BRIGHTHOUSE LIFE INSURANCE Co OF NY - FORM 10-Q - May 11, 2018

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EX-32.2 - EXHIBIT 32.2 - BRIGHTHOUSE LIFE INSURANCE Co OF NYbhny-20180331xex322.htm
EX-32.1 - EXHIBIT 32.1 - BRIGHTHOUSE LIFE INSURANCE Co OF NYbhny-20180331xex321.htm
EX-31.2 - EXHIBIT 31.2 - BRIGHTHOUSE LIFE INSURANCE Co OF NYbhny-20180331xex312.htm
EX-31.1 - EXHIBIT 31.1 - BRIGHTHOUSE LIFE INSURANCE Co OF NYbhny-20180331xex311.htm
 
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, 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: 000-55705
 
logoa08.jpg
Brighthouse Life Insurance Company of NY
(Exact name of registrant as specified in its charter)
New York
 
13-3690700
(State of incorporation)
 
(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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  (Do not check if a smaller reporting company)
  
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 May 11, 2018, 200,000 shares of the registrant’s common stock, $10 par value per share, 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.
 
 


Index to the Interim Condensed Financial Statements and Notes
 
Page
 
Item 1.
Financial Statements (at March 31, 2018 (Unaudited) and December 31, 2017 and for the Three Months Ended March 31, 2018 and 2017 (Unaudited))
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 4.
Item 6.
 
 
 


Part I — Financial Information— 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, 2018 (Unaudited) and December 31, 2017
(In thousands, except share and per share data)
 
 
March 31, 2018
 
December 31, 2017
Assets
 
 
 
 
Investments:
 
 
 
 
Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $2,233,879 and $2,165,134, respectively)
 
$
2,237,349

 
$
2,221,563

Mortgage loans (net of valuation allowances of $1,817 and $1,747, respectively)
 
406,762

 
394,863

Short-term investments, principally at estimated fair value
 
7,978

 
—

Other invested assets, at estimated fair value
 
19,301

 
3,784

Total investments
 
2,671,390

 
2,620,210

Cash and cash equivalents, principally at estimated fair value
 
91,982

 
86,154

Accrued investment income
 
20,836

 
18,323

Premiums, reinsurance and other receivables
 
563,716

 
572,609

Deferred policy acquisition costs and value of business acquired
 
156,897

 
131,059

Other assets
 
37,957

 
36,317

Separate account assets
 
4,846,885

 
5,021,633

Total assets
 
$
8,389,663

 
$
8,486,305

Liabilities and Stockholder's Equity
 
 
 
 
Liabilities
 
 
 
 
Future policy benefits
 
$
683,045

 
$
674,046

Policyholder account balances
 
1,425,202

 
1,343,330

Other policy-related balances
 
9,111

 
12,733

Payables for collateral under derivative transactions
 
16,214

 
5,384

Current income tax payable
 
329

 
2,064

Deferred income tax liability
 
101,540

 
112,498

Other liabilities
 
508,510

 
471,130

Separate account liabilities
 
4,846,885

 
5,021,633

Total liabilities
 
7,590,836

 
7,642,818

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
 
415,931

 
415,931

Retained earnings
 
381,558

 
395,928

Accumulated other comprehensive income (loss)
 
(662
)
 
29,628

Total stockholder's equity
 
798,827

 
843,487

Total liabilities and stockholder's equity
 
$
8,389,663

 
$
8,486,305

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, 2018 and 2017 (Unaudited)
(In thousands)
 
 
Three Months
Ended
March 31,
 
 
2018
 
2017
Revenues
 
 
 
 
Premiums
 
$
10,293

 
$
9,230

Universal life and investment-type product policy fees
 
25,986

 
25,795

Net investment income
 
23,931

 
21,408

Other revenues
 
(12,544
)
 
(12,671
)
Net investment gains (losses):
 
 
 
 
Other net investment gains (losses)
 
(2,355
)
 
(737
)
Total net investment gains (losses)
 
(2,355
)
 
(737
)
Net derivative gains (losses)
 
(44,262
)
 
(131,536
)
Total revenues
 
1,049

 
(88,511
)
Expenses
 
 
 
 
Policyholder benefits and claims
 
(1,541
)
 
(1,783
)
Interest credited to policyholder account balances
 
9,232

 
9,674

Amortization of deferred policy acquisition costs and value of business acquired
 
(3,323
)
 
(25,576
)
Other expenses
 
15,727

 
18,222

Total expenses
 
20,095

 
537

Income (loss) before provision for income tax
 
(19,046
)
 
(89,048
)
Provision for income tax expense (benefit)
 
(4,676
)
 
(32,474
)
Net income (loss)
 
$
(14,370
)
 
$
(56,574
)
Comprehensive income (loss)
 
$
(44,660
)
 
$
(52,463
)
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, 2018 and 2017 (Unaudited)
(In thousands)
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
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

 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholder's
Equity
Balance at December 31, 2016
$
2,000

 
$
340,931

 
$
349,395

 
$
4,407

 
$
696,733

Net income (loss)


 


 
(56,574
)
 


 
(56,574
)
Other comprehensive income (loss), net of income tax


 


 


 
4,111

 
4,111

Balance at March 31, 2017
$
2,000

 
$
340,931

 
$
292,821

 
$
8,518

 
$
644,270

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, 2018 and 2017 (Unaudited)
(In thousands)
 
Three Months 
 Ended 
 March 31,
 
2018
 
2017
Net cash provided by (used in) operating activities
$
23,949

 
$
11,482

Cash flows from investing activities
 
 
 
Sales, maturities and repayments of:
 
 
 
Fixed maturity securities
77,753

 
171,018

Mortgage loans
2,399

 
8,449

Purchases of:
 
 
 
Fixed maturity securities
(141,218
)
 
(146,636
)
Mortgage loans
(14,445
)
 
(8,477
)
Cash received in connection with freestanding derivatives
212

 
—

Cash paid in connection with freestanding derivatives
(29,892
)
 
—

Net change in short-term investments
(7,978
)
 
(2,003
)
Net change in other invested assets
425

 
—

Net cash provided by (used in) investing activities
(112,744
)
 
22,351

Cash flows from financing activities
 
 
 
Policyholder account balances:
 
 
 
Deposits
117,755

 
15,044

Withdrawals
(33,962
)
 
(36,734
)
Net change in payables for collateral under derivative transactions
10,830

 
(200
)
Net cash provided by (used in) financing activities
94,623

 
(21,890
)
Change in cash, cash equivalents and restricted cash
5,828

 
11,943

Cash, cash equivalents and restricted cash, beginning of period
86,154

 
18,583

Cash, cash equivalents and restricted cash, end of period
$
91,982

 
$
30,526

Supplemental disclosures of cash flow information
 
 
 
Net cash paid (received) for:
 
 
 
Income tax
$
4

 
$
3

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. (together with its subsidiaries and affiliates, “Brighthouse”). The Company markets and/or administers traditional life, universal life, variable annuity and fixed annuity products to individuals. The Company is licensed to transact business in the state of New York.
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 Brighthouse Financial, Inc. was distributed to holders of MetLife, Inc.’s common stock and MetLife, Inc. retained the remaining 19.2%. As a result, MetLife, Inc. and its subsidiaries are considered related parties.
The Company is organized into two segments: Annuities and Life.
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.
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, 2017 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, 2017 (the “2017 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 2017 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. 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.

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 adopted as of March 31, 2018 are summarized in the table below.
Standard
Description
Effective Date
Impact on Financial Statements
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 8.


ASUs issued but not yet adopted as of March 31, 2018 are summarized in the table below.
Standard
Description
Effective Date
Impact on Financial Statements
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.
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, 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.
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.

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 (continued)

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, as well as businesses that have been or will be sold or exited by the Company, referred to as divested businesses.
The following are the 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 the 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 deferred policy acquisition cost (“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 are 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 ended March 31, 2018 and 2017 and at March 31, 2018 and December 31, 2017. 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.
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.

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)

The Portfolio Realignment had no effect on the Company’s consolidated net income (loss) or adjusted earnings, but it did impact segment results for the three months ended March 31, 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 three months ended March 31, 2018 increased between $2 million and $5 million as a result of the change. Impacts to the Annuities and Corporate & Other segments 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 $640 million and approximately $875 million, respectively, under the new allocation method. The Corporate & Other segment experienced decreases in total assets of approximately $1.5 billion as a result of the Portfolio Realignment.
 
 
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

 
 
 
 
Operating Results
Three Months Ended March 31, 2017
 
Annuities
 
Life
 
Corporate & Other
 
Total
 
 
(In thousands)
Pre-tax adjusted earnings
 
$
12,054

 
$
(2,212
)
 
$
2,670

 
$
12,512

Provision for income tax expense (benefit)
 
3,036

 
(774
)
 
810

 
3,072

Adjusted earnings
 
$
9,018

 
$
(1,438
)
 
$
1,860

 
9,440

Adjustments for:
 
 
 
 
 
 
 
 
Net investment gains (losses)
 
 
 
 
 
 
 
(737
)
Net derivative gains (losses)
 
 
 
 
 
 
 
(131,536
)
Other adjustments to net income
 
 
 
 
 
 
 
30,713

Provision for income tax (expense) benefit
 
 
 
 
 
 
 
35,546

Net income (loss)
 
 
 
 
 
 
 
$
(56,574
)
 
 
 
 
 
 
 
 
 
Interest revenue
 
$
15,457

 
$
3,749

 
$
2,285

 
 

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,
 
 
2018
 
2017
 
 
(In thousands)
Annuities
 
$
27,638

 
$
27,694

Life
 
15,696

 
9,928

Corporate & Other
 
1,024

 
2,703

Adjustments
 
(43,309
)
 
(128,836
)
Total
 
$
1,049

 
$
(88,511
)
The following table presents total assets with respect to the Company’s segments, as well as Corporate & Other, at:

March 31, 2018

December 31, 2017

(In thousands)
Annuities
$
7,898,394


$
7,219,139

Life
1,452,865


662,546

Corporate & Other
(961,596
)

604,620

Total
$
8,389,663


$
8,486,305

3. Insurance
Guarantees
As discussed in Notes 1 and 3 of the Notes to the 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.
Information regarding the Company’s guarantee exposure was as follows at:
 
 
March 31, 2018
 
December 31, 2017
 
 
 
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)
 
$
4,850,909

 
$
4,002,240

 
$
5,026,927

 
$
4,149,482

 
Separate account value
 
$
4,845,095

 
$
4,001,339

 
$
5,020,107

 
$
4,149,482

 
Net amount at risk
 
$
19,567

(4)
$
182,505

(5)
$
5,262

(4)
$
166,788

(5)
Average attained age of contract holders
 
67 years

 
67 years

 
66 years

 
66 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 2017 Annual Report for a discussion of guaranteed minimum benefits which have been reinsured.

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)

(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.
4. Investments
See 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, 2018
 
December 31, 2017
 
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
$
799,350

 
$
13,661

 
$
10,138

 
$
—

 
$
802,873

 
$
770,385

 
$
29,246

 
$
2,007

 
$
—

 
$
797,624

U.S. government and agency
524,516

 
12,387

 
14,202

 
—

 
522,701

 
535,757

 
17,023

 
5,717

 
—

 
547,063

Foreign corporate
313,381

 
5,292

 
6,314

 
—

 
312,359

 
304,650

 
8,168

 
3,704

 
—

 
309,114

RMBS
227,665


4,369


4,789


—


227,245


217,857


5,626


1,703


—


221,780

CMBS
208,070

 
801

 
2,690

 
—

 
206,181

 
197,931

 
3,533

 
1,043

 
—

 
200,421

State and political subdivision
65,953

 
5,674

 
678

 
—

 
70,949

 
64,056

 
6,596

 
366

 
—

 
70,286

ABS
76,443

 
298

 
242

 
—

 
76,499

 
58,665

 
305

 
98

 
—

 
58,872

Foreign government
18,501

 
279

 
238

 
—

 
18,542

 
15,833

 
597

 
27

 
—

 
16,403

Total fixed maturity securities
$
2,233,879


$
42,761


$
39,291


$
—


$
2,237,349


$
2,165,134


$
71,094


$
14,665


$
—


$
2,221,563

__________________
(1)
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, 2018 and December 31, 2017.
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, 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 thousands)
Amortized cost
$
46,977

 
$
326,248

 
$
775,779

 
$
572,697

 
$
512,178

 
$
2,233,879

Estimated fair value
$
47,298

 
$
327,538

 
$
764,035

 
$
588,553

 
$
509,925

 
$
2,237,349


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, 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 thousands)
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. corporate
$
366,302

 
$
8,191

 
$
46,709

 
$
1,947

 
$
118,514

 
$
898

 
$
46,372

 
$
1,109

U.S. government and agency
304,962

 
9,897

 
85,562

 
4,305

 
248,434

 
2,895

 
107,253

 
2,822

Foreign corporate
168,505

 
3,897

 
39,824

 
2,417

 
88,724

 
1,540

 
29,552

 
2,164

RMBS
99,834

 
3,107

 
33,531

 
1,682

 
24,060

 
162

 
38,454

 
1,541

CMBS
113,284

 
1,249

 
27,350

 
1,441

 
18,430

 
176

 
27,958

 
867

State and political subdivision
22,134

 
366

 
8,054

 
312

 
9,232

 
110

 
8,111

 
256

ABS
22,535

 
160

 
8,050

 
82

 
7,361

 
23

 
8,076

 
75

Foreign government
11,654

 
238

 
—

 
—

 
4,484

 
27

 
—

 
—

Total fixed maturity securities
$
1,109,210


$
27,105


$
249,080


$
12,186


$
519,239


$
5,831


$
265,776


$
8,834

Total number of securities in an unrealized loss position
319

 
 
 
57

 
 
 
131

 
 
 
58

 
 
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 March 31, 2018.

