bhf-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission File Number: 001-37905

Brighthouse Financial, Inc.

(Exact name of registrant as specified in its charter)

Delaware

81-3846992

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

11225 North Community House Road, Charlotte, North Carolina

28277

(Address of principal executive offices)

(Zip Code)

(980) 365-7100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	BHF	The Nasdaq Stock Market LLC
Depositary Shares, each representing a 1/1,000th interest in a share of 6.600% Non-Cumulative Preferred Stock, Series A	BHFAP	The Nasdaq Stock Market LLC
Depositary Shares, each representing a 1/1,000th interest in a share of 6.750% Non-Cumulative Preferred Stock, Series B	BHFAO	The Nasdaq Stock Market LLC
Depositary Shares, each representing a 1/1,000th interest in a share of 5.375% Non-Cumulative Preferred Stock, Series C	BHFAN	The Nasdaq Stock Market LLC
Depositary Shares, each representing a 1/1,000th interest in a share of 4.625% Non-Cumulative Preferred Stock, Series D	BHFAM	The Nasdaq Stock Market LLC
6.250% Junior Subordinated Debentures due 2058	BHFAL	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

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 May 5, 2023, 66,860,519 shares of the registrant’s common stock were outstanding.

Table of Contents


		Page
Part I — Financial Information
Item 1.	Consolidated Financial Statements (at March 31, 2023 (Unaudited) and December 31, 2022 and for the Three Months Ended March 31, 2023 and 2022 (Unaudited)):
	Interim Condensed Consolidated Balance Sheets	2
	Interim Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	3
	Interim Condensed Consolidated Statements of Equity	4
	Interim Condensed Consolidated Statements of Cash Flows	5
	Notes to the Interim Condensed Consolidated Financial Statements (Unaudited):
	Note 1 — Business, Basis of Presentation and Summary of Significant Accounting Policies	6
	Note 2 — ASU 2018-12 Transition	11
	Note 3 — Segment Information	13
	Note 4 — Insurance	16
	Note 5 — Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles	23
	Note 6 — Investments	25
	Note 7 — Derivatives	36
	Note 8 — Fair Value	41

	Note 9 — Equity	50
	Note 10 — Other Revenues and Other Expenses	52
	Note 11 — Earnings Per Common Share	53
	Note 12 — Contingencies, Commitments and Guarantees	54

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	57
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	93
Item 4.	Controls and Procedures	97

Part II — Other Information
Item 1.	Legal Proceedings	97
Item 1A.	Risk Factors	97
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	98

Item 6.	Exhibits	99

Signature		100

Table of Contents

Part I — Financial Information

Item 1. Financial Statements

Brighthouse Financial, Inc.

Interim Condensed Consolidated Balance Sheets

March 31, 2023 (Unaudited) and December 31, 2022

(In millions, except share and per share data)


	March 31, 2023		December 31, 2022
Assets
Investments:
Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $84,693 and $84,344, respectively; allowance for credit losses of $5 and $7, respectively)	$	77,685	$	75,577
Equity securities, at estimated fair value	91		89
Mortgage loans (net of allowance for credit losses of $136 and $119, respectively)	22,823		22,936
Policy loans	1,273		1,282
Limited partnerships and limited liability companies	4,803		4,775
Short-term investments, principally at estimated fair value	1,386		1,081
Other invested assets, principally at estimated fair value (net of allowance for credit losses of $13 and $13, respectively)	3,229		2,852
Total investments	111,290		108,592
Cash and cash equivalents	3,685		4,115
Accrued investment income	985		885
Premiums, reinsurance and other receivables (net of allowance for credit losses of $10 and $10, respectively)	18,967		18,548
Deferred policy acquisition costs and value of business acquired	5,027		5,084
Current income tax recoverable	30		38
Deferred income tax asset	1,673		1,736
Market risk benefit assets	510		483
Other assets	395		401
Separate account assets	87,440		84,965
Total assets	$	230,002	$	224,847
Liabilities and Equity
Liabilities
Future policy benefits	$	32,286	$	31,497
Policyholder account balances	76,120		73,527
Market risk benefit liabilities	10,729		10,389
Other policy-related balances	3,816		4,098
Payables for collateral under securities loaned and other transactions	4,401		4,560
Long-term debt	3,157		3,156


