Brighthouse Life Insurance Co of Ny Earnings 2019-03-31
BHNY 10Q Quarterly Report
| Balance Sheet | Income Statement | Cash Flow |
|---|---|---|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2019
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from ___ to ___
Commission File Number: 000-55705
Brighthouse Life Insurance Company of NY
(Exact name of registrant as specified in its charter)
New York | 13-3690700 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
285 Madison Avenue, 14th Floor, New York, N.Y. | 10017 | |
(Address of principal executive offices) | (Zip Code) | |
(980) 365-7100
(Registrant’s telephone number, including area code)
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 þ | 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
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
As of May 9, 2019, 200,000 shares of the registrant’s common stock were outstanding, all of which were owned indirectly by Brighthouse Financial, Inc.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is, therefore, filing this Form 10-Q with the reduced disclosure format.
Table of Contents
Page | ||
Item 1. | Financial Statements (at March 31, 2019 (Unaudited) and December 31, 2018 and for the Three Months Ended March 31, 2019 and 2018 (Unaudited)): | |
Item 2. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 6. | ||
Part I — Financial Information
Item 1. Financial Statements
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Interim Condensed Balance Sheets
March 31, 2019 (Unaudited) and December 31, 2018
(In thousands, except share and per share data)
March 31, 2019 | December 31, 2018 | |||||||
Assets | ||||||||
Investments: | ||||||||
Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $2,623,070 and $2,469,801, respectively) | $ | 2,664,864 | $ | 2,433,633 | ||||
Mortgage loans (net of valuation allowances of $2,006 and $1,937, respectively) | 467,193 | 448,105 | ||||||
Other invested assets, principally at estimated fair value | 48,176 | 35,815 | ||||||
Total investments | 3,180,233 | 2,917,553 | ||||||
Cash and cash equivalents | 208,781 | 120,130 | ||||||
Accrued investment income | 22,784 | 20,605 | ||||||
Premiums, reinsurance and other receivables | 574,277 | 580,480 | ||||||
Deferred policy acquisition costs and value of business acquired | 178,073 | 185,586 | ||||||
Other assets | 33,133 | 37,348 | ||||||
Separate account assets | 4,559,757 | 4,268,423 | ||||||
Total assets | $ | 8,757,038 | $ | 8,130,125 | ||||
Liabilities and Stockholder's Equity | ||||||||
Liabilities | ||||||||
Future policy benefits | $ | 723,951 | $ | 718,599 | ||||
Policyholder account balances | 1,812,080 | 1,692,498 | ||||||
Other policy-related balances | 9,033 | 9,288 | ||||||
Payables for collateral under derivative transactions | 36,791 | 23,581 | ||||||
Current income tax payable | 1,804 | 1,755 | ||||||
Deferred income tax liability | 118,816 | 107,853 | ||||||
Other liabilities | 538,759 | 471,490 | ||||||
Separate account liabilities | 4,559,757 | 4,268,423 | ||||||
Total liabilities | 7,800,991 | 7,293,487 | ||||||
Contingencies, Commitments and Guarantees (Note 9) | ||||||||
Stockholder's Equity | ||||||||
Common stock, par value $10 per share; 200,000 shares authorized, issued and outstanding | 2,000 | 2,000 | ||||||
Additional paid-in capital | 490,931 | 415,931 | ||||||
Retained earnings (deficit) | 432,267 | 433,778 | ||||||
Accumulated other comprehensive income (loss) | 30,849 | (15,071 | ) | |||||
Total stockholder's equity | 956,047 | 836,638 | ||||||
Total liabilities and stockholder's equity | $ | 8,757,038 | $ | 8,130,125 | ||||
See accompanying notes to the interim condensed financial statements.
2
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Interim Condensed Statements of Operations and Comprehensive Income (Loss)
For the Three Months Ended March 31, 2019 and 2018 (Unaudited)
(In thousands)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Revenues | ||||||||
Premiums | $ | 9,032 | $ | 10,293 | ||||
Universal life and investment-type product policy fees | 23,250 | 25,986 | ||||||
Net investment income | 26,493 | 23,931 | ||||||
Other revenues | (20,323 | ) | (12,544 | ) | ||||
Net investment gains (losses) | (452 | ) | (2,355 | ) | ||||
Net derivative gains (losses) | (3,245 | ) | (44,262 | ) | ||||
Total revenues | 34,755 | 1,049 | ||||||
Expenses | ||||||||
Policyholder benefits and claims | 9,459 | (1,541 | ) | |||||
Interest credited to policyholder account balances | 8,258 | 9,232 | ||||||
Amortization of deferred policy acquisition costs and value of business acquired | 903 | (3,323 | ) | |||||
Other expenses | 18,890 | 15,727 | ||||||
Total expenses | 37,510 | 20,095 | ||||||
Income (loss) before provision for income tax | (2,755 | ) | (19,046 | ) | ||||
Provision for income tax expense (benefit) | (1,244 | ) | (4,676 | ) | ||||
Net income (loss) | $ | (1,511 | ) | $ | (14,370 | ) | ||
Comprehensive income (loss) | $ | 44,409 | $ | (44,660 | ) | |||
See accompanying notes to the interim condensed financial statements.
3
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Interim Condensed Statements of Stockholder’s Equity
For the Three Months Ended March 31, 2019 and 2018 (Unaudited)
(In thousands)
Common Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Total Stockholder’s Equity | |||||||||||||||
Balance at December 31, 2018 | $ | 2,000 | $ | 415,931 | $ | 433,778 | $ | (15,071 | ) | $ | 836,638 | ||||||||
Net income (loss) | (1,511 | ) | (1,511 | ) | |||||||||||||||
Capital contribution | 75,000 | 75,000 | |||||||||||||||||
Other comprehensive income (loss), net of income tax | 45,920 | 45,920 | |||||||||||||||||
Balance at March 31, 2019 | $ | 2,000 | $ | 490,931 | $ | 432,267 | $ | 30,849 | $ | 956,047 | |||||||||
Common Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Total Stockholder’s Equity | |||||||||||||||
Balance at December 31, 2017 | $ | 2,000 | $ | 415,931 | $ | 395,928 | $ | 29,628 | $ | 843,487 | |||||||||
Net income (loss) | (14,370 | ) | (14,370 | ) | |||||||||||||||
Other comprehensive income (loss), net of income tax | (30,290 | ) | (30,290 | ) | |||||||||||||||
Balance at March 31, 2018 | $ | 2,000 | $ | 415,931 | $ | 381,558 | $ | (662 | ) | $ | 798,827 | ||||||||
See accompanying notes to the interim condensed financial statements.
