Brighthouse Financial, Inc. - Quarter Report: 2017 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___ to ___
Commission File Number: 001-37905
Brighthouse Financial, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 81-3846992 | |
(State of incorporation) | (I.R.S. Employer Identification No.) | |
11225 North Community House Road, Charlotte, North Carolina | 28277 | |
(Address of principal executive offices) | (Zip Code) |
(980) 365-7100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ | |
Non-accelerated filer þ (Do not check if a smaller reporting company) | Smaller reporting company ¨ | |
Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
At November 9, 2017, 119,773,106 shares of the registrant’s common stock, $0.01 par value per share, were outstanding.
Table of Contents
Page | ||
Item 1. | Consolidated and Combined Financial Statements (at September 30, 2017 (Unaudited) and December 31, 2016 and for the Three Months and Nine Months Ended September 30, 2017 and 2016 (Unaudited)): | |
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
Part I — Financial Information
Item 1. Financial Statements
Brighthouse Financial, Inc.
Interim Condensed Consolidated and Combined Balance Sheets
September 30, 2017 (Unaudited) and December 31, 2016
(In millions, except share and per share data)
September 30, 2017 | December 31, 2016 | |||||||
Assets | ||||||||
Investments: | ||||||||
Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $59,126 and $58,715, respectively; includes $0 and $3,413, respectively, relating to variable interest entities) | $ | 63,565 | $ | 61,388 | ||||
Equity securities available-for-sale, at estimated fair value (cost: $234 and $280, respectively) | 265 | 300 | ||||||
Mortgage loans (net of valuation allowances of $45 and $40, respectively; includes $119 and $136, respectively, at estimated fair value, relating to variable interest entities) | 10,431 | 9,378 | ||||||
Policy loans | 1,522 | 1,517 | ||||||
Real estate and real estate joint ventures | 407 | 215 | ||||||
Other limited partnership interests | 1,654 | 1,642 | ||||||
Short-term investments, principally at estimated fair value | 1,149 | 1,288 | ||||||
Other invested assets, principally at estimated fair value | 2,666 | 4,904 | ||||||
Total investments | 81,659 | 80,632 | ||||||
Cash and cash equivalents, principally at estimated fair value (includes $0 and $9, respectively, relating to variable interest entities) | 1,698 | 5,228 | ||||||
Accrued investment income (includes $1 and $1, respectively, relating to variable interest entities) | 641 | 693 | ||||||
Premiums, reinsurance and other receivables | 13,591 | 14,647 | ||||||
Deferred policy acquisition costs and value of business acquired | 6,414 | 6,293 | ||||||
Current income tax recoverable | 1,772 | 778 | ||||||
Other assets | 647 | 616 | ||||||
Separate account assets | 116,857 | 113,043 | ||||||
Total assets | $ | 223,279 | $ | 221,930 | ||||
Liabilities and Equity | ||||||||
Liabilities | ||||||||
Future policy benefits | $ | 36,035 | $ | 33,372 | ||||
Policyholder account balances | 37,298 | 37,526 | ||||||
Other policy-related balances | 2,964 | 3,045 | ||||||
Payables for collateral under securities loaned and other transactions | 4,569 | 7,390 | ||||||
Long-term debt (includes $14 and $23, respectively, at estimated fair value, relating to variable interest entities) | 3,615 | 1,910 | ||||||
Collateral financing arrangement | — | 2,797 | ||||||
Deferred income tax liability | 2,116 | 2,056 | ||||||
Other liabilities (includes $0 and $1, respectively, relating to variable interest entities) | 5,994 | 5,929 | ||||||
Separate account liabilities | 116,857 | 113,043 | ||||||
Total liabilities | 209,448 | 207,068 | ||||||
Contingencies, Commitments and Guarantees (Note 11) | ||||||||
Equity | ||||||||
Brighthouse Financial, Inc. stockholders’ equity: | ||||||||
Common stock par value $0.01 per share; 1,000,000,000 shares authorized; 119,773,106 shares issued and outstanding | 1 | — | ||||||
Additional paid-in capital | 12,418 | — | ||||||
Retained earnings (deficit) | 39 | — | ||||||
Shareholder’s net investment | — | 13,597 | ||||||
Accumulated other comprehensive income (loss) | 1,308 | 1,265 | ||||||
Total Brighthouse Financial, Inc.’s stockholders’ equity | 13,766 | 14,862 | ||||||
Noncontrolling interests | 65 | — | ||||||
Total equity | 13,831 | 14,862 | ||||||
Total liabilities and equity | $ | 223,279 | $ | 221,930 |
See accompanying notes to the interim condensed consolidated and combined financial statements.
2
Brighthouse Financial, Inc.
Interim Condensed Consolidated and Combined Statements of Operations and Comprehensive Income (Loss)
For the Three Months and Nine Months Ended September 30, 2017 and 2016 (Unaudited)
(In millions, except share and per share data)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenues | |||||||||||||||
Premiums | $ | 236 | $ | 347 | $ | 630 | $ | 1,021 | |||||||
Universal life and investment-type product policy fees | 1,025 | 976 | 2,935 | 2,843 | |||||||||||
Net investment income | 761 | 869 | 2,309 | 2,422 | |||||||||||
Other revenues | 93 | 49 | 329 | 481 | |||||||||||
Net investment gains (losses): | |||||||||||||||
Other-than-temporary impairments on fixed maturity securities | — | (1 | ) | (1 | ) | (19 | ) | ||||||||
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income (loss) | — | (3 | ) | — | (3 | ) | |||||||||
Other net investment gains (losses) | 21 | 30 | (33 | ) | 7 | ||||||||||
Total net investment gains (losses) | 21 | 26 | (34 | ) | (15 | ) | |||||||||
Net derivative gains (losses) | (164 | ) | (501 | ) | (1,207 | ) | (3,181 | ) | |||||||
Total revenues | 1,972 | 1,766 | 4,962 | 3,571 | |||||||||||
Expenses | |||||||||||||||
Policyholder benefits and claims | 1,083 | 1,058 | 2,732 | 2,948 | |||||||||||
Interest credited to policyholder account balances | 279 | 290 | 838 | 871 | |||||||||||
Goodwill impairment | — | 161 | — | 161 | |||||||||||
Amortization of deferred policy acquisition costs and value of business acquired | 123 | (10 | ) | (4 | ) | (45 | ) | ||||||||
Other expenses | 611 | 519 | 1,789 | 1,564 | |||||||||||
Total expenses | 2,096 | 2,018 | 5,355 | 5,499 | |||||||||||
Income (loss) before provision for income tax | (124 | ) | (252 | ) | (393 | ) | (1,928 | ) | |||||||
Provision for income tax expense (benefit) | 819 | (94 | ) | 653 | (754 | ) | |||||||||
Net income (loss) | $ | (943 | ) | $ | (158 | ) | $ | (1,046 | ) | $ | (1,174 | ) | |||
Comprehensive income (loss) | $ | (1,529 | ) | $ | (351 | ) | $ | (1,003 | ) | $ | (258 | ) | |||
Earnings per common share: | |||||||||||||||
Basic | $ | (7.87 | ) | $ | (1.32 | ) | $ | (8.73 | ) | $ | (9.80 | ) |
See accompanying notes to the interim condensed consolidated and combined financial statements.
3
Brighthouse Financial, Inc.
Interim Condensed Consolidated and Combined Statements of Equity
For the Nine Months Ended September 30, 2017 and 2016 (Unaudited)
(In millions)
Shareholder’s Net Investment | Common Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Brighthouse Financial, Inc’s Stockholders’ Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||
Balance at December 31, 2016 | $ | 13,597 | $ | — | $ | — | $ | — | $ | 1,265 | $ | 14,862 | $ | — | $ | 14,862 | ||||||||||||||||
Issuance of Common Stock to MetLife, Inc. (Note 8) | 1 | 1 | 1 | |||||||||||||||||||||||||||||
Distribution to MetLife, Inc. (Note 8) | (1,798 | ) | (1,798 | ) | (1,798 | ) | ||||||||||||||||||||||||||
Other separation related transactions (Note 8) | 1,704 | 1,704 | 1,704 | |||||||||||||||||||||||||||||
Net income (loss) | (1,085 | ) | 39 | (1,046 | ) | — | (1,046 | ) | ||||||||||||||||||||||||
Separation from MetLife, Inc. | (12,419 | ) | 1 | 12,418 | — | — | ||||||||||||||||||||||||||
Change in noncontrolling interests | — | 65 | 65 | |||||||||||||||||||||||||||||
Other comprehensive income (loss), net of income tax | 43 | 43 | 43 | |||||||||||||||||||||||||||||
Balance at September 30, 2017 | $ | — | $ | 1 | $ | 12,418 | $ | 39 | $ | 1,308 | $ | 13,766 | $ | 65 | $ | 13,831 | ||||||||||||||||
Shareholder’s Net Investment | Common Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Brighthouse Financial, Inc’s Stockholders’ Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||
Balance at December 31, 2015 | $ | 15,316 | $ | — | $ | — | $ | — | $ | 1,523 | $ | 16,839 | $ | — | $ | 16,839 | ||||||||||||||||
Change in net investment | 1,589 | 1,589 | 1,589 | |||||||||||||||||||||||||||||
Net income (loss) | (1,174 | ) | (1,174 | ) | — | (1,174 | ) | |||||||||||||||||||||||||
Other comprehensive income (loss), net of income tax | 916 | 916 | 916 | |||||||||||||||||||||||||||||
Balance at September 30, 2016 | $ | 15,731 | $ | — | $ | — | $ | — | $ | 2,439 | $ | 18,170 | $ | — | $ | 18,170 |
See accompanying notes to the interim condensed consolidated and combined financial statements.
