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BHF Brighthouse Financial

Filed: 6 Nov 20, 4:28pm

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 September 30, 2020
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
bhf-20200930_g1.jpg
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 classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareBHFThe Nasdaq Stock Market LLC
Depositary Shares, each representing a 1/1,000th interest in a share of 6.600% Non-Cumulative Preferred Stock, Series ABHFAPThe Nasdaq Stock Market LLC
Depositary Shares, each representing a 1/1,000th interest in a share of 6.750% Non-Cumulative Preferred Stock, Series BBHFAOThe Nasdaq Stock Market LLC
6.250% Junior Subordinated Debentures due 2058BHFALThe 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 filerþAccelerated 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 November 4, 2020, 89,504,324 shares of the registrant’s common stock were outstanding.
 



Table of Contents


Part I — Financial Information
Item 1. Financial Statements
Brighthouse Financial, Inc.
Interim Condensed Consolidated Balance Sheets
September 30, 2020 (Unaudited) and December 31, 2019
(In millions, except share and per share data)
September 30, 2020December 31, 2019
Assets
Investments:
Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $68,061 and $64,079, respectively; allowance for credit losses of $4 and $0, respectively)$79,338 $71,036 
Equity securities, at estimated fair value117 147 
Mortgage loans (net of allowance for credit losses of $90 and $64, respectively)15,746 15,753 
Policy loans1,289 1,292 
Limited partnerships and limited liability companies2,562 2,380 
Short-term investments, principally at estimated fair value4,239 1,958 
Other invested assets, principally at estimated fair value (net of allowance for credit losses of $13 and $0, respectively)5,038 3,216 
Total investments108,329 95,782 
Cash and cash equivalents6,189 2,877 
Accrued investment income781 684 
Premiums, reinsurance and other receivables16,087 14,760 
Deferred policy acquisition costs and value of business acquired4,664 5,448 
Current income tax recoverable17 
Other assets447 584 
Separate account assets103,184 107,107 
Total assets$239,681 $227,259 
Liabilities and Equity
Liabilities
Future policy benefits$44,537 $39,686 
Policyholder account balances52,798 45,771 
Other policy-related balances3,088 3,111 
Payables for collateral under securities loaned and other transactions6,989 4,391 
Long-term debt3,979 4,365 
Current income tax payable72 
Deferred income tax liability1,816 1,355 
Other liabilities4,887 5,236 
Separate account liabilities103,184 107,107 
Total liabilities221,350 211,022 
Contingencies, Commitments and Guarantees (Note 11)
Equity
Brighthouse Financial, Inc.’s stockholders’ equity:
Preferred stock, par value $0.01 per share; $828 and $425, respectively, aggregate liquidation preference
Common stock, par value $0.01 per share; 1,000,000,000 shares authorized; 120,970,368 and 120,647,871 shares issued, respectively; 91,158,927 and 106,027,301 shares outstanding, respectively
Additional paid-in capital13,314 12,908 
Retained earnings (deficit)511 585 
Treasury stock, at cost; 29,811,441 and 14,620,570 shares, respectively(941)(562)
Accumulated other comprehensive income (loss)5,381 3,240 
Total Brighthouse Financial, Inc.’s stockholders’ equity18,266 16,172 
Noncontrolling interests65 65 
Total equity18,331 16,237 
Total liabilities and equity$239,681 $227,259 
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 Nine Months Ended September 30, 2020 and 2019 (Unaudited)
(In millions, except per share data)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Revenues
Premiums$184 $214 $575 $673 
Universal life and investment-type product policy fees882 867 2,595 2,630 
Net investment income996 928 2,564 2,681 
Other revenues99 94 294 282 
Net investment gains (losses)27 (48)79 
Net derivative gains (losses)(1,857)1,057 2,392 (97)
Total revenues309 3,187 8,372 6,248 
Expenses
Policyholder benefits and claims3,047 1,319 5,073 2,936 
Interest credited to policyholder account balances281 272 816 795 
Amortization of deferred policy acquisition costs and value of business acquired244 181 922 373 
Other expenses580 611 1,674 1,824 
Total expenses4,152 2,383 8,485 5,928 
Income (loss) before provision for income tax(3,843)804 (113)320 
Provision for income tax expense (benefit)(850)119 (88)(14)
Net income (loss)(2,993)685 (25)334 
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to Brighthouse Financial, Inc.(2,995)683 (29)330 
Less: Preferred stock dividends17 31 14 
Net income (loss) available to Brighthouse Financial, Inc.’s common shareholders$(3,012)$676 $(60)$316 
Comprehensive income (loss)$(2,577)$1,550 $2,116 $3,185 
Less: Comprehensive income (loss) attributable to noncontrolling interests
Comprehensive income (loss) attributable to Brighthouse Financial, Inc.$(2,579)$1,548 $2,112 $3,181 
Earnings per common share
Basic$(32.49)$6.09 $(0.61)$2.77 
Diluted$(32.49)$6.06 $(0.61)$2.75 
See accompanying notes to the interim condensed consolidated financial statements.
3

Brighthouse Financial, Inc.
Interim Condensed Consolidated Statements of Equity
For the Three Months and Nine Months Ended September 30, 2020 and 2019 (Unaudited)
(In millions)
Preferred StockCommon StockAdditional Paid-in CapitalRetained Earnings (Deficit)Treasury Stock at CostAccumulated
Other
Comprehensive
Income (Loss)
Brighthouse Financial, Inc.’s Stockholders’ EquityNoncontrolling InterestsTotal Equity
Balance at December 31, 2019$$$12,908 $585 $(562)$3,240 $16,172 $65 $16,237 
Cumulative effect of change in accounting principle, net of income tax (Note 1)(14)(11)(11)
Balance at January 1, 202012,908 571 (562)3,243 16,161 65 16,226 
Preferred stock issuance390390 390 
Treasury stock acquired in connection with share repurchases(322)(322)(322)
Share-based compensation(3)
Dividends on preferred stock(14)(14)(14)
Change in noncontrolling interests(2)(2)
Net income (loss)2,966 2,966 2,968 
Other comprehensive income (loss), net of income tax1,722 1,722 1,722 
Balance at June 30, 202013,307 3,523 (887)4,965 20,909 65 20,974 
Treasury stock acquired in connection with share repurchases(54)(54)(54)
Share-based compensation
Dividends on preferred stock(17)(17)(17)
Change in noncontrolling interests(2)(2)
Net income (loss)(2,995)(2,995)(2,993)
Other comprehensive income (loss), net of income tax416 416 416 
Balance at September 30, 2020$$$13,314 $511 $(941)$5,381 $18,266 $65 $18,331 
Preferred StockCommon StockAdditional Paid-in CapitalRetained Earnings (Deficit)Treasury Stock at CostAccumulated
Other
Comprehensive
Income (Loss)
Brighthouse Financial, Inc.’s Stockholders’ EquityNoncontrolling InterestsTotal Equity
Balance at December 31, 2018$$$12,473 $1,346 $(118)$716 $14,418 $65 $14,483 
Preferred stock issuance412 412 412 
Treasury stock acquired in connection with share repurchases(188)(188)(188)
Share-based compensation
Dividends on preferred stock(7)(7)(7)
Change in noncontrolling interests(2)(2)
Net income (loss)(353)(353)(351)
Other comprehensive income (loss), net of income tax1,986 1,986 1,986 
Balance at June 30, 201912,893 986 (306)2,702 16,276 65 16,341 
Treasury stock acquired in connection with share repurchase(126)(126)(126)
Share-based compensation
Dividends on preferred stock(7)(7)(7)
Change in noncontrolling interests(2)(2)
Net income (loss)683 683 685 
Other comprehensive income (loss), net of income tax865 865 865 
Balance at September 30, 2019$$$12,897 $1,662 $(432)$3,567 $17,695 $65 $17,760 
See accompanying notes to the interim condensed consolidated financial statements.
4

Brighthouse Financial, Inc.
Interim Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
(In millions)
Nine Months Ended
September 30,
20202019
Net cash provided by (used in) operating activities$515 $1,322 
Cash flows from investing activities
Sales, maturities and repayments of:
Fixed maturity securities6,011 11,888 
Equity securities54 29 
Mortgage loans1,232 933 
Limited partnerships and limited liability companies124 205 
Purchases of:
Fixed maturity securities(9,639)(13,412)
Equity securities(4)(3)
Mortgage loans(1,239)(2,625)
Limited partnerships and limited liability companies(423)(321)
Cash received in connection with freestanding derivatives5,280 1,179 
Cash paid in connection with freestanding derivatives(3,281)(1,705)
Net change in policy loans89 
Net change in short-term investments(2,269)(1,977)
Net change in other invested assets(19)21 
Other, net(14)
Net cash provided by (used in) investing activities(4,184)(5,699)
Cash flows from financing activities
Policyholder account balances:
Deposits7,143 5,689 
Withdrawals(1,552)(2,021)
Net change in payables for collateral under securities loaned and other transactions2,598 234 
Long-term debt issued614 1,000 
Long-term debt repaid(1,001)(601)
Preferred stock issued, net of issuance costs390 412 
Dividends on preferred stock(31)(14)
Treasury stock acquired in connection with share repurchases(376)(314)
Financing element on certain derivative instruments and other derivative related transactions, net(764)179 
Other, net(40)(43)
Net cash provided by (used in) financing activities6,981 4,521 
Change in cash, cash equivalents and restricted cash3,312 144 
Cash, cash equivalents and restricted cash, beginning of period2,877 4,145 
Cash, cash equivalents and restricted cash, end of period$6,189 $4,289 
Supplemental disclosures of cash flow information
Net cash paid (received) for:
Interest$95 $108 
Income tax$(57)$
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. Brighthouse Financial, Inc. (“BHF”) is a holding company formed in 2016 to own the legal entities that historically operated a substantial portion of MetLife, Inc.’s former retail segment until becoming a separate, publicly-traded company in August 2017. 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”) that the Company controls. 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 current period presentation as may be discussed when applicable in 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, 2019 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, 2019 (the “2019 Annual Report”), which include all disclosures required by GAAP. Therefore, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company included in the 2019 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 consolidated financial statements. ASUs adopted as of September 30, 2020 are summarized as follows:
StandardDescriptionEffective DateImpact on Financial Statements
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”)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 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 methodThe Company recorded an after tax net decrease to retained earnings of $14 million and a net increase to accumulated other comprehensive income (loss) (“AOCI”) of $3 million for the cumulative effect of adoption. The adjustment included establishing or updating the allowance for credit losses on fixed maturity securities, mortgage loans, and other invested assets.
ASUs issued but not yet adopted as of September 30, 2020 are summarized as follows:
StandardDescriptionEffective DateImpact on Financial Statements
ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration ContractsThe 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 policy 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.January 1, 2023The Company continues to evaluate the new guidance and therefore is unable to estimate the impact to its financial statements. The most significant impact is expected to be the measurement of liabilities for variable annuity guarantees.
CARES Act
In response to the worldwide pandemic sparked by the novel coronavirus (the “COVID-19 pandemic”), on March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act contains numerous provisions intended to provide swift aid, including through tax relief, to businesses and individuals affected by the COVID-19 pandemic. The Company does not believe that the CARES Act will have a material impact to its consolidated financial statements at this time. The Company will continue to closely monitor developments related to the COVID-19 pandemic and the CARES Act.

7

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)

2. Segment Information
The Company is organized into 3 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 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 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”).
The following are significant items excluded from total expenses, net of income tax, in calculating adjusted earnings:
Amounts associated with benefits related to GMIBs (“GMIB Costs”);
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)
The segment accounting policies are the same as those used to prepare the Company’s interim 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 by segment, as well as Corporate & Other, were as follows:
Three Months Ended September 30, 2020
AnnuitiesLifeRun-offCorporate & OtherTotal
(In millions)
Pre-tax adjusted earnings$479 $94 $(1,443)$(32)$(902)
Provision for income tax expense (benefit)92 18 (304)(38)(232)
Post-tax adjusted earnings387 76 (1,139)(670)
Less: Net income (loss) attributable to noncontrolling interests
Less: Preferred stock dividends17 17 
Adjusted earnings$387 $76 $(1,139)$(13)(689)
Adjustments for:
Net investment gains (losses)
Net derivative gains (losses)(1,857)
Other adjustments to net income (loss)(1,089)
Provision for income tax (expense) benefit618 
Net income (loss) available to Brighthouse Financial, Inc.’s common shareholders$(3,012)
Interest revenue$469 $131 $383 $18 
Interest expense$$$$47 
9

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
2. Segment Information (continued)
Three Months Ended September 30, 2019
AnnuitiesLifeRun-offCorporate & OtherTotal
(In millions)
Pre-tax adjusted earnings$255 $91 $(543)$(67)$(264)
Provision for income tax expense (benefit)52 18 (117)(57)(104)
Post-tax adjusted earnings203 73 (426)(10)(160)
Less: Net income (loss) attributable to noncontrolling interests
Less: Preferred stock dividends
Adjusted earnings$203 $73 $(426)$(19)(169)
Adjustments for:
Net investment gains (losses)27 
Net derivative gains (losses)1,057 
Other adjustments to net income (loss)(16)
Provision for income tax (expense) benefit(223)
Net income (loss) available to Brighthouse Financial, Inc.’s common shareholders$676 
Interest revenue$461 $117 $327 $23 
Interest expense$$$$49 
Nine Months Ended September 30, 2020
AnnuitiesLifeRun-offCorporate & OtherTotal
(In millions)
Pre-tax adjusted earnings$1,073 $167 $(1,679)$(189)$(628)
Provision for income tax expense (benefit)199 32 (355)(72)(196)
Post-tax adjusted earnings874 135 (1,324)(117)(432)
Less: Net income (loss) attributable to noncontrolling interests
Less: Preferred stock dividends31 31 
Adjusted earnings$874 $135 $(1,324)$(152)(467)
Adjustments for:
Net investment gains (losses)(48)
Net derivative gains (losses)2,392 
Other adjustments to net income (loss)(1,829)
Provision for income tax (expense) benefit(108)
Net income (loss) available to Brighthouse Financial, Inc.’s common shareholders$(60)
Interest revenue$1,334 $316 $873 $54 
Interest expense$$$$139 
10

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
2. Segment Information (continued)
Nine Months Ended September 30, 2019
AnnuitiesLifeRun-offCorporate & OtherTotal
(In millions)
Pre-tax adjusted earnings$939 $194 $(587)$(224)$322 
Provision for income tax expense (benefit)176 38 (127)(100)(13)
Post-tax adjusted earnings763 156 (460)(124)335 
Less: Net income (loss) attributable to noncontrolling interests
Less: Preferred stock dividends14 14 
Adjusted earnings$763 $156 $(460)$(142)317 
Adjustments for:
Net investment gains (losses)79 
Net derivative gains (losses)(97)
Other adjustments to net income (loss)16 
Provision for income tax (expense) benefit
Net income (loss) available to Brighthouse Financial, Inc.’s common shareholders$316 
Interest revenue$1,352 $330 $942 $57 
Interest expense$$$$144 
Total revenues by segment, as well as Corporate & Other, were as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(In millions)
Annuities$1,157 $1,184 $3,360 $3,495 
Life350 320 989 953 
Run-off553 484 1,378 1,487 
Corporate & Other39 47 118 132 
Adjustments(1,790)1,152 2,527 181 
Total$309 $3,187 $8,372 $6,248 
Total assets by segment, as well as Corporate & Other, were as follows at:
September 30, 2020December 31, 2019
(In millions)
Annuities$162,285 $156,965 
Life22,839 21,876 
Run-off38,256 35,112 
Corporate & Other16,301 13,306 
Total$239,681 $227,259 
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 Financial Statements included in the 2019 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 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 has universal and variable life insurance contracts with secondary guarantees.
Information regarding the Company’s guarantee exposure was as follows at:
September 30, 2020December 31, 2019
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)$100,471 $56,552 $104,271 $59,859 
Separate account value$95,346 $55,266 $99,385 $58,694 
Net amount at risk$8,054 (4)$7,956 (5)$6,671 (4)$4,750 (5)
Average attained age of contract holders70 years70 years68 years68 years
September 30, 2020December 31, 2019
Secondary Guarantees
(Dollars in millions)
Universal Life Contracts
Total account value (3)$5,816 $5,957 
Net amount at risk (6)$69,664 $71,124 
Average attained age of policyholders67 years66 years
Variable Life Contracts
Total account value (3)$3,677 $3,526 
Net amount at risk (6)$20,309 $21,325 
Average attained age of policyholders51 years50 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 Financial Statements included in the 2019 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 Financial Statements included in the 2019 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. In connection with the adoption of new guidance related to the credit losses (see Note 1), effective January 1, 2020, the Company updated its accounting policies on certain investments. Any accounting policy updates required by the new guidance are described in this footnote.
Fixed Maturity Securities Available-for-sale
Fixed Maturity Securities by Sector
Fixed maturity securities by sector were as follows at:
September 30, 2020December 31, 2019
Amortized
Cost
Allowance for Credit LossesGross UnrealizedEstimated
Fair
Value
Amortized
Cost
Allowance for Credit LossesGross UnrealizedEstimated
Fair
Value
GainsLossesGainsLosses
(In millions)
U.S. corporate$31,303 $$4,738 $133 $35,906 $28,375 $$2,852 $67 $31,160 
Foreign corporate9,702 1,069 110 10,660 9,177 741 74 9,844 
RMBS7,807 652 8,449 8,692 438 12 9,118 
U.S. government and agency5,713 3,222 8,935 5,529 1,869 7,396 
CMBS5,865 569 6,425 5,500 264 5,755 
State and political subdivision3,478 953 4,429 3,358 701 4,057 
ABS2,681 54 21 2,714 1,945 21 11 1,955 
Foreign government1,512 314 1,820 1,503 250 1,751 
Total fixed maturity securities$68,061 $$11,571 $290 $79,338 $64,079 $$7,136 $179 $71,036 
The Company did 0t hold any non-income producing fixed maturity securities at either September 30, 2020 or December 31, 2019.
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, 2020:
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 (1)
Total Fixed
Maturity
Securities
(In millions)
Amortized cost$1,535 $7,291 $14,164 $28,718 $16,353 $68,061 
Estimated fair value$1,549 $7,729 $15,661 $36,811 $17,588 $79,338 
_______________
(1)Structured securities include residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and asset-backed securities (“ABS”) (collectively, “Structured Securities”).
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.
13

