UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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
bhflogorgb970pxa20.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 class
Name of each exchange on which registered
Common Stock, par value $0.01 per share
The Nasdaq Stock Market LLC
6.250% Junior Subordinated Debentures due 2058
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer þ
 
Accelerated filer ¨
Non-accelerated filer ¨
 
Smaller reporting company ¨
Emerging growth company ¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of June 29, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $4.8 billion.
As of February 22, 2019, 116,670,471 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement to be filed with the U.S. Securities and Exchange Commission in connection with the registrant’s 2019 annual meeting of stockholders (the “2019 Proxy Statement”) are incorporated by reference into Part III of this Annual Report on Form 10-K. Such 2019 Proxy Statement will be filed within 120 days of the registrant’s fiscal year ended December 31, 2018.
 



Table of Contents
 
 
 
 
Page
Part I
Item 1.
 
 
Item 1A.
 
 
Item 1B.
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
 
 
 
 
 
Part II
Item 5.
 
 
Item 6.
 
 
Item 7.
 
 
Item 7A.
 
 
Item 8.
 
 
Item 9.
 
 
Item 9A.
 
 
Item 9B.
 
 
 
Part III
Item 10.
 
 
Item 11.
 
 
Item 12.
 
 
Item 13.
 
 
Item 14.
 
 
 
Part IV
Item 15.
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

As used in this Annual Report on Form 10-K, unless otherwise mentioned or unless the context indicates otherwise, “Brighthouse,” “Brighthouse Financial,” the “Company,” “we,” “us” and “our” 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. (MetLife, Inc., together with its subsidiaries and affiliates, “MetLife”). The term “Separation” refers to the separation of MetLife, Inc.’s former Brighthouse Financial segment from MetLife’s other businesses and the creation of a separate, publicly traded company, BHF, as well as the distribution on August 4, 2017 of 96,776,670 shares, or 80.8%, of the 119,773,106 shares of BHF common stock outstanding immediately prior to the distribution date by MetLife, Inc. to holders of MetLife, Inc. common stock as of the record date for the distribution. In June 2018, MetLife divested all its remaining shares of BHF common stock. For definitions of selected financial and product terms used herein, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Glossary.”
Note Regarding Forward-Looking Statements
This report and other oral or written statements that we make from time to time may contain information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve substantial risks and uncertainties. We have tried, wherever possible, to identify such statements using words such as “anticipate,” “estimate,” “expect,” “project,” “may,” “will,” “could,” “intend,” “goal,” “target,” “guidance,” “forecast,” “preliminary,” “objective,” “continue,” “aim,” “plan,” “believe” and other words and terms of similar meaning, or that are tied to future periods, in connection with a discussion of future operating or financial performance. In particular, these include, without limitation, statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends in operating and financial results, as well as statements regarding the expected benefits of the Separation.
Any or all forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining the actual future results of Brighthouse. These statements are based on current expectations and the current economic environment and involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance. Actual results could differ materially from those expressed or implied in the forward-looking statements due to a variety of known and unknown risks, uncertainties and other factors. Although it is not possible to identify all of these risks and factors, they include, among others:
differences between actual experience and actuarial assumptions and the effectiveness of our actuarial models;
higher risk management costs and exposure to increased market and counterparty risk due to guarantees within certain of our products;
the effectiveness of our variable annuity exposure management strategy and the impact of such strategy on net income volatility and negative effects on our statutory capital;
the reserves we are required to hold against our variable annuities as a result of actuarial guidelines;
a sustained period of low equity market prices and interest rates that are lower than those we assumed when we issued our variable annuity products;
the potential material adverse effect of changes in accounting standards, practices and/or policies applicable to us, including changes in the accounting for long-duration contracts;
our degree of leverage due to indebtedness;
the effect adverse capital and credit market conditions may have on our ability to meet liquidity needs and our access to capital;
the impact of changes in regulation and in supervisory and enforcement policies on our insurance business or other operations;
the effectiveness of our risk management policies and procedures;
the availability of reinsurance and the ability of our counterparties to our reinsurance or indemnification arrangements to perform their obligations thereunder;
heightened competition, including with respect to service, product features, scale, price, actual or perceived financial strength, claims-paying ratings, credit ratings, e-business capabilities and name recognition;

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the ability of our insurance subsidiaries to pay dividends to us, and our ability to pay dividends to our shareholders;
our ability to market and distribute our products through distribution channels;
any failure of third parties to provide services we need, any failure of the practices and procedures of these third parties and any inability to obtain information or assistance we need from third parties, including MetLife;
whether all or any portion of the tax consequences of the Separation are not as expected, leading to material additional taxes or material adverse consequences to tax attributes that impact us;
the uncertainty of the outcome of any disputes with MetLife over tax-related or other matters and agreements, including the potential of outcomes adverse to us that could cause us to owe MetLife material tax reimbursements or payments, or disagreements regarding MetLife’s or our obligations under our other agreements;
the impact on our business structure, profitability, cost of capital and flexibility due to restrictions we have agreed to that preserve the tax-free treatment of certain parts of the Separation;
the potential material negative tax impact of potential future tax legislation that could decrease the value of our tax attributes and cause other cash expenses, such as reserves, to increase materially and make some of our products less attractive to consumers;
whether the Separation will qualify for non-recognition treatment for federal income tax purposes and potential indemnification to MetLife if the Separation does not so qualify;
the impact of the Separation on our business and profitability due to MetLife’s strong brand and reputation, the increased costs related to replacing arrangements with MetLife with those of third parties and incremental costs as a public company;
whether the operational, strategic and other benefits of the Separation can be achieved, and our ability to implement our business strategy;
our ability to attract and retain key personnel; and
other factors described in this report and from time to time in documents that we file with the U.S. Securities and Exchange Commission (“SEC”).
For the reasons described above, we caution you against relying on any forward-looking statements, which should also be read in conjunction with the other cautionary statements included and the risks, uncertainties and other factors identified elsewhere in this Annual Report on Form 10-K, particularly in “Risk Factors” and “Quantitative and Qualitative Disclosures About Market Risk,” as well as in our subsequent SEC filings. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as otherwise may be required by law.
Corporate Information
We routinely use our Investor Relations website to provide presentations, press releases and other information that may be deemed material to investors. Accordingly, we encourage investors and others interested in the Company to review the information that we share at http://investor.brighthousefinancial.com. Information contained on or connected to any website referenced in this Annual Report on Form 10-K is not incorporated by reference in this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any website references are intended to be inactive textual references only unless expressly noted.
Note Regarding Reliance on Statements in Our Contracts
See “Exhibit Index — Note Regarding Reliance on Statements in Our Contracts” for information regarding agreements included as exhibits to this Annual Report on Form 10-K.

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PART I
Item 1. Business
Index to Business
 
Page

4

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Overview
Our Company
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. Our in-force book of products consists of approximately 2.5 million insurance policies and annuity contracts at December 31, 2018, which are organized into three reporting segments:
(i)
Annuities, which includes variable, fixed, index-linked and income annuities;
(ii)
Life, which includes term, universal, whole and variable life policies; and
(iii)
Run-off, which consists of operations related to products which we are not actively selling, and which are separately managed.
In addition, the Company reports certain of its results of operations in Corporate & Other.
At December 31, 2018, we had $206.3 billion of total assets with total stockholders’ equity of $14.4 billion, including accumulated other comprehensive income (“AOCI”); $134.5 billion of annuity assets under management (“AUM”), which we define as our general account investments and our separate account assets, and approximately $597.7 billion of life insurance face amount in-force, ($414.1 billion, net of reinsurance). Additionally, our insurance subsidiaries had combined statutory total adjusted capital (“TAC”) of $7.4 billion, resulting in a combined action level risk-based capital (“RBC”) in excess of 450% at December 31, 2018. For the year ended December 31, 2018, adjusted statutory earnings were approximately $320 million. Adjusted statutory earnings is a measure of our insurance companies’ generation of statutory distributable cash flows (sometimes referred to as distributable earnings) and is reflective of whether our hedging program functions as intended. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Glossary.”
We seek to be a financially disciplined and, over time, cost-competitive product manufacturer with an emphasis on independent distribution. We aim to leverage our large block of annuity contracts and in-force life insurance policies to operate more efficiently. We believe that our strategy of offering a targeted set of products to serve our customers and distribution partners, each of which is intended to produce positive statutory distributable cash flows on an accelerated basis compared to our legacy products, will enhance our ability to invest in our business and distribute cash to our shareholders over time. We also believe that our product strategy of offering a more tailored set of new products and our decision to outsource a significant portion of our client administration and service processes, is consistent with our focus on reducing our expense structure over time. A key part of our operating strategy is to leverage third parties to deliver certain services important to our business. For example, we have two arrangements with DXC Technology Company, formerly Computer Sciences Corporation (“DXC”) that we entered into (i) in 2016 for the administration of certain in-force policies and (ii) in 2017 for the administration of new life and annuities business and certain in-force life and annuities contracts. As a result of these arrangements, we expect to achieve a phased net reduction in overall expenses for administration of these contracts over the years following our entry into the arrangements.
Risk management of both our in-force book and our new business to enhance sustained, long-term shareholder value is fundamental to our strategy. Consequently, in writing new business we prioritize the value of the new business we write over sales volumes. We assess the value of new products by taking into account the amount and timing of cash flows, the use and cost of capital required to support our financial strength ratings and the cost of risk mitigation. We remain focused on maintaining our strong capital base and we have established a risk management approach that seeks to mitigate the effects of severe market disruptions and other economic events on our business. See “Risk Factors — Risks Related to Our Business — Our variable annuity exposure management strategy may not be effective, may result in net income volatility and may negatively affect our statutory capital,” “— Segments and Corporate & Other — Annuities” and “— Risk Management Strategies — ULSG Market Risk Exposure Management.”
We believe that general demographic trends in the U.S. population, the increase in under-insured individuals, the potential risk to governmental social safety net programs and the shifting of responsibility for retirement planning and financial security from employers and other institutions to individuals will create opportunities to generate significant demand for our products. We also believe our transition to an independent distribution system will enhance our ability to operate most effectively within the emerging requirements of new and proposed regulations establishing standards of conduct for the sale of insurance and annuity products. See “— Regulation — Standard of Conduct Regulation” for a discussion of these final and proposed regulations.
Prior to the Separation, the companies that became our subsidiaries were wholly owned by MetLife. Brighthouse Life Insurance Company (together with its subsidiaries and affiliates, “BLIC”), which is our largest operating subsidiary, was formed in November 2014 through the merger of three affiliated life insurance companies and a former affiliated offshore reinsurance

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subsidiary that mainly reinsured guarantees associated with variable annuity products issued by MetLife affiliates. The principal purpose of the merger was to provide increased transparency relative to capital allocation and variable annuity risk management. In order to further our capabilities to market and distribute our products, prior to the Separation, MetLife contributed to us (i) several entities including Brighthouse Life Insurance Company, New England Life Insurance Company (“NELICO”) and Brighthouse Life Insurance Company of NY (“BHNY”); (ii) a licensed broker-dealer; (iii) a licensed investment advisor; and (iv) other entities necessary for the execution of our strategy.
Segments and Corporate & Other
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.
The following table presents the relevant contributions of each of our segments to our net income (loss) available to shareholders and adjusted earnings, for our ongoing business and for the total Company:
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
 
 
(In millions)
Annuities
 
$
1,023

 
$
1,017

 
$
1,152

Life
 
228

 
16

 
26

Total ongoing business
 
1,251

 
1,033

 
1,178

Run-off
 
(43
)
 
