EXHIBIT 99.1
The 2011 Annual Report is being further revised to reflect the impact on previously filed financial statements and other disclosures therein of the actions taken by MetLife, Inc. described in Item 8.01 of this Current Report on Form 8-K. The 2011 Annual Report is revised as follows:
• | the information set forth under the heading “Part I, Item 1. Business,” beginning with the first paragraph and continuing through and including the last paragraph under the heading “Reinsurance Activity” in the 2011 Annual Report is replaced in its entirety by the information set forth below in this Exhibit 99.1 under the heading “Part I, Item 1. Business.” |
• | the information set forth in the following sections under the heading of “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2011 Annual Report is replaced in its entirety by the information set forth below in this Exhibit 99.1 in the corresponding sections under the heading of “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”: |
- Introduction
- Executive Summary
- Results of Operations
• | the information set forth under the heading “Part II, Item 8. Financial Statements and Supplementary Data” in the 2011 Annual Report is replaced in its entirety by the information set forth below in this Exhibit 99.1 under the heading “Part II, Item 8. Financial Statements and Supplementary Data.” |
• | the information set forth under the heading “Part IV, Item 15. Exhibits and Financial Statement Schedules” in the 2011 Annual Report is replaced in its entirety by the information set forth below in this Exhibit 99.1 under the heading “Part IV, Item 15. Exhibits and Financial Statement Schedules.” |
Other than as set forth herein, the 2011 Annual Report remains unchanged. Those sections of the 2011 Annual Report which have not been revised as set forth herein are not materially impacted by the actions taken by MetLife described in this 8-K and/or have already been updated through the Quarterly Report on Form 10-Q, including Risk Factors and the Note Regarding Forward Looking Statements contained in the Quarterly Report on Form 10-Q, and other filings made by MetLife, Inc. with the SEC, and are not included in this Current Report on Form 8-K. Accordingly, the revised information set forth in this Current Report on Form 8-K should be read in conjunction with the 2011 Annual Report.
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Part I
Item 1. Business
For purposes of this discussion, “MetLife,” the “Company,” “we,” “our” and “us” refers to MetLife, Inc., a Delaware corporation incorporated in 1999, its subsidiaries and affiliates.
With a more than 140-year history, we have grown to become a leading global provider of insurance, annuities and employee benefit programs, serving 90 million customers. Through our subsidiaries and affiliates, we hold leading market positions in the United States, Japan, Latin America, Asia, Europe and the Middle East. Over the past several years, we have grown our core businesses, as well as successfully executed on our growth strategy. This has included completing a number of transactions that have resulted in the acquisition and, in some cases, divestiture of certain businesses while also further strengthening our balance sheet to position MetLife for continued growth.
As announced in November 2011, the Company reorganized its business from its former U.S. Business and International structure into three broad geographic regions to better reflect its global reach. As a result, in the first quarter of 2012, the Company reorganized into six segments, reflecting these broad geographic regions: Retail; Group, Voluntary & Worksite Benefits; Corporate Benefit Funding; and Latin America (collectively, “The Americas”); Asia; and Europe, the Middle East and Africa (“EMEA”). As anticipated, in the third quarter of 2012, the Company continued to realign certain products and businesses among its existing segments to better conform to the way it manages and assesses its business as noted below. In addition, the Company reports certain of its results of operations in Corporate & Other, which includes MetLife Bank, National Association (“MetLife Bank”) (see Note 2 and Note 24 of the Notes to the Consolidated Financial Statements) and other business activities. Management continues to evaluate the Company’s segment performance and allocated resources and may adjust such measurements in the future to better reflect segment profitability.
The Group, Voluntary & Worksite Benefits segment is now organized into two businesses: Group and Voluntary & Worksite. The insurance products and services that were previously reported in the former Non-Medical Health business are now divided between the Group and Voluntary & Worksite businesses as follows: dental, group short- and long-term disability, and accidental death & dismemberment coverages are reported in Group; and long-term care, prepaid legal plans, and critical illness are reported in Voluntary & Worksite. Also, individual disability income, previously reported in the former Non-Medical Health business, is now reported in the Life & Other business (formerly the Life business) in the Retail segment. The products that were previously reported in the former Property & Casualty business are now reported in the Life & Other business in the Retail segment and the Voluntary & Worksite business in the Group, Voluntary & Worksite Benefits segment, based on such products’ distribution channel. In addition, the businesses in South Asia and India are now reported in the Asia segment. They were previously reported in the EMEA segment. Prior period results have been revised in connection with these changes.
In December 2011, MetLife Bank and MetLife, Inc. entered into a definitive agreement to sell most of the depository business of MetLife Bank. The transaction is expected to close in the second quarter of 2012, subject to certain regulatory approvals and other customary closing conditions. Additionally, in January 2012, MetLife, Inc. announced it is exiting the business of originating forward residential mortgages (together with MetLife Bank’s pending actions to exit the depository business, including the aforementioned December 2011 agreement, the “MetLife Bank Events”). Once MetLife Bank has completely exited its depository business, MetLife, Inc. plans to terminate MetLife Bank’s Federal Deposit Insurance Corporation (“FDIC”) insurance, putting MetLife, Inc. in a position to be able to deregister as a bank holding company. See “— U.S. Regulation — Financial Holding Company Regulation.” The Company continues to originate reverse mortgages and will continue to service its current mortgage customers. See Note 2 and Note 24 of the Notes to the Consolidated Financial Statements for additional information.
In November 2011, the Company entered into an agreement to sell its insurance operations in the Caribbean region, Panama and Costa Rica (the “Caribbean Business”). The sale is expected to close in the third quarter of 2012 subject to regulatory approval and other customary closing conditions. See Note 2 and Note 24 of the Notes to the Consolidated Financial Statements.
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On November 1, 2010 (the “Acquisition Date”), MetLife, Inc. completed the acquisition of American Life Insurance Company (“American Life”) from AM Holdings LLC (formerly known as ALICO Holdings LLC) (“AM Holdings”), a subsidiary of American International Group, Inc. (“AIG”), and Delaware American Life Insurance Company (“DelAm”) from AIG (American Life, together with DelAm, collectively, “ALICO”) (the “Acquisition”). ALICO’s fiscal year-end is November 30. Accordingly, the Company’s consolidated financial statements reflect the assets and liabilities of ALICO as of November 30, 2011 and 2010, and the operating results of ALICO for the year ended November 30, 2011 and the one month ended November 30, 2010. The assets, liabilities and operating results relating to the Acquisition are included in the Latin America, Asia and EMEA segments. Prior year results have been adjusted to conform to the current year presentation of segments. See Note 2 and Note 24 of the Notes to the Consolidated Financial Statements.
In the U.S., we provide a variety of insurance and financial services products — including life, dental, disability, property & casualty insurance, guaranteed interest and stable value products, and annuities — through both proprietary and independent retail distribution channels, as well as at the workplace. This business serves approximately 60,000 group customers, including over 90 of the top one hundred FORTUNE 500® companies, and provides protection and retirement solutions to millions of individuals.
Outside the U.S., we operate in Latin America, Asia, Europe, the Middle East, and Africa. MetLife is the largest life insurer in Mexico and also holds leading market positions in Japan, Poland, Chile and Korea. This business provides life insurance, accident & health insurance, credit insurance, annuities, endowment and retirement & savings products to both individuals and groups. We believe our businesses outside the U.S. will grow more quickly than our U.S. business.
Operating revenues derived from any customer did not exceed 10% of consolidated operating revenues in any of the last three years. Financial information, including revenues, expenses, operating earnings, and total assets by segment, is provided in Note 22 of the Notes to the Consolidated Financial Statements. Operating revenues and operating earnings are performance measures that are not based on accounting principles generally accepted in the United States of America (“GAAP”). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for definitions of such measures.
For financial information related to revenues, total assets, and goodwill balances by geographic region, see Note 7 and Note 22 of the Notes to the Consolidated Financial Statements.
We are one of the largest institutional investors in the U.S. with a $522 billion general account portfolio invested primarily in investment grade corporate bonds, structured finance securities, commercial and agricultural mortgage loans, U.S. Treasury and agency securities, as well as real estate and corporate equity. Over the past several years, we have taken a number of actions to further diversify and strengthen our general account portfolio.
Our well-recognized brand, leading market positions, competitive and innovative product offerings and financial strength and expertise should help drive future growth and enhance shareholder value, building on a long history of fairness, honesty and integrity. Over the course of the next several years, we will pursue the following objectives to achieve our goals:
• | Global Presence |
– | Focus on targeted, disciplined global growth of our businesses |
– | Leverage our broad and diverse set of distribution channels and products |
– | Become a more customer-centric organization |
• | Brand |
– | Extend the reach of our widely recognized brand to access customers in key markets |
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• | Financial Strength |
– | Build on our strong risk management and investment expertise |
– | Focus on margin improvement and return on equity expansion |
– | Maintain balance between growth, profitability and risk |
– | Focus on pursuing growth that will add value to the Company and achieve return on equity in excess of our long-term cost of capital |
– | Take a portfolio view of the business and invest capital in core markets |
• | Talent |
– | Further our commitment to a diverse, high performance workplace |
The Americas
Overview
Our businesses offer a broad range of protection products and services aimed at serving the financial needs of our customers throughout their lives. These products are sold to individuals and corporations, as well as other institutions, and their respective employees.
Retail
Our Retail segment is organized into two businesses: Life & Other and Annuities.
Our Life & Other insurance products and services include variable life, universal life, term life, whole life, individual disability income and property & casualty products. Additionally, through our broker-dealer affiliates, we offer a full range of mutual funds and other securities products. The elimination of transactions from activity between the segments within The Americas occurs within Life & Other.
The major products within Life & Other are as follows:
Variable Life. Variable life products provide insurance coverage through a contract that gives the policyholder flexibility in investment choices and, depending on the product, in premium payments and coverage amounts, with certain guarantees. Most importantly, with variable life products, premiums and account balances can be directed by the policyholder into a variety of separate account investment options or directed to the Company’s general account. In the separate account investment options, the policyholder bears the entire risk of the investment results. We collect specified fees for the management of the investment options. The policyholder’s cash value reflects the investment return of the selected investment options, net of management fees and insurance-related and other charges. In some instances, third-party money management firms manage these investment options. With some products, by maintaining a certain premium level, policyholders may have the advantage of various guarantees that may protect the death benefit from adverse investment experience.
Universal Life. Universal life products provide insurance coverage on the same basis as variable life, except that premiums, and the resulting accumulated balances, are allocated only to the Company’s general account. Universal life products may allow the insured to increase or decrease the amount of death benefit coverage over the term of the contract and the owner to adjust the frequency and amount of premium payments. We credit premiums to an account maintained for the policyholder. Premiums are credited net of specified expenses. Interest is credited to the policyholder’s account at interest rates we determine, subject to specified minimums. Specific charges are made against the policyholder’s account for the cost of insurance protection and for expenses. With some products, by maintaining a certain premium level, policyholders may have the advantage of various guarantees that may protect the death benefit from adverse investment experience.
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Term Life. Term life products provide a guaranteed benefit upon the death of the insured for a specified time period in return for the periodic payment of premiums. Specified coverage periods range from one year to 30 years, but in no event are they longer than the period over which premiums are paid. Death benefits may be level over the period or decreasing. Premiums may be guaranteed at a level amount for the coverage period or may be non-level and non-guaranteed. Term insurance products are sometimes referred to as pure protection products, in that there are typically no savings or investment elements. Term contracts expire without value at the end of the coverage period when the insured party is still living.
Whole Life. Whole life products provide a guaranteed benefit upon the death of the insured in return for the periodic payment of a fixed premium over a predetermined period. Premium payments may be required for the entire life of the contract period, to a specified age or period, and may be level or change in accordance with a predetermined schedule. Whole life insurance includes policies that provide a participation feature in the form of dividends. Policyholders may receive dividends in cash or apply them to increase death benefits, increase cash values available upon surrender or reduce the premiums required to maintain the contract in-force. Because the use of dividends is specified by the policyholder, this group of products provides significant flexibility to individuals to tailor the product to suit their specific needs and circumstances, while at the same time providing guaranteed benefits.
Disability. Disability products provide a benefit in the event of the disability of the insured. In most instances, this benefit is in the form of monthly income paid until the insured reaches age 65. In addition to income replacement, the product may be used to provide for the payment of business overhead expenses for disabled business owners or mortgage payment protection.
Property & Casualty. These products include personal lines property & casualty insurance offered to individuals through a variety of retail distribution channels, including independent agents, property & casualty specialists, direct response marketing and the individual distribution sales group. Auto insurance represented 62%, while homeowners and other insurance represented the remaining 38% of the total net earned premiums on these products in 2011.
The major property & casualty products within Retail Life & Other are as follows:
Auto Coverages. Auto insurance policies provide coverage for private passenger automobiles, utility automobiles and vans, motorcycles, motor homes, antique or classic automobiles and trailers. Property & casualty insurance offers traditional coverage such as liability, uninsured motorist, no fault or personal injury protection, as well as collision and comprehensive.
Homeowners and Other Coverages. Homeowners’ insurance policies provide protection for homeowners, renters, condominium owners and residential landlords against losses arising out of damage to dwellings and contents from a wide variety of perils, as well as coverage for liability arising from ownership or occupancy. Other insurance includes personal excess liability (protection against losses in excess of amounts covered by other liability insurance policies), and coverage for recreational vehicles and boat owners. Most of our homeowners’ policies are traditional insurance policies for dwellings, providing protection for loss on a “replacement cost” basis. These policies also provide additional coverage for reasonable, normal living expenses incurred by policyholders that have been displaced from their homes.
In 2011, our property & casualty business was concentrated in New York and Illinois, as measured by the percentage of total direct earned premiums, of 14% and 9%, respectively, followed by Connecticut and Florida, each with 5%.
Our Annuities business offers a variety of variable and fixed annuities that are primarily sold to individuals and tax-qualified groups in the education, healthcare and not-for-profit sectors.
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The major products within Annuities are as follows:
Variable Annuities. Variable annuities provide for both asset accumulation and asset distribution needs. Variable annuities allow the contractholder to make deposits into various investment options in a separate account, as determined by the contractholder. The risks associated with such investment options are borne entirely by the contractholder, except where guaranteed minimum benefits are involved. In certain variable annuity products, contractholders may also choose to allocate all or a portion of their account to the Company’s general account and are credited with interest at rates we determine, subject to certain minimums. In addition, contractholders may also elect certain minimum death benefit and minimum living benefit guarantees for which additional fees are charged and where asset allocation restrictions may apply.
Fixed Annuities. Fixed annuities provide for both asset accumulation and asset distribution needs. Fixed annuities do not allow the same investment flexibility provided by variable annuities, but provide guarantees related to the preservation of principal and interest credited. Deposits made into deferred annuity contracts are allocated to the Company’s general account and are credited with interest at rates we determine, subject to certain minimums. Credited interest rates are guaranteed not to change for certain limited periods of time, ranging from one to 10 years. Fixed income annuities provide a guaranteed monthly income for a specified period of years and/or for the life of the annuitant.
Group, Voluntary & Worksite Benefits
We have built a leading position in the U.S. group insurance market through long-standing relationships with many of the largest corporate employers in the U.S.
Our Group, Voluntary & Worksite Benefits segment is organized into two businesses: Group and Voluntary & Worksite.
Our Group life insurance products and services include variable life, universal life, and term life products. These are similar to the products offered by the Retail Life & Other business (see Retail Life & Other product descriptions above) except we offer group insurance products as employer-paid benefits or as voluntary benefits where all or a portion of the premiums are paid by the employee. These group products and services also include employee paid supplemental life and are offered as standard products or may be tailored to meet specific customer needs. Our Group insurance products and services also include dental, group short- and long-term disability and accidental death & dismemberment coverages as more fully described below. We also sell administrative services-only (“ASO”) arrangements to some employers.
The major non-medical health products within Group are as follows:
Dental. Dental products provide insurance and ASO plans that assist employees, retirees and their families in maintaining oral health while reducing out-of-pocket expenses and providing superior customer service. Dental plans include the Preferred Dentist Program and the Dental Health Maintenance Organization.
Disability. Disability products provide a benefit in the event of the disability of the insured. In most instances, this benefit is in the form of monthly income paid until the insured reaches age 65. In addition to income replacement, the product may be used to provide for the payment of business overhead expenses for disabled business owners or mortgage payment protection.
Our Voluntary & Worksite products and services include long-term care, prepaid legal plans, critical illness and property & casualty products.
The major products within Voluntary & Worksite are as follows:
Long-term Care. LTC products provide protection against the potentially high costs of LTC services. They generally pay benefits to insureds who need assistance with activities of daily living or have a cognitive impairment. Although we discontinued the sale of these products in 2010, we continue to support our existing policyholders.
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Property & Casualty. These products includes personal lines property & casualty insurance offered directly to employees at their employer’s worksite, through a variety of retail distribution channels, including independent agents, property & casualty specialists and direct response marketing. Auto insurance represented 76%, while homeowners and other insurance represented the remaining 24% of the total net earned premiums on these products in 2011.
The major property & casualty products within Voluntary & Worksite are as follows:
Auto Coverages. Auto insurance policies provide coverage for private passenger automobiles, utility automobiles and vans, motorcycles, motor homes, antique or classic automobiles and trailers. Property & casualty insurance offers traditional coverage such as liability, uninsured motorist, no fault or personal injury protection, as well as collision and comprehensive.
Homeowners and Other Coverages. Homeowners’ insurance policies provide protection for homeowners, renters, condominium owners and residential landlords against losses arising out of damage to dwellings and contents from a wide variety of perils, as well as coverage for liability arising from ownership or occupancy. Other insurance includes personal excess liability (protection against losses in excess of amounts covered by other liability insurance policies), and coverage for recreational vehicles and boat owners. Most of our homeowners’ policies are traditional insurance policies for dwellings, providing protection for loss on a “replacement cost” basis. These policies also provide additional coverage for reasonable, normal living expenses incurred by policyholders that have been displaced from their homes.
In 2011, our property & casualty business was concentrated in Massachusetts, New York and Florida, as measured by the percentage of total direct earned premiums, of 14%, 9% and 7%, respectively, followed by California, Texas and New Jersey, each with 6%.
Corporate Benefit Funding
Our Corporate Benefit Funding segment offers a broad range of annuity and investment products, including guaranteed interest products and other stable value products, income annuities, and separate account contracts for the investment management of defined benefit and defined contribution plan assets. This segment also includes certain products to fund postretirement benefits and company, bank or trust owned life insurance used to finance non-qualified benefit programs for executives.
The major products within Corporate Benefit Funding are as follows:
Stable Value Products. We offer general account guaranteed interest contracts, separate account guaranteed interest contracts, and similar products used to support the stable value option of defined contribution plans. We also offer private floating rate funding agreements that are used for money market funds, securities lending cash collateral portfolios and short-term investment funds.
Pensions Closeouts. We offer general account and separate account annuity products, generally in connection with the termination of defined benefit pension plans, both in the U.S. and the United Kingdom (“U.K.”). We also offer partial risk transfer solutions that allow for partial transfers of pension liabilities and annuity products that include single premium buyouts.
Torts and Settlements. We offer innovative strategies for complex litigation settlements, primarily structured settlement annuities.
Capital Markets Investment Products. Products offered include funding agreements, Federal Home Loan Bank advances and funding agreement-backed commercial paper.
Other Corporate Benefit Funding Products and Services. We offer specialized life insurance products designed specifically to provide solutions for non-qualified benefit and retiree benefit funding purposes.
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Latin America
We operate in 22 countries in Latin America, among which the largest operations are in Mexico, Chile and Argentina. Our Mexican operation is the largest life insurance company in Mexico in both the individual and group businesses according to Asociación Mexicana de Instituciones de Seguro, a Mexican industry trade group which provides rankings for insurance companies. Our Chilean operation is the largest life, annuity and group insurance company, based on market share according to Superintendencia de Valores y Seguros, the Chilean insurance regulator. We also actively market individual life insurance, group insurance (including credit life) and accident & health products in Argentina, but the nationalization of the pension system substantially reduced our presence in Argentina. The business environment in Argentina has been, and may continue to be, affected by governmental and legal actions which could impact our results of operations. See Note 2 of the Notes to the Consolidated Financial Statements for additional information on the pending disposition of the Caribbean Business.
Asia
We operate in nine countries across Asia, with our largest operations in Japan and Korea, as well as through a consolidated joint venture in India. In Japan, we have significant sales in whole life and term life, fixed annuity, and accident & health products. Our Korean operation has significant sales of variable universal life and annuity products. Our Hong Kong operation has significant sales of variable universal life and endowment products. In South Asia, we provide life insurance, accident & health insurance, credit insurance and group insurance. Our consolidated joint venture in India provides life insurance products, including endowments and variable life, as well as group life. Our Australia operation has significant sales of credit insurance and group life products. We also operate through a joint venture in China, the results of which are reflected in net investment income and are not consolidated in our financial results. As discussed in Note 2 of the Notes to the Consolidated Financial Statements, the Company sold its 50% interest in its former operating joint venture in Japan in the second quarter of 2011.
EMEA
We operate in 31 countries in EMEA with our largest operations in Poland, the U.K., France and the United Arab Emirates. Our Poland operation is a leading provider of life insurance, accident & health insurance, and credit insurance. It is consistently ranked as a top three company in net profits according to “Rzeczpospolita” financial daily. Our U.K. operation provides life insurance, accident & health insurance and variable annuities in its home market and throughout Europe. Our operation in France provides life insurance, accident & health insurance and credit insurance. In the Middle East and Africa, we provide life insurance, accident & health insurance, credit insurance; group and retirement products, which include annuities and pensions.
