7,286 572 124 9 — 11,511 U.S. government and agency 8,481 157 — — — — 8,638 RMBS 8,204 40 19 11 20 — 8,294 CMBS 6,450 176 109 44 6 5 6,790 State and political subdivision 4,450 188 2 — — — 4,640 ABS 2,549 319 12 4 — — 2,884 Foreign government 826 891 106 5 4 — 1,832 Total fixed maturity securities $ 52,681 $ 26,360 $ 2,526 $ 834 $ 89 $ 5 $ 82,495 U.S. and Foreign Corporate Fixed Maturity Securities We maintain a diversified portfolio of corporate fixed maturity securities across industries and issuers. Our portfolio does not have any exposure to any single issuer in excess of 1% of total investments and the top ten holdings in aggregate comprise 2% of total investments at both September 30, 2021 and December 31, 2020. Our U.S. and foreign corporate fixed maturity securities holdings by industry were as follows at: September 30, 2021 December 31, 2020 Estimated Fair Value % of Total Estimated Fair Value % of Total (Dollars in millions) Industrial $ 15,997 31.8 % $ 15,541 31.5 % Consumer 11,495 22.8 11,535 23.3 Finance 12,191 24.2 11,452 23.2 Utility 7,198 14.3 7,412 15.0 Communications 3,496 6.9 3,477 7.0 Total $ 50,377 100.0 % $ 49,417 100.0 % Structured Securities We held $20.5 billion and $18.0 billion of Structured Securities, at estimated fair value, at September 30, 2021 and December 31, 2020, respectively, as presented in the RMBS, CMBS and ABS sections below. 72 Table of Contents RMBS Our RMBS holdings are diversified by security type, risk profile and ratings profile, which were as follows at: September 30, 2021 December 31, 2020 Estimated Fair Value % of Total Net Unrealized Gains (Losses) Estimated Fair Value % of Total Net Unrealized Gains (Losses) (Dollars in millions) Security type: Collateralized mortgage obligations $ 4,677 49.1 % $ 393 $ 4,852 58.5 % $ 484 Pass-through securities 4,840 50.9 81 3,442 41.5 157 Total RMBS $ 9,517 100.0 % $ 474 $ 8,294 100.0 % $ 641 Risk profile: Agency $ 7,766 81.6 % $ 344 $ 6,519 78.6 % $ 502 Prime 199 2.1 5 167 2.0 5 Alt-A 814 8.5 67 793 9.6 67 Sub-prime 738 7.8 58 815 9.8 67 Total RMBS $ 9,517 100.0 % $ 474 $ 8,294 100.0 % $ 641 Ratings profile: Rated Aaa $ 8,090 85.0 % $ 6,738 81.2 % Designated NAIC 1 $ 9,392 98.7 % $ 8,204 98.9 % Historically, our exposure to sub-prime RMBS holdings has been managed by focusing primarily on senior tranche securities, stress-testing the portfolio with severe loss assumptions and closely monitoring the performance of the portfolio. Our sub-prime RMBS portfolio consists predominantly of securities that were purchased after 2012 at significant discounts to par value and discounts to the expected principal recovery value of these securities. The vast majority of these securities are investment grade under the NAIC designations (e.g., NAIC 1 and NAIC 2). CMBS Our CMBS holdings are diversified by vintage year, which were as follows at: September 30, 2021 December 31, 2020 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value (In millions) 2003 - 2010 $ 92 $ 108 $ 93 $ 115 2011 11 11 66 66 2012 144 144 146 148 2013 209 215 214 218 2014 322 339 347 367 2015 954 1,017 956 1,035 2016 465 495 472 515 2017 711 767 701 781 2018 1,681 1,855 1,664 1,906 2019 1,051 1,095 990 1,072 2020 563 558 558 567 2021 491 491 — — Total $ 6,694 $ 7,095 $ 6,207 $ 6,790 The estimated fair value of CMBS rated Aaa using rating agency ratings was $5.0 billion, or 69.9% of total CMBS, and designated NAIC 1 was $6.7 billion, or 94.2% of total CMBS, at September 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. 73 Table of Contents ABS Our ABS holdings are diversified by both collateral type and issuer. Our ABS holdings by collateral type and ratings profile were as follows at: September 30, 2021 December 31, 2020 Estimated Fair Value % of Total Net Unrealized Gains (Losses) Estimated Fair Value % of Total Net Unrealized Gains (Losses) (Dollars in millions) Collateral type: Collateralized obligations $ 2,345 60.0 % $ 6 $ 1,762 61.1 % $ 5 Consumer loans 286 7.3 4 250 8.7 6 Student loans 395 10.1 8 247 8.6 5 Automobile loans 120 3.1 3 92 3.2 5 Credit card loans 84 2.1 5 53 1.8 7 Other loans 677 17.4 18 480 16.6 22 Total $ 3,907 100.0 % $ 44 $ 2,884 100.0 % $ 50 Ratings profile: Rated Aaa $ 1,807 46.3 % $ 1,512 52.4 % Designated NAIC 1 $ 3,376 86.4 % $ 2,549 88.4 % Allowance for Credit Losses for Fixed Maturity Securities See Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements for information about the evaluation of fixed maturity securities for an allowance for credit losses or write-offs due to uncollectibility. Securities Lending We participate in a securities lending program whereby securities are loaned to third parties, primarily brokerage firms and commercial banks. We obtain collateral, usually cash, in an amount generally equal to 102% of the estimated fair value of the securities loaned, which is obtained at the inception of a loan and maintained at a level greater than or equal to 100% for the duration of the loan. The estimated fair value of the securities loaned is monitored on a daily basis with additional collateral obtained as necessary throughout the duration of the loan. Securities loaned under such transactions may be sold or re-pledged by the transferee. We are liable to return to our counterparties the cash collateral under our control. Security collateral received from counterparties may not be sold or re-pledged, unless the counterparty is in default, and is not reflected in the financial statements. These transactions are treated as financing arrangements and the associated cash collateral liability is recorded at the amount of the cash received. See “— Liquidity and Capital Resources — The Company — Primary Uses of Liquidity and Capital — Securities Lending” and Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements for information regarding our securities lending program. Mortgage Loans Our mortgage loans are principally collateralized by commercial, agricultural and residential properties. Information regarding mortgage loans by portfolio segment is summarized as follows at: September 30, 2021 December 31, 2020 Amortized Cost % of Total Allowance for Credit Losses % of Amortized Cost Amortized Cost % of Total Allowance for Credit Losses % of Amortized Cost (Dollars in millions) Commercial $ 11,156 60.7 % $ 50 0.4 % $ 9,714 61.1 % $ 44 0.5 % Agricultural 3,997 21.8 % 13 0.3 % 3,538 22.2 % 15 0.4 % Residential 3,214 17.5 % 37 1.2 % 2,650 16.7 % 35 1.3 % Total $ 18,367 100.0 % $ 100 0.5 % $ 15,902 100.0 % $ 94 0.6 % Our mortgage loan portfolio is diversified by both geographic region and property type to reduce the risk of concentration. The percentage of our commercial and agricultural mortgage loan portfolios collateralized by properties 74 Table of Contents located in the U.S. were 97% and 96% at September 30, 2021 and December 31, 2020, respectively. The remainder was collateralized by properties located outside of the U.S. The carrying value as a percentage of total commercial and agricultural mortgage loans for the top three states in the U.S. was as follows at: September 30, 2021 California 21% New York 10% Texas 10% Additionally, we manage risk when originating commercial and agricultural mortgage loans by generally lending up to 75% of the estimated fair value of the underlying real estate collateral. Our residential mortgage loan portfolio is managed in a similar manner to reduce risk of concentration. All residential mortgage loans were collateralized by properties located in the U.S. at both September 30, 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: September 30, 2021 California 33% Florida 10% New York 8% 75 Table of Contents Commercial Mortgage Loans by Geographic Region and Property Type . Commercial mortgage loans are the largest component of the mortgage loan invested asset class. The diversification across geographic regions and property types of commercial mortgage loans was as follows at: September 30, 2021 December 31, 2020 Amount % of Total Amount % of Total (Dollars in millions) Geographic region: Pacific $ 2,534 22.7 % $ 2,670 27.5 % South Atlantic 2,176 19.5 1,832 18.9 Middle Atlantic 1,928 17.3 1,861 19.1 West South Central 1,230 11.0 802 8.2 Mountain 947 8.5 736 7.6 New England 675 6.0 453 4.7 East North Central 638 5.7 596 6.1 International 497 4.5 506 5.2 West North Central 254 2.3 113 1.2 East South Central 212 1.9 80 0.8 Multi-region and Other 65 0.6 65 0.7 Total recorded investment 11,156 100.0 % 9,714 100.0 % Less: allowance for credit losses 50 44 Carrying value, net of allowance for credit losses $ 11,106 $ 9,670 Property type: Office $ 3,616 32.4 % $ 3,788 39.0 % Apartment 3,158 28.3 2,072 21.3 Retail 1,951 17.5 2,068 21.3 Industrial 1,461 13.1 822 8.5 Hotel 944 8.5 934 9.6 Other 26 0.2 30 0.3 Total recorded investment 11,156 100.0 % 9,714 100.0 % Less: allowance for credit losses 50 44 Carrying value, net of allowance for credit losses $ 11,106 $ 9,670 Mortgage Loan Credit Quality — Monitoring Process. Our mortgage loan investments are monitored on an ongoing basis, including a review of loans that are current, past due, restructured and under foreclosure. Quarterly, we conduct a formal review of the portfolio with our investment managers. See Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements for information on mortgage loans by credit quality indicator, past due status, nonaccrual status and modified mortgage loans. Our commercial mortgage loans are reviewed on an ongoing basis. These reviews may include an analysis of the property financial statements and rent roll, lease rollover analysis, property inspections, market analysis, estimated valuations of the underlying collateral, loan-to-value ratios, debt-service coverage ratios and tenant creditworthiness. The monitoring process focuses on higher risk loans, which include those that are classified as restructured, delinquent or in foreclosure, as well as loans with higher loan-to-value ratios and lower debt-service coverage ratios. The monitoring process for agricultural mortgage loans is generally similar, with a focus on higher risk loans, such as loans with higher loan-to-value ratios, including reviews on a geographic and sector basis. Our residential mortgage loans are reviewed on an ongoing basis. See Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements for information on our evaluation of residential mortgage loans and related measurement of allowance for credit losses. 76 Table of Contents Loan-to-value ratios and debt-service coverage ratios are common measures in the assessment of the quality of commercial mortgage loans. Loan-to-value ratios are a common measure in the assessment of the quality of agricultural mortgage loans. Loan-to-value ratios compare the amount of the loan to the estimated fair value of the underlying collateral. A loan-to-value ratio greater than 100% indicates that the loan amount is greater than the collateral value. A loan-to-value ratio of less than 100% indicates an excess of collateral value over the loan amount. Generally, the higher the loan-to-value ratio, the higher the risk of experiencing a credit loss. The debt-service coverage ratio compares a property’s net operating income to amounts needed to service the principal and interest due under the loan. Generally, the lower the debt-service coverage ratio, the higher the risk of experiencing a credit loss. For our commercial mortgage loans, our average loan-to-value ratio was 59% and 57% at September 30, 2021 and December 31, 2020, respectively, and our average debt-service coverage ratio was 2.3x at both September 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 48% at both September 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. Loan Modifications Related to the COVID-19 Pandemic. Our investment managers’ underwriting and credit management practices are proactively refined to meet the changing economic environment. To actively mitigate losses and enhance borrower support across the mortgage loan portfolio segments, we have expanded our loan modification and customer assistance programs. Since March 1, 2020, we have completed loan modifications and have provided waivers to certain covenants, including the furniture, fixture and expense reserves, tenant rent payment deferrals or lease modifications, rate reductions, maturity date extensions, and other actions with a number of our borrowers impacted by the COVID-19 pandemic. A subset of these modifications included short-term principal and interest forbearance. At September 30, 2021, the recorded investment on mortgage loans where borrowers were offered debt-service forbearance and were not making payments was $128 million, comprised of $53 million of commercial mortgage loans, $37 million of agricultural mortgage loans and $38 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 of commercial mortgage loans, $23 million of agricultural mortgage loans and $79 million of residential mortgage loans. These types of modifications are generally not considered troubled debt restructurings (“TDR”) due to certain relief granted by U.S. federal legislation in March 2020. For more information on TDRs, see Note 4 to the Interim Condensed Consolidated Financial Statements. Mortgage Loan Allowance for Credit Losses . See Notes 4 and 6 of the Notes to the Interim Condensed Consolidated Financial Statements for information about how the allowance for credit losses is established and monitored, as well as activity in and balances of the allowance for credit losses for the nine months ended September 30, 2021 and 2020. Limited Partnerships and Limited Liability Companies The carrying values of our limited partnerships and LLCs were as follows at: September 30, 2021 December 31, 2020 (In millions) Other limited partnerships $ 3,494 $ 2,373 Real estate limited partnerships and LLCs (1) 465 437 Total $ 3,959 $ 2,810 __________________ (1) The estimated fair value of real estate limited partnerships and LLCs was $559 million and $501 million at September 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. We estimate that the underlying investment of the private equity funds will typically be liquidated over the next 10 to 20 years. 77 Table of Contents Other Invested Assets The carrying value of our other invested assets by type was as follows at: September 30, 2021 December 31, 2020 Carrying Value % of Total Carrying Value % of Total (Dollars in millions) Freestanding derivatives with positive estimated fair values $ 2,596 93.6 % $ 3,582 95.6 % FHLB stock 59 2.1 39 1.1 Tax credit renewable energy partnerships 57 2.1 64 1.7 Leveraged leases, net of non-recourse debt 50 1.8 50 1.3 Other 12 0.4 12 0.3 Total $ 2,774 100.0 % $ 3,747 100.0 % Derivatives Derivative Risks We are exposed to various risks relating to our ongoing business operations, including interest rate, foreign currency exchange rate, credit and equity market. We use a variety of strategies to manage these risks, including the use of derivatives. See Note 5 of the Notes to the Interim Condensed Consolidated Financial Statements: • Information about the gross notional amount, estimated fair value, and primary underlying risk exposure of our derivatives by type of hedge designation, excluding embedded derivatives held at September 30, 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 and nine months ended September 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. Fair Value Hierarchy See Note 6 of the Notes to the Interim Condensed Consolidated Financial Statements for derivatives measured at estimated fair value on a recurring basis and their corresponding fair value hierarchy, as well as a rollforward of the fair value measurements for derivatives measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs as discussed below. The valuation of Level 3 derivatives involves the use of significant unobservable inputs and generally requires a higher degree of management judgment or estimation than the valuations of Level 1 and Level 2 derivatives. Although Level 3 inputs are unobservable, management believes they are consistent with what other market participants would use when pricing such instruments and are considered appropriate given the circumstances. The use of different inputs or methodologies could have a material effect on the estimated fair value of Level 3 derivatives and could materially affect net income. Derivatives categorized as Level 3 at September 30, 2021 include: credit default swaps priced using unobservable credit spreads, or that are priced through independent broker quotations; certain equity options and equity variance swaps with unobservable volatility inputs and foreign currency swaps with certain unobservable inputs. 