104

 
(539
)
Corporate & Other
 
(311
)
 
(217
)
 
47

Less: Net income (loss) attributable to noncontrolling interests
 
5

 

 

Total adjusted earnings
 
892

 
920

 
686

Adjustments:
 
 
 
 
 
 
Net investment gains (losses)
 
(207
)
 
(28
)
 
(78
)
Net derivative gains (losses)
 
702

 
(1,620
)
 
(5,851
)
Other adjustments
 
(536
)
 
(564
)
 
357

Provision for income tax (expense) benefit
 
14

 
914

 
1,947

Net income (loss) available to Brighthouse Financial, Inc.’s common shareholders
 
$
865

 
$
(378
)
 
$
(2,939
)
Revenues derived from any individual customer did not exceed 10% of premiums, universal life and investment-type product policy fees and other revenues for the years ended December 31, 2018, 2017 and 2016. Substantially all of our premiums, universal life and investment-type product policy fees and other revenues originated in the U.S. Financial information, including revenues, expenses, adjusted earnings, and total assets by segment, as well as premiums, universal life and investment-type product policy fees and other revenues by major product groups, is provided in Note 2 of the Notes to the Consolidated and Combined Financial Statements. Adjusted earnings is a performance measure that is not based on GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP and Other Financial Disclosures” for a definition of such measure.
The following table presents the total assets for each of our segments and Corporate & Other:
 
 
December 31, 2018
 
December 31, 2017
 
 
(In millions)
Annuities
 
$
141,489

 
$
154,667

Life
 
$
20,449

 
$
18,049

Run-off
 
$
32,393

 
$
36,824

Corporate & Other
 
$
11,963

 
$
14,652

The following table presents our AUM by segment and Corporate & Other, which we define as our general account investments and our separate account assets.

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December 31, 2018
 
December 31, 2017
 
 
Investments
 
Separate Accounts
 
Total
 
Investments
 
Separate Accounts
 
Total
 
 
(In millions)
Annuities
 
$
42,574

 
$
91,922

 
$
134,496

 
$
37,606

 
$
109,888

 
$
147,494

Life
 
10,344

 
4,679

 
15,023

 
9,216

 
5,250

 
14,466

Run-off
 
30,112

 
1,655

 
31,767

 
29,595

 
3,119

 
32,714

Corporate & Other
 
151

 

 
151

 
5,921

 

 
5,921

Total
 
$
83,181

 
$
98,256

 
$
181,437

 
$
82,338

 
$
118,257

 
$
200,595

Annuities
Overview
Annuities are used by consumers for pre-retirement wealth accumulation and post-retirement income management. The “fixed” and “variable” classifications describe generally whether we or the contract holders bear the investment risk of the assets supporting the contract and determine the manner in which we earn profits from these products, as investment spreads for fixed products or as asset-based fees charged to variable products. Index-linked annuities allow the contract holder to participate in returns from equity indices and, in the case of Shield Annuities (as defined below), provide a specified level of market downside protection. Income annuities provide a guaranteed monthly income for a specified period of years and/or for the life of the annuitant.
The following table presents the insurance liabilities of our annuity products.
 
 
December 31, 2018
 
December 31, 2017
 
 
General
Account (1)
 
Separate
Account
 
Total
 
General
Account (1)
 
Separate
Account
 
Total
 
 
(In millions)
Variable
 
$
4,799

 
$
91,837

 
$
96,636

 
$
5,111

 
$
109,795

 
$
114,906

Fixed Deferred
 
12,872

 

 
12,872

 
13,067

 

 
13,067

Shield Annuities
 
8,453

 

 
8,453

 
5,428

 

 
5,428

Income
 
4,442

 
85

 
4,527

 
4,451

 
93

 
4,544

Total
 
$
30,566

 
$
91,922

 
$
122,488

 
$
28,057

 
$
109,888

 
$
137,945

_______________
(1)
Excludes reserve liabilities for guaranteed minimum benefits (“GMxBs”) and Shield Annuity embedded derivatives.
The following table presents the relevant contributions of our annuity products to our annualized new premium (“ANP”):
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
 
 
(In millions)
Variable
 
$
132

 
$
137

 
$
231

Fixed (1)
 
135

 
49

 
61

Shield Annuities
 
324

 
248

 
166

Total
 
$
591

 
$
434

 
$
458

_______________
(1)
Includes deferred, income and indexed annuities as described below.
We seek to meet our risk-adjusted return objectives in our Annuities segment through a disciplined risk-selection approach and innovative product design, balancing bottom line profitability with top line growth, while remaining focused on margin preservation. Our underwriting approach and product design take into account numerous criteria, including evolving consumer demographics and macroeconomic market conditions, offering a suite of products tailored to respond to external factors without compromising internal constraints. As an example, between 2011 and 2016 we reduced our ANP of our variable annuity contracts by approximately 90%. Beginning in 2013, we began to shift our new annuity business towards products with diversifying market and contract holder behavioral risk attributes and improved risk-adjusted cash returns. Examples of this include

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transitioning from the sale of variable annuities with guaranteed minimum income benefits (“GMIBs”) to the sale of variable annuities with guaranteed minimum withdrawal benefits (“GMWBs”), and our increased emphasis on our Shield Annuities, for which we had new deposits of approximately $3.2 billion, $2.5 billion and $1.7 billion for the years ended December 31, 2018, 2017 and 2016. We believe we have the product design capabilities and distribution relationships to permit us to design and offer new products meeting our risk-adjusted return requirements. We believe these capabilities will enhance our ability to maintain market presence and relevance over the long-term. We intend to meet our risk management objectives by continuing to hedge significant market risks associated with our existing annuity products, as well as new business. See “— Risk Management Strategies — Variable Annuity Statutory Reserving Requirements and Exposure Management.”
Current Products
Our Annuities segment product offerings include fixed, structured, income and variable annuities (each as described below). Our Annuities are designed to address customer needs for tax-deferred asset accumulation and retirement income and their wealth-protection concerns. In 2013, we began a shift in our business towards products with lower guaranteed minimum crediting rates, variable annuity products with less risky living benefits and increased emphasis on index-linked annuity products. Since 2014, our new sales have primarily focused on variable annuities with simplified living benefits and Shield Annuities. As a separate, publicly traded company, we believe we can continue to innovate in response to customer and distributor needs and market conditions.
Fixed Deferred Annuities
Fixed annuities address asset accumulation needs. Purchase payments under deferred fixed annuity contracts are allocated to our general account and are credited with interest at rates we determine, subject to specified guaranteed minimums. Credited interest rates are guaranteed for at least one year. To protect from premature withdrawals, we impose surrender charges. Surrender charges are typically applicable during the early years of the annuity contract, with a declining level of surrender charges over time. We expect to earn a spread between what we earn on the underlying general account investments and what we credit to our fixed annuity contract holders’ accounts. Surrender charges allow us to recoup amounts we expended to initially market and sell such annuities. Approximately 84% of our fixed annuities have a remaining surrender charge of 2% or less.
We launched a fixed index annuity (“FIA”) with Massachusetts Mutual Life Insurance Company (“MassMutual”) in July 2017. The FIA is a single premium fixed indexed annuity designed for growth that credits interest based on the annual performance of an index. Additionally, an optional living benefit rider is available for an additional charge, designed to provide guaranteed lifetime withdrawals.
Structured Annuities
This family of structured annuities combines certain features similar to variable and fixed annuities. Shield Annuities are a suite of single premium deferred annuity contracts that provides for accumulation of retirement savings or other long-term investment purposes. Shield annuities provide the ability for the contract holder to participate in the appreciation of certain financial markets up to a stated level while offering protection from a portion of declines. Rather than allocating purchase payments directly into the equity market, the customer has an opportunity to participate in the returns of a particular market index. The reserve assets are held in a book value non-unitized separate account, but the issuing insurance company is obligated to pay distributions and benefits irrespective of the value of the separate account assets. Shield Annuities offer account value and return of premium death benefits. Shield Annuities are included with variable annuities in our statutory reserve requirements and conditional tail expectations (“CTE”) estimates.
Income Annuities
Income annuities are annuity contracts under which the contract holder contributes a portion of their retirement assets in exchange for a steady stream of retirement income, lasting either for a specified period of time or as long as the life of the annuitant.
We offer two types of income annuities: immediate income annuities, referred to as “single premium immediate annuities” (“SPIAs”) and deferred income annuities (“DIAs”). Both products provide guaranteed lifetime income that can be used to supplement other retirement income sources. SPIAs are single premium annuity products that provide a guaranteed level of income to the contract holder for a specified number of years or the duration of the life of the annuitant(s) beginning during the first 13 months (in certain products longer) from the SPIA’s start date. DIAs differ from SPIAs in that they require the contract holder to wait at least 15 months before income payments commence. SPIAs and DIAs are priced based on considerations consistent with the annuitant’s age, gender and, in the case of DIAs, the deferral period. DIAs provide a pension-like stream of income payments after a specified deferral period.

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Variable Annuities
We issue variable annuity contracts that offer contract holders a tax-deferred basis for wealth accumulation and rights to receive a future stream of payments. The contract holder can choose to invest purchase payments in the separate account or, if available, the general account investment options under the contract. For the separate account options, the contract holder can elect among several subaccounts that invest in internally and externally managed investment portfolios. Unless the contract holder has elected to pay for guaranteed minimum living or death benefits, as discussed below, the contract holder bears the entire risk and receives all of the net returns resulting from the investment option(s) chosen. For the general account options, Brighthouse credits the contract’s account value with the net purchase payment and credits interest to the contract holder at rates declared periodically, subject to a guaranteed minimum crediting rate. The account value of most types of general account options is guaranteed and is not exposed to market risk, because the insurance company rather than the contract holder directly bears the risk that the value of the underlying general account investments of the insurance companies may decline. At December 31, 2018, our variable annuity total account value was $96.6 billion, consisting of $91.8 billion of contract holder separate account assets and $4.8 billion of contract holder general account assets.
The majority of the variable annuities we have issued have GMxBs, which we believe make these products attractive to our customers in periods of economic uncertainty. These GMxBs must be elected by the contract holder no later than at the issuance of the contract. The primary types of GMxBs are those that guarantee death benefits payable upon the death of a contract holder (“GMDBs”) and those that guarantee benefits payable while the contract holder or annuitant is alive (“GMLBs”). There are three primary types of GMLBs: GMIBs, GMWBs, and guaranteed minimum accumulation benefits (“GMABs”). We ceased issuing GMIBs for new purchase in February 2016.
In addition to our directly written business, we also previously assumed from MetLife certain GMxBs pursuant to a coinsurance agreement that was fully recaptured by MetLife in January 2017. For comparative purposes, the tables below do not reflect historical balances for GMxB business recaptured by MetLife.
The guaranteed benefit received by a contract holder pursuant to the GMxBs is calculated based on the benefit base (“Benefit Base”). The calculation of the Benefit Base varies by benefit type and may differ in value from the contract holder’s account value for the following reasons:
The Benefit Base is defined to exclude the effect of a decline in the market value of the contract holder’s account value. By excluding market declines, actual claim payments to be made in the future to the contract holder will be determined without giving effect to equity market declines.
The terms of the Benefit Base may allow it to increase at a guaranteed rate irrespective of the rate of return on the contract holder’s account value.
The Benefit Base may also increase with subsequent purchase payments, after the initial purchase payment made by the contract holder at the issuance of the contract, or at the contract holder’s election with an increase in the account value due to market performance.
GMxBs provide the contract holder with protection against the possibility that a downturn in the markets will reduce the certain specified benefits that can be claimed under the contract. The principal features of our in-force block of variable annuity contracts with GMxBs are as follows:
GMDBs, a contract holder’s beneficiaries are entitled to the greater of (a) the account value or (b) the Benefit Base upon the death of the annuitant;
GMIBs, a contract holder is entitled to annuitize the policy after a specified period of time and receive a minimum amount of lifetime income based on pre-determined payout factors and the Benefit Base, which could be greater than the account value;
GMWBs, a contract holder is entitled to withdraw each year a maximum amount of their Benefit Base, which could be greater than the underlying account value; and
GMABs, a contract holder is entitled to a percentage of the Benefit Base, which could be greater than the account value, after the specified accumulation period, regardless of actual investment performance.
Variable annuities may have more than one GMxB. Variable annuities with a GMLB may also have a GMDB. Additional detail concerning our GMxBs is provided in “— Risk Management Strategies — Variable Annuity Statutory Reserving Requirements and Exposure Management.”

