Document
 
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 September 30, 2018
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: 001-37905
 
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12533758&doc=13
Brighthouse Financial, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
81-3846992
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
11225 North Community House Road, Charlotte, North Carolina
 
28277
(Address of principal executive offices)
 
(Zip Code)
(980) 365-7100
(Registrant’s telephone number, including area code)
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
At November 2, 2018, 118,601,232 shares of the registrant’s common stock, $0.01 par value per share, were outstanding.
 
 



Table of Contents
 
Page
 
   Item 1.
Consolidated Financial Statements (at September 30, 2018 (Unaudited) and December 31, 2017 and for the Three Months and Nine Months Ended September 30, 2018 and 2017 (Unaudited)):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Item 2.
  Item 3.
  Item 4.
 
 
 
  Item 1.
  Item 1A.
  Item 2.
  Item 6.
 
 


Table of Contents


Part I — Financial Information
Item 1. Financial Statements
Brighthouse Financial, Inc.
Interim Condensed Consolidated Balance Sheets
September 30, 2018 (Unaudited) and December 31, 2017
(In millions, except share and per share data)
 
 
September 30, 2018
 
December 31, 2017
Assets
 
 
 
 
Investments:
 
 
 
 
Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $60,705 and $60,173, respectively)
 
$
62,279

 
$
64,991

Equity securities, at estimated fair value (cost: $139 and $142, respectively)
 
150

 
161

Mortgage loans (net of valuation allowances of $56 and $47, respectively; includes $93 and $115, respectively, at estimated fair value, relating to variable interest entities)
 
13,033

 
10,742

Policy loans
 
1,443

 
1,523

Real estate joint ventures
 
444

 
433

Other limited partnership interests
 
1,765

 
1,669

Short-term investments, principally at estimated fair value
 
116

 
312

Other invested assets, principally at estimated fair value
 
2,099

 
2,507

Total investments
 
81,329

 
82,338

Cash and cash equivalents, principally at estimated fair value
 
2,144

 
1,857

Accrued investment income (includes $0 and $1, respectively, relating to variable interest entities)
 
675

 
601

Premiums, reinsurance and other receivables
 
13,551

 
13,525

Deferred policy acquisition costs and value of business acquired
 
6,050

 
6,286

Current income tax recoverable
 
878

 
740

Other assets
 
583

 
588

Separate account assets
 
111,736

 
118,257

Total assets
 
$
216,946

 
$
224,192

Liabilities and Equity
 
 
 
 
Liabilities
 
 
 
 
Future policy benefits
 
$
35,748

 
$
36,616

Policyholder account balances
 
39,446

 
37,783

Other policy-related balances
 
2,907

 
2,985

Payables for collateral under securities loaned and other transactions
 
4,043

 
4,169

Long-term debt (includes $3 and $11, respectively, at estimated fair value, relating to variable interest entities)
 
3,966

 
3,612

Deferred income tax liability
 
576

 
927

Other liabilities
 
5,575

 
5,263

Separate account liabilities
 
111,736

 
118,257

Total liabilities
 
203,997

 
209,612

Contingencies, Commitments and Guarantees (Note 11)
 

 

Equity
 
 
 
 
Brighthouse Financial, Inc.’s stockholders’ equity:
 
 
 
 
Common stock, par value $0.01 per share; 1,000,000,000 shares authorized; 119,782,668 and 119,773,106 shares issued, respectively; 118,800,611 and 119,773,106 shares outstanding, respectively
 
1

 
1

Additional paid-in capital
 
12,469

 
12,432

Retained earnings (deficit)
 
(96
)
 
406

Treasury stock, at cost; 982,057 and 0 shares, respectively
 
(42
)
 

Accumulated other comprehensive income (loss)
 
552

 
1,676

Total Brighthouse Financial, Inc.’s stockholders’ equity
 
12,884

 
14,515

Noncontrolling interests
 
65

 
65

Total equity
 
12,949

 
14,580

Total liabilities and equity
 
$
216,946

 
$
224,192

See accompanying notes to the interim condensed consolidated financial statements.

2

Table of Contents


Brighthouse Financial, Inc.
Interim Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Three Months and Nine Months Ended September 30, 2018 and 2017 (Unaudited)
(In millions, except share and per share data)
 
Three Months Ended
 September 30,
 
Nine Months Ended
 September 30,
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
Premiums
$
225

 
$
236

 
$
677

 
$
630

Universal life and investment-type product policy fees
972

 
1,025

 
2,936

 
2,935

Net investment income
853

 
761

 
2,476

 
2,309

Other revenues
105

 
93

 
308

 
329

Net investment gains (losses)
(42
)
 
21

 
(121
)
 
(34
)
Net derivative gains (losses)
(691
)
 
(164
)
 
(1,337
)
 
(1,207
)
Total revenues
1,422

 
1,972

 
4,939

 
4,962

Expenses
 
 
 