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)

Gross unrealized losses on fixed maturity securities increased $24.6 million during the three months ended March 31, 2018 to $39.3 million. The increase in gross unrealized losses for the three months ended March 31, 2018 was primarily attributable to increasing longer-term interest rates.
At March 31, 2018, there were no gross unrealized losses on 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:
 
March 31, 2018
 
December 31, 2017
 
Carrying
Value
 
% of
Total
 
Carrying
Value
 
% of
Total
 
(Dollars in thousands)
Mortgage loans
 
 
 
 
 
 
 
Commercial
$
289,478

 
71.2
 %
 
$
276,626

 
70.0
 %
Agricultural
119,101

 
29.3

 
119,984

 
30.4

Subtotal
408,579

 
100.5

 
396,610

 
100.4

Valuation allowances (1)
(1,817
)
 
(0.5
)
 
(1,747
)
 
(0.4
)
Total mortgage loans, net
$
406,762

 
100.0
 %
 
$
394,863

 
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.
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.

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)

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
 
Total
 
 
(Dollars in thousands)
March 31, 2018
 
 
 
 
 
 
 
Loan-to-value ratios:
 
 
 
 
 
 
 
Less than 65%
$
255,430

 
$
20,064

 
$
275,494

 
95.2
%
65% to 75%
7,651

 
—

 
7,651

 
2.6

76% to 80%
6,333

 
—

 
6,333

 
2.2

Total
$
269,414


$
20,064


$
289,478

 
100.0
%
December 31, 2017
 
 
 
 
 
 
 
Loan-to-value ratios:
 
 
 
 
 
 
 
Less than 65%
$
243,217

 
$
17,425

 
$
260,642

 
94.2
%
65% to 75%
12,957

 
—

 
12,957

 
4.7

76% to 80%
3,027

 
—

 
3,027

 
1.1

Total
$
259,201


$
17,425


$
276,626

 
100.0
%
Credit Quality of Agricultural Mortgage Loans
The credit quality of agricultural mortgage loans was as follows at: 
 
March 31, 2018
 
December 31, 2017
 
Recorded
Investment
 
% of
Total
 
Recorded
Investment 
 
% of
Total
 
(Dollars in thousands)
Loan-to-value ratios:
 
 
 
 
 
 
 
Less than 65%
$
119,101

 
100.0
%
 
$
119,077

 
99.2
%
65% to 75%
—

 
—

 
907

 
0.8

Total
$
119,101

 
100.0
%
 
$
119,984

 
100.0
%
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, 2018 and December 31, 2017. 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, 2018 or December 31, 2017. During the three months ended March 31, 2018 and 2017, 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 $60.0 million and $60.7 million at March 31, 2018 and December 31, 2017, 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 (loss) (“AOCI”).

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)

The components of net unrealized investment gains (losses), included in AOCI, were as follows:
 
March 31, 2018
 
December 31, 2017
 
(In thousands)
Fixed maturity securities
$
3,472

 
$
56,432

Derivatives
(2,209
)
 
471

Subtotal
1,263

 
56,903

Amounts allocated from:
 
 
 
DAC and DSI
(2,100
)
 
(19,400
)
Deferred income tax benefit (expense)
175

 
(7,875
)
Net unrealized investment gains (losses)
$
(662
)
 
$
29,628

The changes in net unrealized investment gains (losses) were as follows:
 
Three Months 
 Ended 
 March 31, 2018
 
(In thousands)
Balance, beginning of period
$
29,628

Unrealized investment gains (losses) during the period
(55,640
)
Unrealized investment gains (losses) relating to:
 
DAC and DSI
17,300

Deferred income tax benefit (expense)
8,050

Balance, end of period
$
(662
)
Change in net unrealized investment gains (losses)
$
(30,290
)
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, 2018 and December 31, 2017.
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, 2018
 
December 31, 2017
 
(In thousands)
Invested assets on deposit (regulatory deposits)
$
1,491

 
$
1,549

Invested assets pledged as collateral (1)
419

 
707

Total invested assets on deposit and pledged as collateral
$
1,910


$
2,256

__________________
(1)
The Company has pledged invested assets in connection with derivative transactions (see Note 5).
Variable Interest Entities
The Company has invested in legal entities that are VIEs. In certain instances, the Company holds both the power to direct the most significant activities of the entity, as well as an economic interest in the entity and, as such, is deemed to be the primary beneficiary or consolidator of the entity. The determination of the VIE’s primary beneficiary requires an evaluation of the contractual and implied rights and obligations associated with each party’s relationship with or involvement in the entity, an estimate of the entity’s expected losses and expected residual returns and the allocation of such estimates to each party involved in the entity.

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)

Consolidated VIEs
There were no VIEs for which the Company has concluded that it is the primary beneficiary and which are consolidated at either March 31, 2018 or December 31, 2017.
Unconsolidated VIEs
The carrying amount and maximum exposure to loss relating to VIEs in which the Company holds a significant variable interest but is not the primary beneficiary and which have not been consolidated were as follows at:
 
March 31, 2018
 
December 31, 2017
 
Carrying
Amount
 
Maximum
Exposure
to Loss (1)
 
Carrying
Amount
 
Maximum
Exposure
to Loss (1)
 
(In thousands)
Fixed maturity securities AFS:
 
 
 
 
 
 
 
Structured Securities (2)
$
420,170

 
$
420,170

 
$
431,406

 
$
431,406

Foreign corporate
6,141

 
6,141

 
6,394

 
6,394

Total
$
426,311


$
426,311


$
437,800


$
437,800

______________
(1)
The maximum exposure to loss relating to fixed maturity securities AFS is equal to their carrying amounts or the carrying amounts of retained interests. Such a maximum loss would be expected to occur only upon bankruptcy of the issuer.
(2)
For these variable interests, the Company’s involvement is limited to that of a passive investor in mortgage-backed or asset-backed securities issued by trusts that do not have substantial equity.
Net Investment Income
The components of net investment income were as follows:

Three Months
Ended
March 31,

2018
 
2017

(In thousands)
Investment income:
 
 


Fixed maturity securities
$
20,365

 
$
17,592

Mortgage loans
4,191

 
4,388

Cash, cash equivalents and short-term investments
158

 
37

Other
96

 
149

Subtotal
24,810

 
22,166

Less: Investment expenses
879

 
758

Net investment income
$
23,931

 
$
21,408

See “— Related Party Investment
Transactions” for discussion of related party investment expenses.

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 Gains (Losses)
Components of Net Investment Gains (Losses)
The components of net investment gains (losses) were as follows:

Three Months
Ended
March 31,
 
2018
 
2017

(In thousands)
Total gains (losses) on fixed maturity securities:
 
 
 
Fixed maturity securities — net gains (losses) on sales and disposals
$
(2,839
)
 
$
(1,299
)
Total gains (losses) on fixed maturity securities
(2,839
)
 
(1,299
)
Mortgage loans
(82
)
 
(17
)
Other
566

 
579

Total net investment gains (losses)
$
(2,355
)
 
$
(737
)
Gains (losses) from foreign currency transactions included within net investment gains (losses) were $414 thousand and $544 thousand for the three months ended March 31, 2018 and 2017, respectively.
Sales or Disposals and Impairments 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,

2018
 
2017

(In thousands)
Proceeds
$
53,561

 
$
142,318

Gross investment gains
$
15

 
$
663

Gross investment losses
(2,854
)
 
(1,962
)
Net investment gains (losses)
$
(2,839
)
 
$
(1,299
)
Related Party Investment Transactions
The Company receives investment administrative services from MetLife Investment Advisors, LLC (“MLIA”), a related party investment manager. The related investment administrative service charges were $766 thousand and $691 thousand for the three months ended March 31, 2018 and 2017, respectively.
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.

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)
5. Derivatives (continued)

Accruals on derivatives are generally recorded in accrued investment income or within other liabilities. However, accruals that are not scheduled to settle within one year are included with the derivatives carrying value in other invested assets or other liabilities.
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 generally 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 and the method that will be used to measure ineffectiveness. 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 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. The embedded derivative is bifurcated from the host contract and accounted for as a freestanding derivative if:
•
the combined instrument is not accounted for in its entirety at estimated fair value with changes in estimated fair value recorded in earnings;
•
the terms of the embedded derivative are not clearly and closely related to the economic characteristics of the host contract; and
•
a separate instrument with the same terms as the embedded derivative would qualify as a derivative instrument.

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)

Such embedded derivatives are carried on the balance sheet at estimated fair value with the host contract and changes in their estimated fair value are generally reported in net derivative gains (losses). If the Company is unable to properly identify and measure an embedded derivative for separation from its host contract, the entire contract is carried on the balance sheet at estimated fair value, with changes in estimated fair value recognized in the current period in net investment gains (losses) or net investment income. Additionally, the Company may elect to carry an entire contract on the balance sheet at estimated fair value, with changes in estimated fair value recognized in the current period in net investment gains (losses) or net investment income if that contract contains an embedded derivative that requires bifurcation. At inception, the Company attributes to the embedded derivative a portion of the projected future guarantee fees to be collected from the policyholder equal to the present value of projected future guaranteed benefits. Any additional fees represent “excess” fees and are reported in universal life and investment-type product policy fees.
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 Company primarily uses foreign currency swaps.
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 call options to reduce exposure to rising equity markets associated with Shield Annuities. The Company utilizes equity index options in nonqualifying hedging relationships.

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)

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, 2018
 
December 31, 2017
 
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
 
$
72,627

 
$
802

 
$
3,481

 
$
70,307

 
$
1,571

 
$
1,357

Derivatives Not Designated or Not Qualifying as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate caps
Interest rate
 
800,000

 
7,547

 
—

 
—

 
—

 
—

Foreign currency swaps
Foreign currency exchange rate
 
17,892

 
1,350

 
439

 
16,636

 
2,213

 
254

Equity index options
Equity market
 
441,000

 
9,602

 
—

 
—

 
—

 
—

Total non-designated or nonqualifying derivatives
 
1,258,892

 
18,499

 
439

 
16,636

 
2,213

 
254

Total
 
 
$
1,331,519

 
$
19,301

 
$
3,920

 
$
86,943

 
$
3,784

 
$
1,611

The Company recognized net investment income from settlement payments related to qualifying hedges of $186 thousand and $148 thousand for the three months ended March 31, 2018 and 2017, respectively.
The Company recognized net derivative gains (losses) from settlement payments related to non-qualifying hedges of $82 thousand and $84 thousand for the three months ended March 31, 2018 and 2017, respectively.
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):
 
Three Months Ended March 31, 2018
 
Net
Derivative
Gains
(Losses)
Recognized for
Derivatives (1)
 
Net
Derivative
Gains (Losses)
Recognized for
Hedged Items (2)
 
Amount of Gains (Losses) deferred in AOCI
 
(In thousands)
Derivatives Designated as Hedging Instruments:
 
 
 
 
 
Cash flow hedges (3):
 
 
 
 
 
Foreign currency exchange rate derivatives
$
6

 
$
—

 
$
(2,674
)
Total cash flow hedges
6

 
—

 
(2,674
)
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
 
 
 
 
 
Interest rate derivatives
(4,002
)
 
—

 
—

Foreign currency exchange rate derivatives
(1,054
)
 
152

 
—

Credit derivatives
—

 
—

 
—

Equity derivatives
(8,736
)
 
—

 
—

Embedded derivatives
(30,710
)
 
—

 
—

Total non-qualifying hedges
(44,502
)
 
152

 
—

Total
$
(44,496
)
 
$
152

 
$
(2,674
)

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)

 
Three Months Ended March 31, 2017
 
Net
Derivative
Gains
(Losses)
Recognized for
Derivatives (1)
 
Net
Derivative
Gains (Losses)
Recognized for
Hedged Items (2)
 
Amount of Gains (Losses) deferred in AOCI
 
(In thousands)
Derivatives Designated as Hedging Instruments:
 
 
 
 
 
Cash flow hedges (3):
 
 
 
 
 
Foreign currency exchange rate derivatives
$
—

 
$
—

 
$
(421
)
Total cash flow hedges
—

 
—

 
(421
)
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
 
 
 
 
 
Interest rate derivatives
—

 
—

 
—

Foreign currency exchange rate derivatives
(339
)
 
48

 
—

Credit derivatives
—

 
—

 
—

Equity derivatives
—

 
—

 
—

Embedded derivatives
(131,329
)
 
—

 
—

Total non-qualifying hedges
(131,668
)
 
48

 
—

Total
$
(131,668
)
 
$
48

 
$
(421
)
______________
(1)
Includes gains (losses) reclassified from AOCI for cash flow hedges.
(2)
Includes foreign currency transaction gains (losses) on hedged items in cash flow and nonqualifying hedging relationships. Ineffective portion of the gains (losses) recognized in income is not significant.
(3)
All components of each derivative's gain or loss were included in the assessment of hedge effectiveness.
In certain instances, the Company discontinued cash flow hedge accounting because the forecasted transactions were no longer probable of occurring. Because certain of the forecasted transactions also were not probable of occurring within two months of the anticipated date, the Company reclassified amounts from AOCI into net derivative gains (losses). For both the three months ended March 31, 2018 and 2017, there were no amounts reclassified into net derivative gains (losses) related to such discontinued cash flow hedges.
There were no hedged forecasted transactions, other than the receipt or payment of variable interest payments, for both March 31, 2018 and December 31, 2017.
At March 31, 2018 and December 31, 2017, the balance in AOCI associated with foreign currency swaps designated and qualifying as cash flow hedges was ($2.2) million and $471 thousand, respectively.
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.

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)

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, 2018
 
December 31, 2017
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)
 
$
19,408

 
$
3,751

 
$
3,903

 
$
1,482

Total gross estimated fair value of derivatives (1)
 
19,408

 
3,751

 
3,903

 
1,482

Amounts offset on the balance sheets
 
—

 
—

 
—

 
—

Estimated fair value of derivatives presented on the balance sheets (1)
 
19,408

 
3,751

 
3,903

 
1,482

Gross amounts not offset on the balance sheets:
 
 
 
 
 
 
 
 
Gross estimated fair value of derivatives: (2)
 
 
 
 
 
 
 
 
OTC-bilateral
 
(3,751
)
 
(3,751
)
 
(1,482
)
 
(1,482
)
Cash collateral: (3)
 
 
 
 
 
 
 
 
OTC-bilateral
 
(14,246
)
 
—

 
(2,367
)
 
—

Securities collateral: (4)
 
 
 
 
 
 
 
 
OTC-bilateral
 
—

 
—

 
—

 
—

Net amount after application of master netting agreements and collateral
 
$
1,411

 
$
—

 
$
54

 
$
—

______________
(1)
At March 31, 2018 and December 31, 2017, derivative assets included income or (expense) accruals reported in accrued investment income or in other liabilities of $107 thousand and $119 thousand, respectively, and derivative liabilities included (income) or expense accruals reported in accrued investment income or in other liabilities of ($169) thousand and ($129) 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, 2018 and December 31, 2017, the Company received excess cash collateral of $2.0 million and $3.0 million, respectively, and did not provide any excess cash collateral, which is not included in the table above due to the foregoing limitation.

