Index to Management's Discussion and Analysis of Financial Condition and Results of Operations Page Overview 39 Regulatory Developments 40 Summary of Critical Accounting Estimates 40 Non-GAAP Financial Disclosures 41 Results of Operations 43 Note Regarding Forward-Looking Statements 45 39
-------------------------------------------------------------------------------- Table of Contents For purposes of this discussion, "BHNY," the "Company," "we," "our" and "us" refer to
Brighthouse Life Insurance Companyof NY. BHNY is an indirect wholly-owned subsidiary of Brighthouse Financial, Inc. ("BHF" and together with its subsidiaries, "Brighthouse Financial"). This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with (i) the Interim Condensed Financial Statements and related notes included elsewhere herein; (ii) our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the U.S. Securities and Exchange Commission("SEC") on March 3, 2022(the "2021 Annual Report"); (iii) our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022(the "First Quarter Form 10-Q") filed with the SECon May 12, 2022; and (iv) our current reports on Form 8-K filed in 2022.
BHNY is a
New Yorkstock life insurance company licensed to do business only in the state of New York. We market or administer a range of annuity and life insurance products to individuals and deliver our products through multiple independent distribution channels and marketing arrangements with a diverse network of distribution partners. We are organized into two segments: Annuities and Life. In addition, we report certain of our results of operations in Corporate & Other. See "Business - Segments and Corporate & Other" included in our 2021 Annual Report, as well as Note 2 of the Notes to the Interim Condensed Financial Statements for further information regarding our segments and Corporate & Other.
We continue to closely monitor developments related to the COVID-19 pandemic, which has negatively impacted us in certain respects. At this time, it continues to not be possible to estimate (i) the severity or duration of the pandemic, including the severity, duration and frequency of any additional "waves" or emerging variants of COVID-19 or (ii) the efficacy or utilization of any therapeutic treatments and vaccines for COVID-19 or variants thereof. It likewise remains not possible to predict or estimate the longer-term effects of the pandemic, or any actions taken to contain or address the pandemic, on the economy at large and on our business, financial condition, results of operations and prospects, including the impact on our investment portfolio and our ratings, or the need for us in the future to revisit or revise any targets we may provide to the markets or any aspects of our business model. See "Business - Regulation," "Risk Factors - Risks Related to Our Business - The ongoing COVID-19 pandemic could materially adversely affect our business, financial condition and results of operations, including our capitalization and liquidity" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview - COVID-19 Pandemic" included in our 2021 Annual Report.
We are domiciled in
New Yorkand regulated by the New York State Department of Financial Services. We are regulated primarily at the state level, with some products and services also subject to federal regulation. In addition, BHNY is subject to regulation under the insurance holding company laws of various U.S.jurisdictions. Furthermore, some of our operations, products and services are subject to the Employee Retirement Income Security Act of 1974, consumer protection laws, securities, broker-dealer and investment advisor regulations, as well as environmental and unclaimed property laws and regulations. See "Business - Regulation," as well as "Risk Factors - Regulatory and Legal Risks" included in our 2021 Annual Report, as amended or supplemented by our subsequent Quarterly Reports under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Developments."
Summary of Critical Accounting Estimates
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 Financial Statements.
The most critical estimates include those used to determine:
•liabilities for future policy benefits;
•the amortization of deferred acquisition costs (“DAC”);
• the estimated fair values of stand-alone derivatives and the recognition and
the estimated fair value of embedded derivatives requiring bifurcation; and
•assessment of income taxes and assessment of deferred tax assets.
In applying our accounting policies, we make subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance 40
and financial services industries; others are specific to our business and
operations. Actual results could differ from these estimates.
The above critical accounting estimates are described in the
Discussion and analysis of financial position and results of operations –
Summary of Critical Accounting Estimates” and Note 1 of the Notes to
Financial statements included in our 2021 annual report.
Non-GAAP Financial Information
Our definitions of non-GAAP financial measures may differ from those used by
the other companies.
Adjusted Earnings In this report, we present adjusted earnings as a measure of our performance that is not calculated in accordance with GAAP. Adjusted earnings is used by management to evaluate performance and facilitate comparisons to industry results. We believe the presentation of adjusted earnings, as the Company measures it for management purposes, enhances the understanding of our performance by contract holders by highlighting the results of operations and the underlying profitability drivers of our business. Adjusted earnings should not be viewed as a substitute for net income (loss), which is the most directly comparable financial measure calculated in accordance with GAAP. See "- Results of Operations" for a reconciliation of adjusted earnings to net income (loss). Adjusted earnings, which may be positive or negative, focuses on our primary businesses by excluding the impact of market volatility, which could distort trends.