4
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Interim Condensed Statements of Cash Flows
For the Three Months Ended March 31, 2019 and 2018 (Unaudited)
(In thousands)
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Net cash provided by (used in) operating activities | $ | 3,673 | $ | 23,949 | |||
Cash flows from investing activities | |||||||
Sales, maturities and repayments of: | |||||||
Fixed maturity securities | 70,442 | 77,753 | |||||
Mortgage loans | 1,618 | 2,399 | |||||
Purchases of: | |||||||
Fixed maturity securities | (157,155 | ) | (141,218 | ) | |||
Mortgage loans | (22,322 | ) | (14,445 | ) | |||
Cash received in connection with freestanding derivatives | 23,716 | 212 | |||||
Cash paid in connection with freestanding derivatives | (2,827 | ) | (29,892 | ) | |||
Net change in short-term investments | 3 | (7,978 | ) | ||||
Net change in other invested assets | 6,943 | 425 | |||||
Net cash provided by (used in) investing activities | (79,582 | ) | (112,744 | ) | |||
Cash flows from financing activities | |||||||
Policyholder account balances: | |||||||
Deposits | 131,693 | 117,755 | |||||
Withdrawals | (55,343 | ) | (33,962 | ) | |||
Net change in payables for collateral under derivative transactions | 13,210 | 10,830 | |||||
Capital contribution | 75,000 | — | |||||
Net cash provided by (used in) financing activities | 164,560 | 94,623 | |||||
Change in cash, cash equivalents and restricted cash | 88,651 | 5,828 | |||||
Cash, cash equivalents and restricted cash, beginning of period | 120,130 | 86,154 | |||||
Cash, cash equivalents and restricted cash, end of period | $ | 208,781 | $ | 91,982 | |||
Supplemental disclosures of cash flow information | |||||||
Net cash paid (received) for: | |||||||
Income tax | $ | — | $ | 4 | |||
See accompanying notes to the interim condensed financial statements.
5
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies
Business
“BHNY” and the “Company” refer to Brighthouse Life Insurance Company of NY, a New York domiciled life insurance company. Brighthouse Life Insurance Company of NY is a wholly-owned subsidiary of Brighthouse Life Insurance Company, which is an indirect wholly-owned subsidiary of Brighthouse Financial, Inc. (“BHF” together with its subsidiaries and affiliates, “Brighthouse Financial”). The Company is licensed to transact business in the state of New York.
BHNY markets and/or administers traditional life, universal life, variable annuity and fixed annuity products to individuals. The Company is organized into two segments: Annuities; and Life. In addition, the Company reports certain of its results of operations in Corporate & Other.
In 2016, MetLife, Inc. (together with its subsidiaries and affiliates, “MetLife”) announced its plan to pursue the separation of a substantial portion of its former U.S. retail business (the “Separation”). In connection with the Separation, 80.8% of MetLife, Inc.’s interest in BHF was distributed to holders of MetLife, Inc.’s common stock. On June 14, 2018, MetLife, Inc. divested its remaining shares of BHF common stock (the “MetLife Divestiture”). As a result, MetLife, Inc. and its subsidiaries and affiliates are no longer considered related parties subsequent to the MetLife Divestiture.
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 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.
Reclassifications
Certain amounts in the prior year periods’ interim condensed financial statements and related footnotes thereto have been reclassified to conform with the 2019 presentation as may be discussed throughout the Notes to the Interim Condensed Financial Statements.
Since the Company is a member of a controlled group of affiliated companies, its results may not be indicative of those of a stand-alone entity.
The accompanying interim condensed financial statements are unaudited and reflect all adjustments (including normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented in conformity with GAAP. Interim results are not necessarily indicative of full year performance. The December 31, 2018 balance sheet data was derived from audited financial statements included in BHNY’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Annual Report”), which include all disclosures required by GAAP. Therefore, these interim condensed financial statements should be read in conjunction with the financial statements of the Company included in the 2018 Annual Report.
Adoption of New Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are not expected to have a material impact on the Company’s financial statements. There were no ASUs adopted during the first quarter of 2019 which had a material impact on the Company’s financial statements.
6
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
ASUs issued but not yet adopted as of March 31, 2019 are summarized in the table below.
Standard | Description | Effective Date | Impact on Financial Statements |
ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts | The amendments to Topic 944 will result in significant changes to the accounting for long-duration insurance contracts. These changes (1) require all guarantees that qualify as market risk benefits to be measured at fair value, (2) require more frequent updating of assumptions and modify existing discount rate requirements for certain insurance liabilities, (3) modify the methods of amortization for deferred acquisition costs, and (4) require new qualitative and quantitative disclosures around insurance contract asset and liability balances and the judgments, assumptions and methods used to measure those balances. | January 1, 2021 using a modified retrospective method for the new market risk benefit guidance and prospective methods for the increased frequency of updating assumptions, the new discount rate requirements and deferred policy acquisition costs (“DAC”) amortization changes. Early adoption is permitted. | The Company is in the early stages of evaluating the new guidance and therefore is unable to estimate the impact to its financial statements. The most significant impact will be the measurement of liabilities for variable annuity guarantees. |
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments | The amendments to Topic 326 replace the incurred loss impairment methodology for certain financial instruments with one that reflects expected credit losses based on historical loss information, current conditions, and reasonable and supportable forecasts. The new guidance also requires that an other-than- temporary impairment (“OTTI”) on a debt security will be recognized as an allowance going forward, such that improvements in expected future cash flows after an impairment will no longer be reflected as a prospective yield adjustment through net investment income, but rather a reversal of the previous impairment and recognized through realized investment gains and losses. | January 1, 2020 using the modified retrospective method (with early adoption permitted beginning January 1, 2019) | The Company is currently evaluating the impact of this guidance on its financial statements, with the most significant impact expected to be earlier recognition of credit losses on mortgage loan investments. |
7
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
2. Segment Information
The Company is organized into two segments: Annuities and Life. In addition, the Company reports certain of its results of operations in Corporate & Other.
Annuities
The Annuities segment consists of a variety of variable, fixed, index-linked and income annuities designed to address contract holders’ needs for protected wealth accumulation on a tax-deferred basis, wealth transfer and income security.
Life
The Life segment consists of insurance products and services, including term, whole and universal life products designed to address policyholders’ needs for financial security and protected wealth transfer, which may be provided on a tax-advantaged basis.
Corporate & Other
Corporate & Other contains the excess capital not allocated to the segments and expenses associated with certain legal proceedings and income tax audit issues. Corporate & Other also includes the elimination of intersegment amounts and a portion of MetLife’s former U.S. insurance business sold direct to consumers, which is no longer being offered for new sales.
Financial Measures and Segment Accounting Policies
Adjusted earnings is a financial measure used by management to evaluate performance, allocate resources and facilitate comparisons to industry results. Consistent with GAAP guidance for segment reporting, adjusted earnings is also used to measure segment performance. The Company believes the presentation of adjusted earnings, as the Company measures it for management purposes, enhances the understanding of its performance by highlighting the results of operations and the underlying profitability drivers of the business. Adjusted earnings should not be viewed as a substitute for net income (loss).
Adjusted earnings, which may be positive or negative, focuses on the Company’s primary businesses principally by excluding the impact of market volatility, which could distort trends.
The following are significant items excluded from total revenues, net of income tax, in calculating adjusted earnings:
• | Net investment gains (losses); |
• | Net derivative gains (losses) except earned income on derivatives and amortization of premium on derivatives that are hedges of investments or that are used to replicate certain investments, but do not qualify for hedge accounting treatment; and |
• | Certain variable annuity guaranteed minimum income benefits (“GMIBs”) fees (“GMIB Fees”) and amortization of unearned revenue related to net investment gains (losses) and net derivative gains (losses). |
The following are significant items excluded from total expenses, net of income tax, in calculating adjusted earnings:
• | Amounts associated with benefits and hedging costs related to GMIBs (“GMIB Costs”); |
• | Amounts associated with periodic crediting rate adjustments based on the total return of a contractually referenced pool of assets and market value adjustments associated with surrenders or terminations of contracts (“Market Value Adjustments”); and |
• | Amortization of DAC and value of business acquired related to: (i) net investment gains (losses), (ii) net derivative gains (losses), (iii) GMIB Fees and GMIB Costs and (iv) Market Value Adjustments. |
The tax impact of the adjustments mentioned above is calculated net of the statutory tax rate, which could differ from the Company’s effective tax rate.