 
 
 
 
Policyholder benefits and claims
822

 
1,083

 
2,373

 
2,732

Interest credited to policyholder account balances
273

 
279

 
809

 
838

Amortization of deferred policy acquisition costs and value of business acquired
30

 
123

 
581

 
(4
)
Other expenses
665

 
611

 
1,974

 
1,789

Total expenses
1,790

 
2,096

 
5,737

 
5,355

Income (loss) before provision for income tax
(368
)
 
(124
)
 
(798
)
 
(393
)
Provision for income tax expense (benefit)
(99
)
 
819

 
(226
)
 
653

Net income (loss)
(269
)
 
(943
)
 
(572
)
 
(1,046
)
Less: Net income (loss) attributable to noncontrolling interests
2

 

 
5

 

Net income (loss) available to Brighthouse Financial, Inc.’s common shareholders
$
(271
)
 
$
(943
)
 
$
(577
)
 
$
(1,046
)
Comprehensive income (loss)
$
(532
)
 
$
(1,529
)
 
$
(1,617
)
 
$
(1,003
)
Less: Comprehensive income (loss) attributable to noncontrolling interests
2

 

 
5

 

Comprehensive income (loss) attributable to Brighthouse Financial, Inc.
$
(534
)
 
$
(1,529
)
 
$
(1,622
)
 
$
(1,003
)
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
(2.26
)
 
$
(7.87
)
 
$
(4.82
)
 
$
(8.73
)
Diluted
$
(2.26
)
 
$
(7.87
)
 
$
(4.82
)
 
$
(8.73
)
See accompanying notes to the interim condensed consolidated financial statements.

3

Table of Contents


Brighthouse Financial, Inc.
Interim Condensed Consolidated Statements of Equity
For the Nine Months Ended September 30, 2018 and 2017 (Unaudited)
(In millions)
 
 
Shareholder’s Net Investment
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings (Deficit)
 
Treasury Stock at Cost
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Brighthouse Financial, Inc.’s Stockholders’ Equity
 
Noncontrolling Interests
 
Total Equity
Balance at December 31, 2017
 
$

 
$
1

 
$
12,432

 
$
406

 
$

 
$
1,676

 
$
14,515

 
$
65

 
$
14,580

Cumulative effect of change in accounting principle and other, net of income tax (Note 1)
 


 

 

 
75

 

 
(79
)
 
(4
)
 

 
(4
)
Balance at January 1, 2018
 

 
1

 
12,432

 
481

 

 
1,597

 
14,511

 
65

 
14,576

Treasury stock acquired in connection with share repurchases
 


 

 

 

 
(42
)
 

 
(42
)
 

 
(42
)
Share-based compensation
 


 

 
37

 

 

 

 
37

 

 
37

Change in noncontrolling interests
 

 

 

 

 

 

 

 
(5
)
 
(5
)
Net income (loss)
 

 

 

 
(577
)
 

 

 
(577
)
 
5

 
(572
)
Other comprehensive income (loss), net of income tax
 


 


 


 


 


 
(1,045
)
 
(1,045
)
 


 
(1,045
)
Balance at September 30, 2018
 
$

 
$
1

 
$
12,469

 
$
(96
)
 
$
(42
)
 
$
552

 
$
12,884

 
$
65

 
$
12,949

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholder’s Net Investment
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings (Deficit)
 
Treasury Stock at Cost
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Brighthouse Financial, Inc.’s Stockholders’ Equity
 
Noncontrolling Interests
 
Total Equity
Balance at December 31, 2016
 
$
13,597

 
$

 
$

 
$

 
$

 
$
1,265

 
$
14,862

 
$

 
$
14,862

Issuance of Common Stock to MetLife, Inc.
 
1

 

 

 

 

 

 
1

 

 
1

Distribution to MetLife, Inc.
 
(1,798
)
 

 

 

 

 

 
(1,798
)
 

 
(1,798
)
Other separation related transactions
 
1,704

 

 

 

 

 

 
1,704

 

 
1,704

Net income (loss)
 
(1,085
)
 


 


 
39

 


 


 
(1,046
)
 


 
(1,046
)
Separation from MetLife, Inc.
 
(12,419
)
 
1

 
12,418

 


 


 


 

 


 

Change in noncontrolling interests
 


 


 


 


 


 


 

 
65

 
65

Other comprehensive income (loss), net of income tax
 


 


 


 


 


 
43

 
43

 


 
43

Balance at September 30, 2017
 
$


$
1


$
12,418


$
39

 
$


$
1,308

 
$
13,766

 
$
65

 
$
13,831

See accompanying notes to the interim condensed consolidated financial statements.