Sales Distribution
Overview
In The Americas, excluding Latin America, we market our products and services through various distribution groups. Our retail life and annuities products targeted to individuals are sold via sales forces, comprised of MetLife employees, in addition to third-party organizations. Our group life, non-medical health and corporate benefit funding products are sold via sales forces primarily comprised of MetLife employees. Personal lines property & casualty insurance products are directly marketed to employees at their employer’s worksite. Property & casualty insurance products are also marketed and sold to individuals by independent agents and property & casualty specialists through a direct response channel and the individual distribution sales group. MetLife sales employees work with all distribution groups to better reach and service customers, brokers, consultants and other intermediaries.
In Asia, Latin America, Europe, the Middle East, and Africa, we market our products and services through a multi-distribution strategy which varies by geographic region. The various distribution channels include: agency, bancassurance, direct marketing (“DM”), brokerage and e-commerce. In developing countries, agency covers the needs of the emerging middle class with primarily traditional products (e.g., endowment and accident & health).
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In more developed and mature markets, agents, while continuing to serve their existing customers to keep pace with their developing financial needs, also target upper middle class and high net worth customer bases with a more sophisticated product set including more investment-sensitive products, such as universal life, mutual fund and single premium deposits. In the bancassurance channel, we leverage partnerships that span all regions. In DM, we developed extensive and far reaching capabilities in all regions. Our DM operations deploy both broadcast marketing approaches (e.g. direct response TV, web-based lead generation) and traditional DM techniques such as telemarketing. Japan represents our largest DM market. See “Risk Factors — Fluctuations in Foreign Currency Exchange Rates Could Negatively Affect Our Profitability,” “Risk Factors — Our International Operations Face Political, Legal, Operational and Other Risks, Including Exposure to Local and Regional Economic Conditions, That Could Negatively Affect Those Operations or Our Profitability,” “Risk Factors — Difficult Conditions in the Global Capital Markets and the Economy Generally May Materially Adversely Affect Our Business and Results of Operations and These Conditions May Not Improve in the Near Future,” and “Quantitative and Qualitative Disclosures About Market Risk.”
The Americas
Individual Distribution
Our individual distribution sales group targets the large middle-income market, as well as affluent individuals, owners of small businesses and executives of small- to medium-sized companies. We have also been successful in selling our products in various multi-cultural markets.
Retail Life & Other products are sold through our individual distribution sales group and also through various third-party organizations utilizing two models. In the coverage model, wholesalers sell to high net worth individuals and small- to medium-sized businesses through independent general agencies, financial advisors, consultants, brokerage general agencies and other independent marketing organizations under contractual arrangements. In the point of sale model, wholesalers sell through financial intermediaries, including regional broker-dealers, brokerage firms, financial planners and banks. Additionally, we sell term insurance through a DM initiative.
Retail Annuity products are sold through our individual distribution sales group and also through various third-party organizations such as regional broker-dealers, New York Stock Exchange brokerage firms, financial planners and banks.
The individual distribution sales group is comprised of three channels: the MetLife distribution channel, a career agency system, the New England Financial distribution channel, a general agency system, and MetLife Resources, a career agency system.
The MetLife distribution channel had approximately 5,000 MetLife agents under contract in 50 agencies at December 31, 2011. The career agency sales force focuses on the large middle-income and affluent markets, including multi-cultural markets. We support our efforts in multi-cultural markets through targeted advertising, specially trained agents and sales literature written in various languages.
The New England Financial distribution channel included approximately 35 general agencies providing support to 2,100 general agents and a network of independent brokers throughout the U.S. at December 31, 2011. The New England Financial distribution channel targets high net worth individuals, owners of small businesses and executives of small- to medium-sized companies.
MetLife Resources, a focused distribution channel of MetLife, markets retirement, annuity and other financial products on a national basis through approximately 540 MetLife agents and independent brokers at December 31, 2011. MetLife Resources targets the nonprofit, educational and healthcare markets.
We market and sell property & casualty products through independent agents, property & casualty specialists, a direct response channel and the individual distribution sales group. In recent years, we have increased the number of independent agents appointed to sell these products.
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Group Distribution
Group, Voluntary & Worksite Benefits distributes its Group products and services through a sales force that is segmented by the size of the target customer. Marketing representatives sell either directly to corporate and other group customers or through an intermediary, such as a broker or consultant. Voluntary & Worksite products (with the exception of property & casualty products) are sold through the same sales channels, as well as by specialists for these products. Employers have been emphasizing such voluntary products and, as a result, we have increased our focus on communicating and marketing to such employees in order to further foster sales of those products. At December 31, 2011, the Group sales channels had approximately 350 marketing representatives.
We are a leading provider of personal lines property & casualty insurance products offered to employees at their employer’s worksite. At December 31, 2011, approximately 2,400 employers offered MetLife property & casualty products to their employees.
Group marketing representatives market personal lines property & casualty insurance products to employers through a variety of means, including broker referrals and cross-selling to group customers. Once permitted by the employer, MetLife commences marketing efforts to employees. Employees who are interested in the auto and homeowners products can call a toll-free number to request a quote to purchase coverage and to request payroll deduction over the telephone. For our property & casualty products, we have developed proprietary software that permits an employee in most states to obtain a quote for auto insurance through our internet website.
Corporate Benefit Funding products and services are distributed through dedicated sales teams and relationship managers located in 11 offices around the country. Products may be sold directly to benefit plan sponsors and advisors or through brokers, consultants or other intermediaries. In addition, the retirement & benefits funding distribution organization works with individual distribution, group life and non-medical health distribution areas to better reach and service customers, brokers, consultants and other intermediaries.
We have entered into several joint ventures and other arrangements with third parties to expand the marketing and distribution opportunities of group products and services. We also seek to sell our group products and services through sponsoring organizations and affinity groups. In addition, we also provide life and dental coverage to employees of the U.S. Government.
Latin America Distribution
Latin America’s key distribution channels include captive agents, DM, bancassurance, large multinational brokers and small-and medium-sized brokers, direct and group sales forces (mostly for group policies without broker intermediation), and worksite marketing. The region has an exclusive and captive agency distribution network with more than 2,500 agents also selling a variety of individual life, accident & health, and pension products. In the DM channel, we work with more than 50 sponsors and have a network of more than 1,600 telesales representatives selling mainly accident & health and individual life products. We currently work with over 3,000 active brokers with registered sales of group and individual life, accident & health, group medical, dental and pension products. Worksite marketing in Mexico has over 2,200 agents.
Asia
Japan’s multi-channel distribution strategy consists of captive agents, independent agents, brokers, bancassurance, and DM. While face-to-face channels continue to be core to Japan’s business, other channels, including bancassurance and DM, have become a critical part of Japan’s distribution strategy. Our Japan operation has maintained its position in bancassurance due to its strong distribution relationship with Japan’s mega banks, trust banks and various regional banks, as well as with the Japan Post. The DM channel is supported by an industry-leading marketing platform, state-of-the-art call center infrastructure and its own campaign management system.
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Our Japan operation has approximately 5,500 captive agents, 10,500 independent agents, 100 bancassurance relationships, including Japan Post, and 200 DM sponsors.
Elsewhere in Asia, distribution strategies differ by country but generally utilize a combination of captive agents, bancassurance relationships and DM. Agency sales are achieved through a force of approximately 24,400 agents and managers (which includes approximately 1,700 agents and managers related to our operating joint venture in China) and a growing force of independent general agents. Bancassurance is a growing channel with approximately 30 relationships, and approximately 60 programs providing access to thousands of bank customers. Throughout the region, our Asia operation leverages its expertise in DM operations management to conduct its own campaigns and provide those DM capabilities to third-party sponsors.
While not a significant part of the region’s overall business, sales of group life and pension business are primarily achieved through independent brokers and an employee sales force.
EMEA
Our EMEA operations cover a wide geographical region. Our operations in Central Europe and Eastern & Southern Europe has a multi-channel distribution strategy, which includes significant face to face channels, built on a strong captive agency force of more than 3,400 agents, and relationships with more than 90 active independent brokers and third-party multi-level agency networks. This region also has a group/corporate business direct sales force of more than 70 and distribution relationships with more than 100 banks, and other financial and non-financial institutions, as well as a fast growing DM channel. The primary method of distribution is captive third party agency and captive direct sales forces, with a growing presence in bank, other financial and non-financial institutions, and DM.
Our operation in Western Europe also has a multi-channel distribution strategy, including DM, brokerage, banks and financial institutions. Our U.K. operation has built a strong position in the U.K. independent advisor sector and other third-party distributors with a focus on variable and fixed term annuities. Our U.K operation also has a growing group risk business serving small and medium sized enterprise employers and an agency sales force of approximately 600 agents which distributes accident & health and term life products.
In our Middle East and Africa operations, products are distributed via a variety of channels including approximately 1,800 agents, bancassurance, brokers and DM. Agency distribution is our primary distribution channel; we have the largest captive network in the Middle East and Africa. Bancassurance is a growing channel with approximately 60 relationships, and approximately 200 programs providing access to thousands of bank customers.
Corporate & Other
Corporate & Other contains the excess capital not allocated to the segments, external integration costs, internal resource costs for associates committed to acquisitions, and various start-up and certain run-off entities. Corporate & Other also includes assumed reinsurance of certain variable annuity products from our former operating joint venture in Japan. This in-force reinsurance agreement reinsures the living and death benefit guarantees issued in connection with variable annuity products. Additionally, Corporate & Other includes interest expense related to the majority of the Company’s outstanding debt, expenses associated with certain legal proceedings, the financial results of MetLife Bank (see Note 2 of the Notes to the Consolidated Financial Statements) and income tax audit issues. Corporate & Other also includes the elimination of intersegment amounts, which generally relate to intersegment loans, which bear interest rates commensurate with related borrowings.
MetLife Bank is a member of the Federal Reserve System and the Federal Home Loan Bank of New York and is subject to regulation, examination and supervision primarily by the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau, and secondarily by the FDIC, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the Federal Reserve Bank of New York (collectively with the Federal Reserve Board, the “ Federal Reserve”).
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Policyholder Liabilities
We establish, and carry as liabilities, actuarially determined amounts that are calculated to meet our policy obligations when a policy matures or is surrendered, an insured dies or becomes disabled or upon the occurrence of other covered events, or to provide for future annuity payments. Amounts for actuarial liabilities are computed and reported in the consolidated financial statements in conformity with GAAP. For more details on Policyholder Liabilities see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates — Liability for Future Policy Benefits” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Policyholder Liabilities.”
Pursuant to state insurance laws and country regulators, MetLife, Inc.’s insurance subsidiaries establish statutory reserves, reported as liabilities, to meet their obligations on their respective policies. These statutory reserves are established in amounts sufficient to meet policy and contract obligations, when taken together with expected future premiums and interest at assumed rates. Statutory reserves and actuarial liabilities for future policy benefits generally differ based on accounting guidance.
The New York Insurance Law and regulations require certain MetLife entities to submit to the New York Superintendent of Insurance or other state insurance departments, with each annual report, an opinion and memorandum of a “qualified actuary” that the statutory reserves and related actuarial amounts recorded in support of specified policies and contracts, and the assets supporting such statutory reserves and related actuarial amounts, make adequate provision for their statutory liabilities with respect to these obligations. See “— U.S. Regulation — Insurance Regulation — Policy and Contract Reserve Adequacy Analysis.”
Insurance regulators in many of the non-U.S. countries in which MetLife operates require certain MetLife entities to prepare a sufficiency analysis of the reserves posted in the locally required regulatory financial statements, and to submit that analysis to the regulatory authorities. See “— International Regulation.”
Underwriting and Pricing
Underwriting
Underwriting generally involves an evaluation of applications for all regions by a professional staff of underwriters and actuaries, who determine the type and the amount of risk that we are willing to accept. We employ detailed underwriting policies, guidelines and procedures designed to assist the underwriter to properly assess and quantify risks before issuing policies to qualified applicants or groups.
Insurance underwriting considers not only an applicant’s medical history, but also other factors such as financial profile, foreign travel, vocations and alcohol, drug and tobacco use. Group underwriting generally evaluates the risk characteristics of each prospective insured group, although with certain voluntary products and for certain coverages, members of a group may be underwritten on an individual basis. We generally perform our own underwriting; however, certain policies are reviewed by intermediaries under guidelines established by us. Generally, we are not obligated to accept any risk or group of risks from, or to issue a policy or group of policies to, any employer or intermediary. Requests for coverage are reviewed on their merits and generally a policy is not issued unless the particular risk or group has been examined and approved by our underwriters.
The underwriting conducted by our remote underwriting offices and intermediaries, as well as our corporate underwriting office, are subject to periodic quality assurance reviews to maintain high-standards of underwriting and consistency. Such offices are also subject to periodic external audits by reinsurers with whom we do business.
We have established senior level oversight of the underwriting process that facilitates quality sales and serves the needs of our customers, while supporting our financial strength and business objectives. Our goal is to achieve the underwriting, mortality and morbidity levels reflected in the assumptions in our product pricing. This is accomplished by determining and establishing underwriting policies, guidelines, philosophies and strategies that are competitive and suitable for the customer, the agent and us.
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Property & Casualty’s underwriting function has six principal aspects: evaluating potential worksite marketing employer accounts and independent agencies; establishing guidelines for the binding of risks; reviewing coverage bound by agents; underwriting potential insureds, on a case by case basis, presented by agents outside the scope of their binding authority; pursuing information necessary in certain cases to enable issuing a policy within our guidelines; and ensuring that renewal policies continue to be written at rates commensurate with risk.
Subject to very few exceptions, agents in distribution channels for The Americas, excluding Latin America, business have binding authority for risks which fall within its published underwriting guidelines. Risks falling outside the underwriting guidelines may be submitted for approval to the underwriting department; alternatively, agents in such a situation may call the underwriting department to obtain authorization to bind the risk themselves. In most states, we generally have the right within a specified period (usually the first 60 days) to cancel any policy.
Pricing
Pricing reflects our corporate underwriting standards, which are consistent for our global businesses. Product pricing is based on the expected payout of benefits calculated through the use of assumptions for mortality, morbidity, expenses, persistency and investment returns, as well as certain macroeconomic factors, such as inflation. Investment-oriented products are priced based on various factors, which may include investment return, expenses, persistency and optionality. For certain investment oriented products in the U.S. and certain business sold outside the U.S., pricing may include prospective and retrospective experience rating features. Prospective experience rating involves the evaluation of past experience for the purpose of determining future premium rates and all prior year gains and losses are borne by us. Retrospective experience rating also involves the evaluation of past experience for the purpose of determining the actual cost of providing insurance for the customer, however, the contract includes certain features that allow us to recoup certain losses or distribute certain gains back to the policyholder based on actual prior years’ experience.
Rates for Group and Voluntary & Worksite products (with the exception of property & casualty products) are based on anticipated results for the book of business being underwritten. Renewals are generally reevaluated annually or biannually and are repriced to reflect actual experience on such products. Products offered by Corporate Benefit Funding are priced on demand. Pricing reflects expected investment returns, as well as mortality, longevity and expense assumptions appropriate for each product. This business is generally nonparticipating and illiquid, policyholders have little or no options or contractual rights to cash values.
Rates for individual life insurance products are highly regulated and must be approved by the regulators of the jurisdictions in which the product is sold. Generally such products are renewed annually and may include pricing terms that are guaranteed for a certain period of time. Individual disability income products are based on anticipated results for the book of business being underwritten. Renewals are generally reevaluated annually or biannually and are repriced to reflect actual experience on such products. Fixed and variable annuity products are also highly regulated and approved by the respective regulators. Such products generally include penalties for early withdrawals and policyholder benefit elections to tailor the form of the product’s benefits to the needs of the opting policyholder. We periodically reevaluate the costs associated with such options and will periodically adjust pricing levels on our guarantees. Further, from time to time, we may also reevaluate the type and level of guarantee features currently being offered.
Rates for our major lines of property & casualty insurance are based on our proprietary database, rather than relying on rating bureaus. We determine prices in part from a number of variables specific to each risk. The pricing of personal lines insurance products takes into account, among other things, the expected frequency and severity of losses, the costs of providing coverage (including the costs of acquiring policyholders and administering policy benefits and other administrative and overhead costs), competitive factors and profit considerations. The major pricing variables for personal lines insurance include characteristics of the insured property, such as age, make and model or construction type, as well as characteristics of the insureds, such as driving record and loss experience, and the insured’s personal financial management. Our ability to set and change rates is subject to regulatory oversight.
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As a condition of our license to do business in each state, auto insurance written in the Group, Voluntary & Worksite Benefits segment like all other automobile insurers, is required to write or share the cost of private passenger automobile insurance for higher risk individuals who would otherwise be unable to obtain such insurance. This “involuntary” market, also called the “shared market,” is governed by the applicable laws and regulations of each state, and policies written in this market are generally written at rates higher than standard rates.
Reinsurance Activity
We participate in reinsurance activities in order to limit losses, minimize exposure to significant risks, and provide additional capacity for future growth. We enter into various agreements with reinsurers that cover individual risks, group risks or defined blocks of business, primarily on a coinsurance, yearly renewable term, excess or catastrophe excess basis. These reinsurance agreements spread risk and minimize the effect of losses. The extent of each risk retained by us depends on our evaluation of the specific risk, subject, in certain circumstances, to maximum retention limits based on the characteristics of coverages. We also cede first dollar mortality risk under certain contracts. In addition to reinsuring mortality risk, we reinsure other risks, as well as specific coverages. We obtain reinsurance for capital requirement purposes and also when the economic impact of the reinsurance agreement makes it appropriate to do so.
Under the terms of the reinsurance agreements, the reinsurer agrees to reimburse us for the ceded amount in the event a claim is paid. Cessions under reinsurance agreements do not discharge our obligations as the primary insurer. In the event that reinsurers do not meet their obligations under the terms of the reinsurance agreements, reinsurance balances recoverable could become uncollectible.
We reinsure our business through a diversified group of well-capitalized, highly rated reinsurers. We analyze recent trends in arbitration and litigation outcomes in disputes, if any, with our reinsurers. We monitor ratings and evaluate the financial strength of our reinsurers by analyzing their financial statements. In addition, the reinsurance recoverable balance due from each reinsurer is evaluated as part of the overall monitoring process. Recoverability of reinsurance recoverable balances is evaluated based on these analyses. We generally secure large reinsurance recoverable balances with various forms of collateral, including secured trusts, funds withheld accounts and irrevocable letters of credit.
The Americas — Excluding Latin America
For our Retail Life & Other insurance products, we have historically reinsured the mortality risk primarily on an excess of retention basis or a quota share basis. We currently reinsure 90% of the mortality risk in excess of $1 million for most products and reinsure up to 90% of the mortality risk for certain other products. In addition to reinsuring mortality risk as described above, we reinsure other risks, as well as specific coverages. Placement of reinsurance is done primarily on an automatic basis and also on a facultative basis for risks with specified characteristics. On a case by case basis, we may retain up to $20 million per life and reinsure 100% of amounts in excess of the amount we retain. We evaluate our reinsurance programs routinely and may increase or decrease our retention at any time.
Our Retail Annuities business reinsures a portion of the living and death benefit guarantees issued in connection with our variable annuities. Under these reinsurance agreements, we pay a reinsurance premium generally based on fees associated with the guarantees collected from policyholders, and receive reimbursement for benefits paid or accrued in excess of account values, subject to certain limitations.
Our Corporate Benefit Funding segment has periodically engaged in reinsurance activities, as considered appropriate.
For our property & casualty business within both the Retail and Group, Voluntary & Worksite Benefits segments, we purchase reinsurance to manage our exposure to large losses (primarily catastrophe losses) and to protect statutory surplus. We cede a portion of losses and premiums based upon the exposure of the policies subject to reinsurance. To manage exposure to large property & casualty losses, we utilize property catastrophe, casualty and property per risk excess of loss agreements.
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For other policies within The Americas, excluding Latin America, we generally retain most of the risk and only cede particular risks on certain client arrangements.
Latin America, Asia and EMEA
For certain life insurance products, we reinsure risks above the corporate retention limit of up to $5 million to external reinsurers on a yearly renewable term basis. We may also reinsure certain risks with external reinsurers depending upon the nature of the risk and local regulatory requirements.
For selected large corporate clients, we reinsure group employee benefits or credit insurance business with various client-affiliated reinsurance companies, covering policies issued to the employees or customers of the clients. Additionally, we cede and assume risk with other insurance companies when either company requires a business partner with the appropriate local licensing to issue certain types of policies in certain countries. In these cases, the assuming company typically underwrites the risks, develops the products and assumes most or all of the risk.
We also have reinsurance agreements in force that reinsure a portion of the living and death benefit guarantees issued in connection with variable annuity products. Under these agreements, we pay reinsurance fees associated with the guarantees collected from policyholders, and receive reimbursement for benefits paid or accrued in excess of account values, subject to certain limitations.
Corporate & Other
We also reinsure through 100% quota share reinsurance agreements certain run-off LTC and workers’ compensation business written by MetLife Insurance Company of Connecticut, a subsidiary of MetLife, Inc.
Corporate & Other also has a reinsurance agreement in-force to reinsure the living and death benefit guarantees issued in connection with certain variable annuity products. Under this agreement, we receive reinsurance fees associated with the guarantees collected from policyholders, and provide reimbursement for benefits paid or accrued in excess of account values, subject to certain limitations.
Catastrophe Coverage
We have exposure to catastrophes, in The Americas, excluding Latin America, which could contribute to significant fluctuations in our results of operations. We also use excess of retention and quota share reinsurance agreements to provide greater diversification of risk and minimize exposure to larger risks. Currently, for Latin America, Asia and EMEA, we purchase catastrophe coverage to insure risks within certain countries deemed by management to be exposed to the greatest catastrophic risks.