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)

(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, 2018, 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, 2018 and December 31, 2017, the Company did not receive excess securities collateral, and provided excess securities collateral with an estimated fair value of $419 thousand and $707 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, as applicable, 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 both March 31, 2018 and December 31, 2017, the Company held no OTC-bilateral derivatives that were in a net liability position after considering the effect of netting agreements. 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 products that contain embedded derivatives that are required to be separated from their host contracts and accounted for as freestanding derivatives. 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, 2018
 
December 31, 2017
 
 
 
(In thousands)
Embedded derivatives within asset host contracts:
 
 
 
 
Ceded guaranteed minimum benefits
Premiums, reinsurance and other receivables
 
$
262,383

 
$
307,698

 
 
 
 
 
 
Embedded derivatives within liability host contracts:
 
 
 
 
Direct guaranteed minimum benefits
Policyholder account balances
 
$
(56,252
)
 
$
(51,130
)
Fixed annuities with equity indexed returns
Policyholder account balances
 
7,624


11,195

Embedded derivatives within liability host contracts
 
$
(48,628
)
 
$
(39,935
)

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)
5. Derivatives (continued)

The following table presents changes in estimated fair value related to embedded derivatives:
 
 
Three Months
Ended
March 31,
 
 
2018
 
2017
 
 
(In thousands)
Net derivative gains (losses) (1), (2)
 
$
(30,710
)
 
$
(131,329
)
______________
(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 ($1.1) million and ($300) thousand for the three months ended March 31, 2018 and 2017, 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 ($600) thousand and $7.0 million for the three months ended March 31, 2018 and 2017 respectively.
(2)
See Note 10 for discussion of related party net derivative gains (losses).


24
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, including those items for which the Company has elected the fair value option, are presented below at:
 
March 31, 2018
 
Fair Value Hierarchy
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Estimated
Fair Value
 
(In thousands)
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
U.S. corporate
$
—

 
$
758,241

 
$
44,632

 
$
802,873

U.S. government and agency
400,215

 
122,486

 
—

 
522,701

Foreign corporate
—

 
264,911

 
47,448

 
312,359

RMBS
—

 
210,882

 
16,363

 
227,245

CMBS
—

 
201,207

 
4,974

 
206,181

State and political subdivision
—

 
70,949

 
—

 
70,949

ABS
—

 
76,499

 
—

 
76,499

Foreign government
—

 
18,542

 
—

 
18,542

Total fixed maturity securities
400,215

 
1,723,717

 
113,417

 
2,237,349

Short-term investments
7,978

 
—

 
—

 
7,978

Derivative assets: (1)
 
 
 
 
 
 
 
Interest rate
—

 
7,547

 
—

 
7,547

Foreign currency exchange rate
—

 
2,152

 
—

 
2,152

Equity market
—

 
9,602

 
—

 
9,602

Total derivative assets
—

 
19,301

 
—

 
19,301

Embedded derivatives within asset host contracts (2)
—

 
—

 
262,383

 
262,383

Separate account assets
—

 
4,846,885

 
—

 
4,846,885

Total assets
$
408,193

 
$
6,589,903

 
$
375,800

 
$
7,373,896

Liabilities
 
 
 
 
 
 
 
Derivative liabilities: (1)
 
 
 
 
 
 
 
Foreign currency exchange rate
$
—

 
$
3,920

 
$
—

 
$
3,920

Embedded derivatives within liability host contracts (2)
—

 
—

 
(48,628
)
 
(48,628
)
Total liabilities
$
—

 
$
3,920

 
$
(48,628
)
 
$
(44,708
)

25
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 (continued)

 
December 31, 2017
 
Fair Value Hierarchy
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Estimated
Fair Value
 
(In thousands)
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
U.S. corporate
$
—

 
$
750,891

 
$
46,733

 
$
797,624

U.S. government and agency
420,084

 
126,979

 
—

 
547,063

Foreign corporate
—

 
259,897

 
49,217

 
309,114

RMBS
—

 
207,338

 
14,442

 
221,780

CMBS
—

 
195,306

 
5,115

 
200,421

State and political subdivision
—

 
70,286

 
—

 
70,286

ABS
—

 
58,872

 
—

 
58,872

Foreign government
—

 
16,403

 
—

 
16,403

Total fixed maturity securities
420,084

 
1,685,972

 
115,507

 
2,221,563

Short-term investments
—

 
—

 
—

 
—

Derivative assets: (1)
 
 
 
 
 
 
 
Foreign currency exchange rate
—

 
3,784

 
—

 
3,784

Embedded derivatives within asset host contracts (2)
—

 
—

 
307,698

 
307,698

Separate account assets
—

 
5,021,633

 
—

 
5,021,633

Total assets
$
420,084

 
$
6,711,389

 
$
423,205

 
$
7,554,678

Liabilities
 
 
 
 
 
 
 
Derivative liabilities: (1)
 
 
 
 
 
 
 
Foreign currency exchange rate
$
—

 
$
1,611

 
$
—

 
$
1,611

Embedded derivatives within liability host contracts (2)
—

 
—

 
(39,935
)
 
(39,935
)
Total liabilities
$
—

 
$
1,611

 
$
(39,935
)
 
$
(38,324
)
______________
(1)
Derivative assets are presented within other invested assets on the balance sheets and derivative liabilities are presented within other liabilities on the balance sheets. The amounts are presented gross in the tables above to reflect the presentation on the balance sheets.
(2)
Embedded derivatives within asset host contracts are presented within premiums, reinsurance and other receivables on the balance sheets. Embedded derivatives within liability host contracts are presented within policyholder account balances on the balance sheets.
Valuation Controls and Procedures
The Company monitors and provides oversight of valuation controls and policies for securities, mortgage loans and derivatives, which are primarily executed by MLIA. The valuation methodologies used to determine fair values prioritize the use of observable market prices and market-based parameters and determines that judgmental valuation adjustments, when applied, are based upon established policies and are applied consistently over time. The valuation methodologies for securities, mortgage loans and derivatives are reviewed on an ongoing basis and revised when necessary, based on changing market conditions. In addition, the Chief Accounting Officer periodically reports to the Audit Committee of Brighthouse’s Board of Directors regarding compliance with fair value accounting standards.

26
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 (continued)

The fair value of financial assets and financial liabilities is based on quoted market prices, where available. The Company assesses whether prices received represent a reasonable estimate of fair value through controls designed to ensure valuations represent an exit price. MLIA performs several controls, including certain monthly controls, which include, but are not limited to, analysis of portfolio returns to corresponding benchmark returns, comparing a sample of executed prices of securities sold to the fair value estimates, reviewing the bid/ask spreads to assess activity, comparing prices from multiple independent pricing services and ongoing due diligence to confirm that independent pricing services use market-based parameters. The process includes a determination of the observability of inputs used in estimated fair values received from independent pricing services or brokers by assessing whether these inputs can be corroborated by observable market data. Independent non-binding broker quotes, also referred to herein as “consensus pricing,” are used for a non-significant portion of the portfolio. Prices received from independent brokers are assessed to determine if they represent a reasonable estimate of fair value by considering such pricing relative to the current market dynamics and current pricing for similar financial instruments. Fixed maturity securities priced using independent non-binding broker quotations represent less than 1% of the total estimated fair value of fixed maturity securities and 4% of the total estimated fair value of Level 3 fixed maturity securities at March 31, 2018.
MLIA also applies a formal process to challenge any prices received from independent pricing services that are not considered representative of estimated fair value. If prices received from independent pricing services are not considered reflective of market activity or representative of estimated fair value, independent non-binding broker quotations are obtained. If obtaining an independent non-binding broker quotation is unsuccessful, MLIA will use the last available price.
The Company reviews outputs of MLIA’s controls and performs additional controls, including certain monthly controls, which include but are not limited to, performing balance sheet analytics to assess reasonableness of period to period pricing changes, including any price adjustments. Price adjustments are applied if prices or quotes received from independent pricing services or brokers are not considered reflective of market activity or representative of estimated fair value. The Company did not have significant price adjustments during the three months ended March 31, 2018.
Determination of Fair Value
Fixed maturities
The fair values for actively traded marketable bonds, primarily U.S. government and agency securities, are determined using the quoted market prices and are classified as Level 1 assets. For fixed maturities classified as Level 2 assets, fair values are determined using either a market or income approach and are valued based on a variety of observable inputs as described below.
U.S. corporate and foreign corporate securities: Fair value is determined using third-party commercial pricing services, with the primary inputs being quoted prices in markets that are not active, benchmark yields, spreads off benchmark yields, new issuances, issuer rating, trades of identical or comparable securities, or duration. Privately-placed securities are valued using the additional key inputs: market yield curve, call provisions, observable prices and spreads for similar public or private securities that incorporate the credit quality and industry sector of the issuer, and delta spread adjustments to reflect specific credit-related issues.
U.S. government and agency, state and political subdivision and foreign government securities: Fair value is determined using third-party commercial pricing services, with the primary inputs being quoted prices in markets that are not active, benchmark U.S. Treasury yield or other yields, spread off the U.S. Treasury yield curve for the identical security, issuer ratings and issuer spreads, broker dealer quotes, and comparable securities that are actively traded.
Structured securities: Fair value is determined using third-party commercial pricing services, with the primary inputs being quoted prices in markets that are not active, spreads for actively traded securities, spreads off benchmark yields, expected prepayment speeds and volumes, current and forecasted loss severity, ratings, geographic region, weighted average coupon and weighted average maturity, average delinquency rates and debt-service coverage ratios. Other issuance-specific information is also used, including, but not limited to; collateral type, structure of the security, vintage of the loans, payment terms of the underlying asset, payment priority within tranche, and deal performance.

27
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 (continued)

Short-term investments
The fair value for actively traded short-term investments are determined using quoted market prices and are classified as Level 1 assets.
Derivatives
The fair values for OTC-bilateral derivatives and OTC-cleared derivatives classified as Level 2 assets or liabilities, fair values are determined using the income approach. Valuations of non-option-based derivatives utilize present value techniques, whereas valuations of option-based derivatives utilize option pricing models which are based on market standard valuation methodologies and a variety of observable inputs.
The significant inputs to the pricing models for most OTC-bilateral derivatives are inputs that are observable in the market or can be derived principally from, or corroborated by, observable market data. Certain OTC-bilateral derivatives may rely on inputs that are significant to the estimated fair value that are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. These unobservable inputs may involve significant management judgment or estimation. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and management believes they are consistent with what other market participants would use when pricing such instruments.
Most inputs for OTC-bilateral derivatives are mid-market inputs but, in certain cases, liquidity adjustments are made when they are deemed more representative of exit value. Market liquidity, as well as the use of different methodologies, assumptions and inputs, may have a material effect on the estimated fair values of the Company’s derivatives and could materially affect net income. 
The credit risk of both the counterparty and the Company are considered in determining the estimated fair value for all OTC-bilateral derivatives, and any potential credit adjustment is based on the net exposure by counterparty after taking into account the effects of netting agreements and collateral arrangements. The Company values its OTC-bilateral derivatives using standard swap curves which may include a spread to the risk-free rate, depending upon specific collateral arrangements. This credit spread is appropriate for those parties that execute trades at pricing levels consistent with similar collateral arrangements. As the Company and its significant derivative counterparties generally execute trades at such pricing levels and hold sufficient collateral, additional credit risk adjustments are not currently required in the valuation process. The Company’s ability to consistently execute at such pricing levels is in part due to the netting agreements and collateral arrangements that are in place with all of its significant derivative counterparties. An evaluation of the requirement to make additional credit risk adjustments is performed by the Company each reporting period.
Embedded Derivatives
Embedded derivatives principally include certain direct variable annuity guarantees and certain affiliated ceded reinsurance agreements related to such variable annuity guarantees. Embedded derivatives are recorded at estimated fair value with changes in estimated fair value reported in net income.
The Company issues certain variable annuity products with guaranteed minimum benefits. GMWBs, GMABs and certain GMIBs contain embedded derivatives, which are measured at estimated fair value separately from the host variable annuity contract, with changes in estimated fair value reported in net derivative gains (losses). These embedded derivatives are classified within policyholder account balances on the balance sheets.
The Company’s actuarial department calculates the fair value of these embedded derivatives, which are estimated as the present value of projected future benefits minus the present value of projected future fees using actuarial and capital market assumptions including expectations concerning policyholder behavior. The calculation is based on in-force business, and is performed using standard actuarial valuation software which projects future cash flows from the embedded derivative over multiple risk neutral stochastic scenarios using observable risk-free rates.
Capital market assumptions, such as risk-free rates and implied volatilities, are based on market prices for publicly traded instruments to the extent that prices for such instruments are observable. Implied volatilities beyond the observable period are extrapolated based on observable implied volatilities and historical volatilities. Actuarial assumptions, including mortality, lapse, withdrawal and utilization, are unobservable and are reviewed at least annually based on actuarial studies of historical experience.