4

Table of Contents


Brighthouse Financial, Inc.
Interim Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2018 and 2017 (Unaudited)
(In millions)
 
Nine Months Ended
 September 30,
 
2018
 
2017
Net cash provided by (used in) operating activities
$
1,496

 
$
2,030

Cash flows from investing activities
 
 
 
Sales, maturities and repayments of:
 
 
 
Fixed maturity securities
11,680

 
12,784

Equity securities
15

 
58

Mortgage loans
446

 
565

Real estate and real estate joint ventures
87

 
47

Other limited partnership interests
137

 
195

Purchases of:
 
 
 
Fixed maturity securities
(12,005
)
 
(12,888
)
Equity securities
(1
)
 
(2
)
Mortgage loans
(2,771
)
 
(1,554
)
Real estate and real estate joint ventures
(31
)
 
(224
)
Other limited partnership interests
(194
)
 
(174
)
Cash received in connection with freestanding derivatives
1,142

 
1,811

Cash paid in connection with freestanding derivatives
(2,286
)
 
(3,382
)
Net change in policy loans
81

 
(5
)
Net change in short-term investments
196

 
180

Net change in other invested assets
35

 
33

Other, net

 
2

Net cash provided by (used in) investing activities
(3,469
)
 
(2,554
)
Cash flows from financing activities
 
 
 
Policyholder account balances:
 
 
 
Deposits
4,704

 
3,464

Withdrawals
(2,199
)
 
(2,269
)
Net change in payables for collateral under securities loaned and other transactions
(126
)
 
(2,747
)
Long-term debt issued
375

 
3,589

Long-term debt repaid
(9
)
 
(10
)
Collateral financing arrangements repaid

 
(2,797
)
Treasury stock acquired in connection with share repurchases
(42
)
 

Distribution to MetLife, Inc.

 
(1,798
)
Cash received from MetLife, Inc. in connection with shareholder’s net investment

 
293

Cash paid to MetLife, Inc. in connection with shareholder’s net investment

 
(668
)
Financing element on certain derivative instruments and other derivative related transactions, net
(386
)
 
(37
)
Other, net
(57
)
 
(26
)
Net cash provided by (used in) financing activities
2,260

 
(3,006
)
Change in cash, cash equivalents and restricted cash
287

 
(3,530
)
Cash, cash equivalents and restricted cash, beginning of period
1,857

 
5,228

Cash, cash equivalents and restricted cash, end of period
$
2,144

 
$
1,698

Supplemental disclosures of cash flow information
 
 
 
Net cash paid (received) for:
 
 
 
Interest
$
83

 
$
89

Income tax
$
3

 
$
76

Non-cash transactions:
 
 
 
Transfer of fixed maturity securities to former affiliates
$

 
$
293

Reduction of policyholder account balances in connection with reinsurance transactions
$

 
$
293

See accompanying notes to the interim condensed consolidated financial statements.

5

Table of Contents
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)

1. Business, Basis of Presentation and Summary of Significant Accounting Policies
Business
“Brighthouse” and the “Company” refer to Brighthouse Financial, Inc. and its subsidiaries. Brighthouse Financial, Inc. is a holding company formed to own the legal entities that historically operated a substantial portion of the former Retail segment of MetLife, Inc. (together with its subsidiaries and affiliates, “MetLife”). Brighthouse Financial, Inc. was incorporated in Delaware on August 1, 2016 in preparation for MetLife, Inc.’s separation of a substantial portion of its former Retail segment, as well as certain portions of its Corporate Benefit Funding segment (the “Separation”), which was completed on August 4, 2017.
In connection with the Separation, 80.8% of MetLife, Inc.’s interest in Brighthouse Financial, Inc. was distributed to holders of MetLife, Inc.’s common stock and MetLife, Inc. retained the remaining 19.2%. On June 14, 2018, MetLife, Inc. divested its remaining shares of Brighthouse Financial, Inc. 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.
The Company offers a range of individual annuities and individual life insurance products. The Company reports results through three segments: Annuities, Life and Run-off. In addition, the Company reports certain of its results in Corporate & Other.
Basis of Presentation
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported on the interim condensed consolidated financial statements. In applying these policies and estimates, management makes subjective and complex judgments that frequently require assumptions about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Company’s business and operations. Actual results could differ from these estimates.
Consolidation
The accompanying interim condensed consolidated financial statements include the accounts of Brighthouse Financial, Inc. and its subsidiaries, as well as partnerships and joint ventures in which the Company has control, and variable interest entities (“VIEs”) for which the Company is the primary beneficiary. Intercompany accounts and transactions have been eliminated.
The Company uses the equity method of accounting for equity securities when it has significant influence or at least 20% interest and for real estate joint ventures and other limited partnership interests (“investee”) when it has more than a minor ownership interest or more than a minor influence over the investee’s operations. The Company generally recognizes its share of the investee’s earnings on a three-month lag in instances where the investee’s financial information is not sufficiently timely or when the investee’s reporting period differs from the Company’s reporting period. When the Company has virtually no influence over the investee’s operations, the investment is carried at fair value.
Reclassifications
Certain amounts in the prior year periods’ interim condensed consolidated financial statements and related footnotes thereto have been reclassified to conform to the 2018 presentation as discussed throughout the Notes to the Interim Condensed Consolidated Financial Statements. Additionally, effective January 1, 2018 the Company recorded an increase to other liabilities of $46 million, a decrease to deferred tax liabilities of $22 million, a decrease to accumulated other comprehensive income (“AOCI”) of $64 million, and an increase to retained earnings (deficit) of $40 million, to reflect an adjustment, net of tax, to prior year accretion of certain investments in redeemable preferred stock.
The accompanying interim condensed consolidated financial statements are unaudited and reflect all adjustments (including normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented in conformity with GAAP. Interim results are not necessarily indicative of full year performance. The December 31, 2017 consolidated balance sheet data was derived from audited consolidated financial statements included in Brighthouse Financial, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Annual Report”), which include all disclosures required by GAAP. Therefore, these interim condensed consolidated financial statements should be read in conjunction with the consolidated and combined financial statements of the Company included in the 2017 Annual Report.