4
Brighthouse Financial, Inc.
Interim Condensed Consolidated and Combined Statements of Cash Flows
For the Nine Months Ended September 30, 2017 and 2016 (Unaudited)
(In millions)
Nine Months Ended September 30, | |||||||
2017 | 2016 | ||||||
Net cash provided by (used in) operating activities | $ | 2,030 | $ | 2,605 | |||
Cash flows from investing activities | |||||||
Sales, maturities and repayments of: | |||||||
Fixed maturity securities | 12,784 | 27,696 | |||||
Equity securities | 58 | 166 | |||||
Mortgage loans | 565 | 1,429 | |||||
Real estate and real estate joint ventures | 47 | 430 | |||||
Other limited partnership interests | 195 | 289 | |||||
Purchases of: | |||||||
Fixed maturity securities | (12,888 | ) | (29,992 | ) | |||
Equity securities | (2 | ) | (57 | ) | |||
Mortgage loans | (1,554 | ) | (2,097 | ) | |||
Real estate and real estate joint ventures | (224 | ) | (51 | ) | |||
Other limited partnership interests | (174 | ) | (134 | ) | |||
Cash received in connection with freestanding derivatives | 1,811 | 460 | |||||
Cash paid in connection with freestanding derivatives | (3,382 | ) | (1,659 | ) | |||
Receipts on loans to MetLife, Inc. | — | 50 | |||||
Net change in policy loans | (5 | ) | 111 | ||||
Net change in short-term investments | 180 | (1,740 | ) | ||||
Net change in other invested assets | 33 | 25 | |||||
Other, net | 2 | — | |||||
Net cash provided by (used in) investing activities | (2,554 | ) | (5,074 | ) | |||
Cash flows from financing activities | |||||||
Policyholder account balances: | |||||||
Deposits | 3,464 | 9,071 | |||||
Withdrawals | (2,269 | ) | (9,825 | ) | |||
Net change in payables for collateral under securities loaned and other transactions | (2,747 | ) | 3,059 | ||||
Long-term debt issued | 3,589 | — | |||||
Long-term debt repaid | (10 | ) | (21 | ) | |||
Collateral financing arrangements repaid | (2,797 | ) | — | ||||
Financing element on certain derivative instruments and other derivative related transactions, net | (37 | ) | (228 | ) | |||
Distribution to MetLife, Inc. | (1,798 | ) | — | ||||
Cash received from MetLife in connection with shareholder's net investment | 293 | 1,726 | |||||
Cash paid to MetLife in connection with shareholder's net investment | (668 | ) | (58 | ) | |||
Other, net | (26 | ) | — | ||||
Net cash provided by (used in) financing activities | (3,006 | ) | 3,724 | ||||
Change in cash and cash equivalents | (3,530 | ) | 1,255 | ||||
Cash and cash equivalents, beginning of period | 5,228 | 1,570 | |||||
Cash and cash equivalents, end of period | $ | 1,698 | $ | 2,825 | |||
Supplemental disclosures of cash flow information | |||||||
Net cash paid (received) for: | |||||||
Interest | $ | 89 | $ | 153 | |||
Income tax | $ | 76 | $ | 231 | |||
Non-cash transactions: | |||||||
Transfer of fixed maturity securities from former affiliates | $ | — | $ | 3,478 | |||
Transfer of mortgage loans from former affiliates | $ | — | $ | 395 | |||
Transfer of short-term investments from former affiliates | $ | — | $ | 94 | |||
Transfer of fixed maturity securities to former affiliates | $ | 293 | $ | — | |||
Reduction of policyholder account balances in connection with reinsurance transactions | $ | 293 | $ | — |
See accompanying notes to the interim condensed consolidated and combined financial statements.
5
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies
Business
“Brighthouse” and the “Company” refer to Brighthouse Financial, Inc. and its subsidiaries (formerly, MetLife U.S. Retail Separation Business). Brighthouse Financial, Inc. is a holding company formed to own the legal entities that have historically operated a substantial portion of MetLife, Inc.’s former Retail segment. Brighthouse Financial, Inc. was incorporated in Delaware on August 1, 2016 in preparation for MetLife, Inc.’s separation of a substantial portion of its former Retail segment, as well as certain portions of its Corporate Benefit Funding segment (the “Separation”), which was completed on August 4, 2017.
The Company offers a range of individual annuities and individual life insurance products. The Company reports results through three segments: Annuities, Life and Run-off. In addition, the Company reports certain of its results in Corporate & Other.
On January 12, 2016, MetLife, Inc. (MetLife, Inc., together with its subsidiaries and affiliates, “MetLife”) announced its plan to pursue the separation of a substantial portion of its former U.S. retail business. Additionally, on July 21, 2016, MetLife, Inc. announced that the separated business would be rebranded as “Brighthouse Financial.”
On October 5, 2016, Brighthouse Financial, Inc., which until the completion of the Separation on August 4, 2017, was a wholly-owned subsidiary of MetLife, Inc., filed a registration statement on Form 10 (as amended, the “Form 10”) with the U.S. Securities and Exchange Commission (“SEC”) that was declared effective by the SEC on July 6, 2017. The Form 10 disclosed MetLife, Inc.’s plans to undertake several actions, including an internal reorganization involving its U.S. retail business (the “Restructuring”) and include Brighthouse Life Insurance Company (“Brighthouse Insurance”), Brighthouse Life Insurance Company of NY (“Brighthouse NY”), New England Life Insurance Company (“NELICO”), Brighthouse Reinsurance Company of Delaware (“BRCD”) and Brighthouse Investment Advisers, LLC in the planned separated business and distribute at least 80.1% of the shares of Brighthouse Financial, Inc.’s common stock on a pro rata basis to the holders of MetLife, Inc. common stock. In connection with the Restructuring, effective April 2017, following receipt of applicable regulatory approvals, MetLife, Inc. contributed certain affiliated reinsurance companies and Brighthouse NY to Brighthouse Life Insurance Company. The affiliated reinsurance companies were then merged into BRCD, a licensed reinsurance subsidiary of Brighthouse Life Insurance Company. On July 28, 2017, MetLife, Inc. contributed Brighthouse Holdings, LLC to Brighthouse Financial, Inc. See Notes 8 and 10.
On August 4, 2017, Brighthouse Financial, Inc. entered into the Master Separation Agreement with MetLife and MetLife, Inc. completed the Separation through a distribution of 80.8% of MetLife, Inc.’s interest in Brighthouse Financial, Inc., to holders of MetLife, Inc.’s common stock and retained the remaining 19.2%. As a result, Brighthouse Financial, Inc., is now an independent, publicly traded company on the Nasdaq Stock Market under the symbol “BHF.”
Basis of Presentation
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported on the interim condensed consolidated financial statements. In applying these policies and estimates, management makes subjective and complex judgments that frequently require assumptions 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 the Company’s business and operations. Actual results could differ from these estimates.
Consolidation
The financial statements presented in this quarterly report for periods on or after the Separation are presented on a consolidated basis and include the financial position, results of operations and cash flows of the Company. The accompanying interim condensed consolidated financial statements include the accounts of Brighthouse Financial, Inc. and its subsidiaries, as well as partnerships and joint ventures in which the Company has control, and variable interest entities (“VIEs”) for which the Company is the primary beneficiary. Intercompany accounts and transactions have been eliminated.
The Company uses the equity method of accounting for equity securities when it has significant influence or at least 20% interest and for real estate joint ventures and other limited partnership interests (“investees”) when it has more than a minor ownership interest or more than a minor influence over the investee’s operations. The Company generally recognizes its share of the investee’s earnings on a three-month lag in instances where the investee’s financial information is not sufficiently timely or when the investee’s reporting period differs from the Company’s reporting period. The Company uses the cost method of accounting for investments in which it has virtually no influence over the investee’s operations.
6
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited) — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Combination
The financial statements for the periods prior to the Separation are presented on a combined basis and reflect the historical combined financial position, results of operations and cash flows for the periods presented. The combined balance sheets include the attribution of certain assets and liabilities that have historically been held at the MetLife corporate level but which are specifically identifiable or attributable to the Company. Similarly, certain assets attributable to shared services managed at the MetLife corporate level have been excluded from the combined balance sheets. The combined statements of operations reflect certain corporate expenses allocated to the Company by MetLife for certain corporate functions and for shared services provided by MetLife. These expenses have been allocated to the Company based on direct usage or benefit where specifically identifiable, with the remainder allocated based upon other reasonable allocation measures. The Company considers the expense methodology and results to be reasonable for all periods presented. See Note 12 for further information on expenses allocated by MetLife.
The Company previously recorded affiliated transactions with certain MetLife subsidiaries which are not included in the combined financial statements of the Company.
The income tax amounts in these combined financial statements have been calculated based on a separate return methodology and presented as if each company was a separate taxpayer in its respective jurisdiction.
The historical financial results in the combined financial statements presented may not be indicative of the results that would have been achieved by the Company had it operated as a separate, stand-alone entity during the periods presented. The combined financial statements presented do not reflect any changes that may occur in the Company’s financing and operations in connection with or as a result of the Separation. Management believes that the combined financial statements include all adjustments necessary for a fair presentation of the business.