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
4. Investments (continued)
Continuous Gross Unrealized Losses for Fixed Maturity Securities by Sector
The estimated fair value and gross unrealized losses of fixed maturity securities in an unrealized loss position, by sector and by length of time that the securities have been in a continuous unrealized loss position, were as follows at:
September 30, 2020December 31, 2019
Less than 12 Months12 Months or GreaterLess than 12 Months12 Months or Greater
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)
U.S. corporate$2,993 $112 $188 $21 $2,017 $44 $326 $23 
Foreign corporate862 37 451 73 576 12 561 62 
RMBS420 11 857 386 
U.S. government and agency40 
CMBS344 59 559 171 
State and political subdivision123 143 
ABS667 590 13 362 676 
Foreign government121 65 
Total fixed maturity securities$5,530 $181 $1,305 $109 $4,619 $79 $2,128 $100 
Total number of securities in an unrealized loss position1,069 248 720 302 
Allowance for Credit Losses for Fixed Maturity Securities
Evaluation and Measurement Methodologies
For fixed maturity securities in an unrealized loss position, management first assesses whether the Company intends to sell, or whether it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to estimated fair value through net investment gains (losses). For fixed maturity securities that do not meet the aforementioned criteria, management evaluates whether the decline in estimated fair value has resulted from credit losses or other factors. 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 allowance for credit loss evaluation process include, but are not limited to: (i) the extent to which estimated fair value is less than amortized cost; (ii) any changes to the rating of the security by a rating agency; (iii) adverse conditions specifically related to the security, industry or geographic area; and (iv) payment structure of the fixed maturity security and the likelihood of the issuer being able to make payments in the future or the issuer’s failure to make scheduled interest and principal payments. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss is deemed to exist and an allowance for credit losses is recorded, limited by the amount that the estimated fair value is less than the amortized cost basis, with a corresponding charge to net investment gains (losses). Any unrealized losses that have not been recorded through an allowance for credit losses are recognized in other comprehensive income (loss) (“OCI”).
Once a security specific allowance for credit losses is established, the present value of cash flows expected to be collected from the security continues to be reassessed. Any changes in the security specific allowance for credit losses are recorded as a provision for (or reversal of) credit loss expense in net investment gains (losses).
Fixed maturity securities are also evaluated to determine whether any amounts have become uncollectible. When all, or a portion, of a security is deemed uncollectible, the uncollectible portion is written-off with an adjustment to amortized cost and a corresponding reduction to the allowance for credit losses.
14

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
4. Investments (continued)
Accrued interest receivables are presented separate from the amortized cost basis of fixed maturity securities. An allowance for credit losses is not estimated on an accrued interest receivable, rather receivable balances 90-days past due are deemed uncollectible and are written off with a corresponding reduction to net investment income. The accrued interest receivable on fixed maturity securities totaled $546 million at September 30, 2020 and is included in accrued investment income.
Fixed maturity securities are also evaluated to determine if they qualify as purchased financial assets with credit deterioration (“PCD”). To determine if the credit deterioration experienced since origination is more than insignificant, both (i) the extent of the credit deterioration and (ii) any rating agency downgrades are evaluated. For securities categorized as PCD assets, the present value of cash flows expected to be collected from the security are compared to the par value of the security. If the present value of cash flows expected to be collected is less than the par value, credit losses are embedded in the purchase price of the PCD asset. In this situation, both an allowance for credit losses and amortized cost gross-up is recorded, limited by the amount that the estimated fair value is less than the grossed-up amortized cost basis. Any difference between the purchase price and the present value of cash flows is amortized or accreted into net investment income over the life of the PCD asset. Any subsequent PCD asset allowance for credit losses is evaluated in a manner similar to the process described above for fixed maturity securities.
Current Period Evaluation
Based on the Company’s current evaluation of its fixed maturity securities in an unrealized loss position and the current intent or requirement to sell, the Company recorded an allowance for credit losses of $4 million, relating to 11 securities at September 30, 2020. Management concluded that for all other fixed maturity securities in an unrealized loss position, the unrealized loss was not due to issuer-specific credit-related factors and as a result was recognized in OCI. Where unrealized losses have not been recognized into income, it is primarily because the securities’ bond issuer(s) are of high credit quality, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in estimated fair value is largely due to changes in interest rates and non-issuer specific credit spreads. These issuers continued to make timely principal and interest payments and the estimated fair value is expected to recover as the securities approach maturity.
Rollforward of the Allowance for Credit Losses for Fixed Maturity Securities by Sector
The changes in the allowance for credit losses by sector were as follows:
U.S. CorporateRMBSForeign CorporateTotal
(In millions)
Balance at January 1, 2020$$$$
Allowance on securities where credit losses were not previously recorded
Reductions for securities sold(1)(1)
Write-offs charged against allowance (1)(3)(1)(4)
Balance at September 30, 2020$$$$
_______________
(1)The Company recorded total write-offs of $13 million during the nine months ended September 30, 2020.
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:
September 30, 2020December 31, 2019
Carrying
Value
% of
Total
Carrying
Value
% of
Total
(Dollars in millions)
Commercial$9,830 62.4 %$9,721 61.7 %
Agricultural3,380 21.5 3,388 21.5 
Residential2,626 16.7 2,708 17.2 
Total mortgage loans (1)15,836 100.6 15,817 100.4 
Allowance for credit losses(90)(0.6)(64)(0.4)
Total mortgage loans, net$15,746 100.0 %$15,753 100.0 %
_______________
(1)Purchases of mortgage loans from third parties were $47 million and $535 million for the three months and nine months ended September 30, 2020, respectively, and $159 million and $722 million for the three months and nine months ended September 30, 2019, respectively, and were primarily comprised of residential mortgage loans.
Allowance for Credit Losses for Mortgage Loans
Evaluation and Measurement Methodologies
The allowance for credit losses is a valuation account that is deducted from the mortgage loan’s amortized cost basis to present the net amount expected to be collected on the mortgage loan. The loan balance, or a portion of the loan balance, is written-off against the allowance when management believes this amount is uncollectible.
Accrued interest receivables are presented separate from the amortized cost basis of mortgage loans. An allowance for credit losses is generally not estimated on an accrued interest receivable, rather when a loan is placed in nonaccrual status the associated accrued interest receivable balance is written off with a corresponding reduction to net investment income. For mortgage loans that are granted payment deferrals due to the COVID-19 pandemic, interest continues to be accrued during the deferral period if the loan was less than 30 days past due at December 31, 2019 and performing at the onset of the pandemic. Accrued interest on COVID-19 pandemic impacted loans was not significant at September 30, 2020. The accrued interest receivable on mortgage loans is included in accrued investment income and totaled $89 million at September 30, 2020.
The allowance for credit losses is estimated using relevant available information, from internal and external sources, relating to past events, current conditions, and a reasonable and supportable forecast. Historical credit loss experience provides the basis for estimating expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics and environmental conditions. A reasonable and supportable forecast period of two-years is used with an input reversion period of one-year.
Mortgage loans are evaluated in each of the three portfolio segments to determine the allowance for credit losses. The loan-level loss rates are determined using individual loan terms and characteristics, risk pools/internal ratings, national economic forecasts, prepayment speeds, and estimated default and loss severity. The resulting loss rates are applied to the mortgage loan’s amortized cost to generate an allowance for credit losses. In certain situations, the allowance for credit losses is measured as the difference between the loan’s amortized cost and liquidation value of the collateral. These situations include collateral dependent loans, expected troubled debt restructurings (“TDRs”), foreclosure probable loans, and loans with dissimilar risk characteristics.
16

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
4. Investments (continued)
Mortgage loans are also evaluated to determine if they qualify as PCD assets. To determine if the credit deterioration experienced since origination is more than insignificant, the extent of credit deterioration is evaluated. All re-performing/modified loan (“RPL”) pools purchased after December 31, 2019 are determined to have been acquired with evidence of more than insignificant credit deterioration since origination and are classified as PCD assets. RPLs are pools of residential mortgage loans acquired at discounts which have both credit and non-credit components. For PCD mortgage loans, the allowance for credit losses is determined using a similar methodology described above, except the loss-rate is determined at the pool level instead of the individual loan level. The initial allowance for credit losses, determined on a collective basis, is then allocated to the individual loans. The initial amortized cost of the loan is grossed-up to reflect the sum of the loan’s purchase price and allowance for credit losses. The difference between the grossed-up amortized cost basis and the par value of the loan is a noncredit discount, which is accreted into net investment income over the remaining life of the loan. Any subsequent PCD mortgage loan allowance for credit losses is evaluated in a manner similar to the process described above for each of the three portfolio segments.
Rollforward of the Allowance for Credit Losses for Mortgage Loans by Portfolio Segment
The changes in the allowance for credit losses by portfolio segment were as follows:
CommercialAgriculturalResidentialTotal
(In millions)
Balance at December 31, 2019$47 $10 $$64 
Cumulative effect of change in accounting principle(20)15 
Balance at January 1, 202027 17 22 66 
Current period provision17 (1)24 
Balance at September 30, 2020$44 $16 $30 $90 
PCD Mortgage Loans
Purchases of PCD mortgage loans are summarized as follows:
Nine Months Ended September 30, 2020
(In millions)
Purchase price$77 
Allowance at acquisition date$
Discount or premium attributable to other factors$
Par value$81 
17

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
4. Investments (continued)
Credit Quality of Mortgage Loans by Portfolio Segment
The amortized cost of mortgage loans by year of origination and credit quality indicator was as follows at:
20202019201820172016PriorTotal
(In millions)
September 30, 2020
Commercial mortgage loans
Loan-to-value ratios:
Less than 65%$288 $1,645 $1,113 $572 $1,124 $3,210 $7,952 
65% to 75%114 345 452 340 40 277 1,568 
76% to 80%84 84 
Greater than 80%10 13 197 226 
Total commercial mortgage loans402 1,990 1,575 925 1,254 3,684 9,830 
Agricultural mortgage loans
Loan-to-value ratios:
Less than 65%202 556 754 438 486 765 3,201 
65% to 75%37 81 10 33 18 179 
Total agricultural mortgage loans239 637 764 471 486 783 3,380 
Residential mortgage loans
Performing200 428 478 116 43 1,261 2,526 
Nonperforming88 100 
Total residential mortgage loans201 433 483 117 43 1,349 2,626 
Total$842 $3,060 $2,822 $1,513 $1,783 $5,816 $15,836 
The loan-to-value ratio is a measure commonly used to assess the quality of commercial and agricultural mortgage loans. The loan-to-value ratio compares the amount of the loan to the estimated fair value of the underlying property collateralizing the loan and is commonly expressed as a percentage. A loan-to-value ratio less than 100% indicates an excess of collateral value over the loan amount. Loan-to-value ratios greater than 100% indicate that the loan amount exceeds the collateral value. Performing status is a measure commonly used to assess the quality of residential mortgage loans. A loan is considered performing when the borrower makes consistent and timely payments.
The amortized cost of commercial mortgage loans by debt-service coverage ratio was as follows at:
September 30, 2020December 31, 2019
Amortized Cost% of
Total
Amortized Cost% of
Total
(Dollars in millions)
Debt-service coverage ratios:
Greater than 1.20x$9,286 94.5 %$9,257 95.2 %
1.00x - 1.20x359 3.6 298 3.1 
Less than 1.00x185 1.9 166 1.7 
Total$9,830 100.0 %$9,721 100.0 %
The debt-service coverage ratio compares a property’s net operating income to its debt-service payments. Debt-service coverage ratios less than 1.00 times indicate that property operations do not generate enough income to cover the loan’s current debt payments. A debt-service coverage ratio greater than 1.00 times indicates an excess of net operating income over the debt-service payments.
18

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
4. Investments (continued)
Past Due Mortgage Loans by Portfolio Segment
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, 2020 and December 31, 2019. Delinquency is defined 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. To the extent a payment deferral is agreed to with a borrower, in response to the COVID-19 pandemic, the past due status of the impacted loans during the forbearance period is locked-in as of March 1, 2020, which reflects the date on which the COVID-19 pandemic began to affect the borrower’s ability to make payments, as provided in the CARES Act. At September 30, 2020, 5% of the COVID-19 pandemic modified loans were classified as delinquent.
The aging of the amortized cost of past due mortgage loans by portfolio segment was as follows at:
September 30, 2020
CommercialAgriculturalResidentialTotal
(In millions)
Current$9,830 $3,379 $2,461 $15,670 
30-59 days past due65 65 
60-89 days past due69 69 
90-179 days past due16 17 
180+ days past due15 15 
Total$9,830 $3,380 $2,626 $15,836 
Mortgage Loans in Nonaccrual Status by Portfolio Segment
Mortgage loans are placed in a nonaccrual status if there are concerns regarding collectability of future payments or the loan is past due, unless the past due loan is well collateralized and in the process of foreclosure. To the extent a payment deferral is agreed to with a borrower, in response to the COVID-19 pandemic, the impacted loans generally will not be reported as in a nonaccrual status during the period of deferral. A COVID-19 pandemic modified loan is only reported as a nonaccrual asset in the event a borrower declares bankruptcy, the borrower experiences significant credit deterioration such that the Company does not expect to collect all principal and interest due, or the loan was 90 days past due at the onset of the pandemic. At September 30, 2020, 5% of the COVID-19 pandemic modified loans were in nonaccrual status.
The amortized cost of mortgage loans in a nonaccrual status by portfolio segment were as follows at:
CommercialAgriculturalResidentialTotal
(In millions)
December 31, 2019$$21 $37 $58 
September 30, 2020 (1)$$14 $100 $114 
_______________
(1)The Company had $8 million of residential mortgage loans in nonaccrual status for which there was no related allowance for credit losses at September 30, 2020.
Current period investment income on mortgage loans in nonaccrual status was $1 million for the nine months ended September 30, 2020.
Modified Mortgage Loans by Portfolio Segment
Under certain circumstances, modifications are granted to nonperforming mortgage loans. Each modification is evaluated to determine if a TDR has occurred. A modification is a TDR when the borrower is in financial difficulty and the creditor makes concessions. Generally, the types of concessions may include reducing the amount of debt owed, reducing the contractual interest rate, extending the maturity date at an interest rate lower than current market interest rates and/or reducing accrued interest. The Company did not have a significant amount of mortgage loans modified in a troubled debt restructuring during the nine months ended September 30, 2020.
19

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
4. Investments (continued)
Short-term modifications made on a good faith basis to borrowers who were not more than 30 days past due at December 31, 2019 and in response to the COVID-19 pandemic are not considered TDRs.
Other Invested Assets
Over 95% of other invested assets is comprised of freestanding derivatives with positive estimated fair values. 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.
Leveraged Leases
The carrying value of leveraged leases at September 30, 2020 and December 31, 2019 was $51 million and $64 million, respectively, net of allowance for credit losses of $13 million and $0, respectively. Rental receivables are generally due in periodic installments. The payment periods for leveraged leases generally range from one to 13 years. For rental receivables, the primary credit quality indicator is whether the rental receivable is performing or nonperforming, which is assessed monthly. Nonperforming rental receivables are generally defined as those that are 90 days or more past due. At both September 30, 2020 and December 31, 2019, all leveraged leases were performing.
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 at:
September 30, 2020December 31, 2019
(In millions)
Fixed maturity securities$11,281 $6,957 
Derivatives464 245 
Other(17)(13)
Subtotal11,728 7,189 
Amounts allocated from:
Future policy benefits(4,376)(2,692)
DAC, VOBA and DSI(482)(341)
Subtotal(4,858)(3,033)
Deferred income tax benefit (expense)(1,443)(873)
Net unrealized investment gains (losses)$5,427 $3,283 
The changes in net unrealized investment gains (losses) were as follows:
Nine Months Ended September 30, 2020
(In millions)
Balance at December 31, 2019$3,283 
Unrealized investment gains (losses) during the period4,539 
Unrealized investment gains (losses) relating to:
Future policy benefits(1,684)
DAC, VOBA and DSI(141)
Deferred income tax benefit (expense)(570)
Balance at September 30, 2020$5,427 
Change in net unrealized investment gains (losses)$2,144 
20

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated 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, 2020 and December 31, 2019.
Securities Lending
Elements of the securities lending program are presented below at:
September 30, 2020December 31, 2019
(In millions)
Securities on loan: (1)
Amortized cost$2,037 $2,031 
Estimated fair value$3,531 $2,996 
Cash collateral received from counterparties (2)$3,625 $3,074 
Securities collateral received from counterparties (3)$$
Reinvestment portfolio — estimated fair value$3,764 $3,174 
_______________
(1)Included within fixed maturity securities.
(2)Included within payables for collateral under securities loaned and other transactions.
(3)Securities collateral received from counterparties is not reported on the consolidated balance sheets and may not be sold or re-pledged unless the counterparty is in default.
The cash collateral liability by loaned security type and remaining tenor of the agreements were as follows at:
September 30, 2020December 31, 2019
Open (1)1 Month or Less1 to 6 MonthsTotalOpen (1)1 Month or Less1 to 6 MonthsTotal
(In millions)
U.S. government and agency$1,229 $1,801 $593 $3,623 $1,279 $1,094 $701 $3,074 
Foreign corporate
Total$1,231 $1,801 $593 $3,625 $1,279 $1,094 $701 $3,074 
_______________
(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, 2020 was $1.2 billion, primarily 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, ABS, U.S. and foreign corporate securities, non-agency RMBS and U.S. government and agency securities) with 63% invested in agency RMBS, cash and cash equivalents and U.S. government and agency securities at September 30, 2020. 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.
21

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
4. Investments (continued)
Invested Assets on Deposit, Held in Trust and Pledged as Collateral
Invested assets on deposit, held in trust and pledged as collateral at estimated fair value were as follows at:
September 30, 2020December 31, 2019
(In millions)
Invested assets on deposit (regulatory deposits) (1)$10,061 $9,349 
Invested assets held in trust (reinsurance agreements) (2)5,518 4,561 
Invested assets pledged as collateral (3)5,608 3,641 
Total invested assets on deposit, held in trust and pledged as collateral$21,187 $17,551 
_______________
(1)The Company has assets, primarily fixed maturity securities, on deposit with governmental authorities relating to certain policyholder liabilities, of which $83 million and $69 million of the assets on deposit represents restricted cash and cash equivalents at September 30, 2020 and December 31, 2019, respectively.
(2)The Company has assets, primarily fixed maturity securities, held in trust relating to certain reinsurance transactions, of which $83 million and $124 million of the assets held in trust balance represents restricted cash and cash equivalents at September 30, 2020 and December 31, 2019, 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 Financial Statements included in the 2019 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 (i) direct the activities of the VIE that most significantly impact the economic performance of the VIE and (ii) 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 either September 30, 2020 or December 31, 2019.
The carrying amount and maximum exposure to loss related to the VIEs for which the Company has concluded that it holds a variable interest, but is not the primary beneficiary, were as follows at:
 September 30, 2020December 31, 2019
 Carrying
Amount
Maximum
Exposure
to Loss
Carrying
Amount
Maximum
Exposure
to Loss
 (In millions)
Fixed maturity securities$13,446 $12,393 $13,094 $12,454 
Limited partnerships and LLCs2,083 3,351 1,907 3,080 
Total$15,529 $15,744 $15,001 $15,534 