6

Table of Contents
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Adoption of New Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“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. The following table provides a description of new ASUs issued by the FASB and the expected impact of the adoption on the Company’s financial statements.
ASUs adopted as of September 30, 2018 are summarized in the table below.
Standard
Description
Effective Date
Impact on Financial Statements
ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
The new guidance changes the current accounting guidance related to (i) the classification and measurement of certain equity investments, (ii) the presentation of changes in the fair value of financial liabilities measured under the fair value option (“FVO”) that are due to instrument-specific credit risk, and (iii) certain disclosures associated with the fair value of financial instruments. Additionally, there will no longer be a requirement to assess equity securities for impairment since such securities will be measured at fair value through net income.
January 1, 2018 using the modified retrospective method
The Company 1) reclassified net unrealized gains related to equity securities previously classified as available-for-sale (“AFS”) from AOCI to retained earnings (deficit) and 2) increased the carrying value of equity investments previously accounted for under the cost method to estimated fair value. The cumulative effect of the adoption is a net increase to retained earnings (deficit) of $38 million and a net decrease of $15 million to AOCI, after taxes.
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)
For those contracts that are impacted, the guidance will require an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled, in exchange for those goods or services.
January 1, 2018 using the modified retrospective method
The adoption did not have an impact on the Company’s financial statements other than expanded disclosures in Note 9.
ASUs issued but not yet adopted as of September 30, 2018 are summarized in the table below.
Standard
Description
Effective Date
Impact on Financial Statements
ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
The amendments to Topic 350 require the capitalization of certain implementation costs incurred in a cloud computing arrangement that is a service contract. The requirements align with the existing requirements to capitalize implementation costs incurred to develop or obtain internal-use software.
January 1, 2020 using the prospective method or retrospective method (with early adoption permitted)
The Company is currently evaluating the impact of this guidance on its financial statements.

7

Table of Contents
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

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.

Upon adoption of the ASU, all guarantees associated with variable annuities will be measured at fair value, with changes in fair value reported in net income (excluding the change in fair value attributable to nonperformance risk, which would be reported in other comprehensive income). These changes will result in an impact to equity upon adoption and more volatility in net income going forward.

Additionally, certain life insurance and payout annuity contract liabilities will be affected by more frequent updating of cash flow assumptions and changes to the rate used to discount those cash flows. Most products will be impacted by the changes to deferred acquisition cost amortization.  
ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
The amendments to Topic 815 (i) refine and expand the criteria for achieving hedge accounting on certain hedging strategies, (ii) require the earnings effect of the hedging instrument be presented in the same line item in which the earnings effect of the hedged item is reported, and (iii) eliminate the requirement to separately measure and report hedge ineffectiveness.
January 1, 2019 using modified retrospective method (with early adoption permitted)
The Company does not expect a material impact on its financial statements from adoption of the new guidance.
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.
ASU 2016-02, Leases - Topic 842
The new guidance will require a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. Leases would be classified as finance or operating leases and both types of leases will be recognized on the balance sheet. Lessor accounting will remain largely unchanged from current guidance except for certain targeted changes. The amendments also require new qualitative and quantitative disclosures.
January 1, 2019 using the modified retrospective method (with early adoption permitted)
The Company is currently evaluating the impact of this guidance on its financial statements, with the most significant impact expected to be a gross-up of certain lease assets and liabilities on the balance sheet.