Set forth in the tables below is certain financial information with respect to the Company’s segments, as well as Corporate & Other, for the three months ended March 31, 2019 and 2018 and at March 31, 2019 and December 31, 2018. The segment accounting policies are the same as those used to prepare the Company’s condensed financial statements, except for the adjustments to calculate adjusted earnings described above. In addition, segment accounting policies include the methods of capital allocation described below.
8
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
2. Segment Information (continued)
Segment investment and capitalization targets are based on statutory oriented risk principles and metrics. Segment invested assets backing liabilities are based on net statutory liabilities plus excess capital. For the variable annuity business, the excess capital held is based on the target statutory total asset requirement consistent with the Company’s variable annuity risk management strategy. For insurance businesses other than variable annuities, excess capital held is based on a percentage of required statutory risk-based capital. Assets in excess of those allocated to the segments, if any, are held in Corporate & Other. Segment net investment income reflects the performance of each segment’s respective invested assets.
Operating Results | ||||||||||||||||
Three Months Ended March 31, 2019 | Annuities | Life | Corporate & Other | Total | ||||||||||||
(In thousands) | ||||||||||||||||
Pre-tax adjusted earnings | $ | (4,979 | ) | $ | (4,256 | ) | $ | (553 | ) | $ | (9,788 | ) | ||||
Provision for income tax expense (benefit) | (1,468 | ) | (894 | ) | (359 | ) | (2,721 | ) | ||||||||
Adjusted earnings | $ | (3,511 | ) | $ | (3,362 | ) | $ | (194 | ) | (7,067 | ) | |||||
Adjustments for: | ||||||||||||||||
Net investment gains (losses) | (452 | ) | ||||||||||||||
Net derivative gains (losses) | (3,245 | ) | ||||||||||||||
Other adjustments to net income | 10,730 | |||||||||||||||
Provision for income tax (expense) benefit | (1,477 | ) | ||||||||||||||
Net income (loss) | $ | (1,511 | ) | |||||||||||||
Interest revenue | $ | 17,772 | $ | 8,304 | $ | 509 | ||||||||||
Operating Results | ||||||||||||||||
Three Months Ended March 31, 2018 | Annuities | Life | Corporate & Other | Total | ||||||||||||
(In thousands) | ||||||||||||||||
Pre-tax adjusted earnings | $ | 5,430 | $ | 8,014 | $ | 2,262 | $ | 15,706 | ||||||||
Provision for income tax expense (benefit) | 657 | 1,683 | 281 | 2,621 | ||||||||||||
Adjusted earnings | $ | 4,773 | $ | 6,331 | $ | 1,981 | 13,085 | |||||||||
Adjustments for: | ||||||||||||||||
Net investment gains (losses) | (2,355 | ) | ||||||||||||||
Net derivative gains (losses) | (44,262 | ) | ||||||||||||||
Other adjustments to net income | 11,865 | |||||||||||||||
Provision for income tax (expense) benefit | 7,297 | |||||||||||||||
Net income (loss) | $ | (14,370 | ) | |||||||||||||
Interest revenue | $ | 14,803 | $ | 8,839 | $ | 371 | ||||||||||
9
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
2. Segment Information (continued)
The following table presents total revenues with respect to the Company’s segments, as well as Corporate & Other:
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
(In thousands) | |||||||
Annuities | $ | 21,887 | $ | 27,638 | |||
Life | 12,647 | 15,696 | |||||
Corporate & Other | 670 | 1,024 | |||||
Adjustments | (449 | ) | (43,309 | ) | |||
Total | $ | 34,755 | $ | 1,049 | |||
The following table presents total assets with respect to the Company’s segments, as well as Corporate & Other, at:
March 31, 2019 | December 31, 2018 | ||||||
(In thousands) | |||||||
Annuities | $ | 7,539,919 | $ | 7,034,394 | |||
Life | 1,124,314 | 1,083,641 | |||||
Corporate & Other | 92,805 | 12,090 | |||||
Total | $ | 8,757,038 | $ | 8,130,125 | |||
3. Insurance
Guarantees
As discussed in Notes 1 and 3 of the Notes to the Financial Statements included in the 2018 Annual Report, the Company issues variable annuity contracts with guaranteed minimum benefits. Guaranteed minimum accumulation benefits (“GMABs”), the non-life contingent portion of guaranteed minimum withdrawal benefits (“GMWBs”) and certain portions of GMIBs that do not require the policyholder to annuitize are accounted for as embedded derivatives in policyholder account balances and are further discussed in Note 5.
Information regarding the Company’s guarantee exposure was as follows at:
March 31, 2019 | December 31, 2018 | ||||||||||||||||
In the Event of Death | At Annuitization | In the Event of Death | At Annuitization | ||||||||||||||
(Dollars in thousands) | |||||||||||||||||
Annuity Contracts (1), (2) | |||||||||||||||||
Variable Annuity Guarantees | |||||||||||||||||
Total account value (3) | $ | 4,564,444 | $ | 3,703,604 | $ | 4,274,326 | $ | 3,483,668 | |||||||||
Separate account value | $ | 4,557,551 | $ | 3,702,932 | $ | 4,266,520 | $ | 3,482,829 | |||||||||
Net amount at risk | $ | 22,344 | (4) | $ | 211,888 | (5) | $ | 193,102 | (4) | $ | 274,632 | (5) | |||||
Average attained age of contract holders | 68 years | 67 years | 67 years | 67 years | |||||||||||||
______________
(1) | The Company’s annuity contracts with guarantees may offer more than one type of guarantee in each contract. Therefore, the amounts listed above may not be mutually exclusive. |
(2) | Includes direct business, but excludes offsets from hedging or reinsurance, if any. Therefore, the net amount at risk presented reflects the economic exposures of living and death benefit guarantees associated with variable annuities, but not necessarily their impact on the Company. See Note 5 of the Notes to the Financial Statements included in the 2018 Annual Report for a discussion of guaranteed minimum benefits which have been reinsured. |
(3) | Includes the contract holder’s investments in the general account and separate account, if applicable. |
10
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
3. Insurance (continued)
(4) | Defined as the death benefit less the total account value, as of the balance sheet date. It represents the amount of the claim that the Company would incur if death claims were filed on all contracts on the balance sheet date and includes any additional contractual claims associated with riders purchased to assist with covering income taxes payable upon death. |
(5) | Defined as the amount (if any) that would be required to be added to the total account value to purchase a lifetime income stream, based on current annuity rates, equal to the minimum amount provided under the guaranteed benefit. This amount represents the Company’s potential economic exposure to such guarantees in the event all contract holders were to annuitize on the balance sheet date, even though the contracts contain terms that allow annuitization of the guaranteed amount only after the 10th anniversary of the contract, which not all contract holders have achieved. |
4. Investments
See Note 1 of the Notes to the Financial Statements included in the 2018 Annual Report for a description of the Company’s accounting policies for investments and Note 6 for information about the fair value hierarchy for investments and the related valuation methodologies.