22

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
4. Investments (continued)
The Company’s investments in unconsolidated VIEs are described below.
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 Available-for-sale” 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 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 10.
Net Investment Income
The components of net investment income were as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(In millions)
Investment income:
Fixed maturity securities$676 $665 $2,021 $1,997 
Equity securities
Mortgage loans166 172 498 507 
Policy loans15 18 40 51 
Limited partnerships and LLCs (1)155 79 48 175 
Cash, cash equivalents and short-term investments30 44 67 
Other14 12 39 31 
Total investment income1,034 978 2,694 2,834 
Less: Investment expenses38 50 130 153 
Net investment income$996 $928 $2,564 $2,681 
_______________
(1)Includes net investment income pertaining to other limited partnership interests of $153 million and $34 million for the three months and nine months ended September 30, 2020, respectively, and $67 million and $143 million for the three months and nine months ended September 30, 2019, respectively.
23

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
September 30,
Nine Months Ended
September 30,
2020201920202019
(In millions)
Fixed maturity securities $$28 $(26)$81 
Equity securities(3)14 
Mortgage loans(1)(23)(8)
Limited partnerships and LLCs(1)(3)(4)(8)
Other(2)
Total net investment gains (losses)$$27 $(48)$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 follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(In millions)
Proceeds$897 $1,628 $2,168 $8,586 
Gross investment gains$30 $45 $62 $218 
Gross investment losses(29)(17)(72)(137)
Net investment gains (losses)$$28 $(10)$81 
5. Derivatives
Accounting for Derivatives
See Note 1 of the Notes to the Consolidated Financial Statements included in the 2019 Annual Report for a description of the Company’s accounting policies for derivatives and Note 8 for information about the fair value hierarchy for derivatives.
Derivative Strategies
Types of Derivative Instruments and 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. Commonly used derivative instruments include, but are not necessarily limited to:
Interest rate derivatives: swaps, caps, swaptions and forwards;
Foreign currency exchange rate derivatives: forwards and swaps;
Equity derivatives: options, total return swaps and variance swaps; and
Credit derivatives: single and index reference credit default swaps.
For detailed information on these contracts and the related strategies, see Note 7 of the Notes to the Consolidated Financial Statements included in the 2019 Annual Report.
24

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
5. Derivatives (continued)
Primary Risks Managed by Derivatives
The primary underlying risk exposure, gross notional amount and estimated fair value of derivatives held were as follows at:
September 30, 2020December 31, 2019
Primary Underlying Risk ExposureGross
Notional
Amount
Estimated Fair ValueGross
Notional
Amount
Estimated Fair Value
AssetsLiabilitiesAssetsLiabilities
(In millions)
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate forwardsInterest rate$330 $90 $$420 $22 $
Foreign currency swapsForeign currency exchange rate2,808 314 19 2,765 190 27 
Total qualifying hedges3,138 404 19 3,185 212 27 
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate swapsInterest rate3,015 707 24 7,559 878 29 
Interest rate capsInterest rate2,350 3,350 
Interest rate optionsInterest rate22,570 1,481 178 29,750 782 187 
Interest rate forwardsInterest rate7,332 1,179 24 5,418 94 114 
Foreign currency swapsForeign currency exchange rate1,002 141 16 1,051 96 15 
Foreign currency forwardsForeign currency exchange rate157 138 
Credit default swaps — purchasedCredit18 18 
Credit default swaps — writtenCredit1,793 27 1,635 36 
Equity index optionsEquity market37,493 815 995 51,509 850 1,728 
Equity variance swapsEquity market1,098 13 22 2,136 69 69 
Equity total return swapsEquity market12,997 63 222 7,723 367 
Total non-designated or non-qualifying derivatives89,825 4,427 1,484 110,287 2,809 2,510 
Embedded derivatives:
Ceded guaranteed minimum income benefitsOtherN/A321 N/A217 
Direct index-linked annuitiesOtherN/A2,256 N/A2,253 
Direct guaranteed minimum benefitsOtherN/A3,853 N/A1,656 
Assumed index-linked annuitiesOtherN/A340 N/A339 
Total embedded derivativesN/A321 6,449 N/A217 4,248 
Total$92,963 $5,152 $7,952 $113,472 $3,238 $6,785 
Based on gross notional amounts, a substantial portion of the Company’s derivatives was not designated or did not qualify as part of a hedging relationship at both September 30, 2020 and December 31, 2019. The Company’s use of derivatives includes (i) derivatives that serve as macro hedges of the Company’s exposure to various risks and generally do not qualify for hedge accounting because they do not meet the criteria required under portfolio hedging rules; (ii) derivatives that economically hedge insurance liabilities and generally do not qualify for hedge accounting because they do not meet the criteria of being “highly effective” as outlined in ASC 815; (iii) derivatives that economically hedge embedded derivatives that do not qualify for hedge accounting because the changes in estimated fair value of the embedded derivatives are already recorded in net income; and (iv) written credit default swaps that are used to create synthetic credit investments and that do not qualify for hedge accounting because they do not involve a hedging relationship.
25

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
5. Derivatives (continued)
The amount and location of gains (losses), including earned income, recognized for derivatives and gains (losses) pertaining to hedged items presented in net derivative gains (losses) were as follows:
Net Derivative Gains (Losses) Recognized for DerivativesNet Derivative Gains (Losses) Recognized for Hedged ItemsNet Investment IncomeAmount of Gains (Losses) Deferred in AOCI
(In millions)
Three Months Ended September 30, 2020
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate derivatives$$$$(1)
Foreign currency exchange rate derivatives10 (3)(184)
Total cash flow hedges10 (3)(185)
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate derivatives(435)
Foreign currency exchange rate derivatives(50)(3)
Credit derivatives
Equity derivatives(752)
Embedded derivatives(628)
Total non-qualifying hedges(1,861)(3)
Total$(1,851)$(6)$$(185)
Three Months Ended September 30, 2019
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate derivatives$$$$51 
Foreign currency exchange rate derivatives109 
Total cash flow hedges10 160 
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate derivatives1,657 
Foreign currency exchange rate derivatives49 (3)
Credit derivatives
Equity derivatives(18)
Embedded derivatives(630)
Total non-qualifying hedges1,060 (3)
Total$1,060 $(3)$10 $160 
26

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
5. Derivatives (continued)
Net Derivative Gains (Losses) Recognized for DerivativesNet Derivative Gains (Losses) Recognized for Hedged ItemsNet Investment IncomeAmount of Gains (Losses) Deferred in AOCI
(In millions)
Nine Months Ended September 30, 2020
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate derivatives$$$$92 
Foreign currency exchange rate derivatives13 (6)29 143 
Total cash flow hedges14 (6)31 235 
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate derivatives4,321 
Foreign currency exchange rate derivatives57 (12)
Credit derivatives
Equity derivatives(393)
Embedded derivatives(1,590)
Total non-qualifying hedges2,396 (12)
Total$2,410 $(18)$31 $235 
Nine Months Ended September 30, 2019
Derivatives Designated as Hedging Instruments:
Cash flow hedges:
Interest rate derivatives$28 $$$51 
Foreign currency exchange rate derivatives19 (23)26 150 
Total cash flow hedges47 (23)28 201 
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate derivatives2,906 
Foreign currency exchange rate derivatives71 (6)
Credit derivatives32 
Equity derivatives(1,808)
Embedded derivatives(1,316)
Total non-qualifying hedges(115)(6)
Total$(68)$(29)$28 $201 
At September 30, 2020 and December 31, 2019, the balance in AOCI associated with cash flow hedges was $464 million and $245 million, respectively.
Credit Derivatives
In connection with synthetically created credit investment transactions, the Company writes credit default swaps for which it receives a premium to insure credit risk. If a credit event occurs, as defined by the contract, the contract may be cash settled or it may be settled gross by the Company paying the counterparty the specified swap notional amount in exchange for the delivery of par quantities of the referenced credit obligation.
27

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
5. Derivatives (continued)
The estimated fair value, maximum amount of future payments and weighted average years to maturity of written credit default swaps were as follows at:
September 30, 2020December 31, 2019
Rating Agency Designation of Referenced
Credit Obligations (1)
Estimated
Fair Value
of Credit
Default
Swaps
Maximum
Amount of
Future
Payments under
Credit Default
Swaps
Weighted
Average
Years to
Maturity (2)
Estimated
Fair Value
of Credit
Default
Swaps
Maximum
Amount of
Future
Payments under
Credit Default
Swaps
Weighted
Average
Years to
Maturity (2)
(Dollars in millions)
Aaa/Aa/A$$879 2.5$11 $615 2.5
Baa18 914 5.525 1,020 5.1
Total$26 $1,793 4.0$36 $1,635 4.1
_______________
(1)The Company has written credit protection on both single name and index references. The rating agency designations are based on availability and the midpoint of the applicable ratings among Moody’s, S&P and Fitch. If no rating is available from a rating agency, then an internally developed rating is used.
(2)The weighted average years to maturity of the credit default swaps is calculated based on weighted average gross notional amounts.
Counterparty Credit Risk
The Company may be exposed to credit-related losses in the event of counterparty nonperformance on derivative instruments. Generally, the credit exposure is the fair value at the reporting date less any collateral received from the counterparty.
The Company manages its credit risk by: (i) entering into derivative transactions with creditworthy counterparties governed by master netting agreements; (ii) trading through regulated exchanges and central clearing counterparties; (iii) obtaining collateral, such as cash and securities, when appropriate; and (iv) setting limits on single party credit exposures which are subject to periodic management review.
See Note 6 for a description of the impact of credit risk on the valuation of derivatives.
The estimated fair values of net derivative assets and net derivative liabilities after the application of master netting agreements and collateral were as follows at:
Gross Amounts Not Offset on the Consolidated Balance Sheets
Gross Amount RecognizedFinancial Instruments (1)Collateral Received/Pledged (2)Net AmountSecurities Collateral Received/Pledged (3)Net Amount After Securities Collateral
(In millions)
September 30, 2020
Derivative assets$4,861 $(1,068)$(3,159)$634 $(625)$
Derivative liabilities$1,495 $(1,068)$$427 $(426)$
December 31, 2019
Derivative assets$3,062 $(1,458)$(1,115)$489 $(488)$
Derivative liabilities$2,522 $(1,458)$$1,064 $(1,061)$
_______________
(1)Represents amounts subject to an enforceable master netting agreement or similar agreement.
(2)The amount of cash collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreement.
28

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
5. Derivatives (continued)
(3)Securities collateral received from counterparties is not reported on the consolidated balance sheets and may not be sold or re-pledged unless the counterparty is in default. Amounts do not include excess of collateral pledged or received.
The Company’s collateral arrangements generally require the counterparty in a net liability position, after considering the effect of netting agreements, to pledge collateral when the amount owed by that counterparty reaches a minimum transfer amount. Certain of these arrangements also include credit-contingent provisions which permit the party with positive fair value to terminate the derivative at the current fair value or demand immediate full collateralization from the party in a net liability position, in the event that the financial strength or credit rating of the party in a net liability position falls below a certain level.
The aggregate estimated fair values of derivatives in a net liability position containing such credit-contingent provisions and the aggregate estimated fair value of assets posted as collateral for such instruments were as follows at:
September 30, 2020December 31, 2019
(In millions)
Estimated fair value of derivatives in a net liability position (1)$427 $1,064 
Estimated Fair Value of Collateral Provided (2):
Fixed maturity securities$691 $1,473 
_______________
(1)After taking into consideration the existence of netting agreements.
(2)Substantially all of the Company’s collateral arrangements provide for daily posting of collateral for the full value of the derivative contract. As a result, if the credit-contingent provisions of derivative contracts in a net liability position were triggered, minimal additional assets would be required to be posted as collateral or needed to settle the instruments immediately.
29

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
6. Fair Value
Considerable judgment is often required in interpreting market data to develop estimates of fair value, and the use of different assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.
Recurring Fair Value Measurements
The assets and liabilities measured at estimated fair value on a recurring basis and their corresponding placement in the fair value hierarchy, are presented in the tables below. Investments that do not have a readily determinable fair value and are measured at net asset value (or equivalent) as a practical expedient to estimated fair value are excluded from the fair value hierarchy.
September 30, 2020
Fair Value HierarchyTotal Estimated
Fair Value
Level 1Level 2Level 3
(In millions)
Assets
Fixed maturity securities:
U.S. corporate$$35,207 $699 $35,906 
Foreign corporate10,281 379 10,660 
RMBS8,449 8,449 
U.S. government and agency1,849 7,086 8,935 
CMBS6,418 6,425 
State and political subdivision4,429 4,429 
ABS2,640 74 2,714 
Foreign government1,820 1,820 
Total fixed maturity securities1,849 76,330 1,159 79,338 
Equity securities15 99 117 
Short-term investments3,019 1,210 10 4,239 
Derivative assets: (1)
Interest rate3,458 3,458 
Foreign currency exchange rate438 17 455 
Credit18 27 
Equity market878 13 891 
Total derivative assets4,792 39 4,831 
Embedded derivatives within asset host contracts (2)321 321 
Separate account assets153 103,028 103,184 
Total assets$5,036 $185,459 $1,535 $192,030 
Liabilities
Derivative liabilities: (1)
Interest rate$$226 $$226 
Foreign currency exchange rate37 37 
Credit
Equity market1,216 23 1,239 
Total derivative liabilities1,479 24 1,503 
Embedded derivatives within liability host contracts (2)6,449 6,449 
Total liabilities$$1,479 $6,473 $7,952 
30

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
6. Fair Value (continued)
December 31, 2019
Fair Value HierarchyTotal Estimated
Fair Value
Level 1Level 2Level 3
(In millions)
Assets
Fixed maturity securities:
U.S. corporate$$30,831 $329 $31,160 
Foreign corporate9,712 132 9,844 
RMBS9,074 44 9,118 
U.S. government and agency1,636 5,760 7,396 
CMBS5,755 5,755 
State and political subdivision3,984 73 4,057 
ABS1,882 73 1,955 
Foreign government1,751 1,751 
Total fixed maturity securities1,636 68,749 651 71,036 
Equity securities14 125 147 
Short-term investments1,271 682 1,958 
Derivative assets: (1)
Interest rate1,778 1,778 
Foreign currency exchange rate281 286 
Credit25 11 36 
Equity market850 71 921 
Total derivative assets2,934 87 3,021 
Embedded derivatives within asset host contracts (2)217 217 
Separate account assets180 106,924 107,107 
Total assets$3,101 $179,414 $971 $183,486 
Liabilities
Derivative liabilities: (1)
Interest rate$$330 $$330 
Foreign currency exchange rate43 43 
Equity market2,093 71 2,164 
Total derivative liabilities2,466 71 2,537 
Embedded derivatives within liability host contracts (2)4,248 4,248 
Total liabilities$$2,466 $4,319 $6,785 
_______________
(1)Derivative assets are presented within other invested assets on the consolidated balance sheets and derivative liabilities are presented within other liabilities on the consolidated balance sheets. The amounts are presented gross in the tables above to reflect the presentation on the consolidated balance sheets.
(2)Embedded derivatives within asset host contracts are presented within premiums, reinsurance and other receivables and other invested assets on the consolidated balance sheets. Embedded derivatives within liability host contracts are presented within policyholder account balances on the consolidated balance sheets.
31

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
6. Fair Value (continued)
Valuation Controls and Procedures
The Company monitors and provides oversight of valuation controls and policies for securities, mortgage loans and derivatives, which are primarily executed by its valuation service providers. The valuation methodologies used to determine fair values prioritize the use of observable market prices and market-based parameters and determines that judgmental valuation adjustments, when applied, are based upon established policies and are applied consistently over time. The valuation methodologies for securities, mortgage loans and derivatives are reviewed on an ongoing basis and revised when necessary. In addition, the Chief Accounting Officer periodically reports to the Audit Committee of Brighthouse Financial’s Board of Directors regarding compliance with fair value accounting standards.
The fair value of financial assets and financial liabilities is based on quoted market prices, where available. Prices received are assessed to determine if they represent a reasonable estimate of fair value. Several controls are performed, including certain monthly controls, which include, but are not limited to, analysis of portfolio returns to corresponding benchmark returns, comparing a sample of executed prices of securities sold to the fair value estimates, reviewing the bid/ask spreads to assess activity, comparing prices from multiple independent pricing services and ongoing due diligence to confirm that independent pricing services use market-based parameters. The process includes a determination of the observability of inputs used in estimated fair values received from independent pricing services or brokers by assessing whether these inputs can be corroborated by observable market data. Independent non-binding broker quotes, also referred to herein as “consensus pricing,” are used for a non-significant portion of the portfolio. Prices received from independent brokers are assessed to determine if they represent a reasonable estimate of fair value by considering such pricing relative to the current market dynamics and current pricing for similar financial instruments.
A formal process is also applied to challenge any prices received from independent pricing services that are not considered representative of estimated fair value. If prices received from independent pricing services are not considered reflective of market activity or representative of estimated fair value, independent non-binding broker quotations are obtained. If obtaining an independent non-binding broker quotation is unsuccessful, the last available price will be used.
Additional controls are performed, such as, balance sheet analytics to assess reasonableness of period to period pricing changes, including any price adjustments. Price adjustments are applied if prices or quotes received from independent pricing services or brokers are not considered reflective of market activity or representative of estimated fair value. The Company did not have significant price adjustments during the nine months ended September 30, 2020.
Determination of Fair Value
Fixed Maturity Securities
The fair values for actively traded marketable bonds, primarily U.S. government and agency securities, are determined using the quoted market prices and are classified as Level 1 assets. For fixed maturity securities classified as Level 2 assets, fair values are determined using either a market or income approach and are valued based on a variety of observable inputs as described below.
U.S. corporate and foreign corporate securities: Fair value is determined using third-party commercial pricing services, with the primary inputs being quoted prices in markets that are not active, benchmark yields, spreads off benchmark yields, new issuances, issuer rating, trades of identical or comparable securities, or duration. Privately-placed securities are valued using the additional key inputs: market yield curve, call provisions, observable prices and spreads for similar public or private securities that incorporate the credit quality and industry sector of the issuer, and delta spread adjustments to reflect specific credit-related issues.
U.S. government and agency, state and political subdivision and foreign government securities: Fair value is determined using third-party commercial pricing services, with the primary inputs being quoted prices in markets that are not active, benchmark U.S. Treasury yield or other yields, spread off the U.S. Treasury yield curve for the identical security, issuer ratings and issuer spreads, broker-dealer quotes, and comparable securities that are actively traded.
32