8

Table of Contents
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)


2. Segment Information
The Company is organized into three segments: Annuities; Life; and Run-off. In addition, the Company reports certain of its results of operations in Corporate & Other.
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, universal and variable life products designed to address policyholders’ needs for financial security and protected wealth transfer, which may be provided on a tax-advantaged basis.
Run-off
The Run-off segment consists of products no longer actively sold and which are separately managed, including structured settlements, pension risk transfer contracts, certain company-owned life insurance policies, funding agreements and universal life with secondary guarantees.
Corporate & Other
Corporate & Other contains the excess capital not allocated to the segments and interest expense related to the majority of the Company’s outstanding debt, as well as expenses associated with certain legal proceedings and income tax audit issues. Corporate & Other also includes the elimination of intersegment amounts, long-term care and workers compensation business reinsured through 100% quota share reinsurance agreements, and term life insurance 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 the investor community. Adjusted earnings should not be viewed as a substitute for net income (loss) available to Brighthouse Financial, Inc.’s common shareholders, and excludes net income (loss) attributable to noncontrolling interests.
Adjusted earnings, which may be positive or negative, focuses on the Company’s primary businesses principally by excluding (i) the impact of market volatility, which could distort trends, and (ii) businesses that have been or will be sold or exited by the Company, referred to as divested businesses.

9

Table of Contents
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
2. Segment Information (continued)

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
Amortization of unearned revenue related to net investment gains (losses) and net derivative gains (losses) and certain variable annuity guaranteed minimum income benefits (“GMIBs”) fees (“GMIB Fees”).
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 (“VOBA”) 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 U.S. 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 and nine months ended September 30, 2018 and 2017 and at September 30, 2018 and December 31, 2017. The segment accounting policies are the same as those used to prepare the Company’s condensed consolidated 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.
Beginning in the first quarter of 2018, the Company changed the methodology for how capital is allocated to segments and, in some cases, products (the “Portfolio Realignment”). Segment investment and capitalization targets are now 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 discussed in the 2017 Annual Report. 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.
Previously, invested assets held in the segments were based on net GAAP liabilities. Excess capital was retained in Corporate & Other and allocated to segments based on an internally developed statistics based capital model intended to capture the material risks to which the Company was exposed (referred to as “allocated equity”). Surplus assets in excess of the combined allocations to the segments were held in Corporate & Other with net investment income being credited back to the segments at a predetermined rate. Any excess or shortfall in net investment income from surplus assets was recognized in Corporate & Other.
The Portfolio Realignment had no effect on the Company’s consolidated net income (loss) available to Brighthouse Financial, Inc.’s common shareholders or adjusted earnings, but it did impact segment results for the nine months ended September 30, 2018. It was not practicable to determine the impact of the Portfolio Realignment to adjusted earnings in prior periods; however, the Company estimates that pre-tax adjusted earnings in the Life segment for the nine months ended September 30, 2018 increased between $90 million and $105 million as a result of the change, with most of the offsetting impact in the Run-off segment. Impacts to the Annuities segment and Corporate & Other would not have been significantly different under the previous allocation method.
In addition, the total assets recognized in the segments changed as a result of the Portfolio Realignment. Total assets (on a book value basis) in the Annuities and Life segments increased approximately $2 billion and approximately $5 billion, respectively, under the new allocation method. The Run-off segment and Corporate & Other experienced decreases in total assets of approximately $3 billion and approximately $4 billion, respectively, as a result of the Portfolio Realignment.

10

Table of Contents
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
2. Segment Information (continued)

 
 
Operating Results
Three Months Ended September 30, 2018
 
Annuities
 
Life
 
Run-off
 
Corporate & Other
 
Total
 
 
(In millions)
Pre-tax adjusted earnings
 
$
487

 
$
78

 
$
(134
)
 
$
(117
)
 
$
314

Provision for income tax expense (benefit)
 
86

 
17

 
(29
)
 
(32
)
 
42

Post-tax adjusted earnings
 
401

 
61

 
(105
)
 
(85
)
 
272

Less: Net income (loss) attributable to noncontrolling interests
 

 

 

 
2

 
2

Adjusted earnings
 
$
401

 
$
61

 
$
(105
)
 
$
(87
)
 
270

Adjustments for:
 
 
 
 
 
 
 
 
 
 
Net investment gains (losses)
 
 
 
 
 
 
 
 
 
(42
)
Net derivative gains (losses)
 
 
 
 
 
 
 
 
 
(691
)
Other adjustments to net income
 
 
 
 
 
 
 
 
 
51

Provision for income tax (expense) benefit
 
 
 
 
 
 
 
 
 
141

Net income (loss) available to Brighthouse Financial, Inc.’s common shareholders
 
 
 
 
 
 
 
 
 
$
(271
)
 
 
 
 
 
 
 
 
 
 
 
Interest revenue
 
$
399

 
$
115

 
$
322

 
$
16

 
 
Interest expense
 
$

 
$

 
$

 
$
39

 
 
 
 
Operating Results
Three Months Ended September 30, 2017
 
Annuities
 
Life
 
Run-off
 
Corporate & Other
 
Total
 
 
(In millions)
Pre-tax adjusted earnings
 
$
488

 
$
(8
)
 