Reinsurance Recoverables
For information regarding ceded reinsurance recoverable balances, included in premiums, reinsurance and other receivables in the consolidated balance sheets, see Note 9 of the Notes to the Consolidated Financial Statements.
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Part II
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
For purposes of this discussion, “MetLife,” the “Company,” “we,” “our” and “us” refer to MetLife, Inc., a Delaware corporation incorporated in 1999, its subsidiaries and affiliates. Following this summary is a discussion addressing the consolidated results of operations and financial condition of the Company for the periods indicated. This discussion should be read in conjunction with “Note Regarding Forward-Looking Statements,” “Risk Factors,” “Selected Financial Data” and the Company’s consolidated financial statements included elsewhere herein.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain or incorporate by reference information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give expectations or forecasts of future events. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with a discussion of future operating or financial performance. In particular, these include 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 operations and financial results. Any or all forward-looking statements may turn out to be wrong. Actual results could differ materially from those expressed or implied in the forward-looking statements. See “Note Regarding Forward-Looking Statements.”
The following discussion includes references to our performance measures, operating earnings and operating earnings available to common shareholders, that are not based on accounting principles generally accepted in the United States of America (“GAAP”). Operating earnings is the measure of segment profit or loss we use to evaluate segment performance and allocate resources. Consistent with GAAP accounting guidance for segment reporting, operating earnings is our measure of segment performance. Operating earnings is also a measure by which senior management’s and many other employees’ performance is evaluated for the purposes of determining their compensation under applicable compensation plans.
Operating earnings is defined as operating revenues less operating expenses, both net of income tax. Operating earnings available to common shareholders is defined as operating earnings less preferred stock dividends.
Operating revenues and operating expenses exclude results of discontinued operations and other businesses that have been or will be sold or exited by MetLife, Inc. (“Divested Businesses”). Operating revenues also excludes net investment gains (losses) and net derivative gains (losses).
The following additional adjustments are made to GAAP revenues, in the line items indicated, in calculating operating revenues:
• | Universal life and investment-type product policy fees excludes the amortization of unearned revenue related to net investment gains (losses) and net derivative gains (losses) and certain variable annuity guaranteed minimum income benefits (“GMIB”) fees (“GMIB Fees”); |
• | Net investment income: (i) includes amounts for scheduled periodic settlement payments and amortization of premium on derivatives that are hedges of investments but do not qualify for hedge accounting treatment, (ii) includes income from discontinued real estate operations, (iii) excludes post-tax operating earnings adjustments relating to insurance joint ventures accounted for under the equity method, (iv) excludes certain amounts related to contractholder-directed unit-linked investments, and (v) excludes certain amounts related to securitization entities that are variable interest entities (“VIEs”) consolidated under GAAP; and |
• | Other revenues are adjusted for settlements of foreign currency earnings hedges. |
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The following additional adjustments are made to GAAP expenses, in the line items indicated, in calculating operating expenses:
• | Policyholder benefits and claims and policyholder dividends excludes: (i) changes in the policyholder dividend obligation related to net investment gains (losses) and net derivative gains (losses), (ii) inflation-indexed benefit adjustments associated with contracts backed by inflation-indexed investments and amounts associated with periodic crediting rate adjustments based on the total return of a contractually referenced pool of assets, (iii) benefits and hedging costs related to GMIBs (“GMIB Costs”), and (iv) market value adjustments associated with surrenders or terminations of contracts (“Market Value Adjustments”); |
• | Interest credited to policyholder account balances includes adjustments for scheduled periodic settlement payments and amortization of premium on derivatives that are hedges of policyholder account balances (“PABs”) but do not qualify for hedge accounting treatment and excludes amounts related to net investment income earned on contractholder-directed unit-linked investments; |
• | Amortization of deferred policy acquisition costs (“DAC”) and value of business acquired (“VOBA”) excludes amounts related to: (i) net investment gains (losses) and net derivative gains (losses), (ii) GMIB Fees and GMIB Costs, and (iii) Market Value Adjustments; |
• | Amortization of negative VOBA excludes amounts related to Market Value Adjustments; |
• | Interest expense on debt excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP; and |
• | Other expenses excludes costs related to: (i) noncontrolling interests, (ii) implementation of new insurance regulatory requirements, and (iii) business combinations. |
We believe the presentation of operating earnings and operating earnings available to common shareholders as we measure it for management purposes enhances the understanding of our performance by highlighting the results of operations and the underlying profitability drivers of our business. Operating revenues, operating expenses, operating earnings, and operating earnings available to common shareholders, should not be viewed as substitutes for the following financial measures calculated in accordance with GAAP: GAAP revenues, GAAP expenses, GAAP income (loss) from continuing operations, net of income tax, and GAAP net income (loss) available to MetLife, Inc.’s common shareholders, respectively. Reconciliations of these measures to the most directly comparable GAAP measures are included in “— Results of Operations.”
In 2011, management modified its definition of operating earnings and operating earnings available to common shareholders to exclude the impacts of the Divested Businesses, which includes certain operations of MetLife Bank, National Association (“MetLife Bank”) and our insurance operations in the Caribbean region, Panama and Costa Rica (the “Caribbean Business”), as these results are not relevant to understanding the Company’s ongoing operating results. Consequently, prior years’ results for Corporate & Other and total consolidated operating earnings and operating earnings available to common shareholders have been decreased by $111 million, net of $66 million of income tax, and $211 million, net of $139 million of income tax, for the years ended December 31, 2010 and 2009, respectively. In the third quarter of 2012, MetLife, Inc. began reporting additional MetLife Bank operations as Divested Businesses. See Note 2 and Note 24 of the Notes to the Consolidated Financial Statements. Consequently, results for Corporate & Other and total consolidated operating earnings and operating earnings available to common shareholders have been further decreased by $91 million, net of $55 million of income tax, $131 million, net of $75 million of income tax, and $76 million, net of $46 million of income tax, for the years ended December 31, 2011, 2010 and 2009, respectively.
In addition, in 2011, management modified its definition of operating earnings and operating earnings available to common shareholders to exclude impacts related to certain variable annuity guarantees and Market Value Adjustments to better conform to the way it manages and assesses its business. Accordingly, such results are no longer reported in operating earnings and operating earnings available to common shareholders.
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Consequently, prior years’ results for Retail and total consolidated operating earnings have been increased by $64 million, net of $34 million of income tax, and $90 million, net of $49 million of income tax, for the years ended December 31, 2010 and 2009, respectively.
In this discussion, we sometimes refer to sales activity for various products. These sales statistics do not correspond to revenues under GAAP, but are used as relevant measures of business activity. Additionally, the impact of changes in our foreign currency exchange rates is calculated using the average foreign currency exchange rates for the current year and is applied to each of the comparable years.
Executive Summary
MetLife is a leading global provider of insurance, annuities and employee benefit programs throughout the United States, Japan, Latin America, Asia, Europe and the Middle East. Through its subsidiaries and affiliates, MetLife offers life insurance, annuities, property & casualty insurance, and other financial services to individuals, as well as group insurance and retirement & savings products and services to corporations and other institutions. As announced in November 2011, the Company reorganized its business from its former U.S. Business and International structure into three broad geographic regions to better reflect its global reach. As a result, in the first quarter of 2012, the Company reorganized into six segments, reflecting these broad geographic regions: Retail; Group, Voluntary & Worksite Benefits; Corporate Benefit Funding; and Latin America (collectively, “The Americas”); Asia; and Europe, the Middle East and Africa (“EMEA”). As anticipated, in the third quarter of 2012, the Company continued to realign certain products and businesses among its existing segments to better conform to the way it manages and assesses its business. In addition, the Company reports certain of its results of operations in Corporate & Other, which includes MetLife Bank (see Note 2 and Note 24 of the Notes to the Consolidated Financial Statements) and other business activities. Management continues to evaluate the Company’s segment performance and allocated resources and may adjust such measurements in the future to better reflect segment profitability. See “Business” for further information on the reorganization of the Company’s business.
As discussed above, in the third quarter of 2012, as anticipated as part of the November 2011 reorganization, management realigned certain individual disability income and property & casualty products and began reporting such product results in the Retail segment. As a result of the first quarter segment reorganization, these results had been reported in the Group, Voluntary & Worksite Benefits segment. In accordance with the third quarter 2012 realignment, operating earnings for the Retail segment increased by $75 million, net of $8 million of income tax benefit, $205 million, net of $63 million of income tax, and $221 million, net of $71 million of income tax, with a corresponding decrease in the Group, Voluntary & Worksite Benefits segment, for the years ended December 31, 2011, 2010 and 2009, respectively.
Also, as anticipated as part of the November 2011 reorganization, in the third quarter of 2012, management realigned the businesses in South Asia and India and began reporting such results in the Asia segment. As a result of the first quarter segment reorganization, these results had been reported in the EMEA segment. In accordance with the third quarter 2012 realignment, operating earnings for the Asia segment increased (decreased) by $13 million, net of $10 million of income tax, ($2) million, net of $2 million of income tax, and ($12) million, net of $1 million of income tax benefit, with a corresponding change in the EMEA segment, for the years ended December 31, 2011, 2010 and 2009, respectively.
In the first quarter of 2012, the Company adopted new guidance regarding accounting for DAC. See Note 1 of the Notes to the Consolidated Financial Statements for further information. As a result, prior period results have been revised in connection with the Company’s reorganization and the retrospective application of the first quarter 2012 adoption of new guidance regarding accounting for DAC.
In December 2011, MetLife Bank and MetLife, Inc. entered into a definitive agreement to sell most of the depository business of MetLife Bank. The transaction is expected to close in the second quarter of 2012, subject to certain regulatory approvals and other customary closing conditions. Additionally, in January 2012, MetLife, Inc. announced it is exiting the business of originating forward residential mortgages (together with MetLife Bank’s pending actions to exit the depository business, including the aforementioned December 2011 agreement,
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the “MetLife Bank Events”). Once MetLife Bank has completely exited its depository business, MetLife, Inc. plans to terminate MetLife Bank’s Federal Deposit Insurance Corporation (“FDIC”) insurance, putting MetLife, Inc. in a position to be able to deregister as a bank holding company. See “Business — U.S. Regulation — Financial Holding Company Regulation.” The Company continues to originate reverse mortgages and will continue to service its current mortgage customers. As a result of the MetLife Bank Events, for the year ended December 31, 2011, the Company recorded charges totaling $212 million, net of income tax, which included intent-to-sell other-than-temporary impairment (“OTTI”) investment charges, charges related to the de-designation of certain cash flow hedges, a goodwill impairment charge and other employee-related charges. In addition, the Company expects to incur additional charges of $90 million to $110 million, net of income tax, during 2012, related to exiting the forward residential mortgage origination business, with no expected impact on the Company’s operating earnings. See Note 2 and Note 24 of the Notes to the Consolidated Financial Statements for additional information.
On November 1, 2010 (the “Acquisition Date”), MetLife, Inc. completed the acquisition of American Life Insurance Company (“American Life”) from AM Holdings LLC (formerly known as ALICO Holdings LLC) (“AM Holdings”), a subsidiary of American International Group, Inc. (“AIG”), and Delaware American Life Insurance Company (“DelAm”) from AIG (American Life, together with DelAm, collectively, “ALICO”) (the “Acquisition”). ALICO’s fiscal year-end is November 30. Accordingly, the Company’s consolidated financial statements reflect the assets and liabilities of ALICO as of November 30, 2011 and 2010, and the operating results of ALICO for the year ended November 30, 2011 and the one month ended November 30, 2010. The assets, liabilities and operating results relating to the Acquisition are included in the Latin America, Asia and EMEA segments. Prior year results have been adjusted to conform to the current year presentation of segments. See Note 2 and Note 24 of the Notes to the Consolidated Financial Statements.
We continue to experience an increase in market share and sales in several of our businesses; however, the general economic conditions, including the high levels of unemployment, negatively impacted the demand for certain of our products. Higher sales levels drove portfolio growth, which resulted in improved investment results despite lower yields experienced in connection with the continued decline in interest rates in 2011. The declining interest rate environment, however, also generated significant derivative gains in 2011. Current year results were negatively impacted by severe weather, including the earthquake and tsunami in Japan in the first quarter, record numbers of tornadoes in the second quarter and Hurricane Irene in the third quarter.
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Income (loss) from continuing operations, net of income tax | $ | 6,392 | $ | 2,620 | $ | (2,509 | ) | |||||
Less: Net investment gains (losses) | (867 | ) | (408 | ) | (2,901 | ) | ||||||
Less: Net derivative gains (losses) | 4,824 | (265 | ) | (4,866 | ) | |||||||
Less: Other adjustments to continuing operations (1) | (1,450 | ) | (707 | ) | 526 | |||||||
Less: Provision for income tax (expense) benefit | (914 | ) | 304 | 2,573 | ||||||||
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Operating earnings | 4,799 | 3,696 | 2,159 | |||||||||
Less: Preferred stock dividends | 122 | 122 | 122 | |||||||||
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Operating earnings available to common shareholders | $ | 4,677 | $ | 3,574 | $ | 2,037 | ||||||
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(1) | See definitions of operating revenues and operating expenses for the components of such adjustments. |
Year Ended December 31, 2011 compared with the Year Ended December 31, 2010
Unless otherwise stated, all amounts discussed below are net of income tax.
During the year ended December 31, 2011, income (loss) from continuing operations, net of income tax, increased $3.8 billion to $6.4 billion from $2.6 billion in 2010. The change was predominantly due to a $5.1 billion favorable change in net derivative gains (losses), before income tax, and a $1.1 billion favorable change in operating earnings available to common shareholders, which includes the impact of the Acquisition.
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The favorable change in net derivative gains (losses) of $3.3 billion was primarily driven by favorable changes in freestanding derivatives, partially offset by unfavorable changes in embedded derivatives. The favorable change in freestanding derivatives was primarily attributable to the impact of falling long-term and mid-term interest rates and equity market movements and volatility.
The Acquisition drove the majority of the $1.1 billion increase in operating earnings available to common shareholders. In addition, improved investment performance was driven by portfolio growth resulting from increased sales across many of our businesses, which more than offset the negative impact of the declining interest rate environment on yields. Current year results were negatively impacted by severe weather, as well as, in the third quarter, a charge to increase reserves in connection with the Company’s use of the U.S. Social Security Administration’s Death Master File and similar databases to identify potential life insurance claims that have not been presented to the Company (“Death Master File”) and expenses incurred related to a liquidation plan filed by the New York State Department of Financial Services (the “Department of Financial Services”) for Executive Life Insurance Company of New York (“ELNY”).
Year Ended December 31, 2010 compared with the Year Ended December 31, 2009
Unless otherwise stated, all amounts discussed below are net of income tax.
During the year ended December 31, 2010, MetLife’s income (loss) from continuing operations, net of income tax increased $5.1 billion to a gain of $2.6 billion from a loss of $2.5 billion in 2009, of which $2 million in losses is from the inclusion of ALICO results for one month in 2010 and the impact of financing costs for the Acquisition. The change was predominantly due to a $4.6 billion favorable change in net derivative gains (losses), before income tax, and a $2.5 billion favorable change in net investment gains (losses), before income tax. Offsetting these favorable variances were unfavorable changes in adjustments related to continuing operations of $1.2 billion, before income tax, and $2.3 billion of income tax, resulting in a total favorable variance of $3.5 billion. In addition, operating earnings available to common shareholders increased $1.5 billion to $3.5 billion in 2010 from $2.0 billion in 2009.
The favorable change in net derivative gains (losses) of $3.0 billion was primarily driven by net gains on freestanding derivatives in 2010 compared to net losses in 2009, partially offset by an unfavorable change in embedded derivatives from gains in 2009 to losses in 2010. The favorable change in freestanding derivatives was primarily attributable to market factors, including falling long-term and mid-term interest rates, a stronger recovery in equity markets in 2009 than 2010, equity volatility, which decreased more in 2009 as compared to 2010, a strengthening U.S. dollar and widening corporate credit spreads in the financial services sector. The favorable change in net investment gains (losses) of $1.6 billion was primarily driven by a decrease in impairments and a decrease in the provision for credit losses on mortgage loans. These favorable changes in net derivative and net investment gains (losses) were partially offset by an unfavorable change of $518 million in related adjustments.
The improvement in the financial markets, which began in the second quarter of 2009 and continued into 2010, was a key driver of the $1.5 billion increase in operating earnings available to common shareholders. Such market improvement was most evident in higher net investment income and policy fees. These increases were partially offset by an increase in amortization of DAC, VOBA and deferred sales inducements (“DSI”) as a result of an increase in average separate account balances and the impact of a benefit recorded in the prior year related to the pesification in Argentina. The 2010 period also includes one month of ALICO results, contributing $93 million to the increase in operating earnings.
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Consolidated Company Outlook
In 2012, we expect a solid improvement in the operating earnings of the Company over 2011, driven primarily by the following:
• | Premiums, fees and other revenues growth in 2012 is expected to be driven by: |
– | Rational pricing strategy in the group insurance marketplace; |
– | Higher fees earned on separate accounts primarily due to favorable net flows of variable annuities, which are expected to remain strong in 2012, thereby increasing the value of those separate accounts; and |
– | Increases in our businesses outside of the U.S., notably accident & health, from continuing organic growth throughout our various geographic regions. |
• | Focus on disciplined underwriting. We see no significant changes to the underlying trends that drive underwriting results and continue to anticipate solid results in 2012; however, unanticipated catastrophes, similar to those that occurred during 2011, could result in a high volume of weather-related claims. |
• | Focus on expense management. We continue to focus on expense control throughout the Company, and managing the costs associated with the integration of ALICO. |
• | Continued disciplined approach to investing and asset/liability management, including significant hedging to protect against low interest rates. |
We expect only modest investment losses in 2012, but more difficult to predict is the impact of potential changes in fair value of freestanding and embedded derivatives as even relatively small movements in market variables, including interest rates, equity levels and volatility, can have a large impact on the fair value of derivatives and net derivative gains (losses). Additionally, changes in fair value of embedded derivatives within certain insurance liabilities may have a material impact on net derivative gains (losses) related to the inclusion of an adjustment for nonperformance risk.
21
Results of Operations
Year Ended December 31, 2011 Compared with the Year Ended December 31, 2010
Consolidated Results
We have experienced growth and an increase in market share in several of our businesses. Sales of our domestic annuity products were up 51% driven by strong growth in variable annuities across all distribution channels. Even with the impact of the March 2011 earthquake and tsunami in Japan, our sales results in Asia are stronger than anticipated and continue to show steady growth and improvement across essentially all distribution channels. Market penetration continues in our pension closeout business in the U.K.; however, our domestic pension closeout business has been adversely impacted by a combination of poor equity market returns and lower interest rates. In the U.S., sustained high levels of unemployment and a challenging pricing environment continue to depress growth across our group insurance businesses. While we experienced growth in our traditional life and universal life businesses, sales of group life and non-medical health products declined. Policy sales of property & casualty products decreased as the housing and automobile markets remained sluggish. We experienced steady growth and improvement in sales of the majority of our products abroad.
Years Ended December 31, | ||||||||||||||||
2011 | 2010 | Change | % Change | |||||||||||||
(In millions) | ||||||||||||||||
Revenues | ||||||||||||||||
Premiums | $ | 36,361 | $ | 27,071 | $ | 9,290 | 34.3 | % | ||||||||
Universal life and investment-type product policy fees | 7,806 | 6,028 | 1,778 | 29.5 | % | |||||||||||
Net investment income | 19,586 | 17,494 | 2,092 | 12.0 | % | |||||||||||
Other revenues | 2,532 | 2,328 | 204 | 8.8 | % | |||||||||||
Net investment gains (losses) | (867 | ) | (408 | ) | (459 | ) | ||||||||||
Net derivative gains (losses) | 4,824 | (265 | ) | 5,089 | ||||||||||||
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Total revenues | 70,242 | 52,248 | 17,994 | 34.4 | % | |||||||||||
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Expenses | ||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 36,917 | 30,672 | 6,245 | 20.4 | % | |||||||||||
Interest credited to policyholder account balances | 5,603 | 4,919 | 684 | 13.9 | % | |||||||||||
Capitalization of DAC | (5,558 | ) | (2,770 | ) | (2,788 | ) | ||||||||||
Amortization of DAC and VOBA | 4,898 | 2,477 | 2,421 | 97.7 | % | |||||||||||
Amortization of negative VOBA | (697 | ) | (64 | ) | (633 | ) | ||||||||||
Interest expense on debt | 1,629 | 1,550 | 79 | 5.1 | % | |||||||||||
Other expenses | 18,265 | 11,734 | 6,531 | 55.7 | % | |||||||||||
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| |||||||||||
Total expenses | 61,057 | 48,518 | 12,539 | 25.8 | % | |||||||||||
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Income (loss) from continuing operations before provision for income tax | 9,185 | 3,730 | 5,455 | |||||||||||||
Provision for income tax expense (benefit) | 2,793 | 1,110 | 1,683 | |||||||||||||
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Income (loss) from continuing operations, net of income tax | 6,392 | 2,620 | 3,772 | |||||||||||||
Income (loss) from discontinued operations, net of income tax | 23 | 43 | (20 | ) | (46.5 | )% | ||||||||||
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| |||||||||||
Net income (loss) | 6,415 | 2,663 | 3,752 | |||||||||||||
Less: Net income (loss) attributable to noncontrolling interests | (8 | ) | (4 | ) | (4 | ) | (100.0 | )% | ||||||||
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| |||||||||||
Net income (loss) attributable to MetLife, Inc. | 6,423 | 2,667 | 3,756 | |||||||||||||
Less: Preferred stock dividends | 122 | 122 | — | — | % | |||||||||||
Preferred stock redemption premium | 146 | — | 146 | |||||||||||||
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Net income (loss) available to MetLife, Inc.’s common shareholders | $ | 6,155 | $ | 2,545 | $ | 3,610 | ||||||||||
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Unless otherwise stated, all amounts discussed below are net of income tax.