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
6. Fair Value (continued)
Structured Securities: Fair value is determined using third-party commercial pricing services, with the primary inputs being quoted prices in markets that are not active, spreads for actively traded securities, spreads off benchmark yields, expected prepayment speeds and volumes, current and forecasted loss severity, ratings, geographic region, weighted average coupon and weighted average maturity, average delinquency rates and debt-service coverage ratios. Other issuance-specific information is also used, including, but not limited to; collateral type, structure of the security, vintage of the loans, payment terms of the underlying asset, payment priority within tranche, and deal performance.
Equity Securities and Short-term Investments
The fair value for actively traded equity securities and short-term investments are determined using quoted market prices and are classified as Level 1 assets. For financial instruments classified as Level 2 assets or liabilities, fair values are determined using a market approach and are valued based on a variety of observable inputs as described below.
Equity securities and short-term investments: Fair value is determined using third-party commercial pricing services, with the primary input being quoted prices in markets that are not active.
Derivatives
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”).
The fair values for exchange-traded derivatives are determined using the quoted market prices and are classified as Level 1 assets. For OTC-bilateral derivatives and OTC-cleared derivatives classified as Level 2 assets or liabilities, fair values are determined using the income approach. Valuations of non-option-based derivatives utilize present value techniques, whereas valuations of option-based derivatives utilize option pricing models which are based on market standard valuation methodologies and a variety of observable inputs.
The significant inputs to the pricing models for most OTC-bilateral and OTC-cleared derivatives are inputs that are observable in the market or can be derived principally from, or corroborated by, observable market data. Certain OTC-bilateral and OTC-cleared derivatives may rely on inputs that are significant to the estimated fair value that are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. These unobservable inputs may involve significant management judgment or estimation. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and management believes they are consistent with what other market participants would use when pricing such instruments.
Most inputs for OTC-bilateral and OTC-cleared derivatives are mid-market inputs but, in certain cases, liquidity adjustments are made when they are deemed more representative of exit value. Market liquidity, as well as the use of different methodologies, assumptions and inputs, may have a material effect on the estimated fair values of the Company’s derivatives and could materially affect net income.
The credit risk of both the counterparty and the Company are considered in determining the estimated fair value for all OTC-bilateral and OTC-cleared derivatives, and any potential credit adjustment is based on the net exposure by counterparty after taking into account the effects of netting agreements and collateral arrangements. The Company values its OTC-bilateral and OTC-cleared derivatives using standard swap curves which may include a spread to the risk-free rate, depending upon specific collateral arrangements. This credit spread is appropriate for those parties that execute trades at pricing levels consistent with similar collateral arrangements. As the Company and its significant derivative counterparties generally execute trades at such pricing levels and hold sufficient collateral, additional credit risk adjustments are not currently required in the valuation process. The Company’s ability to consistently execute at such pricing levels is in part due to the netting agreements and collateral arrangements that are in place with all of its significant derivative counterparties. An evaluation of the requirement to make additional credit risk adjustments is performed by the Company each reporting period.
Embedded Derivatives
Embedded derivatives principally include certain direct and ceded variable annuity guarantees and equity crediting rates within index-linked annuity contracts. Embedded derivatives are recorded at estimated fair value with changes in estimated fair value reported in net income.
33

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
6. Fair Value (continued)
The Company issues certain variable annuity products with guaranteed minimum benefits. GMWBs, GMABs and certain GMIBs contain embedded derivatives, which are measured at estimated fair value separately from the host variable annuity contract, with changes in estimated fair value reported in net derivative gains (losses). These embedded derivatives are classified within policyholder account balances on the consolidated balance sheets.
The Company determines the fair value of these embedded derivatives by estimating the present value of projected future benefits minus the present value of projected future fees using actuarial and capital market assumptions including expectations of policyholder behavior. The calculation is based on in-force business and is performed using standard actuarial valuation software which projects future cash flows from the embedded derivative over multiple risk neutral stochastic scenarios using observable risk-free rates. The percentage of fees included in the initial fair value measurement is not updated in subsequent periods.
Capital market assumptions, such as risk-free rates and implied volatilities, are based on market prices for publicly-traded instruments to the extent that prices for such instruments are observable. Implied volatilities beyond the observable period are extrapolated based on observable implied volatilities and historical volatilities. Actuarial assumptions, including mortality, lapse, withdrawal and utilization, are unobservable and are reviewed at least annually based on actuarial studies of historical experience.
The valuation of these guarantee liabilities includes nonperformance risk adjustments and adjustments for a risk margin related to non-capital market inputs. The nonperformance adjustment is determined by taking into consideration publicly available information relating to spreads in the secondary market for BHF’s debt. These observable spreads are then adjusted to reflect the priority of these liabilities and claims-paying ability of the issuing insurance subsidiaries as compared to BHF’s overall financial strength.
Risk margins are established to capture the non-capital market risks of the instrument which represent the additional compensation a market participant would require to assume the risks related to the uncertainties of such actuarial assumptions as annuitization, premium persistency, partial withdrawal and surrenders. The establishment of risk margins requires the use of significant management judgment, including assumptions of the amount and cost of capital needed to cover the guarantees.
The Company issues and assumes through reinsurance index-linked annuities which allow the policyholder to participate in returns from equity indices. The crediting rates associated with these features are embedded derivatives which are measured at estimated fair value separately from the host fixed annuity contract, with changes in estimated fair value reported in net derivative gains (losses). These embedded derivatives are classified within policyholder account balances on the consolidated balance sheets.
The estimated fair value of crediting rates associated with index-linked annuities is determined using a combination of an option pricing model and an option-budget approach. The valuation of these embedded derivatives also includes the establishment of a risk margin, as well as changes in nonperformance risk.
Transfers Into or Out of Level 3:
Assets and liabilities are transferred into Level 3 when a significant input cannot be corroborated with market observable data. This occurs when market activity decreases significantly and underlying inputs cannot be observed, current prices are not available, and/or when there are significant variances in quoted prices, thereby affecting transparency. Assets and liabilities are transferred out of Level 3 when circumstances change such that a significant input can be corroborated with market observable data. This may be due to a significant increase in market activity, a specific event, or one or more significant input(s) becoming observable.
34

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
6. Fair Value (continued)
Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)
Certain quantitative information about the significant unobservable inputs used in the fair value measurement, and the sensitivity of the estimated fair value to changes in those inputs, for the more significant asset and liability classes measured at fair value on a recurring basis using significant unobservable inputs (Level 3) were as follows at:
September 30, 2020December 31, 2019Impact of
Increase in Input
on Estimated
Fair Value
Valuation TechniquesSignificant
Unobservable Inputs
RangeRange
Embedded derivatives
Direct, assumed and ceded guaranteed minimum benefitsOption pricing techniquesMortality rates0.03%-12.13%0.02%-11.31%Decrease (1)
Lapse rates0.25%-15.00%0.25%-16.00%Decrease (2)
Utilization rates0.00%-25.00%0.00%-25.00%Increase (3)
Withdrawal rates0.25%-10.00%0.25%-10.00%(4)
Long-term equity volatilities16.66%-22.21%16.24%-21.65%Increase (5)
Nonperformance risk spread0.99%-2.39%0.54%-1.99%Decrease (6)
_______________
(1)Mortality rates vary by age and by demographic characteristics such as gender. The range shown reflects the mortality rate for policyholders between 35 and 90 years old, which represents the majority of the business with living benefits. Mortality rate assumptions are set based on company experience and include an assumption for mortality improvement.
(2)The range shown reflects base lapse rates for major product categories for duration 1-20, which represents majority of business with living benefit riders. Base lapse rates are adjusted at the contract level based on a comparison of the actuarially calculated guaranteed values and the current policyholder account value, as well as other factors, such as the applicability of any surrender charges. A dynamic lapse function reduces the base lapse rate when the guaranteed amount is greater than the account value as in-the-money contracts are less likely to lapse. Lapse rates are also generally assumed to be lower in periods when a surrender charge applies.
(3)The utilization rate assumption estimates the percentage of contract holders with a GMIB or lifetime withdrawal benefit who will elect to utilize the benefit upon becoming eligible in a given year. The range shown represents the floor and cap of the GMIB dynamic election rates across varying levels of in-the-money. For lifetime withdrawal guarantee riders, the assumption is that everyone will begin withdrawals once account value reaches zero which is equivalent to a 100% utilization rate. Utilization rates may vary by the type of guarantee, the amount by which the guaranteed amount is greater than the account value, the contract’s withdrawal history and by the age of the policyholder.
(4)The withdrawal rate represents the percentage of account balance that any given policyholder will elect to withdraw from the contract each year. The withdrawal rate assumption varies by age and duration of the contract, and also by other factors such as benefit type. For any given contract, withdrawal rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. For GMWBs, any increase (decrease) in withdrawal rates results in an increase (decrease) in the estimated fair value of the guarantees. For GMABs and GMIBs, any increase (decrease) in withdrawal rates results in a decrease (increase) in the estimated fair value.
(5)Long-term equity volatilities represent equity volatility beyond the period for which observable equity volatilities are available. For any given contract, long-term equity volatility rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative.
(6)Nonperformance risk spread varies by duration. For any given contract, multiple nonperformance risk spreads will apply, depending on the duration of the cash flow being discounted for purposes of valuing the embedded derivative.
The Company does not develop unobservable inputs used in measuring fair value for all other assets and liabilities classified within Level 3; therefore, these are not included in the table above. The other Level 3 assets and liabilities primarily included fixed maturity securities and derivatives. For fixed maturity securities valued based on non-binding broker quotes, an increase (decrease) in credit spreads would result in a higher (lower) fair value. For derivatives valued based on third-party pricing models, an increase (decrease) in credit spreads would generally result in a higher (lower) fair value.
35

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
6. Fair Value (continued)
The changes in assets and (liabilities) measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3) were summarized as follows:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Fixed Maturity Securities
Corporate (1)Structured SecuritiesState and
Political
Subdivision
Equity
Securities
Short-term
Investments
Net
Derivatives (2)
Net Embedded
Derivatives (3)
Separate
Account Assets (4)
(In millions)
Three Months Ended September 30, 2020
Balance, beginning of period$894 $173 $$$$20 $(5,326)$
Total realized/unrealized gains (losses) included in net income (loss) (5) (6)(1)(1)(628)
Total realized/unrealized gains (losses) included in AOCI(10)
Purchases (7)199 11 10 
Sales (7)(64)(1)
Issuances (7)
Settlements (7)(174)
Transfers into Level 3 (8)185 
Transfers out of Level 3 (8)(142)(103)
Balance, end of period$1,078 $81 $$$10 $15 $(6,128)$
Three Months Ended September 30, 2019
Balance, beginning of period$765 $108 $74 $$$(134)$(3,121)$
Total realized/unrealized gains (losses) included in net income (loss) (5) (6)(2)(630)
Total realized/unrealized gains (losses) included in AOCI
Purchases (7)118 61 
Sales (7)(22)(6)(1)(6)
Issuances (7)
Settlements (7)(219)
Transfers into Level 3 (8)49 29 
Transfers out of Level 3 (8)(84)(18)
Balance, end of period$826 $175 $73 $$$(131)$(3,970)$
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at September 30, 2020 (9)$$$$$$$(668)$
Changes in unrealized gains (losses) included in other comprehensive income for the instruments still held at September 30, 2020 (9)$$$$$$(10)$$
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at September 30, 2019 (9)$$$$$$(2)$(705)$


36

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
6. Fair Value (continued)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Fixed Maturity Securities
Corporate (1)Structured SecuritiesState and
Political
Subdivision
Equity
Securities
Short-term
Investments
Net
Derivatives (2)
Net Embedded
Derivatives (3)
Separate
Account Assets (4)
(In millions)
Nine Months Ended September 30, 2020
Balance, beginning of period$461 $117 $73 $$$16 $(4,031)$
Total realized/unrealized gains (losses) included in net income (loss) (5) (6)(2)(1,590)
Total realized/unrealized gains (losses) included in AOCI12 10 
Purchases (7)509 34 10 
Sales (7)(103)(2)(5)(14)
Issuances (7)
Settlements (7)(507)
Transfers into Level 3 (8)285 
Transfers out of Level 3 (8)(84)(78)(73)(5)
Balance, end of period$1,078 $81 $$$10 $15 $(6,128)$
Nine Months Ended September 30, 2019
Balance, beginning of period$732 $173 $74 $$$(122)$(1,998)$
Total realized/unrealized gains (losses) included in net income (loss) (5) (6)(10)(1,316)
Total realized/unrealized gains (losses) included in AOCI11 
Purchases (7)179 75 
Sales (7)(78)(24)(1)(1)
Issuances (7)
Settlements (7)(656)
Transfers into Level 3 (8)147 92 
Transfers out of Level 3 (8)(165)(145)(4)
Balance, end of period$826 $175 $73 $$$(131)$(3,970)$
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at September 30, 2020 (9)$(1)$$$$$(11)$(1,687)$
Changes in unrealized gains (losses) included in other comprehensive income for the instruments still held at September 30, 2020 (9)$12 $$$$$10 $$
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at September 30, 2019 (9)$$$$$$(11)$(1,531)$
_______________
(1)Comprised of U.S. and foreign corporate securities.
(2)Freestanding derivative assets and liabilities are presented net for purposes of the rollforward.
(3)Embedded derivative assets and liabilities are presented net for purposes of the rollforward.
(4)Investment performance related to separate account assets is fully offset by corresponding amounts credited to contract holders within separate account liabilities. Therefore, such changes in estimated fair value are not recorded in net income (loss). For the purpose of this disclosure, these changes are presented within net investment gains (losses).
37

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
6. Fair Value (continued)
(5)Amortization of premium/accretion of discount is included within net investment income. Changes in the allowance for credit losses and direct write-offs are charged to net income (loss) on securities are included in net investment gains (losses). Lapses associated with net embedded derivatives are included in net derivative gains (losses). Substantially all realized/unrealized gains (losses) included in net income (loss) for net derivatives and net embedded derivatives are reported in net derivative gains (losses).
(6)Interest and dividend accruals, as well as cash interest coupons and dividends received, are excluded from the rollforward.
(7)Items purchased/issued and then sold/settled in the same period are excluded from the rollforward. Fees attributed to embedded derivatives are included in settlements.
(8)Gains and losses, in net income (loss) and OCI, are calculated assuming transfers into and/or out of Level 3 occurred at the beginning of the period. Items transferred into and then out of Level 3 in the same period are excluded from the rollforward.
(9)Changes in unrealized gains (losses) included in net income (loss) for fixed maturities are reported in either net investment income or net investment gains (losses). Substantially all changes in unrealized gains (losses) included in net income (loss) for net derivatives and net embedded derivatives are reported in net derivative gains (losses).
Fair Value of Financial Instruments Carried at Other Than Fair Value
The following tables provide fair value information for financial instruments that are carried on the balance sheet at amounts other than fair value. These tables exclude the following financial instruments: cash and cash equivalents, accrued investment income, payables for collateral under securities loaned and other transactions and those short-term investments that are not securities and therefore are not included in the three level hierarchy table disclosed in the “— Recurring Fair Value Measurements” section. The estimated fair value of the excluded financial instruments, which are primarily classified in Level 2, approximates carrying value as they are short-term in nature such that the Company believes there is minimal risk of material changes in interest rates or credit quality. All remaining balance sheet amounts excluded from the tables below are not considered financial instruments subject to this disclosure.
The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows at:
September 30, 2020
Fair Value Hierarchy
Carrying
Value
Level 1Level 2Level 3Total
Estimated
Fair Value
(In millions)
Assets
Mortgage loans$15,746 $$$16,720 $16,720 
Policy loans$1,289 $$506 $1,610 $2,116 
Other invested assets$93 $$81 $12 $93 
Premiums, reinsurance and other receivables$3,088 $$64 $3,706 $3,770 
Liabilities
Policyholder account balances$17,651 $$$18,843 $18,843 
Long-term debt$3,979 $$4,169 $$4,169 
Other liabilities$1,136 $$480 $656 $1,136 
Separate account liabilities$1,207 $$1,207 $$1,207 
38

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
6. Fair Value (continued)
December 31, 2019
Fair Value Hierarchy
Carrying
Value
Level 1Level 2Level 3Total
Estimated
Fair Value
(In millions)
Assets
Mortgage loans$15,753 $$$16,383 $16,383 
Policy loans$1,292 $$516 $1,062 $1,578 
Other invested assets$51 $$39 $12 $51 
Premiums, reinsurance and other receivables$2,224 $$41 $2,593 $2,634 
Liabilities
Policyholder account balances$15,614 $$$15,710 $15,710 
Long-term debt$4,365 $$3,334 $1,000 $4,334 
Other liabilities$846 $$191 $655 $846 
Separate account liabilities$1,189 $$1,189 $$1,189 
7. Long-term Debt
Senior Notes
During the second quarter of 2020, BHF issued $615 million aggregate principal amount of senior notes due May 2030 (the “2030 Senior Notes”) for aggregate net cash proceeds of $614 million. The 2030 Senior Notes bear interest at a fixed rate of 5.625%, payable semi-annually.
Term Loan Facility
During the second quarter of 2020, BHF used the aggregate net proceeds from the issuances of the 2030 Senior Notes and the Series B Depositary Shares (as defined in Note 8) to repay all outstanding borrowings under its $1.0 billion unsecured term loan facility (the “Term Loan Facility”). On June 2, 2020, BHF terminated the Term Loan Facility without penalty.
Reinsurance Financing Arrangement
On June 11, 2020, Brighthouse Reinsurance Company of Delaware, with the explicit permission of the Delaware Commissioner of Insurance, amended its financing arrangement with a pool of highly rated third-party reinsurers to increase the maximum amount from $10.0 billion to $12.0 billion and to extend the term by two years to 2039. At September 30, 2020, there were 0 borrowings and there was $10.8 billion of funding available under this financing arrangement.
8. Equity
Preferred Stock
Preferred stock shares authorized, issued and outstanding were as follows at:
September 30, 2020December 31, 2019
Shares AuthorizedShares IssuedShares OutstandingShares AuthorizedShares IssuedShares Outstanding
6.600% Non-Cumulative Preferred Stock, Series A17,000 17,000 17,000 17,000 17,000 17,000 
6.750% Non-Cumulative Preferred Stock, Series B16,100 16,100 16,100 
Not designated99,966,900 99,983,000 
Total100,000,000 33,100 33,100 100,000,000 17,000 17,000 
39