$
119

 
$
(95
)
 
$
504

Provision for income tax expense (benefit)
 
133

 
(14
)
 
36

 
1,025

 
1,180

Post-tax adjusted earnings
 
355

 
6

 
83

 
(1,120
)
 
(676
)
Less: Net income (loss) attributable to noncontrolling interests
 

 

 

 

 

Adjusted earnings
 
$
355

 
$
6

 
$
83

 
$
(1,120
)
 
(676
)
Adjustments for:
 
 
 
 
 
 
 
 
 
 
Net investment gains (losses)
 
 
 
 
 
 
 
 
 
21

Net derivative gains (losses)
 
 
 
 
 
 
 
 
 
(164
)
Other adjustments to net income
 
 
 
 
 
 
 
 
 
(485
)
Provision for income tax (expense) benefit
 
 
 
 
 
 
 
 
 
361

Net income (loss) available to Brighthouse Financial, Inc.’s common shareholders
 
 
 
 
 
 
 
 
 
$
(943
)
 
 
 
 
 
 
 
 
 
 
 
Interest revenue
 
$
310

 
$
87

 
$
348

 
$
35

 
 
Interest expense
 
$

 
$

 
$

 
$
36

 
 

11

Table of Contents
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
2. Segment Information (continued)

 
 
Operating Results
Nine Months Ended September 30, 2018
 
Annuities
 
Life
 
Run-off
 
Corporate & Other
 
Total
 
 
(In millions)
Pre-tax adjusted earnings
 
$
1,025

 
$
205

 
$
(79
)
 
$
(327
)
 
$
824

Provision for income tax expense (benefit)
 
177

 
41

 
(18
)
 
(87
)
 
113

Post-tax adjusted earnings
 
848

 
164

 
(61
)
 
(240
)
 
711

Less: Net income (loss) attributable to noncontrolling interests
 

 

 

 
5

 
5

Adjusted earnings
 
$
848

 
$
164

 
$
(61
)
 
$
(245
)
 
706

Adjustments for:
 
 
 
 
 
 
 
 
 
 
Net investment gains (losses)
 
 
 
 
 
 
 
 
 
(121
)
Net derivative gains (losses)
 
 
 
 
 
 
 
 
 
(1,337
)
Other adjustments to net income
 
 
 
 
 
 
 
 
 
(164
)
Provision for income tax (expense) benefit
 
 
 
 
 
 
 
 
 
339

Net income (loss) available to Brighthouse Financial, Inc.s common shareholders
 
 
 
 
 
 
 
 
 
$
(577
)
 
 
 
 
 
 
 
 
 
 
 
Interest revenue
 
$
1,138

 
$
334

 
$
979

 
$
38

 
 
Interest expense
 
$

 
$

 
$

 
$
113

 
 
 
 
Operating Results
Nine Months Ended September 30, 2017
 
Annuities
 
Life
 
Run-off
 
Corporate & Other
 
Total
 
 
(In millions)
Pre-tax adjusted earnings
 
$
1,111

 
$

 
$
272

 
$
(61
)
 
$
1,322

Provision for income tax expense (benefit)
 
302

 
(11
)
 
88

 
1,015

 
1,394

Post-tax adjusted earnings
 
809

 
11

 
184

 
(1,076
)
 
(72
)
Less: Net income (loss) attributable to noncontrolling interests
 

 

 

 

 

Adjusted earnings
 
$
809

 
$
11

 
$
184

 
$
(1,076
)
 
(72
)
Adjustments for:
 
 
 
 
 
 
 
 
 
 
Net investment gains (losses)
 
 
 
 
 
 
 
 
 
(34
)
Net derivative gains (losses)
 
 
 
 
 
 
 
 
 
(1,207
)
Other adjustments to net income
 
 
 
 
 
 
 
 
 
(474
)
Provision for income tax (expense) benefit
 
 
 
 
 
 
 
 
 
741

Net income (loss) available to Brighthouse Financial, Inc.s common shareholders
 
 
 
 
 
 
 
 
 
$
(1,046
)
 
 
 
 
 
 
 
 
 
 
 
Interest revenue
 
$
948

 
$
263

 
$
1,060

 
$
159

 
 
Interest expense
 
$

 
$

 
$
23

 
$
94

 
 

12

Table of Contents
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated 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
 September 30,
 
Nine Months Ended
 September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In millions)
Annuities
 
$
1,160

 
$
1,070

 
$
3,453

 
$
3,270

Life
 
346

 
387

 
1,054

 
982

Run-off
 
536

 
547

 
1,594

 
1,631

Corporate & Other
 
47

 
59

 
112

 
230

Adjustments
 
(667
)
 
(91
)
 
(1,274
)
 