During the year ended December 31, 2011, income (loss) from continuing operations, net of income tax, increased $3.8 billion to $6.4 billion primarily driven by a favorable change in net derivative gains (losses), partially offset by increased net investment losses, net of related adjustments, principally associated with DAC
22
and VOBA amortization. Also included in income (loss) from continuing operations, net of income tax, are the results of the Divested Businesses. In addition, operating earnings increased, reflecting the impact of the Acquisition.
We manage our investment portfolio using disciplined Asset/Liability Management (“ALM”) principles, focusing on cash flow and duration to support our current and future liabilities. Our intent is to match the timing and amount of liability cash outflows with invested assets that have cash inflows of comparable timing and amount, while optimizing, net of income tax, risk-adjusted net investment income and risk-adjusted total return. Our investment portfolio is heavily weighted toward fixed income investments, with over 80% of our portfolio invested in fixed maturity securities and mortgage loans. These securities and loans have varying maturities and other characteristics which cause them to be generally well suited for matching the cash flow and duration of insurance liabilities. Other invested asset classes including, but not limited to, equity securities, other limited partnership interests and real estate and real estate joint ventures, provide additional diversification and opportunity for long-term yield enhancement in addition to supporting the cash flow and duration objectives of our investment portfolio. We also use derivatives as an integral part of our management of the investment portfolio to hedge certain risks, including changes in interest rates, foreign currencies, credit spreads and equity market levels. Additional considerations for our investment portfolio include current and expected market conditions and expectations for changes within our specific mix of products and business segments. In addition, the general account investment portfolio includes, within trading and other securities, contractholder-directed investments supporting unit-linked variable annuity type liabilities, which do not qualify as separate account assets. The returns on these contractholder-directed investments, which can vary significantly period to period, include changes in estimated fair value subsequent to purchase, inure to contractholders and are offset in earnings by a corresponding change in policyholder account balances through interest credited to policyholder account balances.
The composition of the investment portfolio of each business segment is tailored to the specific characteristics of its insurance liabilities, causing certain portfolios to be shorter in duration and others to be longer in duration. Accordingly, certain portfolios are more heavily weighted in longer duration, higher yielding fixed maturity securities, or certain sub-sectors of fixed maturity securities, than other portfolios.
Investments are purchased to support our insurance liabilities and not to generate net investment gains and losses. However, net investment gains and losses are incurred and can change significantly from period to period due to changes in external influences, including changes in market factors such as interest rates, foreign currencies, credit spreads and equity markets; counterparty specific factors such as financial performance, credit rating and collateral valuation; and internal factors such as portfolio rebalancing. Changes in these factors from period to period can significantly impact the levels of both impairments and realized gains and losses on investments sold.
We use freestanding interest rate, equity, credit and currency derivatives to provide economic hedges of certain invested assets and insurance liabilities, including embedded derivatives within certain of our variable annuity minimum benefit guarantees. For those hedges not designated as accounting hedges, changes in market factors can lead to the recognition of fair value changes in net derivative gains (losses) without an offsetting gain or loss recognized in earnings for the item being hedged even though these are effective economic hedges. Additionally, we issue liabilities and purchase assets that contain embedded derivatives whose changes in estimated fair value are sensitive to changes in market factors and are also recognized in net derivative gains (losses).
The favorable change in net derivative gains (losses) of $3.3 billion, from losses of $172 million in 2010 to gains of $3.1 billion in 2011, was driven by a favorable change in freestanding derivatives of $3.9 billion, which was partially offset by an unfavorable change in embedded derivatives of $583 million primarily associated with variable annuity minimum benefit guarantees. The $3.9 billion favorable change in freestanding derivatives was primarily attributable to the impact of falling long-term and mid-term interest rates and equity market movements and volatility. Long-term and mid-term interest rates fell more in 2011 than in 2010 which had a positive impact
23
of $2.1 billion on our interest rate derivatives, $670 million of which was attributable to hedges of variable annuity minimum benefit guarantee liabilities that are accounted for as embedded derivatives. The impact of equity market movements and volatility in 2011 compared to 2010 had a positive impact of $1.5 billion on our equity derivatives, which was primarily attributable to hedges of variable annuity minimum benefit guarantee liabilities that are accounted for as embedded derivatives.
Certain variable annuity products with minimum benefit guarantees contain embedded derivatives that are measured at estimated fair value separately from the host variable annuity contract with changes in estimated fair value recorded in net derivative gains (losses). The fair value of these embedded derivatives also includes an adjustment for nonperformance risk, which is unhedged. The $583 million unfavorable change in embedded derivatives was primarily attributable to hedged risks relating to changes in market factors of $1.6 billion and an unfavorable change in other unhedged non-market risks of $308 million, partially offset by a favorable change in unhedged risks for changes in the adjustment for nonperformance risk of $1.3 billion. The aforementioned $1.6 billion unfavorable change in embedded derivatives was more than offset by favorable changes on freestanding derivatives that hedge these risks, which are described in the preceding paragraphs.
The increase in net investment losses primarily reflects impairments on Greece sovereign debt securities, intent-to-sell impairments on other sovereign debt securities due to the repositioning of the ALICO portfolio into longer duration and higher yielding investments, intent-to-sell impairments related to the Divested Businesses, and lower net gains on sales of fixed maturity and equity securities. These losses were partially offset by net gains on the sales of certain real estate investments and reductions in the mortgage valuation allowance reflecting improving real estate market fundamentals.
Income (loss) from continuing operations, net of income tax, related to the Divested Businesses, excluding net investment gains (losses) and net derivative gains (losses), decreased $152 million to a loss of $41 million in 2011 compared to a gain of $111 million in 2010. Included in this loss was a reduction in total revenues of $73 million and an increase in total expenses of $79 million. As previously mentioned, the Divested Businesses include certain operations of MetLife Bank and the Caribbean Business.
Income tax expense for the year ended December 31, 2011 was $2.8 billion, or 30% of income (loss) from continuing operations before provision for income tax, compared with $1.1 billion, or 30% of income (loss) from continuing operations before provision for income tax, for 2010. The Company’s 2011 and 2010 effective tax rates differ from the U.S. statutory rate of 35% primarily due to the impact of certain permanent tax differences, including non-taxable investment income and tax credits for investments in low income housing, in relation to income (loss) from continuing operations before provision for income tax, as well as certain foreign permanent tax differences.
As more fully described in the discussion of performance measures above, we use operating earnings, which does not equate to income (loss) from continuing operations, net of income tax, as determined in accordance with GAAP, to analyze our performance, evaluate segment performance, and allocate resources. We believe that the presentation of operating earnings and operating earnings available to common shareholders, as we measure it for management purposes, enhances the understanding of our performance by highlighting the results of operations and the underlying profitability drivers of the business. Operating earnings and operating earnings available to common shareholders should not be viewed as substitutes for GAAP income (loss) from continuing operations, net of income tax, and GAAP net income (loss) available to MetLife, Inc.’s common shareholders, respectively. Operating earnings available to common shareholders increased $1.1 billion to $4.7 billion in 2011 from $3.6 billion in 2010.
24
Reconciliation of income (loss) from continuing operations, net of income tax, to operating earnings available to common shareholders
Year Ended December 31, 2011
Retail | Group, Voluntary & Worksite Benefits | Corporate Benefit Funding | Latin America | Asia | EMEA | Corporate & Other | Total | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Income (loss) from continuing operations, net of income tax | $ | 2,486 | $ | 1,568 | $ | 1,455 | $ | 214 | $ | 835 | $ | (153 | ) | $ | (13 | ) | $ | 6,392 | ||||||||||||||
Less: Net investment gains (losses) | 158 | (26 | ) | 19 | (6 | ) | (305 | ) | (525 | ) | (182 | ) | (867 | ) | ||||||||||||||||||
Less: Net derivative gains (losses) | 2,321 | 1,203 | 426 | (36 | ) | 202 | 32 | 676 | 4,824 | |||||||||||||||||||||||
Less: Other adjustments to continuing operations (1) | (709 | ) | (137 | ) | 80 | (340 | ) | 14 | (75 | ) | (283 | ) | (1,450 | ) | ||||||||||||||||||
Less: Provision for income tax (expense) benefit | (619 | ) | (363 | ) | (182 | ) | 82 | 44 | 164 | (40 | ) | (914 | ) | |||||||||||||||||||
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Operating earnings | $ | 1,335 | $ | 891 | $ | 1,112 | $ | 514 | $ | 880 | $ | 251 | (184 | ) | 4,799 | |||||||||||||||||
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Less: Preferred stock dividends | 122 | 122 | ||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||
Operating earnings available to common shareholders | $ | (306 | ) | $ | 4,677 | |||||||||||||||||||||||||||
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Year Ended December 31, 2010
Retail | Group, Voluntary & Worksite Benefits | Corporate Benefit Funding | Latin America | Asia | EMEA | Corporate & Other | Total | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Income (loss) from continuing operations, net of income tax | $ | 1,371 | $ | 924 | $ | 1,121 | $ | 204 | $ | (160 | ) | $ | (175 | ) | $ | (665 | ) | $ | 2,620 | |||||||||||||
Less: Net investment gains (losses) | 178 | 8 | 225 | (26 | ) | (208 | ) | (136 | ) | (449 | ) | (408 | ) | |||||||||||||||||||
Less: Net derivative gains (losses) | 210 | 184 | (107 | ) | 19 | (173 | ) | (33 | ) | (365 | ) | (265 | ) | |||||||||||||||||||
Less: Other adjustments to continuing operations (1) | (509 | ) | (107 | ) | 132 | (274 | ) | (122 | ) | (4 | ) | 177 | (707 | ) | ||||||||||||||||||
Less: Provision for income tax (expense) benefit | 36 | (30 | ) | (87 | ) | 62 | 119 | 5 | 199 | 304 | ||||||||||||||||||||||
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Operating earnings | $ | 1,456 | $ | 869 | $ | 958 | $ | 423 | $ | 224 | $ | (7 | ) | (227 | ) | 3,696 | ||||||||||||||||
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Less: Preferred stock dividends | 122 | 122 | ||||||||||||||||||||||||||||||
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Operating earnings available to common shareholders | $ | (349 | ) | $ | 3,574 | |||||||||||||||||||||||||||
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(1) | See definitions of operating revenues and operating expenses for the components of such adjustments. |
25
Reconciliation of GAAP revenues to operating revenues and GAAP expenses to operating expenses
Year Ended December 31, 2011
Retail | Group, Voluntary & Worksite Benefits | Corporate Benefit Funding | Latin America | Asia | EMEA | Corporate & Other | Total | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Total revenues | $ | 21,491 | $ | 17,777 | $ | 9,414 | $ | 4,448 | $ | 10,959 | $ | 2,956 | $ | 3,197 | $ | 70,242 | ||||||||||||||||
Less: Net investment gains (losses) | 158 | (26 | ) | 19 | (6 | ) | (305 | ) | (525 | ) | (182 | ) | (867 | ) | ||||||||||||||||||
Less: Net derivative gains (losses) | 2,321 | 1,203 | 426 | (36 | ) | 202 | 32 | 676 | 4,824 | |||||||||||||||||||||||
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | 14 | — | — | — | — | — | — | 14 | ||||||||||||||||||||||||
Less: Other adjustments to revenues (1) | (2 | ) | (137 | ) | 134 | 179 | (508 | ) | (28 | ) | 1,546 | 1,184 | ||||||||||||||||||||
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Total operating revenues | $ | 19,000 | $ | 16,737 | $ | 8,835 | $ | 4,311 | $ | 11,570 | $ | 3,477 | $ | 1,157 | $ | 65,087 | ||||||||||||||||
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Total expenses | $ | 17,714 | $ | 15,401 | $ | 7,178 | $ | 4,166 | $ | 9,727 | $ | 3,117 | $ | 3,754 | $ | 61,057 | ||||||||||||||||
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | 507 | — | — | — | 19 | — | — | 526 | ||||||||||||||||||||||||
Less: Other adjustments to expenses (1) | 214 | — | 54 | 519 | (541 | ) | 47 | 1,829 | 2,122 | |||||||||||||||||||||||
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Total operating expenses | $ | 16,993 | $ | 15,401 | $ | 7,124 | $ | 3,647 | $ | 10,249 | $ | 3,070 | $ | 1,925 | $ | 58,409 | ||||||||||||||||
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Year Ended December 31, 2010
Retail | Group, Voluntary & Worksite Benefits | Corporate Benefit Funding | Latin America | Asia | EMEA | Corporate & Other | Total | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Total revenues | $ | 18,726 | $ | 16,877 | $ | 8,398 | $ | 3,544 | $ | 2,356 | $ | 534 | $ | 1,813 | $ | 52,248 | ||||||||||||||||
Less: Net investment gains (losses) | 178 | 8 | 225 | (26 | ) | (208 | ) | (136 | ) | (449 | ) | (408 | ) | |||||||||||||||||||
Less: Net derivative gains (losses) | 210 | 184 | (107 | ) | 19 | (173 | ) | (33 | ) | (365 | ) | (265 | ) | |||||||||||||||||||
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | 1 | — | — | — | — | — | — | 1 | ||||||||||||||||||||||||
Less: Other adjustments to revenues (1) | (86 | ) | (102 | ) | 182 | 13 | 8 | 50 | 1,719 | 1,784 | ||||||||||||||||||||||
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Total operating revenues | $ | 18,423 | $ | 16,787 | $ | 8,098 | $ | 3,538 | $ | 2,729 | $ | 653 | $ | 908 | $ | 51,136 | ||||||||||||||||
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| |||||||||||||||||
Total expenses | $ | 16,656 | $ | 15,496 | $ | 6,674 | $ | 3,310 | $ | 2,589 | $ | 714 | $ | 3,079 | $ | 48,518 | ||||||||||||||||
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | 110 | — | — | — | — | — | — | 110 | ||||||||||||||||||||||||
Less: Other adjustments to expenses (1) | 314 | 5 | 50 | 287 | 130 | 54 | 1,542 | 2,382 | ||||||||||||||||||||||||
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| |||||||||||||||||
Total operating expenses | $ | 16,232 | $ | 15,491 | $ | 6,624 | $ | 3,023 | $ | 2,459 | $ | 660 | $ | 1,537 | $ | 46,026 | ||||||||||||||||
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(1) | See definitions of operating revenues and operating expenses for the components of such adjustments. |
26
Consolidated Results — Operating
Years Ended December 31, | ||||||||||||||||
2011 | 2010 | Change | % Change | |||||||||||||
(In millions) | ||||||||||||||||
OPERATING REVENUES | ||||||||||||||||
Premiums | $ | 36,269 | $ | 27,071 | $ | 9,198 | 34.0 | % | ||||||||
Universal life and investment-type product policy fees | 7,528 | 5,817 | 1,711 | 29.4 | % | |||||||||||
Net investment income | 19,638 | 16,855 | 2,783 | 16.5 | % | |||||||||||
Other revenues | 1,652 | 1,393 | 259 | 18.6 | % | |||||||||||
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| |||||||||||
Total operating revenues | 65,087 | 51,136 | 13,951 | 27.3 | % | |||||||||||
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OPERATING EXPENSES | ||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 36,241 | 29,974 | 6,267 | 20.9 | % | |||||||||||
Interest credited to policyholder account balances | 6,057 | 4,697 | 1,360 | 29.0 | % | |||||||||||
Capitalization of DAC | (5,549 | ) | (2,770 | ) | (2,779 | ) | ||||||||||
Amortization of DAC and VOBA | 4,355 | 2,443 | 1,912 | 78.3 | % | |||||||||||
Amortization of negative VOBA | (619 | ) | (57 | ) | (562 | ) | ||||||||||
Interest expense on debt | 1,304 | 1,137 | 167 | 14.7 | % | |||||||||||
Other expenses | 16,620 | 10,602 | 6,018 | 56.8 | % | |||||||||||
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| |||||||||||
Total operating expenses | 58,409 | 46,026 | 12,383 | 26.9 | % | |||||||||||
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| |||||||||||
Provision for income tax expense (benefit) | 1,879 | 1,414 | 465 | 32.9 | % | |||||||||||
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| |||||||||||
Operating earnings | 4,799 | 3,696 | 1,103 | 29.8 | % | |||||||||||
Less: Preferred stock dividends | 122 | 122 | — | — | % | |||||||||||
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| |||||||||||
Operating earnings available to common shareholders | $ | 4,677 | $ | 3,574 | $ | 1,103 | 30.9 | % | ||||||||
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Unless otherwise stated, all amounts discussed below are net of income tax.
The increase in operating earnings reflects the impact of the Acquisition with the corresponding effects on each of our financial statement lines in Latin America, Asia and EMEA. Further trends and matters impacting our business and the comparison to 2010 results are discussed below.
Positive results from strong sales in 2011 were offset by losses from severe weather and the impact of the low interest rate environment. Changes in foreign currency exchange rates had a slightly positive impact on results compared to 2010.
In 2011, we benefited from strong sales as well as growth and higher persistency in our business, across many of our products. As a result, we experienced growth in our investment portfolio, as well as our average separate account assets, generating both higher net investment income of $565 million and higher policy fee income of $373 million. Since many of our products are interest spread-based, the growth in our individual life, long-term care (“LTC”) and structured settlement businesses also resulted in a $108 million increase in interest credited expenses. These increased sales also generated an increase in commission and other volume-related expenses of $568 million, which was largely offset by an increase of $476 million in related DAC capitalization. DAC amortization also increased $79 million. In addition, other non-variable expenses increased $81 million due to growth in our existing businesses.
We review and update our long-term assumptions used in our calculations of certain insurance-related liabilities and DAC annually, which may result in changes and are recorded in the fourth quarter each year. This annual update, along with other reserve refinements, contributed to a net operating earnings increase of $59 million, mainly in the universal life block of business. In addition, to better align with hedged risks, certain elements of our variable annuity hedging program that were previously recorded in net investment income were recorded in net derivative gains (losses) beginning in 2011 which resulted in a decrease in operating earnings of $77 million.
27
In the fourth quarter of 2011, we announced a reduction in our dividend scale related to our closed block. The impact of this action increased operating earnings by $54 million.
Severe weather during 2011 was the primary driver of our unfavorable claims experience in our property & casualty business, which decreased operating earnings by $239 million. In addition, in the third quarter of 2011, we incurred a $117 million charge to increase reserves in connection with our use of the Death Master File, impacting primarily Group, Voluntary & Worksite Benefits. These events overshadowed positive results of $76 million, driven by favorable claims experience in our dental and disability businesses and strong mortality gains in our group life business.
Market factors, specifically the current low interest rate environment, continued to be a challenge during 2011. Also in 2011, equity markets remained relatively flat compared to much stronger 2010 equity market performance. Investment yields were negatively impacted by the current low interest rate environment and lower returns in the equity markets, partially offset by improving real estate markets, resulting in a $322 million decrease in net investment income. Partially offsetting this decrease was a $134 million improvement in operating earnings, primarily driven by lower average crediting rates on our annuity and funding agreement businesses. The lower average crediting rates continue to reflect the lower investment returns available in the marketplace. Also contributing to the decrease in interest credited is the impact from derivatives that are used to hedge certain liabilities in our funding agreement business.
Interest expense on debt increased $81 million primarily as a result of debt issued in the third and fourth quarters of 2010 in connection with the Acquisition.
The Company incurred $40 million of expenses related to a liquidation plan filed by the Department of Financial Services for ELNY in the third quarter of 2011.
The Company also benefited from higher tax credits in 2011 of $84 million over 2010 primarily due to $75 million of charges in 2010 related to the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (together, the “Health Care Act”). The Health Care Act reduced the tax deductibility of retiree health care costs to the extent of any Medicare Part D subsidy received beginning in 2013. Because the deductibility of future retiree health care costs was reflected in our financial statements, the entire future impact of this change in law was required to be recorded as a charge in the first quarter of 2010, when the legislation was enacted. The Company benefits from the impact of certain permanent tax differences, including non-taxable investment income and tax credits for investments in low income housing. As a result, our effective tax rates differ from the U.S. statutory rate of 35%. In 2011, we benefited primarily from higher utilization of tax preferenced investments, which improved operating earnings by $9 million over the prior period.
28
Retail
Years Ended December 31, | ||||||||||||||||
2011 | 2010 | Change | % Change | |||||||||||||
(In millions) | ||||||||||||||||
OPERATING REVENUES | ||||||||||||||||
Premiums | $ | 6,711 | $ | 6,491 | $ | 220 | 3.4 | % | ||||||||
Universal life and investment-type product policy fees | 4,096 | 3,655 | 441 | 12.1 | % | |||||||||||
Net investment income | 7,414 | 7,644 | (230 | ) | (3.0 | )% | ||||||||||
Other revenues | 779 | 633 | 146 | 23.1 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenues | 19,000 | 18,423 | 577 | 3.1 | % | |||||||||||
|
|
|
|
|
| |||||||||||
OPERATING EXPENSES | ||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 9,220 | 8,835 | 385 | 4.4 | % | |||||||||||
Interest credited to policyholder account balances | 2,412 | 2,381 | 31 | 1.3 | % | |||||||||||
Capitalization of DAC | (2,339 | ) | (1,769 | ) | (570 | ) | (32.2 | )% | ||||||||
Amortization of DAC and VOBA | 1,845 | 1,724 | 121 | 7.0 | % | |||||||||||
Interest expense on debt | 1 | 2 | (1 | ) | (50.0 | )% | ||||||||||
Other expenses | 5,854 | 5,059 | 795 | 15.7 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total operating expenses | 16,993 | 16,232 | 761 | 4.7 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Provision for income tax expense (benefit) | 672 | 735 | (63 | ) | (8.6 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Operating earnings | $ | 1,335 | $ | 1,456 | $ | (121 | ) | (8.3 | )% | |||||||
|
|
|
|
|
|
Unless otherwise stated, all amounts discussed below are net of income tax.
