Brighthouse Financial, Inc. - Quarter Report: 2019 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2019
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 or other jurisdiction of incorporation or organization) | (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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | BHF | The Nasdaq Stock Market LLC |
Depositary Shares, each representing a 1/1,000th interest in a share | BHFAP | The Nasdaq Stock Market LLC |
of 6.600% Non-Cumulative Preferred Stock, Series A | ||
6.250% Junior Subordinated Debentures due 2058 | BHFAL | The Nasdaq Stock Market LLC |
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 every Interactive Data File required to be submitted 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 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 | þ | Accelerated filer | ¨ | ||
Non-accelerated filer | ¨ | 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
As of August 2, 2019, 111,410,202 shares of the registrant’s common stock were outstanding.
Table of Contents
Page | ||
Item 1. | Consolidated Financial Statements (at June 30, 2019 (Unaudited) and December 31, 2018 and for the Three Months and Six Months Ended June 30, 2019 and 2018 (Unaudited)): | |
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 5. | ||
Item 6. | ||
Part I — Financial Information
Item 1. Financial Statements
Brighthouse Financial, Inc.
Interim Condensed Consolidated Balance Sheets
June 30, 2019 (Unaudited) and December 31, 2018
(In millions, except share and per share data)
June 30, 2019 | December 31, 2018 | |||||||
Assets | ||||||||
Investments: | ||||||||
Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $61,362 and $60,920, respectively) | $ | 67,211 | $ | 62,608 | ||||
Equity securities, at estimated fair value | 153 | 140 | ||||||
Mortgage loans (net of valuation allowances of $64 and $57, respectively) | 15,078 | 13,694 | ||||||
Policy loans | 1,342 | 1,421 | ||||||
Real estate limited partnerships and limited liability companies | 462 | 451 | ||||||
Other limited partnership interests | 1,834 | 1,840 | ||||||
Short-term investments, principally at estimated fair value | 793 | — | ||||||
Other invested assets, principally at estimated fair value | 3,064 | 3,027 | ||||||
Total investments | 89,937 | 83,181 | ||||||
Cash and cash equivalents | 3,981 | 4,145 | ||||||
Accrued investment income | 747 | 724 | ||||||
Premiums, reinsurance and other receivables | 14,231 | 13,697 | ||||||
Deferred policy acquisition costs and value of business acquired | 5,492 | 5,717 | ||||||
Current income tax recoverable | — | 1 | ||||||
Other assets | 610 | 573 | ||||||
Separate account assets | 106,214 | 98,256 | ||||||
Total assets | $ | 221,212 | $ | 206,294 | ||||
Liabilities and Equity | ||||||||
Liabilities | ||||||||
Future policy benefits | $ | 38,280 | $ | 36,209 | ||||
Policyholder account balances | 42,941 | 40,054 | ||||||
Other policy-related balances | 3,041 | 3,000 | ||||||
Payables for collateral under securities loaned and other transactions | 4,094 | 5,057 | ||||||
Long-term debt | 4,365 | 3,963 | ||||||
Current income tax payable | 14 | 15 | ||||||
Deferred income tax liability | 1,364 | 972 | ||||||
Other liabilities | 4,558 | 4,285 | ||||||
Separate account liabilities | 106,214 | 98,256 | ||||||
Total liabilities | 204,871 | 191,811 | ||||||
Contingencies, Commitments and Guarantees (Note 11) | ||||||||
Equity | ||||||||
Brighthouse Financial, Inc.’s stockholders’ equity: | ||||||||
Preferred stock, par value $0.01 per share; $425 aggregate liquidation preference at June 30, 2019 | — | — | ||||||
Common stock, par value $0.01 per share; 1,000,000,000 shares authorized; 120,593,413 and 120,448,018 shares issued, respectively; 112,644,952 and 117,532,336 shares outstanding, respectively | 1 | 1 | ||||||
Additional paid-in capital | 12,893 | 12,473 | ||||||
Retained earnings (deficit) | 986 | 1,346 | ||||||
Treasury stock, at cost; 7,948,461 and 2,915,682 shares, respectively | (306 | ) | (118 | ) | ||||
Accumulated other comprehensive income (loss) | 2,702 | 716 | ||||||
Total Brighthouse Financial, Inc.’s stockholders’ equity | 16,276 | 14,418 | ||||||
Noncontrolling interests | 65 | 65 | ||||||
Total equity | 16,341 | 14,483 | ||||||
Total liabilities and equity | $ | 221,212 | $ | 206,294 | ||||
See accompanying notes to the interim condensed consolidated financial statements.
2
Brighthouse Financial, Inc.
Interim Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Three Months and Six Months Ended June 30, 2019 and 2018 (Unaudited)
(In millions, except per share data)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenues | |||||||||||||||
Premiums | $ | 232 | $ | 223 | $ | 459 | $ | 452 | |||||||
Universal life and investment-type product policy fees | 888 | 962 | 1,763 | 1,964 | |||||||||||
Net investment income | 942 | 806 | 1,753 | 1,623 | |||||||||||
Other revenues | 96 | 98 | 188 | 203 | |||||||||||
Net investment gains (losses) | 63 | (75 | ) | 52 | (79 | ) | |||||||||
Net derivative gains (losses) | 149 | (312 | ) | (1,154 | ) | (646 | ) | ||||||||
Total revenues | 2,370 | 1,702 | 3,061 | 3,517 | |||||||||||
Expenses | |||||||||||||||
Policyholder benefits and claims | 845 | 813 | 1,617 | 1,551 | |||||||||||
Interest credited to policyholder account balances | 265 | 269 | 523 | 536 | |||||||||||
Amortization of deferred policy acquisition costs and value of business acquired | 170 | 246 | 192 | 551 | |||||||||||
Other expenses | 621 | 691 | 1,213 | 1,309 | |||||||||||
Total expenses | 1,901 | 2,019 | 3,545 | 3,947 | |||||||||||
Income (loss) before provision for income tax | 469 | (317 | ) | (484 | ) | (430 | ) | ||||||||
Provision for income tax expense (benefit) | 85 | (79 | ) | (133 | ) | (127 | ) | ||||||||
Net income (loss) | 384 | (238 | ) | (351 | ) | (303 | ) | ||||||||
Less: Net income (loss) attributable to noncontrolling interests | — | 1 | 2 | 3 | |||||||||||
Net income (loss) attributable to Brighthouse Financial, Inc. | 384 | (239 | ) | (353 | ) | (306 | ) | ||||||||
Less: Preferred stock dividends | 7 | — | 7 | — | |||||||||||
Net income (loss) available to Brighthouse Financial, Inc.’s common shareholders | $ | 377 | $ | (239 | ) | $ | (360 | ) | $ | (306 | ) | ||||
Comprehensive income (loss) | $ | 1,416 | $ | (160 | ) | $ | 1,635 | $ | (1,085 | ) | |||||
Less: Comprehensive income (loss) attributable to noncontrolling interests | — | 1 | 2 | 3 | |||||||||||
Comprehensive income (loss) attributable to Brighthouse Financial, Inc. | $ | 1,416 | $ | (161 | ) | $ | 1,633 | $ | (1,088 | ) | |||||
Earnings per common share: | |||||||||||||||
Basic | $ | 3.28 | $ | (2.01 | ) | $ | (3.10 | ) | $ | (2.56 | ) | ||||
Diluted | $ | 3.27 | $ | (2.01 | ) | $ | (3.10 | ) | $ | (2.56 | ) | ||||
See accompanying notes to the interim condensed consolidated financial statements.
3
Brighthouse Financial, Inc.