28
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 (continued)

The valuation of these guarantee liabilities includes nonperformance risk adjustments and adjustments for a risk margin related to non-capital market inputs. The nonperformance adjustment is determined by taking into consideration publicly available information relating to spreads in the secondary market for Brighthouse Financial, Inc.’s debt. These observable spreads are then adjusted to reflect the priority of these liabilities and claims paying ability of the issuing insurance subsidiaries as compared to Brighthouse Financial, Inc.’s overall financial strength.
Risk margins are established to capture the non-capital market risks of the instrument which represent the additional compensation a market participant would require to assume the risks related to the uncertainties of such actuarial assumptions as annuitization, premium persistency, partial withdrawal and surrenders. The establishment of risk margins requires the use of significant management judgment, including assumptions of the amount and cost of capital needed to cover the guarantees. These guarantees may be more costly than expected in volatile or declining equity markets. Market conditions including, but not limited to, changes in interest rates, equity indices, market volatility and foreign currency exchange rates; changes in nonperformance risk; and variations in actuarial assumptions regarding policyholder behavior, mortality and risk margins related to non-capital market inputs, may result in significant fluctuations in the estimated fair value of the guarantees that could materially affect net income.
The Company ceded to a former affiliate the risk associated with certain of the GMIBs, GMABs and GMWBs described above. These reinsurance agreements contain embedded derivatives and are included within premiums, reinsurance and other receivables on the balance sheets with changes in estimated fair value reported in net derivative gains (losses). The value of the embedded derivatives on the ceded risk is determined using a methodology consistent with that described previously for the guarantees directly written by the Company with the exception of the input for nonperformance risk that reflects the credit of the reinsurer.
Transfers between Levels
Overall, transfers between levels occur when there are changes in the observability of inputs and market activity. Transfers into or out of any level are assumed to occur at the beginning of the period.
Transfers between Levels 1 and 2:
There were no transfers between Levels 1 and 2 for assets and liabilities measured at estimated fair value and still held at both March 31, 2018 and December 31, 2017.
Transfers into or out of Level 3:
Assets and liabilities are transferred into Level 3 when a significant input cannot be corroborated with market observable data. This occurs when market activity decreases significantly and underlying inputs cannot be observed, current prices are not available, and/or when there are significant variances in quoted prices, thereby affecting transparency. Assets and liabilities are transferred out of Level 3 when circumstances change such that a significant input can be corroborated with market observable data. This may be due to a significant increase in market activity, a specific event, or one or more significant input(s) becoming observable.

29
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 (continued)

Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)
The following table presents certain quantitative information about the significant unobservable inputs used in the fair value measurement, and the sensitivity of the estimated fair value to changes in those inputs, for the more significant asset and liability classes measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at:
 
 
 
 
 
 
 
March 31, 2018
 
December 31, 2017
 
Impact of
Increase in Input
on Estimated
Fair Value (2)
 
Valuation Techniques
 
Significant
Unobservable Inputs
 

Range
 
Weighted
Average (1)
 
Range
 
Weighted
Average (1)
 
Fixed maturity securities (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. corporate and foreign corporate
•
Matrix pricing
 
•
Offered quotes (4)
 
96
-
139
 
105
 
98
-
142
 
108
 
Increase
 
•
Market pricing
 
•
Quoted prices (4)
 
87
-
104
 
97
 
87
-
109
 
99
 
Increase
RMBS
•
Market pricing
 
•
Quoted prices (4)
 
69
-
100
 
88
 
70
-
101
 
85
 
Increase (5)
Embedded derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct, assumed and ceded guaranteed minimum benefits
•
Option pricing techniques
 
•
Mortality rates:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ages 0 - 40
 
0%
-
0.09%
 
 
 
0%
-
0.09%
 
 
 
Decrease (6)
 
 
 
 
 
Ages 41 - 60
 
0.04%
-
0.65%
 
 
 
0.04%
-
0.65%
 
 
 
Decrease (6)
 
 
 
 
 
Ages 61 - 115
 
0.26%
-
100%
 
 
 
0.26%
-
100%
 
 
 
Decrease (6)
 
 
 
 
•
Lapse rates:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Durations 1 - 10
 
0.25%
-
100%
 
 
 
0.25%
-
100%
 
 
 
Decrease (7)
 
 
 
 
 
Durations 11 - 20
 
2%
-
100%
 
 
 
2%
-
100%
 
 
 
Decrease (7)
 
 
 
 
 
Durations 21 - 116
 
2%
-
100%
 
 
 
2%
-
100%
 
 
 
Decrease (7)
 
 
 
 
•
Utilization rates
 
0%
-
25%
 
 
 
0%
-
25%
 
 
 
Increase (8)
 
 
 
 
•
Withdrawal rates
 
0.25%
-
10%
 
 
 
0.25%
-
10%
 
 
 
(9)
 
 
 
 
•
Long-term equity volatilities
 
17.40%
-
25%
 
 
 
17.40%
-
25%
 
 
 
Increase (10)
 
 
 
 
•
Nonperformance risk spread
 
0.90%
-
1.66%
 
 
 
0.64%
-
1.43%
 
 
 
Decrease (11)
______________
(1)
The weighted average for fixed maturity securities is determined based on the estimated fair value of the securities.
(2)
The impact of a decrease in input would have the opposite impact on estimated fair value. For embedded derivatives, changes to direct and assumed guaranteed minimum benefits are based on liability positions; changes to ceded guaranteed minimum benefits are based on asset positions.
(3)
Significant increases (decreases) in expected default rates in isolation would result in substantially lower (higher) valuations.
(4)
Range and weighted average are presented in accordance with the market convention for fixed maturity securities of dollars per hundred dollars of par.
(5)
Changes in the assumptions used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumptions used for prepayment rates.
(6)
Mortality rates vary by age and by demographic characteristics such as gender. Mortality rate assumptions are based on company experience. A mortality improvement assumption is also applied. For any given contract, mortality rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative.
(7)
Base lapse rates are adjusted at the contract level based on a comparison of the actuarially calculated guaranteed values and the current policyholder account value, as well as other factors, such as the applicability of any surrender charges. A dynamic lapse function reduces the base lapse rate when the guaranteed amount is greater than the account value as in the money contracts are less likely to lapse. Lapse rates are also generally assumed to be lower in periods when a surrender charge applies. For any given contract, lapse rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative.

30
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 (continued)

(8)
The utilization rate assumption estimates the percentage of contract holders with a GMIB or lifetime withdrawal benefit who will elect to utilize the benefit upon becoming eligible. The rates may vary by the type of guarantee, the amount by which the guaranteed amount is greater than the account value, the contract’s withdrawal history and by the age of the policyholder. For any given contract, utilization rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative.
(9)
The withdrawal rate represents the percentage of account balance that any given policyholder will elect to withdraw from the contract each year. The withdrawal rate assumption varies by age and duration of the contract, and also by other factors such as benefit type. For any given contract, withdrawal rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. For GMWBs, any increase (decrease) in withdrawal rates results in an increase (decrease) in the estimated fair value of the guarantees. For GMABs and GMIBs, any increase (decrease) in withdrawal rates results in a decrease (increase) in the estimated fair value.
(10)
Long-term equity volatilities represent equity volatility beyond the period for which observable equity volatilities are available. For any given contract, long-term equity volatility rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative.
(11)
Nonperformance risk spread varies by duration and by currency. For any given contract, multiple nonperformance risk spreads will apply, depending on the duration of the cash flow being discounted for purposes of valuing the embedded derivative.
The following is a summary of the valuation techniques and significant unobservable inputs used in the fair value measurement of assets and liabilities classified within Level 3 that are not included in the preceding table. Generally, all other classes of securities classified within Level 3, including those within separate account assets and embedded derivatives, use the same valuation techniques and significant unobservable inputs as previously described for Level 3 securities. This includes matrix pricing and discounted cash flow methodologies, inputs such as quoted prices for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2, as well as independent non-binding broker quotations. The sensitivity of the estimated fair value to changes in the significant unobservable inputs for these other assets and liabilities is similar in nature to that described in the preceding table.

31
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 (continued)

The following tables summarize the change of all assets and (liabilities) measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3):
 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
Fixed Maturity Securities
 
 
 
 
Corporate (1)
 
Structured Securities
 
Net Embedded
Derivatives (2)
 
 
(In thousands)
Three Months Ended March 31, 2018
 
 
 
 
 
 
Balance, beginning of period
 
$
95,950

 
$
19,557

 
$
347,633

Total realized/unrealized gains (losses) included in net income (loss) (3) (4)
 
1

 
109

 
(30,710
)
Total realized/unrealized gains (losses) included in AOCI
 
(772
)
 
119

 
—

Purchases (5)
 
783

 
1,955

 
—

Sales (5)
 
(716
)
 
(403
)
 
—

Issuances (5)
 
—

 
—

 
—

Settlements (5)
 
—

 
—

 
(5,912
)
Transfers into Level 3 (6)
 
—

 
—

 
—

Transfers out of Level 3 (6)
 
(3,166
)
 
—

 
—

Balance, end of period
 
$
92,080

 
$
21,337

 
$
311,011

Three Months Ended March 31, 2017
 
 
 
 
 
 
Balance, beginning of period
 
$
72,291

 
$
31,423

 
$
403,037

Total realized/unrealized gains (losses) included in net income (loss) (3) (4)
 
(42
)
 
95

 
(131,329
)
Total realized/unrealized gains (losses) included in AOCI
 
998

 
216

 
—

Purchases (5)
 
20,631

 
—

 
—

Sales (5)
 
(11,274
)
 
(1,449
)
 
—

Issuances (5)
 
—

 
—

 
—

Settlements (5)
 
—

 
—

 
119,116

Transfers into Level 3 (6)
 
—

 
42

 
—

Transfers out of Level 3 (6)
 
—

 
—

 
—

Balance, end of period
 
$
82,604

 
$
30,327

 
$
390,824

Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at March 31, 2018 (7)
 
$
1

 
$
109

 
$
(33,063
)
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at March 31, 2017 (7)
 
$
(42
)
 
$
95

 
$
(130,943
)
______________
(1)
Comprised of U.S. and foreign corporate securities.
(2)
Embedded derivative assets and liabilities are presented net for purposes of the rollforward.
(3)
Amortization of premium/accretion of discount is included within net investment income. Impairments charged to net income (loss) on securities are included in net investment gains (losses). Lapses associated with net embedded derivatives are included in net derivative gains (losses). Substantially all realized/unrealized gains (losses) included in net income (loss) for net embedded derivatives are reported in net derivative gains (losses).
(4)
Interest accruals, as well as cash interest coupons received, are excluded from the rollforward.
(5)
Items purchased/issued and then sold/settled in the same period are excluded from the rollforward. Fees attributed to embedded derivatives are included in settlements.
(6)
Gains and losses, in net income (loss) and OCI, are calculated assuming transfers into and/or out of Level 3 occurred at the beginning of the period. Items transferred into and then out of Level 3 in the same period are excluded from the rollforward.

32
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 (continued)

(7)
Changes in unrealized gains (losses) included in net income (loss) relate to assets and liabilities still held at the end of the respective periods. Substantially all changes in unrealized gains (losses) included in net income (loss) for net embedded derivatives are reported in net derivative gains (losses).
Fair Value of Financial Instruments Carried at Other Than Fair Value
The following tables provide fair value information for financial instruments that are carried on the balance sheet at amounts other than fair value. These tables exclude the following financial instruments: cash and cash equivalents, accrued investment income and payables for collateral under derivative transactions. The estimated fair value of the excluded financial instruments, which are primarily classified in Level 2, approximates carrying value as they are short-term in nature such that the Company believes there is minimal risk of material changes in interest rates or credit quality. All remaining balance sheet amounts excluded from the tables below are not considered financial instruments subject to this disclosure.
The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows at:
 
March 31, 2018
 
 
 
Fair Value Hierarchy
 
 
 
Carrying
Value
Level 1
 
Level 2
 
Level 3
Total
Estimated
Fair Value
 
(In thousands)
Assets
 
 
 
 
 
 
 
 
 
Mortgage loans
$
406,762

 
$
—

 
$
—

 
$
402,200

 
$
402,200

Premiums, reinsurance and other receivables
$
18,170

 
$
—

 
$
701

 
$
16,150

 
$
16,851

Liabilities
 
 
 
 
 
 
 
 
 
Policyholder account balances
$
1,139,063

 
$
—

 
$
—

 
$
1,077,586

 
$
1,077,586

 
December 31, 2017
 
 
 
Fair Value Hierarchy
 
 
 
Carrying
Value
Level 1
 
Level 2
 
Level 3
Total
Estimated
Fair Value
 
(In thousands)
Assets
 
 
 
 
 
 
 
 
 
Mortgage loans
$
394,863

 
$
—

 
$
—

 
$
395,894

 
$
395,894

Premiums, reinsurance and other receivables
$
20,489

 
$
—

 
$
900

 
$
19,728

 
$
20,628

Liabilities
 
 
 
 
 
 
 
 
 
Policyholder account balances
$
1,154,733

 
$
—

 
$
—

 
$
1,140,886

 
$
1,140,886



33
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)

7. Equity
Accumulated Other Comprehensive Income (Loss)
Information regarding changes in the balances of each component of AOCI was as follows:
 
Three Months 
 Ended 
 March 31, 2018
 
Unrealized
Investment Gains
(Losses), Net of
Related Offsets (1)
 
Unrealized
Gains (Losses)
on Derivatives
 
Total
 
(In thousands)
Balance, beginning of period
$
29,323

 
$
305

 
$
29,628

OCI before reclassifications
(38,499
)
 
(2,674
)
 
(41,173
)
Deferred income tax benefit (expense)
8,083

 
562

 
8,645

AOCI before reclassifications, net of income tax
(1,093
)
 
(1,807
)
 
(2,900
)
Amounts reclassified from AOCI
2,839

 
(6
)
 
2,833

Deferred income tax benefit (expense)
(596
)
 
1

 
(595
)
Amounts reclassified from AOCI, net of income tax
2,243

 
(5
)
 
2,238

Balance, end of period
$
1,150

 
$
(1,812
)
 
$
(662
)
 
Three Months 
 Ended 
 March 31, 2017
 
Unrealized
Investment Gains
(Losses), Net of
Related Offsets (1)
 
Unrealized
Gains (Losses)
on Derivatives
 
Total
 
(In thousands)
Balance, beginning of period
$
1,340

 
$
3,067

 
$
4,407

OCI before reclassifications
5,460

 
(421
)
 
5,039

Deferred income tax benefit (expense)
(1,911
)
 
147

 
(1,764
)
AOCI before reclassifications, net of income tax
4,889

 
2,793

 
7,682

Amounts reclassified from AOCI
1,287

 
—

 
1,287

Deferred income tax benefit (expense)
(451
)
 