In 2011, operating results for our property & casualty business were negatively impacted by severe weather, including a record number of tornadoes in the second quarter and Hurricane Irene in the third quarter. Overall sales increased, largely driven by a 51% increase in annuity sales, which grew to $30.4 billion, mainly from strong growth in variable annuities across all distribution channels. However, the favorable impact of our sales growth was dampened by the sustained low interest rate environment. Variable annuity product sales increased primarily due to the introduction of a new higher benefit, lower-risk variable annuity rider and changes in competitors’ offerings which, we believe, made our products more attractive. We launched several changes to our annuity products and riders that are expected to reduce sales volumes in 2012, as we manage sales to strike the right balance among growth, profitability and risk. Retail life and annuity net flows were $18.6 billion, $8.7 billion higher than 2010.
Sales growth in variable annuities and in our variable and universal life products, along with higher persistency in 2011, resulted in an increase in operating earnings of $295 million. The growth in variable products increased average separate account assets and, as a result, generated higher asset-based fee revenue on the separate account assets, partially offset by increases in DAC amortization. This, coupled with the impact of positive net flows on invested assets, increased net investment income. Partially offsetting the positive impact from the strong sales of variable annuities, were increases in variable expenses, net of DAC capitalization. In addition, this business growth generated higher interest credited on policyholder account balances as well as on certain future policyholder benefits. The aforementioned increase in our variable and universal life products was mainly driven by our launch of a new product in the current year, coupled with ongoing organic growth in the business. The expected run-off of the traditional life closed block offset this growth. While property & casualty sales declined, due to sluggish housing and new automobile markets, an increase in average premium per policy in both our homeowners and auto businesses improved operating earnings by $39 million. This was partially offset by a $14 million negative impact to operating earnings due to the decline in exposures; the negative impact from lower premiums exceeded the positive impact from lower claims. This negative impact was coupled with a $9 million increase in expenses, mainly higher commissions, resulting from the increase in average premium per policy.
29
Changes in interest rates and equity markets can significantly impact our earnings. In 2011, interest rates declined while equity markets remained relatively flat compared with much stronger 2010 equity market performance. These changes in interest rates and equity markets reduced operating earnings by $281 million, including the related acceleration of DAC amortization. Lower investment returns in all products and higher interest crediting expense in the life products were partially offset by lower average interest crediting rates on annuity fixed rate funds. Our annuity interest crediting rates continue to reflect the lower investment returns available in the marketplace, while in our other products, reduced investment returns are not reflected as quickly in interest rates credited on policyholder account balances or on certain future policyholder benefits.
Catastrophe-related losses in our property & casualty business increased $117 million compared to 2010, mainly due to severe storm activity. Also, 2011 non-catastrophe claim costs increased $41 million as a result of higher claim frequencies, primarily due to severe winter weather, wind and hail. In addition, a $40 million decrease in operating earnings was the result of poor mortality experience from our variable life, universal life and income annuity businesses, partially offset by slightly improved mortality experience in the traditional life business. We review and update our long-term assumptions used in our calculations of certain insurance-related liabilities and DAC annually, which may result in changes and are recorded in the fourth quarter each year. This annual update, along with other reserve refinements, contributed to a net operating earnings increase of $84 million, mainly in the universal life block of business. These favorable adjustments, primarily related to DAC unlocking, were partially offset by a $28 million charge related to our use of the U.S. Social Security Administration’s Death Master File.
The impact of the items discussed above, related to the property & casualty business, can be seen in the unfavorable change in the combined ratio, including catastrophes, to 107.3% in 2011 from 95.2% in 2010. The combined ratio, excluding catastrophes, was 88.2% in 2011 compared to 86.8% in 2010.
Two items in 2011 had the net impact of a $23 million reduction to operating earnings. First, to better align with hedged risks, certain elements of our variable annuity hedging program that were previously recorded in net investment income were recorded in net derivative gains (losses) beginning in 2011 which resulted in a decrease in operating earnings of $77 million. The second item was a reduction to our dividend scale related to our closed block, which was announced in the fourth quarter of 2011. The impact of this action increased operating earnings by $54 million.
Group, Voluntary & Worksite Benefits
Years Ended December 31, | ||||||||||||||||
2011 | 2010 | Change | % Change | |||||||||||||
(In millions) | ||||||||||||||||
OPERATING REVENUES | ||||||||||||||||
Premiums | $ | 13,949 | $ | 14,100 | $ | (151 | ) | (1.1 | )% | |||||||
Universal life and investment-type product policy fees | 630 | 616 | 14 | 2.3 | % | |||||||||||
Net investment income | 1,768 | 1,702 | 66 | 3.9 | % | |||||||||||
Other revenues | 390 | 369 | 21 | 5.7 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenues | 16,737 | 16,787 | (50 | ) | (0.3 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
OPERATING EXPENSES | ||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 13,015 | 13,112 | (97 | ) | (0.7 | )% | ||||||||||
Interest credited to policyholder account balances | 178 | 192 | (14 | ) | (7.3 | )% | ||||||||||
Capitalization of DAC | (176 | ) | (187 | ) | 11 | 5.9 | % | |||||||||
Amortization of DAC and VOBA | 186 | 181 | 5 | 2.8 | % | |||||||||||
Other expenses | 2,198 | 2,193 | 5 | 0.2 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total operating expenses | 15,401 | 15,491 | (90 | ) | (0.6 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Provision for income tax expense (benefit) | 445 | 427 | 18 | 4.2 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Operating earnings | $ | 891 | $ | 869 | $ | 22 | 2.5 | % | ||||||||
|
|
|
|
|
|
30
Unless otherwise stated, all amounts discussed below are net of income tax.
In 2011, strong mortality and morbidity results coupled with the net impact of asset growth in our life and health businesses, as well as additional favorable development of prior year losses in our property & casualty business contributed to the increase in operating earnings. These positive results were significantly offset by the negative impact of severe weather in our property & casualty business, including a record number of tornadoes in the second quarter and Hurricane Irene in the third quarter. In addition, 2011 results for our life business include a charge taken in the third quarter related to the use of the U.S. Social Security Administration’s Death Master File. The impacts of the sustained low interest rate environment also depressed operating earnings.
Policy sales in our property & casualty business decreased as the housing and new automobile sales markets remained sluggish. However, average premium per policy increased for both our homeowners and auto policies and we benefitted from additional growth in exposures over the prior period. For our life and health businesses, sustained high levels of unemployment and a challenging pricing environment continued to depress growth. Our dental business benefited from higher enrollment and certain pricing actions, but this was more than offset by a decline in revenues from our disability business. This reduction was mainly due to net customer cancellations and lower covered lives. Our LTC revenues were flat period over period, consistent with the discontinuance of the sale of this coverage at the end of 2010.
Although revenues have declined from the prior year, current year premiums and deposits resulted in an increase in our average invested assets, which contributed $74 million to operating earnings. Mirroring the net growth in average invested assets, primarily in our LTC business, interest credited on long-duration contracts and on our policyholder account balances increased by $16 million. The increase in average premium per policy in both our homeowners and auto businesses improved operating earnings by $21 million and the net increase in exposures resulted in a $10 million increase in operating earnings as the positive impact from higher premiums exceeded the negative impact from higher claims. Exposures are generally defined as each automobile for the auto line of business and each residence for the homeowners line of business. Higher commissions, resulting from the aforementioned increase in average premium per policy, coupled with an increase in other volume-related expenses, contributed to a $9 million increase in other expenses, including the net change in DAC. In our dental business, expenses related to the implementation of a large contract decreased operating earnings by $14 million.
Lower claims incidence resulted in very strong life mortality gains, and contributed $71 million to operating earnings. Pricing actions and improved claims experience, mainly the result of stabilizing benefits utilization, drove a $57 million increase in our dental results. Higher closures and lower incidence in 2011 contributed to the $43 million increase in our disability results. In our property & casualty business, additional favorable development of prior year losses contributed $14 million to operating earnings. Partially offsetting these increases to operating earnings, catastrophe-related losses increased $70 million compared to 2010, mainly due to severe storm activity in the U.S. during the second and third quarters of 2011. In addition, current year non-catastrophe claim costs increased $34 million as a result of higher claim frequencies in both our auto and homeowners businesses, due primarily to more severe winter weather in the first quarter of 2011 and to non-catastrophe wind and hail through the remainder of the year. In our life business, an $81 million charge related to our use of the U.S. Social Security Administration’s Death Master File, contributed to the decrease in operating earnings during the third quarter of the current year. Lastly, long-term care results decreased $10 million resulting from less favorable claims experience in the current period.
The impact of the items discussed above, related to our property & casualty business, can be seen in the unfavorable change in the combined ratio, including catastrophes, to 101.9% in 2011 from 93.8% in 2010. The combined ratio, excluding catastrophes, was 91.2% in 2011 and 90.0% in 2010.
Market factors, specifically the current low interest rate environment, continued to be a challenge during 2011. Investment yields were negatively impacted by lower returns on our fixed maturity securities portfolio, a decrease in the crediting rate on allocated equity as well as lower returns in the equity markets on our private
31
equity investments. Unlike in our Retail and Corporate Benefit Funding segments, a reduction in investment yield does not necessarily drive a corresponding reduction in the rates credited on policyholder account balances or amounts held for future policyholder benefits. The changes in market factors discussed above resulted in a $26 million decrease in operating earnings.
Corporate Benefit Funding
Years Ended December 31, | ||||||||||||||||
2011 | 2010 | Change | % Change | |||||||||||||
(In millions) | ||||||||||||||||
OPERATING REVENUES | ||||||||||||||||
Premiums | $ | 2,848 | $ | 2,345 | $ | 503 | 21.4 | % | ||||||||
Universal life and investment-type product policy fees | 232 | 226 | 6 | 2.7 | % | |||||||||||
Net investment income | 5,506 | 5,280 | 226 | 4.3 | % | |||||||||||
Other revenues | 249 | 247 | 2 | 0.8 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenues | 8,835 | 8,098 | 737 | 9.1 | % | |||||||||||
|
|
|
|
|
| |||||||||||
OPERATING EXPENSES | ||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 5,287 | 4,677 | 610 | 13.0 | % | |||||||||||
Interest credited to policyholder account balances | 1,323 | 1,447 | (124 | ) | (8.6 | )% | ||||||||||
Capitalization of DAC | (25 | ) | (18 | ) | (7 | ) | (38.9 | )% | ||||||||
Amortization of DAC and VOBA | 17 | 16 | 1 | 6.3 | % | |||||||||||
Interest expense on debt | 9 | 8 | 1 | 12.5 | % | |||||||||||
Other expenses | 513 | 494 | 19 | 3.8 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total operating expenses | 7,124 | 6,624 | 500 | 7.5 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Provision for income tax expense (benefit) | 599 | 516 | 83 | 16.1 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Operating earnings | $ | 1,112 | $ | 958 | $ | 154 | 16.1 | % | ||||||||
|
|
|
|
|
|
Unless otherwise stated, all amounts discussed below are net of income tax.
Corporate Benefit Funding had strong pension closeout sales in the U.K., and strong sales of structured settlements. Although the combination of poor equity returns and the low interest rate environment has resulted in underfunded pension plans, which reduces our customers’ flexibility to engage in transactions such as pension closeouts, sales in the U.K. remained strong as we continue to penetrate that market. Sales in our structured settlement business were strong as we remain very competitive in the marketplace. Premiums for these businesses were almost entirely offset by the related change in policyholder benefits. However, current year premiums, deposits, funding agreement issuances, an increase in allocated equity, and the expansion of our securities lending program, all contributed to the growth of our average invested assets, which led to an increase in net investment income. This growth in premiums, deposits and funding agreement issuances also increased the interest credited on future policyholder liabilities and policyholder account balances. The net result of these increases contributed $114 million to operating earnings.
Market factors, including the current low interest rate environment, have negatively impacted our investment returns. However, the low interest rate environment also decreased interest credited to policyholders and the interest credited expense associated with insurance liabilities. Many of our funding agreement and guaranteed interest contract liabilities are tied to market indices. Interest rates on new business were set lower, as were the rates on existing business with terms that can fluctuate. The lower investment returns were more than offset by the decrease in interest credited expense, resulting in an increase in operating earnings of $75 million. The lower investment returns also includes the impact of returns on invested economic capital, and the decrease in interest credited is impacted by derivatives that are used to hedge certain liabilities in our funding agreement business.
32
The Company’s use of the Death Master File in connection with our post-retirement benefit business resulted in a charge in the third quarter of the current year of $8 million. Other insurance liability refinements and mortality results negatively impacted our year-over-year operating earnings by $34 million.
Latin America
Years Ended December 31, | ||||||||||||||||
2011 | 2010 | Change | % Change | |||||||||||||
(In millions) | ||||||||||||||||
OPERATING REVENUES | ||||||||||||||||
Premiums | $ | 2,514 | $ | 1,969 | $ | 545 | 27.7 | % | ||||||||
Universal life and investment-type product policy fees | 757 | 630 | 127 | 20.2 | % | |||||||||||
Net investment income | 1,025 | 927 | 98 | 10.6 | % | |||||||||||
Other revenues | 15 | 12 | 3 | 25.0 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenues | 4,311 | 3,538 | 773 | 21.8 | % | |||||||||||
|
|
|
|
|
| |||||||||||
OPERATING EXPENSES | ||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 2,064 | 1,829 | 235 | 12.8 | % | |||||||||||
Interest credited to policyholder account balances | 371 | 370 | 1 | 0.3 | % | |||||||||||
Capitalization of DAC | (295 | ) | (221 | ) | (74 | ) | (33.5 | )% | ||||||||
Amortization of DAC and VOBA | 207 | 144 | 63 | 43.8 | % | |||||||||||
Amortization of negative VOBA | (6 | ) | (1 | ) | (5 | ) | ||||||||||
Interest expense on debt | 1 | 1 | — | — | % | |||||||||||
Other expenses | 1,305 | 901 | 404 | 44.8 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total operating expenses | 3,647 | 3,023 | 624 | 20.6 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Provision for income tax expense (benefit) | 150 | 92 | 58 | 63.0 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Operating earnings | $ | 514 | $ | 423 | $ | 91 | 21.5 | % | ||||||||
|
|
|
|
|
|
Unless otherwise stated, all amounts discussed below are net of income tax.
Operating earnings increased by $91 million over 2010 primarily as a result of the inclusion of a full year of results of ALICO’s operations for 2011 compared to one month of results for 2010, which contributed $36 million to the operating earnings increase for the segment. The positive impact of changes in foreign currency exchange rates improved reported earnings by $15 million for 2011 compared to the prior year.
Latin America experienced strong sales growth driven primarily by accident & health products. In addition, sales of retirement products in Mexico as well as immediate annuity products in Chile increased over the prior year. Net investment income increased due to increased average invested assets and higher fee income on universal life products, primarily in Mexico, also favorably impacted operating earnings. Commissions and compensation expenses were higher in Mexico and Brazil due to business growth, which is offset by DAC capitalization. Other expenses also increased over the prior year due to growth in the businesses. Growth in our businesses contributed $144 million to operating earnings. As a result of the Acquisition and growth in the business, Latin America’s results reflect higher corporate expenses of $18 million, which decreased operating earnings.
Changes in market factors negatively impacted investment yields, which resulted in a $63 million decrease to operating earnings. Beginning in the fourth quarter of 2010, investment earnings and interest credited related to contractholder-directed unit-linked investments were excluded from operating revenues and operating expenses, as the contractholder, and not the Company, directs the investment of the funds. This change in presentation had no impact on operating earnings in the current period; however, it resulted in a decrease in net investment income in Brazil in 2011, when compared to 2010, as positive returns were experienced in 2010 from recovering equity markets. A corresponding decrease is reflected in interest credited expense.
33
Operating earnings were also adversely impacted by a tax refund in the prior period which reduced operating earnings by $23 million.
Asia
Years Ended December 31, | ||||||||||||||||
2011 | 2010 | Change | % Change | |||||||||||||
(In millions) | ||||||||||||||||
OPERATING REVENUES | ||||||||||||||||
Premiums | $ | 7,716 | $ | 1,716 | $ | 6,000 | ||||||||||
Universal life and investment-type product policy fees | 1,343 | 502 | 841 | |||||||||||||
Net investment income | 2,475 | 497 | 1,978 | |||||||||||||
Other revenues | 36 | 14 | 22 | |||||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenues | 11,570 | 2,729 | 8,841 | |||||||||||||
|
|
|
|
|
| |||||||||||
OPERATING EXPENSES | ||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 5,239 | 1,351 | 3,888 | |||||||||||||
Interest credited to policyholder account balances | 1,607 | 183 | 1,424 | |||||||||||||
Capitalization of DAC | (2,045 | ) | (459 | ) | (1,586 | ) | ||||||||||
Amortization of DAC and VOBA | 1,486 | 290 | 1,196 | |||||||||||||
Amortization of negative VOBA | (560 | ) | (49 | ) | (511 | ) | ||||||||||
Interest expense on debt | — | 1 | (1 | ) | (100.0 | )% | ||||||||||
Other expenses | 4,522 | 1,142 | 3,380 | |||||||||||||
|
|
|
|
|
| |||||||||||
Total operating expenses | 10,249 | 2,459 | 7,790 | |||||||||||||
|
|
|
|
|
| |||||||||||
Provision for income tax expense (benefit) | 441 | 46 | 395 | |||||||||||||
|
|
|
|
|
| |||||||||||
Operating earnings | $ | 880 | $ | 224 | $ | 656 | ||||||||||
|
|
|
|
|
|
Unless otherwise stated, all amounts discussed below are net of income tax.
Operating earnings increased by $656 million over 2010 as a result of the inclusion of a full year of results of ALICO’s operations for 2011 compared to one month of results for 2010, which contributed $796 million to the operating earnings increase for the segment. The positive impact of changes in foreign currency exchange rates improved reported earnings by $6 million for 2011 compared to the prior year.
The Japanese economy, to which we face substantial exposure given our operations there, was significantly negatively impacted by the March 2011 earthquake and tsunami. During 2011, the Company incurred $39 million of incremental insurance claims and operating expenses related to the March 2011 earthquake and tsunami, which is included in the aforementioned ALICO results.
Sales results continued to show steady growth and improvement, with increases over 2010 in essentially all of our businesses. Strong variable universal life sales and the launch of new accident & health products in Korea drove higher premiums and universal life fees over the prior year. Premiums were lower compared to the prior year in Hong Kong due to a decline in life sales, and in Australia despite growth in group sales. An increase in average invested assets generated higher net investment income and policy fees. Operating expenses increased primarily driven by higher commissions and compensation expenses in Korea due to business growth, partially offset by an increase in DAC capitalization. DAC amortization also increased due to business growth. As a result of the Acquisition and growth in the business, Asia’s results reflect higher corporate expenses of $77 million, which decreased operating earnings.
Investment yields were negatively impacted by lower returns on allocated equity and a decrease in the results of our operating joint venture in China. Beginning in the fourth quarter of 2010, investment earnings and interest credited related to contractholder-directed unit-linked investments were excluded from operating revenues and
34
operating expenses, as the contractholder, and not the Company, directs the investment of the funds. This change in presentation had no impact on operating earnings in the current period; however, it resulted in a decrease in net investment income in Hong Kong in 2011, when compared to 2010, as positive returns were experienced in 2010 from recovering equity markets. A corresponding decrease is reflected in interest credited expense.
The impact of the sale of our operating joint venture in Japan on April 1, 2011 decreased operating results by $28 million, as no earnings were recognized in the current year.
Unfavorable claims experience resulted in a $16 million decline in operating earnings over the prior period.
EMEA
Years Ended December 31, | ||||||||||||||||
2011 | 2010 | Change | % Change | |||||||||||||
(In millions) | ||||||||||||||||
OPERATING REVENUES | ||||||||||||||||
Premiums | $ | 2,477 | $ | 439 | $ | 2,038 | ||||||||||
Universal life and investment-type product policy fees | 315 | 50 | 265 | |||||||||||||
Net investment income | 562 | 155 | 407 | |||||||||||||
Other revenues | 123 | 9 | 114 | |||||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenues | 3,477 | 653 | 2,824 | |||||||||||||
|
|
|
|
|
| |||||||||||
OPERATING EXPENSES | ||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 1,290 | 137 | 1,153 | |||||||||||||
Interest credited to policyholder account balances | 166 | 124 | 42 | 33.9 | % | |||||||||||
Capitalization of DAC | (669 | ) | (116 | ) | (553 | ) | ||||||||||
Amortization of DAC and VOBA | 613 | 87 | 526 | |||||||||||||
Amortization of negative VOBA | (53 | ) | (7 | ) | (46 | ) | ||||||||||
Interest expense on debt | — | 1 | (1 | ) | (100.0 | )% | ||||||||||
Other expenses | 1,723 | 434 | 1,289 | |||||||||||||
|
|
|
|
|
| |||||||||||
Total operating expenses | 3,070 | 660 | 2,410 | |||||||||||||
|
|
|
|
|
| |||||||||||
Provision for income tax expense (benefit) | 156 | — | 156 | |||||||||||||
|
|
|
|
|
| |||||||||||
Operating earnings | $ | 251 | $ | (7 | ) | $ | 258 | |||||||||
|
|
|
|
|
|
Unless otherwise stated, all amounts discussed below are net of income tax.
Operating earnings increased by $258 million over 2010 as a result of the inclusion of a full year of results of ALICO’s operations for 2011 compared to one month of results for 2010, which contributed $295 million to the operating earnings increase for the segment. Changes in foreign currency exchange had a slightly positive impact on 2011 results compared to the prior year.