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Variable Annuity Fees
The following table presents the fees and charges we earn on our variable annuity contracts invested in separate accounts, by type of fee:
 
 
Years Ended December 31,
 
 
2018
 
2017
 
 
(In millions)
Mortality & Expense Fees and Administrative Fees
 
$
1,494

 
$
1,532

Surrender Charges
 
24

 
27

Investment Management Fees (1)
 
239

 
247

12b-1 Fees and Other Revenue (1)
 
263

 
271

Death Benefit Rider Fees
 
211

 
213

Living Benefit Riders Fees
 
929

 
937

Total
 
$
3,160

 
$
3,227

_______________
(1)
These fees are net of pass through amounts.
For the account value on contracts that invest through a separate account, we earn various types of fee revenue based on account value, fund assets and Benefit Base. In general, GMxB fees calculated based on the Benefit Base are more stable in market downturns compared to fees based on the account value.
Mortality & Expense Fees and Administrative Fees. We earn mortality and expense fees (“M&E Fees”), as well as administrative fees on variable annuity contracts. The M&E Fees are calculated based on the portion of the contract holder’s account value allocated to the separate accounts and are expressed as an annual percentage deducted daily. These fees are used to offset the insurance and operational expenses relating to our variable annuity contracts. Additionally, the administrative fees are charged either based on the daily average of the net asset values in the subaccounts or when contracts fall below minimum values based on a flat annual fee per contract.
Surrender Charges. Most, but not all, variable annuity contracts depending on their share class may also impose surrender charges on withdrawals for a period of time after the purchase and in certain products for a period of time after each subsequent deposit, also known as the surrender charge period. A surrender charge is a deduction of a percentage of the contract holder’s account value prior to distribution to him or her. Surrender charges generally decline gradually over the surrender charge period, which can range from zero to 10 years. Our variable annuity contracts typically permit contract holders to withdraw up to 10% of their account value each year without any surrender charge, although their guarantees may be significantly impacted by such withdrawals. Contracts may also specify circumstances when no surrender charges apply, for example, upon payment of a death benefit.
The following table presents account value by remaining surrender charge:
 
 
Variable Annuities (1)
 
 
December 31, 2018
 
December 31, 2017
 
 
(In millions)
0%
 
$
64,770

 
$
65,294

>0 to 2%
 
20,300

 
29,564

>2% to 4%
 
6,422

 
14,218

>4% to 6%
 
5,021

 
4,801

>6%
 
8,635

 
6,763

Total
 
$
105,148

 
$
120,640

_______________
(1)
Shield Annuities are included with variable annuities.
Investment Management Fees. We charge investment management fees for managing the proprietary mutual funds managed by our subsidiary Brighthouse Investment Advisers, LLC (“Brighthouse Advisers”) that are offered as investments under the variable annuities. Investment management fees are also paid on the non-proprietary funds managed by investment advisors unaffiliated with us, to the unaffiliated investment advisors. Investment management fees differ by fund. A portion

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of the investment management fees charged on proprietary funds managed by subadvisors unaffiliated with us are paid by us to the subadvisors. Investment management fees reduce the net returns on the variable annuity investments.
12b-1 Fees and Other Revenue. 12b-1 fees are paid by the mutual funds which our contract holders chose to invest in and are calculated based on the net assets of the funds allocated to our subaccounts. These fees reduce the returns contract holders earn from these funds. Additionally, mutual fund companies with funds which are available to contract holders through the variable annuity subaccounts pay us fees consistent with the terms of administrative service agreements. These fees are funded from the fund companies’ net revenues.
Death Benefit Rider Fees. We may earn fees in addition to the base M&E fees for promising to pay GMDBs. The fees earned vary by generation and rider type. For some death benefits, the fees are calculated based on account value, but for enhanced death benefits (“EDBs”), the fees are normally calculated based on the Benefit Base. In general, these fees were set at a level intended to be sufficient to cover the anticipated expenses of covering claim payments and hedge costs associated with these benefits. These fees are deducted from the account value.
Living Benefit Riders Fees. We earn these fees for promising to pay guaranteed benefits while the contract holder is alive, such as for any type of GMLB (including GMIBs, GMWBs and GMABs). The fees earned vary by generation and rider type and are typically calculated based on the Benefit Base and deducted from account value. Generally, these fees are set at a level intended to be sufficient to cover the anticipated expenses of covering claim payments and hedge costs associated with these benefits.
In addition to fees, we also earn a spread on the portion of the account value allocated to the general account.
Pricing and Risk Selection
Product pricing reflects our pricing standards and guidelines. Annuities are priced based on various factors, which may include investment returns, expenses, persistency, longevity, policyholder behavior, equity market returns, and interest rate scenarios.
Rates for annuity products are highly regulated and generally the forms of which must be approved by the regulators of the jurisdictions in which the product is sold. The offer and sale of variable annuity products are regulated by the SEC. Generally, these products include pricing terms that are guaranteed for a certain period of time. Such products generally include surrender charges for early withdrawals and fees for guaranteed benefits. We periodically reevaluate the costs associated with such guarantees and may adjust pricing levels accordingly. Further, from time to time, we may also reevaluate the type and level of guarantee features being offered. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates.”
We continually review our pricing guidelines in light of applicable regulations and to ensure that our policies remain competitive and supportive of our marketing strategies and profitability goals.
Evolution of our Variable Annuity Business
Our in-force variable annuity block reflects a wide variety of product offerings within each type of guarantee, reflecting the changing nature of these products over the past two decades. The changes in product features and terms over time are driven partially by customer demand but also reflect our continually refined evaluation of the guarantees, their expected long-term claims costs and the most effective market risk management strategies in the prevailing market conditions.
We introduced our variable annuity product over 50 years ago and began offering GMIBs, which were our first living benefit riders, in 2001. The design of our more recent generations of GMIBs have been modified to reduce payouts in certain circumstances. Beginning in 2009, we reduced the minimum payments we guaranteed if the contract holder were to annuitize; in 2012 we began to reduce the guaranteed portion of account value up to a percentage of the Benefit Base (“roll-up rates”); and, after first reducing the maximum equity allocation in separate accounts, in 2011 we introduced managed volatility funds for all our GMIBs. We ceased offering GMIBs for new purchase in February 2016 and to the extent permitted, we have suspended subsequent premium payments on all but our final generation of GMIBs.
While we added GMWBs to our variable annuity product suite in 2003, we shifted our marketing focus from GMIBs to GMWBs in 2015 with the release of FlexChoiceSM, a GMWB with lifetime payments (“GMWB4L”). In the first quarter of 2018, we launched an updated version of FlexChoiceSM, “Flex Choice Access” to provide financial advisors and their clients more investment flexibility.
In 2013, we introduced Shield Annuities, which generated approximately $3.2 billion, $2.5 billion and $1.7 billion of new deposits for the years ended December 31, 2018, 2017 and 2016, respectively, representing 71%, 64% and 41% of our annuity deposits for the years ended December 31, 2018, 2017 and 2016, respectively. We intend to increase sales of Shield

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Annuities due to growing consumer demand for the products. In addition, we believe that Shield Annuities may provide us with risk offset to the GMxBs offered in our traditional variable annuity products. As of December 31, 2018, there was $8.8 billion of policyholder account balances for Shield Annuities.
With the goal of continuing to diversify and better manage our in-force block, in the future we intend to focus on selling the following products:
variable annuities with GMWBs;
variable annuities without GMLBs; and
Shield Annuities.
The table below presents our variable and Shield Annuity deposits and ANP.
 
 
Deposits
 
Annual New Premium
 
 
Years Ended December 31,
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
 
2018
 
2017
 
2016
 
 
(In millions)
GMIB
 
$
107

 
$
155

 
$
356

 
$
11

 
$
15

 
$
36

GMWB (1)
 
858

 
812

 
1,317

 
86

 
81

 
132

GMAB (1)
 

 

 
54

 

 

 
5

GMDB only
 
353

 
408

 
574

 
35

 
41

 
58

Shield Annuities
 
3,243

 
2,475

 
1,655

 
324

 
248

 
166

Total
 
$
4,561

 
$
3,850

 
$
3,956

 
$
456

 
$
385

 
$
397

_______________
(1)
The decline in sales of GMWBs and GMABs is driven by the suspension of sales by Fidelity in 2016.
We describe below in more detail the product features and relative account values, Benefit Base and net amount at risk (“NAR”) for our death benefit and living benefit guarantees.
Guaranteed Death Benefits
Since 2001, we have offered a variety of GMDBs to our contract holders, which include the following (with no additional charge unless noted):
Account Value Death Benefit. The Account Value Death Benefit returns the account value at the time of the claim with no imposition of surrender charges at the time of the claim.
Return of Premium Death Benefit. The Return of Premium Death Benefit, also referred to as Principal Protection, comes standard with many of our base contracts and pays the greater of the contract holder’s account value at the time of the claim or their total purchase payments, adjusted proportionately for any withdrawals.
Interval Reset. The Reset Death Benefit enables the contract holder to lock in their guaranteed death benefit on the interval anniversary date with this level of death benefit being reset (either up or down) on the next interval anniversary date. This may only be available through a maximum age. This death benefit pays the greater of the contract holder’s account value at the time of the claim, their total purchase payments, adjusted proportionately for any withdrawals, or the interval reset value, adjusted proportionally for any withdrawals. We no longer offer this guarantee.
Annual Step-Up Death Benefit. Contract holders may elect, for an additional fee, the option to step up their guaranteed death benefit on any contract anniversary through age 80. The Annual Step-Up Death Benefit allows for the contract holder to lock in the high-water mark on their death benefit adjusted proportionally for any withdrawals. This death benefit may only be elected at issue through age 79. Fees charged for this benefit are usually based on account value. This death benefit pays the greater of the contract holder’s account value at the time of the claim, their total purchase payments, adjusted proportionately for any withdrawals, or the highest anniversary value, adjusted proportionally for any withdrawals.
Combination Death Benefit. Contract holders may elect, for an additional fee, a combination death benefit that, in addition to the Annual Step-Up Death Benefit as described above, includes a roll-up feature which accumulates