Interim Condensed Consolidated Statements of Equity
For the Six Months Ended June 30, 2019 and 2018 (Unaudited)
(In millions)
Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | Treasury Stock at Cost | Accumulated Other Comprehensive Income (Loss) | Brighthouse Financial, Inc.’s Stockholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||
Balance at December 31, 2018 | $ | — | $ | 1 | $ | 12,473 | $ | 1,346 | $ | (118 | ) | $ | 716 | $ | 14,418 | $ | 65 | $ | 14,483 | |||||||||||||||||
Preferred stock issuance | — | 412 | 412 | 412 | ||||||||||||||||||||||||||||||||
Treasury stock acquired in connection with share repurchases | (52 | ) | (52 | ) | (52 | ) | ||||||||||||||||||||||||||||||
Share-based compensation | 4 | 4 | 4 | |||||||||||||||||||||||||||||||||
Change in noncontrolling interests | — | (2 | ) | (2 | ) | |||||||||||||||||||||||||||||||
Net income (loss) | (737 | ) | (737 | ) | 2 | (735 | ) | |||||||||||||||||||||||||||||
Other comprehensive income (loss), net of income tax | 954 | 954 | 954 | |||||||||||||||||||||||||||||||||
Balance at March 31, 2019 | — | 1 | 12,889 | 609 | (170 | ) | 1,670 | 14,999 | 65 | 15,064 | ||||||||||||||||||||||||||
Treasury stock acquired in connection with share repurchases | (136 | ) | (136 | ) | (136 | ) | ||||||||||||||||||||||||||||||
Share-based compensation | 4 | 4 | 4 | |||||||||||||||||||||||||||||||||
Dividends on preferred stock | (7 | ) | (7 | ) | (7 | ) | ||||||||||||||||||||||||||||||
Net income (loss) | 384 | 384 | — | 384 | ||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of income tax | 1,032 | 1,032 | 1,032 | |||||||||||||||||||||||||||||||||
Balance at June 30, 2019 | $ | — | $ | 1 | $ | 12,893 | $ | 986 | $ | (306 | ) | $ | 2,702 | $ | 16,276 | $ | 65 | $ | 16,341 | |||||||||||||||||
Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | Treasury Stock at Cost | Accumulated Other Comprehensive Income (Loss) | Brighthouse Financial, Inc.’s Stockholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||
Balance at December 31, 2017 | $ | — | $ | 1 | $ | 12,432 | $ | 406 | $ | — | $ | 1,676 | $ | 14,515 | $ | 65 | $ | 14,580 | ||||||||||||||||||
Cumulative effect of change in accounting principle and other, net of income tax | 75 | (79 | ) | (4 | ) | (4 | ) | |||||||||||||||||||||||||||||
Balance at January 1, 2018 | — | 1 | 12,432 | 481 | — | 1,597 | 14,511 | 65 | 14,576 | |||||||||||||||||||||||||||
Change in noncontrolling interests | — | (2 | ) | (2 | ) | |||||||||||||||||||||||||||||||
Net income (loss) | (67 | ) | (67 | ) | 2 | (65 | ) | |||||||||||||||||||||||||||||
Other comprehensive income (loss), net of income tax | (860 | ) | (860 | ) | (860 | ) | ||||||||||||||||||||||||||||||
Balance at March 31, 2018 | — | 1 | 12,432 | 414 | — | 737 | 13,584 | 65 | 13,649 | |||||||||||||||||||||||||||
Share-based compensation | 12 | 12 | 12 | |||||||||||||||||||||||||||||||||
Change in noncontrolling interests | — | (1 | ) | (1 | ) | |||||||||||||||||||||||||||||||
Net income (loss) | (239 | ) | (239 | ) | 1 | (238 | ) | |||||||||||||||||||||||||||||
Other comprehensive income (loss), net of income tax | 78 | 78 | 78 | |||||||||||||||||||||||||||||||||
Balance at June 30, 2018 | $ | — | $ | 1 | $ | 12,444 | $ | 175 | $ | — | $ | 815 | $ | 13,435 | $ | 65 | $ | 13,500 | ||||||||||||||||||
See accompanying notes to the interim condensed consolidated financial statements.
4
Brighthouse Financial, Inc.
Interim Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2019 and 2018 (Unaudited)
(In millions)
Six Months Ended June 30, | |||||||
2019 | 2018 | ||||||
Net cash provided by (used in) operating activities | $ | 809 | $ | 1,017 | |||
Cash flows from investing activities | |||||||
Sales, maturities and repayments of: | |||||||
Fixed maturity securities | 9,102 | 7,601 | |||||
Equity securities | 16 | 12 | |||||
Mortgage loans | 542 | 299 | |||||
Real estate limited partnerships and limited liability companies | 1 | 82 | |||||
Other limited partnership interests | 143 | 75 | |||||
Purchases of: | |||||||
Fixed maturity securities | (9,263 | ) | (7,394 | ) | |||
Equity securities | (3 | ) | (1 | ) | |||
Mortgage loans | (1,973 | ) | (1,916 | ) | |||
Real estate limited partnerships and limited liability companies | (9 | ) | (27 | ) | |||
Other limited partnership interests | (200 | ) | (99 | ) | |||
Cash received in connection with freestanding derivatives | 725 | 722 | |||||
Cash paid in connection with freestanding derivatives | (1,341 | ) | (1,570 | ) | |||
Net change in policy loans | 79 | 65 | |||||
Net change in short-term investments | (789 | ) | 135 | ||||
Net change in other invested assets | 38 | (7 | ) | ||||
Net cash provided by (used in) investing activities | (2,932 | ) | (2,023 | ) | |||
Cash flows from financing activities | |||||||
Policyholder account balances: | |||||||
Deposits | 3,794 | 3,018 | |||||
Withdrawals | (1,504 | ) | (1,567 | ) | |||
Net change in payables for collateral under securities loaned and other transactions | (963 | ) | 96 | ||||
Long-term debt issued | 1,000 | — | |||||
Long-term debt repaid | (601 | ) | (6 | ) | |||
Preferred stock issued, net of issuance costs | 412 | — | |||||
Dividends on preferred stock | (7 | ) | — | ||||
Treasury stock acquired in connection with share repurchases | (188 | ) | — | ||||
Financing element on certain derivative instruments and other derivative related transactions, net | 44 | (226 | ) | ||||
Other, net | (28 | ) | (31 | ) | |||
Net cash provided by (used in) financing activities | 1,959 | 1,284 | |||||
Change in cash, cash equivalents and restricted cash | (164 | ) | 278 | ||||
Cash, cash equivalents and restricted cash, beginning of period | 4,145 | 1,857 | |||||
Cash, cash equivalents and restricted cash, end of period | $ | 3,981 | $ | 2,135 | |||
Supplemental disclosures of cash flow information | |||||||
Net cash paid (received) for: | |||||||
Interest | $ | 92 | $ | 80 | |||
Income tax | $ | 5 | $ | 3 | |||
See accompanying notes to the interim condensed consolidated financial statements.
5
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies
Business
“Brighthouse Financial” and the “Company” refer to Brighthouse Financial, Inc. and its subsidiaries (formerly, MetLife U.S. Retail Separation Business). Brighthouse Financial, Inc. (“BHF”) is a holding company formed to own the legal entities that historically operated a substantial portion of MetLife, Inc.’s (together with its subsidiaries and affiliates, “MetLife”) former Retail segment. BHF 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 former Corporate Benefit Funding segment (the “Separation”), which was completed on August 4, 2017.
In connection with the Separation, 80.8% of MetLife, Inc.’s interest in BHF was distributed to holders of MetLife, Inc.’s common stock and MetLife, Inc. retained the remaining 19.2%. On June 14, 2018, MetLife, Inc. divested its remaining shares of BHF common stock (the “MetLife Divestiture”). As a result, MetLife, Inc. and its subsidiaries and affiliates are no longer considered related parties subsequent to the MetLife Divestiture.
Brighthouse Financial is 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. 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.
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 accompanying interim condensed consolidated financial statements include the accounts of Brighthouse Financial, as well as partnerships and limited liability companies (“LLCs”) in which the Company has control. Intercompany accounts and transactions have been eliminated.
The Company uses the equity method of accounting for investments in limited partnerships and LLCs 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. When the Company has virtually no influence over the investee’s operations, the investment is carried at fair value.