78 Table of Contents Credit Derivatives The gross notional amount and estimated fair value of credit default swaps were as follows at: September 30, 2021 December 31, 2020 Gross Notional Amount Estimated Fair Value Gross Notional Amount Estimated Fair Value (In millions) Written $ 1,774 $ 38 $ 1,755 $ 41 Purchased 18 (1) 18 — Total $ 1,792 $ 37 $ 1,773 $ 41 The maximum amount at risk related to our written credit default swaps is equal to the corresponding gross notional amount. In a replication transaction, we pair an asset on our balance sheet with a written credit default swap to synthetically replicate a corporate bond, a core asset holding of life insurance companies. Replications are entered into in accordance with the guidelines approved by state insurance regulators and the NAIC and are an important tool in managing the overall corporate credit risk within the Company. In order to match our long-dated insurance liabilities, we seek to buy long-dated corporate bonds. In some instances, these may not be readily available in the market, or they may be issued by corporations to which we already have significant corporate credit exposure. For example, by purchasing Treasury bonds (or other high-quality assets) and associating them with written credit default swaps on the desired corporate credit name, we can replicate the desired bond exposures and meet our ALM needs. This can expose the Company to changes in credit spreads as the written credit default swap tenor is shorter than the maturity of Treasury bonds. Credit Risk See Note 5 of the Notes to the Interim Condensed Consolidated Financial Statements for information about how we manage credit risk related to derivatives and for the estimated fair value of our net derivative assets and net derivative liabilities after the application of master netting agreements and collateral. Our policy is not to offset the fair value amounts recognized for derivatives executed with the same counterparty under the same master netting agreement. This policy applies to the recognition of derivatives on the balance sheets and does not affect our legal right of offset. Embedded Derivatives See Note 6 of the Notes to the Interim Condensed Consolidated Financial Statements for (i) information about embedded derivatives measured at estimated fair value on a recurring basis and their corresponding fair value hierarchy and (ii) a rollforward of the fair value measurements for net embedded derivatives measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs. See Note 5 of the Notes to the Interim Condensed Consolidated Financial Statements for information about the nonperformance risk adjustment included in the valuation of guaranteed minimum benefits accounted for as embedded derivatives. Off-Balance Sheet Arrangements Collateral for Securities Lending and Derivatives We have a securities lending program for the purpose of enhancing the total return on our investment portfolio. Periodically, we receive non-cash collateral for securities lending from counterparties, which cannot be sold or re-pledged, and which is not recorded on our consolidated balance sheets. The Company did not hold any non-cash collateral at either September 30, 2021 or 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. We enter into derivatives to manage various risks relating to our ongoing business operations. We have non-cash collateral from counterparties for derivatives, which can be sold or re-pledged subject to certain constraints, and which has not been recorded on our consolidated balance sheets. The amount of this non-cash collateral was $475 million and $898 million at September 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. 79 Table of Contents Guarantees See “Guarantees” in Note 10 of the Notes to the Interim Condensed Consolidated Financial Statements. Other Additionally, we enter into commitments for the purpose of enhancing the total return on our investment portfolio: mortgage loan commitments and commitments to fund partnership investments, bank credit facilities and private corporate bond investments. See Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements for information on the investment income, investment expense, gains and losses from such investments. See also “— Investments — Fixed Maturity Securities Available-for-sale” and “— Investments — Mortgage Loans” for information on our investments in fixed maturity securities and mortgage loans. See “— Investments — Limited Partnerships and Limited Liability Companies” for information on our partnership investments. Other than the commitments disclosed in Note 10 of the Notes to the Interim Condensed Consolidated Financial Statements, there are no other material obligations or liabilities arising from the commitments to fund mortgage loans, partnership investments, bank credit facilities and private corporate bond investments. For further information on commitments to fund partnership investments, mortgage loans, bank credit facilities and private corporate bond investments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — The Company — Contractual Obligations” included in our 2020 Annual Report. Policyholder Liabilities We establish, and carry as liabilities, actuarially determined amounts that are calculated to meet policy obligations or to provide for future annuity payments. Amounts for actuarial liabilities are computed and reported in the financial statements in conformity with GAAP. For more details on policyholder liabilities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Policyholder Liabilities” included in our 2020 Annual Report. Except as otherwise discussed below, there have been no material changes to our actuarial liabilities. Future Policy Benefits We establish liabilities for amounts payable under insurance policies. See Note 3 of the Notes to the Interim Condensed Consolidated Financial Statements. A discussion of future policy benefits by segment, as well as Corporate & Other, can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Policyholder Liabilities” included in our 2020 Annual Report. Policyholder Account Balances Policyholder account balances are generally equal to the account value, which includes accrued interest credited, but excludes the impact of any applicable charge that may be incurred upon surrender. See 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 We issue certain variable annuity products with guaranteed minimum benefits that provide the policyholder a minimum return based on their initial deposit (i.e., the Benefit Base) less withdrawals. In some cases, the Benefit Base may be increased by additional deposits, bonus amounts, accruals or optional market value step-ups. See Note 3 of the Notes to the Interim Condensed Consolidated Financial Statements. See also “Quantitative and Qualitative Disclosures About Market Risk — Market Risk - Fair Value Exposures — Interest Rates” and “Business — Segments and Corporate & Other — Annuities — Overview — Current Products — Variable Annuities” included in our 2020 Annual Report for additional information. Select information that management considers relevant to understanding our variable annuity risk management strategy has been included below. 