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
8. Equity (continued)
In May 2020, BHF issued depositary shares (the “Series B Depositary Shares”), each representing a 1/1,000th ownership interest in a share of its perpetual 6.750% non-cumulative preferred stock, Series B (the “Series B Preferred Stock”) and in the aggregate representing 16,100 shares of Series B Preferred Stock, with a stated amount of $25,000 per share, for aggregate net cash proceeds of $390 million. Dividends, if declared, will accrue and be payable quarterly, in arrears, at an annual rate of 6.750% on the stated amount per share. In connection with the issuance of the Series B Depositary Shares and the underlying Series B Preferred Stock, BHF incurred $13 million of issuance costs, which have been recorded as a reduction of additional paid-in capital.
The declaration, record and payment dates, as well as per share and aggregate dividend amounts for BHF’s preferred stock by series for the nine months ended September 30, 2020 and 2019 were as follows:
Series ASeries B
Declaration DateRecord DatePayment DatePer ShareAggregatePer ShareAggregate
(In millions, except per share data)
August 17, 2020September 10, 2020September 25, 2020$412.50 $$595.31 $10 
May 15, 2020June 10, 2020June 25, 2020412.50 
February 14, 2020March 10, 2020March 25, 2020412.50 
$1,237.50 $21 $595.31 $10 
August 15, 2019September 10, 2019September 25, 2019$412.50 $$$
May 15, 2019June 10, 2019June 25, 2019412.50 
$825.00 $14 $$
Common Stock Repurchase Program
On February 6, 2020, BHF authorized the repurchase of up to an additional $500 million of its common stock. Repurchases under this authorization may be made through open market purchases, including pursuant to 10b5-1 plans or pursuant to accelerated stock repurchase plans, or through privately negotiated transactions, from time to time at management’s discretion in accordance with applicable legal requirements. On May 11, 2020, the Company announced that it had temporarily suspended repurchases of its common stock. On August 24, 2020, the Company resumed repurchases of its common stock, as was announced on August 21, 2020.
During the nine months ended September 30, 2020 and 2019, BHF repurchased 15,119,010 and 8,395,371 shares, respectively, of its common stock through open market purchases pursuant to 10b5-1 plans for $376 million and $314 million, respectively. At September 30, 2020, BHF had $177 million remaining under its common stock repurchase program.
40

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
8. Equity (continued)
Accumulated Other Comprehensive Income (Loss)
Information regarding changes in the balances of each component of AOCI was as follows:
Three Months Ended September 30, 2020
Unrealized
Investment Gains
(Losses), Net of
Related Offsets (1)
Unrealized
Gains (Losses)
on Derivatives
Foreign
Currency
Translation
Adjustments
Defined Benefit Plans AdjustmentTotal
(In millions)
Balance at June 30, 2020$4,517 $500 $(24)$(28)$4,965 
OCI before reclassifications707 (185)(2)529 
Deferred income tax benefit (expense)(149)39 (1)(111)
AOCI before reclassifications, net of income tax5,075 354 (16)(30)5,383 
Amounts reclassified from AOCI(11)(3)
Deferred income tax benefit (expense)(1)
Amounts reclassified from AOCI, net of income tax(9)(2)
Balance at September 30, 2020$5,082 $345 $(16)$(30)$5,381 
Three Months Ended September 30, 2019
Unrealized
Investment Gains
(Losses), Net of
Related Offsets (1)
Unrealized
Gains (Losses)
on Derivatives
Foreign
Currency
Translation
Adjustments
Defined Benefit Plans AdjustmentTotal
(In millions)
Balance at June 30, 2019$2,564 $181 $(20)$(23)$2,702 
OCI before reclassifications970 160 (3)1,127 
Deferred income tax benefit (expense)(204)(33)(237)
AOCI before reclassifications, net of income tax3,330 308 (23)(23)3,592 
Amounts reclassified from AOCI(30)(1)(31)
Deferred income tax benefit (expense)
Amounts reclassified from AOCI, net of income tax(24)(1)(25)
Balance at September 30, 2019$3,306 $307 $(23)$(23)$3,567 
Nine Months Ended September 30, 2020
Unrealized
Investment Gains
(Losses), Net of
Related Offsets (1)
Unrealized
Gains (Losses)
on Derivatives
Foreign
Currency
Translation
Adjustments
Defined Benefit Plans AdjustmentTotal
(In millions)
Balance at December 31, 2019$3,111 $172 $(15)$(28)$3,240 
OCI before reclassifications (2)2,475 235 (2)2,717 
Deferred income tax benefit (expense)(520)(49)(10)(579)
AOCI before reclassifications, net of income tax5,066 358 (16)(30)5,378 
Amounts reclassified from AOCI20 (16)
Deferred income tax benefit (expense)(4)(1)
Amounts reclassified from AOCI, net of income tax16 (13)
Balance at September 30, 2020$5,082 $345 $(16)$(30)$5,381 
41

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
8. Equity (continued)
Nine Months Ended September 30, 2019
Unrealized
Investment Gains
(Losses), Net of
Related Offsets (1)
Unrealized
Gains (Losses)
on Derivatives
Foreign
Currency
Translation
Adjustments
Defined Benefit Plans AdjustmentTotal
(In millions)
Balance at December 31, 2018$576 $187 $(27)$(20)$716 
OCI before reclassifications3,515 201 (3)3,717 
Deferred income tax benefit (expense)(738)(42)(780)
AOCI before reclassifications, net of income tax3,353 346 (23)(23)3,653 
Amounts reclassified from AOCI(59)(49)(108)
Deferred income tax benefit (expense)12 10 22 
Amounts reclassified from AOCI, net of income tax(47)(39)(86)
Balance at September 30, 2019$3,306 $307 $(23)$(23)$3,567 
__________________
(1)See Note 4 for information on offsets to investments related to future policy benefits, DAC, VOBA and DSI.
(2)Includes $3 million related to the adoption of ASU 2016-13, see Note 1.
Information regarding amounts reclassified out of each component of AOCI was as follows:
AOCI ComponentsAmounts Reclassified from AOCIConsolidated Statements of Operations and Comprehensive Income (Loss) Locations
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(In millions)
Net unrealized investment gains (losses):
Net unrealized investment gains (losses)$$31 $(6)$86 Net investment gains (losses)
Net unrealized investment gains (losses)(9)(1)(14)(27)Net derivative gains (losses)
Net unrealized investment gains (losses), before income tax(8)30 (20)59 
Income tax (expense) benefit(6)(12)
 Net unrealized investment gains (losses), net of income tax(7)24 (16)47 
Unrealized gains (losses) on derivatives - cash flow hedges:
Interest rate swaps28 Net derivative gains (losses)
Interest rate swapsNet investment income
Foreign currency swaps10 13 19 Net derivative gains (losses)
Gains (losses) on cash flow hedges, before income tax11 16 49 
Income tax (expense) benefit(2)(3)(10)
Gains (losses) on cash flow hedges, net of income tax13 39 
Total reclassifications, net of income tax$$25 $(3)$86 
9. Other Revenues and Other Expenses
Other Revenues
The Company has entered into contracts with mutual funds, fund managers, and their affiliates (collectively, the “Funds”) whereby the Company is paid monthly or quarterly fees (“12b-1 fees”) for providing certain services to customers and distributors of the Funds. The 12b-1 fees are generally equal to a fixed percentage of the average daily balance of the customer’s investment in a fund. The percentage is specified in the contract between the Company and the Funds. Payments are generally collected when due and are neither refundable nor able to offset future fees.
To earn these fees, the Company performs services such as responding to phone inquiries, maintaining records, providing information to distributors and shareholders about fund performance and providing training to account managers and sales agents. The passage of time reflects the satisfaction of the Company’s performance obligations to the Funds and is used to recognize revenue associated with 12b-1 fees.
42

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
9. Other Revenues and Other Expenses (continued)
Other revenues consisted primarily of 12b-1 fees of $83 million and $240 million for the three months and nine months ended September 30, 2020, respectively, and $84 million and $251 million for the three months and nine months ended September 30, 2019, respectively, of which substantially all were reported in the Annuities segment.
Other Expenses
Information on other expenses was as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(In millions)
Compensation$85 $76 $247 $238 
Contracted services and other labor costs56 73 202 185 
Transition services agreements37 64 90 196 
Establishment costs19 13 72 85 
Premium and other taxes, licenses and fees11 15 37 35 
Separate account fees118 123 343 365 
Volume related costs, excluding compensation, net of DAC capitalization155 155 445 472 
Interest expense on debt47 49 139 144 
Other52 43 99 104 
Total other expenses$580 $611 $1,674 $1,824 
10. Earnings Per Common Share
The calculation of earnings per common share was as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
 (In millions, except share and per share data)
Net income (loss) available to Brighthouse Financial, Inc.’s common shareholders$(3,012)$676 $(60)$316 
Weighted average common shares outstanding — basic92,693,188 110,915,416 97,366,447 114,195,767 
Dilutive effect of share-based awards612,064 546,931 
Weighted average common shares outstanding — diluted92,693,188 111,527,480 97,366,447 114,742,698 
Earnings per common share:
Basic$(32.49)$6.09 $(0.61)$2.77 
Diluted$(32.49)$6.06 $(0.61)$2.75 
For both the three months and nine months ended September 30, 2020, basic loss per common share equaled diluted loss per common share. The diluted shares were not utilized in the per share calculation for this period as the inclusion of such shares would have an antidilutive effect.
For both the three months and nine months ended September 30, 2019, weighted average shares used for calculating diluted earnings per common share excludes 196,492 of out-of-the-money stock options, as the inclusion of these shares would be antidilutive to the earnings per common share calculation due to the average share price for the three and nine months ended September 30, 2019.
43

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
11. Contingencies, Commitments and Guarantees
Contingencies
Litigation
The Company is a defendant in a number of litigation matters. In some of the matters, large and/or indeterminate amounts, including punitive and treble damages, are sought. Modern pleading practice in the U.S. permits considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible verdicts in the jurisdiction for similar matters. This variability in pleadings, together with the actual experience of the Company in litigating or resolving through settlement numerous claims over an extended period of time, demonstrates to management that the monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value.
Due to the vagaries of litigation, the outcome of a litigation matter and the amount or range of potential loss at particular points in time may normally be difficult to ascertain. Uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how trial and appellate courts will apply the law in the context of the pleadings or evidence presented, whether by motion practice, or at trial or on appeal. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable law.
The Company establishes liabilities for litigation and regulatory loss contingencies when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. It is possible that some matters could require the Company to pay damages or make other expenditures or establish accruals in amounts that could not be estimated at September 30, 2020.
Matters as to Which an Estimate Can Be Made
For some loss contingency matters, the Company is able to estimate a reasonably possible range of loss. For such matters where a loss is believed to be reasonably possible, but not probable, no accrual has been made. As of September 30, 2020, the Company estimates the aggregate range of reasonably possible losses in excess of amounts accrued for these matters to be $0 to $10 million.
Matters as to Which an Estimate Cannot Be Made
For other matters, the Company is not currently able to estimate the reasonably possible loss or range of loss. The Company is often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, analysis by experts, and the progress of settlement negotiations. On a quarterly and annual basis, the Company reviews relevant information with respect to litigation contingencies and updates its accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews.
Sales Practices Claims
Over the past several years, the Company has faced claims and regulatory inquiries and investigations, alleging improper marketing or sales of individual life insurance policies, annuities or other products. The Company continues to defend vigorously against the claims in these matters. The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for sales practices matters.
44

Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
11. Contingencies, Commitments and Guarantees (continued)
Cost of Insurance Class Action 
Richard A. Newton v. Brighthouse Life Insurance Company (U.S. District Court, Northern District of Georgia, Atlanta Division, filed May 8, 2020). Plaintiff has filed a purported class action lawsuit against Brighthouse Life Insurance Company. Plaintiff was the owner of a universal life insurance policy issued by Travelers Insurance Company, a predecessor to Brighthouse Life Insurance Company. Plaintiff seeks to certify a class of all persons who own or owned life insurance policies issued where the terms of the life insurance policy provide or provided, among other things, a guarantee that the cost of insurance rates would not be increased by more than a specified percentage in any contract year. Plaintiff alleges, among other things, causes of action for breach of contract, fraud, suppression and concealment, and violation of the Georgia Racketeer Influenced and Corrupt Organizations Act. Plaintiff seeks to recover damages, including punitive damages, interest and treble damages, attorneys’ fees, and injunctive and declaratory relief. Brighthouse Life Insurance Company filed a motion to dismiss in June 2020 and intends to vigorously defend this matter.
Summary
Various litigations, claims and assessments against the Company, in addition to those discussed previously and those otherwise provided for in the Company’s consolidated financial statements, have arisen in the course of the Company’s business, including, but not limited to, in connection with its activities as an insurer, investor and taxpayer. Further, state insurance regulatory authorities and other federal and state authorities regularly make inquiries and conduct investigations concerning the Company’s compliance with applicable insurance and other laws and regulations.
It is not possible to predict the ultimate outcome of all pending investigations and legal proceedings. In some of the matters referred to previously, large and/or indeterminate amounts, including punitive and treble damages, are sought. Although, in light of these considerations, it is possible that an adverse outcome in certain cases could have a material effect upon the Company’s financial position, based on information currently known by the Company’s management, in its opinion, the outcomes of such pending investigations and legal proceedings are not likely to have such an effect. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material effect on the Company’s consolidated net income or cash flows in particular quarterly or annual periods.
Other Contingencies
As with litigation and regulatory loss contingencies, the Company considers establishing liabilities for certain non-litigation loss contingencies when assertions are made involving disputes or other matters with counterparties to contractual arrangements entered into by the Company, including with third-party vendors. The Company establishes liabilities for such non-litigation loss contingencies when it is probable that a loss will be incurred and the amount of the loss can be reasonably estimated. In matters where it is not probable, but is reasonably possible that a loss will be incurred and the amount of loss can be reasonably estimated, such losses or range of losses are disclosed, and no accrual is made. In the absence of sufficient information to support an assessment of the reasonably possible loss or range of loss, no accrual is made and no loss or range of loss is disclosed.
Disputes have arisen with counterparties in connection with reinsurance arrangements where the Company’s subsidiaries are acting as either the reinsured or the reinsurer. These disputes involve assertions by third parties primarily related to rates, fees and/or reinsured benefit calculations, and in certain of such disputes the counterparty has made a request to arbitrate the dispute.
As of September 30, 2020, the Company estimates the amount of reasonably possible losses in excess of the amounts accrued for certain non-litigation loss contingencies to be up to $50 million, which are primarily associated with reinsurance-related matters. For certain other reinsurance-related matters, the Company is not currently able to estimate the reasonably possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of such loss.
On a quarterly and annual basis, the Company reviews relevant information with respect to non-litigation contingencies and, when applicable, updates its accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews.
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Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
11. Contingencies, Commitments and Guarantees (continued)
Commitments
Mortgage Loan Commitments
The Company commits to lend funds under mortgage loan commitments. The amounts of these mortgage loan commitments were $271 million and $206 million at September 30, 2020 and December 31, 2019, respectively.
Commitments to Fund Partnership Investments, Bank Credit Facilities and Private Corporate Bond Investments
The Company commits to fund partnership investments and to lend funds under bank credit facilities and private corporate bond investments. The amounts of these unfunded commitments were $1.8 billion at both September 30, 2020 and December 31, 2019.
Guarantees
In the normal course of its business, the Company has provided certain indemnities, guarantees and commitments to third parties such that it may be required to make payments now or in the future. In the context of acquisition, disposition, investment and other transactions, the Company has provided indemnities and guarantees, including those related to tax, environmental and other specific liabilities and other indemnities and guarantees that are triggered by, among other things, breaches of representations, warranties or covenants provided by the Company. In addition, in the normal course of business, the Company provides indemnifications to counterparties in contracts with triggers similar to the foregoing, as well as for certain other liabilities, such as third-party lawsuits. These obligations are often subject to time limitations that vary in duration, including contractual limitations and those that arise by operation of law, such as applicable statutes of limitation. In some cases, the maximum potential obligation under the indemnities and guarantees is subject to a contractual limitation ranging from less than $1 million to $112 million, with a cumulative maximum of $118 million, while in other cases such limitations are not specified or applicable. Since certain of these obligations are not subject to limitations, the Company does not believe that it is possible to determine the maximum potential amount that could become due under these guarantees in the future. Management believes that it is unlikely the Company will have to make any material payments under these indemnities, guarantees, or commitments.
In addition, the Company indemnifies its directors and officers as provided in its charters and by-laws. Also, the Company indemnifies its agents for liabilities incurred as a result of their representation of the Company’s interests. Since these indemnities are generally not subject to limitation with respect to duration or amount, the Company does not believe that it is possible to determine the maximum potential amount that could become due under these indemnities in the future.
The Company’s recorded liabilities were $1 million at both September 30, 2020 and December 31, 2019 for indemnities, guarantees and commitments.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Introduction
For purposes of this discussion, unless otherwise mentioned or unless the context indicates otherwise, “Brighthouse,” “Brighthouse Financial,” the “Company,” “we,” “our” and “us” refer to Brighthouse Financial, Inc. a corporation incorporated in Delaware in 2016, and its subsidiaries. We use the term “BHF” to refer solely to Brighthouse Financial, Inc., and not to any of its subsidiaries. Until August 4, 2017, BHF was a wholly-owned subsidiary of MetLife, Inc. (together with its subsidiaries and affiliates, “MetLife”). Following this summary is a discussion addressing the consolidated results of operations and financial condition of the Company for the periods indicated. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with (i) the Interim Condensed Consolidated Financial Statements and related notes included elsewhere herein; (ii) our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the U.S. Securities and Exchange Commission (“SEC”) on February 26, 2020 (the “2019 Annual Report”); (iii) our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (the “First Quarter Form 10-Q”) filed with the SEC on May 11, 2020; (iv) our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 (the “Second Quarter Form 10-Q” and, together with the First Quarter Form 10-Q, the “Quarterly Reports”) filed with the SEC on August 7, 2020 and (v) our current reports on Form 8-K filed in 2020.
Presentation
Prior to discussing our Results of Operations, we present background information and definitions that we believe are useful to understanding the discussion of our financial results. This information precedes the Results of Operations and is most beneficial when read in the sequence presented. A summary of key informational sections is as follows:
“Executive Summary” provides information regarding our business, segments and results as discussed in the Results of Operations.
“Industry Trends” discusses updates and changes to a number of trends and uncertainties included in our 2019 Annual Report, as amended or supplemented by our subsequent Quarterly Reports on Form 10-Q, that we believe may materially affect our future financial condition, results of operations or cash flows, including from the worldwide pandemic sparked by the novel coronavirus (the “COVID-19 pandemic”).
“Summary of Critical Accounting Estimates” explains the most critical estimates and judgments applied in determining our results in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
“Non-GAAP and Other Financial Disclosures” defines key financial measures presented in the Results of Operations that are not calculated in accordance with GAAP but are used by management in evaluating company and segment performance. As described in this section, adjusted earnings is presented by key business activities which are derived from, but different than, the line items presented in the GAAP statement of operations. This section also refers to certain other terms used to describe our insurance business and financial and operating metrics, but is not intended to be exhaustive.
Certain amounts presented in prior periods within the foregoing discussions of our financial results have been reclassified to conform with the current year presentation.
Executive Summary
We are one of the largest providers of annuity and life insurance products in the United States through multiple independent distribution channels and marketing arrangements with a diverse network of distribution partners.
For operating purposes, we have established three segments: (i) Annuities, (ii) Life and (iii) Run-off, which consists of operations relating to products we are not actively selling and which are separately managed. In addition, we report certain of our results of operations in Corporate & Other.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of operations, financial condition and cash flows of Brighthouse for the periods indicated. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Summary — Overview,” and “Business — Segments and Corporate & Other” included in our 2019 Annual Report along with Note 2 of the Notes to the Interim Condensed Consolidated Financial Statements for further information on our segments and Corporate & Other.
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Net income (loss) available to shareholders and adjusted earnings, a non-GAAP financial measure, were as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(In millions)
Income (loss) available to shareholders before provision for income tax$(3,862)$795 $(148)$302 
Less: Provision for income tax expense (benefit)(850)119 (88)(14)
Net income (loss) available to shareholders (1)$(3,012)$676 $(60)$316 
Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends$(921)$(273)$(663)$304 
Less: Provision for income tax expense (benefit)(232)(104)(196)(13)
Adjusted earnings$(689)$(169)$(467)$317 
__________________
(1)We use the term “net income (loss) available to shareholders” to refer to “net income (loss) available to Brighthouse Financial, Inc.’s common shareholders” throughout the results of operations discussions.
For the three months ended September 30, 2020, we had a net loss available to shareholders of $3.0 billion and an adjusted loss of $689 million compared to net income available to shareholders of $676 million and an adjusted loss of $169 million for the three months ended September 30, 2019. Net loss available to shareholders for the three months ended September 30, 2020 primarily reflects an unfavorable impact from our annual actuarial review (“AAR”) and net unfavorable changes in the estimated fair value of our guaranteed minimum living benefits (“GMLB”) riders (“GMLB Riders”) due to higher equity markets, lower interest rates and tightening credit spreads.
For the nine months ended September 30, 2020, we had a net loss available to shareholders of $60 million and an adjusted loss of $467 million compared to net income available to shareholders of $316 million and adjusted earnings of $317 million for the nine months ended September 30, 2019. Net loss available to shareholders for the nine months ended September 30, 2020 was driven primarily by a net unfavorable impact from our AAR, which was largely offset by a favorable impact of declining long-term interest rates on the estimated fair value of the universal life with secondary guarantees (“ULSG”) hedge program.
See “— Non-GAAP and Other Financial Disclosures.” For a detailed discussion of our results see “— Results of Operations.”
See Note 1 of the Notes to the Interim Condensed Consolidated Financial Statements for information regarding the adoption of new accounting pronouncements in 2020.
Administrative System Conversion
As we continue to execute on our strategy to leverage emerging technology and outsource our policy administration functions, during the third quarter of 2020, we completed the conversion of a significant portion of our in-force annuity business to a single third-party service provider. Following the conversion, a number of our customers and distribution partners experienced delays and service interruptions. While these issues have been largely resolved, there can be no assurance that in connection with this or any future conversion we will not incur unanticipated expenses or experience other economic or reputational harm, or be subject to litigation or regulatory investigations and actions, any of which could have a material adverse effect on our business, financial condition, and results of operations. See “Risk Factors — Risks Related to Our Business — The failure of third parties to provide various services, or any failure of the practices and procedures that these third parties use to provide services to us, could have a material adverse effect on our business,” “Risk Factors — General Risks — We may experience difficulty in marketing and distributing products through our distribution channels” and “Risk Factors — Regulatory and Legal Risks — Litigation and regulatory investigations are common in our businesses and may result in significant financial losses and/or harm to our reputation” in our 2019 Annual Report.
Industry Trends
Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we discuss a number of trends and uncertainties that we believe may materially affect our future financial condition, results of operations or cash flows. Where these trends or uncertainties are specific to a particular aspect of our business, we often include such a
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discussion under the relevant caption of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, as part of our broader analysis of that area of our business. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends and Uncertainties” included in our 2019 Annual Report, as amended or supplemented by our subsequent Quarterly Reports on Form 10-Q, for a comprehensive discussion of some of the key general trends and uncertainties that have influenced the development of our business and our historical financial performance and that we believe will continue to influence our business and results of operations in the future. In addition, significant changes or updates in certain of these trends and uncertainties are discussed below.
COVID-19 Pandemic
We continue to closely monitor developments related to the COVID-19 pandemic, which has negatively impacted us in certain respects, including as discussed below. At this time, it is not possible to estimate the severity or duration of the pandemic, including the severity, duration and frequency of any additional “waves” of the pandemic or the timetable for the development and implementation, and the efficacy, of any therapeutic treatment or vaccine for COVID-19. It is likewise not possible to predict or estimate the longer-term effects of the pandemic, or any actions taken to contain or address the pandemic, on the economy at large and on our business, results of operations, financial condition and prospects, including the impact on our investment portfolio and our ratings, or the need for us in the future to revisit or revise targets previously provided to the markets and/or aspects of our business model. See “Risk Factors — The ongoing COVID-19 pandemic may materially adversely affect our business, results of operations and financial condition, including capitalization and liquidity” in our First Quarter Form 10-Q.
In March, in response to this extraordinary event, management promptly implemented our business continuity plans, and quickly and successfully shifted all our employees to a work-from-home environment, where they currently remain. Our sales and support teams remain fully operational, and the COVID-19 pandemic has not interrupted our ability to service our distribution partners and customers. Additionally, we are closely monitoring all aspects of our business, including but not limited to, levels of sales and claims activity, policy lapses or surrenders, payments of premiums, sources and uses of liquidity, the valuation of our investments and the performance of our derivatives programs. We have observed varying degrees of impact in these areas, and we have taken prudent and proportionate measures to address such impacts; however, at this time it is impossible to predict if the COVID-19 pandemic will have a material adverse impact on our business, results of operations or financial condition. We continue to closely monitor this evolving situation as we remain focused on ensuring the health and safety of our employees, on supporting our partners and customers as usual and on mitigating potential adverse impacts to our business.
Increased economic uncertainty and increased unemployment resulting from the economic impacts of the COVID-19 pandemic have also impacted sales of certain of our products and have prompted us to take actions to provide relief to customers affected by adverse circumstances due to the COVID-19 pandemic, as previously disclosed in “— Regulatory Developments” in our First Quarter Form 10-Q. While the relief granted to customers to date has not had a material impact on our financial condition or results of operations, it is not possible to estimate the potential impact of any future relief. Circumstances resulting from the COVID-19 pandemic have also impacted the incidents of claims and may have impacted the utilization of benefits, lapses or surrenders of policies and payments on insurance premiums, though such impacts have not been material through the end of the third quarter of 2020. Additionally, circumstances resulting from the COVID-19 pandemic have not materially impacted services we receive from third-party vendors, nor have such circumstances led to the identification of new loss contingencies or any increases in existing loss contingencies. However, there can be no assurance that any future impact from the COVID-19 pandemic, including, without limitation, with respect to revenues and expenses associated with our products, services we receive from third-party vendors, or loss contingencies, will not be material.
Certain sectors of our investment portfolio have been, and are expected to continue to be, adversely affected as a result of the impact of the COVID-19 pandemic on capital markets and the global economy, as well as uncertainty regarding its duration and outcome. See “— Investments — Current Environment — Selected Sector Investments,” “— Investments — Mortgage Loans — Loan Modifications Related to the COVID-19 Pandemic” and Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements.
Credit rating agencies may continue to review and adjust their ratings for the companies that they rate, including us. The credit rating agencies also evaluate the insurance industry as a whole and may change our credit rating based on their overall view of our industry. For example, during the second quarter of 2020, Fitch revised the rating outlook for BHF and certain of its subsidiaries to negative from stable due to the disruption to economic activity and the financial markets from the COVID-19 pandemic. This action by Fitch followed its revision of the rating outlook on the U.S. life insurance industry to negative. Downgrades in our ratings or changes to our rating outlooks could have a material adverse effect on our results of operations and financial condition, including capitalization and liquidity. There can be no assurance that Fitch will not take
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further adverse action with respect to our ratings or that other rating agencies will not take similar actions in the future. Each rating should be evaluated independently of any other rating.
Regulatory Developments
Our life insurance companies are regulated primarily at the state level, with some products and services also subject to federal regulation. In addition, BHF and its subsidiaries are subject to regulation under the insurance holding company laws of various U.S. jurisdictions. Furthermore, some of our operations, products and services are subject to the Employee Retirement Income Security Act of 1974, consumer protection laws, securities, broker-dealer and investment advisor regulations, as well as environmental and unclaimed property laws and regulations. See “Business — Regulation,” as well as “Risk Factors — Regulatory and Legal Risks” included in our 2019 Annual Report, as amended or supplemented by our subsequent Quarterly Reports under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends — Regulatory Developments.”
Summary of Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported on the Interim Condensed Consolidated Financial Statements.
The most critical estimates include those used in determining:
liabilities for future policy benefits;
amortization of deferred policy acquisition costs (“DAC”);
investment credit losses;
estimated fair values of freestanding derivatives and the recognition and estimated fair value of embedded derivatives requiring bifurcation; and
measurement of income taxes and the valuation of deferred tax assets.
In applying our accounting policies, we make subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our business and operations. Actual results could differ from these estimates.
The above critical accounting estimates are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates” and Note 1 of the Notes to the Consolidated Financial Statements included in our 2019 Annual Report.
Non-GAAP and Other Financial Disclosures
Our definitions of the non-GAAP and other financial measures may differ from those used by other companies.
Non-GAAP Financial Disclosures
Adjusted Earnings
In this report, we present adjusted earnings, which excludes net income (loss) attributable to noncontrolling interests and preferred stock dividends, as a measure of our performance that is not calculated in accordance with GAAP. We believe that this non-GAAP financial measure highlights our results of operations and the underlying profitability drivers of our business, as well as enhances the understanding of our performance by the investor community. However, adjusted earnings should not be viewed as a substitute for net income (loss) available to Brighthouse Financial, Inc.’s common shareholders, which is the most directly comparable financial measure calculated in accordance with GAAP. See “— Results of Operations” for a reconciliation of adjusted earnings to net income (loss) available to Brighthouse Financial, Inc.’s common shareholders.
Adjusted earnings, which may be positive or negative, is used by management to evaluate performance, allocate resources and facilitate comparisons to industry results. This financial measure focuses on our primary businesses principally by excluding the impact of market volatility, which could distort trends.
The following are significant items excluded from total revenues, net of income tax, in calculating adjusted earnings:
Net investment gains (losses);
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Net derivative gains (losses) except earned income and amortization of premium on derivatives that are hedges of investments or that are used to replicate certain investments, but do not qualify for hedge accounting treatment (“Investment Hedge Adjustments”); and
Certain variable annuity guaranteed minimum income benefits (“GMIBs”) fees (“GMIB Fees”).
The following are significant items excluded from total expenses, net of income tax, in calculating adjusted earnings:
Amounts associated with benefits related to GMIBs (“GMIB Costs”);
Amounts associated with periodic crediting rate adjustments based on the total return of a contractually referenced pool of assets and market value adjustments associated with surrenders or terminations of contracts (“Market Value Adjustments”); and
Amortization of DAC and value of business acquired (“VOBA”) related to (i) net investment gains (losses), (ii) net derivative gains (losses), (iii) GMIB Fees and GMIB Costs and (iv) Market Value Adjustments.
The tax impact of the adjustments mentioned is calculated net of the statutory tax rate, which could differ from our effective tax rate.
We present adjusted earnings in a manner consistent with management’s view of the primary business activities that drive the profitability of our core businesses. The following table illustrates how each component of adjusted earnings is calculated from the GAAP statement of operations line items:
Component of Adjusted EarningsHow Derived from GAAP (1)
(i)Fee income(i)
Universal life and investment-type policy fees (excluding (a) unearned revenue adjustments related to net investment gains (losses) and net derivative gains (losses) and (b) GMIB Fees) plus Other revenues (excluding other revenues associated with related party reinsurance) and amortization of deferred gain on reinsurance.
(ii)Net investment spread(ii)
Net investment income plus Investment Hedge Adjustments and interest received on ceded fixed annuity reinsurance deposit funds reduced by Interest credited to policyholder account balances and interest on future policy benefits.
(iii)Insurance-related activities(iii)
Premiums less Policyholder benefits and claims (excluding (a) GMIB Costs, (b) Market Value Adjustments, (c) interest on future policy benefits and (d) amortization of deferred gain on reinsurance) plus the pass through of performance of ceded separate account assets.
(iv)Amortization of DAC and VOBA(iv)
Amortization of DAC and VOBA (excluding amounts related to (a) net investment gains (losses), (b) net derivative gains (losses), (c) GMIB Fees and GMIB Costs and (d) Market Value Adjustments).
(v)Other expenses, net of DAC capitalization(v)
Other expenses reduced by capitalization of DAC.
(vi)Provision for income tax expense (benefit)(vi)Tax impact of the above items.
__________________
(1)Italicized items indicate GAAP statement of operations line items.
Consistent with GAAP guidance for segment reporting, adjusted earnings is also our GAAP measure of segment performance. Accordingly, we report adjusted earnings by segment in Note 2 of the Notes to the Interim Condensed Consolidated Financial Statements.
Adjusted Net Investment Income
We present adjusted net investment income, which is not calculated in accordance with GAAP. We present adjusted net investment income to measure our performance for management purposes, and we believe it enhances the understanding of our investment portfolio results. Adjusted net investment income represents net investment income including Investment Hedge Adjustments. For a reconciliation of adjusted net investment income to net investment income, the most directly comparable GAAP measure, see footnote 3 to the summary yield table located in “— Investments — Current Environment — Investment Portfolio Results.”
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Other Financial Disclosures
Similar to adjusted net investment income, we present net investment income yields as a performance measure we believe enhances the understanding of our investment portfolio results. Net investment income yields are calculated on adjusted net investment income as a percent of average quarterly asset carrying values. Asset carrying values exclude unrealized gains (losses), collateral received in connection with our securities lending program, freestanding derivative assets and collateral received from derivative counterparties.
Results of Operations
Annual Actuarial Review
We typically conduct our AAR in the third quarter of each year. As a result of the 2020 AAR, we lowered the long-term general account earned rate, driven by a reduction in our mean reversion rate from 3.75% to 3.00%, which had the largest impact to our ULSG business. For our variable annuity business, in addition to the update in the long-term general account earned rate, we updated assumptions regarding policyholder behavior, mortality, separate account fund allocations and volatility, as well as maintenance expenses. In our life business, we updated assumptions related to policyholder behavior, mortality and expenses.
In 2019, the most significant impact from our AAR was decreasing the long-term general account earned rate, driven by a reduction in our mean reversion rate from 4.25% to 3.75%, which primarily impacted our ULSG business. For our variable annuity business, in addition to the update in the long-term general account earned rate, we updated assumptions regarding separate account fund allocations and volatility, as well as maintenance expenses. In our life business, we updated assumptions related to mortality and expenses.
The following table presents the impact of the AAR on pre-tax adjusted earnings and income (loss) available to shareholders before provision for income tax for the nine months ended September 30, 2020 and 2019. The impact related to GMLBs is included in income (loss) available to shareholders before provision for income tax, but is not included in pre-tax adjusted earnings. See “— Non-GAAP and Other Financial Disclosures.”
Nine Months Ended
September 30,
20202019
(In millions)
GMLBs$(1,431)$84 
Included in pre-tax adjusted earnings:
Other annuity business128 (38)
Life business(11)24 
Run-off(1,484)(545)
Total included in pre-tax adjusted earnings(1,367)(559)
Total impact on income (loss) available to shareholders before provision for income tax$(2,798)$(475)
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Consolidated Results for the Three Months and Nine Months Ended September 30, 2020 and 2019
Unless otherwise noted, all amounts in the following discussions of our results of operations are stated before income tax except for adjusted earnings, which are presented net of income tax.
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
 (In millions)
Revenues
Premiums$184 $214 $575 $673 
Universal life and investment-type product policy fees882 867 2,595 2,630 
Net investment income996 928 2,564 2,681 
Other revenues99 94 294 282 
Net investment gains (losses)27 (48)79 
Net derivative gains (losses)(1,857)1,057 2,392 (97)
Total revenues309 3,187 8,372 6,248 
Expenses
Policyholder benefits and claims3,047 1,319 5,073 2,936 
Interest credited to policyholder account balances281 272 816 795 
Capitalization of DAC(90)(93)(279)(274)
Amortization of DAC and VOBA244 181 922 373 
Interest expense on debt47 49 139 144 
Other expenses623 655 1,814 1,954 
Total expenses4,152 2,383 8,485 5,928 
Income (loss) before provision for income tax(3,843)804 (113)320 
Provision for income tax expense (benefit)(850)119 (88)(14)
Net income (loss)(2,993)685 (25)334 
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to Brighthouse Financial, Inc.(2,995)683 (29)330 
Less: Preferred stock dividends17 31 14 
Net income (loss) available to Brighthouse Financial, Inc.’s common shareholders$(3,012)$676 $(60)$316 
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The components of net income (loss) available to shareholders were as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
 (In millions)
GMLB Riders$(2,739)$419 $(833)$(1,144)
Other derivative instruments(174)636 1,462 1,116 
Net investment gains (losses)27 (48)79 
Other adjustments(33)(14)(66)(53)
Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends(921)(273)(663)304 
Income (loss) available to shareholders before provision for income tax(3,862)795 (148)302 
Provision for income tax expense (benefit)(850)119 (88)(14)
Net income (loss) available to shareholders$(3,012)$676 $(60)$316 
Three Months Ended September 30, 2020 Compared with the Three Months Ended September 30, 2019
Loss available to shareholders before provision for income tax was $3.9 billion ($3.0 billion, net of income tax), a decrease of $4.7 billion ($3.7 billion, net of income tax) from income before provision for income tax of $795 million ($676 million, net of income tax) in the prior period.
The decrease in income before provision for income tax was driven by the following key unfavorable items:
losses from GMLB Riders in the current period, compared to gains in the prior period, see “— GMLB Riders for the Three Months and Nine Months Ended September 30, 2020 and 2019”;
losses on other derivative instruments reflecting:
losses on interest rate derivatives used to manage interest rate exposure in our ULSG business due to the benchmark long-term interest rate increasing in the current period and decreasing in the prior period; and
an unfavorable impact from foreign currency swaps due to the U.S. dollar mostly weakening in the current period and strengthening in the prior period; and
lower pre-tax adjusted earnings, discussed in greater detail below.
The provision for income tax, expressed as a percentage of income (loss) before provision for income tax, resulted in an effective tax rate of 22% in the current period compared to 15% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions and tax credits.
Nine Months Ended September 30, 2020 Compared with the Nine Months Ended September 30, 2019
Loss available to shareholders before provision for income tax was $148 million ($60 million, net of income tax), a decrease of $450 million ($376 million, net of income tax) from income before provision for income tax of $302 million ($316 million, net of income tax) in the prior period.
The decrease in income before provision for income tax was driven by the following key unfavorable items:
lower pre-tax adjusted earnings, discussed in greater detail below; and
lower net investment gains (losses) reflecting:
net losses on sales of fixed maturity securities compared to prior period net gains;
current period mark-to-market losses on equity securities compared to prior period net gains;
net losses due to an increase in mortgage loan reserves; and
higher impairments on fixed maturity securities in the current period.
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The decrease in income before provision for income tax was partially offset by the following key net favorable items:
long-term interest rates declining more and equity markets increasing less in the current period than in the prior period resulted in:
current period gains on interest rate derivatives used to manage interest rate exposure in our ULSG business; and
a favorable change in the estimated fair value of the embedded derivatives associated with our fixed indexed annuity business;
partially offset by
an unfavorable impact from equity options; and
lower losses from GMLB Riders in the current period, see “— GMLB Riders for the Three Months and Nine Months Ended September 30, 2020 and 2019.”
The provision for income tax, expressed as a percentage of income (loss) before provision for income tax, resulted in an effective tax rate of 78% in the current period compared to 5% in the prior period. The increase in the effective tax rate in the current period is driven by lower pre-tax adjusted earnings, discussed in greater detail below. Certain one-time tax adjustments recognized in the prior period, primarily due to the revaluation of certain liabilities related to our separation from MetLife (“separation-related liabilities”), resulted in an unusually low effective tax rate in the prior period. In addition to such one-time tax adjustments, our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions and tax credits.
Reconciliation of Net Income (Loss) Available to Shareholders to Adjusted Earnings
The reconciliation of net income (loss) available to shareholders to adjusted earnings was as follows:
Three Months Ended September 30, 2020
AnnuitiesLifeRun-offCorporate & OtherTotal
(In millions)
Net income (loss) available to shareholders$(2,398)$78 $(1,141)$449 $(3,012)
Add: Provision for income tax expense (benefit)92 18 (460)(500)(850)
Income (loss) available to shareholders before provision for income tax(2,306)96 (1,601)(51)(3,862)
Less: GMLB Riders(2,739)— — — (2,739)
Less: Other derivative instruments(54)(4)(115)(1)(174)
Less: Net investment gains (losses)37 (39)
Less: Other adjustments(29)— (4)— (33)
Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends479 94 (1,443)(51)(921)
Less: Provision for income tax expense (benefit)92 18 (304)(38)(232)
Adjusted earnings$387 $76 $(1,139)$(13)$(689)
56