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aggregate purchase payments at a predetermined roll-up rate, as adjusted for withdrawals. Descriptions of the two principal versions of this guaranteed death benefit are as follows:
Compounded-Plus Death Benefit. The death benefit is the greater of (i) the account value at time of the claim, (ii) the highest anniversary value (highest anniversary value/high water mark through age 80, adjusted proportionately for any withdrawals) or (iii) a roll-up Benefit Base, which rolls up through age 80, and is adjusted proportionally for withdrawals. Fees for this benefit are calculated and charged against the account value. We stopped offering this rider in 2013.
Enhanced Death Benefit. The death benefit is equal to the Benefit Base which is defined as the greater of (i) the highest anniversary value Benefit Base (highest anniversary value/high water mark through age 80, adjusted proportionately for any withdrawals) or (ii) a roll-up benefit, which may apply to the step-up (rollup applies through age 90), which allows for dollar-for-dollar withdrawals up to the permitted amount for that contract year and proportional adjustments for withdrawals in excess of the permitted amount. The fee may be increased upon step-up of the roll-up Benefit Base. Fees charged for this benefit are calculated based on the Benefit Base and charged annually against the account value. We stopped offering this rider on a stand-alone basis in 2011.
In addition, we currently also offer an optional death benefit for an additional fee with our FlexChoiceSM GMWB4L riders, available at issue through age 65, which has a similar level of death benefit protection as the Benefit Base for the living benefit rider. However, the Benefit Base for this death benefit is adjusted for all withdrawals.
The table below presents the breakdown of variable annuity guarantee account value and Benefit Base for the above described GMDBs at:
 
 
December 31, 2018 (1)
 
December 31, 2017 (1)
 
 
Account Value
 
Benefit Base
 
Account Value 
 
Benefit Base 
 
 
(In millions)
Account value / other
 
$
2,916

 
$
2,964

 
$
3,320

 
$
2,757

Return of premium
 
42,691

 
43,242

 
50,892

 
51,333

Interval reset
 
5,136

 
5,352

 
5,917

 
6,133

Annual step-up
 
19,926

 
21,965

 
23,835

 
24,211

Combination Death Benefit (2)
 
26,193

 
34,413

 
31,184

 
35,371

Total
 
$
96,862

 
$
107,936

 
$
115,148

 
$
119,805

_______________
(1)
Many of our annuity contracts offer more than one type of guarantee such that death benefit guarantee amounts listed above are not mutually exclusive to the amounts in the GMLBs table below.
(2)
Combination Death Benefit includes Compounded-Plus Death Benefit, EDBs, and FlexChoiceSM death benefit.
Guaranteed Living Benefits
Our in-force block of variable annuities consists of three varieties of GMLBs, including variable annuities with GMIBs, GMWBs and GMABs. Since 2001, we have offered a variety of guaranteed living benefit riders to our contract holders. Based on total account value, approximately 79% and 80% of our variable annuity block included living benefit guarantees at December 31, 2018 and 2017, respectively.
GMIBs. GMIBs are our largest block of living benefit guarantees based on in-force account value. Contract holders must wait for a defined period, usually 10 years, before they can elect to receive income through guaranteed annuity payments. This initial period when the contract holder invests their account value in the separate and/or general account to grow on a tax-deferred basis is often referred to as the accumulation phase. The contract holder may elect to continue the accumulation phase beyond the waiting period in order to maintain access to their account value or continue to participate in the potential growth of both the account value and Benefit Base pursuant to the contract terms. During the accumulation phase, the contract holder still has access to his or her account value through the following choices, although their Benefit Base may be adjusted downward consistent with these choices:
Partial surrender or withdrawal to a maximum specified amount each year (typically 10% of account value). This action does not trigger surrender charges, but the Benefit Base is adjusted downward depending on the contract terms;

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Full surrender or lapse of the contract, with the net proceeds paid to the contract holder being the then prevailing account value less surrender charges defined in the contract; or
Limited “Dollar-for-Dollar Withdrawal” from the account value as described in the paragraph below.
The second phase of the contract starts upon annuitization. The occurrence and timing of annuitization depends on how contract holders choose to utilize the multiple benefit options available to them in their annuity contract. Below are examples of contract holder benefit utilization choices that can affect benefit payment patterns and reserves:
Lapse. The contract holder may lapse or exit the contract at which time all GMxB guarantees are canceled. If he or she partially exits, the GMxB Benefit Base may be reduced in accordance with the contract terms.
Use of Guaranteed Principal Option after waiting period. For certain GMIB contracts issued since 2005, the contract holder has the option to receive a lump sum return of initial premium less withdrawals (the Benefit Base does not apply) in exchange for cancellation of the GMIB optional benefit.
Dollar-for-Dollar Withdrawal. The contract holder may, in any year, withdraw, without penalty and regardless of the underlying account value, a portion of his or her account value up to a percentage of the Benefit Base (“roll-up rate”). The withdrawal reduces the contract holder’s Benefit Base “dollar-for-dollar.” If making such withdrawals in combination with market movements reduces the account value to zero, the contract may have an automatic annuitization feature, which entitles the contract holder to receive a stream of lifetime (with period certain) annuity payments based on a variety of factors, including the Benefit Base, the age and gender of the annuitant, and predetermined annuity interest rates and mortality rates. The Benefit Base depends on the contract terms, but the majority of our in-force has a greater of roll-up or step-up combination Benefit Base similar to the roll-up and step-up Benefit Base described above in “— Guaranteed Death Benefits.” Any withdrawal greater than the roll-up rate would result in a penalty which may be a proportional reduction in the Benefit Base.
Elective Annuitization. The contract holder may elect to annuitize the account value or exercise the guaranteed annuitization under the GMIB. The guaranteed annuitization entitles the contract holder to receive a stream of lifetime (with period certain) annuity payments based on the same factors that would be used as if the contract holder elected to annuitize.
Do nothing. If the contract holder elects to continue to remain in the accumulation phase past the maximum age for electing annuitization under the GMIB and the account value has not depleted to zero, then the contract will continue as a variable annuity with a death benefit. The Benefit Base for the death benefit may be the same as the Benefit Base for the GMIB.
Contract holder behaviors around choosing a particular option cannot be predicted with certainty at the time of contract issuance or thereafter. The incidents and timing of benefit elections and the resulting benefit payments may materially differ from those we anticipate at the time we issue a variable annuity contract. As we observe actual contract holder behavior, we periodically update our assumptions with respect to contract holder behavior and take appropriate action with respect to the amount of the reserves we establish for the future payment of such benefits. See “Risk Factors — Risks Related to Our Business — Guarantees within certain of our products may decrease our earnings, decrease our capitalization, increase the volatility of our results, result in higher risk management costs and expose us to increased market risk and counterparty risk” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates.”
We have employed several risk exposure reduction strategies at the product level. These include reducing the interest rates used to determine annuity payout rates on GMIBs from 2.5% to 0.5% over time, partially in response to sustained low interest rates. In addition, we increased the setback period used to determine the annuity payout rates for contract holders from seven years to 10 years. For example, a 10 year age setback would determine actual annuitization monthly payout rates for a contract holder assuming they were 10 years younger than their actual age at the time of annuitization, thereby reducing the monthly guaranteed annuity claim payments. We have also reduced the guarantee roll-up rates from 6% to 4%.
Additionally, we introduced limitations on fund selections inside variable annuity contracts. In 2005, we reduced the maximum equity allocation in the separate accounts. Further, in 2011 we introduced managed volatility funds to our fund offerings in conjunction with the introduction of our last generation GMIB product “Max.” Approximately 32% and 33% of the $56.0 billion and $67.1 billion of GMIB total account value as of both December 31, 2018 and 2017, was invested in managed volatility funds. The managers of these funds seek to reduce the risk of large, sudden declines in account value

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during market downturns by managing the volatility or draw-down risk of the underlying fund holdings by re-balancing the fund holdings within certain guidelines or overlaying hedging strategies at the fund level. We believe that these risk mitigation actions at the fund level reduce the amount of hedging or reinsurance we require to manage our risks arising from guarantees we provide on the underlying variable annuity separate accounts.
GMWBs. GMWBs have a Benefit Base that contract holders may roll up for up to 10 years. If contract holders take withdrawals early, the roll-up may be less than 10 years. This is in contrast to GMIBs, in which roll ups may continue beyond 10 years. Therefore, the roll-up period for the Benefit Base on GMWBs is typically less uncertain and is shorter than those on GMIBs. Additionally, the contract holder may receive income only through withdrawal of his or her Benefit Base. These withdrawal percentages are defined in the contract and differ by the age when contract holders start to take withdrawals. Withdrawal rates may differ if they are offered on a single contract holder or a couple (joint life). GMWBs primarily come in two versions depending on if they are period certain or if they are lifetime payments, GMWB4L.
GMABs. GMABs guarantee a minimum amount of account value to the contract holder after a set period of time, which can also include locking in capital market gains. This protects the value of the annuity from market fluctuations.
The table below presents the breakdown of our variable annuity account value and Benefit Base by type of GMLBs as of December 31, 2018 and 2017.
 
 
December 31, 2018 (1)(2)
 
December 31, 2017 (1)(2)
 
 
Account Value 
 
Benefit Base
 
Account Value
 
Benefit Base 
 
 
(In millions)
GMIB
 
$
55,968

 
$
75,325

 
$
67,110

 
$
77,460

GMWB
 
2,672

 
2,300

 
3,357

 
2,564

GMWB4L
 
17,415

 
19,542

 
20,379

 
19,998

GMAB
 
600

 
585

 
737

 
603

Total
 
$
76,655

 
$
97,752

 
$
91,583

 
$
100,625

_______________
(1)
Many of our annuity contracts offer more than one type of guarantee such that living benefit guarantee amounts listed above are not mutually exclusive to the amounts in the GMDBs table above.
(2)
As of December 31, 2018 and 2017, the total account value includes investments in the general account totaling $4.8 billion and $5.1 billion, respectively.
Net Amount at Risk
The NAR for the GMDB is the amount of death benefit in excess of the account value (if any) as of the balance sheet date. It represents the amount of the claim we would incur if death claims were made on all contracts on the balance sheet date and includes any additional contractual claims associated with riders purchased to assist with covering income taxes payable upon death.
The NAR for the GMWB and GMAB is the amount of guaranteed benefit in excess of the account values (if any) as of the balance sheet date. The NAR assumes utilization of benefits by all contract holders as of the balance sheet date. For the GMWB benefits, only a small portion of the Benefit Base is available for withdrawal on an annual basis. For the GMAB, the NAR would not be available until the GMAB maturity date.
The NAR for the GMWB4L is the amount (if any) that would be required to be added to the total account value to purchase a lifetime income stream, based on current annuity rates, equal to the lifetime amount provided under the guaranteed benefit. For contracts where the GMWB4L provides for a guaranteed cumulative dollar amount of payments, the NAR is based on the purchase of a lifetime with period certain income stream where the period certain ensures payment of this cumulative dollar amount. The NAR represents our potential economic exposure to such guarantees in the event all contract holders were to begin lifetime withdrawals on the balance sheet date regardless of age. Only a small portion of the Benefit Base is available for withdrawal on an annual basis.
The NAR for the GMIB is the amount (if any) that would be required to be added to the total account value to purchase a lifetime income stream, based on current annuity rates, equal to the minimum amount provided under the guaranteed benefit. This amount represents our potential economic exposure to such guarantees in the event all contract holders were to annuitize on the balance sheet date, even though the guaranteed amount under the contracts may not be annuitized until after the waiting period of the contract.

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The account values and NAR of contract holders by type of guaranteed minimum benefit for variable annuity contracts are summarized below.
 