—

 
(451
)
Amounts reclassified from AOCI, net of income tax
836

 
—

 
836

Balance, end of period
$
5,725

 
$
2,793

 
$
8,518

______________
(1)
See Note 4 for information on offsets to investments related to DAC and DSI.

34
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
7. Equity (continued)

Information regarding amounts reclassified out of each component of AOCI was as follows:
AOCI Components
 
Amounts Reclassified from AOCI
 
Statements of Operations and
Comprehensive Income (Loss) Locations
 
 
Three Months
Ended
March 31,
 
 
 
 
2018
 
2017
 
 
 
 
(In thousands)
 
 
Net unrealized investment gains (losses):
 
 
 
 
 
 
Net unrealized investment gains (losses)
 
$
(2,839
)
 
$
(1,304
)
 
Net investment gains (losses)
Net unrealized investment gains (losses)
 
—

 
17

 
Net investment income
Net unrealized investment gains (losses), before income tax
 
(2,839
)
 
(1,287
)
 
 
Income tax (expense) benefit
 
596

 
451

 
 
Net unrealized investment gains (losses), net of income tax
 
(2,243
)
 
(836
)
 
 
Unrealized gains (losses) on derivatives - cash flow hedges:
 
 
 
 
 
 
Foreign currency swaps
 
6

 
—

 
Net derivative gains (losses)
Gains (losses) on cash flow hedges, before income tax
 
6

 
—

 
 
Income tax (expense) benefit
 
(1
)
 
—

 
 
Gains (losses) on cash flow hedges, net of income tax
 
5

 
—

 
 
Total reclassifications, net of income tax
 
$
(2,238
)
 
$
(836
)
 
 
8. Other Revenues and Other Expenses
Other Revenues
The Company has entered into contracts with mutual funds, fund managers, and their affiliates (collectively, the “Funds”) whereby the Company is paid monthly or quarterly fees (“12b-1 fees”) for providing certain services to customers and distributors of the Funds. The 12b-1 fees are generally equal to a fixed percentage of the average daily balance of the customer’s investment in a fund are based on a specified in the contract between the Company and the Funds. Payments are generally collected when due and are neither refundable nor able to offset future fees.
To earn these fees, the Company performs services such as responding to phone inquiries, maintaining records, providing information to distributors and shareholders about fund performance and providing training to account managers and sales agents. The passage of time reflects the satisfaction of the Company’s performance obligations to the Funds, and is used to recognize revenue associated with 12b-1 fees.
Other revenues consisted primarily of 12b-1 fees of $3 million for both the three months ended March 31, 2018 and 2017, of which all were reported in the annuities segment.

35
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
8. Other Revenues and Other Expenses (continued)

Other Expenses
Information on other expenses was as follows:
 
 
Three Months
Ended
March 31,
 
 
2018
 
2017
 
(In thousands)
Compensation
 
$
3,510

 
$
2,879

Commissions
 
11,449

 
6,301

Volume-related costs
 
2,220

 
1,006

Related party expenses on ceded reinsurance
 
—

 
4,523

Capitalization of DAC
 
(8,116
)
 
(2,192
)
Premium taxes, licenses and fees
 
1,043

 
348

Professional services
 
1,457

 
1,080

Rent and related expenses
 
111

 
143

Other
 
4,053

 
4,134

Total other expenses
 
$
15,727

 
$
18,222

Related Party Expenses
Commissions and capitalization of DAC include the impact of related party reinsurance transactions. See Note 10 for a discussion of related party expenses included in the table above.
9. Contingencies, Commitments and Guarantees
Contingencies
Litigation
Sales Practices Claims
Over the past several years, the Company has faced claims and regulatory inquiries and investigations, alleging improper marketing or sales of individual life insurance policies, annuities, or other products. The Company continues to defend vigorously against the claims in these matters. The Company believes adequate provision has been made in its financial statements for all probable and reasonably estimable losses for sales practices matters.
Unclaimed Property Litigation
Total Asset Recovery Services, LLC on its own behalf and on behalf of the State of New York v. Brighthouse Financial, Inc., et al. (Supreme Court, New York County, NY, second amended complaint filed November 17, 2017). Total Asset Recovery Services, LLC (the “Relator”) has brought a qui tam action against Brighthouse Financial, Inc. and its subsidiaries and affiliates under the New York False Claims Act seeking to recover damages on behalf of the State of New York. The action originally was filed under seal on or about December 3, 2010. The State of New York declined to intervene in the action, and the Relator is now prosecuting the action. The Relator alleges that from on or about April 1, 1986 and continuing annually through on or about September 10, 2017, the defendants violated New York State Finance Law Section 189 (1) (g) by failing to timely report and deliver unclaimed insurance property to the State of New York. The Relator is seeking, among other things, treble damages, penalties, expenses and attorneys’ fees and prejudgment interest. No specific dollar amount of damages is specified by the Relator who also is suing numerous insurance companies and John Doe defendants. Brighthouse Financial, Inc. has filed a motion to dismiss. The Brighthouse defendants intend to defend this action vigorously. 

36
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
9. Contingencies, Commitments and Guarantees (continued)

Summary
Various litigation, claims and assessments against the Company, have arisen in the course of the Company's business, including, but not limited to, in connection with its activities as an insurer, investor, and taxpayer. Further, state insurance regulatory authorities and other federal and state authorities regularly make inquiries and conduct investigations concerning the Company's compliance with applicable insurance and other laws and regulations.
It is not possible to predict the ultimate outcome of all pending investigations and legal proceedings. In some of the matters, large and/or indeterminate amounts, including punitive and treble damages, are sought. Although in light of these considerations it is possible that an adverse outcome in certain cases could have a material effect upon the Company's financial position, based on information currently known by the Company's management, in its opinion, the outcomes of such pending investigations and legal proceedings are not likely to have such an effect. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material effect on the Company's net income or cash flows in particular quarterly or annual periods.
Commitments
Mortgage Loan Commitments
The Company commits to lend funds under mortgage loan commitments. The amounts of these mortgage loan commitments were $4.3 million and $355 thousand at March 31, 2018 and December 31, 2017, respectively.
Commitments to Fund Private Corporate Bond Investments
The Company commits to lend funds under private corporate bond investments. The amounts of these unfunded commitments were $6.5 million and $11.6 million at March 31, 2018 and December 31, 2017, respectively.
Guarantees
In the normal course of its business, the Company has provided certain indemnities, guarantees and commitments to third parties such that it may be required to make payments now or in the future. In the context of acquisition, disposition, investment and other transactions, the Company has provided indemnities and guarantees, including those related to tax, environmental and other specific liabilities and other indemnities and guarantees that are triggered by, among other things, breaches of representations, warranties or covenants provided by the Company. In addition, in the normal course of business, the Company provides indemnifications to counterparties in contracts with triggers similar to the foregoing, as well as for certain other liabilities, such as third-party lawsuits. These obligations are often subject to time limitations that vary in duration, including contractual limitations and those that arise by operation of law, such as applicable statutes of limitation. In some cases, the maximum potential obligation under the indemnities and guarantees is subject to a contractual limitation, while in other cases such limitations are not specified or applicable. Since certain of these obligations are not subject to limitations, the Company does not believe that it is possible to determine the maximum potential amount that could become due under these guarantees in the future. Management believes that it is unlikely the Company will have to make any material payments under these indemnities, guarantees, or commitments.
In addition, the Company indemnifies its directors and officers as provided in its charters and by-laws. Also, the Company indemnifies its agents for liabilities incurred as a result of their representation of the Company’s interests. Since these indemnities are generally not subject to limitation with respect to duration or amount, the Company does not believe that it is possible to determine the maximum potential amount that could become due under these indemnities in the future.
The Company had no liability for indemnities, guarantees and commitments at both March 31, 2018 and December 31, 2017.

37
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)

10. Related Party Transactions
The Company has various existing arrangements with its Brighthouse affiliates and MetLife for services necessary to conduct its activities. Subsequent to the Separation, certain of the MetLife services continued, as provided for under a master service agreement and various transition services agreements entered into in connection with the Separation.
Non-Broker-Dealer Transactions
The following table summarizes income and expense from transactions with related parties (excluding broker-dealer transactions) for the periods indicated:
 
Three Months
Ended
March 31,
 
2018
 
2017
 
(In thousands)
Income
$
(68,442
)
 
$
(174,298
)
Expense
$
(17,521
)
 
$
(10,705
)
The following table summarizes assets and liabilities from transactions with related parties (excluding broker-dealer transactions) at:
 
March 31, 2018
 
December 31, 2017
 
(In thousands)
Assets
$
531,663

 
$
536,843

Liabilities
$
470,878

 
$
448,237

The material arrangements between the Company and its related parties are as follows:
Reinsurance Agreements
The Company enters into reinsurance agreements primarily as a purchaser of reinsurance for its various insurance products. The Company participates in reinsurance activities in order to limit losses, minimize exposure to significant risks and provide additional capacity for future growth.
The Company has reinsurance agreements with its parent, Brighthouse Life Insurance Company, and Metropolitan Life Insurance Company (“MLIC”), a subsidiary of MetLife, Inc., both of which were related parties at March 31, 2018.
Information regarding the significant effects of related party reinsurance included on the interim condensed statements of operations and comprehensive income (loss) was as follows:
 
Three Months
Ended
March 31,
 
2018
 
2017
 
(In thousands)
Premiums
 
 
 
Reinsurance ceded
$
(8,112
)
 
$
(9,844
)
Universal life and investment-type product policy fees
 
 
 
Reinsurance ceded
$
(1,043
)
 
$
(907
)
Other revenues
 
 
 
Reinsurance ceded
$
(15,936
)
 
$
(15,644
)
Policyholder benefits and claims
 
 
 
Reinsurance ceded
$
(24,732
)
 
$
(20,774
)

38
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
10. Related Party Transactions (continued)

Information regarding the significant effects of ceded related party reinsurance included on the interim condensed balance sheets was as follows at:
 
 
March 31, 2018
 
December 31, 2017
 
 
(In thousands)
Assets
 
 
 
 
Premiums, reinsurance and other receivables
 
$
522,486

 
$
533,388

Liabilities
 
 
 
 
Other liabilities
 
$
470,851

 
$
448,210

The Company cedes risks to Brighthouse Life Insurance Company related to guaranteed minimum benefit guarantees written directly by the Company. These ceded reinsurance agreements contain embedded derivatives and changes in their estimated fair value are included within net derivative gains (losses). The embedded derivatives associated with the cessions are included within premiums, reinsurance and other receivables and were $262.4 million and $307.7 million at March 31, 2018 and December 31, 2017, respectively. Net derivative gains (losses) associated with the embedded derivatives were ($45.8) million and ($25.3) million for the three months ended March 31, 2018 and 2017, respectively.
The Company previously ceded 100% of certain variable annuities including guaranteed minimum benefit guarantees on a modified coinsurance basis to MLIC. In January 2017, the Company executed a novation and reassigned this reinsurance agreement with Brighthouse Life Insurance Company, as reinsurer. These transactions were treated as a termination of the existing reinsurance agreement with recognition of a loss and a new reinsurance agreement with no recognition of a gain or loss. These transactions resulted in an increase in other liabilities of $129.8 million. The Company recognized a loss of $84.4 million, net of income tax, as a result of these transactions.
Investment Transactions
See Note 4 for further discussion of the related party investment transactions.
Shared Services and Overhead Allocations
Brighthouse affiliates and MetLife provide the Company certain services, which include, but are not limited to, treasury, financial planning and analysis, legal, human resources, tax planning, internal audit, financial reporting, and information technology. The Company is charged for the MetLife services through a transition services agreement and allocated to the legal entities and products within the Company. When specific identification to a particular legal entity and/or product is not practicable, an allocation methodology based on various performance measures or activity-based costing, such as sales, new policies/contracts issued, reserves, and in-force policy counts is used. The bases for such charges are modified and adjusted by management when necessary or appropriate to reflect fairly and equitably the actual incidence of cost incurred by the Company and/or affiliate. Management believes that the methods used to allocate expenses under these arrangements are reasonable. Expenses incurred with the Brighthouse affiliates and MetLife related to these arrangements, recorded in other expenses, were $9.7 million and $7.7 million for the three months ended March 31, 2018 and 2017, respectively.
Broker-Dealer Transactions
Beginning in March 2017, Brighthouse Securities, LLC, a registered broker-dealer affiliate, began distributing certain of the Company’s existing and future variable insurance products, and the MetLife broker-dealers discontinued such distributions. Prior to March 2017, the Company recognized related party revenues and expenses arising from transactions with MetLife broker-dealers that previously sold the Company’s variable annuity and life products. The related party expense for the Company was commissions collected on the sale of variable products by the Company and passed through to the broker-dealer. The related party revenue for the Company was fee income from trusts and mutual funds whose shares serve as investment options of policyholders of the Company.