Reclassifications
Certain amounts in the prior year periods’ interim condensed consolidated and combined financial statements and related footnotes thereto have been reclassified to conform to the 2017 presentation as discussed throughout the Notes to the Interim Condensed Consolidated and Combined Financial Statements.
The accompanying interim condensed consolidated financial statements are unaudited and reflect all adjustments (including normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented in conformity with GAAP. Interim results are not necessarily indicative of full year performance. The December 31, 2016 combined balance sheet data was derived from audited combined financial statements for the year ended December 31, 2016 included in the Form 10, which include all disclosures required by GAAP. Therefore, these interim condensed consolidated financial statements should be read in conjunction with the combined financial statements included in the Form 10.
Adoption of New Accounting Pronouncements
Effective January 1, 2017, the Company early adopted guidance relating to business combinations. The new guidance clarifies the definition of a business and requires that an entity apply certain criteria in order to determine when a set of assets and activities qualifies as a business. The adoption of this standard will result in fewer acquisitions qualifying as businesses and, accordingly, acquisition costs for those acquisitions that do not qualify as businesses will be capitalized rather than expensed. The adoption did not have an impact on the Company’s financial statements.
Effective January 1, 2017, the Company retrospectively adopted guidance relating to consolidation. The new guidance does not change the characteristics of a primary beneficiary under current GAAP. It changes how a reporting entity evaluates whether it is the primary beneficiary of a VIE by changing how a reporting entity that is a single decision maker of a VIE handles indirect interests in the entity held through related parties that are under common control with the reporting entity. The adoption of this new guidance did not have a material impact on the Company’s financial statements.
7
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited) — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Other
Effective January 3, 2017, the Chicago Mercantile Exchange (“CME”) amended its rulebook, resulting in the characterization of variation margin transfers as settlement payments, as opposed to adjustments to collateral. These amendments impacted the accounting treatment of the Company’s centrally cleared derivatives, for which the CME serves as the central clearing party. As of the effective date, the application of the amended rulebook, reduced gross derivative assets by $206 million, gross derivative liabilities by $927 million, accrued investment income by $30 million, collateral receivables recorded within premiums, reinsurance and other receivables of $765 million, and collateral payables recorded within payables for collateral under securities loaned and other transactions of $74 million.
Future Adoption of New Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board (“FASB”) issued new guidance on accounting for hedging activities (Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities). The new guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those years. Early adoption is permitted. The ASU (i) refines and expands the criteria for achieving hedge accounting on certain hedging strategies, (ii) requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported, and (iii) eliminates the requirement to separately measure and report hedge ineffectiveness. The ASU also makes other changes to simplify the application of existing guidance related to the assessment of hedge effectiveness and creates new disclosure requirements. The Company is currently evaluating the impact of this guidance on its financial statements.
In May 2017, the FASB issued new guidance on share-based payment awards (ASU 2017-09, Compensation — Stock Compensation (Topic 718) — Scope of Modification Accounting). The new guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years and should be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted. The ASU includes guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The adoption of this guidance will not have a material impact on the Company’s financial statements.
In March 2017, the FASB issued new guidance on purchased callable debt securities (ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities). The new guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those years and should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings. Early adoption is permitted. The ASU shortens the amortization period for certain callable debt securities held at a premium and requires the premium to be amortized to the earliest call date. However, the new guidance does not require an accounting change for securities held at a discount whose discount continues to be amortized to maturity. The Company is currently evaluating the impact of this guidance on its financial statements.
In March 2017, the FASB issued new guidance on the presentation of net periodic pension cost and net periodic postretirement benefit cost (ASU 2017- 07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost). The new guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods and early adoption is permitted. The guidance should be applied retrospectively for the presentation of the service cost component in the income statement and allows a practical expedient for the estimation basis for applying the retrospective presentation requirements. The ASU requires that an employer that offers to its employees defined benefit pension or other postretirement benefit plans report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The adoption of this guidance will not have a material impact on the Company’s financial statements.
In February 2017, the FASB issued new guidance on derecognition of nonfinancial assets (ASU 2017- 05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets). The new guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted for interim or annual reporting periods beginning after December 15, 2017. The guidance may be applied retrospectively for all periods presented or retrospectively with a cumulative-effect adjustment at the date of adoption. The adoption of this guidance will not have a material impact on the Company’s financial statements.
8
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited) — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
In November 2016, the FASB issued new guidance on restricted cash (ASU 2016-18, Statement of Cash Flows (Topic 230): a consensus of the FASB Emerging Issues Task Force). The new guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and should be applied on a retrospective basis. Early adoption is permitted. The new guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, the new guidance requires that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance does not provide a definition of restricted cash or restricted cash equivalents. The adoption of this guidance will not have a material impact on the Company’s financial statements.
In October 2016, the FASB issued new guidance on tax accounting for intra-entity transfers of assets (ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory). The new guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and should be applied on a modified retrospective basis. Early adoption is permitted. The new guidance eliminates the prohibition on recognizing current or deferred income taxes related to inter-entity asset transfers other than inventory by requiring recognition when the transfer occurs. The adoption of this guidance will not have a material impact on the Company’s financial statements.
In August 2016, the FASB issued new guidance on cash flow statement presentation (ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments). The new guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and should be applied retrospectively to all periods presented. Early adoption is permitted. This ASU addresses diversity in how certain cash receipts and cash payments are presented and classified on the statement of cash flows. The adoption of this guidance will not have a material impact on the Company’s financial statements.
In June 2016, the FASB issued new guidance on measurement of credit losses on financial instruments (ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments). The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. This ASU replaces the incurred loss impairment methodology with one that reflects expected credit losses based on historical loss information, current conditions, and reasonable and supportable forecasts. The new guidance requires that an other-than-temporary impairment (“OTTI”) on a debt security will be recognized as an allowance going forward, such that improvements in expected future cash flows after an impairment will no longer be reflected as a prospective yield adjustment through net investment income, but rather a reversal of the previous impairment and recognized through realized investment gains and losses. The guidance also requires enhanced disclosures. The Company has assessed the asset classes impacted by the new guidance and has determined the most significant impacts will be to its mortgage loan investments. The Company is currently assessing the accounting and reporting system changes that will be required to comply with the new guidance along with the overall impacts to its financial statements.
In February 2016, the FASB issued new guidance on leasing transactions (ASU 2016-02, Leases - Topic 842). The new guidance is effective for the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and requires a modified retrospective transition approach. Early adoption is permitted. The new guidance requires a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. Leases would be classified as finance or operating leases and both types of leases will be recognized on the balance sheet. Lessor accounting will remain largely unchanged from current guidance except for certain targeted changes. The new guidance will also require new qualitative and quantitative disclosures. The Company’s implementation efforts are primarily focused on the review of its existing lease contracts as well as identification of other contracts that may fall under the scope of the new guidance. The Company is currently evaluating the impact of this guidance on its financial statements.
In January 2016, the FASB issued new guidance (ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities) on the recognition and measurement of financial instruments. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for the instrument-specific credit risk provision. The new guidance changes the current accounting guidance related to (i) the classification and measurement of certain equity investments, (ii) the presentation of changes in the fair value of financial liabilities measured under the fair value option (“FVO”) that are due to instrument-specific credit risk, and (iii) certain disclosures associated with the fair value of financial instruments. Additionally, there will no longer be a requirement to assess equity securities for impairment since such securities will be measured at fair value through net income. The Company has assessed the population of financial instruments that are subject to the new guidance and has determined that
9
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited) — (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
the most significant impact will be the requirement to report changes in fair value in net income each reporting period for all equity securities currently classified as available-for-sale (“AFS”) and to a lesser extent, the elimination of the cost method of accounting for equity method investments. The Company had approximately $195 million of equity securities and $42 million of partnerships and joint ventures accounted for under the cost method as of September 30, 2017 that will be subject to the new guidance. The Company is continuing to evaluate the impact of this guidance on its financial statements.
In May 2014, the FASB issued a comprehensive new revenue recognition standard (ASU 2014‑09, Revenue from Contracts with Customers (Topic 606)), effective for fiscal years beginning after December 15, 2017 and interim periods within those years. The guidance may be applied retrospectively for all periods presented or retrospectively with a cumulative-effect adjustment at the date of adoption. The new guidance will supersede nearly all existing revenue recognition guidance under U.S. GAAP; however, it will not impact the accounting for insurance and investment contracts within the scope of Financial Services insurance (Topic 944), leases, financial instruments and guarantees. For those contracts that are impacted, the guidance will require an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled, in exchange for those goods or services. The adoption of this guidance will not have a material impact on the Company’s financial statements.
2. Segment Information
The Company is organized into three segments: Annuities; Life; and Run-off. In addition, the Company reports certain of its results of operations in Corporate & Other. Also, in the fourth quarter of 2016, the Company moved the universal life policies with secondary guarantees (“ULSG”) business from the Life segment to the Run-off segment. These and certain other presentation changes were applied retrospectively and did not have an impact on total consolidated and combined net income (loss) or operating earnings (loss) in the prior periods.
Annuities
The Annuities segment offers a variety of variable, fixed, index-linked and income annuities designed to address contractholders’ needs for protected wealth accumulation on a tax-deferred basis, wealth transfer and income security.
Life
The Life segment offers insurance products and services, including term, whole, universal and variable life products designed to address policyholders’ needs for financial security and protected wealth transfer, which may be provided on a tax-advantaged basis.