Fixed Maturity Securities Available-for-sale (“AFS”)
Fixed Maturity Securities AFS by Sector
The following table presents the fixed maturity securities AFS by sector at:
March 31, 2019 | December 31, 2018 | ||||||||||||||||||||||||||||||||||||||
Amortized Cost | Gross Unrealized | Estimated Fair Value | Amortized Cost | Gross Unrealized | Estimated Fair Value | ||||||||||||||||||||||||||||||||||
Gains | Temporary Losses | OTTI Losses | Gains | Temporary Losses | OTTI Losses | ||||||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: (1) | |||||||||||||||||||||||||||||||||||||||
U.S. corporate | $ | 916,754 | $ | 21,416 | $ | 7,539 | $ | — | $ | 930,631 | $ | 890,676 | $ | 5,402 | $ | 23,034 | $ | — | $ | 873,044 | |||||||||||||||||||
U.S. government and agency | 504,101 | 15,524 | 4,269 | — | 515,356 | 511,255 | 9,961 | 13,697 | — | 507,519 | |||||||||||||||||||||||||||||
Foreign corporate | 374,509 | 6,641 | 7,194 | — | 373,956 | 368,149 | 1,473 | 17,258 | — | 352,364 | |||||||||||||||||||||||||||||
CMBS | 336,322 | 7,335 | 1,216 | — | 342,441 | 325,491 | 1,481 | 4,121 | — | 322,851 | |||||||||||||||||||||||||||||
RMBS | 315,454 | 6,879 | 1,973 | — | 320,360 | 200,827 | 4,643 | 2,882 | — | 202,588 | |||||||||||||||||||||||||||||
ABS | 83,618 | 262 | 489 | — | 83,391 | 79,806 | 158 | 1,133 | — | 78,831 | |||||||||||||||||||||||||||||
State and political subdivision | 65,995 | 6,168 | 70 | — | 72,093 | 66,131 | 4,777 | 1,083 | — | 69,825 | |||||||||||||||||||||||||||||
Foreign government | 26,317 | 692 | 373 | — | 26,636 | 27,466 | 140 | 995 | — | 26,611 | |||||||||||||||||||||||||||||
Total fixed maturity securities | $ | 2,623,070 | $ | 64,917 | $ | 23,123 | $ | — | $ | 2,664,864 | $ | 2,469,801 | $ | 28,035 | $ | 64,203 | $ | — | $ | 2,433,633 | |||||||||||||||||||
__________________
(1) | Redeemable preferred stock is reported within foreign corporate fixed maturity securities. Included within fixed maturity securities are structured securities including residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and asset-backed securities (“ABS”) (collectively, “Structured Securities”). |
The Company did not hold non-income producing fixed maturity securities at both March 31, 2019 and December 31, 2018.
Maturities of Fixed Maturity Securities
The amortized cost and estimated fair value of fixed maturity securities, by contractual maturity date, were as follows at March 31, 2019:
Due in One Year or Less | Due After One Year Through Five Years | Due After Five Years Through Ten Years | Due After Ten Years | Structured Securities | Total Fixed Maturity Securities | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Amortized cost | $ | 56,296 | $ | 342,812 | $ | 898,149 | $ | 590,419 | $ | 735,394 | $ | 2,623,070 | |||||||||||
Estimated fair value | $ | 56,866 | $ | 344,578 | $ | 906,709 | $ | 610,519 | $ | 746,192 | $ | 2,664,864 | |||||||||||
11
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
4. Investments (continued)
Actual maturities may differ from contractual maturities due to the exercise of call or prepayment options. Fixed maturity securities not due at a single maturity date have been presented in the year of final contractual maturity. Structured Securities are shown separately, as they are not due at a single maturity.
Continuous Gross Unrealized Losses for Fixed Maturity Securities AFS by Sector
The following table presents the estimated fair value and gross unrealized losses of fixed maturity securities AFS in an unrealized loss position, aggregated by sector and by length of time that the securities have been in a continuous unrealized loss position at:
March 31, 2019 | December 31, 2018 | ||||||||||||||||||||||||||||||
Less than 12 Months | Equal to or Greater than 12 Months | Less than 12 Months | Equal to or Greater than 12 Months | ||||||||||||||||||||||||||||
Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||
Fixed maturity securities: | |||||||||||||||||||||||||||||||
U.S. corporate | $ | 54,218 | $ | 1,415 | $ | 213,094 | $ | 6,124 | $ | 483,424 | $ | 15,849 | $ | 131,812 | $ | 7,185 | |||||||||||||||
U.S. government and agency | — | — | 264,905 | 4,269 | 102,447 | 1,925 | 296,265 | 11,772 | |||||||||||||||||||||||
Foreign corporate | 68,008 | 3,251 | 102,547 | 3,943 | 194,924 | 10,156 | 72,803 | 7,102 | |||||||||||||||||||||||
CMBS | 8,975 | 58 | 67,525 | 1,158 | 119,412 | 1,909 | 44,775 | 2,212 | |||||||||||||||||||||||
RMBS | 72,806 | 130 | 46,591 | 1,843 | 57,510 | 1,746 | 28,573 | 1,136 | |||||||||||||||||||||||
ABS | 39,489 | 389 | 11,104 | 100 | 51,028 | 985 | 11,699 | 148 | |||||||||||||||||||||||
State and political subdivision | 6,175 | 25 | 7,815 | 45 | 18,260 | 744 | 13,999 | 339 | |||||||||||||||||||||||
Foreign government | 10,645 | 373 | — | — | 7,435 | 716 | 6,782 | 279 | |||||||||||||||||||||||
Total fixed maturity securities | $ | 260,316 | $ | 5,641 | $ | 713,581 | $ | 17,482 | $ | 1,034,440 | $ | 34,030 | $ | 606,708 | $ | 30,173 | |||||||||||||||
Total number of securities in an unrealized loss position | 108 | 181 | 364 | 146 | |||||||||||||||||||||||||||
Evaluation of AFS Securities for OTTI and Evaluating Temporarily Impaired AFS Securities
Evaluation and Measurement Methodologies
Management considers a wide range of factors about the security issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations used in the impairment evaluation process include, but are not limited to: (i) the length of time and the extent to which the estimated fair value has been below amortized cost; (ii) the potential for impairments when the issuer is experiencing significant financial difficulties; (iii) the potential for impairments in an entire industry sector or sub-sector; (iv) the potential for impairments in certain economically depressed geographic locations; (v) the potential for impairments where the issuer, series of issuers or industry has suffered a catastrophic loss or has exhausted natural resources; (vi) whether the Company has the intent to sell or will more likely than not be required to sell a particular security before the decline in estimated fair value below amortized cost recovers; (vii) with respect to Structured Securities, changes in forecasted cash flows after considering the quality of underlying collateral, expected prepayment speeds, current and forecasted loss severity, consideration of the payment terms of the underlying assets backing a particular security, and the payment priority within the tranche structure of the security; (viii) the potential for impairments due to weakening of foreign currencies on non-functional currency denominated fixed maturity securities that are near maturity; and (ix) other subjective factors, including concentrations and information obtained from regulators and rating agencies.
12
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
4. Investments (continued)
For securities in an unrealized loss position, an OTTI is recognized in earnings when it is anticipated that the amortized cost will not be recovered. When either: (i) the Company has the intent to sell the security; or (ii) it is more likely than not that the Company will be required to sell the security before recovery, the OTTI recognized in earnings is the entire difference between the security’s amortized cost and estimated fair value. If neither of these conditions exists, the difference between the amortized cost of the security and the present value of projected future cash flows expected to be collected is recognized as an OTTI in earnings (“credit loss”). If the estimated fair value is less than the present value of projected future cash flows expected to be collected, this portion of OTTI related to other-than-credit factors (“noncredit loss”) is recorded in other comprehensive income (“OCI”).