Other liabilities	6,234		7,057
Separate account liabilities	87,440		84,965
Total liabilities	224,183		219,249
Contingencies, Commitments and Guarantees (Note 12)
Equity
Brighthouse Financial, Inc.’s stockholders’ equity:
Preferred stock, par value $0.01 per share; $1,753 aggregate liquidation preference	—		—
Common stock, par value $0.01 per share; 1,000,000,000 shares authorized; 122,717,866 and 122,153,422 shares issued, respectively; 67,401,618 and 68,278,068 shares outstanding, respectively	1		1
Additional paid-in capital	14,054		14,075
Retained earnings (deficit)	(894)		(395)
Treasury stock, at cost; 55,316,248 and 53,875,354 shares, respectively	(2,119)		(2,042)
Accumulated other comprehensive income (loss)	(5,288)		(6,106)
Total Brighthouse Financial, Inc.’s stockholders’ equity	5,754		5,533
Noncontrolling interests	65		65
Total equity	5,819		5,598
Total liabilities and equity	$	230,002	$	224,847

See accompanying notes to the interim condensed consolidated financial statements.

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Brighthouse Financial, Inc.

Interim Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

For the Three Months Ended March 31, 2023 and 2022 (Unaudited)

(In millions, except per share data)


	Three Months Ended March 31,
		2023		2022
Revenues
Premiums		$	197	$	166
Universal life and investment-type product policy fees		606		680
Net investment income		1,059		1,151
Other revenues		93		138
Net investment gains (losses)		(96)		(68)
Net derivative gains (losses)		(575)		(54)
Total revenues		1,284		2,013
Expenses
Policyholder benefits and claims (including liability remeasurement gains (losses) of $0 and $0, respectively)		687		675
Interest credited to policyholder account balances		422		248
Amortization of deferred policy acquisition costs and value of business acquired		156		157
Change in market risk benefits		194		(1,579)
Other expenses		478		509
Total expenses		1,937		10
Income (loss) before provision for income tax		(653)		2,003
Provision for income tax expense (benefit)		(156)		416
Net income (loss)		(497)		1,587
Less: Net income (loss) attributable to noncontrolling interests		2		2
Net income (loss) attributable to Brighthouse Financial, Inc.		(499)		1,585
Less: Preferred stock dividends		26		27
Net income (loss) available to Brighthouse Financial, Inc.’s common shareholders		$	(525)	$	1,558
Comprehensive income (loss)		$	321	$	(1,001)
Less: Comprehensive income (loss) attributable to noncontrolling interests		2		2
Comprehensive income (loss) attributable to Brighthouse Financial, Inc.		$	319	$	(1,003)


Earnings per common share
Basic	$	(7.72)	$	20.27
Diluted	$	(7.72)	$	20.11

See accompanying notes to the interim condensed consolidated financial statements.

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Brighthouse Financial, Inc.

Interim Condensed Consolidated Statements of Equity

For the Three Months Ended March 31, 2023 and 2022 (Unaudited)

(In millions)


	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings (Deficit)		Treasury Stock at Cost		Accumulated Other Comprehensive Income (Loss)		Brighthouse Financial, Inc.’s Stockholders’ Equity		Noncontrolling Interests		Total Equity
Balance at December 31, 2022	$	—	$	1	$	14,075	$	(395)	$	(2,042)	$	(6,106)	$	5,533	$	65	$	5,598
Treasury stock acquired in connection with share repurchases									(62)				(62)				(62)
Share-based compensation			—		5				(15)				(10)				(10)
Dividends on preferred stock					(26)								(26)				(26)
Change in noncontrolling interests													—		(2)		(2)
Net income (loss)							(499)						(499)		2		(497)
Other comprehensive income (loss), net of income tax											818		818				818
Balance at March 31, 2023	$	—	$	1	$	14,054	$	(894)	$	(2,119)	$	(5,288)	$	5,754	$	65	$	5,819