Reclassifications
Certain amounts in the prior year periods’ interim condensed consolidated financial statements and related footnotes thereto have been reclassified to conform with the 2019 presentation as may be discussed throughout the Notes to the Interim Condensed Consolidated 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, 2018 consolidated balance sheet data was derived from audited consolidated financial statements included in Brighthouse Financial, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Annual Report”), which include all disclosures required by GAAP. Therefore, these interim condensed consolidated financial statements should be read in conjunction with the consolidated and combined financial statements of the Company included in the 2018 Annual Report.
6
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Adoption of New Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are not expected to have a material impact on the Company’s financial statements. There were no ASUs adopted during 2019 which had a material impact on the Company’s financial statements.
ASUs issued but not yet adopted as of June 30, 2019 are summarized in the table below.
Standard | Description | Effective Date | Impact on Financial Statements |
ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract | The amendments to Topic 350 require the capitalization of certain implementation costs incurred in a cloud computing arrangement that is a service contract. The requirements align with the existing requirements to capitalize implementation costs incurred to develop or obtain internal-use software. | January 1, 2020 using the prospective method or retrospective method (with early adoption permitted) | The Company is currently evaluating the impact of this guidance on its financial statements. |
ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts | The amendments to Topic 944 will result in significant changes to the accounting for long-duration insurance contracts. These changes (1) require all guarantees that qualify as market risk benefits to be measured at fair value, (2) require more frequent updating of assumptions and modify existing discount rate requirements for certain insurance liabilities, (3) modify the methods of amortization for deferred acquisition costs (“DAC”), and (4) require new qualitative and quantitative disclosures around insurance contract asset and liability balances and the judgments, assumptions and methods used to measure those balances. The market risk benefit guidance is required to be applied on a retrospective basis, while the changes to guidance for insurance liabilities and DAC may be applied to existing carrying amounts on the effective date or on a retrospective basis. | The amendments are currently effective on January 1, 2021. On July 17, 2019 the FASB tentatively decided to extend the effective date of the ASU by one year. The FASB intends to release an exposure draft, which if adopted, will change the effective date for the Company to January 1, 2022. | The Company is in the early stages of evaluating the new guidance and therefore is unable to estimate the impact to its financial statements. The most significant impact will be the measurement of liabilities for variable annuity guarantees. |
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments | The amendments to Topic 326 replace the incurred loss impairment methodology for certain financial instruments with one that reflects expected credit losses based on historical loss information, current conditions, and reasonable and supportable forecasts. The new guidance also 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. | January 1, 2020 using the modified retrospective method (with early adoption permitted beginning January 1, 2019) | The Company is currently evaluating the impact of this guidance on its financial statements, with the most significant impact expected to be earlier recognition of credit losses on mortgage loan investments. |
7
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
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.
Annuities
The Annuities segment consists of a variety of variable, fixed, index-linked and income annuities designed to address contract holders’ needs for protected wealth accumulation on a tax-deferred basis, wealth transfer and income security.
Life
The Life segment consists of insurance products and services, including term, universal, whole 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, pension risk transfer contracts, certain company-owned life insurance policies, funding agreements and universal life with secondary guarantees.
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, long-term care and workers compensation business reinsured through 100% quota share reinsurance agreements, and term life insurance sold direct to consumers, which is no longer being offered for new sales.
Financial Measures and Segment Accounting Policies
Adjusted earnings is a financial measure used by management to evaluate performance, allocate resources and facilitate comparisons to industry results. Consistent with GAAP guidance for segment reporting, adjusted earnings is also used to measure segment performance. The Company believes the presentation of adjusted earnings, as the Company measures it for management purposes, enhances the understanding of its performance by the investor community. Adjusted earnings should not be viewed as a substitute for net income (loss) available to BHF’s common shareholders and excludes net income (loss) attributable to noncontrolling interests and preferred stock dividends.
Adjusted earnings, which may be positive or negative, focuses on the Company’s primary businesses principally by excluding the impact of market volatility, which could distort trends.
The following are significant items excluded from total revenues, net of income tax, in calculating adjusted earnings:
• | Net investment gains (losses); |
• | Net derivative gains (losses) except earned income 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 |
• | Certain variable annuity guaranteed minimum income benefits (“GMIBs”) fees (“GMIB Fees”) and amortization of unearned revenue related to net investment gains (losses) and net derivative gains (losses). |
The following are significant items excluded from total expenses, net of income tax, in calculating adjusted earnings:
• | 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”); and |
• | Amortization of DAC and value of business acquired (“VOBA”) related to: (i) net investment gains (losses), (ii) net derivative gains (losses), (iii) GMIB Fees and GMIB Costs and (iv) Market Value Adjustments. |
The tax impact of the adjustments mentioned above is calculated net of the statutory tax rate, which could differ from the Company’s effective tax rate.
8
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
2. Segment Information (continued)
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 six months ended June 30, 2019 and 2018 and at June 30, 2019 and December 31, 2018. The segment accounting policies are the same as those used to prepare the Company’s condensed consolidated financial statements, except for the adjustments to calculate adjusted earnings described above. In addition, segment accounting policies include the methods of capital allocation described below.
Segment investment and capitalization targets are based on statutory oriented risk principles and metrics. Segment invested assets backing liabilities are based on net statutory liabilities plus excess capital. For the variable annuity business, the excess capital held is based on the target statutory total asset requirement consistent with the Company’s variable annuity risk management strategy. For insurance businesses other than variable annuities, excess capital held is based on a percentage of required statutory risk-based capital. Assets in excess of those allocated to the segments, if any, are held in Corporate & Other. Segment net investment income reflects the performance of each segment’s respective invested assets.
Operating Results | ||||||||||||||||||||
Three Months Ended June 30, 2019 | Annuities | Life | Run-off | Corporate & Other | Total | |||||||||||||||
(In millions) | ||||||||||||||||||||
Pre-tax adjusted earnings | $ | 323 | $ | 72 | $ | 2 | $ | (85 | ) | $ | 312 | |||||||||