39
Brighthouse Life Insurance Company of NY
(An Indirect Wholly-Owned Subsidiary of Brighthouse Financial, Inc.)
Notes to the Interim Condensed Financial Statements (Unaudited) (continued)
10. Related Party Transactions (continued)

The following table summarizes income and expense from transactions with related party broker-dealers for the periods indicated:
 
Three Months
Ended
March 31,
 
2018
 
2017
 
(In thousands)
Fee income
$
3,167

 
$
2,854

Commission expense
$
13,075

 
$
5,929

The following table summarizes assets from transactions with related party broker-dealers at:
 
March 31, 2018
 
December 31, 2017
 
(In thousands)
Fee income receivables
$
1,069

 
$
1,090


40

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations

41

Introduction
For purposes of this discussion, “BHNY,” the “Company,” “we,” “our” and “us” refer to Brighthouse Life Insurance Company of NY (formerly, First MetLife Investors Insurance Company), a New York domiciled life insurance company. BHNY is an indirect wholly-owned subsidiary of Brighthouse Financial, Inc. (together with its subsidiaries and affiliates, “Brighthouse”). Management’s narrative analysis of the results of operations is presented pursuant to General Instruction H(2)(a) of Form 10-Q. This narrative analysis should be read in conjunction with (i) the unaudited interim condensed financial statements and related notes included elsewhere herein; (ii) our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 23, 2018 (the “2017 Annual Report”); and (iii) our current reports on Form 8-K filed in 2018.
The term “Separation” refers to the separation of MetLife, Inc.’s (together with its subsidiaries and affiliates, “MetLife”) former Brighthouse Financial segment from MetLife’s other businesses and the creation of a separate, publicly traded company, Brighthouse Financial, Inc., to hold the assets (including the equity interests of certain MetLife, Inc. subsidiaries, including the Company) and liabilities associated with MetLife, Inc.’s former Brighthouse Financial segment from and after the Distribution; the term “Distribution” refers to the distribution on August 4, 2017 of 96,776,670, or 80.8%, of the 119,773,106 shares of Brighthouse Financial, Inc. common stock outstanding immediately prior to the Distribution date by MetLife, Inc. to shareholders of MetLife, Inc. as of the record date for the Distribution.
Overview
We offer a range of individual annuities and individual life insurance products in New York. For operating purposes we have established two reporting segments: Annuities and Life. In addition, the Company reports certain of its results of operations in Corporate & Other. See “Business — Segments and Corporate & Other” included in the 2017 Annual Report and Note 2 of the Notes to the Interim Condensed Financial Statements for further information on our segments and Corporate & Other.
Regulatory Developments
We are domiciled in New York and regulated by the New York State Department of Financial Services (“NYDFS”). We are regulated primarily at the state level, with some products and services also subject to federal regulation. Furthermore, some of our operations, products and services are subject to the Employee Retirement Income Security Act of 1974 (“ERISA”), consumer protection laws, securities, broker-dealer and investment advisor regulations, and environmental and unclaimed property laws and regulations. In addition, in marketing certain of Brighthouse’s products and services to tax-qualified pension plans, retirement plans and individual retirement annuities (collectively, “IRAs”), rules issued by the Department of Labor (“DOL”) described below under “— Department of Labor and ERISA Considerations” raise the standard for recommendations to such plans and IRAs to purchase variable and index-linked annuities to a fiduciary standard. See “Business — Regulation,” as well as “Risk Factors — Regulatory and Legal Risks” included in the 2017 Annual Report, as amended or supplemented herein and in our subsequently filed Quarterly Reports on Form 10-Q under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory Developments” and similarly named sections under the caption “Risk Factors.”
Surplus and Capital; Risk-Based Capital
We are required to maintain our capital and surplus at or above minimum levels. Regulators have discretionary authority, in connection with the continued licensing of an insurer, to limit or prohibit the insurer’s sales to policyholders if, in their judgment, the regulators determine that such insurer has not maintained the minimum surplus or capital or that the further transaction of business will be hazardous to policyholders. We are subject to risk-based capital (“RBC”) requirements that were developed by the National Association of Insurance Commissioners (the “NAIC”) and adopted by New York. RBC is based on a formula calculated by applying factors to various asset, premium, claim, expense and statutory reserve items. The formula takes into account the risk characteristics of the insurer and is calculated on an annual basis. The major categories of risk involved are asset risk, insurance risk, interest rate risk, market risk and business risk. The formula is used as an early warning regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. The New York Insurance Law provides the NYDFS the authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not meet or exceed certain RBC levels. As of the date of the most recent annual statutory financial statements filed with the NYDFS, our total adjusted capital was in excess of the required RBC levels. See “Statutory Equity and Income” in Note 9 of the Notes to the Financial Statements included in our 2017 Annual Report.
Department of Labor and ERISA Considerations
We manufacture annuities for third parties to sell to tax-qualified pension plans, retirement plans and IRAs, as well as individual retirement annuities sold to individuals that are subject to ERISA or the Internal Revenue Code of 1986, as amended

42

(the “Code”). Also, a portion of our in-force life insurance products are held by tax-qualified pension and retirement plans. While we currently believe manufacturers do not have as much exposure to ERISA and the Code as distributors, certain activities are subject to the restrictions imposed by ERISA and the Code, including the requirement under ERISA that fiduciaries of a Plan subject to Title I of ERISA (an “ERISA Plan”) must perform their duties solely in the interests of the ERISA Plan participants and beneficiaries, and those fiduciaries may not cause a covered plan to engage in certain prohibited transactions. The applicable provisions of ERISA and the Code are subject to enforcement by the DOL, the Internal Revenue Service (“IRS”) and the Pension Benefit Guaranty Corporation.
In addition, the prohibited transaction rules of ERISA and the Code generally restrict the provision of investment advice to ERISA qualified plans, plan participants and IRAs if the investment recommendation results in fees paid to an individual advisor, the firm that employs the advisor or their affiliates that vary according to the investment recommendation chosen.
The DOL issued new regulations on April 6, 2016 that became applicable on June 9, 2017 (the “Fiduciary Rule”). As initially adopted, these rules substantially expanded the definition of “investment advice,” thereby broadening the circumstances under which distributors and manufacturers can be considered fiduciaries under ERISA or the Code, and subject to an impartial or “best interests” standard in providing such advice. Pursuant to the final rule, certain communications with plans, plan participants and IRA holders, including the marketing of products, and marketing of investment management or advisory services, could be deemed fiduciary investment advice, thus, causing increased exposure to fiduciary liability if the distributor does not recommend what is in the client’s best interests.
In connection with the promulgation of the Fiduciary Rule, the DOL also issued amendments to certain of its prohibited transaction exemptions, and issued the best interest contract exemption (“BIC”), a new prohibited transaction exemption that imposes more significant disclosure and contract requirements to certain transactions involving ERISA Plans, plan participants and IRAs. The new and amended exemptions increase fiduciary requirements and fiduciary liability exposure for transactions involving ERISA Plans, plan participants and IRAs. The application of the BIC contract and point of sale disclosures required under BIC and the changes made to prohibited transaction exemption 84-24 were delayed until July 1, 2019, except for the impartial conduct standards (i.e., compliance with the “best interest” standard, reasonable compensation, and no misleading statements), which are applicable as of June 9, 2017. Contracts entered into prior to June 9, 2017 are generally “grandfathered” and, as such, are not subject to the requirements of the rule and related exemptions. To retain “grandfathered” status for annuity products, no investment recommendations may be made after the applicability date of the final regulation with respect to such annuity products that were sold to ERISA Plans or IRAs.
MetLife sold MetLife Premier Client Group, its former Retail segment’s proprietary distribution channel, in July 2016 to Massachusetts Mutual Life Insurance Company (“MassMutual”) to complete a transition to an independent third-party distribution model. We will not be engaging in direct distribution of retail products, including IRA products and retail annuities sold into ERISA Plans and IRAs, and therefore we anticipate that we will have limited exposure to the new DOL regulations, as the application of the vast majority of the provisions of the new DOL regulations are targeted at such retail products. Specifically, the most onerous of the requirements under the DOL Fiduciary Rule, as currently adopted, relate to BIC. The DOL guidance makes clear that distributors, not manufacturers, are primarily responsible for BIC compliance. However, we will be asked by our distributors, to assist them with preparing the voluminous disclosures required under BIC. Furthermore, if we want to retain the “grandfathered” status described above of current contracts, we will be limited in the interactions we can have directly with customers and the information that can be provided. We also anticipate that we will need to undertake certain additional tasks in order to comply with certain of the exemptions provided in the DOL regulations, including additional compliance reviews of material shared with distributors, wholesaler and call center training and product reporting and analysis. See “Risk Factors — Regulatory and Legal Risks — Our business is highly regulated, and changes in regulation and in supervisory and enforcement policies may materially impact our capitalization or cash flows, reduce our profitability and limit our growth” included in the 2017 Annual Report.
On February 3, 2017, President Trump, in a memorandum to the Secretary of Labor, requested that the DOL prepare an updated economic and legal analysis concerning the likely impact of the new rules, and possible revisions to the rules. In response to President Trump’s request, on June 29, 2017, the DOL issued a request for information related to the Fiduciary Rule, and also the DOL’s new and amended exemptions that were published in conjunction with the final rule. The request for information sought public input that could lead to new exemptions or changes and revisions to the final rule. On November 29, 2017, the DOL finalized an 18 month delay, from January 1, 2018 to July 1, 2019, of the applicability of significant portions of the previously proposed exemptions (including BIC and prohibited transaction exemption 84-24), to afford sufficient time to review further the previously adopted rules and such exemptions. The DOL also updated its enforcement policy to indicate that the DOL and IRS will not pursue claims, until July 1, 2019, against fiduciaries who are working diligently and in good faith to comply with the final Fiduciary Rule or treat those fiduciaries as being in violation of the final rule.

43

On March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit issued a decision vacating the Fiduciary Rule, overturning a lower court ruling that rejected a challenge to the rule. The Court of Appeals decision, if allowed to stand, would nullify the Fiduciary Rule in its entirety.
We have worked diligently to comply with the final rule and, subject to its continued applicability, we anticipate that we will need to undertake certain additional tasks in order to comply with certain of the exemptions provided in the DOL regulations, including additional compliance reviews of material shared with distributors, wholesaler and call center training and product reporting and analysis.
The change of administration, the DOL’s June 29, 2017 request for information related to the Fiduciary Rule and related exemptions, the November 29, 2017 extension of the applicability of many of the conditions of the proposed and revised exemptions, and the March 15, 2018 Court of Appeals decision leave uncertainty over whether the regulations will be substantially modified, repealed or vacated. This uncertainty could create confusion among our distribution partners, which could negatively impact product sales. We cannot predict what other proposals may be made, what legislation or regulations may be introduced or enacted, or what impact any such legislation or regulations may have on our business, results of operations and financial condition. See “— Proposed SEC Rules Addressing Standards of Conduct for Broker-Dealers” below for a discussion of standard of conduct rules proposed by the SEC and “Risk Factors — Regulatory and Legal Risks — NAIC — Existing and proposed insurance regulation” in our 2017 Annual Report for a discussion of efforts by the NAIC and state regulators, including the NYDFS, to include a “best interest” standard as part of their suitability requirements.
Proposed SEC Rules Addressing Standards of Conduct for Broker-Dealers
On April 18, 2018, the SEC released a set of proposed rules that would, among other things, enhance the existing standard of conduct for broker-dealers to require them to act in the best interest of their clients; clarify the nature of the fiduciary obligations owed by registered investment advisers to their clients; impose new disclosure requirements aimed at ensuring investors understand the nature of their relationship with their investment professionals; and restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor.” Public comments will be accepted for 90 days following publication of the proposal in the Federal Register. Although the full impact of the proposed rules can only be measured when the implementing regulations are adopted, the intent of this provision is to authorize the SEC to impose on broker-dealers fiduciary duties to their customers similar to what applies to investment advisers under existing law. We are currently assessing these proposed rules to determine the impact they may have on our business.
Summary of Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported on the Interim Condensed Financial Statements.
The most critical estimates include those used in determining: 
(i)
liabilities for future policy benefits;
(ii)
accounting for reinsurance;
(iii)
capitalization and amortization of deferred policy acquisition costs (“DAC”) and the establishment and amortization of value of business acquired (“VOBA”);
(iv)
estimated fair values of investments in the absence of quoted market values;
(v)
investment impairments;
(vi)
estimated fair values of freestanding derivatives and the recognition and estimated fair value of embedded derivatives requiring bifurcation;
(vii)
measurement of income taxes and the valuation of deferred tax assets; and
(viii)
liabilities for litigation and regulatory matters.
In applying our accounting policies, we make subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our business and operations. Actual results could differ from these estimates.
The above critical accounting estimates are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates” and Note 1 of the Notes to the Financial Statements included in the 2017 Annual Report.

44

Non-GAAP and Other Financial Disclosures
Our definitions of the non-GAAP and other financial measures may differ from those used by other companies.
Non-GAAP Financial Disclosures
Adjusted Earnings
In this report, we present adjusted earnings as a measure of our performance that is not calculated in accordance with GAAP. We believe that this non-GAAP financial measure highlights our results of operations and the underlying profitability drivers of our business, as well as enhances the understanding of our performance by the investor community. However, adjusted earnings should not be viewed as a substitute for net income (loss), which is the most directly comparable financial measure calculated in accordance with GAAP. See “— Results of Operations” for a reconciliation of adjusted earnings to net income (loss). A reconciliation of adjusted earnings to net income (loss) is not accessible on a forward-looking basis because we believe it is not possible without unreasonable efforts to provide other than a range of net investment gains and losses and net derivative gains and losses, which can fluctuate significantly within or outside the range and from period to period and may have a material impact on net income (loss).
Adjusted earnings, which may be positive or negative, is used by management to evaluate performance, allocate resources and facilitate comparisons to industry results. This financial measure focuses on our primary businesses principally by excluding the impact of market volatility, which could distort trends, as well as businesses that have been or will be sold or exited by us, referred to as divested businesses.
The following are the 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 (“Investment Hedge Adjustments”); 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 the 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 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 are calculated net of the U.S. statutory tax rate, which could differ from our effective tax rate.