	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings (Deficit)		Treasury Stock at Cost		Accumulated Other Comprehensive Income (Loss)		Brighthouse Financial, Inc.’s Stockholders’ Equity		Noncontrolling Interests		Total Equity
Balance at December 31, 2021	$	—	$	1	$	14,154	$	(4,274)	$	(1,543)	$	47	$	8,385	$	65	$	8,450
Treasury stock acquired in connection with share repurchases									(127)				(127)				(127)
Share-based compensation			—		6				(11)				(5)				(5)
Dividends on preferred stock					(27)								(27)				(27)
Change in noncontrolling interests													—		(2)		(2)
Net income (loss)							1,585						1,585		2		1,587
Other comprehensive income (loss), net of income tax											(2,588)		(2,588)				(2,588)
Balance at March 31, 2022	$	—	$	1	$	14,133	$	(2,689)	$	(1,681)	$	(2,541)	$	7,223	$	65	$	7,288

See accompanying notes to the interim condensed consolidated financial statements.

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Brighthouse Financial, Inc.

Interim Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2023 and 2022 (Unaudited)

(In millions)


	Three Months Ended March 31,
	2023		2022
Net cash provided by (used in) operating activities	$	(500)	$	(199)
Cash flows from investing activities
Sales, maturities and repayments of:
Fixed maturity securities	1,474		3,715
Equity securities	2		20
Mortgage loans	262		461
Limited partnerships and limited liability companies	37		67
Purchases of:
Fixed maturity securities	(1,840)		(5,532)
Equity securities	(5)		—
Mortgage loans	(173)		(1,972)
Limited partnerships and limited liability companies	(121)		(279)
Cash received in connection with freestanding derivatives	1,106		1,440
Cash paid in connection with freestanding derivatives	(1,758)		(1,197)



Net change in policy loans	9		(5)
Net change in short-term investments	(299)		781
Net change in other invested assets	(19)		(18)

Net cash provided by (used in) investing activities	(1,325)		(2,519)
Cash flows from financing activities
Policyholder account balances:
Deposits	6,864		6,356
Withdrawals	(5,298)		(3,707)
Net change in payables for collateral under securities loaned and other transactions	(159)		(60)

Long-term debt repaid	—		(1)

Dividends on preferred stock	(26)		(27)
Treasury stock acquired in connection with share repurchases	(62)		(127)



Financing element on certain derivative instruments and other derivative related transactions, net	91		(76)
Other, net	(15)		(13)
Net cash provided by (used in) financing activities	1,395		2,345
Change in cash, cash equivalents and restricted cash	(430)		(373)
Cash, cash equivalents and restricted cash, beginning of period	4,115		4,474
Cash, cash equivalents and restricted cash, end of period	$	3,685	$	4,101
Supplemental disclosures of cash flow information
Net cash paid (received) for:
Interest	$	6	$	6
Income tax	$	(9)	$	1

See accompanying notes to the interim condensed consolidated financial statements.

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Brighthouse Financial, Inc.

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)

1. Business, Basis of Presentation and Summary of Significant Accounting Policies

Business

Brighthouse Financial, Inc. (“BHF” and together with its subsidiaries, “Brighthouse Financial” or the “Company”) is a holding company formed in 2016 to own the legal entities that historically operated a substantial portion of MetLife, Inc.’s former retail segment until becoming a separate, publicly-traded company in August 2017. Brighthouse Financial is one of the largest providers of annuity and life insurance products in the U.S. through multiple independent distribution channels and marketing arrangements with a diverse network of distribution partners. The Company is organized into three segments: Annuities; Life; and Run-off. In addition, the Company reports certain of its results of operations in Corporate & Other.

Basis of Presentation

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported on the interim condensed consolidated financial statements. In applying these policies and estimates, management makes subjective and complex judgments that frequently require assumptions about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Company’s business and operations. Actual results could differ from these estimates.

Consolidation

The accompanying interim condensed consolidated financial statements include the accounts of Brighthouse Financial, as well as partnerships and limited liability companies (“LLC”) that the Company controls. Intercompany accounts and transactions have been eliminated.