Provision for income tax expense (benefit) | 58 | 14 | — | (21 | ) | 51 | ||||||||||||||
Post-tax adjusted earnings | 265 | 58 | 2 | (64 | ) | 261 | ||||||||||||||
Less: Net income (loss) attributable to noncontrolling interests and preferred stock dividends | — | — | — | 7 | 7 | |||||||||||||||
Adjusted earnings | $ | 265 | $ | 58 | $ | 2 | $ | (71 | ) | 254 | ||||||||||
Adjustments for: | ||||||||||||||||||||
Net investment gains (losses) | 63 | |||||||||||||||||||
Net derivative gains (losses) | 149 | |||||||||||||||||||
Other adjustments to net income | (55 | ) | ||||||||||||||||||
Provision for income tax (expense) benefit | (34 | ) | ||||||||||||||||||
Net income (loss) available to Brighthouse Financial, Inc.’s common shareholders | $ | 377 | ||||||||||||||||||
Interest revenue | $ | 470 | $ | 116 | $ | 339 | $ | 17 | ||||||||||||
Interest expense | $ | — | $ | — | $ | — | $ | 48 | ||||||||||||
9
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
2. Segment Information (continued)
Operating Results | ||||||||||||||||||||
Three Months Ended June 30, 2018 | Annuities | Life | Run-off | Corporate & Other | Total | |||||||||||||||
(In millions) | ||||||||||||||||||||
Pre-tax adjusted earnings | $ | 266 | $ | 46 | $ | (8 | ) | $ | (124 | ) | $ | 180 | ||||||||
Provision for income tax expense (benefit) | 45 | 9 | (2 | ) | (26 | ) | 26 | |||||||||||||
Post-tax adjusted earnings | 221 | 37 | (6 | ) | (98 | ) | 154 | |||||||||||||
Less: Net income (loss) attributable to noncontrolling interests and preferred stock dividends | — | — | — | 1 | 1 | |||||||||||||||
Adjusted earnings | $ | 221 | $ | 37 | $ | (6 | ) | $ | (99 | ) | 153 | |||||||||
Adjustments for: | ||||||||||||||||||||
Net investment gains (losses) | (75 | ) | ||||||||||||||||||
Net derivative gains (losses) | (312 | ) | ||||||||||||||||||
Other adjustments to net income | (110 | ) | ||||||||||||||||||
Provision for income tax (expense) benefit | 105 | |||||||||||||||||||
Net income (loss) available to Brighthouse Financial, Inc.’s common shareholders | $ | (239 | ) | |||||||||||||||||
Interest revenue | $ | 376 | $ | 111 | $ | 314 | $ | 11 | ||||||||||||
Interest expense | $ | — | $ | — | $ | — | $ | 37 | ||||||||||||
Operating Results | ||||||||||||||||||||
Six Months Ended June 30, 2019 | Annuities | Life | Run-off | Corporate & Other | Total | |||||||||||||||
(In millions) | ||||||||||||||||||||
Pre-tax adjusted earnings | $ | 684 | $ | 103 | $ | (44 | ) | $ | (157 | ) | $ | 586 | ||||||||
Provision for income tax expense (benefit) | 124 | 20 | (10 | ) | (43 | ) | 91 | |||||||||||||
Post-tax adjusted earnings | 560 | 83 | (34 | ) | (114 | ) | 495 | |||||||||||||
Less: Net income (loss) attributable to noncontrolling interests and preferred stock dividends | — | — | — | 9 | 9 | |||||||||||||||
Adjusted earnings | $ | 560 | $ | 83 | $ | (34 | ) | $ | (123 | ) | 486 | |||||||||
Adjustments for: | ||||||||||||||||||||
Net investment gains (losses) | 52 | |||||||||||||||||||
Net derivative gains (losses) | (1,154 | ) | ||||||||||||||||||
Other adjustments to net income | 32 | |||||||||||||||||||
Provision for income tax (expense) benefit | 224 | |||||||||||||||||||
Net income (loss) available to Brighthouse Financial, Inc.’s common shareholders | $ | (360 | ) | |||||||||||||||||
Interest revenue | $ | 891 | $ | 213 | $ | 615 | $ | 34 | ||||||||||||
Interest expense | $ | — | $ | — | $ | — | $ | 95 | ||||||||||||
10
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
2. Segment Information (continued)
Operating Results | ||||||||||||||||||||
Six Months Ended June 30, 2018 | Annuities | Life | Run-off | Corporate & Other | Total | |||||||||||||||
(In millions) | ||||||||||||||||||||
Pre-tax adjusted earnings | $ | 538 | $ | 127 | $ | 55 | $ | (210 | ) | $ | 510 | |||||||||
Provision for income tax expense (benefit) | 91 | 24 | 11 | (55 | ) | 71 | ||||||||||||||
Post-tax adjusted earnings | 447 | 103 | 44 | (155 | ) | 439 | ||||||||||||||
Less: Net income (loss) attributable to noncontrolling interests and preferred stock dividends | — | — | — | 3 | 3 | |||||||||||||||
Adjusted earnings | $ | 447 | $ | 103 | $ | 44 | $ | (158 | ) | 436 | ||||||||||
Adjustments for: | ||||||||||||||||||||
Net investment gains (losses) | (79 | ) | ||||||||||||||||||
Net derivative gains (losses) | (646 | ) | ||||||||||||||||||
Other adjustments to net income | (215 | ) | ||||||||||||||||||
Provision for income tax (expense) benefit | 198 | |||||||||||||||||||
Net income (loss) available to Brighthouse Financial, Inc.’s common shareholders | $ | (306 | ) | |||||||||||||||||
Interest revenue | $ | 739 | $ | 219 | $ | 657 | $ | 22 | ||||||||||||
Interest expense | $ | — | $ | — | $ | — | $ | 74 | ||||||||||||
The following table presents total revenues with respect to the Company’s segments, as well as Corporate & Other:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(In millions) | ||||||||||||||||
Annuities | $ | 1,194 | $ | 1,146 | $ | 2,311 | $ | 2,293 | ||||||||
Life | 330 | 339 | 633 | 708 | ||||||||||||
Run-off | 527 | 510 | 1,003 | 1,058 | ||||||||||||
Corporate & Other | 42 | 31 | 85 | 65 | ||||||||||||
Adjustments | 277 | (324 | ) | (971 | ) | (607 | ) | |||||||||
Total | $ | 2,370 | $ | 1,702 | $ | 3,061 | $ | 3,517 | ||||||||
The following table presents total assets with respect to the Company’s segments, as well as Corporate & Other, at:
June 30, 2019 | December 31, 2018 | |||||||
(In millions) | ||||||||
Annuities | $ | 152,948 | $ | 141,489 | ||||
Life | 20,854 | 20,449 | ||||||
Run-off | 34,245 | 32,393 | ||||||
Corporate & Other | 13,165 | 11,963 | ||||||
Total | $ | 221,212 | $ | 206,294 | ||||
11
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
3. Insurance
Guarantees
As discussed in Notes 1 and 3 of the Notes to the Consolidated and Combined Financial Statements included in the 2018 Annual Report, the Company issues variable annuity contracts with guaranteed minimum benefits. Guaranteed minimum accumulation benefits (“GMABs”), the non-life contingent portion of guaranteed minimum withdrawal benefits (“GMWBs”) and certain portions of GMIBs that do not require the policyholder to annuitize are accounted for as embedded derivatives in policyholder account balances and are further discussed in Note 5.
The Company also has universal and variable life insurance contracts with secondary guarantees.
Information regarding the Company’s guarantee exposure was as follows at:
June 30, 2019 | December 31, 2018 | |||||||||||||||
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) | $ | 103,866 | $ | 59,924 | $ | 96,865 | $ | 55,967 | ||||||||
Separate account value | $ | 98,907 | $ | 58,727 | $ | 91,837 | $ | 54,731 | ||||||||
Net amount at risk | $ | 7,044 | (4) | $ | 3,584 | (5) | $ | 11,073 | (4) | $ | 4,128 | (5) | ||||
Average attained age of contract holders | 68 years | 68 years | 68 years | 68 years | ||||||||||||
June 30, 2019 | December 31, 2018 | ||||||
Secondary Guarantees | |||||||
(Dollars in millions) | |||||||
Universal Life Contracts | |||||||
Total account value (3) | $ | 6,028 | $ | 6,099 | |||
Net amount at risk (6) | $ | 72,121 | $ | 73,131 | |||
Average attained age of policyholders | 66 years | 65 years | |||||
Variable Life Contracts | |||||||
Total account value (3) | $ | 3,325 | $ | 3,230 | |||
Net amount at risk (6) | $ | 22,139 | $ | 23,004 | |||
Average attained age of policyholders | 50 years | 50 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. |
(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 5 of the Notes to the Consolidated and Combined Financial Statements included in the 2018 Annual Report for a discussion of guaranteed minimum benefits which have been reinsured. |
(3) | Includes the contract holder’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. |
12
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
3. Insurance (continued)
(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 contract holders 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 contract holders 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. |
4. Investments
See Note 1 of the Notes to the Consolidated and Combined Financial Statements included in the 2018 Annual Report for a description of the Company’s accounting policies for investments and Note 6 for information about the fair value hierarchy for investments and the related valuation methodologies.