80 Table of Contents Net Amount at Risk 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. 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. The NAR assumes utilization of benefits by all contract holders as of the balance sheet date. For the GMAB, the NAR would not be available until the GMAB maturity date. For the GMWB, only a small portion of the Benefit Base is available for withdrawal on an annual basis. The NAR for the GMWB with lifetime payments (“GMWB4L”) is the amount (if any) that would be required to be added to the total account value to purchase a lifetime income stream, based on current annuity rates, equal to the lifetime amount provided under the guaranteed benefit. For contracts where the GMWB4L provides for a guaranteed cumulative dollar amount of payments, the NAR is based on the purchase of a lifetime with period certain income stream where the period certain ensures payment of this cumulative dollar amount. The NAR represents our potential economic exposure to such guarantees in the event all contract holders were to begin lifetime withdrawals on the balance sheet date regardless of age. Only a small portion of the Benefit Base is available for withdrawal on an annual basis. The NAR for the GMDB is the amount of death benefit in excess of the account value (if any) as of the balance sheet date. It represents the amount of the claim we would incur if death claims were made on all contracts on the balance sheet date and includes any additional contractual claims associated with riders purchased to assist with covering income taxes payable upon death. A detailed description of NAR by type of guaranteed minimum benefit can be found in “Business — Segments and Corporate & Other — Annuities — Overview — Net Amount at Risk” included in our 2020 Annual Report. The variable annuity account values and NAR by type of guaranteed minimum benefit were as follows at: September 30, 2021 (1) December 31, 2020 (1) Account Value Death Benefit NAR (1) Living Benefit NAR (1) % of Account Value In-the-Money (2) Account Value Death Benefit NAR (1) Living Benefit NAR (1) % of Account Value In-the-Money (2) (Dollars in millions) GMIB $ 41,954 $ 1,970 $ 5,758 45.6 % $ 42,693 $ 1,930 $ 6,482 49.0 % GMIB Max with EDB (3) 11,052 3,087 205 17.8 % 11,457 2,869 173 16.7 % GMIB Max without EDB 6,241 12 41 7.6 % 6,524 2 37 7.2 % GMAB 739 1 1 2.7 % 723 1 1 0.2 % GMWB 2,745 43 9 9.3 % 2,803 38 6 0.9 % GMWB4L 14,721 113 694 31.3 % 15,165 80 718 27.5 % GMWB4L (FlexChoice SM ) 7,149 14 211 37.6 % 5,823 3 145 30.0 % EDB Only 3,890 590 — N/A 3,908 556 — N/A GMDB Only (Other than EDB) 19,806 962 — N/A 19,328 959 — N/A Total $ 108,297 $ 6,792 $ 6,919 $ 108,424 $ 6,438 $ 7,562 __________________ (1) The “Death Benefit NAR” and “Living Benefit NAR” are not additive at the contract level. (2) In-the-money is defined as any contract with a living benefit NAR in excess of zero. (3) EDB is defined as enhanced death benefits. 81 Table of Contents Reserves Under GAAP, certain of our variable annuity guarantee features are accounted for as insurance liabilities and reported on the balance sheet in future policy benefits with changes reported in policyholder benefits and claims. These liabilities are accounted for using long-term assumptions of equity and bond market returns and the level of interest rates. Therefore, these liabilities, valued at $6.2 billion at September 30, 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 $2.2 billion at September 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 $5.1 billion at September 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: September 30, 2021 December 31, 2020 Future Policy Benefits Policyholder Account Balances Total Reserves Future Policy Benefits Policyholder Account Balances Total Reserves (In millions) GMDB $ 1,523 $ — $ 1,523 $ 1,355 $ — $ 1,355 GMIB 3,420 2,042 5,462 3,499 2,496 5,995 GMIB Max 959 20 979 871 153 1,024 GMAB — (1) (1) — 1 1 GMWB — 42 42 — 47 47 GMWB4L 314 117 431 291 218 509 GMWB4L (FlexChoice SM ) — (6) (6) — 5 5 Total $ 6,216 $ 2,214 $ 8,430 $ 6,016 $ 2,920 $ 8,936 The carrying values of these guarantees can change significantly during periods of sizable and sustained shifts in equity market performance, equity market volatility, or interest rates. Carrying values are also affected by our assumptions around mortality, separate account returns and policyholder behavior, including lapse, annuitization and withdrawal rates. See “Risk Factors — Risks Related to Our Business — Guarantees within certain of our annuity products may decrease our earnings, decrease our capitalization, increase the volatility of our results, result in higher risk management costs and expose us to increased market risk” included in our 2020 Annual Report. Furthermore, changes in policyholder behavior assumptions can result in additional changes in accounting estimates. 82 Table of Contents Derivatives Hedging Variable Annuity Guarantees The gross notional amount and estimated fair value of the derivatives held in our macro interest rate hedging program were as follows at: September 30, 2021 December 31, 2020 Instrument Type Gross Notional Amount (1) Estimated Fair Value Gross Notional Amount (1) Estimated Fair Value Assets Liabilities Assets Liabilities (In millions) Interest rate swaps $ 2,130 $ 254 $ 14 $ 2,180 $ 358 $ — Interest rate options 8,750 89 1 25,980 712 121 Interest rate forwards 10,502 276 225 8,086 851 78 Hybrid options (2) 900 16 — — — — Total $ 22,282 $ 635 $ 240 $ 36,246 $ 1,921 $ 199 __________________ (1) The gross notional amounts presented do not necessarily represent the relative economic coverage provided by option instruments because certain positions were closed out by entering into offsetting positions that are not netted in the above table. (2) Hybrid options have equity exposure in addition to interest rate exposure. 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: September 30, 2021 December 31, 2020 Instrument Type Gross Notional Amount (1) Estimated Fair Value Gross Notional Amount (1) Estimated Fair Value Assets Liabilities Assets Liabilities (In millions) Equity index options $ 26,557 $ 869 $ 1,104 $ 28,955 $ 942 $ 838 Equity total return swaps 31,782 421 324 15,056 143 822 Equity variance swaps 359 9 7 1,098 13 20 Interest rate swaps 2,130 254 14 2,180 358 — Interest rate options 8,150 41 — 24,780 531 121 Interest rate forwards 4,439 79 46 3,466 208 26 Hybrid options 900 16 — — — — Total $ 74,317 $ 1,689 $ 1,495 $ 75,535 $ 2,195 $ 1,827 __________________ (1) The gross notional amounts presented do not necessarily represent the relative economic coverage provided by option instruments because certain positions were closed out by entering into offsetting positions that are not netted in the above table. Period-to-period changes in the estimated fair value of these hedges affect our net income, as well as stockholders’ equity and these effects can be material in any given period. See “Risk Factors — Risks Related to Our Business — Our variable annuity exposure risk management strategy may not be effective, may result in significant volatility in our profitability measures and may negatively affect our statutory capital,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management Strategies” included in our 2020 Annual Report. 