Current Period Evaluation
Based on the Company’s current evaluation of its AFS securities in an unrealized loss position in accordance with its impairment policy, and the Company’s current intentions and assessments (as applicable to the type of security) about holding, selling and any requirements to sell these securities, the Company concluded that these securities were not other-than-temporarily impaired at March 31, 2019.
Gross unrealized losses on fixed maturity securities decreased $41.1 million during the three months ended March 31, 2019 to $23.1 million. The decrease in gross unrealized losses for the three months ended March 31, 2019 was primarily attributable to decreasing longer-term interest rates and narrowing credit spreads.
At March 31, 2019, $940 thousand of the total $23.1 million of gross unrealized losses were from one fixed maturity security with an unrealized loss position of 20% or more of amortized cost for six months or greater.
Mortgage Loans
Mortgage Loans by Portfolio Segment
Mortgage loans are summarized as follows at:
March 31, 2019 | December 31, 2018 | ||||||||||||
Carrying Value | % of Total | Carrying Value | % of Total | ||||||||||
(Dollars in thousands) | |||||||||||||
Mortgage loans: | |||||||||||||
Commercial | $ | 319,650 | 68.4 | % | $ | 310,681 | 69.3 | % | |||||
Agricultural | 149,549 | 32.0 | 139,361 | 31.1 | |||||||||
Subtotal | 469,199 | 100.4 | 450,042 | 100.4 | |||||||||
Valuation allowances (1) | (2,006 | ) | (0.4 | ) | (1,937 | ) | (0.4 | ) | |||||
Total mortgage loans, net | $ | 467,193 | 100.0 | % | $ | 448,105 | 100.0 | % | |||||
__________________
(1) | The valuation allowances were primarily from collective evaluation (non-specific loan related). |
Information on commercial and agricultural mortgage loans is presented in the tables below.
13
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
4. Investments (continued)
Valuation Allowance Methodology
Mortgage loans are considered to be impaired when it is probable that, based upon current information and events, the Company will be unable to collect all amounts due under the loan agreement. Specific valuation allowances are established using the same methodology for both portfolio segments as the excess carrying value of a loan over either (i) the present value of expected future cash flows discounted at the loan’s original effective interest rate, (ii) the estimated fair value of the loan’s underlying collateral if the loan is in the process of foreclosure or otherwise collateral dependent, or (iii) the loan’s observable market price. A common evaluation framework is used for establishing non-specific valuation allowances for both loan portfolio segments; however, a separate non-specific valuation allowance is calculated and maintained for each loan portfolio segment that is based on inputs unique to each loan portfolio segment. Non-specific valuation allowances are established for pools of loans with similar risk characteristics where a property-specific or market-specific risk has not been identified, but for which the Company expects to incur a credit loss. These evaluations are based upon several loan portfolio segment-specific factors, including the Company’s experience for loan losses, defaults and loss severity, and loss expectations for loans with similar risk characteristics. These evaluations are revised as conditions change and new information becomes available.
Credit Quality of Commercial Mortgage Loans
The credit quality of commercial mortgage loans was as follows at:
Recorded Investment | ||||||||||||||||||
Debt Service Coverage Ratios | % of Total | |||||||||||||||||
> 1.20x | 1.00x - 1.20x | < 1.00x | Total | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||||
March 31, 2019 | ||||||||||||||||||
Loan-to-value ratios: | ||||||||||||||||||
Less than 65% | $ | 277,674 | $ | 5,000 | $ | 13,448 | $ | 296,122 | 92.7 | % | ||||||||
65% to 75% | 19,240 | — | — | 19,240 | 6.0 | |||||||||||||
76% to 80% | 4,288 | — | — | 4,288 | 1.3 | |||||||||||||
Total | $ | 301,202 | $ | 5,000 | $ | 13,448 | $ | 319,650 | 100.0 | % | ||||||||
December 31, 2018 | ||||||||||||||||||
Loan-to-value ratios: | ||||||||||||||||||
Less than 65% | $ | 273,681 | $ | 5,000 | $ | 13,447 | $ | 292,128 | 94.0 | % | ||||||||
65% to 75% | 14,257 | — | — | 14,257 | 4.6 | |||||||||||||
76% to 80% | 4,296 | — | — | 4,296 | 1.4 | |||||||||||||
Total | $ | 292,234 | $ | 5,000 | $ | 13,447 | $ | 310,681 | 100.0 | % | ||||||||
Credit Quality of Agricultural Mortgage Loans
The credit quality of agricultural mortgage loans was as follows at:
March 31, 2019 | December 31, 2018 | ||||||||||||
Recorded Investment | % of Total | Recorded Investment | % of Total | ||||||||||
(Dollars in thousands) | |||||||||||||
Loan-to-value ratios: | |||||||||||||
Less than 65% | $ | 141,731 | 94.8 | % | $ | 133,884 | 96.1 | % | |||||
65% to 75% | 7,818 | 5.2 | 5,477 | 3.9 | |||||||||
Total | $ | 149,549 | 100.0 | % | $ | 139,361 | 100.0 | % | |||||
14
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
4. Investments (continued)
Past Due, Nonaccrual and Modified Mortgage Loans
The Company has a high quality, well performing mortgage loan portfolio, with all mortgage loans classified as performing at both March 31, 2019 and December 31, 2018. The Company defines delinquency consistent with industry practice, when mortgage loans are past due as follows: commercial mortgage loans — 60 days and agricultural mortgage loans — 90 days. The Company had no commercial or agricultural mortgage loans past due and no commercial or agricultural mortgage loans in nonaccrual status at either March 31, 2019 or December 31, 2018. During both the three months ended March 31, 2019 and 2018, the Company did not have any mortgage loans modified in a troubled debt restructuring.
Cash Equivalents
The carrying value of cash equivalents, which includes securities and other investments with an original or remaining maturity of three months or less at the time of purchase, was $0 and $89.9 million at March 31, 2019 and December 31, 2018, respectively.
Net Unrealized Investment Gains (Losses)
Unrealized investment gains (losses) on fixed maturity securities and the effect on DAC, deferred sales inducements (“DSI”) and future policy benefits, that would result from the realization of the unrealized gains (losses), are included in net unrealized investment gains (losses) in accumulated other comprehensive income (“AOCI”).
The components of net unrealized investment gains (losses), included in AOCI, were as follows:
March 31, 2019 | December 31, 2018 | ||||||
(In thousands) | |||||||
Fixed maturity securities | $ | 41,793 | $ | (36,166 | ) | ||
Derivatives | 4,756 | 5,791 | |||||
Subtotal | 46,549 | (30,375 | ) | ||||
Amounts allocated from: | |||||||
DAC and DSI | (7,500 | ) | 11,299 | ||||
Deferred income tax benefit (expense) | (8,200 | ) | 4,005 | ||||
Net unrealized investment gains (losses) | $ | 30,849 | $ | (15,071 | ) | ||
The changes in net unrealized investment gains (losses) were as follows:
Three Months Ended March 31, 2019 | |||
(In thousands) | |||
Balance, December 31, 2018 | $ | (15,071 | ) |
Unrealized investment gains (losses) during the period | 76,924 | ||
Unrealized investment gains (losses) relating to: | |||
DAC and DSI | (18,799 | ) | |
Deferred income tax benefit (expense) | (12,205 | ) | |
Balance, March 31, 2019 | $ | 30,849 | |
Change in net unrealized investment gains (losses) | $ | 45,920 | |
Concentrations of Credit Risk
There were no investments in any counterparty that were greater than 10% of the Company’s equity, other than the U.S. government and its agencies, at both March 31, 2019 and December 31, 2018.