The Company uses the equity method of accounting for investments in limited partnerships and LLCs when it has more than a minor ownership interest or more than a minor influence over the investee’s operations. The Company generally recognizes its share of the investee’s earnings on a three-month lag in instances where the investee’s financial information is not sufficiently timely or when the investee’s reporting period differs from the Company’s reporting period. When the Company has virtually no influence over the investee’s operations, the investment is carried at fair value.

The accompanying interim condensed consolidated financial statements are unaudited and reflect all adjustments (including normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented in conformity with GAAP. Interim results are not necessarily indicative of full year performance. The December 31, 2022 consolidated balance sheet data was derived from audited consolidated financial statements included in Brighthouse Financial, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report”), which include all disclosures required by GAAP. Therefore, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company included in the 2022 Annual Report.

Reclassifications

Certain amounts in the prior year period’s interim condensed consolidated financial statements and related footnotes thereto have been reclassified to conform with the 2023 presentation as discussed throughout the Notes to the Interim Condensed Consolidated Financial Statements. See “— Adoption of New Accounting Pronouncements” for discussion of the adoption of new guidance on long-duration contracts in the first quarter of 2023, parts of which were retrospectively applied to prior periods presented in the interim condensed consolidated financial statements.

Summary of Significant Accounting Policies

In connection with the adoption of new guidance on long-duration insurance contracts, the Company updated its impacted accounting policies as described below. See Note 1 of the Notes to the Consolidated Financial Statements included in the 2022 Annual Report for a description of the Company’s accounting policies that did not change.

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Brighthouse Financial, Inc.

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)

1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Insurance Contract Obligations

The Company has obligations under insurance contracts to pay benefits over an extended period of time. The Company establishes liabilities for future obligations under long-duration insurance contracts based on the accounting model appropriate for each type of contract or contract feature. Liabilities for insurance contract benefits are generally accrued over time as revenue is recognized, or established based on the balance that accrues to the contract holder. In addition, certain insurance contracts may contain features that are required to be measured at fair value separately from the base contracts, either as a market risk benefit or embedded derivative.

The discussion below provides an overview of the different accounting models for insurance contract obligations and the applicability of such models to the Company’s insurance products.

Liability for Future Policy Benefits

The Company establishes a liability for future policy benefits (“LFPB”) for non-participating term and whole life insurance and income annuities. LFPBs are accrued over time as revenue is recognized based on a net premium ratio. The net premium ratio is the portion of gross premiums required to provide for all future benefits. LFPBs are established using the Company’s current assumptions of future cash flows, discounted at a rate that approximates a single A corporate bond curve. The Company generally aggregates insurance contracts into groupings by issue year, product and segment for determining the net premium ratio and related LFPBs.

The Company reviews cash flow assumptions regularly, and if they change significantly, LFPBs are adjusted by determining a revised net premium ratio. The revised net premium ratio is calculated as of contract inception using both actual historical experience and updated future cash flow assumptions. The recalculated net premium ratio is applied to derive a remeasurement gain or loss recognized in current period net income. For insurance policies in-force as of December 31, 2020, January 1, 2021 is considered the contract inception date. The net premium ratio is also updated quarterly for the difference between actual and expected experience.

The net premium ratio is not updated for changes in discount rate assumptions, as changes in the discount rate are updated quarterly and the impacts are reflected in other comprehensive income (loss) (“OCI”). The discount rate assumption is determined by developing a yield curve based on market observable yields for upper-medium fixed income instruments derived from an external index. The yield curve is applied to the expected future cash flows used in the measurement of LFPBs based on the duration characteristics of those liabilities.

The most significant cash flow assumptions used in the establishment of LFPBs are mortality, policy lapses and market interest rates. See Note 4 for more information on the effect of changes in assumptions on the measurement of LFPBs.

The Company also establishes an LFPB for participating term and whole life insurance using a net premium ratio and the Company’s current assumptions of future cash flows. Assumptions are determined at issuance of the policy and are not updated unless a premium deficiency exists. A premium deficiency exists when the LFPB plus the present value of expected future gross premiums are less than expected future benefits and expenses (based on current assumptions). When a premium deficiency exists, the Company will reduce any deferred acquisition costs and may also establish an additional liability to eliminate the deficiency. See Note 4 for more information on assumptions used in establishing LFPBs related to participating term and whole life insurance.