Run-off
The Run-off segment consists of products no longer actively sold and which are separately managed, including structured settlements, certain company-owned life insurance policies, bank-owned life insurance policies, funding agreements and ULSG.
Corporate & Other
Corporate & Other contains the excess capital not allocated to the segments and interest expense related to the majority of the Company’s outstanding debt, as well as expenses associated with certain legal proceedings and income tax audit issues. Corporate & Other also includes the elimination of intersegment amounts and term life insurance sold direct to consumers, which is no longer being offered for new sales.
Financial Measures and Segment Accounting Policies
Operating earnings (loss) is used by management to evaluate performance, allocate resources and facilitate comparisons to industry results. The Company believes the presentation of operating earnings (loss), as the Company measures it for management purposes, enhances the understanding of its performance by highlighting the results of operations and the underlying profitability drivers of the business. Consistent with GAAP guidance for segment reporting, operating earnings (loss) is also the Company’s GAAP measure of segment performance and is reported below. Operating earnings (loss) should not be viewed as a substitute for net income (loss).
10
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited) — (continued)
2. Segment Information (continued)
Operating earnings (loss) is a measure that focuses on the Company’s primary businesses principally by excluding the impact of market volatility, which could distort trends, and revenues and costs related to non-core products and businesses. Non-core businesses include discontinued operations and other businesses that have been or will be sold or exited by the Company, referred to as divested businesses and certain entities required to be consolidated under GAAP.
The following are excluded from total revenues in calculating operating earnings (loss):
• | Net investment gains (losses); |
• | Net derivative gains (losses) except: (i) earned income on derivatives 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 and (ii) earned income on derivatives that are hedges of policyholder account balances but do not qualify for hedge accounting treatment; |
• | Amortization of unearned revenue related to net investment gains (losses) and net derivative gains (losses) and certain variable annuity guaranteed minimum income benefits (“GMIBs”) fees (“GMIB Fees”); |
• | Certain amounts related to securitization entities that are VIEs consolidated under GAAP; and |
• | Revenues from divested businesses. |
The following are excluded from total expenses in calculating operating earnings (loss):
• | Amounts associated with benefits and hedging costs 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”); |
• | Amortization of deferred policy acquisition costs (“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; |
• | Recognition of certain contingent assets and liabilities that could not be recognized at acquisition or adjusted for during the measurement period under GAAP business combination accounting guidance; |
• | Expenses of divested businesses; |
• | Amounts related to securitization entities that are VIEs consolidated under GAAP; |
• | Goodwill impairment; and |
• | Costs related to: (i) implementation of new insurance regulatory requirements and (ii) acquisition and integration costs. |
The tax impact of the adjustments mentioned above are calculated net of the U.S. statutory tax rate, which could differ from the Company’s effective tax rate.
Set forth in the tables below is certain financial information with respect to the Company’s segments, as well as Corporate & Other, for the three months and nine months ended September 30, 2017 and 2016. The segment accounting policies are the same as those used to prepare the Company’s consolidated and combined financial statements, except for operating earnings (loss) adjustments, as defined above. In addition, segment accounting policies include the method of capital allocation described below.
The internal capital model is a risk capital model that reflects management’s judgment and view of required capital to represent the measurement of the risk profile of the business, to meet the Company’s long term promises to clients, to service long-term obligations and to support the credit ratings of the Company. It accounts for the unique and specific nature of the risks inherent in the Company’s business. Management is responsible for the ongoing production and enhancement of the internal capital model and reviews its approach periodically to ensure that it remains consistent with emerging industry practice standards.
The Company allocates equity to the segments based on the internal capital model and aligns with emerging standards and consistent risk principles.
Segment net investment income is credited or charged based on the level of allocated equity; however, changes in allocated equity do not impact the Company’s consolidated and combined net investment income or net income (loss).
11
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited) — (continued)
2. Segment Information (continued)
Net investment income is based upon the actual results of each segment’s specifically identifiable investment portfolios adjusted for allocated equity. Other costs are allocated to each of the segments based upon: (i) a review of the nature of such costs; (ii) time studies analyzing the amount of employee time incurred by each segment; and (iii) cost estimates included in the Company’s product pricing.
Operating Results | ||||||||||||||||||||
Three Months Ended September 30, 2017 | Annuities | Life | Run-off | Corporate & Other | Total | |||||||||||||||
(In millions) | ||||||||||||||||||||
Pre-tax operating earnings (loss) | $ | 488 | $ | (8 | ) | $ | 119 | $ | (95 | ) | $ | 504 | ||||||||
Provision for income tax expense (benefit) | 133 | (14 | ) | 36 | 1,025 | 1,180 | ||||||||||||||
Operating earnings (loss) | $ | 355 | $ | 6 | $ | 83 | $ | (1,120 | ) | (676 | ) | |||||||||
Adjustments for: | ||||||||||||||||||||
Net investment gains (losses) | 21 | |||||||||||||||||||
Net derivative gains (losses) | (164 | ) | ||||||||||||||||||
Other adjustments to net income | (485 | ) | ||||||||||||||||||
Provision for income tax (expense) benefit | 361 | |||||||||||||||||||
Net income (loss) | $ | (943 | ) | |||||||||||||||||
Inter-segment revenues | $ | (17 | ) | $ | (98 | ) | $ | 28 | $ | (9 | ) | |||||||||
Interest revenue | $ | 310 | $ | 87 | $ | 348 | $ | 35 | ||||||||||||
Interest expense | $ | — | $ | — | $ | — | $ | 36 |
Operating Results | ||||||||||||||||||||
Three Months Ended September 30, 2016 | Annuities | Life | Run-off | Corporate & Other | Total | |||||||||||||||
(In millions) | ||||||||||||||||||||
Pre-tax operating earnings (loss) | $ | 387 | $ | 42 | $ | 28 | $ | 38 | $ | 495 | ||||||||||
Provision for income tax expense (benefit) | 140 | 16 | 2 | 8 | 166 | |||||||||||||||
Operating earnings (loss) | $ | 247 | $ | 26 | $ | 26 | $ | 30 | 329 | |||||||||||
Adjustments for: | ||||||||||||||||||||
Net investment gains (losses) | 26 | |||||||||||||||||||
Net derivative gains (losses) | (501 | ) | ||||||||||||||||||
Other adjustments to net income | (272 | ) | ||||||||||||||||||
Provision for income tax (expense) benefit | 260 | |||||||||||||||||||
Net income (loss) | $ | (158 | ) | |||||||||||||||||
Inter-segment revenues | $ | 29 | $ | (132 | ) | $ | 7 | $ | (64 | ) | ||||||||||
Interest revenue | $ | 370 | $ | 110 | $ | 359 | $ | 103 | ||||||||||||
Interest expense | $ | — | $ | — | $ | 15 | $ | 28 |
12
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited) — (continued)
2. Segment Information (continued)
Operating Results | ||||||||||||||||||||
Nine Months Ended September 30, 2017 | Annuities | Life | Run-off | Corporate & Other | Total | |||||||||||||||
(In millions) | ||||||||||||||||||||
Pre-tax operating earnings (loss) | $ | 1,111 | $ | — | $ | 272 | $ | (61 | ) | $ | 1,322 | |||||||||
Provision for income tax expense (benefit) | 302 | (11 | ) | 88 | 1,015 | 1,394 | ||||||||||||||
Operating earnings (loss) | $ | 809 | $ | 11 | $ | 184 | $ | (1,076 | ) | (72 | ) | |||||||||
Adjustments for: | ||||||||||||||||||||
Net investment gains (losses) | (34 | ) | ||||||||||||||||||
Net derivative gains (losses) | (1,207 | ) | ||||||||||||||||||
Other adjustments to net income | (474 | ) | ||||||||||||||||||
Provision for income tax (expense) benefit | 741 | |||||||||||||||||||
Net income (loss) | $ | (1,046 | ) | |||||||||||||||||
Inter-segment revenues | $ | 43 | $ | (338 | ) | $ | 77 | $ | (79 | ) | ||||||||||
Interest revenue | $ | 948 | $ | 263 | $ | 1,060 | $ | 159 | ||||||||||||
Interest expense | $ | — | $ | — | $ | 23 | $ | 94 |
Operating Results | ||||||||||||||||||||
Nine Months Ended September 30, 2016 | Annuities | Life | Run-off | Corporate & Other | Total | |||||||||||||||
(In millions) | ||||||||||||||||||||
Pre-tax operating earnings (loss) | $ | 1,228 | $ | 68 | $ | (298 | ) | $ | 26 | $ | 1,024 | |||||||||
Provision for income tax expense (benefit) | 368 | 18 | (109 | ) | (1 | ) | 276 | |||||||||||||
Operating earnings (loss) | $ | 860 | $ | 50 | $ | (189 | ) | $ | 27 | 748 | ||||||||||
Adjustments for: | ||||||||||||||||||||
Net investment gains (losses) | (15 | ) | ||||||||||||||||||
Net derivative gains (losses) | (3,181 | ) | ||||||||||||||||||
Other adjustments to net income | 244 | |||||||||||||||||||
Provision for income tax (expense) benefit | 1,030 | |||||||||||||||||||
Net income (loss) | $ | (1,174 | ) | |||||||||||||||||
Inter-segment revenues | $ | 411 | $ | (468 | ) | $ | 9 | $ | (27 | ) | ||||||||||
Interest revenue | $ | 1,075 | $ | 305 | $ | 1,057 | $ | 187 | ||||||||||||
Interest expense | $ | — | $ | — | $ | 45 | $ | 83 |
The following table presents total revenues with respect to the Company’s segments, as well as Corporate & Other:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(In millions) | ||||||||||||||||
Annuities | $ | 1,070 | $ | 1,133 | $ | 3,270 | $ | 3,809 | ||||||||
Life | 387 | 319 | 982 | 929 | ||||||||||||
Run-off | 547 | 674 | 1,631 | 1,720 | ||||||||||||
Corporate & Other | 59 | 117 | 230 | 291 | ||||||||||||
Adjustments | (91 | ) | (477 | ) | (1,151 | ) | (3,178 | ) | ||||||||
Total | $ | 1,972 | $ | 1,766 | $ | 4,962 | $ | 3,571 |
13
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited) — (continued)
2. Segment Information (continued)
The following table presents total assets with respect to the Company’s segments, as well as Corporate & Other, at:
September 30, 2017 | December 31, 2016 | ||||||
(In millions) | |||||||
Annuities | $ | 153,506 | $ | 152,146 | |||
Life | 18,527 | 17,150 | |||||
Run-off | 36,546 | 40,007 | |||||
Corporate & Other | 14,700 | 12,627 | |||||
Total | $ | 223,279 | $ | 221,930 |
3. Insurance
Guarantees
As discussed in Notes 1 and 4 of the Notes to the Combined Financial Statements included in the Form 10, the Company issues variable annuity products with guaranteed minimum benefits. Guaranteed minimum accumulation benefits (“GMABs”), the non-life contingent portion of guaranteed minimum withdrawal benefits (“GMWBs”) and the portion of certain GMIBs that do not require annuitization are accounted for as embedded derivatives in policyholder account balances and are further discussed in Note 5.