15
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
4. Investments (continued)
Invested Assets on Deposit and Pledged as Collateral
Invested assets on deposit and pledged as collateral are presented below at estimated fair value:
March 31, 2019 | December 31, 2018 | ||||||
(In thousands) | |||||||
Invested assets on deposit (regulatory deposits) | $ | 1,530 | $ | 1,482 | |||
Invested assets pledged as collateral (1) | 8,652 | 158 | |||||
Total invested assets on deposit and pledged as collateral (2) | $ | 10,182 | $ | 1,640 | |||
__________________
(1) | The Company has pledged invested assets in connection with derivative transactions (see Note 5). |
(2) | The Company held no restricted cash at both March 31, 2019 and December 31, 2018. |
Variable Interest Entities
The Company has invested in legal entities that are variable interest entities (“VIEs”). VIEs are consolidated when the investor is the primary beneficiary. A primary beneficiary is the variable interest holder in a VIE with both the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and the obligation to absorb losses, or the right to receive benefits that could potentially be significant to the VIE.
There were no material VIEs for which the Company has concluded that it is the primary beneficiary at March 31, 2019 or December 31, 2018.
The Company’s investments in unconsolidated VIEs are described below.
Fixed Maturity Securities
The Company invests in U.S. corporate bonds, foreign corporate bonds, and Structured Securities issued by VIEs. The Company is not obligated to provide any financial or other support to these VIEs, other than the original investment. The Company’s involvement with these entities is limited to that of a passive investor. The Company has no unilateral right to appoint or remove the servicer, special servicer, or investment manager, which are generally viewed as having the power to direct the activities that most significantly impact the economic performance of the VIE, nor does the Company function in any of these roles. The Company does not have the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the entity; as a result, the Company has determined it is not the primary beneficiary, or consolidator, of the VIE. The Company’s maximum exposure to loss on these fixed maturity securities is limited to the amortized cost of these investments. See “— Fixed Maturity Securities AFS” for information on these securities.
March 31, 2019 | December 31, 2018 | ||||||||||||||
Carrying Amount | Maximum Exposure to Loss | Carrying Amount | Maximum Exposure to Loss | ||||||||||||
(In thousands) | |||||||||||||||
Fixed maturity securities | $ | 489,002 | $ | 480,919 | $ | 409,699 | $ | 409,699 | |||||||
16
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
4. Investments (continued)
Net Investment Income
The components of net investment income were as follows:
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
(In thousands) | |||||||
Investment income: | |||||||
Fixed maturity securities | $ | 22,913 | $ | 20,365 | |||
Mortgage loans | 3,899 | 4,191 | |||||
Cash, cash equivalents and short-term investments | 387 | 158 | |||||
Other | 350 | 96 | |||||
Subtotal | 27,549 | 24,810 | |||||
Less: Investment expenses | 1,056 | 879 | |||||
Net investment income | $ | 26,493 | $ | 23,931 | |||
See “— Related Party Investment Transactions” for discussion of related party investment expenses.
Net Investment Gains (Losses)
Components of Net Investment Gains (Losses)
The components of net investment gains (losses) were as follows:
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
(In thousands) | |||||||
Fixed maturity securities | $ | (468 | ) | $ | (2,839 | ) | |
Mortgage loans | (69 | ) | (82 | ) | |||
Other | 85 | 566 | |||||
Total net investment gains (losses) | $ | (452 | ) | $ | (2,355 | ) | |
Gains (losses) from foreign currency transactions included within net investment gains (losses) were $10 thousand and $414 thousand for the three months ended March 31, 2019 and 2018, respectively.
Sales or Disposals of Fixed Maturity Securities
Investment gains and losses on sales of securities are determined on a specific identification basis. Proceeds from sales or disposals of fixed maturity securities and the components of fixed maturity securities net investment gains (losses) were as shown in the table below.
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
(In thousands) | |||||||
Proceeds | $ | 55,477 | $ | 53,561 | |||
Gross investment gains | $ | 150 | $ | 15 | |||
Gross investment losses | (618 | ) | (2,854 | ) | |||
Net investment gains (losses) | $ | (468 | ) | $ | (2,839 | ) | |
17
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
4. Investments (continued)
Related Party Investment Transactions
The Company receives investment administrative services from MetLife Investment Advisors, LLC, which was considered a related party investment manager until the completion of the MetLife Divestiture. The related investment administrative service charges were $0 and $766 thousand for the three months ended March 31, 2019 and 2018, respectively. All of the charges reported as related party activity in 2018 occurred prior to the MetLife Divestiture. See Note 1 regarding the MetLife Divestiture.
5. Derivatives
Accounting for Derivatives
Freestanding Derivatives
Freestanding derivatives are carried on the Company’s balance sheet either as assets within other invested assets or as liabilities within other liabilities at estimated fair value. The Company does not offset the estimated fair value amounts recognized for derivatives executed with the same counterparty under the same master netting agreement.
If a derivative is not designated as an accounting hedge or its use in managing risk does not qualify for hedge accounting, changes in the estimated fair value of the derivative are reported in net derivative gains (losses).
Hedge Accounting
The Company primarily designates derivatives as a hedge of a forecasted transaction or a variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). When a derivative is designated as a cash flow hedge and is determined to be highly effective, changes in fair value are recorded in OCI and subsequently reclassified into the statement of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item.
To qualify for hedge accounting, at the inception of the hedging relationship, the Company formally documents its risk management objective and strategy for undertaking the hedging transaction, as well as its designation of the hedge. In its hedge documentation, the Company sets forth how the hedging instrument is expected to hedge the designated risks related to the hedged item and sets forth the method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and at least quarterly throughout the life of the designated hedging relationship.
The Company discontinues hedge accounting prospectively when: (i) it is determined that the derivative is no longer highly effective in offsetting changes in the cash flows of a hedged item; (ii) the derivative expires, is sold, terminated, or exercised; (iii) it is no longer probable that the hedged forecasted transaction will occur; or (iv) the derivative is de-designated as a hedging instrument.
When hedge accounting is discontinued because it is determined that the derivative is not highly effective in offsetting changes in the cash flows of a hedged item, the derivative continues to be carried on the balance sheet at its estimated fair value, with changes in estimated fair value recognized in net derivative gains (losses). Provided the hedged forecasted transaction is still probable of occurrence, the changes in estimated fair value of derivatives recorded in OCI related to discontinued cash flow hedges are released into the statement of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item.
In all other situations in which hedge accounting is discontinued, the derivative is carried at its estimated fair value on the balance sheet, with changes in its estimated fair value recognized in the current period as net derivative gains (losses).
Embedded Derivatives
The Company sells variable and index-linked annuities and is a party to certain reinsurance agreements that have embedded derivatives. The Company assesses each identified embedded derivative to determine whether it is required to be bifurcated and measured at fair value, separately from the host contract. The Company bifurcates embedded derivatives when a separate instrument with the same terms as the embedded derivative would qualify as a derivative instrument, the terms of the embedded derivative are not clearly and closely related to the economic characteristics of the host contract and the underlying contract is not already measured at estimated fair value with changes recorded in earnings.