83 Table of Contents Liquidity and Capital Resources Our business and results of operations are materially affected by conditions in the global capital markets and the economy generally. Stressed conditions, volatility or disruptions in global capital markets, particular markets or financial asset classes can impact us adversely, in part because we have a large investment portfolio and our insurance liabilities and derivatives are sensitive to changing market factors. Changing conditions in the global capital markets and the economy may affect our financing costs and market interest rates for our debt or equity securities. For further information regarding market factors that could affect our ability to meet liquidity and capital needs, including those related to the COVID-19 pandemic, see “— Industry Trends — COVID-19 Pandemic” and “— Investments — Current Environment,” as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends and Uncertainties,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Investments — Current Environment” included in our 2020 Annual Report. Liquidity and Capital Management Based upon our capitalization, expectations regarding maintaining our business mix, ratings, and funding sources available to us, we believe we have sufficient liquidity to meet business requirements in current market conditions and certain stress scenarios. Our Board of Directors and senior management are directly involved in the governance of the capital management process, including proposed changes to the annual capital plan and capital targets. We continuously monitor and adjust our liquidity and capital plans in light of market conditions, as well as changing needs and opportunities. We maintain a substantial short-term liquidity position, which was $3.8 billion and $4.5 billion at September 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 $55.2 billion and $52.0 billion at September 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, funding agreements, derivatives and assets held on deposit or in trust. The Company Liquidity Liquidity refers to our ability to generate adequate cash flows from our normal operations to meet the cash requirements of our operating, investing and financing activities. We determine our liquidity needs based on a rolling 12-month forecast by portfolio of invested assets, which we monitor daily. We adjust the general account asset and derivatives mix and general account asset maturities based on this rolling 12-month forecast. To support this forecast, we conduct cash flow and stress testing, which reflect the impact of various scenarios, including (i) the potential increase in our requirement to pledge additional collateral or return collateral to our counterparties, (ii) a reduction in new business sales, and (iii) the risk of early contract holder and policyholder withdrawals, as well as lapses and surrenders of existing policies and contracts. We include provisions limiting withdrawal rights in many of our products, which deter the customer from making withdrawals prior to the maturity date of the product. If significant cash is required beyond our anticipated liquidity needs, we have various alternatives available depending on market conditions and the amount and timing of the liquidity need. These available alternative sources of liquidity include cash flows from operations, sales of liquid assets and funding sources, including secured funding agreements, unsecured credit facilities and secured committed facilities. Under certain adverse market and economic conditions, our access to liquidity may deteriorate, or the cost to access liquidity may increase. Capital We manage our capital position to maintain our financial strength and credit ratings. Our capital position is supported by our ability to generate cash flows within our insurance companies, our ability to effectively manage the risks of our businesses and our expected ability to borrow funds and raise additional capital to meet operating and growth needs under a variety of market and economic conditions. We target to maintain a debt-to-capital ratio of approximately 25%, which we monitor using an average of our key leverage ratios as calculated by A.M. Best, Fitch, Moody’s and S&P. As such, we may opportunistically look to pursue additional financing over time, which may include borrowings under credit facilities, the issuance of debt, equity or hybrid 84 Table of Contents securities, the incurrence of term loans, or the refinancing of existing indebtedness. There can be no assurance that we will be able to complete any such financing transactions on terms and conditions favorable to us or at all. In support of our target combined risk-based capital (“RBC”) ratio between 400% and 450% in normal market conditions, we expect to continue to maintain a capital and exposure risk management program that targets total assets supporting our variable annuity contracts at or above the average of the worst two percent of a set of capital markets 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 markets scenarios over the life of the contracts) and CTE98. On August 2, 2021, we authorized the repurchase of up to $1.0 billion of our common stock, which is in addition to the $200 million repurchase authorization announced on February 10, 2021. Repurchases under the August 2, 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. Common stock repurchases are dependent upon several factors, including our capital position, liquidity, financial strength and credit ratings, general market conditions, the market price of our common stock compared to management’s assessment of the stock’s underlying value and applicable regulatory approvals, as well as other legal and accounting factors. We currently have no plans to declare and pay dividends on our common stock. Any future declaration and payment of dividends or other distributions or returns of capital will be at the discretion of our Board of Directors and will depend on and be subject to our financial condition, results of operations, cash needs, regulatory and other constraints, capital requirements (including capital requirements of our insurance subsidiaries), contractual restrictions and any other factors that our Board of Directors deems relevant in making such a determination. Therefore, there can be no assurance that we will pay any dividends or make other distributions or returns of capital on our common stock, or as to the amount of any such dividends, distributions or returns of capital. Rating Agencies Credit rating agencies may continue to review and adjust our ratings. For example, in April 2020, Fitch revised the rating outlook for BHF and certain of its subsidiaries to negative from stable due to the disruption to economic activity and the financial markets from the COVID-19 pandemic. This action by Fitch followed its revision of the rating outlook on the U.S. life insurance industry to negative. In April 2021, Fitch revised the rating outlook for BHF and certain of its subsidiaries from negative back to stable. See “Risk Factors — Risks Related to Our Business — A downgrade or a potential downgrade in our financial strength or credit ratings could result in a loss of business and materially adversely affect our financial condition and results of operations” included in our 2020 Annual Report for an in-depth description of the impact of a potential ratings downgrade. 85 Table of Contents Sources and Uses of Liquidity and Capital Our primary sources and uses of liquidity and capital were as follows at: Nine Months Ended September 30, 2021 2020 (In millions) Sources: Operating activities, net $ 644 $ 515 Changes in policyholder account balances, net 9,237 5,591 Changes in payables for collateral under securities loaned and other transactions, net 387 2,598 Long-term debt issued — 614 Preferred stock issued, net of issuance costs — 390 Total sources 10,268 9,708 Uses: Investing activities, net 9,665 4,184 Long-term debt repaid 1 1,001 Dividends on preferred stock 68 31 Treasury stock acquired in connection with share repurchases 341 376 Financing element on certain derivative instruments and other derivative related transactions, net 183 764 Other, net 10 40 Total uses 10,268 6,396 Net increase (decrease) in cash and cash equivalents $ — $ 3,312 Cash Flows from Operating Activities The principal cash inflows from our insurance activities come from insurance premiums, annuity considerations and net investment income. The principal cash outflows are the result of various annuity and life insurance products, operating expenses and income tax, as well as interest expense. The primary liquidity