The Company also issues universal and variable life contracts where the Company contractually guarantees to the contractholder a secondary guarantee.
Information regarding the Company’s guarantee exposure was as follows at:
September 30, 2017 | December 31, 2016 | |||||||||||||||
In the Event of Death | At Annuitization | In the Event of Death | At Annuitization | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Annuity Contracts (1), (2) | ||||||||||||||||
Variable Annuity Guarantees | ||||||||||||||||
Total account value (3) | $ | 116,468 | $ | 66,523 | $ | 111,719 | $ | 64,503 | ||||||||
Separate account value | $ | 111,335 | $ | 65,132 | $ | 106,759 | $ | 63,025 | ||||||||
Net amount at risk | $ | 5,559 | (4) | $ | 2,980 | (5) | $ | 6,837 | (4) | $ | 3,313 | (5) | ||||
Average attained age of contractholders | 68 years | 67 years | 67 years | 67 years |
September 30, 2017 | December 31, 2016 | ||||||
Secondary Guarantees | |||||||
(Dollars in millions) | |||||||
Universal Life Contracts | |||||||
Total account value (3) | $ | 6,256 | $ | 6,216 | |||
Net amount at risk (6) | $ | 75,862 | $ | 76,216 | |||
Average attained age of policyholders | 64 years | 63 years | |||||
Variable Life Contracts | |||||||
Total account value (3) | $ | 3,260 | $ | 3,110 | |||
Net amount at risk (6) | $ | 25,027 | $ | 26,419 | |||
Average attained age of policyholders | 48 years | 48 years |
__________________
(1) | The Company’s annuity contracts with guarantees may offer more than one type of guarantee in each contract. Therefore, the amounts listed above may not be mutually exclusive. |
14
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited) — (continued)
3. Insurance (continued)
(2) | Includes direct business, but excludes offsets from hedging or reinsurance, if any. Therefore, the net amount at risk presented reflects the economic exposures of living and death benefit guarantees associated with variable annuities, but not necessarily their impact on the Company. See Note 6 of the Notes to the Combined Financial Statements included in the Form 10 for a discussion of guaranteed minimum benefits which have been reinsured. |
(3) | Includes the contractholder’s investments in the general account and separate account, if applicable. |
(4) | Defined as the death benefit less the total account value, as of the balance sheet date. It represents the amount of the claim that the Company would incur if death claims were filed 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. |
(5) | Defined as 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 the Company’s potential economic exposure to such guarantees in the event all contractholders were to annuitize on the balance sheet date, even though the contracts contain terms that allow annuitization of the guaranteed amount only after the 10th anniversary of the contract, which not all contractholders have achieved. |
(6) | Defined as the guarantee amount less the account value, as of the balance sheet date. It represents the amount of the claim that the Company would incur if death claims were filed on all contracts on the balance sheet date. |
Liabilities for Unpaid Claims and Claim Expenses
Rollforward of Claims and Claim Adjustment Expenses
Information regarding the liabilities for unpaid claims and claim adjustment expenses was as follows:
Nine Months Ended September 30, | |||||||
2017 | 2016 | ||||||
(In millions) | |||||||
Balance at December 31 of prior period | $ | 2,008 | $ | 1,719 | |||
Less: Reinsurance recoverables | 1,832 | 1,565 | |||||
Net balance at December 31 of prior period | 176 | 154 | |||||
Cumulative adjustment (1) | — | 89 | |||||
Net balance, beginning of period | 176 | 243 | |||||
Incurred related to: | |||||||
Current period | 556 | 738 | |||||
Prior periods (2) | (5 | ) | (48 | ) | |||
Total incurred | 551 | 690 | |||||
Paid related to: | |||||||
Current period | (460 | ) | (546 | ) | |||
Prior periods | (56 | ) | (171 | ) | |||
Total paid | (516 | ) | (717 | ) | |||
Net balance, end of period | 211 | 216 | |||||
Add: Reinsurance recoverables | 1,887 | 1,670 | |||||
Balance, end of period | $ | 2,098 | $ | 1,886 |
______________
(1) | Reflects the accumulated adjustment, net of reinsurance, upon implementation of the new short-duration contracts guidance which clarified the requirement to include claim information for long-duration contracts. The accumulated adjustment primarily reflects unpaid claim liabilities, net of reinsurance, for long-duration contracts as of the beginning of the period presented. |
15
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited) — (continued)
3. Insurance (continued)
(2) | During the nine months ended September 30, 2017 and 2016, the claims and claim adjustment expenses associated with prior years changed due to differences between the actual benefits paid and the expected benefits owed during those periods. |
4. Investments
Fixed Maturity and Equity Securities Available-for-Sale
Fixed Maturity and Equity Securities Available-for-Sale by Sector
The following table presents the fixed maturity and equity securities AFS by sector. Redeemable preferred stock is reported within U.S. corporate and foreign corporate fixed maturity securities and non-redeemable preferred stock is reported within equity securities. Included within fixed maturity securities are structured securities including residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and asset-backed securities (“ABS”) (collectively, “Structured Securities”).
September 30, 2017 | December 31, 2016 | ||||||||||||||||||||||||||||||||||||||
Cost or Amortized Cost | Gross Unrealized | Estimated Fair Value | Cost or Amortized Cost | Gross Unrealized | Estimated Fair Value | ||||||||||||||||||||||||||||||||||
Gains | Temporary Losses | OTTI Losses (1) | Gains | Temporary Losses | OTTI Losses (1) | ||||||||||||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | |||||||||||||||||||||||||||||||||||||||
U.S. corporate | $ | 20,774 | $ | 1,773 | $ | 101 | $ | — | $ | 22,446 | $ | 21,278 | $ | 1,324 | $ | 291 | $ | — | $ | 22,311 | |||||||||||||||||||
U.S. government and agency | 14,313 | 1,657 | 127 | — | 15,843 | 12,032 | 1,294 | 236 | — | 13,090 | |||||||||||||||||||||||||||||
RMBS | 7,786 | 284 | 62 | (4 | ) | 8,012 | 7,961 | 206 | 144 | — | 8,023 | ||||||||||||||||||||||||||||
Foreign corporate | 6,466 | 373 | 75 | — | 6,764 | 6,343 | 230 | 180 | — | 6,393 | |||||||||||||||||||||||||||||
State and political subdivision | 3,619 | 508 | 9 | — | 4,118 | 3,590 | 393 | 38 | — | 3,945 | |||||||||||||||||||||||||||||
CMBS | 3,331 | 61 | 16 | (1 | ) | 3,377 | 3,799 | 44 | 32 | (1 | ) | 3,812 | |||||||||||||||||||||||||||
ABS | 1,732 | 20 | 2 | — | 1,750 | 2,654 | 12 | 14 | — | 2,652 | |||||||||||||||||||||||||||||
Foreign government | 1,105 | 153 | 3 | — | 1,255 | 1,058 | 116 | 12 | — | 1,162 | |||||||||||||||||||||||||||||
Total fixed maturity securities | $ | 59,126 | $ | 4,829 | $ | 395 | $ | (5 | ) | $ | 63,565 | $ | 58,715 | $ | 3,619 | $ | 947 | $ | (1 | ) | $ | 61,388 | |||||||||||||||||
Equity securities: | |||||||||||||||||||||||||||||||||||||||
Non-redeemable preferred stock | $ | 138 | $ | 10 | $ | 1 | $ | — | $ | 147 | $ | 180 | $ | 6 | $ | 9 | $ | — | $ | 177 | |||||||||||||||||||
Common stock | 96 | 22 | — | — | 118 | 100 | 23 | — | — | 123 | |||||||||||||||||||||||||||||
Total equity securities | $ | 234 | $ | 32 | $ | 1 | $ | — | $ | 265 | $ | 280 | $ | 29 | $ | 9 | $ | — | $ | 300 |
__________________
(1) | Noncredit OTTI losses included in accumulated other comprehensive income (“AOCI”) in an unrealized gain position are due to increases in estimated fair value subsequent to initial recognition of noncredit losses on such securities. See also “— Net Unrealized Investment Gains (Losses).” |
The Company held non-income producing fixed maturity securities with an estimated fair value of $3 million and $5 million with unrealized gains (losses) of ($1) million and less than $1 million at September 30, 2017 and December 31, 2016, respectively.