Fixed Maturity Securities Available-for-sale (“AFS”)
Fixed Maturity Securities AFS by Sector
The following table presents the fixed maturity securities AFS by sector at:
June 30, 2019 | December 31, 2018 | ||||||||||||||||||||||||||||||||||||||
Amortized Cost | Gross Unrealized | Estimated Fair Value | Amortized Cost | Gross Unrealized | Estimated Fair Value | ||||||||||||||||||||||||||||||||||
Gains | Temporary Losses | OTTI Losses (1) | Gains | Temporary Losses | OTTI Losses (1) | ||||||||||||||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: (2) | |||||||||||||||||||||||||||||||||||||||
U.S. corporate | $ | 26,149 | $ | 2,221 | $ | 88 | $ | — | $ | 28,282 | $ | 24,312 | $ | 830 | $ | 669 | $ | — | $ | 24,473 | |||||||||||||||||||
U.S. government and agency | 5,506 | 1,763 | — | — | 7,269 | 7,944 | 1,263 | 112 | — | 9,095 | |||||||||||||||||||||||||||||
RMBS | 9,003 | 425 | 21 | (4 | ) | 9,411 | 8,428 | 246 | 129 | (2 | ) | 8,547 | |||||||||||||||||||||||||||
Foreign corporate | 9,154 | 536 | 105 | — | 9,585 | 8,183 | 159 | 316 | — | 8,026 | |||||||||||||||||||||||||||||
CMBS | 5,062 | 254 | 4 | — | 5,312 | 5,292 | 43 | 88 | (1 | ) | 5,248 | ||||||||||||||||||||||||||||
State and political subdivision | 3,198 | 648 | — | — | 3,846 | 3,200 | 412 | 15 | — | 3,597 | |||||||||||||||||||||||||||||
ABS | 1,832 | 24 | 9 | — | 1,847 | 2,135 | 13 | 22 | — | 2,126 | |||||||||||||||||||||||||||||
Foreign government | 1,458 | 204 | 3 | — | 1,659 | 1,426 | 102 | 32 | — | 1,496 | |||||||||||||||||||||||||||||
Total fixed maturity securities | $ | 61,362 | $ | 6,075 | $ | 230 | $ | (4 | ) | $ | 67,211 | $ | 60,920 | $ | 3,068 | $ | 1,383 | $ | (3 | ) | $ | 62,608 | |||||||||||||||||
__________________
(1) | Noncredit OTTI losses included in accumulated other comprehensive income (loss) (“AOCI”) in an unrealized gain position are due to increases in estimated fair value subsequent to initial recognition of noncredit losses on such securities. |
(2) | Redeemable preferred stock is reported within U.S. corporate and foreign corporate fixed maturity 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”). |
The Company held non-income producing fixed maturity securities with an estimated fair value of $32 million and less than $1 million with unrealized gains (losses) of ($2) million and less than $1 million at June 30, 2019 and December 31, 2018, respectively.
13
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
4. Investments (continued)
Maturities of Fixed Maturity Securities
The amortized cost and estimated fair value of fixed maturity securities, by contractual maturity date, were as follows at June 30, 2019:
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 | $ | 1,670 | $ | 7,069 | $ | 12,313 | $ | 24,413 | $ | 15,897 | $ | 61,362 | |||||||||||
Estimated fair value | $ | 1,681 | $ | 7,264 | $ | 12,967 | $ | 28,729 | $ | 16,570 | $ | 67,211 | |||||||||||
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 Securities AFS by Sector
The following table presents the estimated fair value and gross unrealized losses of fixed maturity 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:
June 30, 2019 | December 31, 2018 | ||||||||||||||||||||||||||||||
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 | $ | 1,342 | $ | 41 | $ | 1,235 | $ | 47 | $ | 10,584 | $ | 470 | $ | 2,328 | $ | 199 | |||||||||||||||
U.S. government and agency | 139 | — | 58 | — | 412 | 8 | 1,543 | 104 | |||||||||||||||||||||||
RMBS | 145 | 3 | 1,421 | 14 | 1,627 | 26 | 2,611 | 101 | |||||||||||||||||||||||
Foreign corporate | 740 | 27 | 805 | 78 | 3,982 | 203 | 774 | 113 | |||||||||||||||||||||||
CMBS | 78 | — | 263 | 4 | 2,317 | 53 | 803 | 34 | |||||||||||||||||||||||
State and political subdivision | 5 | — | 36 | — | 346 | 7 | 158 | 8 | |||||||||||||||||||||||
ABS | 564 | 4 | 357 | 5 | 1,422 | 21 | 70 | 1 | |||||||||||||||||||||||
Foreign government | 70 | 3 | — | — | 521 | 26 | 132 | 6 | |||||||||||||||||||||||
Total fixed maturity securities | $ | 3,083 | $ | 78 | $ | 4,175 | $ | 148 | $ | 21,211 | $ | 814 | $ | 8,419 | $ | 566 | |||||||||||||||
Total number of securities in an unrealized loss position | 660 | 521 | 3,027 | 1,028 | |||||||||||||||||||||||||||
14
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
4. Investments (continued)
Evaluation of AFS Securities for OTTI and Evaluating Temporarily Impaired AFS Securities
Evaluation and Measurement Methodologies
Management considers a wide range of factors about the security issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations used in the impairment evaluation process include, but are not limited to: (i) the length of time and the extent to which the estimated fair value has been below amortized cost; (ii) the potential for impairments when the issuer is experiencing significant financial difficulties; (iii) the potential for impairments in an entire industry sector or sub-sector; (iv) the potential for impairments in certain economically depressed geographic locations; (v) the potential for impairments where the issuer, series of issuers or industry has suffered a catastrophic loss or has exhausted natural resources; (vi) whether the Company has the intent to sell or will more likely than not be required to sell a particular security before the decline in estimated fair value below amortized cost recovers; (vii) with respect to Structured Securities, changes in forecasted cash flows after considering the quality of underlying collateral, expected prepayment speeds, current and forecasted loss severity, consideration of the payment terms of the underlying assets backing a particular security, and the payment priority within the tranche structure of the security; (viii) the potential for impairments due to weakening of foreign currencies on non-functional currency denominated fixed maturity securities that are near maturity; and (ix) other subjective factors, including concentrations and information obtained from regulators and rating agencies.
For securities in an unrealized loss position, an OTTI is recognized in earnings when it is anticipated that the amortized cost will not be recovered. When either: (i) the Company has the intent to sell the security; or (ii) it is more likely than not that the Company will be required to sell the security before recovery, the OTTI recognized in earnings is the entire difference between the security’s amortized cost and estimated fair value. If neither of these conditions exists, the difference between the amortized cost of the security and the present value of projected future cash flows expected to be collected is recognized as an OTTI in earnings (“credit loss”). If the estimated fair value is less than the present value of projected future cash flows expected to be collected, this portion of OTTI related to other-than-credit factors (“noncredit loss”) is recorded in other comprehensive income (“OCI”).
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 June 30, 2019.
Gross unrealized losses on fixed maturity securities decreased $1.2 billion during the six months ended June 30, 2019 to $226 million. The decrease in gross unrealized losses for the six months ended June 30, 2019 was primarily attributable to decreasing longer-term interest rates and narrowing credit spreads.
At June 30, 2019, $8 million of the total $226 million of gross unrealized losses were from seven fixed maturity securities with an unrealized loss position of 20% or more of amortized cost for six months or greater.
15
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
4. Investments (continued)
Mortgage Loans
Mortgage Loans by Portfolio Segment
Mortgage loans are summarized as follows at:
June 30, 2019 | December 31, 2018 | ||||||||||||
Carrying Value | % of Total | Carrying Value | % of Total | ||||||||||
(Dollars in millions) | |||||||||||||
Mortgage loans: | |||||||||||||
Commercial | $ | 9,267 | 61.5 | % | $ | 8,529 | 62.3 | % | |||||
Agricultural | 3,248 | 21.5 | 2,946 | 21.5 | |||||||||
Residential | 2,627 | 17.4 | 2,276 | 16.6 | |||||||||
Subtotal (1) | 15,142 | 100.4 | 13,751 | 100.4 | |||||||||
Valuation allowances (2) | (64 | ) | (0.4 | ) | (57 | ) | (0.4 | ) | |||||
Total mortgage loans, net | $ | 15,078 | 100.0 | % | $ | 13,694 | 100.0 | % | |||||
__________________
(1) | Purchases of mortgage loans from third parties were $86 million and $563 million for the three months and six months ended June 30, 2019, respectively, and $518 million and $604 million for the three months and six months ended June 30, 2018, respectively, and were primarily comprised of residential mortgage loans. |
(2) | The valuation allowances were primarily from collective evaluation (non-specific loan related). |
Information on commercial, agricultural and residential mortgage loans is presented in the tables below.