 
December 31, 2018
 
December 31, 2017
 
 
Account Value
 
Death Benefit NAR (1)
 
Living Benefit NAR (1)
 
% of Account Value In-the-Money (2)
 
Account Value
 
Death Benefit NAR (1)
 
Living Benefit NAR (1)
 
% of Account Value In-the-Money (2)
 
 
(Dollars in millions)
GMIB
 
$
38,682

 
$
4,064

 
$
4,115

 
42.6
%
 
$
46,585

 
$
1,796

 
$
2,641

 
25
%
GMIB Max w/ Enhanced DB
 
10,961

 
3,775

 
11

 
1.3
%
 
13,035

 
1,850

 
1

 
0.1
%
GMIB Max w/o Enhanced DB
 
6,324

 
87

 
2

 
0.42
%
 
7,490

 
3

 

 
<0.1%

GMWB4L (FlexChoiceSM)
 
2,819

 
100

 
15

 
12.5
%
 
2,351

 

 
1

 
1.0
%
GMAB
 
600

 
17

 
16

 
27.3
%
 
695

 
2

 
1

 
0.3
%
GMWB
 
2,672

 
143

 
85

 
31.3
%
 
3,355

 
46

 
13

 
2
%
GMWB4L
 
14,596

 
558

 
505

 
27.8
%
 
18,026

 
73

 
267

 
13.5
%
EDB Only
 
3,434

 
955

 

 
N/A

 
4,020

 
453

 

 
N/A

GMDB Only (Other than EDB)
 
16,777

 
1,374

 

 
N/A

 
19,587

 
1,038

 

 
N/A

Total
 
$
96,865

 
$
11,073

 
$
4,749

 
 
 
$
115,144

 
$
5,261

 
$
2,924

 
 
_______________
(1)
The “Death Benefit NAR” and “Living Benefit NAR” are not additive at the contract level.
(2)
In-the-money is defined as any contract with a living benefit NAR in excess of zero.
The in-the-money and out-of-the-money account values for GMIB’s and GMWB’s at December 31, 2018 are summarized below.
 
 
Account Value
 
 
GMIB I & II
 
GMIB Plus
 
GMIB Max
 
GMWB
 
Total
 
 
(Dollars in millions)
30% +
 
$
1,624

 
$
2,805

 
$
3

 
$
348

 
$
4,780

20% to 30%
 
1,047

 
1,306

 
7

 
389

 
2,749

10% to 20%
 
1,737

 
1,856

 
33

 
1,401

 
5,027

0% to 10%
 
2,226

 
3,861

 
129

 
3,105

 
9,321

-10% to 0%
 
2,629

 
4,415

 
788

 
4,986

 
12,818

-20% to -10%
 
1,144

 
5,359

 
4,772

 
5,711

 
16,986

-20%+
 
119

 
8,557

 
11,550

 
4,147

 
24,373

Total
 
$
10,526

 
$
28,159

 
$
17,282

 
$
20,087

 
$
76,054



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The in-the-money NAR amounts for death benefits at December 31, 2018 are summarized below.
 
 
NAR
 
 
Account Value/Other
 
Annual Step-Up
 
Combination Death Benefit
 
Interval Reset
 
Return of Premium
 
Total
 
 
(Dollars in millions)
30% +
 
$
37

 
$
253

 
$
5,444

 
212

 
379

 
$
6,325

20% to 30%
 

 
128

 
2,046

 

 
11

 
2,185

10% to 20%
 
6

 
895

 
673

 
2

 
61

 
1,637

0% to 10%
 
5

 
763

 
56

 
2

 
100

 
926

0
 

 

 

 

 

 

Total
 
$
48

 
$
2,039

 
$
8,219

 
216

 
551

 
$
11,073

Reserves
Under accounting principles generally accepted in the United States of America (“GAAP”), certain of our variable annuity guarantee features are accounted for as insurance liabilities and recorded on the balance sheet in Future Policy Benefits with changes reported in policyholder benefits and claims. These liabilities are accounted for using long term assumptions of equity and bond market returns and the level of interest rates. Therefore, these liabilities, valued at $4.6 billion as of December 31, 2018, are less sensitive than derivative instruments to periodic changes to equity and fixed income market returns and the level of interest rates. Guarantees accounted for in this manner include GMDBs, as well as the life contingent portion of GMIBs and certain GMWBs. All other variable annuity guarantee features are accounted for as embedded derivatives and recorded on the balance sheet in Policyholder Account Balances with changes reported in net derivative gains (losses). These liabilities, valued at $1.6 billion as of December 31, 2018, are accounted for at fair value. Guarantees accounted for in this manner include GMABs, GMWBs and the non-life contingent portions of GMIBs. In some cases, a guarantee will have multiple features or options that require separate accounting such that the guarantee is not fully accounted for under only one of the accounting models (known as “split accounting”). Additionally, the index protection and accumulation features of Shield Annuities are accounted for as embedded derivatives, recorded on the balance sheet in policyholder account balances with changes reported in net derivative gains (losses) and valued at $488 million as of December 31, 2018. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates.”
The table below presents the GAAP variable annuity reserve balances by guarantee type and accounting model.
 
 
December 31, 2018
 
December 31, 2017
 
 
Future Policy Benefits
 
Policyholder Account Balances
 
Total Reserves
 
Future Policy Benefits (1)
 
Policyholder Account Balances (2)
 
Total Reserves
 
 
(In millions)
GMDB
 
$
1,305

 
$

 
$
1,305

 
$
1,163

 
$

 
$
1,163

GMIB
 
2,565

 
1,603

 
4,168

 
2,310

 
1,416

 
3,726

GMIB Max
 
507

 
14

 
521

 
399

 
(243
)
 
156

GMAB
 

 
(8
)
 
(8
)
 

 
(15
)
 
(15
)
GMWB
 

 
16

 
16

 

 
18

 
18

GMWB4L
 
261

 
17

 
278

 
277

 
30

 
307

GMWB4L (FlexChoiceSM)
 

 

 

 

 
5

 
5

Total
 
$
4,638

 
$
1,642

 
$
6,280

 
$
4,149

 
$
1,211

 
$
5,360

_______________
(1)
Excludes $102 million of insurance liabilities assumed from a former affiliate, which were recaptured as of January 1, 2017.
(2)
Excludes $460 million of embedded derivatives assumed from a former affiliate, which were recaptured as of January 1, 2017.
The carrying values of these guarantees can change significantly during periods of sizable and sustained shifts in equity market performance, equity market volatility, or interest rates. Carrying values are also affected by our assumptions around mortality, separate account returns and policyholder behavior, including lapse, annuitization and withdrawal rates. See “Risk Factors — Risks Related to Our Business — Guarantees within certain of our products may decrease our earnings, decrease

17

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our capitalization, increase the volatility of our results, result in higher risk management costs and expose us to increased market risk and counterparty risk.” Furthermore, changes in policyholder behavior assumptions can result in additional changes in accounting estimates.
Life
Overview
Our Life segment manufactures products to serve our target segments through a broad independent distribution network. While our in-force book reflects a broad range of life products, we have focused on term life and universal life, consistent with our financial objectives, with a concentration on design and profitability over volume. By managing our in-force book of business, we expect to generate future revenue and profits for the Company. The Life segment generates profits from premiums, investment margins, expense margins, mortality margins, morbidity margins and surrender fees. We aim to maximize our profits by focusing on operational excellence and cost optimization in order to continue to reduce the cost basis and underwriting expenses. Our life insurance in-force book provides natural diversification to our Annuity segment and a source of future profits.
The following table presents the insurance liabilities of our life insurance products.
 
 
December 31, 2018
 
December 31, 2017
 
 
General
Account
 
Separate
Account
 
Total
 
General
Account
 
Separate
Account
 
Total
 
 
(In millions)
Term
 
$
2,544

 
$

 
$
2,544

 
$
2,444

 
$

 
$
2,444

Whole
 
2,400

 

 
2,400

 
2,192

 

 
2,192

Universal
 
2,111

 

 
2,111

 
2,052

 

 
2,052

Variable
 
1,075

 
4,679

 
5,754

 
1,124

 
5,250

 
6,374

Total
 
$
8,130

 
$
4,679

 
$
12,809

 
$
7,812

 
$
5,250

 
$
13,062

The following table presents the relevant contributions of our life insurance products, excluding universal life with secondary guarantees (“ULSG”), to our ANP:
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
 
 
(In millions)
Term
 
$
3

 
$
12

 
$
53

Whole
 
2

 
15

 
75

Total Traditional
 
5

 
27

 
128

Universal
 
2

 
6

 
19

Variable
 

 
3

 
11

Total Universal and Variable
 
2

 
9

 
30

Total Life (Excluding ULSG)
 
$
7

 
$
36

 
$
158

The following table presents our in-force face amount and direct premiums received, respectively, for the life insurance products that we offer:
 
 
In-Force Face Amount
 
Premiums
 
 
December 31,
 
December 31,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In millions)
Term
 
$
433,058

 
$
453,804

 
$
698

 
$
750

Whole (1)
 
$
21,804

 
$
23,204

 
$
477

 
$
508

Universal
 
$
14,827

 
$
15,617

 
$
207

 
$
234

Variable
 
$
42,055

 
$
44,897

 
$
253

 
$
292

_______________
(1) Participating whole life business written from 2013 to the first quarter of 2017 is 90% coinsured to a former affiliate.

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Products
We currently offer term life and universal life products.
Term Life
Term life products are designed to provide a fixed death benefit in exchange for a guaranteed level premium to be paid over a specified period of time, usually 10 to 30 years. A one-year term option is also offered. Our term life product does not include any cash value, accumulation or investment components. As a result, it is our most basic life insurance product offering and generally has lower premiums than other forms of life insurance. Term life products may allow the policyholder to continue coverage beyond the guaranteed level premium period, generally at an elevated cost. Some of our term life policies allow the policyholder to convert the policy during the conversion period to a permanent policy. Such conversion does not require additional medical or financial underwriting. Term life products allow us to spread expenses over a large number of policies while gaining mortality insights that come from high policy volumes.
Universal Life
Universal life products provide a death benefit in return for payment of specified annual policy charges that are generally related to specific costs, which may change over time. To the extent that the policyholder chooses to pay more than the charges required in any given year to keep the policy in-force, the excess premium will be added to the cash value of the policy and credited with a stated interest rate. This structure gives policyholders flexibility in the amount and timing of premium payments, subject to tax guidelines. Consequently, universal life policies can be used in a variety of different ways. We may market universal life policies focused on cash accumulation within the policy; this can be accessed later via surrender, withdrawals, loans or ultimate payment of the death benefit. Our policies may feature limited surrender charges and low initial compensation related to policy expenses, compared to our competitors.
Whole Life
Although we have a significant in-force book of whole life policies, we suspended new sales of participating whole life and conversions into participating whole life beginning with the first quarter of 2017. Whole life products provide a guaranteed death benefit in exchange for a guaranteed level premium for a specified period of time in order to maintain coverage for the life of the insured. Whole life products also have guaranteed minimum cash surrender values. Our in-force whole life products provide for participation in the returns generated by the business, delivered to the policyholder in the form of non-guaranteed dividend payments. The policyholder can elect to receive the dividends in cash or to use them to increase the paid-up policy death benefit or pay the required premium. They can also be used for other purposes, including payment of loans and loan interest. The versatility of whole life allows it to be used for a variety of purposes beyond just the primary purpose of death benefit protection. With our in-force policies, the policyholder can withdraw or borrow against the policy (sometimes on a tax favored basis). In November 2017, we launched a non-participating conversion whole life product that is available for term and group conversions and to satisfy other contractual obligations.
Variable Life
Although we have a significant in-force book of variable life policies, we suspended new sales of certain variable life policies and conversions into certain variable life policies beginning with the first quarter of 2017. We may choose to issue additional variable life products in the future. Variable life products operate similarly to universal life products, with the additional feature that the excess amount paid over policy charges can be directed by the policyholder into a variety of separate account investment options. In the separate account investment options, the policyholder bears the entire risk of the investment results. We collect specified fees for the management of the investment options in addition to the base policy charges. In some instances, third-party asset management firms manage these investment options. The policyholder’s cash value reflects the investment return of the selected investment options, net of management fees and insurance-related charges. With some products, by maintaining a certain premium level, policyholders may also have the advantage of various guarantees designed to protect the death benefit from adverse investment experience.
Pricing and Underwriting
Pricing
Life insurance pricing at issuance is based on the expected payout of benefits calculated using our assumptions for mortality, morbidity, premium payment patterns, sales mix, expenses, persistency and investment returns, as well as certain macroeconomic factors, such as inflation. Our product pricing models consider additional factors, such as hedging costs, reinsurance programs, and capital requirements. Our product pricing reflects our pricing standards and guidelines. We continually review our pricing guidelines in light of applicable regulations and to ensure that our policies remain competitive and supportive of our marketing strategies and profitability goals.