Three Months Ended September 30, 2019
AnnuitiesLifeRun-offCorporate & OtherTotal
(In millions)
Net income (loss) available to shareholders$576 $92 $234 $(226)$676 
Add: Provision for income tax expense (benefit)52 18 (116)165 119 
Income (loss) available to shareholders before provision for income tax628 110 118 (61)795 
Less: GMLB Riders419 — — — 419 
Less: Other derivative instruments(43)678 — 636 
Less: Net investment gains (losses)(2)18 (4)15 27 
Less: Other adjustments(1)— (13)— (14)
Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends255 91 (543)(76)(273)
Less: Provision for income tax expense (benefit)52 18 (117)(57)(104)
Adjusted earnings$203 $73 $(426)$(19)$(169)
Nine Months Ended September 30, 2020
AnnuitiesLifeRun-offCorporate & OtherTotal
(In millions)
Net income (loss) available to shareholders$67 $79 $80 $(286)$(60)
Add: Provision for income tax expense (benefit)199 32 (344)25 (88)
Income (loss) available to shareholders before provision for income tax266 111 (264)(261)(148)
Less: GMLB Riders(833)— — — (833)
Less: Other derivative instruments72 (64)1,456 (2)1,462 
Less: Net investment gains (losses)(3)(18)(35)(48)
Less: Other adjustments(43)— (23)— (66)
Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends1,073 167 (1,679)(224)(663)
Less: Provision for income tax expense (benefit)199 32 (355)(72)(196)
Adjusted earnings$874 $135 $(1,324)$(152)$(467)
Nine Months Ended September 30, 2019
AnnuitiesLifeRun-offCorporate & OtherTotal
(In millions)
Net income (loss) available to shareholders$(434)$186 $924 $(360)$316 
Add: Provision for income tax expense (benefit)165 38 (305)88 (14)
Income (loss) available to shareholders before provision for income tax(269)224 619 (272)302 
Less: GMLB Riders(1,144)— — — (1,144)
Less: Other derivative instruments(78)22 1,173 (1)1,116 
Less: Net investment gains (losses)15 85 (29)79 
Less: Other adjustments(1)— (52)— (53)
Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends939 194 (587)(242)304 
Less: Provision for income tax expense (benefit)176 38 (127)(100)(13)
Adjusted earnings$763 $156 $(460)$(142)$317 
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Consolidated Results for the Three Months and Nine Months Ended September 30, 2020 and 2019 — Adjusted Earnings
The components of adjusted earnings were as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(In millions)
Fee income$914 $893 $2,693 $2,713 
Net investment spread474 433 1,075 1,227 
Insurance-related activities(1,589)(796)(2,345)(1,361)
Amortization of DAC and VOBA(158)(183)(414)(433)
Other expenses, net of DAC capitalization(543)(611)(1,637)(1,824)
Less: Net income (loss) attributable to noncontrolling interests and preferred stock dividends19 35 18 
Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends(921)(273)(663)304 
Provision for income tax expense (benefit)(232)(104)(196)(13)
Adjusted earnings$(689)$(169)$(467)$317 
Three Months Ended September 30, 2020 Compared with the Three Months Ended September 30, 2019
Adjusted earnings were a loss of $689 million, a decrease of $520 million.
Key net unfavorable impacts were:
higher net costs associated with insurance-related activities due to:
a net increase in liability balances resulting from changes in connection with the AAR in our Run-off and Annuities segments;
partially offset by
a one-time adjustment in the current period related to modeling improvements resulting from an actuarial system conversion, primarily in our Life segment;
Key net favorable impacts were:
lower other expenses due to:
the exit of various transition service agreements with MetLife;
interest expense recognized in the prior period on a tax liability associated with our separation from MetLife; and
lower asset-based variable annuity expenses resulting from lower average separate account balances, a portion of which are offset in fee income;
higher net investment spread reflecting:
higher returns on other limited partnerships for the comparative measurement period; and
higher average invested assets resulting from positive net flows in the general account;
partially offset by
lower investment yields on our fixed income portfolio, as proceeds from maturing investments and the growth in the investment portfolio were invested at lower yields than the portfolio average;
lower net amortization of DAC and VOBA due to:
a favorable change in our variable annuity business from changes in actual to expected experience in our in-force blocks;
partially offset by
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a net unfavorable impact resulting from changes in connection with the AAR in our Annuities and Life segments; and
higher net fee income due to:
higher unearned revenue amortization from changes in maintenance expense and policyholder behavior assumptions in connection with the AAR, primarily in our Life segment;
partially offset by
lower asset-based fees from lower average separate account balances, a portion of which is offset in other expenses.
The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 26% in the current period compared to 38% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions and tax credits.
Nine Months Ended September 30, 2020 Compared with the Nine Months Ended September 30, 2019
Adjusted earnings were a loss of $467 million, a decrease of $784 million.
Key net unfavorable impacts were:
higher net costs associated with insurance-related activities due to:
a net increase in liability balances resulting from changes in connection with the AAR in our Run-off and Annuities segments;
partially offset by
a one-time adjustment in the current period related to modeling improvements resulting from an actuarial system conversion, primarily in our Life segment;
lower net investment spread due to:
lower returns on other limited partnerships for the comparative measurement period; and
lower investment yields on our fixed income portfolio, as proceeds from maturing investments and the growth in the investment portfolio were invested at lower yields than the portfolio average;
partially offset by
higher average invested assets resulting from positive net flows in the general account;
lower net fee income due to:
lower asset-based fees from lower average separate account balances, a portion of which is offset in other expenses;
partially offset by
higher unearned revenue amortization from changes in maintenance expense and policyholder behavior assumptions made in connection with the AAR, primarily in our Life segment.
Key net favorable impacts were:
lower other expenses due to:
the exit of various transition service agreements with MetLife;
lower asset-based variable annuity expenses resulting from lower average separate account balances, a portion of which are offset in fee income; and
interest expense recognized in the prior period on a tax liability associated with our separation from MetLife;
lower net amortization of DAC and VOBA due to:
a favorable change in our variable annuity business from changes in actual to expected experience in our in-force blocks;
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partially offset by
a net unfavorable impact resulting from changes in connection with the AAR in our Annuities and Life segments.
The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 31% in the current period compared to 4% in the prior period. Certain one-time tax adjustments recognized in the prior period, primarily due to the revaluation of certain separation-related liabilities, resulted in an unusually low effective tax rate in the prior period. In addition to such one-time tax adjustments, our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions and tax credits.
Segments and Corporate & Other Results for the Three Months and Nine Months Ended September 30, 2020 and 2019 — Adjusted Earnings
Annuities
The components of adjusted earnings for our Annuities segment were as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(In millions)
Fee income$654 $675 $1,917 $1,977 
Net investment spread257 268 720 789 
Insurance-related activities68 (60)(140)(179)
Amortization of DAC and VOBA(127)(211)(322)(421)
Other expenses, net of DAC capitalization(373)(417)(1,102)(1,227)
Pre-tax adjusted earnings479 255 1,073 939 
Provision for income tax expense (benefit)92 52 199 176 
Adjusted earnings$387 $203 $874 $763 
A significant portion of our adjusted earnings is driven by separate account balances related to our variable annuity business. Most directly, these balances determine asset-based fee income, but they also impact DAC amortization and asset-based commissions. The changes in our variable annuities separate account balances are presented in the table below. Variable annuities separate account balances increased for the three months ended September 30, 2020 driven by positive equity markets partially offset by negative net flows and policy charges. Variable annuities separate account balances decreased for the nine months ended September 30, 2020 driven by negative net flows and policy charges partially offset by positive equity market performance.
Three Months Ended
September 30, 2020
Nine Months Ended
September 30, 2020
(In millions)
Balance, beginning of period$92,211 $99,498 
Deposits443 1,210 
Withdrawals, surrenders and benefits(1,755)(5,679)
Net flows(1,312)(4,469)
Investment performance5,337 2,636 
Policy charges(630)(1,789)
Net transfers from (to) general account(145)(415)
Balance, end of period$95,461 $95,461 
Average balance$95,718 $92,927 
Three Months Ended September 30, 2020 Compared with the Three Months Ended September 30, 2019
Adjusted earnings were $387 million for the current period, an increase of $184 million.
Key net favorable impacts were:
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lower costs associated with insurance-related activities due to:
a decrease in guaranteed minimum death benefit (“GMDB”) liabilities and a favorable adjustment to deferred sales inducements (“DSI”) resulting from changes in connection with the AAR; and
a decrease in GMDB liabilities resulting from favorable equity market performance in the current period;
lower amortization of DAC and VOBA due to:
a favorable impact in the current period resulting primarily from changes in policyholder behavior and long-term general account earned rate assumptions made in connection with the AAR; and
a favorable change in our variable annuity business from changes in actual to expected experience in our in-force blocks; and
lower other expenses due to:
the exit of various transition service agreements with MetLife; and
lower asset-based variable annuity expenses resulting from lower average separate account balances, a portion of which are offset in fee income.
Key net unfavorable impacts were:
lower asset-based fees from lower average separate account balances, a portion of which is offset in other expenses; and
lower net investment spread due to:
higher interest credited on average policyholder account balances resulting from positive net flows; and
lower investment yields on our fixed income portfolio, as proceeds from maturing investments and the growth in the investment portfolio were invested at lower yields than the portfolio average;
partially offset by
higher average invested assets resulting from positive net flows in the general account; and
higher returns on other limited partnerships for the comparative measurement period.
The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 19% in the current period compared to 20% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions.
Nine Months Ended September 30, 2020 Compared with the Nine Months Ended September 30, 2019
Adjusted earnings were $874 million for the current period, an increase of $111 million.
Key net favorable impacts were:
lower other expenses due to:
the exit of various transition service agreements with MetLife; and
lower asset-based variable annuity expenses resulting from lower average separate account balances, a portion of which are offset in fee income;
lower amortization of DAC and VOBA due to:
a favorable impact in the current period resulting primarily from changes in policyholder behavior and long-term general account earned rate assumptions made in connection with the AAR; and
a favorable change in our variable annuity business from changes in actual to expected experience in our in-force blocks net of the impact on estimated gross profits from lower separate account returns; and
lower costs associated with insurance-related activities due to:
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a decrease in GMDB liabilities and a favorable adjustment to DSI resulting from changes in connection with the AAR;
partially offset by
an increase in GMDB liabilities resulting from less favorable equity market performance in the current period, net of lower income annuity benefit payments.
Key net unfavorable impacts were:
lower net investment spread due to:
lower investment yields on our fixed income portfolio, as proceeds from maturing investments and the growth in the investment portfolio were invested at lower yields than the portfolio average; and
lower returns on other limited partnerships for the comparative measurement period;
partially offset by
higher average invested assets resulting from positive net flows in the general account; and
lower asset-based fees from lower average separate account balances, a portion of which is offset in other expenses.
The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 19% in both the current and prior periods. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions.
Life
The components of adjusted earnings for our Life segment were as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(In millions)
Fee income$90 $60 $271 $185 
Net investment spread53 52 126 155 
Insurance-related activities48 (1)(4)
Amortization of DAC and VOBA(50)31 (104)(1)
Other expenses, net of DAC capitalization(47)(51)(122)(150)
Pre-tax adjusted earnings94 91 167 194 
Provision for income tax expense (benefit)18 18 32 38 
Adjusted earnings$76 $73 $135 $156 
Three Months Ended September 30, 2020 Compared with the Three Months Ended September 30, 2019
Adjusted earnings were $76 million for the current period, an increase of $3 million.
Key favorable impacts were:
lower costs associated with insurance-related activities due to:
a one-time adjustment in the current period related to modeling improvements resulting from an actuarial system conversion; and
lower paid claims, net of reinsurance; and
higher fee income due to higher unearned revenue amortization from changes in maintenance expense and policyholder behavior assumptions made in connection with the AAR.
Key net unfavorable impacts were:
higher net amortization of DAC and VOBA due to:
changes in maintenance expense and policyholder assumptions in connection with the AAR; and
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a one-time adjustment in the current period related to modeling improvements resulting from an actuarial system conversion;
partially offset by
the impact on gross profits from higher separate account returns.
The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 19% in the current period compared to 20% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions.
Nine Months Ended September 30, 2020 Compared with the Nine Months Ended September 30, 2019
Adjusted earnings were $135 million for the current period, a decrease of $21 million.
Key net unfavorable impacts were:
higher amortization of DAC and VOBA due to:
changes in maintenance expense and policyholder assumptions in connection with the AAR; and
a one-time adjustment in the current period related to modeling improvements resulting from an actuarial system conversion;
lower net investment spread due to:
lower investment yields on our fixed income portfolio, as proceeds from maturing investments and the growth in the investment portfolio were invested at lower yields than the portfolio average; and
lower returns on other limited partnerships for the comparative measurement period; and
higher costs associated with insurance-related activities due to:
higher paid claims, net of reinsurance;
partially offset by
a one-time adjustment in the current period related to modeling improvements resulting from an actuarial system conversion.
Key favorable impacts were:
higher fee income due to:
higher unearned revenue amortization from changes in maintenance expense and policyholder behavior assumptions made in connection with the AAR; and
lower ongoing net reinsurance costs as a result of reinsurance recaptured in prior periods; and
lower other expenses due to the exit of various transition services agreements with MetLife.
The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 19% in the current period compared to 20% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions.
63