18
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
5. Derivatives (continued)
See “— Future Policy Benefit Liabilities and Policyholder Account Balances”, “— Index-Linked Annuities” and “— Reinsurance” in the Note 1 of the Notes to the Financial Statements included in the 2018 Annual Report for additional information on the accounting policies for embedded derivatives bifurcated from variable annuity and reinsurance host contracts.
Derivative Strategies
The Company is exposed to various risks relating to its ongoing business operations, including interest rate, foreign currency exchange rate, credit and equity market. The Company uses a variety of strategies to manage these risks, including the use of derivatives.
Derivatives are financial instruments with values derived from interest rates, foreign currency exchange rates, credit spreads and/or other financial indices. Derivatives may be exchange-traded or contracted in the over-the-counter (“OTC”) market. Certain of the Company’s OTC derivatives are bilateral contracts between two counterparties (“OTC-bilateral”). The types of derivatives the Company uses include swaps and option contracts.
Interest Rate Derivatives
The Company purchases interest rate caps to protect against rises in long-term interest rates. The Company utilizes interest rate caps in nonqualifying hedging relationships.
Foreign Currency Exchange Rate Derivatives
The Company uses foreign currency swaps to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets denominated in foreign currencies.
In a foreign currency swap transaction, the Company agrees with another party to exchange, at specified intervals, the difference between one currency and another at a fixed exchange rate, generally set at inception, calculated by reference to an agreed upon notional amount. The notional amount of each currency is exchanged at the inception and termination of the currency swap by each party. The Company utilizes foreign currency swaps in cash flow and nonqualifying hedging relationships.
Equity Derivatives
The Company uses equity index options to reduce exposure to rising equity markets associated with fixed annuities with equity indexed returns. The Company utilizes equity index options in nonqualifying hedging relationships.
Primary Risks Managed by Derivatives
The following table presents the primary underlying risk exposure, gross notional amount, and estimated fair value of the Company’s derivatives, excluding embedded derivatives, held at:
March 31, 2019 | December 31, 2018 | ||||||||||||||||||||||||
Primary Underlying Risk Exposure | Gross Notional Amount | Estimated Fair Value | Gross Notional Amount | Estimated Fair Value | |||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | ||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||
Derivatives Designated as Hedging Instruments: | |||||||||||||||||||||||||
Cash flow hedges: | |||||||||||||||||||||||||
Foreign currency swaps | Foreign currency exchange rate | $ | 83,513 | $ | 4,563 | $ | 130 | $ | 82,704 | $ | 5,649 | $ | 187 | ||||||||||||
Derivatives Not Designated or Not Qualifying as Hedging Instruments: | |||||||||||||||||||||||||
Interest rate caps | Interest rate | 800,000 | 4,772 | — | 800,000 | 9,284 | — | ||||||||||||||||||
Foreign currency swaps | Foreign currency exchange rate | 17,892 | 3,191 | 96 | 28,133 | 3,395 | 144 | ||||||||||||||||||
Equity index options | Equity market | 2,307,473 | 35,487 | 9,969 | 2,154,321 | 10,389 | 96 | ||||||||||||||||||
Total non-designated or nonqualifying derivatives | 3,125,365 | 43,450 | 10,065 | 2,982,454 | 23,068 | 240 | |||||||||||||||||||
Total | $ | 3,208,878 | $ | 48,013 | $ | 10,195 | $ | 3,065,158 | $ | 28,717 | $ | 427 | |||||||||||||
19
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
5. Derivatives (continued)
The following tables present the amount and location of gains (losses) recognized for derivatives and gains (losses) pertaining to hedged items presented in net derivative gains (losses):
Net Derivative Gains (Losses) Recognized for Derivatives (1), (4) | Net Derivative Gains (Losses) Recognized for Hedged Items (2), (4) | Net Investment Income (5) | Amount of Gains (Losses) deferred in AOCI | ||||||||||||
(In thousands) | |||||||||||||||
Three Months Ended March 31, 2019 | |||||||||||||||
Derivatives Designated as Hedging Instruments: | |||||||||||||||
Cash flow hedges (3): | |||||||||||||||
Foreign currency exchange rate derivatives | $ | — | $ | — | $ | 270 | $ | (1,035 | ) | ||||||
Total cash flow hedges | — | — | 270 | (1,035 | ) | ||||||||||
Derivatives Not Designated or Not Qualifying as Hedging Instruments: | |||||||||||||||
Interest rate derivatives | (4,512 | ) | — | — | — | ||||||||||
Foreign currency exchange rate derivatives | (36 | ) | 88 | — | — | ||||||||||
Equity derivatives | 36,116 | — | — | — | |||||||||||
Embedded derivatives | (34,901 | ) | — | — | — | ||||||||||
Total non-qualifying hedges | (3,333 | ) | 88 | — | — | ||||||||||
Total | $ | (3,333 | ) | $ | 88 | $ | 270 | $ | (1,035 | ) | |||||
Three Months Ended March 31, 2018 | |||||||||||||||
Derivatives Designated as Hedging Instruments: | |||||||||||||||
Cash flow hedges (3): | |||||||||||||||
Foreign currency exchange rate derivatives | $ | 6 | $ | — | $ | 186 | $ | (2,674 | ) | ||||||
Total cash flow hedges | 6 | — | 186 | (2,674 | ) | ||||||||||
Derivatives Not Designated or Not Qualifying as Hedging Instruments: | |||||||||||||||
Interest rate derivatives | (4,002 | ) | — | — | — | ||||||||||
Foreign currency exchange rate derivatives | (972 | ) | 152 | — | — | ||||||||||
Equity derivatives | (8,736 | ) | — | — | — | ||||||||||
Embedded derivatives | (30,710 | ) | — | — | — | ||||||||||
Total non-qualifying hedges | (44,420 | ) | 152 | — | — | ||||||||||
Total | $ | (44,414 | ) | $ | 152 | $ | 186 | $ | (2,674 | ) | |||||
______________
(1) | Includes gains (losses) reclassified from AOCI primarily for terminated cash flow hedges. |
(2) | Includes foreign currency transaction gains (losses) on hedged items in cash flow and nonqualifying hedging relationships. |
(3) | All components of each derivative's gain or loss were included in the assessment of hedge effectiveness. |
(4) | Total net derivative gains (losses) were ($3.2) million and ($44.3) million for the three months ended March 31, 2019 and 2018 respectively. |
(5) | Total net investment income was ($452) thousand and ($2.4) million for the three months ended March 31, 2019 and 2018 respectively. |
At March 31, 2019 and December 31, 2018, the balance in AOCI associated with foreign currency swaps designated and qualifying as cash flow hedges was $4.8 million and $5.8 million, respectively.
20
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
5. Derivatives (continued)
Counterparty Credit Risk
The Company may be exposed to credit-related losses in the event of nonperformance by its counterparties to derivatives. Generally, the current credit exposure of the Company’s derivatives is limited to the net positive estimated fair value of derivatives at the reporting date after taking into consideration the existence of master netting or similar agreements and any collateral received pursuant to such agreements.