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We have a dedicated unit, the primary responsibility of which is the development of product pricing standards and independent pricing and underwriting oversight for our insurance business. Further important controls around management of underwriting and pricing processes include regular experience studies to monitor assumptions against expectations, formal new product approval processes, periodic updates to product profitability studies and the use of reinsurance to manage our exposures, as appropriate. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates — Reinsurance.”
Underwriting
Underwriting generally involves an evaluation of applications by a professional staff of underwriters and actuaries, who determine the type and the amount of insurance risk that we are willing to accept. We employ detailed underwriting policies, guidelines and procedures designed to assist the underwriters to properly assess and quantify such risks before issuing policies to qualified applicants or groups.
Insurance underwriting may consider not only an insured’s medical history, but also other factors such as the insured’s foreign travel, vocations, alcohol, drug and tobacco use, and the policyholder’s financial profile. We generally perform our own underwriting; however, certain policies are reviewed by intermediaries under guidelines established by us. Requests for coverage are reviewed on their merits and a policy is not issued unless the particular risk has been examined and approved in accordance with our underwriting guidelines.
The underwriting conducted by our corporate underwriting office and intermediaries is subject to periodic quality assurance reviews to maintain high standards of underwriting and consistency. The office is also subject to periodic external audits by reinsurers with whom we do business.
We have established oversight of the underwriting process that facilitates quality sales and serves the needs of our customers, while supporting our financial strength and business objectives. Our goal is to achieve the underwriting, mortality and morbidity levels reflected in the assumptions in our product pricing. This is accomplished by determining and establishing underwriting policies, guidelines, philosophies and strategies that are competitive and suitable for the customer, the agent and us.
We continually review our underwriting guidelines (i) in light of applicable regulations and (ii) to ensure that our practices remain competitive and supportive of our marketing strategies, emerging industry trends and profitability goals.
Run-off
This segment consists of operations related to products which we are not actively selling, and which are separately managed, including structured settlements, pension risk transfer contracts, company-owned life insurance (“COLI”) policies, funding agreements and ULSG. With the exception of ULSG, these legacy business lines were not part of MetLife’s former Retail segment but were issued by certain of the legal entities that are now part of Brighthouse. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Summary — Overview.”
The following table presents the insurance liabilities of our annuity contracts and life insurance policies which are reported in our Run-off segment:
 
 
December 31, 2018
 
December 31, 2017
 
 
General
Account
 
Separate
Account
 
Total
 
General
Account
 
Separate
Account
 
Total
 
 
(In millions)
Annuities (1)
 
$
10,575

 
$
16

 
$
10,591

 
$
11,908

 
$
18

 
$
11,926

Life (2)
 
14,745

 
1,639

 
16,384

 
15,118

 
3,100

 
18,218

Total
 
$
25,320

 
$
1,655

 
$
26,975

 
$
27,026

 
$
3,118

 
$
30,144

_______________
(1)
Includes $3.7 billion and $3.9 billion of pension risk transfer general account liabilities at December 31, 2018 and 2017, respectively.
(2)
Includes $13.9 billion and $14.1 billion of general account liabilities associated with the ULSG business at December 31, 2018 and 2017, respectively.
Corporate & Other
Corporate & Other contains the excess capital not allocated to the segments and interest expense related to the majority of our outstanding debt, as well as expenses associated with certain legal proceedings and income tax audit issues. Corporate &

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Other also includes the elimination of intersegment amounts, long-term care and workers compensation business reinsured through 100% quota share reinsurance agreements, and term life insurance sold direct to consumers, which is no longer being offered for new sales.
Risk Management Strategies
Variable Annuity Statutory Reserving Requirements and Exposure Management
We are required to calculate the statutory reserves which support our variable annuity products in conformity with Valuation Manual Chapter 21 for 2017 and later new issues and Actuarial Guideline 43 for earlier issues (collectively, “AG 43”) issued by the National Association of Insurance Commissioners (“NAIC”). The principal components of AG 43 are a deterministic calculation based on a single standard scenario (“Standard Scenario”) and a calculation utilizing stochastic scenario analysis across a set of capital market scenarios, referred to as CTE. AG 43 requires that we carry reserves for our variable annuity contracts that include the greater of the amount determined under the Standard Scenario or CTE.
The Standard Scenario reflects an instantaneous drop in account values followed by a recovery in each case using returns specified in AG 43. Unlike CTE, which is calculated on an aggregate basis, the Standard Scenario is a seriatim (policy-by-policy) calculation which does not permit deficiencies for certain contracts to be offset by redundancies in other contracts. In addition, the Standard Scenario has prescribed assumptions, including those for policyholder behavior, which we believe to be conservative when applied to GMIB products.
CTE is a statistical tail risk measure used to assess the adequacy of assets supporting variable annuity contract liabilities by averaging the worst “x” percent of a set of stochastic capital market scenarios used, which is commonly described as CTE100 less “x.” The CTE calculation under AG 43 represents the result derived from the worst 30% of these stochastic scenarios, or “CTE70.” Although the NAIC does not specify the exact scenarios used, it has issued guidelines that must be complied with when selecting the scenarios used.
The results of the Standard Scenario and CTE70 calculations under AG 43 may differ materially. We held $7.1 billion of statutory reserves, including voluntary reserves, to support our variable annuity products at December 31, 2018.
On August 7, 2018, the NAIC approved the framework for variable annuity reserve and capital reform, which includes modifications to the calculation of RBC. See “— Regulation — Insurance Regulation — NAIC.” Under this approach, a total asset requirement (“TAR”) is determined by estimating the amount of assets that are currently required in order to satisfy contract holder obligations across a set of capital market scenarios. For capital and risk management purposes, we target a level of assets between CTE95 and CTE99 (each defined as the amount of assets required to satisfy contract holder obligations across market environments in the average of the worst five percent and one percent of a set of capital market scenarios over the life of the contracts, “CTE95” and “CTE99,” respectively). In the third quarter of 2018, we incorporated our best estimate interpretation of the new NAIC framework in our management metrics used for capital and risk management. We expect to continue to maintain exposure risk management programs that result in total assets supporting our variable annuity contracts at or above the “CTE98” level (defined as the amount of assets required to satisfy contract holder obligations across market environments in the average of the worst two percent of a set of capital market scenarios over the life of the contracts) in normal market conditions, and in excess of the CTE95 level in most plausible stressed market conditions. For statutory reporting purposes, we will incorporate the new framework when permitted by our state regulators. We expect this to begin at the earliest for year end 2019 and may be gradually phased in over a couple of years.
We refer to our target level of TAR assets as our “Variable Annuity Target Funding Level.” We intend to manage our Variable Annuity Assets at or above our Variable Annuity Target Funding Level of CTE98 in normal markets. Our CTE98 target level at December 31, 2018 was $11.3 billion and total Variable Annuity Assets were $11.7 billion, or approximately $0.3 billion above CTE98. The growth in Variable Annuity Assets since December 31, 2017 is principally driven by gains on derivative instruments recognized in the fourth quarter of 2018, capital contributions and the positive cash flows generated by our variable annuity business as the fees earned are only partially offset by claims and expenses. Assets may be above the CTE98 level as part of our hedging strategy of using out-of-the-money derivatives. Additionally, under stressed conditions, we intend to allow the Variable Annuity Assets to range between a variable annuity hedging target floor level of CTE95 and CTE98. This is consistent with our VA hedging strategy of protecting a floor level of assets at or above CTE95 under market stress and thereafter building back to a CTE98 level through retained statutory results and capital actions.
Our exposure risk management program seeks to mitigate the potential adverse effects of changes in capital markets, specifically equity markets and interest rates, on our Variable Annuity Target Funding Level and hence our view of statutory distributable cash flows. We utilize a combination of short-term and longer-term derivative instruments to have a laddered maturity of protection and reduce roll over risk during periods of market disruption or higher volatility. We continually monitor the capital markets for opportunities to adjust our derivative positions to manage our variable annuity exposure, as appropriate.

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The table below presents the gross notional amount and estimated fair value of the derivatives in our variable annuity hedging program.
 
 
 
 
December 31, 2018
 
December 31, 2017
Primary Underlying Risk Exposure
 
Instrument Type
 
Gross Notional Amount
 
Estimated Fair Value
 
Gross Notional Amount
 
Estimated Fair Value
 
Assets
 
Liabilities
 
 
Assets
 
Liabilities
 
 
 
 
(In millions)
Interest rate
 
Interest rate swaps
 
$
7,928

 
$
470

 
$
29

 
$
14,586

 
$
899

 
$
378

 
 
Interest rate futures
 
54

 

 

 
282

 
1

 

 
 
Interest rate options
 
10,500

 
94

 

 
20,800

 
68

 
27

Equity market
 
Equity futures
 
170

 

 

 
2,713

 
15

 

 
 
Equity index options
 
43,985

 
1,365

 
1,202

 
47,066

 
793

 
1,663

 
 
Equity variance swaps
 
5,574

 
80

 
232

 
8,998

 
128

 
430

 
 
Equity total return swaps
 
3,920

 
280

 
3

 
1,767

 

 
79

 
 