Policyholder Account Balances

The Company establishes a policyholder account balance liability for customer deposits on universal life insurance, universal life insurance with secondary guarantees (“ULSG”) and deferred annuity contracts. The policyholder account balance liability is equal to the sum of deposits, plus interest credited, less charges and withdrawals, excluding the impact of any applicable charge that may be incurred upon surrender. The Company also holds additional liabilities for certain product features including secondary guarantees on universal life insurance contracts and the crediting rates associated with index-linked annuities.

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Brighthouse Financial, Inc.

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)

1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Additional Liabilities for ULSG

The Company establishes a liability in addition to the account balance for secondary guarantees on universal life insurance. These liabilities are determined by estimating the expected value of death benefits payable when the account balance is projected to be zero and recognizing those benefits ratably over the contract period based on total expected assessments. The benefits used in calculating the liabilities are based on the average benefits payable over a range of scenarios. The Company also maintains a liability for profits followed by losses on ULSG determined by projecting future earnings and establishing a liability to offset losses that are expected to occur in later years. Both ULSG liabilities are adjusted for the effects of unrealized investment gains and losses.

The Company reviews cash flow assumptions regularly, and, if they change significantly, the liability for secondary guarantees is adjusted by a cumulative charge or credit to net income. Liabilities for secondary guarantees are presented within future policy benefits with changes in the liabilities reported in policyholder benefits and claims, except for the effects of unrealized investment gains and losses, which are reported in OCI.

The most significant assumptions used in estimating liabilities for secondary guarantees are the general account rate of return, premium persistency, mortality and lapses. See Note 4 for more information on the effect of changes in assumptions on the measurement of liabilities for secondary guarantees.

Market Risk Benefits on Annuity Guarantees

Market risk benefits (“MRB”) are contracts or contract features that provide protection to the policyholder from capital markets risk by transferring such risks to the Company. MRBs are required to be separated from the deferred annuity host contract and measured at fair value. The Company establishes MRB assets and liabilities for guaranteed minimum benefits on variable annuity contracts including guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”), guaranteed minimum accumulation benefits (“GMAB”) and guaranteed minimum withdrawal benefits (“GMWB”). MRB assets are also established for reinsured benefits related to these guarantees. Certain index-linked annuity products may also have guaranteed minimum benefits classified as MRBs.

The measurement of fair value includes an adjustment for the risk that the Company fails to satisfy its obligations, which is referred to as nonperformance risk, as well as risk margin to capture the non-capital markets risks of the instrument which represents the additional compensation a market participant would require to assume the risks related to the uncertainties in certain actuarial assumptions. MRBs are measured at estimated fair value, with changes reported in change in MRBs on the consolidated statements of operations, except for the change due to nonperformance risk, which is reported in OCI.

See Note 4 for more information on the effect of changes in inputs and assumptions on the measurement of MRBs and Note 8 for more information on the determination of fair value of MRBs.

Embedded Derivatives on Index-Linked Annuities

The Company issues, and assumes through reinsurance, index-linked annuities which allow the policyholder to participate in returns from certain specified equity indices. The crediting rates associated with these features are classified as embedded derivatives and measured at estimated fair value, with changes in estimated fair value reported in net derivative gains (losses). These embedded derivatives are classified within policyholder account balances on the consolidated balance sheets.

Embedded derivative liabilities are required to be separated from the deferred annuity host contract and measured at fair value. The estimated fair value is determined using a combination of an option pricing model and an option-budget approach. Under this approach, the Company estimates the cost of funding the crediting rate using option pricing and establishes that cost on the balance sheet as a reduction to the initial deposit amount. The estimate of fair value includes an adjustment for nonperformance risk, as well as a risk margin.

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Brighthouse Financial, Inc.

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)

1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Actuarial assumptions are reviewed at least annually, and if they change significantly, the estimated fair value is adjusted through net income. Capital market inputs used in the measurement of index-linked crediting rate embedded derivatives are updated quarterly through net income. The reduction to the initial deposit is accreted back up to the initial deposit over the estimated life of the contract. Embedded derivatives related to index-linked annuities are presented within policyholder account balances while changes in the estimated fair value are reported in net derivative gains (losses).