45

We present adjusted earnings in a manner consistent with management’s view of the primary business activities that drive the profitability of our core businesses. The following table illustrates how each component of adjusted earnings is calculated from the GAAP statement of operations line items:
Component of Adjusted Earnings
How Derived from GAAP (1)
(i)
Fee income
(i)
Universal life and investment-type policy fees (excluding (a) unearned revenue adjustments related to net investment gains (losses) and net derivative gains (losses) and (b) GMIB Fees) plus Other revenues (excluding other revenues associated with related party reinsurance) and amortization of deferred gain on reinsurance.
(ii)
Net investment spread
(ii)
Net investment income plus Investment Hedge Adjustments and interest received on ceded fixed annuity reinsurance deposit funds reduced by Interest credited to policyholder account balances and interest on future policy benefits.
(iii)
Insurance-related activities
(iii)
Premiums less Policyholder benefits and claims (excluding (a) GMIB Costs, (b) Market Value Adjustments, (c) interest on future policy benefits and (d) amortization of deferred gain on reinsurance) plus the pass through of performance of ceded separate account assets.
(iv)
Amortization of DAC and VOBA
(iv)
Amortization of DAC and VOBA (excluding amounts related to (a) net investment gains (losses), (b) net derivative gains (losses), (c) GMIB Fees and GMIB Costs and (d) Market Value Adjustments).
(v)
Other expenses, net of DAC capitalization
(v)
Other expenses reduced by capitalization of DAC and securitization entities expense.
(vi)
Provision for income tax expense (benefit)
(vi)
Tax impact of the above items.
______________
(1) Italicized items indicate GAAP statement of operations line items.
Consistent with GAAP guidance for segment reporting, adjusted earnings is also our GAAP measure of segment performance. Accordingly, we report adjusted earnings by segment in Note 2 of the Notes to the Interim Condensed Financial Statements.
Other Financial Disclosures
The following additional information is relevant to an understanding of our performance results:
•
We sometimes refer to sales activity for various products. Statistical sales information for life sales are calculated using the LIMRA (Life Insurance Marketing and Research Association) definition of sales for core direct sales, excluding company sponsored internal exchanges, corporate-owned life insurance, bank-owned life insurance, and private placement variable universal life insurance. Annuity sales consist of 10% of direct statutory premiums, excluding company sponsored internal exchanges. These sales statistics do not correspond to revenues under GAAP, but are used as relevant measures of business activity.
•
Allocated equity is the portion of common stockholder’s equity that management allocated to each of its segments prior to 2018. See “— Segment Capital” and Note 2 of the Notes to the Interim Condensed Financial Statements for further information.
Segment Capital
Beginning in the first quarter of 2018, we changed the methodology for how capital is allocated to segments and, in some cases, products. 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 our variable annuity business, the excess capital held is based on the target statutory total asset requirement. For insurance businesses other than variable annuities, excess capital held is based on a percentage of required statutory RBC. 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.
We refer to this change in methodology as the “Portfolio Realignment.” While this change had no effect on our net income or adjusted earnings, it did, and we expect will continue to, impact segment results. Prior period segment results were not re-cast for this change in methodology as the inventory of assets has changed over time. Therefore, it is not reasonably possible to replicate the asset transfers as of prior periods and estimating such would not provide a meaningful comparison. In the future,

46

management will evaluate, on a periodic basis, the excess capital held by each segment and may rebalance or move capital between segments based on market changes or changes in our statutory metrics.
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 we were 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.
Management is responsible for the periodic review and enhancement of the capital allocation model to ensure it remains consistent with the Company’s overall objectives and emerging industry practices.
Results of Operations
Results for the Three Months Ended March 31, 2018 and 2017
Business Overview. Annuity sales experienced significant growth for the three months ended March 31, 2018, compared to the three months ended March 31, 2017. This increase resulted primarily from sales of our structured annuities (“Shield Annuities”), which we began selling in the first quarter of 2017. This increase was partially offset by lower sales of our variable annuities with GMWBs. With the exception of a limited number of term life policies, we are not accepting new sales of traditional life products; however, we do accept renewal premiums on in-force business and allow certain term-to-permanent policy conversions. In the second quarter of 2017, we began selling a new universal life product.
A significant portion of our net income is driven by separate account balances, particularly in our variable annuity business. Most directly, these balances determine asset-based fee income, but also impact DAC amortization and asset-based commissions. Separate account balances are driven by sales, movements in the market, surrenders, withdrawals, benefit payments, transfers and policy charges. Average separate account balances increased in the current period, compared to the prior period, due to favorable equity market performance which more than offset the impact of continued negative net flows.
Unless otherwise noted, all amounts in the following discussions of our results of operations are stated before income tax except for adjusted earnings, which are presented net of income tax.
 
Three Months 
 Ended 
 March 31,
 
2018
 
2017
 
(In thousands)
Revenues
 
 
 
Premiums
$
10,293

 
$
9,230

Universal life and investment-type product policy fees
25,986

 
25,795

Net investment income
23,931

 
21,408

Other revenues
(12,544
)
 
(12,671
)
Net investment gains (losses)
(2,355
)
 
(737
)
Net derivative gains (losses)
(44,262
)
 
(131,536
)
Total revenues
1,049

 
(88,511
)
Expenses
 
 
 
Policyholder benefits and claims
(1,541
)
 
(1,783
)
Interest credited to policyholder account balances
9,232

 
9,674

Capitalization of DAC
(8,116
)
 
(2,192
)
Amortization of DAC and VOBA
(3,323
)
 
(25,576
)
Other expenses
23,843

 
20,414

Total expenses
20,095

 
537

Income (loss) before provision for income tax
(19,046
)
 
(89,048
)
Provision for income tax expense (benefit)
(4,676
)
 
(32,474
)
Net income (loss)
$
(14,370
)
 
$
(56,574
)

47

The table below shows the components of net income (loss), in addition to adjusted earnings, for the three months ended March 31, 2018 and 2017.
 
Three Months 
 Ended 
 March 31,
 
2018
 
2017
 
(In thousands)
Guaranteed minimum living benefits
$
(27,886
)
 
$
(100,712
)
Other derivative instruments
(4,898
)
 
(221
)
Net investment gains (losses)
(2,355
)
 
(737
)
Other adjustments
387

 
110

Adjusted earnings before provision for income tax
15,706

 
12,512

Income (loss) before provision for income tax
(19,046
)
 
(89,048
)
Provision for income tax expense (benefit)
(4,676
)
 
(32,474
)
Net income (loss)
$
(14,370
)
 
$
(56,574
)
Three Months Ended March 31, 2018 Compared with the Three Months Ended March 31, 2017
Overview. Income (loss) before provision for income tax increased $70.0 million ($42.2 million, net of income tax), primarily due to favorable changes in our guaranteed minimum living benefits (“GMLBs”) combined with higher adjusted earnings.
Guaranteed Minimum Living Benefits. Comparative results from GMLBs, including the DAC offset, were favorable by $72.8 million, primarily driven by an increase in net derivative gains (losses) from the impact of the recapture from MLIC in the prior period of ceded reinsurance agreements covering certain risks of our variable annuity business combined with the change in fair value of our Shield Annuities embedded derivatives in the current period, compared to the prior period. These increases were partially offset by unfavorable impacts from (i) the establishment of new freestanding derivative positions hedging Shield Annuities, (ii) changes in our ceded reinsurance embedded derivatives due to changes in interest rates, net of equity market impacts, and (iii) a higher DAC amortization offset.
The change in GMLB net derivative gains (losses) includes a net $5.2 million unfavorable change related to Shield Annuities resulting from the impact of the new freestanding hedge positions which was partially offset by the favorable change in the embedded derivatives. In connection with the transition to our new variable annuity hedging program, changes in the Shield Annuities embedded derivatives are included in the GMLB results beginning in the third quarter of 2017 on a prospective basis.
Other Derivative Instruments. In addition to GMLB embedded derivatives, we enter into other freestanding derivative instruments primarily to hedge foreign currency risks when we have foreign denominated fixed maturity securities backing our U.S dollar denominated liabilities. In the first quarter of 2018, we began purchasing interest rate caps to protect against rises in interest rates. The changes in fair value of the hedges are accounted for in net income (loss), through net derivative gains (losses), while the offsetting economic impacts on the items they are hedging are either not recognized or recognized in equity through other comprehensive income. Changes in interest rates on the fair value of our interest rate caps had an unfavorable impact of $4.7 million. This unfavorable change was partially offset by favorable changes in our foreign currency swaps due to the U.S. dollar strengthening against key foreign currencies in the current period when compared to the prior period.
Net Investment Gains (Losses). Net investment gains (losses) had an unfavorable impact on comparative results of $1.6 million, primarily due to higher current period net losses on the sale of fixed maturity securities compared to the prior period.
Adjusted Earnings. Adjusted earnings before provision for income tax increased $3.2 million ($3.6 million, net of income tax) for the three months ended March 31, 2018, compared to the prior period. Adjusted earnings are discussed in greater detail below.
Income Tax Expense (Benefit). Income tax benefit for the three months ended March 31, 2018 was $4.7 million, or 25% of income (loss) before provision for income tax, compared to $32.5 million, or 36% of income (loss) before provision for income tax, for the three months ended March 31, 2017. Our effective tax rates typically differ from the U.S. statutory rates primarily due to the impacts of the dividend received deductions and utilization of tax credits.

48

Reconciliation of net income (loss) to adjusted earnings
 
Three Months 
 Ended 
 March 31,
 
2018
 
2017
 
(In thousands)
Net income (loss)
$
(14,370
)
 
$
(56,574
)
Add: Provision for income tax expense (benefit)
(4,676
)
 
(32,474
)
Income (loss) before provision for income tax
(19,046
)
 
(89,048
)
Less: Guaranteed minimum living benefits
(27,886
)
 
(100,712
)
Less: Other derivative instruments
(4,898
)
 
(221
)
Less: Net investment gains (losses)
(2,355
)
 
(737
)
Less: Other adjustments (1)
387

 
110

Adjusted earnings before provision for income tax
15,706

 
12,512

Less: Provision for income tax expense (benefit)
2,621

 
3,072

Adjusted earnings
$
13,085

 
$
9,440

__________________
(1)
See “— Non-GAAP and Other Financial Disclosures” for a listing of other adjustments to net income (loss).
Results for the Three Months Ended March 31, 2018 and 2017 — Adjusted Earnings
 
Three Months 
 Ended 
 March 31,
 
2018
 
2017
 
(In thousands)
Fee income
$
37,684

 
$
38,493

Net investment spread
10,261

 
7,631

Insurance-related activities
(8,831
)
 
(11,721
)
Amortization of DAC and VOBA
(7,681
)
 
(3,669
)
Other expenses, net of DAC capitalization
(15,727
)
 
(18,222
)
Adjusted earnings before provision for income tax
15,706

 
12,512

Provision for income tax expense (benefit)
2,621

 
3,072

Adjusted earnings
$
13,085

 
$
9,440


49

Three Months Ended March 31, 2018 Compared with the Three Months Ended March 31, 2017
Overview. The $3.6 million increase in adjusted earnings was driven primarily by (i) favorable underwriting experience, (ii) higher net investment spread, (iii) lower expenses, and (iv) lower income taxes. These increases were partially offset by higher DAC amortization.
Net Investment Spread. Net investment spread increased $2.6 million, primarily due to a higher average invested asset base due to positive net flows in our annuities business, partially offset by the impact of investing this increase in invested assets at yields lower than the portfolio average.
Insurance-Related Activities. Net costs from insurance-related activities decreased $2.9 million, primarily due to favorable underwriting experience in our life business as a result of the prior period recapture of reinsurance agreements from MLIC and our parent, partially offset by unfavorable underwriting experience in our annuities business.
Amortization of DAC and VOBA. Higher amortization of DAC and VOBA had an unfavorable impact on comparative results of $4.0 million, primarily from unfavorable impacts in our annuities business from lower profits resulting from lower than expected separate account returns in the current period, as well as changes in in-force and actuarial model refinements.
Other Expenses, Net of DAC Capitalization. Expenses decreased $2.5 million, primarily due to impacts from prior period recapture activity related to ceded reinsurance agreements with MLIC in our annuities business.
Income Tax Expense (Benefit). Income tax expense for the three months ended March 31, 2018 was $2.6 million, or 17% of adjusted earnings before provision for income tax, compared to $3.1 million, or 25% of adjusted earnings before provision for income tax, for the three months ended March 31, 2017. Our effective tax rates typically differ from the U.S. statutory rates primarily due to the impacts of the dividend received deductions and utilization of tax credits.
Note Regarding Forward-Looking Statements
This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, and other written or oral statements that we make from time to time may contain information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve substantial risks and uncertainties. We have tried, wherever possible, to identify such statements using words such as “anticipate,” “estimate,” “expect,” “project,” “may,” “will,” “could,” “intend,” “goal,” “target,” “forecast,” “objective,” “continue,” “aim,” “plan,” “believe” and other words and terms of similar meaning, or are tied to future periods, in connection with a discussion of future operating or financial performance. In particular, these include, without limitation, statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends in operating and financial results, as well as statements regarding the expected benefits of the Separation and the recapitalization actions.
Any or all forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining the actual future results of the Company. These statements are based on current expectations and the current economic environment and involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance. Actual results could differ materially from those expressed or implied in the forward-looking statements due to a variety of known and unknown risks, uncertainties and other factors. Although it is not possible to identify all of these risks and factors, they include, among others:
•
differences between actual experience and actuarial assumptions and the effectiveness of our actuarial models;
•
higher risk management costs and exposure to increased counterparty risk due to guarantees within certain of our products;
•
the effectiveness of our exposure management strategy and the impact of such strategy on net income volatility and negative effects on our statutory capital;
•
a sustained period of low equity market prices and interest rates that are lower than those we assumed when we issued our variable annuity products;
•
the effect adverse capital and credit market conditions may have on our ability to meet liquidity needs and our access to capital;
•
the impact of changes in regulation and in supervisory and enforcement policies on our insurance business or other operations;
•
the effectiveness of our risk management policies and procedures;

50

•
the availability of reinsurance and the ability of our counterparties to our reinsurance or indemnification arrangements to perform their obligations thereunder;
•
heightened competition, including with respect to service, product features, scale, price, actual or perceived financial strength, claims-paying ratings, credit ratings, e-business capabilities and name recognition;
•
changes in accounting standards, practices and/or policies applicable to us;
•
our ability to market and distribute our products through distribution channels;
•
the impact of the Separation on our business and profitability due to MetLife’s strong brand and reputation, the increased costs related to replacing arrangements with MetLife with those of third parties;
•
any failure of third parties to provide services we need, any failure of the practices and procedures of these third parties and any inability to obtain information or assistance we need from third parties, including MetLife;
•
whether the operational, strategic and other benefits of the Separation can be achieved, and our ability to implement our business strategy;
•
whether all or any portion of the Separation tax consequences are not as expected, leading to material additional taxes or material adverse consequences to tax attributes that impact us;
•
the uncertainty of the outcome of any disputes with MetLife over tax-related or other matters and agreements including the potential of outcomes adverse to us that could cause us to owe MetLife material tax reimbursements or payments or disagreements regarding MetLife’s or our obligations under our other agreements;
•
the impact on our business structure, profitability, cost of capital and flexibility due to restrictions we have agreed to that preserve the tax-free treatment of certain parts of the Separation;
•
the potential material negative tax impact of the Tax Cuts and Jobs Act (the “Tax Act”) and other potential future tax legislation that could decrease the value of our tax attributes, lead to increased RBC requirements and cause other cash expenses, such as reserves, to increase materially and make some of our products less attractive to consumers;
•
whether the Distribution will qualify for non-recognition treatment for U.S. federal income tax purposes and potential indemnification to MetLife if the Distribution does not so qualify;
•
our ability to attract and retain key personnel; and
•
other factors described in our 2017 Annual Report, this report, and from time to time in documents that we file with the SEC.
For the reasons described above, we caution you against relying on any forward-looking statements, which should also be read in conjunction with the other cautionary statements included and the risks, uncertainties and other factors identified in our 2017 Annual Report, particularly in the sections entitled “Risk Factors” and “Quantitative and Qualitative Disclosures About Market Risk,” and included elsewhere herein, as well as in our subsequent filings with the SEC. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as otherwise may be required by law. Please consult any further disclosures the Company makes on related subjects in reports to the SEC.