concern with respect to these cash flows is the risk of early contract holder and policyholder withdrawal. Cash Flows from Investing Activities The principal cash inflows from our investment activities come from repayments of principal, proceeds from maturities and sales of investments, as well as settlements of freestanding derivatives. The principal cash outflows relate to purchases of investments and settlements of freestanding derivatives. We typically can have a net cash outflow from investing activities because cash inflows from insurance operations are reinvested in accordance with our ALM discipline to fund insurance liabilities. We closely monitor and manage these risks through our comprehensive investment risk management process. The primary liquidity concerns with respect to these cash flows are the risk of default by debtors and market disruption. Cash Flows from Financing Activities The principal cash inflows from our financing activities come from issuances of debt and equity securities, deposits of funds associated with policyholder account balances and lending of securities. The principal cash outflows come from repayments of debt, common stock repurchases, preferred stock dividends, withdrawals associated with policyholder account balances and the return of securities on loan. The primary liquidity concerns with respect to these cash flows are market disruption and the risk of early policyholder withdrawal. 86 Table of Contents Primary Sources of Liquidity and Capital In addition to the summary description of liquidity and capital sources discussed in “— Sources and Uses of Liquidity and Capital,” the following additional information is provided regarding our primary sources of liquidity and capital: Funding Sources Liquidity is provided by a variety of funding sources, including secured and unsecured funding agreements, unsecured credit facilities and secured committed facilities. Capital is provided by a variety of funding sources, including issuances of debt and equity securities, as well as borrowings under our credit facilities. We maintain a shelf registration statement with the SEC that permits the issuance of public debt, equity and hybrid securities. As a “Well-Known Seasoned Issuer” under SEC rules, our shelf registration statement provides for automatic effectiveness upon filing and has no stated issuance capacity. The diversity of our funding sources enhances our funding flexibility, limits dependence on any one market or source of funds and generally lowers the cost of funds. Our primary funding sources include: Preferred Stock See Note 7 of the Notes to the Interim Condensed Consolidated Financial Statements and Note 10 of the Notes to the Consolidated Financial Statements included in our 2020 Annual Report for information on preferred stock issuances. Funding Agreements From time to time, Brighthouse Life Insurance Company issues funding agreements and uses the proceeds from such issuances for spread lending purposes in connection with our institutional spread margin business or to provide additional liquidity. The institutional spread margin business is comprised of active funding agreements issued in connection with the programs described in more detail below. The activity under all such funding agreements is reported in policyholder account balances. See Note 3 of the Notes to the Consolidated Financial Statements included in our 2020 Annual Report for additional information on funding agreements. Funding Agreement-Backed Commercial Paper Program 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 is 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 for spread lending purposes. The maximum aggregate principal amount permitted to be outstanding at any one time under the FABN Program is $5.0 billion. Activity related to these funding agreements is reported in Corporate & Other. Federal Home Loan Bank Funding Agreements Brighthouse Life Insurance Company is a member of 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) for spread lending purposes or (ii) to provide additional liquidity. Activity related to these funding agreements is reported in Corporate & Other. 87 Table of Contents Information regarding funding agreements issued for spread lending purposes is as follows: Aggregate Principal Amount Outstanding Issuances Repayments Nine Months Ended September 30, September 30, 2021 December 31, 2020 2021 2020 2021 2020 (In millions) FABCP Program $ 1,663 $ — $ 1,989 $ — $ 326 $ — FABN Program 2,400 — 2,400 — — — FHLB Funding Agreements (1) 600 — 951 — 351 — Farmer Mac Funding Agreements 25 — 25 — — — Total $ 4,688 $ — $ 5,365 $ — $ 677 $ — __________________ (1) Additionally, in 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 See Note 9 of the Notes to the Consolidated Financial Statements included in our 2020 Annual Report for information on debt issuances. Credit and Committed Facilities See Note 9 of the Notes to the Consolidated Financial Statements included in our 2020 Annual Report for information regarding our credit and committed facilities. We have no reason to believe that our lending counterparties would be unable to fulfill their respective contractual obligations under these facilities. As commitments under our credit and committed facilities may expire unused, these amounts do not necessarily reflect our actual future cash funding requirements. Outstanding Long-term Debt Our outstanding long-term debt was as follows at: September 30, 2021 December 31, 2020 (In millions) Senior notes $ 3,043 $ 3,042 Junior subordinated debentures 363 363 Other long-term debt (1) 30 31 Total long-term debt (2) $ 3,436 $ 3,436 __________________ (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 $34 million and $35 million at September 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. Debt and Facility Covenants Our debt instruments and credit and committed facilities contain certain administrative, reporting and legal covenants. Additionally, our Revolving Credit Facility contains financial covenants, including requirements to maintain a specified minimum adjusted consolidated net worth, to maintain a ratio of total indebtedness to total capitalization not in excess of a specified percentage and that place limitations on the dollar amount of indebtedness that may be incurred by our subsidiaries, which could restrict our operations and use of funds. At September 30, 2021, we were in compliance with these financial covenants. 88 Table of Contents Primary Uses of Liquidity and Capital In addition to the summarized description of liquidity and capital uses discussed in “— Sources and Uses of Liquidity and Capital,” the following additional information is provided regarding our primary uses of liquidity and capital: Common Stock Repurchases 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 September 30, 2021. Subsequent to September 30, 2021 and through November 2, 2021, BHF repurchased an additional 1,151,195 shares of its common stock through open market purchases, pursuant to a 10b5-1 plan, for $57 million. Preferred Stock Dividends See Note 7 of the Notes to the Interim Condensed Consolidated Financial Statements for information relating to dividends declared and paid on our preferred stock. Debt Repayments See Note 9 of the Notes to the Consolidated Financial Statements included in our 2020 Annual Report for information on debt repayments. Debt Repurchases, Redemptions and Exchanges We may from time to time seek to retire or purchase our outstanding indebtedness through cash purchases or exchanges for other securities, purchases in the open market, privately negotiated transactions or otherwise. Any such repurchases or exchanges will be dependent upon several factors, including our liquidity requirements, contractual restrictions, general market conditions, and applicable regulatory, legal and accounting factors. Whether or not we repurchase any debt and the size and timing of any such repurchases will be