Maturities of Fixed Maturity Securities
The amortized cost and estimated fair value of fixed maturity securities, by contractual maturity date, were as follows at September 30, 2017:
Due in One Year or Less | Due After One Year Through Five Years | Due After Five Years Through Ten Years | Due After Ten Years | Structured Securities | Total Fixed Maturity Securities | ||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Amortized cost | $ | 1,658 | $ | 11,012 | $ | 10,713 | $ | 22,894 | $ | 12,849 | $ | 59,126 | |||||||||||
Estimated fair value | $ | 1,669 | $ | 11,436 | $ | 11,076 | $ | 26,245 | $ | 13,139 | $ | 63,565 |
16
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited) — (continued)
4. Investments (continued)
Actual maturities may differ from contractual maturities due to the exercise of call or prepayment options. Fixed maturity securities not due at a single maturity date have been presented in the year of final contractual maturity. Structured Securities are shown separately, as they are not due at a single maturity.
Continuous Gross Unrealized Losses for Fixed Maturity and Equity Securities AFS by Sector
The following table presents the estimated fair value and gross unrealized losses of fixed maturity and equity securities AFS in an unrealized loss position, aggregated by sector and by length of time that the securities have been in a continuous unrealized loss position at:
September 30, 2017 | December 31, 2016 | ||||||||||||||||||||||||||||||
Less than 12 Months | Equal to or Greater than 12 Months | Less than 12 Months | Equal to or Greater than 12 Months | ||||||||||||||||||||||||||||
Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||||||||||
Fixed maturity securities: | |||||||||||||||||||||||||||||||
U.S. corporate | $ | 2,322 | $ | 53 | $ | 750 | $ | 48 | $ | 4,676 | $ | 189 | $ | 745 | $ | 102 | |||||||||||||||
U.S. government and agency | 5,384 | 72 | 529 | 55 | 4,396 | 236 | — | — | |||||||||||||||||||||||
RMBS | 2,232 | 44 | 395 | 14 | 3,494 | 112 | 818 | 32 | |||||||||||||||||||||||
Foreign corporate | 561 | 12 | 594 | 63 | 1,466 | 66 | 633 | 114 | |||||||||||||||||||||||
State and political subdivision | 300 | 6 | 43 | 3 | 889 | 35 | 29 | 3 | |||||||||||||||||||||||
CMBS | 681 | 10 | 92 | 5 | 1,572 | 27 | 171 | 4 | |||||||||||||||||||||||
ABS | 122 | — | 97 | 2 | 478 | 6 | 461 | 8 | |||||||||||||||||||||||
Foreign government | 149 | 2 | 14 | 1 | 273 | 11 | 6 | 1 | |||||||||||||||||||||||
Total fixed maturity securities | $ | 11,751 | $ | 199 | $ | 2,514 | $ | 191 | $ | 17,244 | $ | 682 | $ | 2,863 | $ | 264 | |||||||||||||||
Equity securities: | |||||||||||||||||||||||||||||||
Non-redeemable preferred stock | $ | — | $ | — | $ | 16 | $ | 1 | $ | 57 | $ | 2 | $ | 40 | $ | 7 | |||||||||||||||
Common stock | 1 | — | — | — | — | — | — | — | |||||||||||||||||||||||
Total equity securities | $ | 1 | $ | — | $ | 16 | $ | 1 | $ | 57 | $ | 2 | $ | 40 | $ | 7 | |||||||||||||||
Total number of securities in an unrealized loss position | 1,037 | 375 | 1,741 | 483 |
Evaluation of AFS Securities for OTTI and Evaluating Temporarily Impaired AFS Securities
As described more fully in Notes 1 and 7 of the Notes to the Combined Financial Statements included in the Form 10, the Company performs a regular evaluation of all investment classes for impairment, including fixed maturity securities, equity securities and perpetual hybrid securities, in accordance with its impairment policy, in order to evaluate whether such investments are other-than-temporarily impaired.
Current Period Evaluation
Based on the Company’s current evaluation of its AFS securities in an unrealized loss position in accordance with its impairment policy, and the Company’s current intentions and assessments (as applicable to the type of security) about holding, selling and any requirements to sell these securities, the Company concluded that these securities were not other-than-temporarily impaired at September 30, 2017. Future OTTI will depend primarily on economic fundamentals, issuer performance (including changes in the present value of future cash flows expected to be collected), changes in credit ratings, collateral valuation, interest rates and credit spreads, as well as a change in the Company’s intention to hold or sell a security that is in an unrealized loss position. If economic fundamentals deteriorate or if there are adverse changes in the above factors, OTTI may be incurred in upcoming periods.
Gross unrealized losses on fixed maturity securities decreased $556 million during the nine months ended September 30, 2017 to $390 million. The decrease in gross unrealized losses for the nine months ended September 30, 2017 was primarily attributable to narrowing credit spreads and decreasing longer-term interest rates.
17
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited) — (continued)
4. Investments (continued)
At September 30, 2017, $5 million of the total $390 million of gross unrealized losses were from eight fixed maturity securities with an unrealized loss position of 20% or more of amortized cost for six months or greater.
The change in gross unrealized losses on equity securities was not significant during the nine months ended September 30, 2017.
Investment Grade Fixed Maturity Securities
Of the $5 million of gross unrealized losses on fixed maturity securities with an unrealized loss of 20% or more of amortized cost for six months or greater, $3 million, or 60%, were related to gross unrealized losses on two investment grade fixed maturity securities. Unrealized losses on investment grade fixed maturity securities are principally related to widening credit spreads since purchase and, with respect to fixed-rate fixed maturity securities, rising interest rates since purchase.
Below Investment Grade Fixed Maturity Securities
Of the $5 million of gross unrealized losses on fixed maturity securities with an unrealized loss of 20% or more of amortized cost for six months or greater, $2 million, or 40%, were related to gross unrealized losses on six below investment grade fixed maturity securities. Unrealized losses on below investment grade fixed maturity securities are principally related to U.S. and foreign corporate securities (primarily industrial securities) and are the result of significantly wider credit spreads resulting from higher risk premiums since purchase, largely due to economic and market uncertainties including concerns over lower oil prices in the energy sector. Management evaluates U.S. and foreign corporate securities based on factors such as expected cash flows and the financial condition and near-term and long-term prospects of the issuers.
Mortgage Loans
Mortgage Loans by Portfolio Segment
Mortgage loans are summarized as follows at:
September 30, 2017 | December 31, 2016 | ||||||||||||
Carrying Value | % of Total | Carrying Value | % of Total | ||||||||||
(Dollars in millions) | |||||||||||||
Mortgage loans: | |||||||||||||
Commercial | $ | 7,039 | 67.5 | % | $ | 6,523 | 69.6 | % | |||||
Agricultural | 2,220 | 21.3 | 1,892 | 20.2 | |||||||||
Residential | 1,098 | 10.5 | 867 | 9.2 | |||||||||
Subtotal (1) | 10,357 | 99.3 | 9,282 | 99.0 | |||||||||
Valuation allowances | (45 | ) | (0.4 | ) | (40 | ) | (0.4 | ) | |||||
Subtotal mortgage loans, net | 10,312 | 98.9 | 9,242 | 98.6 | |||||||||
Commercial mortgage loans held by CSEs — FVO | 119 | 1.1 | 136 | 1.4 | |||||||||
Total mortgage loans, net | $ | 10,431 | 100.0 | % | $ | 9,378 | 100.0 | % |
__________________
(1) | Purchases of mortgage loans were $32 million and $339 million for the three months and nine months ended September 30, 2017, respectively, and $123 million and $354 million for the three months and nine months ended September 30, 2016, respectively, and were primarily comprised of residential mortgage loans. |
See “— Variable Interest Entities” for discussion of consolidated securitization entities (“CSEs”).
Information on commercial, agricultural and residential mortgage loans is presented in the tables below. Information on commercial mortgage loans held by CSEs — FVO is presented in Note 6. The Company elects the FVO for certain commercial mortgage loans and related long-term debt that are managed on a total return basis.
