See Notes 1 and 11 of the Notes to the Financial Statements for additional information on our income taxes.
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).
net favorable changes in variable annuity liability reserves as the impact from higher relative equity markets more than offset the impact of lower interest rates; and
higher amortization of DAC in our annuity business primarily driven by changes in the long-term general account earned rate in connection with our annual actuarial assumption review;
The Company updates expected future gross profits to reflect the actual gross profits for each period, including changes to its nonperformance risk related to embedded derivatives and the actual amount of business remaining in-force. When actual gross profits exceed those previously estimated, the DAC amortization will increase, resulting in a current period charge to net income. The opposite result occurs when the actual gross profits are below the previously expected future gross profits.
The Company issues variable annuity contracts with guaranteed minimum benefits. GMABs, the non-life contingent portion of 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 7.
Interest rate caps: The Company uses interest rate caps to protect against interest rate exposure arising from mismatches between assets and liabilities. Interest rate caps are used in non-qualifying hedging relationships.
At both December 31, 2019 and 2018, the balance in AOCI associated with cash flow hedges was $6 million.
The Company entered into a tax separation agreement with MetLife (the “Tax Separation Agreement”). Among other things, the Tax Separation Agreement governs the allocation between MetLife and the Company of the responsibility for the taxes of the MetLife group. The Tax Separation Agreement also allocates rights, obligations and responsibilities in connection with certain administrative matters relating to the preparation of tax returns and control of tax audits and other proceedings relating to taxes. In October 2017, MetLife paid $56 million to the Company under the Tax Separation Agreement. At December 31, 2017, the current income tax recoverable included $1 million related to this agreement. In November 2018, MetLife paid $2 million to the Company under the Tax Separation Agreement. At December 31, 2019, the current income tax payable included a $3 million payable to MetLife related to this agreement.
The Company had net receivables (payables) from/to affiliates, related to the items discussed above, of ($18) million and $1 million at December 31, 2019 and 2018, respectively.