51

Item 3. Quantitative and Qualitative Disclosures About Market Risk
We regularly analyze our market risk exposure to interest rate, equity market price, credit and foreign currency exchange rate risks. As a result of that analysis, we have determined that the estimated fair values of certain assets and liabilities are significantly exposed to changes in interest rates, and to a lesser extent, to changes in equity market prices and foreign currency exchange rates. We have exposure to market risk through our insurance and annuity operations and general account investment activities. For purposes of this discussion, “market risk” is defined as changes in fair value resulting from changes in interest rates, equity market prices, credit spreads and foreign currency exchange rates. We may have additional financial impacts, other than changes in fair value, which are beyond the scope of this discussion. A description of our market risk exposures may be found under “Quantitative and Qualitative Disclosures About Market Risk” in the 2017 Annual Report. There have been no material changes to our market risk exposures from the market risk exposures previously disclosed in the 2017 Annual Report, with the exception of sensitivity to changes in equity pricing. Sensitivity to a 10% rise in equity prices decreased by $15.3 million or 50%, to $15.0 million as of March 31, 2018 from $30.3 million on December 31, 2017, primarily driven by purchases of derivatives to reduce exposure to equity market risk associated with index-linked annuity products.
Item 4. Controls and Procedures
Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of March 31, 2018.
MetLife continues to provide certain services to the Company on a transitional basis through services agreements. The Company continues to change business processes as a subsidiary of Brighthouse Financial, Inc. and identifies, documents and evaluates controls to ensure controls over our financial reporting are effective. We consider these to be a material change in our internal control over financial reporting.
Other than as noted above, there were no changes to the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II — Other Information
Item 1. Legal Proceedings
The following should be read in conjunction with (i) Part I, Item 3 of the 2017 Annual Report and Note 12 to the Notes to the Consolidated Financial Statements included in the 2017 Annual Report; and (ii) Note 9 of the Notes to the Interim Condensed Financial Statements in Part I of this report.
Various litigation, claims and assessments against the Company, in addition to those discussed previously and those otherwise provided for in the Company’s financial statements, have arisen in the course of the Company’s business, including, but not limited to, in connection with its activities as an insurer, investor and taxpayer. Further, state insurance regulatory authorities and other federal and state authorities regularly make inquiries and conduct investigations concerning the Company’s compliance with applicable insurance and other laws and regulations.
It is not possible to predict the ultimate outcome of all pending investigations and legal proceedings. In some of the matters referred to previously, large and/or indeterminate amounts, including punitive and treble damages, are sought. Although in light of these considerations it is possible that an adverse outcome in certain cases could have a material effect upon the Company’s financial position, based on information currently known by the Company’s management, in its opinion, the outcomes of such pending investigations and legal proceedings are not likely to have such an effect. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material effect on the Company’s net income or cash flows in particular quarterly or annual periods.

52

Item 1A. Risk Factors
The following should be read in conjunction with, and supplements and amends, the factors that may affect the Company’s business or operations described under “Risk Factors” in the 2017 Annual Report. In addition, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Note Regarding Forward-Looking Statements” included in this report is incorporated by reference herein. Other than as described herein, there have been no other material changes to our risk factors from the risk factors previously disclosed in the 2017 Annual Report.
Risks Related to Our Business
The failure of third parties to provide various services, or any failure of the practices and procedures that these third parties use to provide services to us, could have a material adverse effect on our business
A key part of our operating strategy is to outsource certain services important to our business. In July 2016, Brighthouse entered into a multi-year outsourcing arrangement for the administration of certain in-force policies currently housed on up to 20 systems. Pursuant to this arrangement, at least 13 of such systems will be consolidated down to one. In December 2017, Brighthouse formalized an arrangement for the administration of life and annuities new business and approximately 1.3 million in-force life and annuities contracts. Brighthouse intends to focus on further outsourcing opportunities with third-party vendors, including after the Transition Services Agreement, Investment Management Agreement and other agreements with MetLife companies expire. See “— Risks Related to Our Separation from, and Continuing Relationship with, MetLife — Brighthouse’s contractual arrangements with MetLife may not be adequate to meet our operational and business needs. The terms of our arrangements with MetLife may be more favorable than we would be able to obtain from an unaffiliated third party. Brighthouse may be unable to replace those services in a timely manner or on comparable terms” for information regarding the potential effect that the Separation from MetLife will have on the pricing of such services. It may be difficult and disruptive for us to replace some of our third-party vendors in a timely manner if they were unwilling or unable to provide us with these services in the future (as a result of their financial or business conditions or otherwise), and our business and operations likely could be materially adversely affected.
In addition, if a third-party provider fails to provide the administrative, operational, financial or actuarial services we require, fails to meet contractual requirements, such as compliance with applicable laws and regulations, suffers a cyberattack or other security breach or fails to provide material information on a timely basis, our business could suffer economic and reputational harm that could have a material adverse effect on our business and results of operations. See the risk factor referenced in the preceding paragraph and “Risk Factors — Operational Risks — The failure in cyber- or other information security systems, as well as the occurrence of events unanticipated in Brighthouse’s and MetLife’s disaster recovery systems and business continuity planning could result in a loss or disclosure of confidential information, damage to our reputation and impairment of our ability to conduct business effectively” in the 2017 Annual Report.
Similarly, if any third-party provider experiences any deficiency in internal controls, determines that its practices and procedures used in administering our policies require review or otherwise fails to administer our policies in accordance with acceptable standards, we could incur expenses and experience other adverse effects as a result. In these situations, we may be unable to resolve any issues on our own without assistance from the third-party provider, and we may have limited ability to influence the speed and effectiveness of that resolution.
In December 2017, for example, MetLife announced that it was undertaking a review of practices and procedures used to estimate its reserves related to certain group annuitants that have been unresponsive or missing over time. As a result of this review, MetLife identified a material weakness in its internal control over financial reporting relating to certain group annuity reserves and announced that it was recording charges to reinstate reserves previously released. As a result of that review and based on information provided by MetLife, Brighthouse identified approximately 14,000 group annuitants across Brighthouse entities who may be owed annuity payments now or in the future.
These group annuity contracts and many of our other products are administered by MetLife under the Transition Services Agreement, and we depend on MetLife for the information and assistance in modifying administrative practices and procedures. We also depend on MetLife for information and assistance in reviewing administrative practices and procedures and reserves with respect to other products it administers for us. From time to time, MetLife has brought to our attention practices, procedures and reserves with respect to other products that require further review. While we do not believe, based on the information made available to us to date by MetLife, that any of the matters MetLife has brought to our attention will require material modifications to reserves or have a material effect on our financial condition or results of operations, we are reliant upon MetLife to provide further information and assistance with respect to those products. There can also be no assurance that such matters will not require material modifications to reserves or have a material effect on our financial condition or results of operations in the future, or that MetLife will provide further information and assistance.

53

If material issues were to arise with respect to any of our products administered by third parties, whether involving MetLife or another third-party provider, any resulting expenses or other economic or reputational harm could have a material adverse effect on our business and results of operations, particularly if they involved our core annuity and life insurance businesses. In addition, we could be subject to litigation or regulatory investigations and actions resulting from any such issues, which could have a material adverse effect on our financial condition and results of operations.
Changes in our deferred income tax assets or liabilities, including changes in our ability to realize our deferred income tax assets, or any changes resulting from preparing our first U.S. federal income tax returns, could adversely affect our results of operations or financial condition
Deferred income tax represents the tax effect of the differences between the book and tax bases of assets and liabilities. Deferred tax assets are assessed periodically by management to determine whether they are realizable. Factors in management’s determination include the performance of the business including the ability to generate future taxable income. If, based on available information, it is more likely than not that the deferred income tax asset will not be realized, then a valuation allowance must be established with a corresponding charge to net income. Such charges could have a material adverse effect on our results of operations or financial position. Changes in the corporate tax rates could also affect the value of our deferred tax assets and may require a write-off of some of those assets. In addition, we have not yet been required to file U.S. federal income tax returns since our Separation from MetLife, and we will depend on information from MetLife in order to do so. If the information we receive from MetLife in the course of preparing our U.S. federal income tax returns is materially different from information received in the past or if we do not receive full information, we could find it necessary to change the deferred income tax assets and liabilities recorded on our balance sheet or to record provisions for income taxes on our statement of operations, which could adversely affect our financial condition and results of operations. See Note 11 of the Notes to the Financial Statements in the 2017 Annual Report for the impact of the Tax Act on our financial statements. Also, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates” in the 2017 Annual Report.
Operational Risks
Gaps in our risk management policies and procedures may leave us exposed to unidentified or unanticipated risk, which could negatively affect our business
We have developed and continue to develop risk management policies and procedures to reflect the ongoing review of our risks and expect to continue to do so in the future. Nonetheless, our policies and procedures may not be comprehensive and may not identify every risk to which we are exposed. In addition, we rely on third-party providers to administer and service many of our products, and our risk management policies and procedures may not be successful in identifying every risk with respect to those products, especially to the extent we rely on those providers for detailed information regarding the holders of our products and other relevant information. Many of our methods for managing risk and exposures are based upon the use of observed historical market behavior to model or project potential future exposure. Models used by our business are based on assumptions and projections which may be inaccurate. Business decisions based on incorrect or misused model output and reports could have a material adverse impact on our results of operations. Model risk may be the result of a model being misspecified for its intended purpose, being misused or producing incorrect or inappropriate results. Models used by our business may not operate properly and could contain errors related to model inputs, data, assumptions, calculations, or output which could give rise to adjustments to models that may adversely impact our results of operations. As a result, these methods may not fully predict future exposures, which can be significantly greater than our historical measures indicate. Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that are publicly available or otherwise accessible to us. This information may not always be accurate, complete, up-to-date or properly evaluated. Furthermore, there can be no assurance that we can effectively review and monitor all risks or that all of our employees will follow our risk management policies and procedures, nor can there be any assurance that our risk management policies and procedures, or the risk management policies and procedures of third parties that administer or service our products, will enable us to accurately identify all risks and limit our exposures based on our assessments. In addition, we may have to implement more extensive and perhaps different risk management policies and procedures under pending regulations.
Risks Related to Our Separation from, and Continuing Relationship with, MetLife
Brighthouse’s contractual arrangements with MetLife may not be adequate to meet our operational and business needs. The terms of our arrangements with MetLife may be more favorable than we would be able to obtain from an unaffiliated third party. Brighthouse may be unable to replace those services in a timely manner or on comparable terms
Brighthouse has contractual arrangements, such as the Transition Services Agreement, the Investment Management Agreements, the Intellectual Property License Agreement, the Investment Finance Services Agreements entered into in connection with the Investment Management Agreements and other agreements that require MetLife affiliates to provide certain services to us, including certain IT services pursuant to software license agreements that MetLife affiliates have with certain third-party software vendors, and investment management and related accounting, reporting, actuarial and other administrative services by

54

MetLife Investment Advisors, LLC with respect to Brighthouse’s general and separate account investment portfolios. There can be no assurance that the services to be provided by the MetLife affiliates will be sufficient to meet our operational and business needs, that the MetLife affiliates will be able to perform such functions in a manner satisfactory to us, that MetLife’s practices and procedures will enable it to adequately administer the policies it handles, that we will receive sufficient information from MetLife with respect to the policies it administers for us or that any remedies available under these arrangements will be sufficient to us in the event of a dispute or nonperformance. See “— Risks Related to Our Business — The failure of third parties to provide various services, or any failure of the practices and procedures that these third parties use to provide services to us, could have a material adverse effect on our business.”
Upon termination or expiration of any agreement between Brighthouse and MetLife affiliates, there can be no assurance that these services will be sustained at the same levels as they were when we were receiving such services from MetLife or that Brighthouse or we will be able to obtain the same benefits from another provider or that Brighthouse’s or our indemnity rights from such third parties will not be limited. Brighthouse or we may not be able to replace services and arrangements in a timely manner or on terms and conditions, including cost, as favorable as those we have previously received from MetLife. The agreements with the MetLife affiliates were entered into in the context of intercompany relationships that arose from enterprise-wide agreements with vendors, and we may have to pay higher prices for similar services from MetLife or unaffiliated third parties in the future.
Item 4. Mine Safety Disclosures
Not applicable.
Item 6. Exhibits
(Note Regarding Reliance on Statements in Our Contracts: In reviewing the agreements included as exhibits herein, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Brighthouse Life Insurance Company of NY. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and (i) should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; (iii) may apply standards of materiality in a way that is different from what may be viewed as material to investors; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about Brighthouse Life Insurance Company of NY may be found elsewhere herein and Brighthouse Life Insurance Company of NY’s other public filings, which are available without charge through the U.S. Securities and Exchange Commission website at www.sec.gov.)
Exhibit
No.
 
Description
31.1
 
31.2
 
32.1
 
32.2
 
101.INS
 
XBRL Instance Document.
101.SCH
 
XBRL Taxonomy Extension Schema Document.
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.

55

Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BRIGHTHOUSE LIFE INSURANCE COMPANY OF NY
 
 
 
By:
 
 
/s/ Lynn A. Dumais
 
Name:
 
Lynn A. Dumais
 
Title:
 
Vice President and Chief Financial Officer
 
 
 
(Authorized Signatory and Principal Financial Officer)
Date: May 11, 2018

56

BRIGHTHOUSE LIFE INSURANCE Co OF NY Reports