In 2011, EMEA experienced strong variable life and annuity sales, which drove higher premiums and a corresponding increase in policyholder benefits. Operating expenses increased primarily due to higher commissions and compensation expenses in Ireland due to business growth, which is partially offset by DAC capitalization. Growth in our businesses, combined with growth in average invested assets, contributed $11 million to operating earnings. As a result of the Acquisition and growth in the business, EMEA’s results reflect higher corporate expenses of $44 million, which decreased operating earnings.
Market factors had a slight negative impact to operating earnings. Beginning in the fourth quarter of 2010, investment earnings and interest credited related to contractholder-directed unit-linked investments were excluded from operating revenues and operating expenses, as the contractholder, and not the Company, directs the investment of the funds. This change in presentation had no impact on operating earnings in the current period; however, it resulted in a decrease in net investment income in Ireland in 2011, when compared to 2010, as positive returns were experienced in 2010 from recovering equity markets. A corresponding decrease is reflected in interest credited expense.
35
Unfavorable claims experience, primarily in the United Kingdom, resulted in a $7 million decline in operating earnings from the prior year.
Corporate & Other
Years Ended December 31, | ||||||||||||||||
2011 | 2010 | Change | % Change | |||||||||||||
(In millions) | ||||||||||||||||
OPERATING REVENUES | ||||||||||||||||
Premiums | $ | 54 | $ | 11 | $ | 43 | ||||||||||
Universal life and investment-type product policy fees | 155 | 138 | 17 | 12.3 | % | |||||||||||
Net investment income | 888 | 650 | 238 | 36.6 | % | |||||||||||
Other revenues | 60 | 109 | (49 | ) | (45.0 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenues | 1,157 | 908 | 249 | 27.4 | % | |||||||||||
|
|
|
|
|
| |||||||||||
OPERATING EXPENSES | ||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 126 | 33 | 93 | |||||||||||||
Amortization of DAC and VOBA | 1 | 1 | — | — | % | |||||||||||
Interest expense on debt | 1,293 | 1,124 | 169 | 15.0 | % | |||||||||||
Other expenses | 505 | 379 | 126 | 33.2 | % | |||||||||||
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|
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| |||||||||||
Total operating expenses | 1,925 | 1,537 | 388 | 25.2 | % | |||||||||||
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|
|
| |||||||||||
Provision for income tax expense (benefit) | (584 | ) | (402 | ) | (182 | ) | (45.3 | )% | ||||||||
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| |||||||||||
Operating earnings | (184 | ) | (227 | ) | 43 | 18.9 | % | |||||||||
Less: Preferred stock dividends | 122 | 122 | — | — | % | |||||||||||
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| |||||||||||
Operating earnings available to common shareholders | $ | (306 | ) | $ | (349 | ) | $ | 43 | 12.3 | % | ||||||
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|
Unless otherwise stated, all amounts discussed below are net of income tax.
MetLife, Inc. completed four debt financings in August 2010 in connection with the Acquisition, issuing $1.0 billion of 2.375% senior notes, $1.0 billion of 4.75% senior notes, $750 million of 5.875% senior notes, and $250 million of floating rate senior notes. MetLife, Inc. also issued debt securities in November 2010, which are part of the $3.0 billion stated value of common equity units. The proceeds from these debt issuances were used to finance the Acquisition.
Operating earnings available to common shareholders and operating earnings each increased $43 million, primarily due to higher net investment income, higher operating earnings on invested assets that were funded using Federal Home Loan Bank (“FHLB”) advances and higher tax credits. These increases were partially offset by an increase in interest expense on debt of $81 million, primarily resulting from the 2010 debt issuances and an increase in other expenses. Lower earnings from the assumed reinsurance of a variable annuity business and the resolutions of certain legal matters in 2010 also decreased operating earnings.
Net investment income, excluding the FHLB and assumed reinsurance which are discussed below, increased $105 million reflecting an increase of $125 million from higher yields, partially offset by a $20 million decrease from a decline in average invested assets. Yields were primarily impacted by the decline in interest rates, resulting in lower crediting rates on the economic capital invested on the segment’s behalf, partially offset by lower returns on our private equity and alternative investments. Our investments primarily include structured securities, investment grade corporate fixed maturity securities, mortgage loans and U.S. Treasury and agency securities. In addition, our investment portfolio includes the excess capital not allocated to the segments. Accordingly, it includes a higher allocation to certain other invested asset classes to provide additional diversification and opportunity for long-term yield enhancement, including leveraged leases, other limited partnership interests, real estate, real estate joint ventures, trading and other securities and equity securities.
36
Operating earnings on invested assets that were funded using FHLB advances increased $20 million, reflected by increases in net investment income and interest expense on debt, due to growth in long-term FHLB borrowings, primarily associated with growth in mortgages.
Corporate & Other benefits from the impact of certain permanent tax differences, including non-taxable investment income and tax credits for investments in low income housing. As a result, our effective tax rates differ from the U.S. statutory rate of 35%. Corporate & Other benefited in 2011 from higher tax credits of $133 million over 2010 primarily due to $75 million of charges in 2010 related to the Health Care Act and higher utilization of tax preferenced investments in 2011.
The Company incurred $40 million of expenses related to a liquidation plan filed by the Department of Financial Services for ELNY in the third quarter of 2011. In addition, the Company had higher advertising costs of $15 million and internal resources costs for associates committed to the Acquisition increased by $13 million. Minor fluctuations in various other expense categories, such as interest on uncertain tax positions, and discretionary spending, such as consulting and postemployment related costs, offset each other and resulted in a small increase to earnings. Additionally, the resolutions of certain legal matters in the prior period resulted in $39 million of lower operating earnings for 2011.
The earnings associated with the assumed reinsurance of certain variable annuity products from our former operating joint venture in Japan decreased $35 million. This was primarily due to an increase in benefit liabilities resulting from lower returns in the underlying funds and lower net investment income, partially offset by higher fee income due to business growth.
37
Results of Operations
Year Ended December 31, 2010 Compared with the Year Ended December 31, 2009
Consolidated Results
We have experienced growth and an increase in market share in several of our businesses, which, together with improved overall market conditions compared to conditions a year ago, positively impacted our results most significantly through increased net cash flows, improved yields on our investment portfolio and increased policy fee income. Sales of our domestic annuity products declined as lower fixed annuity sales were partially offset by an increase in variable annuity sales compared with the prior year. We benefited in 2010 from strong sales of structured settlement products. Market penetration continues in our pension closeout business in the U.K.; however, although improving, our domestic pension closeout business has been adversely impacted by a combination of poor equity returns and lower interest rates. High levels of unemployment continue to depress growth across our group insurance businesses due to lower covered payrolls. While we experienced growth in our group life business, sales of non-medical health and individual life products declined. Sales of new homeowner and auto policies increased 11% and 4%, respectively, as the housing and automobile markets have improved. Sales improved in the majority of our products abroad.
Years Ended December 31, | Change | % Change | ||||||||||||||
2010 | 2009 | |||||||||||||||
(In millions) | ||||||||||||||||
Revenues | ||||||||||||||||
Premiums | $ | 27,071 | $ | 26,157 | $ | 914 | 3.5 | % | ||||||||
Universal life and investment-type product policy fees | 6,028 | 5,197 | 831 | 16.0 | % | |||||||||||
Net investment income | 17,494 | 14,729 | 2,765 | 18.8 | % | |||||||||||
Other revenues | 2,328 | 2,329 | (1 | ) | — | % | ||||||||||
Net investment gains (losses) | (408 | ) | (2,901 | ) | 2,493 | 85.9 | % | |||||||||
Net derivative gains (losses) | (265 | ) | (4,866 | ) | 4,601 | 94.6 | % | |||||||||
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| |||||||||||
Total revenues | 52,248 | 40,645 | 11,603 | 28.5 | % | |||||||||||
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|
| |||||||||||
Expenses | ||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 30,672 | 29,654 | 1,018 | 3.4 | % | |||||||||||
Interest credited to policyholder account balances | 4,919 | 4,845 | 74 | 1.5 | % | |||||||||||
Capitalization of DAC | (2,770 | ) | (2,502 | ) | (268 | ) | (10.7 | )% | ||||||||
Amortization of DAC and VOBA | 2,477 | 1,055 | 1,422 | |||||||||||||
Amortization of negative VOBA | (64 | ) | — | (64 | ) | |||||||||||
Interest expense on debt | 1,550 | 1,044 | 506 | 48.5 | % | |||||||||||
Other expenses | 11,734 | 11,164 | 570 | 5.1 | % | |||||||||||
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| |||||||||||
Total expenses | 48,518 | 45,260 | 3,258 | 7.2 | % | |||||||||||
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|
|
| |||||||||||
Income (loss) from continuing operations before provision for income tax | 3,730 | (4,615 | ) | 8,345 | ||||||||||||
Provision for income tax expense (benefit) | 1,110 | (2,106 | ) | 3,216 | ||||||||||||
�� |
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| ||||||||||
Income (loss) from continuing operations, net of income tax | 2,620 | (2,509 | ) | 5,129 | ||||||||||||
Income (loss) from discontinued operations, net of income tax | 43 | 62 | (19 | ) | (30.6 | )% | ||||||||||
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|
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| |||||||||||
Net income (loss) | 2,663 | (2,447 | ) | 5,110 | ||||||||||||
Less: Net income (loss) attributable to noncontrolling interests | (4 | ) | (36 | ) | 32 | 88.9 | % | |||||||||
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|
|
| |||||||||||
Net income (loss) attributable to MetLife, Inc. | 2,667 | (2,411 | ) | 5,078 | ||||||||||||
Less: Preferred stock dividends | 122 | 122 | — | — | % | |||||||||||
Preferred stock redemption premium | — | — | — | — | % | |||||||||||
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| |||||||||||
Net income (loss) available to MetLife, Inc.’s common shareholders | $ | 2,545 | $ | (2,533 | ) | $ | 5,078 | |||||||||
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38
Unless otherwise stated, all amounts discussed below are net of income tax.
During the year ended December 31, 2010, income (loss) from continuing operations, net of income tax increased $5.1 billion to a gain of $2.6 billion from a loss of $2.5 billion in 2009, of which $2 million in losses was from the inclusion of one month of ALICO results in 2010. The change was predominantly due to a $3.0 billion favorable change in net derivative gains (losses) and a $1.6 billion favorable change in net investment gains (losses). Offsetting these favorable variances totaling $4.6 billion were unfavorable changes in adjustments related to net derivative and net investment gains (losses) of $472 million, net of income tax, principally associated with DAC and VOBA amortization, resulting in a total favorable variance related to net derivative and net investment gains (losses), net of related adjustments and income tax, of $4.1 billion.
The favorable variance in net derivative gains (losses) of $3.0 billion, from losses of $3.2 billion in 2009 to losses of $172 million in 2010 was primarily driven by a favorable change in freestanding derivatives of $4.4 billion, comprised of a $4.5 billion favorable change from losses in the prior year of $4.3 billion to gains in the current year of $203 million and $123 million in ALICO freestanding derivative losses. This favorable variance was partially offset by an unfavorable change in embedded derivatives primarily associated with variable annuity minimum benefit guarantees of $1.4 billion from gains in the prior year of $1.1 billion to losses in the current year of $257 million, net of $5 million in ALICO embedded derivative gains.
We use freestanding interest rate, currency, credit and equity derivatives to provide economic hedges of certain invested assets and insurance liabilities, including embedded derivatives within certain of our variable annuity minimum benefit guarantees. The $4.5 billion favorable variance in freestanding derivatives was primarily attributable to market factors, including falling long-term and mid-term interest rates, a stronger recovery in equity markets in the prior year than the current year, a greater decrease in equity volatility in the prior year as compared to the current year, a strengthening U.S. dollar and widening corporate credit spreads in the financial services sector. Falling long-term and mid-term interest rates in the current year compared to rising long-term and mid-term interest rates in the prior year had a positive impact of $2.6 billion on our interest rate derivatives, $931 million of which is attributable to hedges of variable annuity minimum benefit guarantee liabilities, which are accounted for as embedded derivatives. In addition, stronger equity market recovery and lower equity market volatility in the prior year as compared to the current year had a positive impact of $1.1 billion on our equity derivatives, which we use to hedge variable annuity minimum benefit guarantees. U.S. dollar strengthening had a positive impact of $554 million on certain of our foreign currency derivatives, which are used to hedge foreign-denominated asset and liability exposures. Finally, widening corporate credit spreads in the financial services sector had a positive impact of $221 million on our purchased protection credit derivatives.
Certain variable annuity products with minimum benefit guarantees contain embedded derivatives that 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 also include an adjustment for nonperformance risk of the related liabilities carried at estimated fair value. The $1.4 billion unfavorable change in embedded derivatives was primarily attributable to the impact of market factors, including falling long-term and mid-term interest rates, changes in foreign currency exchange rates, equity volatility and equity market movements. Falling long-term and mid-term interest rates in the current year compared to rising long-term and mid-term interest rates in the prior year had a negative impact of $1.4 billion. Changes in foreign currency exchange rates had a negative impact of $468 million. Equity volatility decreased more in the prior year than in the current year causing a negative impact of $284 million, and a stronger recovery in the equity markets in the prior year than in the current year had a negative impact of $228 million. The unfavorable impact from these hedged risks was partially offset by a favorable change related to the adjustment for nonperformance risk of $1.2 billion, from losses of $1.3 billion in 2009 to losses of $62 million in 2010. This $62 million loss was net of a $621 million loss related to a refinement in estimating the spreads used in the adjustment for nonperformance risk made in the second quarter of 2010. Gains on the freestanding derivatives that hedged these embedded derivative risks largely offset the change in liabilities attributable to market factors, excluding the adjustment for nonperformance risk, which does not have an economic impact on the Company.
39
Improved or stabilizing market conditions across several invested asset classes and sectors as compared to the prior year resulted in decreases in impairments and in net realized losses from sales and disposals of investments in most components of our investment portfolio. These decreases, coupled with a decrease in the provision for credit losses on mortgage loans due to improved market conditions, resulted in a $1.6 billion improvement in net investment gains (losses).
Income from continuing operations, net of income tax for 2010 includes $138 million of expenses related to the acquisition and integration of ALICO. These expenses, which primarily consisted of investment banking and legal fees, are recorded in Corporate & Other and are not a component of operating earnings.
Income tax expense for the year ended December 31, 2010 was $1.1 billion, or 30% of income from continuing operations before provision for income tax, compared with income tax benefit of $2.1 billion, or 46% of the loss from continuing operations before benefit for income tax, for the comparable 2009 period. The Company’s 2010 and 2009 effective tax rates differ from the U.S. statutory rate of 35% primarily due to the impact of certain permanent tax differences, including non-taxable investment income and tax credits for investments in low income housing, in relation to income (loss) from continuing operations before income tax, as well as certain foreign permanent tax differences.
As more fully described in the discussion of performance measures above, we use operating earnings, which does not equate to income (loss) from continuing operations as determined in accordance with GAAP, to analyze our performance, evaluate segment performance, and allocate resources. Operating earnings is also a measure by which senior management’s and many other employees’ performance is evaluated for the purpose of determining their compensation under applicable compensation plans. We believe that the presentation of operating earnings, as we measure it for management purposes, enhances the understanding of our performance by highlighting the results of operations and the underlying profitability drivers of the business. Operating earnings should not be viewed as a substitute for GAAP income (loss) from continuing operations, net of income tax. Operating earnings available to common shareholders increased by $1.5 billion to $3.5 billion in 2010 from $2.0 billion in 2009.
Reconciliation of income (loss) from continuing operations, net of income tax, to operating earnings available to common shareholders
Year Ended December 31, 2010
Retail | Group, Voluntary & Worksite Benefits | Corporate Benefit Funding | Latin America | Asia | EMEA | Corporate & Other | Total | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Income (loss) from continuing operations, net | $ | 1,371 | $ | 924 | $ | 1,121 | $ | 204 | $ | (160 | ) | $ | (175 | ) | $ | (665 | ) | $ | 2,620 | |||||||||||||
Less: Net investment gains (losses) | 178 | 8 | 225 | (26 | ) | (208 | ) | (136 | ) | (449 | ) | (408 | ) | |||||||||||||||||||
Less: Net derivative gains (losses) | 210 | 184 | (107 | ) | 19 | (173 | ) | (33 | ) | (365 | ) | (265 | ) | |||||||||||||||||||
Less: Other adjustments to continuing operations (1) | (509 | ) | (107 | ) | 132 | (274 | ) | (122 | ) | (4 | ) | 177 | (707 | ) | ||||||||||||||||||
Less: Provision for income tax (expense) benefit | 36 | (30 | ) | (87 | ) | 62 | 119 | 5 | 199 | 304 | ||||||||||||||||||||||
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| |||||||||||||||||
Operating earnings | $ | 1,456 | $ | 869 | $ | 958 | $ | 423 | $ | 224 | $ | (7 | ) | (227 | ) | 3,696 | ||||||||||||||||
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| |||||||||||||||||||||
Less: Preferred stock dividends | 122 | 122 | ||||||||||||||||||||||||||||||
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|
| |||||||||||||||||||||||||||||
Operating earnings available to common shareholders | $ | (349 | ) | $ | 3,574 | |||||||||||||||||||||||||||
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40
Year Ended December 31, 2009
Retail | Group, Voluntary & Worksite Benefits | Corporate Benefit Funding | Latin America | Asia | EMEA | Corporate & Other | Total | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Income (loss) from continuing operations, net | $ | (260 | ) | $ | (348 | ) | $ | (843 | ) | $ | 280 | $ | (33 | ) | $ | (48 | ) | $ | (1,257 | ) | $ | (2,509 | ) | |||||||||
Less: Net investment gains (losses) | (695 | ) | (303 | ) | (1,534 | ) | (59 | ) | (47 | ) | — | (263 | ) | (2,901 | ) | |||||||||||||||||
Less: Net derivative gains (losses) | (1,587 | ) | (1,281 | ) | (726 | ) | 79 | 15 | 4 | (1,370 | ) | (4,866 | ) | |||||||||||||||||||
Less: Other adjustments to continuing operations (1) | 238 | (67 | ) | 118 | 2 | (190 | ) | — | 425 | 526 | ||||||||||||||||||||||
Less: Provision for income tax (expense) benefit | 714 | 577 | 748 | (7 | ) | 52 | (2 | ) | 491 | 2,573 | ||||||||||||||||||||||
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| |||||||||||||||||
Operating earnings | $ | 1,070 | $ | 726 | $ | 551 | $ | 265 | $ | 137 | $ | (50 | ) | (540 | ) | 2,159 | ||||||||||||||||
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|
|
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|
|
|
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| |||||||||||||||||||||
Less: Preferred stock dividends | 122 | 122 | ||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||
Operating earnings available to common shareholders | $ | (662 | ) | $ | 2,037 | |||||||||||||||||||||||||||
|
|
|
|
(1) | See definitions of operating revenues and operating expenses for the components of such adjustments. |
Reconciliation of GAAP revenues to operating revenues and GAAP expenses to operating expenses
Year Ended December 31, 2010
Retail | Group, Voluntary & Worksite Benefits | Corporate Benefit Funding | Latin America | Asia | EMEA | Corporate & Other | Total | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Total revenues | $ | 18,726 | $ | 16,877 | $ | 8,398 | $ | 3,544 | $ | 2,356 | $ | 534 | $ | 1,813 | $ | 52,248 | ||||||||||||||||
Less: Net investment gains (losses) | 178 | 8 | 225 | (26 | ) | (208 | ) | (136 | ) | (449 | ) | (408 | ) | |||||||||||||||||||
Less: Net derivative gains (losses) | 210 | 184 | (107 | ) | 19 | (173 | ) | (33 | ) | (365 | ) | (265 | ) | |||||||||||||||||||
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | 1 | — | — | — | — | — | — | 1 | ||||||||||||||||||||||||
Less: Other adjustments to revenues (1) | (86 | ) | (102 | ) | 182 | 13 | 8 | 50 | 1,719 | 1,784 | ||||||||||||||||||||||
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|
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| |||||||||||||||||
Total operating revenues | $ | 18,423 | $ | 16,787 | $ | 8,098 | $ | 3,538 | $ | 2,729 | $ | 653 | $ | 908 | $ | 51,136 | ||||||||||||||||
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|
|
|
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|
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|
|
|
|
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|
| |||||||||||||||||
Total expenses | $ | 16,656 | $ | 15,496 | $ | 6,674 | $ | 3,310 | $ | 2,589 | $ | 714 | $ | 3,079 | $ | 48,518 | ||||||||||||||||
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | 110 | — | — | — | — | — | — | 110 | ||||||||||||||||||||||||
Less: Other adjustments to expenses (1) | 314 | 5 | 50 | 287 | 130 | 54 | 1,542 | 2,382 | ||||||||||||||||||||||||
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|
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|
|
|
|
|
|
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| |||||||||||||||||
Total operating expenses | $ | 16,232 | $ | 15,491 | $ | 6,624 | $ | 3,023 | $ | 2,459 | $ | 660 | $ | 1,537 | $ | 46,026 | ||||||||||||||||
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41
Year Ended December 31, 2009
Retail | Group, Voluntary & Worksite Benefits | Corporate Benefit Funding | Latin America | Asia | EMEA | Corporate & Other | Total | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Total revenues | $ | 15,271 | $ | 14,862 | $ | 5,664 | $ | 2,767 | $ | 1,583 | $ | 425 | $ | 73 | $ | 40,645 | ||||||||||||||||
Less: Net investment gains (losses) | (695 | ) | (303 | ) | (1,534 | ) | (59 | ) | (47 | ) | — | (263 | ) | (2,901 | ) | |||||||||||||||||
Less: Net derivative gains (losses) | (1,587 | ) | (1,281 | ) | (726 | ) | 79 | 15 | 4 | (1,370 | ) | (4,866 | ) | |||||||||||||||||||
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | (27 | ) | — | — | — | — | — | — | (27 | ) | ||||||||||||||||||||||
Less: Other adjustments to revenues (1) | (60 | ) | (68 | ) | 182 | 8 | (156 | ) | — | 1,460 | 1,366 | |||||||||||||||||||||
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|
|
|
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|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total operating revenues | $ | 17,640 | $ | 16,514 | $ | 7,742 | $ | 2,739 | $ | 1,771 | $ | 421 | $ | 246 | $ | 47,073 | ||||||||||||||||
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|
|
|
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|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total expenses | $ | 15,741 | $ | 15,443 | $ | 6,982 | $ | 2,360 | $ | 1,667 | $ | 484 | $ | 2,583 | $ | 45,260 | ||||||||||||||||
Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | (644 | ) | — | — | — | — | — | — | (644 | ) | ||||||||||||||||||||||
Less: Other adjustments to expenses (1) | 319 | (1 | ) | 64 | 6 | 34 | — | 1,035 | 1,457 | |||||||||||||||||||||||
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|
|
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|
| |||||||||||||||||
Total operating expenses | $ | 16,066 | $ | 15,444 | $ | 6,918 | $ | 2,354 | $ | 1,633 | $ | 484 | $ | 1,548 | $ | 44,447 | ||||||||||||||||
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|
|
|
(1) | See definitions of operating revenues and operating expenses for the components of such adjustments. |
Consolidated Results — Operating
Years Ended December 31, | Change | % Change | ||||||||||||||
2010 | 2009 | |||||||||||||||
(In millions) | ||||||||||||||||
OPERATING REVENUES | ||||||||||||||||
Premiums | $ | 27,071 | $ | 26,157 | $ | 914 | 3.5 | % | ||||||||
Universal life and investment-type product policy fees | 5,817 | 5,055 | 762 | 15.1 | % | |||||||||||
Net investment income | 16,855 | 14,580 | 2,275 | 15.6 | % | |||||||||||
Other revenues | 1,393 | 1,281 | 112 | 8.7 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenues | 51,136 | 47,073 | 4,063 | 8.6 | % | |||||||||||
|
|
|
|
|
| |||||||||||
OPERATING EXPENSES | ||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 29,974 | 29,106 | 868 | 3.0 | % | |||||||||||
Interest credited to policyholder account balances | 4,697 | 4,849 | (152 | ) | (3.1 | )% | ||||||||||
Capitalization of DAC | (2,770 | ) | (2,502 | ) | (268 | ) | (10.7 | )% | ||||||||
Amortization of DAC and VOBA | 2,443 | 1,885 | 558 | 29.6 | % | |||||||||||
Amortization of negative VOBA | (57 | ) | — | (57 | ) | |||||||||||
Interest expense on debt | 1,137 | 1,031 | 106 | 10.3 | % | |||||||||||
Other expenses | 10,602 | 10,078 | 524 | 5.2 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total operating expenses | 46,026 | 44,447 | 1,579 | 3.6 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Provision for income tax expense (benefit) | 1,414 | 467 | 947 | |||||||||||||
|
|
|
|
|
| |||||||||||
Operating earnings | 3,696 | 2,159 | 1,537 | 71.2 | % | |||||||||||
Less: Preferred stock dividends | 122 | 122 | — | — | % | |||||||||||
|
|
|
|
|
| |||||||||||
Operating earnings available to common shareholders | $ | 3,574 | $ | 2,037 | $ | 1,537 | 75.5 | % | ||||||||
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|
|
|
|
42
Unless otherwise stated, all amounts discussed below are net of income tax.