Total
 
$
72,131

 
$
2,289

 
$
1,466

 
$
96,212

 
$
1,904

 
$
2,577

Period to period changes in the estimated fair value of these hedges affect our net income, as well as stockholders’ equity and these effects can be material in any given period. See “Risk Factors — Risks Related to Our Business — Our variable annuity exposure management strategy may not be effective, may result in net income volatility and may negatively affect our statutory capital” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates.”
The principal components of our exposure risk management strategy are described in further detail below:
Variable Annuity Assets - This includes both derivative assets and non-derivative assets. We intend to continue to hold non-derivative assets supporting our variable annuity contracts to sustain asset adequacy during modest market downturns without substantial reliance on gains on derivative instruments and accordingly, reduce the need for hedging the daily or weekly fluctuations from small movements in capital markets. At December 31, 2018, we held derivative and non-derivative assets in excess of the CTE98 level.
Hedge Target - We focus our hedging activities primarily on mitigating the risk from larger movements in capital markets, which may deplete variable annuity contract holder account values, and may increase long-term variable annuity guarantee claims. When we determine hedges to hold for this risk, we consider the fact that our obligations under Shield Annuity contracts decrease in falling equity markets when variable annuity guarantee obligations increase and increase in rising equity markets when variable annuity guarantee obligations decrease. Additionally, we believe that holding longer dated assets including derivative instruments is consistent with the long-term nature of our variable annuity contract guarantees. We believe this will result in our being less exposed to the risk that we will be unable to roll-over expiring derivative instruments into new derivative instruments consistent with our hedge strategy on economically attractive terms and conditions. Over time, we expect our variable annuity exposure management strategy will allow us to reduce net hedge costs and increase long-term value for our shareholders for various reasons, including:
Protect against more significant market risks. Protecting against larger market movements can be achieved at a lower cost through the use of derivatives with strike levels that are below the current market level, referred to as “out-of-the-money.” These derivatives, typically, require a lower premium outlay than those with strike levels at the current market level, known as “at the money.” However, they may result in higher bid-ask spread or trading cost, if frequently re-balanced. Additionally, we believe a strategy using primarily options will produce fewer losses from extreme realized volatility over a compressed time period, with potentially multiple up and down-market movements, referred to as “gamma losses.”
Reduce transaction costs associated with hedge execution. Less frequent rebalancing of derivative positions can reduce trading costs. This approach is commonly described as a “semi-static hedging” approach. With a greater emphasis on semi-static hedging, we generally favor using longer-term option instruments.
Improve statutory results in rising markets. First dollar dynamic hedging strategies, for example using futures or swaps, have similar symmetrical impacts in both rising and falling markets. Therefore, while protecting for market downside situations, first dollar dynamic hedging strategies also incur first dollar losses in rising markets, which is what we refer to as selling upside. We have reduced the use of futures and swaps (as reflected

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in the preceding table), which should improve statutory earnings for the Company in the event markets outperform our baseline expectations.
We believe the higher statutory earnings that our strategy may generate can be used to increase financial flexibility and support deploying capital for growing long-term, sustainable shareholder value. However, because this hedge strategy places a lower priority on offsetting changes to GAAP liabilities and moderate market movement impacts to statutory capital, some GAAP net income and statutory capital volatility could result when markets are volatile.
Variable Annuity Sensitivities
Set forth below are several tables related to our variable annuity block: (i) sensitivity of our Variable Annuity Assets above CTE98 to instantaneous changes in equity markets and interest rates; (ii) CTE98 peak level over time; (iii) Variable Annuity statutory distributable cash flows over three and five years across five capital market scenarios; (iv) the present value of Variable Annuity product cash flows (including hedging results) over the next fifty years across five capital market scenarios and (v) sensitivity of GAAP net income. All of these tables reflect our current best estimate of the interaction impacts between our variable annuity guarantees and Shield Annuities.
Sensitivity of Variable Annuity Assets Above CTE98
The following table estimates the impact of various instantaneous changes in equity markets and interest rates, assuming implied volatility is held constant with respect to market levels at December 31, 2018 on the estimated Variable Annuity Assets supporting our variable annuity contracts, as well as on the corresponding resulting CTE9x level. It does not reflect an increase in total asset requirements as the block of business seasons over time. For purposes of the table we have estimated the impacts of these equity market and interest rate changes on our (i) variable annuity contract liabilities as of December 31, 2018; and (ii) Variable Annuity Assets consisting of derivative instruments as of December 31, 2018. The impacts presented below are not representative of the aggregate changes that could result if a combination of such changes to equity markets and interest rates occurred. The combined impacts of equity and interest rate movements may differ from the sum of their individual sensitivities.
 
 
Estimated at December 31, 2018
 
 
Equity Market (S&P 500)
 
Interest Rates
 
 
(40)%
 
(25)%
 
(10)%
 
(5)%
 
Base
 
5%
 
10%
 
25%
 
40%
 
(1)%
 
1%
Variable Annuity Assets Backing TAR
 
(Dollars in billions)
 Variable Annuity Assets (1)
 
$
18.5

 
$
15.7

 
$
13.1

 
$
12.4

 
$
11.7

 
$
11.1

 
$
10.6

 
$
9.5

 
$
8.7

 
$
13.5

 
$
10.8

Corresponding CTE9x level (2)
 
CTE97+

 
CTE98

 
CTE98+

 
CTE98+

 
 
 
CTE98+

 
CTE98+

 
CTE98+

 
CTE98+

 
CTE97+

 
CTE98+

_______________
(1)
Variable Annuity Assets backing TAR related specifically to reserve and target risk capital.
(2)
Reflects the nearest CTE level that the Variable Annuity Assets are equal to or exceed.
CTE98 Peak Levels
Based on our Base Case Scenario (as defined below), we believe the Variable Annuity Target Funding Level for our variable annuity in-force book (“VA In-Force”) will continue to increase over time until it approaches its peak level in approximately 7 years. We believe this to be typical of most insurance liabilities, where reserves or reserves and required capital, combined as total asset requirements, increase as the block of business seasons over time until it reaches maturity. After maturity, total asset requirements decline, thereby permitting a release of assets and an increase to retained capital and surplus. Assuming our Base Case Scenario, as of December 31, 2018, our Variable Annuity Target Funding Level was approximately 97% of the estimated peak level of our total Variable Annuity Asset requirements. By December 31, 2023, we believe that we will be holding approximately 99% of the expected peak Variable Annuity Target Funding Level as shown in the following table:
 
 
2018
 
2023
 
2025
 
2028
 
 
(Dollars in billions)
Variable Annuity Target Funding Level (CTE98)
 
$
11.3

 
$
11.5

 
$
11.6

 
$
10.9

Percent of peak Variable Annuity Target Funding Level
 
97
%
 
99
%
 
100
%
 
93
%
We anticipate that our increasing total asset requirements will be funded with revenues from our VA In-Force, net of expenses, exposure management impacts and commitments for the Variable Annuity business. We expect the residual cash

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flows will be available for investment in new business, as well as other corporate purposes. Additionally, after the business is past the peak level, we expect the Variable Annuity Target Funding Level to decline and increase distributable earnings to provide a source of cash flow to shareholders.
The following table is based on Scenario 4 (as defined below). We believe this helps represent the impact that aging has on the Variable Annuity Target Funding Level, which is growth that occurs in the CTE98 requirement assuming separate account funds earn modest premium to risk-free rates and interest rates follow the forward curve. We estimate this impact to be approximately $850 million per year through 2023, declining to approximately $500 million per year through 2025.
 
 
2018
 
2023
 
2025
 
2028
 
 
(Dollars in billions)
Variable Annuity Target Funding Level (CTE98)
 
$
11.3

 
$
15.6

 
$
16.6

 
$
16.2

Percent of peak Variable Annuity Target Funding Level
 
68
%
 
94
%
 
100
%
 
97
%
Sensitivity of Cash Flows
We present five scenarios to illustrate our projected sensitivity of variable annuity distributable earnings and the total present value of cash flows to different potential equity market and interest rate levels. We refer to one such scenario as the “Base Case Scenario.” The Base Case Scenario is representative of relatively stable future market conditions, growing at rates that have historically been observed in U.S. capital markets. As a result, while the Base Case Scenario may be no more or less probable than any of the other illustrative scenarios, for the purpose of establishing certain financial targets, management utilizes the Base Case Scenario.
 
Assumptions
Base Case Scenario
Separate Account Returns: 6.5%
Interest Rate Yields: mean reversion of 10 Year UST to 4.25% over 10 years
Scenario 2
Separate Account Returns: 9.0%
Interest Rate Yields: mean reversion of 10 Year UST to 4.25% over 10 years
Scenario 3
Separate Account Returns: 4.0%
Interest Rate Yields: mean reversion of 10 Year UST to 4.25% over 10 years

Scenario 4
Separate Account Returns: 4.0%
Interest Rate Yields: follows the forward U.S. Treasury and swap interest rate curve as of December 31, 2018.

Scenario 5
Separate Account Returns: (25)% shock to equities, then 6.5% separate account return
Interest Rate Yields: 10-year U.S. Treasury interest rates drop to 1.5%, and increase to 1.7% over 10 years
The tables below estimate the impact of distributable statutory cash flow from our variable annuity business for both the three and five annual periods beginning December 31, 2018, under the above defined five capital market scenarios. These values are presented on a pre-tax basis. Effective year end 2017, we made certain tax elections related to our variable annuity hedging program to better align recognition of taxes on hedge gain (loss) with the longer-term nature of the hedges and reduce any potential tax friction impacts due to the difference in the amount of tax reserves and the hedge target based on CTE95. The Company believes statutory distributable cash flows from our variable annuity business in the Base Case Scenario continues to support our capital return target.

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 For the Three Years Ending
December 31, 2019 to December 31, 2021
 
 
Base Case Scenario
 
Scenario 2
 
Scenario 3
 
Scenario 4
 
Scenario 5
 
 
(In billions)
Fees
 
$
8.0

 
$
8.2

 
$
7.9

 
$
7.9

 
$
7.1

Hedge gains (losses) (including Shield net impact)
 
(3.8
)
 
(5.0
)
 
(2.6
)
 
(2.6
)
 
5.0

Benefits and expenses
 
(3.6
)
 
(3.6
)
 
(3.7
)
 
(3.7
)
 
(4.0
)
Investment income
 
1.4

 
1.3

 
1.4

 
1.4

 
1.4

Impact of (increase) decrease in CTE95
 
(0.3
)
 
1.8

 
(2.4
)
 
(3.1
)
 
(10.0
)
Subtotal
 
1.7

 
2.7

 
0.6

 
(0.1
)
 
(0.5
)
(Increase) decrease in assets to fund hedge target (1)
 
(0.1) - (1.1)

 
(0.1) - (1.1)

 
(0.1) - (0.6)

 
0.1

 
0.5

Variable annuity distributable earnings
 
0.6 - 1.6

 
1.6 - 2.6

 
0.0 - 0.5

 
$

 
$

_______________
(1) This range is consistent with our approach to managing our variable annuity total assets between $2-3 billion above CTE95. CTE95 is the floor amount of Variable Annuity Assets that we protect under market stress, while targeting CTE98 or higher in normal markets.
 
 
For the Five Years Ending
December 31, 2019 to December 31, 2023
 
 
Base Case Scenario
 
Scenario 2
 
Scenario 3
 
Scenario 4
 
Scenario 5
 
 
(In billions)
Fees
 
$
12.5

 
$
12.8

 
$
12.1

 
$
12.1

 
$
11.1

Hedge gains (losses) (including Shield net impact)
 
(5.5
)
 
(7.3
)
 
(3.6
)
 
(3.5
)
 
3.4

Benefits and expenses
 
(5.9
)
 
(5.7
)
 
(6.1
)
 
(6.2
)
 
(7.0
)
Investment income
 
2.5

 
2.2

 
2.7

 
2.6

 
2.6

Impact of (increase) decrease in CTE95
 
(0.6
)
 
2.6

 
(3.8
)
 
(4.7
)
 
(10.3
)
Subtotal
 
3.0

 
4.6

 
1.3

 
0.3

 
(0.2
)
(Increase) decrease in assets to fund hedge target (1)
 
(0.1) - (1.1)

 
(0.1) - (1.1)

 
(0.1) - (1.1)

 
(0.1) - (0.3)

 
0.2

Variable annuity distributable earnings
 
1.9 - 2.9

 
3.5 - 4.5

 
0.2 - 1.2

 
0.0 - 0.2

 
$

_______________
(1) This range is consistent with our approach to managing our variable annuity total assets between $2-3 billion above CTE95. CTE95 is the floor amount of Variable Annuity Assets that we protect under market stress, while targeting CTE98 or higher in normal markets.
The table below presents, under these five scenarios, the present value over the lifetime of the existing variable annuity block at a 4% discount rate of anticipated revenues net of reasonable expenses and hedge costs, without reflecting the effect of capital and reserving requirements on the cash flows of this business. The Company believes that its current level of Variable Annuity Assets is sufficient to support the total present value of pre-tax cash flows across all scenarios presented.
 