For more information on the determination of estimated fair value of embedded derivatives, see Note 8.

Recognition of Revenues and Deposits on Insurance Contracts

Premiums related to traditional long-duration contracts are recognized as revenues when due from policyholders. When premiums for income annuities are due over a significantly shorter period than the period over which policyholder benefits are incurred, the Company establishes a deferred profit liability (“DPL”) for the excess of the gross premium over the net premium. DPLs are amortized into net income in proportion to the amount of expected future benefit payments. Assumptions used in the measurement of the DPL are updated at the same time as the related LFPBs, with the updated estimates used to recalculate the DPL as of contract inception. The remeasurement gain or loss from updating DPLs is recognized in current period net income along with the related change in LFPBs.

Deposits related to universal life insurance, deferred annuity contracts and investment contracts are credited to policyholder account balances. Revenues from such contracts consist of asset-based investment management fees, cost of insurance charges, risk charges, policy administration fees and surrender charges. These fees, which are included in universal life and investment-type product policy fees, are recognized when assessed to the contract holder, except for non-level insurance charges which are deferred by the establishment of an unearned revenue liability and amortized over the expected life of the contracts.

Premiums and policy fees are presented net of reinsurance.

Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles

The Company incurs significant costs in connection with acquiring new and renewal insurance business. Costs that are directly related to the successful acquisition or renewal of insurance contracts are capitalized as deferred policy acquisition costs (“DAC”). These costs mainly consist of commissions and include the portion of employees’ compensation and benefits related to time spent selling, underwriting or processing the issuance of new insurance contracts. All other acquisition-related costs are expensed as incurred.

Value of business acquired (“VOBA”) is an intangible asset resulting from a business combination that represents the excess of book value over the estimated fair value of acquired insurance, annuity and investment-type contracts in-force as of the acquisition date.

The Company amortizes DAC and VOBA in a manner that approximates a straight-line basis over the expected life of the related contracts. For life insurance contracts, amortization is based on projections of amounts of insurance in-force, while projections of policy counts are used for deferred annuity contracts and expected future benefits payments for income annuities. These assumptions are reviewed at least annually, and if they change significantly, updates are recognized through changes to future amortization. VOBA balances are tested annually to determine if the balance is deemed unrecoverable from expected future profits. All changes in DAC and VOBA balances are recorded to net income.

Periodically, the Company modifies product benefits, features, rights or coverages that occur by the exchange of an existing contract for a new contract, or by amendment, endorsement, or rider to a contract, or by election or coverage within a contract. If a modification is considered to have substantially changed the contract, the associated DAC or VOBA is written off immediately through net income and any new acquisition costs associated with the replacement contract are deferred. If the modification does not substantially change the contract, the DAC or VOBA amortization on the original contract will continue and any acquisition costs associated with the related modification are expensed.

The Company also has intangible assets representing deferred sales inducements (“DSI”) included in other assets and unearned revenue liabilities included in other policy-related balances. The Company defers sales inducements and unearned revenue and amortizes the balances using the same methodology and assumptions used to amortize DAC and VOBA.

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Brighthouse Financial, Inc.

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)

1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Adoption of New Accounting Pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASU”) to the FASB Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. Except as noted below, there were no significant ASUs adopted during the period ended March 31, 2023.

In March 2022, the FASB issued new guidance on Troubled Debt Restructurings (“TDR”) (ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures). This ASU eliminates TDR recognition and measurement guidance and, instead, requires that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. The Company adopted this guidance on January 1, 2023. This ASU was applied prospectively and did not have a material impact on the consolidated financial statements upon adoption but could change the future recognition and measurement of modified loans and other receivables.

In August 2018, the FASB issued new guidance on long-duration contracts (ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (“LDTI”)). LDTI is effective for fiscal years beginning after January 1, 2023. LDTI resulted in significant changes to the measurement, presentation and disclosure requirements for long-duration insurance contracts. A summary of the most significant changes is provided below:

(1) Guaranteed benefits associated with variable annuity and certain fixed annuity contracts have been classified and presented separately on the consolidated balance sheets as MRBs. MRBs are now measured at estimated fair value through net income and reported separately on the consolidated statements of operations, except for nonperformance risk changes, which will be recognized in OCI.