The improvement in the financial markets was the primary driver of the increase in operating earnings, as evidenced by higher net investment income and an increase in average separate account balances, which resulted in an increase in policy fee income. Partially offsetting this improvement was an increase in amortization of DAC, VOBA and DSI. Strong sales and business growth was partially offset by unfavorable claims experience and the prior period impact of the pesification in Argentina. The 2010 period includes one month of ALICO results, which contributed $93 million to the increase in operating earnings. The impact of changes in foreign currency exchange rates improved operating earnings by $30 million.
Market conditions continued to improve and positively impacted our results. Yields were positively impacted by the effects of stabilizing real estate markets and recovering private equity markets year over year on real estate joint ventures and other limited partnership interests, and by the effects of continued repositioning of the accumulated liquidity in our portfolio to longer duration and higher yielding investments, including investment grade corporate fixed maturity securities. This resulted in a $712 million increase in net investment income. In addition, the impact of increased inflation, primarily in Chile, as well as the impact of changes in assumptions for measuring the effects of inflation on certain inflation-indexed fixed maturity securities improved results by $156 million. A $237 million decrease in interest credited expense was driven by a decline in average crediting rates, reflecting the lower interest rate environment. In addition, growth in our separate accounts due to favorable equity market performance resulted in increased fees and other revenues of $174 million. The improved financial market conditions also resulted in a decrease in certain expenses, such as pension and post-retirement benefit costs, contributing $32 million to operating earnings. These market-related improvements were partially offset by higher DAC amortization of $146 million primarily driven by higher fee income and lower interest credited expense.
In 2010, we benefited from strong sales as well as growth and higher persistency in our business, across many of our products. As a result, we experienced growth in our investment portfolio, as well as our average separate account assets, generating both higher net investment income of $510 million and higher policy fee income of $242 million. Since many of our products are interest spread-based, the growth in our individual life, LTC and structured settlement businesses also resulted in a $244 million increase in interest credited expenses. These increased sales also generated an increase in DAC amortization of $83 million. In addition, other non-variable expenses increased $66 million due to growth in our existing businesses.
The reduction in the dividend scale in the fourth quarter of 2009 resulted in a $109 million decrease in policyholder dividends in the traditional life business in the current period.
We benefited from a $74 million net decrease in other operating expenses, primarily driven by a reduction in discretionary spending, such as consulting and postemployment related costs. These expense reductions were more than offset by the impact of a $95 million benefit recorded in the prior year related to the pesification in Argentina.
We review and update our long-term assumptions used in our calculations of certain insurance-related liabilities and DAC annually, which may result in changes and are recorded in the fourth quarter each year. This annual update, along with other refinements, contributed to a net operating earnings decrease of $24 million.
Claims experience varied amongst our businesses with a net unfavorable impact of $131 million to operating earnings compared to the prior year. Excellent mortality results in our group life business was more than offset by strong, but less favorable mortality in our individual life business and unfavorable mortality in Corporate Benefit Funding. Unfavorable claims experience in Latin America, Asia, EMEA and in our property & casualty and disability businesses was partially offset by favorable results from our LTC and dental businesses.
Interest expense increased $60 million primarily as a result of the full year impact of debt issuances in 2009 and of senior notes and debt securities issued in anticipation of the Acquisition, partially offset by the impact of lower interest rates on variable rate collateral financing arrangements.
43
The 2010 period includes $75 million of charges related to the Health Care Act. The Federal government currently provides a Medicare Part D subsidy. The Health Care Act reduced the tax deductibility of retiree health care costs to the extent of any Medicare Part D subsidy received beginning in 2013. Because the deductibility of future retiree health care costs is reflected in our financial statements, the entire future impact of this change in law was required to be recorded as a charge in the period in which the legislation was enacted. Changes to the provision for income taxes in both periods contributed to an increase in operating earnings of $64 million for our Latin America segment, resulting from an unfavorable impact in 2009 due to a change in assumption regarding the repatriation of earnings and a benefit in the current year from additional permanent reinvestment of earnings, the reversal of tax provisions and favorable changes in liabilities for tax uncertainties. The Company benefits from the impact of certain permanent tax differences, including non-taxable investment income and tax credits for investments in low income housing. As a result, our effective tax rates differ from the U.S. statutory rate of 35%. In 2010, we had lower utilization of tax preferenced investments, which decreased operating earnings by $49 million from the prior period.
Retail
Years Ended December 31, | Change | % Change | ||||||||||||||
2010 | 2009 | |||||||||||||||
(In millions) | ||||||||||||||||
OPERATING REVENUES | ||||||||||||||||
Premiums | $ | 6,491 | $ | 6,748 | $ | (257 | ) | (3.8 | )% | |||||||
Universal life and investment-type product policy fees | 3,655 | 3,191 | 464 | 14.5 | % | |||||||||||
Net investment income | 7,644 | 7,137 | 507 | 7.1 | % | |||||||||||
Other revenues | 633 | 564 | 69 | 12.2 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenues | 18,423 | 17,640 | 783 | 4.4 | % | |||||||||||
|
|
|
|
|
| |||||||||||
OPERATING EXPENSES | ||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 8,835 | 8,946 | (111 | ) | (1.2 | )% | ||||||||||
Interest credited to policyholder account balances | 2,381 | 2,429 | (48 | ) | (2.0 | )% | ||||||||||
Capitalization of DAC | (1,769 | ) | (1,782 | ) | 13 | 0.7 | % | |||||||||
Amortization of DAC and VOBA | 1,724 | 1,328 | 396 | 29.8 | % | |||||||||||
Interest expense on debt | 2 | 6 | (4 | ) | (66.7 | )% | ||||||||||
Other expenses | 5,059 | 5,139 | (80 | ) | (1.6 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Total operating expenses | 16,232 | 16,066 | 166 | 1.0 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Provision for income tax expense (benefit) | 735 | 504 | 231 | 45.8 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Operating earnings | $ | 1,456 | $ | 1,070 | $ | 386 | 36.1 | % | ||||||||
|
|
|
|
|
|
Unless otherwise stated, all amounts discussed below are net of income tax.
During 2010, overall sales declined, driven by a 6% decrease in annuities sales. Lower fixed annuity sales were partially offset by increased sales of our variable annuity products. The financial market turmoil in early 2009 resulted in extraordinarily high sales of fixed annuity products. The high level of sales was not expected to continue after the financial markets returned to more stable levels. Variable annuity product sales increased primarily due to an expansion of alternative distribution channels coupled with fewer competitors in the market place. Retail life and annuity net flows were $9.9 billion; $3.0 billion lower than the prior year.
While sales declined, we experienced a significant increase in average separate account assets due to positive separate account net cash flows. This growth generated higher policy fees and other revenues, partially offset by increased DAC amortization. In addition, the impact of positive net flows on invested assets, as well as an increase in allocated equity, increased net investment income. This growth also generated an increase in insurance-related liabilities in the annuity business and higher interest credited on policyholder account balances as well as on certain future policyholder benefits. The net impact of the aforementioned items resulted in a $136 million increase to operating earnings.
44
Financial market improvements and the positive impacts of the continued repositioning of the accumulated liquidity in our investment portfolio were partially offset by a lower crediting rate on allocated equity. This resulted in an increase in net investment income of $212 million. Fee income increased $174 million due to higher separate account balances largely attributable to improved market performance. These favorable variances were coupled with a $60 million decline in interest credited on policyholder account balances, as well as on certain future policyholder benefits. In addition, financial market conditions decreased certain expenses, such as pension and post-retirement benefit costs, contributing $32 million to operating earnings. Partially offsetting these variances was higher DAC amortization of $146 million primarily driven by higher fee income and lower interest credited expense.
An $82 million decrease in operating earnings was the result of solid, but less favorable mortality, in our life business, mainly attributable to the variable and universal life and income annuity businesses in the current period. In our property & casualty business, catastrophe-related losses increased by $46 million compared to 2009 due to increases in both the number and severity of storms. We review and update our long-term assumptions used in our calculations of certain insurance-related liabilities and DAC annually, which may result in changes and are recorded in the fourth quarter each year. This annual update, along with other reserve refinements, contributed to a net operating earnings decrease of $57 million.
For the property & casualty business, the impact of the items discussed above can be seen in the unfavorable change in the combined ratio, including catastrophes, increasing to 95.2% in 2010 from 92.7% in 2009. The combined ratio excluding catastrophes decreased to 86.8% in 2010 from 88.6% in 2009.
The impact of the reduction in our closed block dividend scale, which was announced in the fourth quarter of 2009, increased operating earnings by $109 million.
Group, Voluntary & Worksite Benefits
Years Ended December 31, | Change | % Change | ||||||||||||||
2010 | 2009 | |||||||||||||||
(In millions) | ||||||||||||||||
OPERATING REVENUES | ||||||||||||||||
Premiums | $ | 14,100 | $ | 13,945 | $ | 155 | 1.1 | % | ||||||||
Universal life and investment-type product policy fees | 616 | 633 | (17 | ) | (2.7 | )% | ||||||||||
Net investment income | 1,702 | 1,516 | 186 | 12.3 | % | |||||||||||
Other revenues | 369 | 420 | (51 | ) | (12.1 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenues | 16,787 | 16,514 | 273 | 1.7 | % | |||||||||||
|
|
|
|
|
| |||||||||||
OPERATING EXPENSES | ||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 13,112 | 13,031 | 81 | 0.6 | % | |||||||||||
Interest credited to policyholder account balances | 192 | 210 | (18 | ) | (8.6 | )% | ||||||||||
Capitalization of DAC | (187 | ) | (197 | ) | 10 | 5.1 | % | |||||||||
Amortization of DAC and VOBA | 181 | 194 | (13 | ) | (6.7 | )% | ||||||||||
Other expenses | 2,193 | 2,206 | (13 | ) | (0.6 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Total operating expenses | 15,491 | 15,444 | 47 | 0.3 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Provision for income tax expense (benefit) | 427 | 344 | 83 | 24.1 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Operating earnings | $ | 869 | $ | 726 | $ | 143 | 19.7 | % | ||||||||
|
|
|
|
|
|
45
Unless otherwise stated, all amounts discussed below are net of income tax.
The improving housing and automobile markets have provided opportunities that led to increased new business sales for both homeowners and auto policies in 2010. Sales of new policies increased 10% for our homeowners business and 2% for our auto business in 2010 compared to 2009. High levels of unemployment continue to depress growth across most of our life and health businesses due to lower covered payrolls. Growth in our life businesses was dampened by a decline in our health related businesses. However, our dental business benefited from the impact of higher enrollments and pricing actions, partially offset by lower persistency and the loss of existing subscribers, driven by high unemployment. This business also experienced more stable utilization and benefits costs in the current year. The revenue growth from our dental business was more than offset by a decline in revenues from our disability business, mainly due to net customer cancellations, changes in benefit levels and lower covered lives. Our LTC revenues were flat year over year, concurrent with the discontinuance of the sale of this coverage at the end of 2010.
Claims experience varied amongst our businesses with a net favorable impact of $68 million to operating earnings. We experienced excellent mortality results in our life businesses, resulting in a $72 million improvement in operating earnings, mainly due to a decrease in severity, as well as the impact of favorable reserve refinements in 2010. In addition, an improvement of $31 million in our LTC results was driven by favorable claim experience, mainly due to higher terminations and less claimants in 2010, coupled with the impact of unfavorable reserve refinements in 2009. Our improved dental results of $21 million were driven by higher enrollment and pricing actions, as well as improved claim experience in the current year. In our property & casualty business, 2010 claim costs decreased $5 million, the result of lower frequencies in both our auto and homeowners businesses; however, this was substantially offset by a $4 million increase in claims due to higher severity in our homeowners business. Catastrophe-related losses increased by $12 million compared to 2009 due to increases in both the number and severity of storms. In the disability business, higher incidence and severity of disability claims in the current year and the impact of a gain from the recapture of a reinsurance agreement in 2009 contributed a $45 million decrease in operating earnings.
For the property & casualty business, the impact of the items discussed above can be seen in the unfavorable change in the combined ratio, including catastrophes, increasing to 93.8% in 2010 from 91.9% in 2009. The combined ratio, excluding catastrophes, was 90.0% in 2010 compared to 89.4% in 2009.
The positive impacts of recovering private equity markets and stabilizing real estate markets on other limited partnership interests and real estate joint ventures along with increased securities prepayments, contributed to our increase in operating earnings. This increase was partially offset by the impacts of a lower crediting rate on allocated equity. Unlike in our Retail and Corporate Benefit Funding segments, an increase in investment yield does not necessarily drive a corresponding increase in the rates credited on policyholder account balances or amounts held for future policyholder benefits. The changes in market factors discussed above resulted in a $52 million increase in operating earnings.
Growth in invested assets and allocated equity contributed $76 million to the increase in operating earnings. Growth in the investment portfolio was primarily attributed to an increase in net cash flows from the majority of our businesses. Mirroring the net growth in average invested assets, primarily in our LTC business, interest credited on long-duration contracts and on our policyholder account balances increased by $34 million.
46
Corporate Benefit Funding
Years Ended December 31, | ||||||||||||||||
2010 | 2009 | Change | % Change | |||||||||||||
(In millions) | ||||||||||||||||
OPERATING REVENUES | ||||||||||||||||
Premiums | $ | 2,345 | $ | 2,561 | $ | (216 | ) | (8.4 | )% | |||||||
Universal life and investment-type product policy fees | 226 | 176 | 50 | 28.4 | % | |||||||||||
Net investment income | 5,280 | 4,766 | 514 | 10.8 | % | |||||||||||
Other revenues | 247 | 239 | 8 | 3.3 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenues | 8,098 | 7,742 | 356 | 4.6 | % | |||||||||||
|
|
|
|
|
| |||||||||||
OPERATING EXPENSES | ||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 4,677 | 4,797 | (120 | ) | (2.5 | )% | ||||||||||
Interest credited to policyholder account balances | 1,447 | 1,633 | (186 | ) | (11.4 | )% | ||||||||||
Capitalization of DAC | (18 | ) | (13 | ) | (5 | ) | (38.5 | )% | ||||||||
Amortization of DAC and VOBA | 16 | 14 | 2 | 14.3 | % | |||||||||||
Interest expense on debt | 8 | 3 | 5 | |||||||||||||
Other expenses | 494 | 484 | 10 | 2.1 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total operating expenses | 6,624 | 6,918 | (294 | ) | (4.2 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Provision for income tax expense (benefit) | 516 | 273 | 243 | 89.0 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Operating earnings | $ | 958 | $ | 551 | $ | 407 | 73.9 | % | ||||||||
|
|
|
|
|
|
Unless otherwise stated, all amounts discussed below are net of income tax.
Corporate Benefit Funding had strong sales in structured settlement products and strong pension closeout sales in the U.K. Although we were very competitive in the marketplace, structured settlement sales were lower than the prior period, which is a reflection of extraordinary sales in 2009. Sales in the U.K. remained strong, as the number of cases sold increased, however the premium declined from the prior period. The combination of poor equity returns and the low interest rate environment has resulted in underfunded pension plans, which reduces our customers’ flexibility to engage in transactions such as pension closeouts. Premiums for these businesses were almost entirely offset by the related change in policyholder benefits. However, current year premiums, deposits, funding agreement issuances and the expansion of our securities lending program, all contributed to the growth of our average invested assets, which led to an increase in net investment income. This growth in premiums, deposits and funding agreement issuances also increased the interest credited on insurance liabilities and policyholder account balances. The net result of these increases contributed $25 million to operating earnings.
The stabilization of the real estate markets and recovering private equity markets resulted in an increase in investment returns. This increase was partially offset by the impact of the low interest rate environment on our fixed maturity securities. However, the low interest rate environment also decreased the interest credited to policyholders and the interest credited expense associated with insurance liabilities. Many of our funding agreement and guaranteed interest contract liabilities are tied to market indices. Interest rates on new business were set lower, as were the rates on existing business with terms that can fluctuate. The result of the higher net investment returns and lower interest credited expense, increased operating earnings by $385 million. The investment returns also includes the impact of lower returns on invested economic capital, and the decrease in interest credited is also impacted by derivatives that are used to hedge certain liabilities in our funding agreement business.
Insurance liability refinements and mortality results negatively impacted our operating earnings by $19 million. This is more than offset by an increase of $20 million due to a charge in 2009 related to a reinsurance recoverable in the small record keeping business.
47
Latin America
Years Ended December 31, | ||||||||||||||||
2010 | 2009 | Change | % Change | |||||||||||||
(In millions) | ||||||||||||||||
OPERATING REVENUES | ||||||||||||||||
Premiums | $ | 1,969 | $ | 1,562 | $ | 407 | 26.1 | % | ||||||||
Universal life and investment-type product policy fees | 630 | 546 | 84 | 15.4 | % | |||||||||||
Net investment income | 927 | 624 | 303 | 48.6 | % | |||||||||||
Other revenues | 12 | 7 | 5 | 71.4 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenues | 3,538 | 2,739 | 799 | 29.2 | % | |||||||||||
|
|
|
|
|
| |||||||||||
OPERATING EXPENSES | ||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 1,829 | 1,412 | 417 | 29.5 | % | |||||||||||
Interest credited to policyholder account balances | 370 | 331 | 39 | 11.8 | % | |||||||||||
Capitalization of DAC | (221 | ) | (155 | ) | (66 | ) | (42.6 | )% | ||||||||
Amortization of DAC and VOBA | 144 | 111 | 33 | 29.7 | % | |||||||||||
Amortization of negative VOBA | (1 | ) | — | (1 | ) | |||||||||||
Interest expense on debt | 1 | 1 | — | — | % | |||||||||||
Other expenses | 901 | 654 | 247 | 37.8 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total operating expenses | 3,023 | 2,354 | 669 | 28.4 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Provision for income tax expense (benefit) | 92 | 120 | (28 | ) | (23.3 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Operating earnings | $ | 423 | $ | 265 | $ | 158 | 59.6 | % | ||||||||
|
|
|
|
|
|
Unless otherwise stated, all amounts discussed below are net of income tax.
