Brighthouse Financial Inc

We employ risk management strategies to mitigate the effects of severe market disruptions and other economic events on our business. These strategies currently include macro hedge programs that manage market risks across all products, hedging certain market risk exposures at the product level, and, to a lesser extent, reinsurance. Our risk management strategies focus on protecting the capital and surplus of our insurance subsidiaries, through the use of metrics aligned with regulatory capital requirements. We continually review our risk management strategies in the context of our overall capitalization targets as well as monitor the capital markets for opportunities to adjust our derivative positions to manage our market risk exposure, as appropriate.

A metric we utilize to manage our risk is the combined RBC ratio (“Combined RBC Ratio”), which 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 risk management strategy; it is not a metric required or used by regulators. Brighthouse Financial targets a Combined RBC Ratio of 400% to 450% in normal market conditions.

We manage our variable annuity and first generation Shield Annuity contracts together, consistent with how we determine statutory reserves and required capital. These products have natural risk offsets because our obligations under Shield Annuity contracts decrease in falling equity markets when variable annuity guarantee obligations increase, and our obligations under Shield Annuity contracts increase in rising equity markets when variable annuity guarantee obligations decrease. In managing the risks associated with this block, we continue to operate with a first loss position of no more than $500 million. The first loss position is relative to our target funding level, which is based on regulatory capital requirements.

We launched updated versions of our Shield Annuity products in 2024, which we manage and hedge on a standalone basis separately from our variable annuity and first generation Shield Annuity products.

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 strategies place 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 hedging strategy may not be effective, which may result in significant volatility in our profitability measures or may negatively affect our statutory capital” and “— Summary of Critical Accounting Estimates.”

Interest Rate Risk Management

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. Historically, we have managed interest rate exposure in aggregate across the Company, while also setting individual hedge targets for certain products such as ULSG, where the economics of the interest rate derivatives are ceded through reinsurance to BRCD. Our current macro hedge program is used to manage interest rate risk in aggregate, with rebalancing and trade executions determined by net exposure. By managing the interest rate exposure on a net basis, we expect to more efficiently manage the derivative portfolio, protect capital and reduce costs. Our interest rate hedge programs may also include hybrid options that have other risk exposure in addition to interest rate exposure.

The ULSG block, which is no longer actively sold, 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.

We seek to mitigate interest rate exposures associated with our ULSG business 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 $24.6 billion and $24.1 billion for the years ended December 31, 2024 and 2023, 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 prioritize the ULSG Target. 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 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, 2024, BRCD assets exceeded the ULSG CFT requirement.

Equity Risk Management

We are exposed to equity market risk from policyholder liabilities with long-term guarantees based on equity performance, with our most significant exposures found in crediting rates on Shield Annuities and variable annuity guarantees. We manage equity risk primarily through the use of product-specific hedging strategies and have a macro hedging program for managing residual equity risk. As discussed above, we have historically managed equity risk of variable annuities and Shield Annuities together, recognizing the natural risk offset between the two products.

In 2024, we launched updated versions of our Shield Annuity products, which we manage on a standalone basis separately from our variable annuity and first generation Shield Annuity products. As we write new business, we use equity derivatives that are intended to offset the embedded options related to the crediting rate in Shield Annuity contracts. Since it is not practical to hedge each policy individually, we may group individual policies into cohorts or use other industry methods to reduce the number of hedge trades.