 
Estimated at December 31, 2018
 
 
Base Case Scenario
 
Scenario 2
 
Scenario 3
 
Scenario 4
 
Scenario 5
 
 
(In billions)
Present value of cash flows
 
$
1.8

 
$
9.1

 
$
(4.9
)
 
$
(5.9
)
 
$
(8.9
)
Present value of hedge gains (losses) (including Shield net impact)
 
(6.7
)
 
(10.3
)
 
(3.7
)
 
(4.3
)
 
0.6

Total present value of cash flows pre-tax
 
(4.9
)
 
(1.2
)
 
(8.6
)
 
(10.2
)
 
(8.3
)
Variable Annuity Assets
 
11.7

 
11.7

 
11.7

 
11.7

 
11.7

Total (including Variable Annuity Assets)
 
$
6.8

 
$
10.5

 
$
3.1

 
$
1.5

 
$
3.4


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Table of Contents

Sensitivity of GAAP Net Income
The primary drivers of GAAP liability sensitivity to changes in capital markets are Variable Annuity and Shield embedded derivatives carried at fair value. The following table estimates the GAAP net income impact, on a post-tax basis, of various instantaneous changes in equity markets and interest rates, assuming implied volatility is held constant with respect to market levels at December 31, 2018 on the derivative instruments in our Variable Annuity Assets and the GAAP embedded derivative liabilities, excluding the impacts of changes in our non-performance risk and risk margin. The impacts presented below are not representative of the aggregate changes that could result if a combination of such changes to equity markets and interest rates occurred. The changes exclude any other GAAP impacts, including but not limited to the sensitivity of DAC and guarantees accounted for as insurance to changes in capital markets.
 
 
Estimated at December 31, 2018
 
 
Equity Market (S&P 500)
 
Interest Rates
 
 
(40)%
 
(25)%
 
(10)%
 
(5)%
 
Base
 
5%
 
10%
 
25%
 
40%
 
(1)%
 
1%
 
 
(In billions)
Net impact of the above on variable annuity GAAP net income (loss)
 
$
4.0

 
$
2.5

 
$
0.9

 
$
0.5

 
$

 
$
(0.4
)
 
$
(0.7
)
 
$
(1.5
)
 
$
(2.0
)
 
$
0.3

 
$
0.2

Additional Assumptions Underlying Sensitivities for Variable Annuities
The preceding sensitivities and scenarios discussed in this sensitivities section (the “Analyses”) are estimates and are not intended to predict the future financial performance of our variable annuity hedging program or to represent an opinion of market value. They were selected for illustrative purposes only and they do not purport to encompass all of the many factors that may bear upon a market value and are based on a series of assumptions as to the future. It should be recognized that actual future results may differ from those shown, on account of changes in the operating and economic environments and natural variations in experience. The results shown are presented as of December 31, 2018 and no assurance can be given that future experience will be in line with the assumptions made.
Additionally, neither the NAIC nor any state insurance department has promulgated guidelines around the method and format of scenarios an insurance company must use in its CTE calculations. As a result, the assumptions underlying these Analyses and the CTE measures we apply may differ from those followed or developed by other insurance companies. See “Risk Factors — Risk Related to Our Business — Our analyses of scenarios and sensitivities utilized in connection with our variable annuity risk management strategies involve significant estimates based on assumptions that may result in material differences in actual outcomes compared to the sensitivities calculated under such scenarios.”
Additionally, in the modeling supporting our Analyses, we use seriatim calculations, that is, each individual annuity contract is considered.
ULSG Market Risk Exposure Management
The ULSG block includes the business that resides in our operating insurance companies and the portion of it that is ceded to Brighthouse Reinsurance Company of Delaware (“BRCD”) for providing redundant, non-economic reserve financing support. The primary market risk associated with our ULSG block is the uncertainty around the future levels of U.S. interest rates and bond yields. To help ensure we have sufficient assets to meet future ULSG policyholder obligations, we have employed an actuarial approach based upon NY Regulation 126 Cash Flow Testing (“ULSG CFT”) as the basis for setting our ULSG asset requirement target for BRCD. For the business that remains in the operating companies, we set our ULSG asset requirement target to equal the actuarially determined statutory reserves, which, taken together with our ULSG asset requirement target of BRCD, comprises our total ULSG asset requirement target (“ULSG Target”). Under the ULSG CFT approach, we assume that interest rates remain flat or lower than current levels and our actuarial assumptions include a provision for adverse deviation. These underlying assumptions used in ULSG CFT are more conservative than those required under GAAP, which assumes a long-term upward mean reversion of interest rates and best estimate actuarial assumptions without additional provisions for adverse deviation.
We seek to mitigate interest rate exposures associated with these liabilities by holding ULSG Assets to closely match our ULSG Target under different interest rate environments. “ULSG Assets” are defined as (i) total general account assets in the operating companies and BRCD supporting statutory reserves and capital and (ii) interest rate derivative instruments dedicated to mitigating ULSG interest rate exposures. At December 31, 2018, the statutory reserves for the ULSG business (in our operating companies and BRCD) were $22.0 billion supported by approximately $7.0 billion of reserve financings in BRCD, and GAAP reserves were $12.0 billion.

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Table of Contents

Our ULSG Target is sensitive to the actual and future expected level of long-term U.S. interest rates. If interest rates fall, our ULSG Target increases. Likewise, if interest rates rise, our ULSG Target declines. Given this profile, we maintain a dedicated interest rate risk mitigation program, composed of interest rate derivatives (the “ULSG Hedge Program”), which we may rebalance periodically to preserve a risk mitigation profile consistent with our objectives. The ULSG Hedge Program prioritizes the ULSG Target (comprised of ULSG CFT and statutory considerations), with less emphasis on mitigating GAAP net income volatility. This could increase the period-to-period volatility of net income and equity due to differences in the sensitivity of the ULSG Target and GAAP liabilities to the changes in interest rates. This mitigation strategy enables us to better protect statutory capitalization of BRCD from potential losses due to an increase in our ULSG Target under lower interest rate conditions. Conversely, we may allow for lower realization of gains as the ULSG Target declines in moderately rising interest rate environments, in order to limit the cost of this risk mitigation strategy. We intend to maintain an adequate amount of liquid investments in our investment portfolio supporting our ULSG book to support any contingent collateral posting requirements from our ULSG Hedge Program.
We closely monitor the sensitivity of our ULSG Assets and ULSG Target to changes in interest rates. We seek to maintain ULSG Assets above the ULSG Target across a wide range of interest rate scenarios. At December 31, 2018, BRCD assets exceed the ULSG CFT requirement. In addition, our hedge portfolio is designed to help us maintain ULSG Assets above the ULSG Target when interest rates decline.
The following table shows the sensitivity of GAAP net income, on a post-tax basis, due to the ULSG hedging strategy, representing instantaneous changes in interest rates. GAAP ULSG policy reserves are relatively insensitive to interest rate movements. As a result, the sensitivity of ULSG GAAP net income largely consists of changes in the fair value of the ULSG Hedge Program, as depicted in the following table as of December 31, 2018.
 
 
Estimated at December 31, 2018
 
 
Interest Rates
 
 
(2.0)%
 
(1.5)%
 
(1.0)%
 
(0.5)%
 
Base
 
0.5%
 
1.0%
 
1.5%
 
2.0%
 
 
(In billions)
Impacts due to ULSG Hedge Program (1)
 
$
2.3

 
$
1.5

 
$
0.8

 
$
0.3

 
$

 
$
(0.3
)
 
$
(0.5
)
 
$
(0.7
)
 
$
(0.9
)
The preceding sensitivities discussed in this section are estimates and are not intended to predict the future financial performance of our ULSG Hedge Program or to represent an opinion of market value. They were selected for illustrative purposes only and they do not purport to encompass all of the many factors that may bear upon a market value and are based on a series of assumptions as to the future. It should be recognized that actual future results may differ from those shown, on account of changes in the operating and economic environments and natural variations in experience. The results shown are presented as of December 31, 2018 and no assurance can be given that future experience will be in line with the assumptions made.
Reinsurance Activity
In connection with our risk management efforts and in order to provide opportunities for growth and capital management, we enter into reinsurance arrangements pursuant to which we cede certain insurance risks to unaffiliated reinsurers (“Unaffiliated Third-Party Reinsurance”). We discuss below our use of Unaffiliated Third-Party Reinsurance, as well as the cession of a block of legacy insurance liabilities to a third party and related indemnification and assignment arrangements.
Unaffiliated Third-Party Reinsurance
We cede risks to third parties in order to limit losses, minimize exposure to significant risks and provide capacity for future growth. We enter into various agreements with reinsurers that cover groups of risks, as well as individual risks. Our ceded reinsurance to third parties is primarily structured on a treaty basis as coinsurance, yearly renewable term, excess or catastrophe excess of retention insurance. These reinsurance arrangements are an important part of our risk management strategy because they permit us to spread risk and minimize the effect of losses. The extent of each risk retained by us depends on our evaluation of the specific risk, subject, in certain circumstances, to maximum retention limits based on the characteristics and relative cost of reinsurance. We also cede first dollar mortality risk under certain contracts. In addition to reinsuring mortality risk, we cede other risks, as well as specific coverages.
Under the terms of the reinsurance agreements, the reinsurer agrees to reimburse us for the ceded amount in the event that we pay a claim. Cessions under reinsurance agreements do not discharge our obligations as the primary insurer. In the event the reinsurers do not meet their obligations under the terms of the reinsurance agreements, reinsurance recoverable balances could become uncollectible.

27

Table of Contents

We have historically reinsured the mortality risk on our life insurance policies primarily on an excess of retention basis or on a quota share basis. When we cede risks to a reinsurer on an excess of retention basis we retain the liability up to a contractually specified amount and the reinsurer is responsible for indemnifying us for amounts in excess of the liability we retain, subject sometimes to a cap. When we cede risks on a quota share basis we share a portion of the risk within a contractually specified layer of reinsurance coverage. We reinsure on a facultative basis for risks with specified characteristics. On a case by case basis, we may retain up to $20 million per life and reinsure 100% of the risk in excess of $20 million. We also reinsure portions of the risk associated with certain whole life policies to a former affiliate and we assume certain term life policies and universal life policies with secondary death benefit guarantees issued by a former affiliate. We routinely evaluate our reinsurance program and may increase or decrease our retention at any time.
Our reinsurance is diversified with a group of well-capitalized, highly rated reinsurers. We analyze recent trends in arbitration and litigation outcomes in disputes, if any, with our reinsurers. We monitor ratings and evaluate the financial strength of our reinsurers by analyzing their financial statements. In addition, the reinsurance recoverable balance due from each reinsurer is evaluated as part of the overall monitoring process. Recoverability of reinsurance recoverable balances is evaluated based on these analyses. We generally secure large reinsurance recoverable balances with various forms of collateral, including secured trusts, funds withheld accounts and irrevocable letters of credit.
We reinsure, through 100% quota share reinsurance agreements, certain run-off long-term care and workers’ compensation business that we have originally written. For products in our Run-off segment other than ULSG, we have periodically engaged in reinsurance activities on an opportunistic basis.
The following table presents our ordinary course net reinsurance recoverables from unaffiliated third-party reinsurers as of December 31, 2018.
 
 
Reinsurance
Recoverables
 
A.M. Best
Financial
Strength Rating (1)