(1,151
)
Total
 
$
1,422

 
$
1,972

 
$
4,939

 
$
4,962

The following table presents total assets with respect to the Company’s segments, as well as Corporate & Other, at:

September 30, 2018

December 31, 2017

(In millions)
Annuities
$
152,342

 
$
154,667

Life
20,485

 
18,049

Run-off
31,710

 
36,824

Corporate & Other
12,409

 
14,652

Total
$
216,946


$
224,192

3. Insurance
Guarantees
As discussed in Notes 1 and 3 of the Notes to the Consolidated and Combined Financial Statements included in the 2017 Annual Report, the Company issues variable annuity products with guaranteed minimum benefits. Guaranteed minimum accumulation benefits (“GMABs”), the non-life contingent portion of guaranteed minimum withdrawal benefits (“GMWBs”) and the portion of certain GMIBs that do not require annuitization are accounted for as embedded derivatives in policyholder account balances and are further discussed in Note 5.
The Company also issues universal and variable life contracts where the Company contractually guarantees to the contract holder a secondary guarantee.
Information regarding the Company’s guarantee exposure was as follows at:
 
September 30, 2018
 
December 31, 2017
 
 
In the
Event of Death
 
At
Annuitization
 
In the
Event of Death
 
At
Annuitization
 
 
(Dollars in millions)
 
Annuity Contracts (1), (2)
 
 
 
 
 
 
 
 
Variable Annuity Guarantees
 
 
 
 
 
 
 
 
Total account value (3)
$
109,613

 
$
63,194

 
$
115,147

 
$
67,110

 
Separate account value
$
104,479

 
$
61,945

 
$
109,792

 
$
65,782

 
Net amount at risk
$
6,471

(4)
$
2,521

(5)
$
5,261

(4)
$
2,642

(5)
Average attained age of contract holders
68 years

 
68 years

 
68 years

 
68 years

 

13

Table of Contents
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
3. Insurance (continued)

 
September 30, 2018
 
December 31, 2017
 
Secondary Guarantees
 
(Dollars in millions)
Universal Life Contracts
 
 
 
Total account value (3)
$
6,133

 
$
6,244

Net amount at risk (6)
$
73,680

 
$
75,304

Average attained age of policyholders
65 years

 
64 years

 
 
 
 
Variable Life Contracts
 
 
 
Total account value (3)
$
3,486

 
$
3,379

Net amount at risk (6)
$
23,250

 
$
24,546

Average attained age of policyholders
49 years

 
49 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 Consolidated and Combined Financial Statements included in the 2017 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.
(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.
(6)
Defined as the guarantee amount less the 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.

14

Table of Contents
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)

4. Investments
See Note 6 for information about the fair value hierarchy for investments and the related valuation methodologies.
Fixed Maturity Securities AFS
Fixed Maturity Securities AFS by Sector
The following table presents the fixed maturity securities AFS by sector at:
 
September 30, 2018
 
December 31, 2017
 
Amortized
Cost
 
Gross Unrealized
 
Estimated
Fair
Value
 
Amortized
Cost
 
Gross Unrealized
 
Estimated
Fair
Value
 
Gains
 
Temporary
Losses
 
OTTI
Losses (1)
 
Gains
 
Temporary
Losses
 
OTTI
Losses (1)
 
 
(In millions)
Fixed maturity securities: (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. corporate
$
23,475

 
$
918

 
$
458

 
$

 
$
23,935

 
$
21,190

 
$
1,859

 
$
92

 
$

 
$
22,957

U.S. government and agency
10,089

 
1,075

 
214

 

 
10,950

 
14,548

 
1,862

 
118

 

 
16,292

RMBS
8,373

 
227

 
230

 
(4
)
 
8,374

 
7,749

 
285

 
60

 
(3
)
 
7,977

Foreign corporate
7,311

 
155

 
218

 

 
7,248

 
6,703

 
386

 
66

 

 
7,023

State and political subdivision
3,747


369


47




4,069


3,635


553


6


1


4,181

CMBS
4,381

 
9

 
101

 
(1
)
 
4,290

 
3,386

 
53

 
17

 
(1
)
 
3,423

ABS
2,006

 
10

 
7

 

 
2,009

 
1,810

 
21

 
2

 

 
1,829

Foreign government
1,323

 
104

 
23

 

 
1,404

 
1,152

 
161

 
4

 

 
1,309

Total fixed maturity securities
$
60,705


$
2,867


$
1,298


$
(5
)

$
62,279


$
60,173


$
5,180


$
365


$
(3
)

$
64,991

__________________
(1)
Noncredit OTTI losses included in AOCI in an unrealized gain position are due to increases in estimated fair value subsequent to initial recognition of noncredit losses on such securities. See also “— Net Unrealized Investment Gains (Losses).”
(2)
Redeemable preferred stock is reported within U.S. corporate and 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 held non-income producing fixed maturity securities with an estimated fair value of less than $1 million and $4 million with unrealized gains (losses) of less than ($1) million and ($2) million at September 30, 2018 and December 31, 2017, respectively.
Maturities of Fixed Maturity Securities
The amortized cost and estimated fair value of fixed maturity securities, by contractual maturity date, were as follows at September 30, 2018:
 
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 millions)
Amortized cost
$
1,956

 
$
8,580

 
$
11,376

 
$
24,033

 
$
14,760

 
$
60,705

Estimated fair value
$
1,962

 
$
8,638

 
$
11,263

 
$
25,743

 
$
14,673

 
$
62,279

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.