18
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited) — (continued)
4. Investments (continued)
Mortgage Loans, Valuation Allowance and Impaired Loans by Portfolio Segment
Mortgage loans by portfolio segment, by method of evaluation of credit loss, impaired mortgage loans including those modified in a troubled debt restructuring, and the related valuation allowances, were as follows at:
Evaluated Individually for Credit Losses | Evaluated Collectively for Credit Losses | Impaired Loans | |||||||||||||||||||||||||||||
Impaired Loans with a Valuation Allowance | Impaired Loans without a Valuation Allowance | ||||||||||||||||||||||||||||||
Unpaid Principal Balance | Recorded Investment | Valuation Allowances | Unpaid Principal Balance | Recorded Investment | Recorded Investment | Valuation Allowances | Carrying Value | ||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||
September 30, 2017 | |||||||||||||||||||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 7,039 | $ | 34 | $ | — | |||||||||||||||
Agricultural | 4 | 3 | — | — | — | 2,217 | 7 | 3 | |||||||||||||||||||||||
Residential | — | — | — | 4 | 4 | 1,094 | 4 | 4 | |||||||||||||||||||||||
Total | $ | 4 | $ | 3 | $ | — | $ | 4 | $ | 4 | $ | 10,350 | $ | 45 | $ | 7 | |||||||||||||||
December 31, 2016 | |||||||||||||||||||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 6,523 | $ | 32 | $ | — | |||||||||||||||
Agricultural | 4 | 3 | — | — | — | 1,889 | 5 | 3 | |||||||||||||||||||||||
Residential | — | — | — | 1 | 1 | 866 | 3 | 1 | |||||||||||||||||||||||
Total | $ | 4 | $ | 3 | $ | — | $ | 1 | $ | 1 | $ | 9,278 | $ | 40 | $ | 4 |
The average recorded investment for impaired commercial, agricultural and residential mortgage loans was $0, $3 million and $4 million, respectively, for the three months ended September 30, 2017 and $0, $3 million and $2 million, respectively, for the nine months ended September 30, 2017. The average recorded investment for impaired commercial, agricultural and residential mortgage loans was $0, $3 million and $0, respectively, for both the three months and nine months ended September 30, 2016.
Valuation Allowance Rollforward by Portfolio Segment
The changes in the valuation allowance, by portfolio segment, were as follows:
Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2017 | 2016 | ||||||||||||||||||||||||||||||
Commercial | Agricultural | Residential | Total | Commercial | Agricultural | Residential | Total | ||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||
Balance, beginning of period | $ | 32 | $ | 5 | $ | 3 | $ | 40 | $ | 29 | $ | 5 | $ | 3 | $ | 37 | |||||||||||||||
Provision (release) | 2 | 2 | 1 | 5 | 4 | — | 2 | 6 | |||||||||||||||||||||||
Balance, end of period | $ | 34 | $ | 7 | $ | 4 | $ | 45 | $ | 33 | $ | 5 | $ | 5 | $ | 43 |
19
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited) — (continued)
4. Investments (continued)
Credit Quality of Commercial Mortgage Loans
The credit quality of commercial mortgage loans was as follows at:
Recorded Investment | |||||||||||||||||||||||||
Debt Service Coverage Ratios | % of Total | Estimated Fair Value | % of Total | ||||||||||||||||||||||
> 1.20x | 1.00x - 1.20x | < 1.00x | Total | ||||||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||||
September 30, 2017 | |||||||||||||||||||||||||
Loan-to-value ratios: | |||||||||||||||||||||||||
Less than 65% | $ | 6,084 | $ | 300 | $ | 33 | $ | 6,417 | 91.2 | % | $ | 6,583 | 91.4 | % | |||||||||||
65% to 75% | 519 | 9 | 18 | 546 | 7.8 | 547 | 7.6 | ||||||||||||||||||
76% to 80% | 10 | 33 | 9 | 52 | 0.7 | 51 | 0.7 | ||||||||||||||||||
Greater than 80% | — | — | 24 | 24 | 0.3 | 23 | 0.3 | ||||||||||||||||||
Total | $ | 6,613 | $ | 342 | $ | 84 | $ | 7,039 | 100.0 | % | $ | 7,204 | 100.0 | % | |||||||||||
December 31, 2016 | |||||||||||||||||||||||||
Loan-to-value ratios: | |||||||||||||||||||||||||
Less than 65% | $ | 5,744 | $ | 230 | $ | 167 | $ | 6,141 | 94.1 | % | $ | 6,222 | 94.3 | % | |||||||||||
65% to 75% | 291 | — | 19 | 310 | 4.8 | 303 | 4.6 | ||||||||||||||||||
76% to 80% | 34 | — | — | 34 | 0.5 | 33 | 0.5 | ||||||||||||||||||
Greater than 80% | 24 | 14 | — | 38 | 0.6 | 37 | 0.6 | ||||||||||||||||||
Total | $ | 6,093 | $ | 244 | $ | 186 | $ | 6,523 | 100.0 | % | $ | 6,595 | 100.0 | % |
Credit Quality of Agricultural Mortgage Loans
The credit quality of agricultural mortgage loans was as follows at:
September 30, 2017 | December 31, 2016 | ||||||||||||
Recorded Investment | % of Total | Recorded Investment | % of Total | ||||||||||
(Dollars in millions) | |||||||||||||
Loan-to-value ratios: | |||||||||||||
Less than 65% | $ | 2,086 | 94.0 | % | $ | 1,849 | 97.7 | % | |||||
65% to 75% | 134 | 6.0 | 43 | 2.3 | |||||||||
Total | $ | 2,220 | 100.0 | % | $ | 1,892 | 100.0 | % |
The estimated fair value of agricultural mortgage loans was $2.2 billion and $1.9 billion at September 30, 2017 and December 31, 2016, respectively.
20
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited) — (continued)
4. Investments (continued)
Credit Quality of Residential Mortgage Loans
The credit quality of residential mortgage loans was as follows at:
September 30, 2017 | December 31, 2016 | ||||||||||||
Recorded Investment | % of Total | Recorded Investment | % of Total | ||||||||||
(Dollars in millions) | |||||||||||||
Performance indicators: | |||||||||||||
Performing | $ | 1,072 | 97.6 | % | $ | 856 | 98.7 | % | |||||
Nonperforming | 26 | 2.4 | 11 | 1.3 | |||||||||
Total | $ | 1,098 | 100.0 | % | $ | 867 | 100.0 | % |
The estimated fair value of residential mortgage loans was $1.1 billion and $867 million at September 30, 2017 and December 31, 2016, respectively.
Past Due and Nonaccrual Mortgage Loans
The Company has a high quality, well performing mortgage loan portfolio, with over 99% of all mortgage loans classified as performing at both September 30, 2017 and December 31, 2016. The Company defines delinquency consistent with industry practice, when mortgage loans are past due as follows: commercial and residential mortgage loans — 60 days and agricultural mortgage loans — 90 days. The past due and nonaccrual mortgage loans at recorded investment, prior to valuation allowances, by portfolio segment, were as follows at:
Past Due | Nonaccrual Status | ||||||||||||||
September 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | — | |||||||
Agricultural | — | — | — | — | |||||||||||
Residential | 26 | 11 | 26 | 11 | |||||||||||
Total | $ | 26 | $ | 11 | $ | 26 | $ | 11 |
Mortgage Loans Modified in a Troubled Debt Restructuring
The Company did not have a significant amount of mortgage loans modified in a troubled debt restructuring during both the three months and nine months ended September 30, 2017 and 2016.
Cash Equivalents
The carrying value of cash equivalents, which includes securities and other investments with an original or remaining maturity of three months or less at the time of purchase, was $1.0 billion and $4.8 billion at September 30, 2017 and December 31, 2016, respectively.
Net Unrealized Investment Gains (Losses)
Unrealized investment gains (losses) on fixed maturity and equity securities AFS and the effect on DAC, VOBA, deferred sales inducements (“DSI”) and future policy benefits, that would result from the realization of the unrealized gains (losses), are included in net unrealized investment gains (losses) in AOCI.
21
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited) — (continued)
4. Investments (continued)
The components of net unrealized investment gains (losses), included in AOCI, were as follows:
September 30, 2017 | December 31, 2016 | ||||||
(In millions) | |||||||
Fixed maturity securities | $ | 4,424 | $ | 2,663 | |||
Fixed maturity securities with noncredit OTTI losses included in AOCI | 5 | 1 | |||||
Total fixed maturity securities | 4,429 | 2,664 | |||||
Equity securities | 55 | 32 | |||||
Derivatives | 293 | 414 | |||||
Short-term investments | — | (42 | ) | ||||
Other | (7 | ) | (26 | ) | |||
Subtotal | 4,770 | 3,042 | |||||
Amounts allocated from: | |||||||
Future policy benefits | (2,384 | ) | (802 | ) | |||
DAC and VOBA related to noncredit OTTI losses recognized in AOCI | (2 | ) | (2 | ) | |||
DAC, VOBA and DSI | (299 | ) | (214 | ) | |||
Subtotal | (2,685 | ) | (1,018 | ) | |||
Deferred income tax benefit (expense) related to noncredit OTTI losses recognized in AOCI | (1 | ) | — | ||||
Deferred income tax benefit (expense) | (732 | ) | (712 | ) | |||
Net unrealized investment gains (losses) | $ | 1,352 | $ | 1,312 |
The changes in net unrealized investment gains (losses) were as follows:
Nine Months Ended September 30, 2017 | |||
(In millions) | |||
Balance, beginning of period | $ | 1,312 | |
Fixed maturity securities on which noncredit OTTI losses have been recognized | 4 | ||
Unrealized investment gains (losses) during the period | 1,724 | ||
Unrealized investment gains (losses) relating to: | |||
Future policy benefits | (1,582 | ) | |
DAC, VOBA and DSI | (85 | ) | |
Deferred income tax benefit (expense) related to noncredit OTTI losses recognized in AOCI | (1 | ) | |
Deferred income tax benefit (expense) | (20 | ) | |
Balance, end of period | $ | 1,352 | |
Change in net unrealized investment gains (losses) | $ | 40 |
22
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited) — (continued)
4. Investments (continued)
Concentrations of Credit Risk
There were no investments in any counterparty that were greater than 10% of the Company’s equity, other than the U.S. government and its agencies, at both September 30, 2017 and December 31, 2016.