Valuation Allowance Methodology
Mortgage loans are considered to be impaired when it is probable that, based upon current information and events, the Company will be unable to collect all amounts due under the loan agreement. Specific valuation allowances are established using the same methodology for all three portfolio segments as the excess carrying value of a loan over either (i) the present value of expected future cash flows discounted at the loan’s original effective interest rate, (ii) the estimated fair value of the loan’s underlying collateral if the loan is in the process of foreclosure or otherwise collateral dependent, or (iii) the loan’s observable market price. A common evaluation framework is used for establishing non-specific valuation allowances for all loan portfolio segments; however, a separate non-specific valuation allowance is calculated and maintained for each loan portfolio segment that is based on inputs unique to each loan portfolio segment. Non-specific valuation allowances are established for pools of loans with similar risk characteristics where a property-specific or market-specific risk has not been identified, but for which the Company expects to incur a credit loss. These evaluations are based upon several loan portfolio segment-specific factors, including the Company’s experience for loan losses, defaults and loss severity, and loss expectations for loans with similar risk characteristics. These evaluations are revised as conditions change and new information becomes available.
16
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated 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) | |||||||||||||||||||||||||
June 30, 2019 | |||||||||||||||||||||||||
Loan-to-value ratios: | |||||||||||||||||||||||||
Less than 65% | $ | 8,197 | $ | 121 | $ | 113 | $ | 8,431 | 91.0 | % | $ | 8,818 | 91.1 | % | |||||||||||
65% to 75% | 688 | — | — | 688 | 7.4 | 712 | 7.4 | ||||||||||||||||||
76% to 80% | 139 | — | 9 | 148 | 1.6 | 148 | 1.5 | ||||||||||||||||||
Total | $ | 9,024 | $ | 121 | $ | 122 | $ | 9,267 | 100.0 | % | $ | 9,678 | 100.0 | % | |||||||||||
December 31, 2018 | |||||||||||||||||||||||||
Loan-to-value ratios: | |||||||||||||||||||||||||
Less than 65% | $ | 7,470 | $ | 89 | $ | 34 | $ | 7,593 | 89.0 | % | $ | 7,668 | 89.0 | % | |||||||||||
65% to 75% | 762 | — | 24 | 786 | 9.2 | 798 | 9.3 | ||||||||||||||||||
76% to 80% | 141 | — | 9 | 150 | 1.8 | 145 | 1.7 | ||||||||||||||||||
Total | $ | 8,373 | $ | 89 | $ | 67 | $ | 8,529 | 100.0 | % | $ | 8,611 | 100.0 | % | |||||||||||
Credit Quality of Agricultural Mortgage Loans
The credit quality of agricultural mortgage loans was as follows at:
June 30, 2019 | December 31, 2018 | ||||||||||||
Recorded Investment | % of Total | Recorded Investment | % of Total | ||||||||||
(Dollars in millions) | |||||||||||||
Loan-to-value ratios: | |||||||||||||
Less than 65% | $ | 2,896 | 89.1 | % | $ | 2,623 | 89.0 | % | |||||
65% to 75% | 350 | 10.8 | 322 | 10.9 | |||||||||
76% to 80% | 2 | 0.1 | 1 | 0.1 | |||||||||
Total | $ | 3,248 | 100.0 | % | $ | 2,946 | 100.0 | % | |||||
The estimated fair value of agricultural mortgage loans was $3.3 billion and $2.9 billion at June 30, 2019 and December 31, 2018, respectively.
Credit Quality of Residential Mortgage Loans
The credit quality of residential mortgage loans was as follows at:
June 30, 2019 | December 31, 2018 | ||||||||||||
Recorded Investment | % of Total | Recorded Investment | % of Total | ||||||||||
(Dollars in millions) | |||||||||||||
Performance indicators: | |||||||||||||
Performing | $ | 2,590 | 98.6 | % | $ | 2,240 | 98.4 | % | |||||
Nonperforming | 37 | 1.4 | 36 | 1.6 | |||||||||
Total | $ | 2,627 | 100.0 | % | $ | 2,276 | 100.0 | % | |||||
17
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
4. Investments (continued)
The estimated fair value of residential mortgage loans was $2.7 billion and $2.3 billion at June 30, 2019 and December 31, 2018, respectively.
Past Due, Nonaccrual and Modified 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 June 30, 2019 and December 31, 2018. 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 Company had no commercial mortgage loans past due or in nonaccrual status at either June 30, 2019 or December 31, 2018. Agricultural mortgage loans past due totaled $6 million and less than $1 million at June 30, 2019 and December 31, 2018, respectively. The Company had no agricultural mortgage loans in nonaccrual status at either June 30, 2019 or December 31, 2018. Residential mortgage loans past due and in nonaccrual status totaled $37 million and $36 million at June 30, 2019 and December 31, 2018, respectively. During the three months and six months ended June 30, 2019 and 2018, the Company did not have a significant number of mortgage loans modified in a troubled debt restructuring.
Other Invested Assets
Freestanding derivatives with positive estimated fair values comprise over 90% of other invested assets. See Note 5 for information about freestanding derivatives with positive estimated fair values. Other invested assets also includes tax credit and renewable energy partnerships, leveraged leases and Federal Home Loan Bank stock.
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 $3.1 billion at June 30, 2019 and December 31, 2018, respectively.
Net Unrealized Investment Gains (Losses)
Unrealized investment gains (losses) on fixed maturity securities 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.
The components of net unrealized investment gains (losses), included in AOCI, were as follows:
June 30, 2019 | December 31, 2018 | ||||||
(In millions) | |||||||
Fixed maturity securities | $ | 5,849 | $ | 1,691 | |||
Derivatives | 257 | 264 | |||||
Other | (13 | ) | (13 | ) | |||
Subtotal | 6,093 | 1,942 | |||||
Amounts allocated from: | |||||||
Future policy benefits | (2,318 | ) | (886 | ) | |||
DAC, VOBA and DSI | (300 | ) | (90 | ) | |||
Subtotal | (2,618 | ) | (976 | ) | |||
Deferred income tax benefit (expense) | (730 | ) | (203 | ) | |||
Net unrealized investment gains (losses) | $ | 2,745 | $ | 763 | |||
18
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
4. Investments (continued)
The changes in net unrealized investment gains (losses) were as follows:
Six Months Ended June 30, 2019 | |||
(In millions) | |||
Balance, December 31, 2018 | $ | 763 | |
Unrealized investment gains (losses) during the period | 4,151 | ||
Unrealized investment gains (losses) relating to: | |||
Future policy benefits | (1,432 | ) | |
DAC, VOBA and DSI | (210 | ) | |
Deferred income tax benefit (expense) | (527 | ) | |
Balance, June 30, 2019 | $ | 2,745 | |
Change in net unrealized investment gains (losses) | $ | 1,982 | |
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 June 30, 2019 and December 31, 2018.
Securities Lending
Elements of the securities lending program are presented below at:
June 30, 2019 | December 31, 2018 | ||||||
(In millions) | |||||||
Securities on loan: (1) | |||||||
Amortized cost | $ | 2,038 | $ | 3,056 | |||
Estimated fair value | $ | 2,973 | $ | 3,628 | |||
Cash collateral received from counterparties (2) | $ | 3,023 | $ | 3,646 | |||
Security collateral received from counterparties (3) | $ | 18 | $ | 55 | |||
Reinvestment portfolio — estimated fair value | $ | 3,072 | $ | 3,658 | |||
__________________
(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 financial statements. |
The cash collateral liability by loaned security type and remaining tenor of the agreements were as follows at:
June 30, 2019 | December 31, 2018 | ||||||||||||||||||||||||||||||
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) | |||||||||||||||||||||||||||||||
U.S. government and agency | $ | 1,446 | $ | 686 | $ | 891 | $ | 3,023 | $ | 1,474 | $ | 1,823 | $ | 349 | $ | 3,646 | |||||||||||||||
__________________
(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. |
19
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
4. Investments (continued)
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 June 30, 2019 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.