determined at our discretion. See Note 9 of the Notes to the Consolidated Financial Statements included in our 2020 Annual Report for additional information on debt repurchases. Insurance Liabilities Liabilities arising from our insurance activities primarily relate to benefit payments under various annuity and life insurance products, as well as payments for policy surrenders, withdrawals and loans. Surrender or lapse behavior differs somewhat by product but tends to occur in the ordinary course of business. During the nine months ended September 30, 2021 and 2020, general account surrenders and withdrawals totaled $2.2 billion and $1.5 billion, respectively, of which $1.8 billion and $1.5 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 September 30, 2021 and December 31, 2020, we did not pledge any cash collateral to counterparties. At September 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. We also pledge collateral from time to time in connection with funding agreements. Securities Lending We have a securities lending program whereby securities are loaned to third parties, primarily brokerage firms and commercial banks. We obtain collateral, usually cash, from the borrower, which must be returned to the borrower when the loaned securities are returned to us. Under our securities lending program, we were liable for cash collateral under our control of $4.5 billion and $3.7 billion at September 30, 2021 and December 31, 2020, respectively. Of these amounts, $1.6 billion and $937 million at September 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 September 30, 2021 was $1.6 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. See Note 4 of the Notes to the Interim Condensed 89 Table of Contents Consolidated Financial Statements. Litigation Putative or certified class action litigation and other litigation, and claims and assessments against us, in addition to those discussed elsewhere herein and those otherwise provided for in the financial statements, have arisen in the course of our business, including, but not limited to, in connection with our activities as an insurer, employer, investor, investment advisor, and taxpayer. Further, state insurance regulatory authorities and other federal and state authorities regularly make inquiries and conduct investigations concerning our compliance with applicable insurance and other laws and regulations. See Note 10 of the Notes to the Interim Condensed Consolidated Financial Statements. The Parent Company Liquidity and Capital In evaluating liquidity, it is important to distinguish the cash flow needs of the parent company from the cash flow needs of the combined group of companies. BHF is largely dependent on cash flows from its insurance subsidiaries to meet its obligations. Constraints on BHF’s liquidity may occur as a result of operational demands or as a result of compliance with regulatory requirements. Short-term Liquidity and Liquid Assets At September 30, 2021 and December 31, 2020, BHF and certain of its non-insurance subsidiaries had short-term liquidity of $1.5 billion and $1.6 billion, 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 assets held in trust. At September 30, 2021 and December 31, 2020, BHF and certain of its non-insurance subsidiaries had liquid assets of $1.5 billion and $1.7 billion, respectively, of which $1.5 billion and $1.6 billion was held by BHF. 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 The NAIC and state insurance departments have established regulations that provide minimum capitalization requirements based on RBC formulas for insurance companies. RBC is based on a formula calculated by applying factors to various asset, premium, claim, expense and statutory reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk, market risk and business risk and is calculated on an annual basis. The formula is used as an early warning regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. State insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose total adjusted capital (“TAC”) does not meet or exceed certain RBC levels. As of the date of the most recent annual statutory financial statements filed with insurance regulators, the TAC of each of our insurance subsidiaries subject to these requirements was in excess of each of those RBC levels. The amount of dividends that our insurance subsidiaries can ultimately pay to BHF through their various parent entities provides an additional margin for risk protection and investment in our businesses. Such dividends are constrained by the amount of surplus our insurance subsidiaries hold to maintain their ratings, which is generally higher than minimum RBC requirements. We proactively take actions to maintain capital consistent with these ratings objectives, which may include adjusting dividend amounts and deploying financial resources from internal or external sources of capital. Certain of these activities may require regulatory approval. Furthermore, the payment of dividends and other distributions by our insurance subsidiaries is governed by insurance laws and regulations. See Note 10 of the Notes to the Consolidated Financial Statements included in our 2020 Annual Report. Primary Sources and Uses of Liquidity and Capital The principal sources of funds available to BHF include distributions from Brighthouse Holdings, LLC (“BH Holdings”), dividends and returns of capital from its insurance subsidiaries and BRCD, capital markets issuances, as well as its own cash and cash equivalents and short-term investments. These sources of funds may also be supplemented by alternate sources of liquidity either directly or indirectly through our insurance subsidiaries. For example, we have established internal liquidity facilities to provide liquidity within and across our regulated and non-regulated entities to support our businesses. 90 Table of Contents The primary uses of liquidity of BHF include debt-service obligations (including interest expense and debt repayments), preferred stock dividends, capital contributions to subsidiaries, common stock repurchases and payment of general operating expenses. Based on our analysis and comparison of our current and future cash inflows from the dividends we receive from subsidiaries that are permitted to be paid without prior insurance regulatory approval, our investment portfolio and other cash flows and anticipated access to the capital markets, we believe there will be sufficient liquidity and capital to enable BHF to make payments on debt, pay preferred stock dividends, contribute capital to its subsidiaries, repurchase its common stock, pay all general operating expenses and meet its cash needs. In addition to the liquidity and capital sources discussed in “— The Company — Primary Sources of Liquidity and Capital” and “— The Company — Primary Uses of Liquidity and Capital,” the following additional information is provided regarding BHF’s primary sources and uses of liquidity and capital: Distributions from and Capital Contributions to BH Holdings During the nine months ended September 30, 2021 and 2020, BHF received cash distributions of $310 million and $988 million, respectively, from BH Holdings. During both the nine months ended September 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. On November 2, 2021, New England Life Insurance Company declared a $44 million ordinary cash dividend payable to Brighthouse Holdings. Such dividend has not been paid as of November 5, 2021. Short-term Intercompany Loans BHF, as borrower, has a short-term intercompany loan agreement with certain of its non-insurance subsidiaries, as lenders, for the purposes of facilitating the management of the available cash of the borrower and the lenders on a short-term and consolidated basis. Such intercompany loan agreement allows management to optimize the efficient use of and maximize the yield on cash between BHF and its subsidiary lenders. Each loan entered into under this intercompany loan