15

Table of Contents
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
4. Investments (continued)

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:
 
September 30, 2018
 
December 31, 2017
 
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 millions)
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. corporate
$
9,484

 
$
308

 
$
1,742

 
$
150

 
$
1,783

 
$
21

 
$
1,451

 
$
71

U.S. government and agency
2,530

 
52

 
1,901

 
162

 
4,962

 
38

 
1,573

 
80

RMBS
3,838

 
103

 
1,619

 
123

 
2,367

 
14

 
1,332

 
43

Foreign corporate
3,410

 
131

 
562

 
87

 
637

 
8

 
603

 
58

State and political subdivision
1,076

 
34

 
151

 
13

 
170

 
3

 
106

 
4

CMBS
3,078

 
68

 
542

 
32

 
619

 
6

 
335

 
10

ABS
998

 
7

 
27

 

 
170

 

 
74

 
2

Foreign government
449

 
17

 
111

 
6

 
155

 
2

 
69

 
2

Total fixed maturity securities
$
24,863


$
720


$
6,655


$
573


$
10,863


$
92


$
5,543


$
270

Total number of securities in an unrealized loss position
2,978

 
 
 
807

 
 
 
911

 
 
 
638

 
 
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.
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 September 30, 2018.
Gross unrealized losses on fixed maturity securities increased $931 million during the nine months ended September 30, 2018 to $1.3 billion. The increase in gross unrealized losses for the nine months ended September 30, 2018 was primarily attributable to increasing longer-term interest rates and widening credit spreads.

16

Table of Contents
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
4. Investments (continued)

At September 30, 2018, $4 million of the total $1.3 billion of gross unrealized losses were from ten fixed maturity securities 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:
 
September 30, 2018
 
December 31, 2017
 
Carrying
Value
 
% of
Total
 
Carrying
Value
 
% of
Total
 
(Dollars in millions)
Mortgage loans:
 
 
 
 
 
 
 
Commercial
$
8,405

 
64.5
 %
 
$
7,260

 
67.5
 %
Agricultural
2,767

 
21.2

 
2,276

 
21.2

Residential
1,824

 
14.0

 
1,138

 
10.6

Subtotal (1)
12,996

 
99.7

 
10,674

 
99.3

Valuation allowances (2)
(56
)
 
(0.4
)
 
(47
)
 
(0.4
)
Subtotal mortgage loans, net
12,940

 
99.3

 
10,627

 
98.9

Commercial mortgage loans held by CSEs — FVO
93

 
0.7

 
115

 
1.1

Total mortgage loans, net
$
13,033

 
100.0
 %
 
$
10,742

 
100.0
 %
__________________
(1)
Purchases of mortgage loans from third parties were $816 million and $1.4 billion for the three months and nine months ended September 30, 2018, respectively, and $147 million and $307 million for the three months and nine months ended September 30, 2017, respectively, and were primarily comprised of residential mortgage loans.
(2)
The valuation allowances were primarily from collective evaluation (non-specific loan related).
See “— Variable Interest Entities” for discussion of consolidated securitization entities (“CSEs”).
Information on commercial, agricultural and residential mortgage loans is presented in the tables below. Information on commercial mortgage loans held by CSEs — FVO is presented in Note 6. The Company elects the FVO for certain commercial mortgage loans and related long-term debt that are managed on a total return basis.
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 all three 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 all 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.

17

Table of Contents
Brighthouse Financial, Inc.
Notes to the Interim Condensed Consolidated Financial Statements (Unaudited) (continued)
4. Investments (continued)

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
 
Estimated
Fair
Value
 
% of
Total
 
> 1.20x
 
1.00x - 1.20x
 
< 1.00x
 
Total
 
 
(Dollars in millions)
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan-to-value ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 65%
$
7,438

 
$
38

 
$
15

 
$
7,491

 
89.2
%
 
$
7,440

 
89.2
%
65% to 75%
738

 
12

 
68

 
818

 
9.7

 
809

 
9.7

76% to 80%
87

 

 
9

 
96

 
1.1

 
92

 
1.1

Total
$
8,263


$
50


$
92


$
8,405

 
100.0
%
 
$
8,341

 
100.0
%