The following are significant items excluded from total revenue in the calculation
•Net investment gains (losses);
• Net gains (losses) on derivatives, excluding earned income and amortization of premiums
on derivatives which are investment hedges or which are used to replicate
certain investments, but do not qualify for hedge accounting treatment
(“Investment Hedge Adjustments”); and
• Certain Variable Annuity Guaranteed Minimum Income (“GMIB”) benefit charges
The following are significant items excluded from the total expenses in the calculation
• Amounts Associated with GMIB Benefits (“GMIB Costs”);
• Amounts associated with periodic credit rate adjustments based on total
return of a contractually referenced pool of assets (“Market Value
Adjustments” ); and
• Amortization of DAC related to (i) net investment gains (losses), (ii)
derivative gains (losses) and (iii) GMIB fees and GMIB costs.
The tax impact of the adjustments mentioned above is calculated net of the
statutory tax rate, which may differ from our effective tax rate.
We present adjusted earnings in a manner consistent with management’s view of
the main business activities that drive the profitability of our core business
businesses. The following table illustrates how each component of
the profit is calculated from the line items of the GAAP income statement:
Component of Adjusted Earnings How Derived from GAAP (1) (i) Fee income (i) Universal life and investment-type product policy fees (excluding (a) unearned revenue adjustments related to net investment gains (losses) and net derivative gains (losses) and (b) GMIB Fees) plus Other revenues and amortization of deferred gain on reinsurance. (ii) Net investment spread (ii) Net investment income plus Investment Hedge Adjustments and interest received on ceded fixed annuity reinsurance deposit funds reduced by Interest credited to policyholder
account balances and interest on future benefits of the contract.
Insurance-related activities (iii) Premiums less Policyholder benefits and claims (excluding (a) GMIB Costs, (b) Market Value Adjustments, (c) interest on future policy benefits and (d) amortization of deferred gain on reinsurance) plus the pass through of performance of ceded separate account assets. (iv) Amortization of DAC (iv) Amortization of DAC (excluding amounts related to (a) net investment gains (losses), (b) net derivative gains (losses) and (c) GMIB Fees and GMIB Costs). (v) Other expenses, net of DAC capitalization (v)
Other expenses reduced by the capitalization of DAC.
Provision for income tax expense (benefit) (vi)
Tax impact of the above items.
(1) Items in italics indicate income statement items under GAAP.
Consistent with GAAP guidance for segment reporting, adjusted earnings is also our GAAP measure of segment performance. Accordingly, we report adjusted earnings by segment in Note 2 of the Notes to the Interim Condensed Financial Statements. 42
Results for the half-year ended
Unless otherwise noted, all amounts in the following discussions of our results of operations are stated before income tax except for adjusted earnings, which are presented net of income tax. Six Months Ended June 30, 2022 2021 (In millions) Revenues Premiums
$ 4 $ 6Universal life and investment-type product policy fees 47 52 Net investment income 88 76 Other revenues (43) (49) Net investment gains (losses) (9) - Net derivative gains (losses) (84) (56) Total revenues 3 29 Expenses Policyholder benefits and claims 17
Interest credited to policyholder account balances 25 24 Capitalization of DAC (29) (30) Amortization of DAC 20 (2) Other expenses 65 70 Total expenses 98 48 Income (loss) before provision for income tax (95)
Provision for income tax expense (benefit) (22) (6) Net income (loss)
$ (73) $ (13)
The components of net income (loss) were as follows:
Six Months Ended June 30, 2022 2021 (In millions) GMLB Riders
$ (97) $ (11)Other derivative instruments 6 1 Net investment gains (losses) (9) - Other adjustments - (2) Pre-tax adjusted earnings 5 (7) Income (loss) before provision for income tax (95)
Provision for income tax expense (benefit) (22) (6) Net income (loss)
$ (73) $ (13)
Loss before provision for income tax was
$95 million( $73 million, net of income tax), a higher loss of $76 million( $60 million, net of income tax) from a loss before provision for income tax of $19 million( $13 million, net of income tax) in the prior period.
The increase in the loss before provision for income taxes is explained by the following items
unfavorable net items:
•a net unfavorable change in guaranteed minimum living benefits ("GMLB") riders ("GMLB Riders") from lower relative equity markets and higher interest rates resulting in:
•the unfavorable change in the estimated fair value of our GMLB hedges;
• adverse changes in the estimated fair value of the variable annuity liability
• unfavorable evolution of the GMLB DAC;
partially offset by
• favorable change in the estimated fair value of the embedded derivative
liabilities associated with Shield Level Annuities (“Shield”); and
•the favorable trend in ceded reinsurance.
The increase in loss before provision for income taxes was partially offset by
higher adjusted pre-tax profits, as discussed in more detail below.