The Company manages its credit risk related to derivatives by entering into transactions with creditworthy counterparties and establishing and monitoring exposure limits. The Company’s OTC-bilateral derivative transactions are generally governed by International Swaps and Derivatives Association, Inc. (“ISDA”) Master Agreements which provide for legally enforceable set-off and close-out netting of exposures to specific counterparties in the event of early termination of a transaction, which includes, but is not limited to, events of default and bankruptcy. In the event of an early termination, the Company is permitted to set off receivables from the counterparty against payables to the same counterparty arising out of all included transactions. Substantially all of the Company’s ISDA Master Agreements also include Credit Support Annex provisions which require both the pledging and accepting of collateral in connection with its OTC-bilateral derivatives.
See Note 6 for a description of the impact of credit risk on the valuation of derivatives.
The estimated fair values of the Company’s net derivative assets and net derivative liabilities after the application of master netting agreements and collateral were as follows at:
March 31, 2019 | December 31, 2018 | |||||||||||||||
Derivatives Subject to a Master Netting Arrangement or a Similar Arrangement | Assets | Liabilities | Assets | Liabilities | ||||||||||||
(In thousands) | ||||||||||||||||
Gross estimated fair value of derivatives: | ||||||||||||||||
OTC-bilateral (1) | $ | 48,331 | $ | 10,160 | $ | 29,006 | $ | 411 | ||||||||
Total gross estimated fair value of derivatives (1) | 48,331 | 10,160 | 29,006 | 411 | ||||||||||||
Amounts offset on the balance sheets | — | — | — | — | ||||||||||||
Estimated fair value of derivatives presented on the balance sheets (1) | 48,331 | 10,160 | 29,006 | 411 | ||||||||||||
Gross amounts not offset on the balance sheets: | ||||||||||||||||
Gross estimated fair value of derivatives: (2) | ||||||||||||||||
OTC-bilateral | (3,825 | ) | (3,825 | ) | (365 | ) | (365 | ) | ||||||||
Cash collateral: (3) | ||||||||||||||||
OTC-bilateral | (34,235 | ) | — | (23,197 | ) | — | ||||||||||
Securities collateral: (4) | ||||||||||||||||
OTC-bilateral | (2,875 | ) | (6,335 | ) | (2,212 | ) | (46 | ) | ||||||||
Net amount after application of master netting agreements and collateral | $ | 7,396 | $ | — | $ | 3,232 | $ | — | ||||||||
______________
(1) | At March 31, 2019 and December 31, 2018, derivative assets included income or (expense) accruals reported in accrued investment income or in other liabilities of $318 thousand and $289 thousand, respectively, and derivative liabilities included (income) or expense accruals reported in accrued investment income or in other liabilities of ($35) thousand and ($16) thousand, respectively. |
(2) | Estimated fair value of derivatives is limited to the amount that is subject to set-off and includes income or expense accruals. |
(3) | Cash collateral received is included in cash and cash equivalents or in short-term investments, and the obligation to return it is included in payables for collateral transactions on the balance sheet. The amount of cash collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements. At March 31, 2019 and December 31, 2018, the Company received excess cash collateral of $2.6 million and $384 thousand, respectively, and did not provide any excess cash collateral, which is not included in the table above due to the foregoing limitation. |
21
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
5. Derivatives (continued)
(4) | Securities collateral received by the Company is held in separate custodial accounts and is not recorded on the balance sheet. Subject to certain constraints, the Company is permitted by contract to sell or re-pledge this collateral, but at March 31, 2019, none of the collateral had been sold or re-pledged. Securities collateral pledged by the Company is reported in fixed maturity securities on the balance sheet. Subject to certain constraints, the counterparties are permitted by contract to sell or re-pledge this collateral. The amount of securities collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements and cash collateral. At March 31, 2019 and December 31, 2018, the Company received excess securities collateral with an estimated fair value of $3.9 million and $78 thousand, respectively, and provided excess securities collateral with an estimated fair value of $2.3 million and $112 thousand, respectively, for its OTC-bilateral derivatives. |
The Company’s collateral arrangements for its OTC-bilateral derivatives generally require the counterparty in a net liability position, after considering the effect of netting agreements, to pledge collateral when the amount owed by that counterparty reaches a minimum transfer amount. In addition, the Company’s netting agreements for derivatives contain provisions that require both the Company and the counterparty to maintain a specific investment grade credit rating from each of Moody’s Investors Service and Standard & Poor’s Global Ratings 500 Index. If a party’s financial strength or credit ratings were to fall below that specific investment grade credit rating, that party would be in violation of these provisions, and the other party to the derivatives could terminate the transactions and demand immediate settlement and payment based on such party’s reasonable valuation of the derivatives.
At March 31, 2019 and December 31, 2018, the Company held OTC-bilateral derivatives that are in a net liability position after considering the effect of netting agreements with an estimated fair value of $6.3 million and $46 thousand, respectively. At March 31, 2019 and December 31, 2018, the Company provided collateral with an estimated fair value of $8.7 million and $158 thousand, respectively. The Company’s collateral agreements require both parties to be fully collateralized, as such, the Company would not be required to post additional collateral as a result of a downgrade in its financial strength rating.
Embedded Derivatives
The Company issues certain insurance contracts that contain embedded derivatives that are required to be separated from their host contracts and measured at fair value. These host contracts principally include: variable annuities with guaranteed minimum benefits, including GMWBs, GMABs and certain GMIBs; related party ceded reinsurance of guaranteed minimum benefits related to GMWBs, GMABs and certain GMIBs; and fixed annuities with equity-indexed returns.
The following table presents the estimated fair value and balance sheet location of the Company’s embedded derivatives that have been separated from their host contracts at:
Balance Sheet Location | March 31, 2019 | December 31, 2018 | |||||||
(In thousands) | |||||||||
Embedded derivatives within asset host contracts: | |||||||||
Ceded guaranteed minimum benefits | Premiums, reinsurance and other receivables | $ | 295,107 | $ | 298,112 | ||||
Embedded derivatives within liability host contracts: | |||||||||
Direct guaranteed minimum benefits | Policyholder account balances | $ | (33,520 | ) | $ | (18,811 | ) | ||
Fixed annuities with equity indexed returns | Policyholder account balances | 66,887 | 5,617 | ||||||
Embedded derivatives within liability host contracts | $ | 33,367 | $ | (13,194 | ) | ||||
22
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
5. Derivatives (continued)
The following table presents changes in estimated fair value related to embedded derivatives:
Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
(In thousands) | |||||||
Net derivative gains (losses) (1), (2) | $ | (34,901 | ) | $ | (30,710 | ) | |
______________
(1) | The valuation of direct guaranteed minimum benefits includes a nonperformance risk adjustment. The amounts included in net derivative gains (losses) in connection with this adjustment were ($3.4) million and ($1.1) million for the three months ended March 31, 2019, and 2018, respectively. In addition, the valuation of ceded guaranteed minimum benefits includes a nonperformance risk adjustment. The amounts included in net derivative gains (losses) in connection with this adjustment were $19.8 million and ($600) thousand for the three months ended March 31, 2019 and 2018, respectively. |
(2) | See Note 10 for discussion of related party net derivative gains (losses). |
23
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
6. Fair Value
Considerable judgment is often required in interpreting market data to develop estimates of fair value, and the use of different assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.
Recurring Fair Value Measurements
The assets and liabilities measured at estimated fair value on a recurring basis and their corresponding placement in the fair value hierarchy, are presented below. Investments that do not have a readily determinable fair value and are measured at net asset value (or equivalent) as a practical expedient to estimated fair value are excluded from the fair value hierarchy.
March 31, 2019 | |||||||||||||||