Run-off
The components of adjusted earnings for our Run-off segment were as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(In millions)
Fee income$170 $157 $505 $544 
Net investment spread149 90 179 226 
Insurance-related activities(1,718)(740)(2,226)(1,210)
Amortization of DAC and VOBA— — — — 
Other expenses, net of DAC capitalization(44)(50)(137)(147)
Pre-tax adjusted earnings(1,443)(543)(1,679)(587)
Provision for income tax expense (benefit)(304)(117)(355)(127)
Adjusted earnings$(1,139)$(426)$(1,324)$(460)
Three Months Ended September 30, 2020 Compared with the Three Months Ended September 30, 2019
Adjusted earnings were a loss of $1.1 billion for the current period, a higher loss of $713 million.
Key unfavorable impacts were:
higher costs associated with insurance-related activities, primarily in our ULSG business, due to:
an increase in liability balances resulting primarily from changes in the long-term general account earned rate assumptions made in connection with the AAR; and
higher paid claims, net of reinsurance in the current period.
Key favorable impacts were:
higher net investment spread due to higher returns on other limited partnerships for the comparative measurement period; and
higher fee income in our ULSG business due to higher unearned revenue amortization resulting from changes in premium assumptions made in connection with the AAR.
The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 21% in the current period compared to 22% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions.
Nine Months Ended September 30, 2020 Compared with the Nine Months Ended September 30, 2019
Adjusted earnings were a loss of $1.3 billion for the current period, a higher loss of $864 million.
Key net unfavorable impacts were:
higher costs associated with insurance-related activities, primarily in our ULSG business, due to:
an increase in liability balances resulting primarily from changes in the long-term general account earned rate assumptions made in connection with the AAR; and
higher paid claims, net of reinsurance in the current period;
lower net investment spread due to lower returns on other limited partnerships for the comparative measurement period, net of decreases in average crediting rates in connection with the low interest rate environment; and
lower net fee income in our ULSG business due to:
a decline in the net cost of insurance fees driven by the aging in-force business; and
a decrease in policyholder fees consistent with lower average account balances;
partially offset by
64

higher unearned revenue amortization resulting from changes in premium assumptions made in connection with the AAR.
The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 21% in the current period compared to 22% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions and tax credits.
Corporate & Other
The components of adjusted earnings for Corporate & Other were as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(In millions)
Fee income$— $$— $
Net investment spread15 23 50 57 
Insurance-related activities13 25 23 
Amortization of DAC and VOBA19 (3)12 (11)
Other expenses, net of DAC capitalization(79)(93)(276)(300)
Less: Net income (loss) attributable to noncontrolling interests and preferred stock dividends19 35 18 
Pre-tax adjusted earnings, less net income (loss) attributable to noncontrolling interests and preferred stock dividends(51)(76)(224)(242)
Provision for income tax expense (benefit)(38)(57)(72)(100)
Adjusted earnings$(13)$(19)$(152)$(142)
Three Months Ended September 30, 2020 Compared with the Three Months Ended September 30, 2019
Adjusted earnings were a loss of $13 million, a lower loss of $6 million from the prior period.
Key favorable impacts were:
lower amortization of DAC and VOBA due to a one-time adjustment in the current period related to modeling improvements resulting from an actuarial system conversion; and
lower other expenses driven by interest expense recognized in the prior period on a tax liability associated with our separation from MetLife.
The lower adjusted loss was partially offset by the timing of our preferred stock dividend payments.
The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 119% in the current period compared to 75% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions and tax credits. We believe the effective tax rate for Corporate & Other is not generally meaningful, neither on a standalone basis nor for comparison to prior periods, since taxes for Corporate & Other are derived from the difference between the overall consolidated effective tax rate and total taxes for the combined operating segments.
Nine Months Ended September 30, 2020 Compared with the Nine Months Ended September 30, 2019
Adjusted earnings were a loss of $152 million, a higher loss of $10 million from the prior period.
The higher adjusted loss was primarily due to the timing of our preferred stock dividend payments.
Key favorable impacts were:
lower other expenses driven by:
lower establishment costs in the current period related to planned technology expenses; and
interest expense recognized in the prior period on a tax liability associated with our separation from MetLife; and
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lower amortization of DAC and VOBA due to a one-time adjustment in the current period related to modeling improvements resulting from an actuarial system conversion.
The provision for income tax, expressed as a percentage of pre-tax adjusted earnings, resulted in an effective tax rate of 38% in the current period compared to 41% in the prior period. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deductions and tax credits. We believe the effective tax rate for Corporate & Other is not generally meaningful, neither on a standalone basis nor for comparison to prior periods, since taxes for Corporate & Other are derived from the difference between the overall consolidated effective tax rate and total taxes for the combined operating segments.
GMLB Riders for the Three Months and Nine Months Ended September 30, 2020 and 2019
The overall impact to income (loss) available to shareholders before provision for income tax from the performance of GMLB Riders, which includes (i) changes in carrying value of the GAAP liabilities, (ii) the mark-to-market of hedges and reinsurance, (iii) fees and (iv) associated DAC offsets, was as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(In millions)
Liabilities$(1,787)$(810)$(3,591)$(1,856)
Hedges(1,078)948 2,538 (51)
Ceded reinsurance(3)50 101 75 
Fees (1)223 228 621 628 
GMLB DAC(94)(502)60 
Total GMLB Riders$(2,739)$419 $(833)$(1,144)
__________________
(1)Excludes living benefit fees, included as a component of adjusted earnings, of $15 million and $44 million for the three months and nine months ended September 30, 2020, respectively, and $16 million and $48 million for the three months and nine months ended September 30, 2019, respectively.
Three Months Ended September 30, 2020 Compared with the Three Months Ended September 30, 2019
Comparative results from GMLB Riders were unfavorable by $3.2 billion.
The AAR resulted in unfavorable changes in the current period primarily due to higher reserves and higher DAC amortization recognized in the current period.
Results were also driven by:
unfavorable changes in our GMLB hedges;
unfavorable changes to the estimated fair value of Shield Annuity liabilities, net of favorable changes to the estimated fair value of the related hedges;
unfavorable changes to the estimated fair value of variable annuity liability reserves; and
unfavorable changes in GMLB DAC.
Higher relative equity markets in the current period resulted in the following significant impacts:
unfavorable changes to the estimated fair value of our GMLB hedges; and
unfavorable changes to the estimated fair value of Shield Annuity liabilities, net of favorable changes to the estimated fair value of the related hedges;
partially offset by
favorable changes to the estimated fair value of variable annuity liability reserves; and
favorable changes to GMLB DAC.
66

Interest rates increasing in the current period, compared to decreasing in the prior period, resulted in the following impacts:
unfavorable changes to the estimated fair value of our GMLB hedges; and
unfavorable changes to GMLB DAC;
partially offset by
favorable changes to the estimated fair value of variable annuity liability reserves.
The narrowing of credit default swap spreads in the current period resulted in an unfavorable change in the adjustment for nonperformance risk, net of an offsetting favorable change in GMLB DAC.
Nine Months Ended September 30, 2020 Compared with the Nine Months Ended September 30, 2019
Comparative results from GMLB Riders were favorable by $311 million, primarily driven by:
favorable changes in our GMLB hedges; and
favorable changes to the estimated fair value of Shield Annuity liabilities, net of unfavorable changes to the estimated fair value of the related hedges;
partially offset by
unfavorable changes to the estimated fair value of variable annuity liability reserves; and
unfavorable changes in GMLB DAC.
Equity markets increasing less in the current period than in the prior period resulted in the following significant impacts:
favorable changes to the estimated fair value of our GMLB hedges;
favorable changes to the estimated fair value of Shield Annuity liabilities, net of unfavorable changes to the estimated fair value of the related hedges; and
favorable changes to GMLB DAC;
partially offset by
unfavorable changes to the estimated fair value of the variable annuity liability reserves.
Lower interest rates in the current period resulted in the following significant impacts:
favorable changes to the estimated fair value of our GMLB hedges;
favorable changes to the estimated fair value of Shield Annuity liabilities, net of unfavorable changes to the estimated fair value of the related hedges; and
favorable changes to GMLB DAC;
partially offset by
unfavorable changes to the estimated fair value of the variable annuity liability reserves.
The widening of credit default swap spreads combined with a larger increase in the underlying variable annuity liability reserves in the current period resulted in a favorable change in the adjustment for nonperformance risk, net of an unfavorable change in GMLB DAC.
The AAR resulted in unfavorable changes in the current period primarily due to higher reserves and higher DAC amortization recognized in the current period.
Investments
Investment Risks
Our primary investment objective is to optimize risk-adjusted net investment income and risk-adjusted total return while appropriately matching assets and liabilities. In addition, the investment process is designed to ensure that the portfolio has an appropriate level of liquidity, quality and diversification.
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We are exposed to the following primary sources of investment risks, which may be heightened or exacerbated by the factors discussed in “— Industry Trends — COVID-19 Pandemic”:
credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest, which will likely result in a higher allowance for credit losses and write-offs for uncollectible balances for certain investments;
interest rate risk, relating to the market price and cash flow variability associated with changes in market interest rates. Changes in market interest rates will impact the net unrealized gain or loss position of our fixed income investment portfolio and the rates of return we receive on both new funds invested and reinvestment of existing funds;
market valuation risk, relating to the variability in the estimated fair value of investments associated with changes in market factors such as credit spreads and equity market levels. A widening of credit spreads will adversely impact the net unrealized gain (loss) position of the fixed income investment portfolio and will increase losses associated with credit-based non-qualifying derivatives where we assume credit exposure. Credit spread tightening will reduce net investment income associated with new purchases of fixed maturity securities and will favorably impact the net unrealized gain (loss) position of the fixed income investment portfolio;
liquidity risk, relating to the diminished ability to sell certain investments, in times of strained market conditions;
real estate risk, relating to commercial, agricultural and residential real estate, and stemming from factors, which include, but are not limited to, market conditions, including the demand and supply of leasable commercial space, creditworthiness of borrowers and their tenants and joint venture partners, capital markets volatility and inherent interest rate movements;
currency risk, relating to the variability in currency exchange rates for non-U.S. dollar denominated investments; and
financial and operational risks related to using external investment managers.
We manage these risks through asset-type allocation and industry and issuer diversification. Risk limits are also used to promote diversification by asset sector, avoid concentrations in any single issuer and limit overall aggregate credit and equity risk exposure. Real estate risk is managed through geographic and property type and product type diversification. Interest rate risk is managed as part of our Asset Liability Management (“ALM”) strategies. Product design, such as the use of market value adjustment features and surrender charges, is also utilized to manage interest rate risk. These strategies include maintaining an investment portfolio that targets a weighted average duration that reflects the duration of our estimated liability cash flow profile. For certain of our liability portfolios, it is not possible to invest assets to the full liability duration, thereby creating some asset/liability mismatch. We also use certain derivatives in the management of currency, credit, interest rate, and equity market risks.
Investment Management Agreements
Other than our derivatives trading, which we manage in-house, we have engaged a select group of experienced external asset management firms to manage the investment of the assets comprising our general account portfolio and certain separate account assets of our insurance subsidiaries, as well as assets of BHF and our reinsurance subsidiary, Brighthouse Reinsurance Company of Delaware (“BRCD”).
Current Environment
Our business and results of operations are materially affected by conditions in capital markets and the economy, generally. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry Trends and Uncertainties — Financial and Economic Environment” included in our 2019 Annual Report.
As a U.S. insurance company, we are affected by the monetary policy of the Federal Reserve Board in the United States. The Federal Reserve may increase or decrease the federal funds rate in the future, which may have an impact on the pricing levels of risk-bearing investments and may adversely impact the level of product sales. We are also affected by the monetary policy of central banks around the world due to the diversification of our investment portfolio.
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Selected Sector Investments
Recent elevated levels of market volatility have affected the performance of various asset classes. Contributing factors include concerns about lower energy and oil prices impacting the energy sector and the COVID-19 pandemic. See “Risk Factors — The ongoing COVID-19 pandemic may materially adversely affect our business, results of operations and financial condition, including capitalization and liquidity” in our First Quarter Form 10-Q.
There has been an increased market focus on energy sector investments as a result of lower energy and oil prices. We maintain a diversified energy sector fixed maturity securities portfolio across sub-sectors and issuers. Our exposure to energy sector fixed maturity securities was $3.0 billion, of which 91% were investment grade, with net unrealized gains (losses) of $236 million at September 30, 2020.
There has also been an increased market focus on retail sector investments as a result of the COVID-19 pandemic and uncertainty regarding its outcome. Our exposure to retail sector corporate fixed maturity securities was $1.9 billion, of which 97% were investment grade, with net unrealized gains (losses) of $213 million at September 30, 2020.
In addition to the fixed maturity securities disclosed above, we have exposure to mortgage loans and certain residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and asset-backed securities (“ABS”) (collectively, “Structured Securities”) that may be impacted by the COVID-19 pandemic. Our investment managers are actively working with borrowers who are experiencing short-term financial or operational problems as a result of the COVID-19 pandemic to provide temporary relief. See “— Investments — Mortgage Loans” and Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements for information on mortgage loans, including credit quality by portfolio segment and commercial mortgage loans by property type. Additionally, see “— Investments — Structured Securities” for information on Structured Securities, including security type, risk profile and ratings profile.
We monitor direct and indirect investment exposure across sectors and asset classes and adjust our level of investment exposure, as appropriate. At this time, we do not expect that our general account investments in these sectors and asset classes will have a material adverse effect on our results of operations or financial condition.
Investment Portfolio Results
The following summary yield table presents the yield and adjusted net investment income for our investment portfolio for the periods indicated. As described below, this table reflects certain differences from the presentation of net investment income presented in the GAAP statement of operations. This summary yield table presentation is consistent with how we measure our investment performance for management purposes, and we believe it enhances understanding of our investment portfolio results.
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Yield %AmountYield %AmountYield %AmountYield %Amount
(Dollars in millions)
Investment income (1)4.56 %$1,036 4.62 %$951 4.04 %$2,676 4.56 %$2,757 
Investment fees and expenses (2)(0.14)(35)(0.10)(23)(0.13)(99)(0.12)(76)
Adjusted net investment income (3)4.42 %$1,001 4.52 %$928 3.91 %$2,577 4.44 %$2,681 
_______________
(1)Investment income yields are calculated as investment income as a percent of average quarterly asset carrying values. Investment income excludes recognized gains and losses and reflects the adjustments presented in footnote 3 below to arrive at adjusted net investment income. Asset carrying values exclude unrealized gains (losses), collateral received in connection with our securities lending program, freestanding derivative assets and collateral received from derivative counterparties.
(2)Investment fee and expense yields are calculated as investment fees and expenses as a percent of average quarterly asset estimated fair values. Asset estimated fair values exclude collateral received in connection with our securities lending program, freestanding derivative assets and collateral received from derivative counterparties.
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(3)Adjusted net investment income presented in the yield table varies from the most directly comparable GAAP measure due to certain reclassifications, as presented below.
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(In millions)
Net investment income$996 $928 $2,564 $2,681 
Less: Investment hedge adjustments(5)— (13)— 
Adjusted net investment income — in the above yield table$1,001 $928 $2,577 $2,681 
See “— Results of Operations — Consolidated Results for the Three Months and Nine Months Ended September 30, 2020 and 2019 — Adjusted Earnings” for an analysis of the period over period changes in net investment income.
Fixed Maturity Securities Available-for-sale (“AFS”)
Fixed maturity securities held by type (public or private) were as follows at:
 September 30, 2020December 31, 2019
 Estimated
Fair Value
% of
Total
Estimated
Fair Value
% of
Total
(Dollars in millions)
Publicly-traded$65,812 83.0 %$58,099 81.8 %
Privately-placed13,526 17.0 12,937 18.2 
Total fixed maturity securities$79,338 100.0 %$71,036 100.0 %
Percentage of cash and invested assets69.3 % 72.0 % 
See Note 6 of the Notes to the Interim Condensed Consolidated Financial Statements for further information on our valuation controls and procedures including our formal process to challenge any prices received from independent pricing services that are not considered representative of estimated fair value.
See Note 4 of the Notes to the Interim Condensed Consolidated Financial Statements for further information about fixed maturity securities by sector, contractual maturities, continuous gross unrealized losses and the allowance for credit losses.
Fixed Maturity Securities Credit Quality — Ratings
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Investments — Fixed Maturity AFS — Fixed Maturity Securities Credit Quality — Ratings” included in our 2019 Annual Report for a discussion of the credit quality ratings assigned by Nationally Recognized Statistical Rating Organizations (“NRSRO”), credit quality designations assigned by and methodologies used by the Securities Valuation Office of the National Association of Insurance Commissioners (“NAIC”) for fixed maturity securities and the methodologies adopted by the NAIC for certain Structured Securities.
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The following table presents total fixed maturity securities by NRSRO rating and the applicable NAIC designation from the NAIC published comparison of NRSRO ratings to NAIC designations, except for certain Structured Securities, which are presented using the NAIC methodologies, as well as the percentage, based on estimated fair value that each NAIC designation is comprised of at:
  September 30, 2020December 31, 2019
NAIC
Designation
NRSRO RatingAmortized
Cost
Allowance for Credit LossesUnrealized
Gain (Loss)
Estimated Fair Value% of
Total
Amortized
Cost
Allowance for Credit LossesUnrealized
Gain (Loss)
Estimated Fair Value% of
Total
  (Dollars in millions)
1Aaa/Aa/A$43,320 $— $8,752 $52,072 65.7 %$41,463 $— $5,252 $46,715 65.8 %
2Baa21,534 — 2,503 24,037 30.3 19,838 — 1,610 21,448 30.2 
Subtotal investment grade64,854 — 11,255 76,109 96.0 61,301 — 6,862 68,163 96.0 
3Ba2,290 — 33 2,323 2.9 2,015 — 72 2,087 2.9 
4B802 (2)799 1.0 673 — 23 696 1.0 
5Caa and lower115 (5)107 0.1 90 — — 90 0.1 
6In or near default— — — — — — — — — — 
Subtotal below investment grade3,207 26 3,229 4.0 2,778 — 95 2,873 4.0 
Total fixed maturity securities$68,061 $$11,281 $79,338 100.0 %$64,079 $— $6,957 $71,036 100.0 %
The following tables present total fixed maturity securities, based on estimated fair value, by sector classification and by NRSRO rating and the applicable NAIC designations from the NAIC published comparison of NRSRO ratings to NAIC designations, except for certain Structured Securities, which are presented using the NAIC methodologies as described above:
Fixed Maturity Securities — by Sector & Credit Quality Rating
NAIC Designation123456Total
Estimated
Fair Value
NRSRO RatingAaa/Aa/ABaaBaBCaa and
Lower
In or Near
Default
(In millions)
September 30, 2020
U.S. corporate$17,758 $15,782 $1,673 $630 $63 $— $35,906 
Foreign corporate3,325 6,659 530 140 — 10,660 
RMBS8,376 15 19 12 27 — 8,449 
U.S. government and agency8,836 99 — — — — 8,935 
CMBS6,287 127 — — 6,425 
State and political subdivision4,236 185 — — 4,429 
ABS2,400 298 12 — — 2,714 
Foreign government854 872 86 — 1,820 
Total fixed maturity securities$52,072 $24,037 $2,323 $799 $107 $— $79,338 
December 31, 2019
U.S. corporate$15,313 $13,770 $1,479 $556 $42 $— $31,160 
Foreign corporate3,162 6,113 466 90 13 — 9,844 
RMBS9,020 59 15 21 — 9,118 
U.S. government and agency7,303 93 — — — — 7,396 
CMBS5,612 126 11 — — 5,755 
State and political subdivision3,863 185 — — — 4,057 
ABS1,696 240 19 — — — 1,955 
Foreign government746 862 102 36 — 1,751 
Total fixed maturity securities$46,715 $21,448 $2,087 $696 $90 $— $71,036 
U.S. and Foreign Corporate Fixed Maturity Securities
We maintain a diversified portfolio of corporate fixed maturity securities across industries and issuers. Our portfolio does not have any exposure to any single issuer in excess of 1% of total investments, and the top ten holdings in aggregate
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comprise 2% of total investments at both September 30, 2020 and December 31, 2019. Our U.S. and foreign corporate fixed maturity securities holdings by industry were as follows at:
September 30, 2020December 31, 2019
Estimated
Fair Value
% of
Total
Estimated
Fair Value
% of
Total
(Dollars in millions)
Industrial$14,575 31.3 %$12,633 30.9 %
Consumer10,981 23.6 9,719 23.7 
Finance10,614 22.8 9,448 23.0 
Utility