The reinvestment portfolio acquired with the cash collateral consisted principally of fixed maturity securities (including agency RMBS, U.S. and foreign corporate securities, ABS, non-agency RMBS and U.S. government and agency securities) with 55% invested in agency RMBS, cash and cash equivalents and U.S. government and agency securities at June 30, 2019. 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:
June 30, 2019 | December 31, 2018 | ||||||
(In millions) | |||||||
Invested assets on deposit (regulatory deposits) (1) | $ | 8,991 | $ | 8,176 | |||
Invested assets held in trust (reinsurance agreements) (2) | 4,087 | 3,455 | |||||
Invested assets pledged as collateral (3) | 3,336 | 3,341 | |||||
Total invested assets on deposit, held in trust and pledged as collateral | $ | 16,414 | $ | 14,972 | |||
__________________
(1) | The Company has assets, primarily fixed maturity securities, on deposit with governmental authorities relating to certain policyholder liabilities, of which $171 million and $55 million of the assets on deposit balance represents restricted cash at June 30, 2019 and December 31, 2018, respectively. |
(2) | The Company has assets, primarily fixed maturity securities, held in trust relating to certain reinsurance transactions. $52 million and $87 million of the assets held in trust balance represents restricted cash at June 30, 2019 and December 31, 2018, respectively. |
(3) | The Company has pledged invested assets in connection with various agreements and transactions, including funding agreements (see Note 3 of the Notes to the Consolidated and Combined Financial Statements included in the 2018 Annual Report) and derivative transactions (see Note 5). |
See “— Securities Lending” for information regarding securities on loan.
Variable Interest Entities
The Company has invested in legal entities that are variable interest entities (“VIEs”). VIEs are consolidated when the investor is the primary beneficiary. A primary beneficiary is the variable interest holder in a VIE with both the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and the obligation to absorb losses, or the right to receive benefits that could potentially be significant to the VIE.
There were no material VIEs for which the Company has concluded that it is the primary beneficiary at June 30, 2019 or December 31, 2018.
The Company’s investments in unconsolidated VIEs are described below.
20
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
4. Investments (continued)
Fixed Maturity Securities
The Company invests in U.S. corporate bonds, foreign corporate bonds, and Structured Securities issued by VIEs. The Company is not obligated to provide any financial or other support to these VIEs, other than the original investment. The Company’s involvement with these entities is limited to that of a passive investor. The Company has no unilateral right to appoint or remove the servicer, special servicer, or investment manager, which are generally viewed as having the power to direct the activities that most significantly impact the economic performance of the VIE, nor does the Company function in any of these roles. The Company does not have the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the entity; as a result, the Company has determined it is not the primary beneficiary, or consolidator, of the VIE. The Company’s maximum exposure to loss on these fixed maturity securities is limited to the amortized cost of these investments. See “— Fixed Maturity Securities AFS” for information on these securities.
Limited Partnerships and LLCs
The Company holds investments in certain limited partnerships and LLCs which are VIEs. These ventures include real estate limited partnerships/LLCs, private equity funds, hedge funds, and to a lesser extent tax credit and renewable energy partnerships. The Company is not considered the primary beneficiary, or consolidator, when its involvement takes the form of a limited partner interest and is restricted to a role of a passive investor, as a limited partner’s interest does not provide the Company with any substantive kick-out or participating rights, nor does it provide the Company with the power to direct the activities of the fund. The Company’s maximum exposure to loss on these investments is limited to: (i) the amount invested in debt or equity of the VIE and (ii) commitments to the VIE, as described in Note 11.
The carrying amount and maximum exposure to loss related to the VIEs in which the Company concluded that it holds a variable interest, but is not the primary beneficiary, were as follows at:
June 30, 2019 | December 31, 2018 | ||||||||||||||
Carrying Amount | Maximum Exposure to Loss | Carrying Amount | Maximum Exposure to Loss | ||||||||||||
(In millions) | |||||||||||||||
Fixed maturity securities | $ | 13,477 | $ | 12,865 | $ | 13,099 | $ | 13,099 | |||||||
Limited partnerships and LLCs | 1,774 | 3,003 | 1,756 | 3,145 | |||||||||||
Total | $ | 15,251 | $ | 15,868 | $ | 14,855 | $ | 16,244 | |||||||
Net Investment Income
The components of net investment income were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
(In millions) | |||||||||||||||
Investment income: | |||||||||||||||
Fixed maturity securities | $ | 679 | $ | 638 | $ | 1,332 | $ | 1,266 | |||||||
Equity securities | 1 | 2 | 4 | 4 | |||||||||||
Mortgage loans | 176 | 128 | 335 | 246 | |||||||||||
Policy loans | 17 | 34 | 33 | 50 | |||||||||||
Real estate limited partnerships and limited liability companies | 12 | 10 | 20 | 24 | |||||||||||
Other limited partnership interests | 76 | 25 | 76 | 90 | |||||||||||
Cash, cash equivalents and short-term investments | 23 | 7 | 37 | 13 | |||||||||||
Other | 6 | 11 | 19 | 22 | |||||||||||
Subtotal | 990 | 855 | 1,856 | 1,715 | |||||||||||
Less: Investment expenses | 48 | 49 | 103 | 92 | |||||||||||
Net investment income | $ | 942 | $ | 806 | $ | 1,753 | $ | 1,623 | |||||||
21
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
4. Investments (continued)
Net Investment Gains (Losses)
Components of Net Investment Gains (Losses)
The components of net investment gains (losses) were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
(In millions) | |||||||||||||||
Fixed maturity securities | $ | 68 | $ | (65 | ) | $ | 53 | $ | (104 | ) | |||||
Equity securities | 1 | (3 | ) | 11 | (4 | ) | |||||||||
Mortgage loans | (3 | ) | (3 | ) | (7 | ) | (7 | ) | |||||||
Real estate limited partnerships and limited liability companies | 1 | — | — | 42 | |||||||||||
Other limited partnership interests | (3 | ) | — | (5 | ) | — | |||||||||
Other | (1 | ) | (4 | ) | — | (6 | ) | ||||||||
Total net investment gains (losses) | $ | 63 | $ | (75 | ) | $ | 52 | $ | (79 | ) | |||||
Sales or Disposals of Fixed Maturity Securities
Investment gains and losses on sales of securities are determined on a specific identification basis. Proceeds from sales or disposals of fixed maturity securities and the components of fixed maturity securities net investment gains (losses) were as shown in the table below.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
(In millions) | |||||||||||||||
Proceeds | $ | 3,679 | $ | 2,476 | $ | 6,958 | $ | 5,337 | |||||||
Gross investment gains | $ | 106 | $ | 9 | $ | 173 | $ | 12 | |||||||
Gross investment losses | (38 | ) | (74 | ) | (120 | ) | (116 | ) | |||||||
Net investment gains (losses) | $ | 68 | $ | (65 | ) | $ | 53 | $ | (104 | ) | |||||
5. Derivatives
Accounting for Derivatives
Freestanding Derivatives
Freestanding derivatives are carried on the Company’s balance sheet either as assets within other invested assets or as liabilities within other liabilities at estimated fair value. The Company does not offset the estimated fair value amounts recognized for derivatives executed with the same counterparty under the same master netting agreement.
If a derivative is not designated or did not qualify as an accounting hedge, changes in the estimated fair value of the derivative are reported in net derivative gains (losses) except for economic hedges of limited partnerships and LLCs which are presented in net investment income.
The Company generally reports cash received or paid for a derivative in the investing activity section of the statement of cash flows except for cash flows of certain derivative options with deferred premiums, which are reported in the financing activity section of the statement of cash flows.
Hedge Accounting
The Company primarily designates derivatives as a hedge of a forecasted transaction or a variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). When a derivative is designated as a cash flow hedge and is determined to be highly effective, changes in fair value are recorded in OCI and subsequently reclassified into the statement of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item.