(2) Cash flow assumptions used to measure the liability for LFPBs on traditional long-duration contracts (including term and non-participating whole life insurance and immediate annuities) have been updated on an annual basis using a retrospective method. The resulting remeasurement gain or loss is now reported separately on the consolidated statements of operations along with the remeasurement gain or loss on universal life-type contract liabilities.

(3) The discount rate assumption used to measure the liability for traditional long-duration contracts is now based on an upper-medium grade fixed income yield, updated quarterly, with changes recognized in OCI.

(4) DAC for all insurance products are required to be amortized on a constant-level basis over the expected term of the contracts, using amortization methods that are not a function of revenue or profit emergence. Changes in assumptions used to amortize DAC have been recognized as a revision to future amortization amounts.

(5) There was a significant increase in required disclosures, including disaggregated rollforwards of insurance contract assets and liabilities supplemented by qualitative and quantitative information regarding the cash flows, assumptions, methods and judgements used to measure those balances.

The transition date was January 1, 2021. MRB changes were required to be applied on a retrospective basis, while the changes for insurance liability assumption updates and DAC amortization were applied to existing carrying amounts on the transition date.

The cumulative effect, on an after-tax basis, of the adoption of ASU 2018-12 as of the transition date was a $5.4 billion decrease to retained earnings and a $3.9 billion decrease to accumulated other comprehensive income (loss) (“AOCI”). See Note 2 for more detailed information on the impacts of the ASU to the Company’s financial statements.

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Brighthouse Financial, Inc.

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)

2. ASU 2018-12 Transition

The Company adopted ASU 2018-12 for LFPBs, DAC and other balances amortized on a basis consistent with DAC by applying the guidance to contracts in-force on the basis of their existing carrying amounts at the transition date. The Company adopted ASU 2018-12 for MRBs on a fully retrospective basis.

The effect of transition adjustments on stockholders’ equity at January 1, 2021 due to the adoption of ASU 2018-12 was as follows:


	Retained Earnings (Deficit)		AOCI
	(In millions)
Liability for future policy benefits	$	(436)	$	(2,073)
Market risk benefits and related adjustments	(6,237)		(3,454)
DAC and VOBA	—		520
Reinsurance recoverables	(141)		34
Deferred income tax asset	1,431		1,044
Total	$	(5,383)	$	(3,929)

For LFPBs, the transition adjustment to retained earnings relates to instances where net premiums exceed gross premiums resulting in LFPBs being increased to eliminate the premium deficiency. The premium deficiency primarily relates to structured settlement annuities. The transition adjustment related to AOCI represents the effect of the requirement to discount LFPBs based on an upper-medium grade fixed income rate as well as the removal of amounts previously recorded in AOCI for the effects of unrealized investment gains and losses.

For MRBs, the transition adjustment to AOCI relates to the cumulative effect of changes in the nonperformance risk between contract issue date and transition date. The remaining difference between the estimated fair value and carrying amount of MRBs at transition, excluding the amounts recorded in AOCI, was recorded as an adjustment to retained earnings as of the transition date.

For DAC and VOBA, the Company removed amounts previously recorded in AOCI for the effect of unrealized investment gains and losses.

For reinsurance, the adjustments to both retained earnings and AOCI were made to align the measurement of reinsurance recoverables with the related LFPBs.

The balances of and changes in LFPBs at January 1, 2021 due to the adoption of ASU 2018-12 were as follows:


	Term and Whole Life Insurance		Income Annuities		Structured Settlement and Pension Risk Transfer Annuities
	(In millions)
Balance at December 31, 2020	$	2,854	$	4,311	$	10,115
Removal of related balances in AOCI	—		(203)		(1,784)
Change in cash flow assumptions	14		(171)		200
Initial recognition of deferred profit liabilities	—		176		217
Change in discount rate assumptions	536		754		2,770
Adjusted balance at January 1, 2021	3,404		4,867