The provision for income tax resulted in an effective tax rate of 23% in the current period compared to 32% in the prior period. The decrease in the effective tax rate was driven by higher pre-tax adjusted earnings, as discussed in greater detail below. Our effective tax rate differs from the statutory tax rate primarily due to the impacts of the dividends received deduction and tax credits.
Reconciliation of Net Earnings (Loss) to Adjusted Earnings
The reconciliation of net income (loss) to adjusted earnings was as follows: Six Months Ended June 30, 2022 2021 (In millions) Net income (loss)
$ (73) $ (13)Add: Provision for income tax expense (benefit) (22)
Income (loss) before provision for income tax (95)
Less: GMLB Riders (97)
Less: Other derivative instruments 6
Less: Net investment gains (losses) (9) - Less: Other adjustments - (2) Pre-tax adjusted earnings 5 (7) Less: Provision for income tax expense (benefit) (1) (3) Adjusted earnings
$ 6 $ (4)
Results for the half-year ended
The components of adjusted earnings were as follows:
Six Months Ended June 30, 2022 2021 (In millions) Fee income
$ 61 $ 66Net investment spread 53 42 Insurance-related activities (55) (47) Amortization of DAC (18) (28) Other expenses, net of DAC capitalization (36) (40) Pre-tax adjusted earnings 5 (7) Provision for income tax expense (benefit) (1) (3) Adjusted earnings $ 6 $ (4)
Adjusted profit was
The main positive impacts were:
• higher net investment gap due to higher average invested assets resulting
positive net flows from the general account; and
• lower DAC amortization due to lower equity market performance
resulting in favorable changes to our Shield business.
The main adverse impacts were:
• higher costs associated with insurance-related activities driven by higher salaries
claims, net of reinsurance; and
• lower asset-based fees resulting from lower average separate account balances,
part of which is offset in other expenses.
The income tax provision resulted in an effective tax rate of 20% at
current period compared to 43% for the previous period. Our effective tax rate
differs from the statutory tax rate primarily due to the impacts of
dividends benefited from a deduction and tax credits.
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, financial projections, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, as well as trends in operating and financial results. 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 BHNY. 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
effectiveness of our actuarial models;
•the impact on earnings, capitalization and share capital and greater
the volatility of our results due to warranties on some of our products;
•the impact of the ongoing COVID-19 pandemic;
•the potential material adverse effect of changes in accounting standards, practices or policies applicable to us, including changes in the accounting for long-duration contracts;
• the loss of business and other negative impacts resulting from a decommissioning or
the potential downgrade of our financial strength ratings;
•the availability of reinsurance and the ability of counterparties to our
reinsurance or indemnification agreements to perform their obligations
•heightened competition, including with respect to service, product features, scale, price, actual or perceived financial strength, claims-paying ratings, financial strength ratings, e-business capabilities and name recognition;
• our ability to market and distribute our products through the distribution
• any failure of third parties to provide the services we require, any failure of the
practices and procedures of such third parties and any inability to obtain
information or assistance we need from third parties;
•risks related to climate change;
•the negative impact on policyholder claims liabilities due to
extreme mortality events;
•the impact of adverse capital and credit market conditions, including with
with respect to our ability to meet liquidity needs and access capital;
•the impact of economic conditions on capital markets and the
the world economy, as well as geopolitical events, military actions or
catastrophic events, on our investment portfolio, including on the achievements and
unrealized losses and impairments, net investment gap and net investment
•the impact of events that adversely affect issuers, guarantors or collateral relating to our investments or our derivatives counterparties, on impairments, valuation allowances, reserves, net investment income and changes in unrealized gain or loss positions;
• the impact of regulatory changes and supervisory and enforcement policies
about our insurance business or other operations;
• the potential negative tax impact of possible future tax legislation
this could make some of our products less attractive to consumers;
•the effectiveness of our risk management policies and procedures;
•the loss or disclosure of confidential information, damage to our reputation and impairment of our ability to conduct business effectively as a result of any failure in cyber- or other information security systems; •whether all or any portion of the tax consequences of our separation from MetLife, Inc. (together with its subsidiaries and affiliates, "MetLife") are not as expected, leading to material additional taxes or material adverse consequences to tax attributes that impact us;
• uncertainty as to the outcome of any litigation with MetLife regarding tax matters or
other matters and agreements or disagreements regarding MetLife or our
obligations under our other agreements; and
• other factors described in this report and from time to time in documents that
we file with the
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 in our 2021 Annual Report, particularly in the sections entitled "Risk Factors" and "Quantitative and Qualitative Disclosures About Market Risk," as well as in our other subsequent filings with the
SEC. 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.