agreement has a term not more than 364 days and bears interest on the unpaid principal amount at a variable rate, payable monthly. During the nine months ended September 30, 2021 and 2020, BHF borrowed $547 million and $454 million, respectively, from certain of its non-insurance subsidiaries and repaid $614 million and $415 million of such borrowings during the nine months ended September 30, 2021 and 2020, respectively. At September 30, 2021 and December 31, 2020, BHF had total obligations outstanding of $386 million and $453 million, respectively, under such agreements. Intercompany Liquidity Facilities BHF has established intercompany liquidity facilities with certain of its insurance and non-insurance subsidiaries to provide short-term liquidity within and across the combined group of companies. Under these facilities, which are comprised of a series of revolving loan agreements among BHF and its participating subsidiaries, each company may lend to or borrow from each other, subject to certain maximum limits for a term not more than 364 days. During both the nine months ended September 30, 2021 and 2020, there were no borrowings or repayments by BHF under these facilities and, at both September 30, 2021 and December 31, 2020, BHF had no obligations outstanding under such facilities. 91 Table of Contents Note Regarding Forward-Looking Statements This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, and other oral or written statements that we make from time to time may contain information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve substantial risks and uncertainties. We have tried, wherever possible, to identify such statements using words such as “anticipate,” “estimate,” “expect,” “project,” “may,” “will,” “could,” “intend,” “goal,” “target,” “guidance,” “forecast,” “preliminary,” “objective,” “continue,” “aim,” “plan,” “believe” and other words and terms of similar meaning, or that are tied to future periods, in connection with a discussion of future operating or financial performance. In particular, these include, without limitation, statements relating to future actions, prospective services or products, financial projections, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, as well as trends in operating and financial results. Any or all forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining the actual future results of Brighthouse. These statements are based on current expectations and the current economic environment and involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance. Actual results could differ materially from those expressed or implied in the forward-looking statements due to a variety of known and unknown risks, uncertainties and other factors. Although it is not possible to identify all of these risks and factors, they include, among others: • differences between actual experience and actuarial assumptions and the effectiveness of our actuarial models; • higher risk management costs and exposure to increased market risk due to guarantees within certain of our products; • the effectiveness of our variable annuity exposure risk management strategy and the impact of such strategy on volatility in our profitability measures and negative effects on our statutory capital; • material differences from actual outcomes compared to the sensitivities calculated under certain scenarios and sensitivities that we may utilize in connection with our variable annuity risk management strategies; • the impact of interest rates on our future ULSG policyholder obligations and net income volatility; • the impact of the COVID-19 pandemic; • the potential material adverse effect of changes in accounting standards, practices or policies applicable to us, including changes in the accounting for long-duration contracts; • loss of business and other negative impacts resulting from a downgrade or a potential downgrade in our financial strength or credit ratings; • the availability of reinsurance and the ability of the counterparties to our reinsurance or indemnification arrangements to perform their obligations thereunder; • heightened competition, including with respect to service, product features, scale, price, actual or perceived financial strength, claims-paying ratings, credit ratings, e-business capabilities and name recognition; • our ability to market and distribute our products through distribution channels; • any failure of third parties to provide services we need, any failure of the practices and procedures of such third parties and any inability to obtain information or assistance we need from third parties; • the ability of our subsidiaries to pay dividends to us, and our ability to pay dividends to our shareholders and repurchase our common stock; • the adverse impact on liabilities for policyholder claims as a result of extreme mortality events; • the impact of adverse capital and credit market conditions, including with respect to our ability to meet liquidity needs and access capital; • the impact of economic conditions in the capital markets and the U.S. and global economy, as well as geo-political or catastrophic events, on our investment portfolio, including on realized and unrealized losses and impairments, net investment spread and net investment income; 92 Table of Contents • the impact of events that adversely affect issuers, guarantors or collateral relating to our investments or our derivatives counterparties, on impairments, valuation allowances, reserves, net investment income and changes in unrealized gain or loss positions; • the impact of changes in regulation and in supervisory and enforcement policies on our insurance business or other operations; • the potential material negative tax impact of potential future tax legislation that could make some of our products less attractive to consumers; • the effectiveness of our policies and procedures in managing risk; • the loss or disclosure of confidential information, damage to our reputation and impairment of our ability to conduct business effectively as a result of any failure in cyber- or other information security systems; • whether all or any portion of the tax consequences of our separation from MetLife are not as expected, leading to material additional taxes or material adverse consequences to tax attributes that impact us; • the uncertainty of the outcome of any disputes with MetLife over tax-related or other matters and agreements or disagreements regarding MetLife’s or our obligations under our other agreements; and • other factors described in this report and from time to time in documents that we file with the SEC. For the reasons described above, we caution you against relying on any forward-looking statements, which should also be read in conjunction with the other cautionary statements included and the risks, uncertainties and other factors identified in our 2020 Annual Report, particularly in the sections entitled “Risk Factors” and “Quantitative and Qualitative Disclosures About Market Risk,” as well as in our other subsequent filings with the SEC. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as otherwise may be required by law. Corporate Information We routinely use our Investor Relations website to provide presentations, press releases and other information that may be deemed material to investors. Accordingly, we encourage investors and others interested in the Company to review the information that we share at http://investor.brighthousefinancial.com. In addition, our Investor Relations website allows interested persons to sign up to automatically receive e-mail alerts when we post financial information. Information contained on or connected to any website referenced in this report or any of our other filings with the SEC is not incorporated by reference in this report or in any other report or document we file with the SEC, and any website references are intended to be inactive textual references only unless expressly noted.