Brighthouse Financial Inc

We employ risk management strategies to protect against capital markets risks specific to our variable annuity and ULSG businesses, which includes the utilization of a combined RBC ratio. Combined RBC ratio reflects the aggregate RBC ratio of our insurance subsidiaries, defined as aggregate TAC of our insurance subsidiaries divided by the total of their respective company action level RBCs. Combined RBC ratio is an internal metric used by the Company to manage the risk associated with its insurance products through our capital and exposure risk management program; it is not a metric required or used by regulators.

Interest Rate Hedging

We are exposed to interest rate risk in most of our products, with the more significant longer-dated exposure residing in our in-force variable annuity guarantees and ULSG business. We individually manage the interest rate risk in these two blocks with hedge targets based on statutory metrics designed principally to protect the capital of our largest insurance subsidiary, BLIC. Our interest rate hedge programs may also include hybrid options that have other risk exposure in addition to interest rate exposure.

The gross notional amount and estimated fair value of the derivatives hedging our in-force variable annuity guarantees and ULSG business viewed in aggregate in our interest rate hedging program were as follows at:

(1)The gross notional amounts presented do not necessarily represent the relative economic coverage provided by derivative instruments because certain positions were closed out by entering into offsetting positions that are not netted in the above table.

(2)Hybrid options have equity exposure in addition to interest rate exposure.

This aggregate view includes all interest rate derivatives used to manage the variable annuity and ULSG product exposures based on the hedge targets of the respective programs as of the balance sheet date. We intend to maintain an adequate amount of liquid investments in the investment portfolios supporting these businesses to cover any contingent collateral posting requirements from this hedging strategy.

Variable Annuity Exposure Risk Management

With the adoption of VA Reform, our management of, and our hedging strategy associated with, our variable annuity business aligns with the regulatory framework. Given this alignment and our large non-variable annuity business, among other things, we utilize a combined RBC ratio to manage the risk associated with our insurance products through our capital and exposure risk management program. In support of our target combined RBC ratio of 400% to 450% in normal market conditions, we expect to maintain a capital and exposure risk management program that targets total assets supporting our variable annuity contracts at or above the CTE98 level in normal market conditions. We refer to our target level of assets as our “Variable Annuity Target Funding Level.” With our risk management focus on the core drivers of our combined RBC ratio, we can also better manage our RBC in stressed market scenarios. See “Glossary” for the definition of CTE.

When setting our hedge target, we consider the fact that our obligations under Shield Annuity contracts decrease in falling equity markets when variable annuity guarantee obligations increase, and increase in rising equity markets when variable annuity guarantee obligations decrease. Shield Annuities are included with variable annuities in our statutory reserve requirements, as well as in our CTE estimates.

Our exposure risk management program seeks to mitigate the potential adverse effects of changes in capital markets, specifically equity markets and interest rates, on our Variable Annuity Target Funding Level, as well as on our statutory free cash flow. We utilize a combination of short-term and longer-term derivative instruments to establish a layered maturity of protection, which we believe will reduce rollover risk during periods of market disruption or higher volatility. We continually review our hedging strategy in the context of our overall capitalization targets and monitor the capital markets for opportunities to adjust our derivative positions to manage our variable annuity exposure, as appropriate.

Under this strategy, we plan to operate with a first loss position of no more than $500 million. The first loss position is relative to our Variable Annuity Target Funding Level such that the impact on reserves, and thus TAC, could be greater than the first loss position. However, under such a scenario there would be an offset in required statutory capital.

In addition, while recent amendments to the Valuation Manual, which became effective on December 31, 2023, changed the requirements for reflecting hedge instruments in reserves and capital, the key pillars of our hedging strategy (including our targeted combined RBC ratio in normal markets, our Variable Annuity Target Funding Level, and our first loss position) were not impacted by this new statutory requirement. See “Business — Regulation — Insurance Regulation — Statutory Accounting, Reserves and Risk-Based Capital” for more information regarding the new statutory requirement and the related impacts.

We believe the level of our capital protection provides us financial flexibility and supports deploying capital for growing long-term, sustainable shareholder value. However, because our hedging strategy places a lower priority on offsetting changes to GAAP liabilities, changes to markets over time, including market volatility, could result in GAAP net income volatility, which could potentially impact stockholders’ equity. See “Risk Factors — Risks Related to Our Business — Our variable annuity exposure risk management strategy may not be effective, may result in significant volatility in our profitability measures or may negatively affect our statutory capital” and “— Summary of Critical Accounting Estimates.”

The gross notional amount and estimated fair value of the derivatives held in our variable annuity hedging program were as follows at:

(1)The gross notional amounts presented do not necessarily represent the relative economic coverage provided by option instruments because certain positions were closed out by entering into offsetting positions that are not netted in the above table.

ULSG Market Risk Exposure Management

The ULSG block includes the business retained by our insurance subsidiaries and the portion of it that is ceded to BRCD for providing redundant, non-economic reinsurance financing support. The primary market risk associated with our ULSG block is the uncertainty around the future levels of U.S. interest rates and bond yields. To help ensure we have sufficient assets to meet future ULSG policyholder obligations, we have employed an actuarial approach based upon ULSG CFT to set our ULSG asset requirement target for BRCD, which reinsures the majority of the ULSG business written by our insurance subsidiaries. For the business retained by our insurance subsidiaries, we set our ULSG asset requirement target to equal the actuarially determined statutory reserves, which, taken together with our ULSG asset requirement target of BRCD, comprises our ULSG Target. Under the ULSG CFT approach, we assume that interest rates remain flat or lower than current levels and our actuarial assumptions include a provision for adverse deviation. These underlying assumptions used in ULSG CFT include scenarios that are more conservative than those required under GAAP, which assumes a long-term upward mean reversion of interest rates and best estimate actuarial assumptions without additional provisions for adverse deviation.

We seek to mitigate interest rate exposures associated with these liabilities by holding ULSG Assets to closely match our ULSG Target under different interest rate environments. “ULSG Assets” are defined as (i) total general account assets supporting statutory reserves and capital in the ULSG portfolios of our insurance subsidiaries and BRCD and (ii) interest rate derivative instruments to mitigate ULSG interest rate exposures.

The net statutory reserves for the ULSG business in our insurance subsidiaries and BRCD (which is in part supported by reinsurance financings) were $24.1 billion and $23.4 billion for the years ended December 31, 2023 and 2022, respectively.

Our ULSG Target is sensitive to the actual and future expected level of long-term U.S. interest rates. If interest rates fall, our ULSG Target increases. Likewise, if interest rates rise, our ULSG Target declines. The interest rate derivatives allocated to ULSG Assets prioritizes the ULSG Target (comprised of ULSG CFT and statutory considerations). This could increase the period-to-period volatility of net income and equity due to differences in the sensitivity of the ULSG Target and GAAP liabilities to the changes in interest rates.

We closely monitor the sensitivity of our ULSG Assets and ULSG Target to changes in interest rates. We seek to maintain ULSG Assets above the ULSG Target across a wide range of interest rate scenarios. At December 31, 2023, BRCD assets exceeded the ULSG CFT requirement. Maintaining ULSG Assets that closely match our ULSG Target supports our target combined RBC ratio of 400% to 450% in normal market conditions.