Securities Lending
Elements of the securities lending program are presented below at:
September 30, 2017 | December 31, 2016 | ||||||
(In millions) | |||||||
Securities on loan: (1) | |||||||
Amortized cost | $ | 3,169 | $ | 5,895 | |||
Estimated fair value | $ | 3,820 | $ | 6,555 | |||
Cash collateral received from counterparties (2) | $ | 3,902 | $ | 6,642 | |||
Security collateral received from counterparties (3) | $ | — | $ | 27 | |||
Reinvestment portfolio — estimated fair value | $ | 3,935 | $ | 6,571 |
__________________
(1) | Included within fixed maturity securities. |
(2) | Included within payables for collateral under securities loaned and other transactions. |
(3) | Security collateral received from counterparties may not be sold or re-pledged, unless the counterparty is in default, and is not reflected on the consolidated and combined financial statements. |
The cash collateral liability by loaned security type and remaining tenor of the agreements were as follows at:
September 30, 2017 | December 31, 2016 | ||||||||||||||||||||||||||||||
Remaining Tenor of Securities Lending Agreements | Remaining Tenor of Securities Lending Agreements | ||||||||||||||||||||||||||||||
Open (1) | 1 Month or Less | 1 to 6 Months | Total | Open (1) | 1 Month or Less | 1 to 6 Months | Total | ||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||
Cash collateral liability by loaned security type: | |||||||||||||||||||||||||||||||
U.S. government and agency | $ | 1,480 | $ | 1,512 | $ | 910 | $ | 3,902 | $ | 2,129 | $ | 1,906 | $ | 1,743 | $ | 5,778 | |||||||||||||||
U.S. corporate | — | — | — | — | — | 480 | — | 480 | |||||||||||||||||||||||
Agency RMBS | — | — | — | — | — | — | 274 | 274 | |||||||||||||||||||||||
Foreign corporate | — | — | — | — | — | 58 | — | 58 | |||||||||||||||||||||||
Foreign government | — | — | — | — | — | 52 | — | 52 | |||||||||||||||||||||||
Total | $ | 1,480 | $ | 1,512 | $ | 910 | $ | 3,902 | $ | 2,129 | $ | 2,496 | $ | 2,017 | $ | 6,642 |
__________________
(1) | The related loaned security could be returned to the Company on the next business day which would require the Company to immediately return the cash collateral. |
If the Company is required to return significant amounts of cash collateral on short notice and is forced to sell securities to meet the return obligation, it may have difficulty selling such collateral that is invested in securities in a timely manner, be forced to sell securities in a volatile or illiquid market for less than what otherwise would have been realized under normal market conditions, or both. The estimated fair value of the securities on loan related to the cash collateral on open at September 30, 2017 was $1.4 billion, all of which were U.S. government and agency securities which, if put back to the Company, could be immediately sold to satisfy the cash requirement.
23
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited) — (continued)
4. Investments (continued)
The reinvestment portfolio acquired with the cash collateral consisted principally of fixed maturity securities (including agency RMBS, ABS, U.S. and foreign corporate securities, U.S. government and agency securities and non-agency RMBS) with 60% invested in agency RMBS, U.S. government and agency securities, short-term investments, cash equivalents, or held in cash at September 30, 2017. If the securities on loan or the reinvestment portfolio become less liquid, the Company has the liquidity resources of most of its general account available to meet any potential cash demands when securities on loan are put back to the Company.
Invested Assets on Deposit, Held in Trust and Pledged as Collateral
Invested assets on deposit, held in trust and pledged as collateral are presented below at estimated fair value at:
September 30, 2017 | December 31, 2016 | ||||||
(In millions) | |||||||
Invested assets on deposit (regulatory deposits) | $ | 8,096 | $ | 7,648 | |||
Invested assets held in trust (reinsurance agreements) | 2,511 | 9,054 | |||||
Invested assets pledged as collateral | 3,933 | 3,548 | |||||
Total invested assets on deposit, held in trust and pledged as collateral | $ | 14,540 | $ | 20,250 |
The Company has pledged invested assets in connection with various agreements and transactions, including funding agreements (see Note 4 of the Notes to the Combined Financial Statements included in the Form 10) and derivative transactions (see Note 5). The Company held in trust certain investments in connection with certain reinsurance transactions. In April 2017, the MetLife Reinsurance Company of South Carolina (“MRSC”) collateral financing arrangement was repaid in connection with the Restructuring (see Note 7). Amounts in the table above include invested assets and cash and cash equivalents.
See “— Securities Lending” for information regarding securities on loan.
Variable Interest Entities
The Company has invested in legal entities that are VIEs. In certain instances, the Company holds both the power to direct the most significant activities of the entity, as well as an economic interest in the entity and, as such, is deemed to be the primary beneficiary or consolidator of the entity.
The determination of the VIE’s primary beneficiary requires an evaluation of the contractual and implied rights and obligations associated with each party’s relationship with or involvement in the entity, an estimate of the entity’s expected losses and expected residual returns and the allocation of such estimates to each party involved in the entity.
Consolidated VIEs
Creditors or beneficial interest holders of VIEs where the Company is the primary beneficiary have no recourse to the general credit of the Company, as the Company’s obligation to the VIEs is limited to the amount of its committed investment.
The following table presents the total assets and total liabilities relating to VIEs for which the Company has concluded that it is the primary beneficiary and which are consolidated at:
September 30, 2017 | December 31, 2016 | ||||||||||||||
Total Assets | Total Liabilities | Total Assets | Total Liabilities | ||||||||||||
(In millions) | |||||||||||||||
MRSC (collateral financing arrangement) (1) | $ | — | $ | — | $ | 3,422 | $ | — | |||||||
CSEs (assets (primarily loans) and liabilities (primarily debt)) (2) | 120 | 14 | 137 | 24 | |||||||||||
Total | $ | 120 | $ | 14 | $ | 3,559 | $ | 24 |
__________________
24
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited) — (continued)
4. Investments (continued)
(1) | See Note 12 of the Notes to the Combined Financial Statements included in the Form 10 for a description of the MRSC collateral financing arrangement. In April 2017, these assets were liquidated and the proceeds were used to repay the collateral financing arrangement. See Note 7. These assets historically consisted of fixed maturity securities, short-term investments and cash equivalents, but were transitioned into short-term investments and cash equivalents prior to termination of the arrangement. |
(2) | The Company consolidates entities that are structured as CMBS. The assets of these entities can only be used to settle their respective liabilities, and under no circumstances is the Company liable for any principal or interest shortfalls should any arise. The Company’s exposure was limited to that of its remaining investment in these entities of $87 million and $95 million at estimated fair value at September 30, 2017 and December 31, 2016, respectively. |
Unconsolidated VIEs
The carrying amount and maximum exposure to loss relating to VIEs in which the Company holds a significant variable interest but is not the primary beneficiary and which have not been consolidated were as follows at:
September 30, 2017 | December 31, 2016 | ||||||||||||||
Carrying Amount | Maximum Exposure to Loss (1) | Carrying Amount | Maximum Exposure to Loss (1) | ||||||||||||
(In millions) | |||||||||||||||
Fixed maturity securities AFS: | |||||||||||||||
Structured Securities (2) | $ | 11,477 | $ | 11,477 | $ | 13,062 | $ | 13,062 | |||||||
U.S. and foreign corporate | 501 | 501 | 518 | 518 | |||||||||||
Other limited partnership interests | 1,492 | 2,394 | 1,495 | 2,292 | |||||||||||
Other investments (3) | 87 | 97 | 90 | 101 | |||||||||||
Total | $ | 13,557 | $ | 14,469 | $ | 15,165 | $ | 15,973 |
__________________
(1) | The maximum exposure to loss relating to fixed maturity securities AFS is equal to their carrying amounts or the carrying amounts of retained interests. The maximum exposure to loss relating to other limited partnership interests and real estate joint ventures is equal to the carrying amounts plus any unfunded commitments. For certain of its investments in other invested assets, the Company’s return is in the form of income tax credits which are guaranteed by creditworthy third parties. For such investments, the maximum exposure to loss is equal to the carrying amounts plus any unfunded commitments, reduced by income tax credits guaranteed by third parties. There were no income tax credits at both September 30, 2017 and December 31, 2016. Such a maximum loss would be expected to occur only upon bankruptcy of the issuer or investee. |
(2) | For these variable interests, the Company’s involvement is limited to that of a passive investor in mortgage-backed or asset-backed securities issued by trusts that do not have substantial equity. |
(3) | Other investments is comprised of real estate joint ventures, other invested assets and non-redeemable preferred stock. |
As described in Note 11, the Company makes commitments to fund partnership investments in the normal course of business. Excluding these commitments, the Company did not provide financial or other support to investees designated as VIEs during both the three months and nine months ended September 30, 2017 and 2016.
25
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated and Combined Financial Statements (Unaudited) — (continued)
4. Investments (continued)
Net Investment Income
The components of net investment income were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
(In millions) | |||||||||||||||
Investment income: | |||||||||||||||
Fixed maturity securities | $ | 601 | $ | 690 | $ | 1,809 | $ | 2,001 | |||||||
Equity securities | 3 |