22
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
5. Derivatives (continued)
To qualify for hedge accounting, at the inception of the hedging relationship, the Company formally documents its risk management objective and strategy for undertaking the hedging transaction, as well as its designation of the hedge. In its hedge documentation, the Company sets forth how the hedging instrument is expected to hedge the designated risks related to the hedged item and sets forth the method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and at least quarterly throughout the life of the designated hedging relationship.
The Company discontinues hedge accounting prospectively when: (i) it is determined that the derivative is no longer highly effective in offsetting changes in the estimated fair value or cash flows of a hedged item; (ii) the derivative or hedged item expires, is sold, terminated, or exercised; (iii) it is no longer probable that the hedged forecasted transaction will occur; or (iv) the derivative is de-designated as a hedging instrument.
When hedge accounting is discontinued the derivative is carried at its estimated fair value on the balance sheet, with changes in its estimated fair value recognized in the current period as net derivative gains (losses). The changes in estimated fair value of derivatives previously recorded in OCI related to discontinued cash flow hedges are released into the statement of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item. When the hedged item matures or is sold, or the forecasted transaction is not probable of occurring, the Company immediately reclassifies any remaining balances in OCI to net derivative gains (losses).
Embedded Derivatives
The Company has certain insurance and reinsurance contracts that contain embedded derivatives which are required to be separated from their host contracts and reported as derivatives. These host contracts include: variable annuities with guaranteed minimum benefits, including GMWBs, GMABs and certain GMIBs; index-linked annuities that are directly written or assumed through reinsurance; and ceded reinsurance of variable annuity GMIBs. Embedded derivatives within asset host contracts are presented within premiums, reinsurance and other receivables on the consolidated balance sheets. Embedded derivatives within liability host contracts are presented within policyholder account balances on the consolidated balance sheets. Changes in the estimated fair value of the embedded derivative are reported in net derivative gains (losses).
Derivative Strategies
The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to minimize its exposure to various market risks, including interest rate, foreign currency exchange rate, credit and equity market.
Derivatives are financial instruments with values derived from interest rates, foreign currency exchange rates, credit spreads and/or other financial indices. Derivatives may be exchange-traded or contracted in the over-the-counter (“OTC”) market. Certain of the Company’s OTC derivatives are cleared and settled through central clearing counterparties (“OTC-cleared”), while others are bilateral contracts between two counterparties (“OTC-bilateral”).
Interest Rate Derivatives
Interest rate swaps: The Company primarily uses interest rate swaps to hedge interest rate exposure in variable annuity products and minimum guarantees embedded in universal life products. Interest rate swaps are used in nonqualifying hedging relationships.
Interest rate caps: The Company uses interest rate caps to protect its floating rate liabilities against rises in interest rates above a specified level, and against interest rate exposure arising from mismatches between assets and liabilities. Interest rate caps are used in nonqualifying hedging relationships.
Interest rate futures: The Company uses exchange-traded interest rate futures contracts to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. Exchange-traded interest rate futures are used in nonqualifying hedging relationships.
Swaptions: The Company uses swaptions to hedge interest rate risk associated with the Company’s variable annuity and universal life products. Swaptions are used in nonqualifying hedging relationships. Swaptions are included in interest rate options.
Interest rate forwards: The Company uses interest rate forwards to hedge minimum guarantees embedded in universal life products. Interest rate forwards are used in nonqualifying hedging relationships.
23
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
5. Derivatives (continued)
Foreign Currency Exchange Rate Derivatives
Foreign currency swaps: The Company uses foreign currency swaps to convert foreign currency denominated cash flows to U.S. dollars to reduce cash flow fluctuations due to changes in currency exchange rates. Foreign currency swaps are used in cash flow and nonqualifying hedging relationships.
Foreign currency forwards: The Company uses foreign currency forwards to hedge currency exposure on its invested assets. Foreign currency forwards are used in nonqualifying hedging relationships.
Credit Derivatives
Credit default swaps: The Company uses credit default swaps to create synthetic credit investments to replicate credit exposure that is more economically attractive than what is available in the market or otherwise unavailable (written credit protection), or to reduce credit loss exposure on certain assets that the Company owns (purchased credit protection). Credit default swaps are used in nonqualifying hedging relationships.
Equity Derivatives
Equity futures: The Company uses exchange-traded equity futures to hedge minimum guarantees embedded in certain variable annuity products against adverse changes in equity markets. Exchange-traded equity futures are used in nonqualifying hedging relationships.
Equity index options: The Company uses equity index options primarily to hedge minimum guarantees embedded in certain variable annuity products against adverse changes in equity markets. Additionally, the Company uses equity index options to hedge index-linked annuity products against adverse changes in equity markets. Equity index options are used in nonqualifying hedging relationships.
Equity total return swaps: The Company uses equity total return swaps to hedge minimum guarantees embedded in certain variable annuity products against adverse changes equity markets. Equity total return swaps are used in nonqualifying hedging relationships.
Equity variance swaps: The Company uses equity variance swaps to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. Equity variance swaps are used in nonqualifying hedging relationships.
24
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
5. Derivatives (continued)
Primary Risks Managed by Derivatives
The following table presents the primary underlying risk exposure, gross notional amount, and estimated fair value of the Company’s derivatives, held at:
June 30, 2019 | December 31, 2018 | ||||||||||||||||||||||||
Primary Underlying Risk Exposure | Gross Notional Amount | Estimated Fair Value | Gross Notional Amount | Estimated Fair Value | |||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | ||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||
Derivatives Designated as Hedging Instruments: | |||||||||||||||||||||||||
Cash flow hedges: | |||||||||||||||||||||||||
Foreign currency swaps | Foreign currency exchange rate | $ | 2,698 | $ | 233 | $ | 38 | $ | 2,524 | $ | 211 | $ | 30 | ||||||||||||
Total qualifying hedges | 2,698 | 233 | 38 | 2,524 | 211 | 30 | |||||||||||||||||||
Derivatives Not Designated or Not Qualifying as Hedging Instruments: | |||||||||||||||||||||||||
Interest rate swaps | Interest rate | 7,960 | 873 | 37 | 10,747 | 528 | 558 | ||||||||||||||||||
Interest rate caps | Interest rate | 3,350 | 4 | — | 3,350 | 21 | — | ||||||||||||||||||
Interest rate futures | Interest rate | — | — | — | 54 | — | — | ||||||||||||||||||
Interest rate options | Interest rate | 25,445 | 753 | 111 | 17,168 | 168 | 61 | ||||||||||||||||||
Interest rate forwards | Interest rate | 2,237 | 16 | — | — | — | — | ||||||||||||||||||
Foreign currency swaps | Foreign currency exchange rate | 1,108 | 114 | 16 | 1,409 | 101 | 18 | ||||||||||||||||||
Foreign currency forwards | Foreign currency exchange rate | 138 | — | — | 125 | — | — | ||||||||||||||||||
Credit default swaps — purchased | Credit | 12 | — | — | 98 | 3 | — | ||||||||||||||||||
Credit default swaps — written | Credit | 1,905 | 33 | — | 1,820 | 14 | 3 | ||||||||||||||||||
Equity futures | Equity market | — | — | — | 169 | — | — | ||||||||||||||||||
Equity index options | Equity market | 43,450 | 731 | 1,627 | 45,815 | 1,372 | 1,207 | ||||||||||||||||||
Equity variance swaps | Equity market | 5,574 | 95 | 247 | 5,574 | 80 | 232 | ||||||||||||||||||
Equity total return swaps | Equity market | 5,061 | 4 | 92 | 3,920 | 280 | 3 | ||||||||||||||||||
Total non-designated or nonqualifying derivatives | 96,240 | 2,623 | 2,130 | 90,249 | 2,567 | 2,082 | |||||||||||||||||||
Embedded derivatives: | |||||||||||||||||||||||||
Ceded guaranteed minimum income benefits | Other | N/A | |||||||||||||||||||||||