Operating earnings increased by $158 million over the prior year. The positive impact of changes in foreign currency exchange rates improved reported earnings by $11 million for 2010 compared to the prior year. Reported operating earnings reflect the operating results of ALICO operations within Latin America from the Acquisition Date through November 30, 2010, which contributed $4 million to our 2010 operating earnings. As previously noted, ALICO’s fiscal year end is November 30; therefore, our results for the year include one month of results from ALICO operations within Latin America.
Operating earnings also increased due to higher yields as a result of favorable market factors, contributing $150 million to operating earnings. Improved yields reflects the impact of increased inflation, primarily in Chile, as well as the impact of changes in assumptions for measuring the effects of inflation on certain inflation-indexed fixed maturity securities and investment in higher yielding assets, primarily in Argentina due to portfolio restructuring. The increase in net investment income from higher inflation was partially offset by an increase in the interest credited on certain insurance liabilities due to higher inflation.
Our Latin America operation experienced an overall increase in sales resulting from solid growth in pension and universal life sales in Mexico and an increase in fixed annuity sales in Chile due to market recovery, slightly offset by lower bank sales in Brazil resulting from incentives offered in the prior year. Fee income on universal life products in Mexico increased due to business growth, which favorably impacted operating earnings. Investment income due to higher average invested assets, as well as other expenses, also increased over the prior year due to growth in the businesses. Operating expenses increased primarily due to higher commissions and compensation expenses in Mexico and Brazil due to business growth, which is offset by DAC capitalization. The growth in our business contributed $50 million to operating earnings.
Changes to the provision for income taxes in both years contributed to a $64 million increase in operating earnings. This was the result of an unfavorable impact in 2009 from a change in assumption regarding the repatriation of earnings and a benefit in the current year from additional permanent reinvestment of earnings, the reversal of tax provisions and favorable changes in liabilities for tax uncertainties.
48
Unfavorable claims experience, primarily in Chile and Mexico, resulted in a $31 million decrease in operating earnings from the prior year. Lower corporate overhead expenses in the current period favorably impacted operating earnings by $6 million.
The impact of pesification in Argentina favorably impacted 2009 reported earnings by $95 million. This prior period benefit was due to a liability release resulting from a reassessment of our approach in managing existing and potential future claims related to certain social security pension annuity contractholders in Argentina.
Asia
Years Ended December 31, | ||||||||||||||||
2010 | 2009 | Change | % Change | |||||||||||||
(In millions) | ||||||||||||||||
OPERATING REVENUES | ||||||||||||||||
Premiums | $ | 1,716 | $ | 1,023 | $ | 693 | 67.7 | % | ||||||||
Universal life and investment-type product policy fees | 502 | 390 | 112 | 28.7 | % | |||||||||||
Net investment income | 497 | 356 | 141 | 39.6 | % | |||||||||||
Other revenues | 14 | 2 | 12 | |||||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenues | 2,729 | 1,771 | 958 | 54.1 | % | |||||||||||
|
|
|
|
|
| |||||||||||
OPERATING EXPENSES | ||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 1,351 | 844 | 507 | 60.1 | % | |||||||||||
Interest credited to policyholder account balances | 183 | 148 | 35 | 23.6 | % | |||||||||||
Capitalization of DAC | (459 | ) | (311 | ) | (148 | ) | (47.6 | )% | ||||||||
Amortization of DAC and VOBA | 290 | 194 | 96 | 49.5 | % | |||||||||||
Amortization of negative VOBA | (49 | ) | — | (49 | ) | |||||||||||
Interest expense on debt | 1 | 2 | (1 | ) | (50.0 | )% | ||||||||||
Other expenses | 1,142 | 756 | 386 | 51.1 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total operating expenses | 2,459 | 1,633 | 826 | 50.6 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Provision for income tax expense (benefit) | 46 | 1 | 45 | |||||||||||||
|
|
|
|
|
| |||||||||||
Operating earnings | $ | 224 | $ | 137 | $ | 87 | 63.5 | % | ||||||||
|
|
|
|
|
|
Unless otherwise stated, all amounts discussed below are net of income tax.
Operating earnings increased by $87 million over the prior year. The positive impact of changes in foreign currency exchange rates improved reported earnings by $19 million for 2010 compared to the prior year. Reported operating earnings reflect the operating results of ALICO operations within Asia from the Acquisition Date through November 30, 2010, which contributed $59 million to our 2010 operating earnings. As previously noted, ALICO’s fiscal year end is November 30; therefore, our results for the year include one month of results from ALICO operations within Asia.
Sales in our Asia operation, excluding the results of our operating joint venture in Japan, increased primarily due to higher variable universal life sales in Korea and strong bank channel sales in China, slightly offset by the decline in annuity sales in Korea and lower pension and variable universal life sales in India due to the loss of a major distributor. Despite lower sales, India experienced higher premiums along with a corresponding increase in policyholder benefits. Average invested assets and other expenses increased over the prior year due to growth in the businesses. Operating expenses increased primarily due to higher commissions and compensation expenses in Korea due to business growth, which was partially offset by DAC capitalization. The growth in our business contributed $22 million to operating earnings.
Market factors positively impacted operating earnings by $3 million as higher returns on allocated equity and higher yields on fixed maturity securities were partially offset by an increase in interest credited expense. In addition, lower income on trading and other securities, primarily in Hong Kong, was driven by a stronger
49
recovery in equity markets in 2009 compared to 2010. The reduction in net investment income from our trading and other securities portfolio was entirely offset by a corresponding decrease in the interest credited on the related contractholder account balances and therefore had no impact on operating earnings.
Unfavorable claims experience, primarily in Hong Kong and Australia, resulted in a $28 million decrease in operating earnings from the prior year.
Refinements in actuarial assumptions in Korea favorably impacted 2010 operating earnings by $15 million.
EMEA
Years Ended December 31, | ||||||||||||||||
2010 | 2009 | Change | % Change | |||||||||||||
(In millions) | ||||||||||||||||
OPERATING REVENUES | ||||||||||||||||
Premiums | $ | 439 | $ | 299 | $ | 140 | 46.8 | % | ||||||||
Universal life and investment-type product policy fees | 50 | 13 | 37 | |||||||||||||
Net investment income | 155 | 104 | 51 | 49.0 | % | |||||||||||
Other revenues | 9 | 5 | 4 | 80.0 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenues | 653 | 421 | 232 | 55.1 | % | |||||||||||
|
|
|
|
|
| |||||||||||
OPERATING EXPENSES | ||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 137 | 60 | 77 | |||||||||||||
Interest credited to policyholder account balances | 124 | 98 | 26 | 26.5 | % | |||||||||||
Capitalization of DAC | (116 | ) | (44 | ) | (72 | ) | ||||||||||
Amortization of DAC and VOBA | 87 | 41 | 46 | |||||||||||||
Amortization of negative VOBA | (7 | ) | — | (7 | ) | |||||||||||
Interest expense on debt | 1 | 5 | (4 | ) | (80.0 | )% | ||||||||||
Other expenses | 434 | 324 | 110 | 34.0 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Total operating expenses | 660 | 484 | 176 | 36.4 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Provision for income tax expense (benefit) | — | (13 | ) | 13 | 100.0 | % | ||||||||||
|
|
|
|
|
| |||||||||||
Operating earnings | $ | (7 | ) | $ | (50 | ) | $ | 43 | 86.0 | % | ||||||
|
|
|
|
|
|
Unless otherwise stated, all amounts discussed below are net of income tax.
Operating results improved by $43 million from the prior year, and reflect the operating results of ALICO operations within EMEA from the Acquisition Date through November 30, 2010, which contributed $30 million to our 2010 operating earnings. As previously noted, ALICO’s fiscal year end is November 30; therefore, our results for the year include one month of results from ALICO operations within EMEA. Changes in foreign currency exchange rates had a minimal impact on 2011 results compared to the prior year.
In our EMEA operations, sales of variable annuities remained strong, which increased fee income. Credit life sales in the United Kingdom declined, driving a decrease in policyholder benefits partially offset by a corresponding decrease in premiums. Commissions also decreased significantly in the United Kingdom due to the decrease in credit life premiums. Operating expenses in Ireland increased primarily due to business growth. The net growth in our business, combined with growth in average invested assets, contributed $8 million to operating earnings.
50
Corporate & Other
Years Ended December 31, | ||||||||||||||||
2010 | 2009 | Change | % Change | |||||||||||||
(In millions) | ||||||||||||||||
OPERATING REVENUES | ||||||||||||||||
Premiums | $ | 11 | $ | 19 | $ | (8 | ) | (42.1 | )% | |||||||
Universal life and investment-type product policy fees | 138 | 106 | 32 | 30.2 | % | |||||||||||
Net investment income | 650 | 77 | 573 | |||||||||||||
Other revenues | 109 | 44 | 65 | |||||||||||||
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|
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| |||||||||||
Total operating revenues | 908 | 246 | 662 | |||||||||||||
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|
|
| |||||||||||
OPERATING EXPENSES | ||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 33 | 16 | 17 | |||||||||||||
Amortization of DAC and VOBA | 1 | 3 | (2 | ) | (66.7 | )% | ||||||||||
Interest expense on debt | 1,124 | 1,014 | 110 | 10.8 | % | |||||||||||
Other expenses | 379 | 515 | (136 | ) | (26.4 | )% | ||||||||||
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|
|
| |||||||||||
Total operating expenses | 1,537 | 1,548 | (11 | ) | (0.7 | )% | ||||||||||
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|
|
| |||||||||||
Provision for income tax expense (benefit) | (402 | ) | (762 | ) | 360 | 47.2 | % | |||||||||
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|
|
|
| |||||||||||
Operating earnings | (227 | ) | (540 | ) | 313 | 58.0 | % | |||||||||
Less: Preferred stock dividends | 122 | 122 | — | — | % | |||||||||||
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|
|
| |||||||||||
Operating earnings available to common shareholders | $ | (349 | ) | $ | (662 | ) | $ | 313 | 47.3 | % | ||||||
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|
|
|
Unless otherwise stated, all amounts discussed below are net of income tax.
MetLife, Inc. completed four debt financings in August 2010 in anticipation of the Acquisition, issuing $1.0 billion of 2.375% senior notes, $1.0 billion of 4.75% senior notes, $750 million of 5.875% senior notes, and $250 million of floating rate senior notes. MetLife, Inc. also issued debt securities, which are part of the $3.0 billion stated value of common equity units. The proceeds from these debt issuances were used to finance the Acquisition. MetLife, Inc. completed three debt issuances in 2009 in response to the economic crisis, issuing $397 million of floating rate senior notes in March 2009, $1.3 billion of senior notes in May 2009, and $500 million of junior subordinated debt securities in July 2009. The proceeds from these debt issuances were used for general corporate purposes.
Operating earnings available to common shareholders and operating earnings each increased $313 million, primarily due to an increase in net investment income, a reduction in operating expenses and higher earnings on invested assets that were funded using FHLB advances, partially offset by lower tax credits and an increase in interest expense on debt resulting from the debt issuances noted above.
Net investment income, excluding the FHLB which is discussed below, increased $346 million reflecting an increase of $243 million due to higher yields and an increase of $103 million from growth in average invested assets. Yields were positively impacted by the effects of recovering private equity markets and stabilizing real estate markets on other limited partnership interests and real estate joint ventures. This was partially offset by lower fixed maturity securities and mortgage loan yields which were adversely impacted by the reinvestment of proceeds from maturities and sales during this lower interest rate environment and from decreased trading and other securities results due to a stronger recovery in equity markets in 2009 as compared to 2010. In addition, due to the lower interest rate environment in the current year, less net investment income was credited to the segments in 2010 compared to 2009. Growth in average invested assets was primarily due to higher cash collateral balances received from our derivative counterparties and the temporary investment of the proceeds from the debt and common stock issuances in anticipation of the Acquisition. Our investments primarily include structured finance securities, investment grade corporate fixed maturity securities, mortgage loans and U.S. Treasury and agency securities. In addition, our investment portfolio includes the excess capital not allocated to the segments.
51
Accordingly, it includes a higher allocation of certain other invested asset classes to provide additional diversification and opportunity for long-term yield enhancement, including leveraged leases, other limited partnership interests, real estate, real estate joint ventures, trading securities and equity securities.
Operating earnings on invested assets that were funded using FHLB advances increased $13 million, reflected by an increase in net investment income and interest expense on debt due to growth in long-term FHLB borrowings, primarily associated with growth in mortgages and securities.
The 2010 period includes $75 million of charges related to the Health Care Act. The Federal government currently provides a Medicare Part D subsidy. The Health Care Act reduced the tax deductibility of retiree health care costs to the extent of any Medicare Part D subsidy received beginning in 2013. Because the deductibility of future retiree health care costs is reflected in our financial statements, the entire future impact of this change in law was required to be recorded as a charge in the period in which the legislation was enacted. As a result, we incurred a $75 million charge in the first quarter of 2010. The Health Care Act also amended Internal Revenue Code Section 162(m) as a result of which MetLife was initially considered a healthcare provider, as defined, and would be subject to limits on tax deductibility of certain types of compensation. In December 2010, the Internal Revenue Service issued Notice 2011-2 which clarified that the executive compensation deduction limitation included in the Health Care Act did not apply to insurers like MetLife selling de minimis amounts of health care coverage. As a result, in the fourth quarter of 2010, we reversed $18 million of previously recorded taxes for 2010. Corporate & Other benefits from the impact of certain permanent tax differences, including non-taxable investment income and tax credits for investments in low income housing. As a result, our effective tax rates differ from the U.S. statutory rate of 35%. In 2010, we had lower utilization of tax preferenced investments which decreased operating earnings by $49 million from the prior year.
Corporate & Other benefited in 2010 from a $76 million reduction in discretionary spending, such as consulting and postemployment related costs, a $35 million decrease in real estate-related charges and $15 million of lower legal costs. These savings were partially offset by a $14 million increase in charitable contributions. The current year also included $44 million of internal resource costs for associates committed to the Acquisition. Additionally, the resolutions of certain legal matters increased operating earnings by $35 million.
Interest expense on debt increased $60 million primarily as a result of the debt issuances in 2009 and the senior notes and debt securities issued in anticipation of the Acquisition, partially offset by the impact of lower interest rates on variable rate collateral financing arrangements.
52
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Schedules
Page | ||
54 | ||
55 | ||
56 | ||
57 | ||
58 | ||
61 | ||
63 | ||
Schedule I — Consolidated Summary of Investments — Other Than Investments in Related Parties | 292 | |
293 | ||
Schedule III — Consolidated Supplementary Insurance Information | 301 | |
303 |
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
MetLife, Inc.:
We have audited the accompanying consolidated balance sheets of MetLife, Inc. and subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2011. Our audits also included the financial statement schedules listed in the Index to Consolidated Financial Statements and Schedules. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of MetLife, Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, such financial statements have been retrospectively adjusted for the Company’s adoption of guidance relating to the presentation of comprehensive income, for the Company’s adoption of guidance relating to a change in accounting for costs associated with acquiring or renewing insurance contracts, and for the reorganization of the Company’s segments. In addition, as discussed in Note 1, the Company changed its method of accounting for the recognition and presentation of other-than-temporary impairment losses for certain investments as required by accounting guidance adopted on April 1, 2009.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report, dated February 28, 2012 (not presented herein) expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
New York, New York
February 28, 2012
(May 22, 2012, as it relates to the effects of the retrospective application of accounting guidance adopted on January 1, 2012 relating to the presentation of comprehensive income and the accounting for costs associated with acquiring or renewing insurance contracts discussed in Note 1 to the consolidated financial statements, and November 16, 2012 as it relates to the reorganization of the Company’s segments discussed in Notes 1 and 22, the removal of “Unaudited” from the title of the statutory equity and income tables in Note 18, and the subsequent events discussed in Note 24 to the consolidated financial statements)
54
December 31, 2011 and 2010
(In millions, except share and per share data)
2011 | 2010 | |||||||
Assets | ||||||||
Investments: | ||||||||
Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $329,811 and $317,617, respectively; includes $3,225 and $3,330, respectively, relating to variable interest entities) | $ | 350,271 | $ | 324,797 | ||||
Equity securities available-for-sale, at estimated fair value (cost: $3,208 and $3,621, respectively) | 3,023 | 3,602 | ||||||
Trading and other securities, at estimated fair value (includes $473 and $463, respectively, of actively traded securities; and $280 and $387, respectively, relating to variable interest entities) | 18,268 | 18,589 | ||||||
Mortgage loans: | ||||||||
Held-for-investment, principally at amortized cost (net of valuation allowances of $481 and $664, respectively; includes $3,187 and $6,840, respectively, at estimated fair value, relating to variable interest entities) | 56,915 | 58,976 | ||||||
Held-for-sale, principally at estimated fair value (includes $10,716 and $2,510, respectively, under the fair value option) | 15,178 | 3,321 | ||||||
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|
|
| |||||
Mortgage loans, net | 72,093 | 62,297 | ||||||
Policy loans | 11,892 | 11,761 | ||||||
Real estate and real estate joint ventures (includes $15 and $10, respectively, relating to variable interest entities) | 8,563 | 8,030 | ||||||
Other limited partnership interests (includes $259 and $298, respectively, relating to variable interest entities) | 6,378 | 6,416 | ||||||
Short-term investments, principally at estimated fair value | 17,310 | 9,384 | ||||||
Other invested assets, principally at estimated fair value (includes $98 and $104, respectively, relating to variable interest entities) | 23,581 | 15,400 | ||||||
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|
|
| |||||
Total investments | 511,379 | 460,276 | ||||||
Cash and cash equivalents, principally at estimated fair value (includes $176 and $69, respectively, relating to variable interest entities) | 10,461 | 12,957 | ||||||
Accrued investment income (includes $16 and $34, respectively, relating to variable interest entities) | 4,344 | 4,328 | ||||||
Premiums, reinsurance and other receivables (includes $12 and $2, respectively, relating to variable interest entities) | 22,481 | 19,799 | ||||||
Deferred policy acquisition costs and value of business acquired | 24,619 | 24,465 | ||||||
Goodwill | 11,935 | 11,781 | ||||||
Other assets (includes $5 and $6, respectively, relating to variable interest entities) | 7,984 | 8,174 | ||||||
Assets of subsidiaries held-for-sale | — | 3,331 | ||||||
Separate account assets | 203,023 | 183,138 | ||||||
|
|
|
| |||||
Total assets | $ | 796,226 | $ | 728,249 | ||||
|
|
|
| |||||
Liabilities and Equity | ||||||||
Liabilities | ||||||||
Future policy benefits | $ | 184,275 | $ | 170,922 | ||||
Policyholder account balances | 217,700 | 210,757 | ||||||
Other policy-related balances | 15,599 | 15,750 | ||||||
Policyholder dividends payable | 774 | 830 | ||||||
Policyholder dividend obligation | 2,919 | 876 | ||||||
Payables for collateral under securities loaned and other transactions | 33,716 | 27,272 | ||||||
Bank deposits | 10,507 | 10,316 | ||||||
Short-term debt | 686 | 306 | ||||||
Long-term debt (includes $3,068 and $6,902, respectively, at estimated fair value, relating to variable interest entities) | 23,692 | 27,586 | ||||||
Collateral financing arrangements | 4,647 | 5,297 | ||||||
Junior subordinated debt securities | 3,192 | 3,191 | ||||||
Current income tax payable | 193 | 297 | ||||||
Deferred income tax liability | 6,395 | 967 | ||||||
Other liabilities (includes $60 and $93, respectively, relating to variable interest entities; and $7,626 and $0, respectively, under the fair value option) | 30,914 | 20,366 | ||||||
Liabilities of subsidiaries held-for-sale | — | 3,043 | ||||||
Separate account liabilities | 203,023 | 183,138 | ||||||
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| |||||
Total liabilities | 738,232 | 680,914 | ||||||
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| |||||
Contingencies, Commitments and Guarantees (Note 16) | ||||||||
Redeemable noncontrolling interests in partially owned consolidated subsidiaries | 105 | 117 | ||||||
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| |||||
Equity | ||||||||
MetLife, Inc.’s stockholders’ equity: | ||||||||
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized: | ||||||||
Preferred stock, 84,000,000 shares issued and outstanding; $2,100 aggregate liquidation preference | 1 | 1 | ||||||
Convertible preferred stock, 0 and 6,857,000 shares issued and outstanding at December 31, 2011 and 2010, respectively | — | — | ||||||
Common stock, par value $0.01 per share; 3,000,000,000 shares authorized; 1,061,150,915 and 989,031,704 shares issued at December 31, 2011 and 2010, respectively; 1,057,957,028 and 985,837,817 shares outstanding at December 31, 2011 and 2010, respectively | 11 | 10 | ||||||
Additional paid-in capital | 26,782 | 26,423 | ||||||
Retained earnings | 24,814 | 19,446 | ||||||
Treasury stock, at cost; 3,193,887 shares at December 31, 2011 and 2010 | (172 | ) | (172 | ) | ||||
Accumulated other comprehensive income (loss) | 6,083 | 1,145 | ||||||
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| |||||
Total MetLife, Inc.’s stockholders’ equity | 57,519 | 46,853 | ||||||
Noncontrolling interests | 370 | 365 | ||||||
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| |||||
Total equity | 57,889 | 47,218 | ||||||
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| |||||
Total liabilities and equity | $ | 796,226 | $ | 728,249 | ||||
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See accompanying notes to the consolidated financial statements.
55
Consolidated Statements of Operations
For the Years Ended December 31, 2011, 2010 and 2009
(In millions, except per share data)
2011 | 2010 | 2009 | ||||||||||
Revenues | ||||||||||||
Premiums | $ | 36,361 | $ | 27,071 | $ | 26,157 | ||||||
Universal life and investment-type product policy fees | 7,806 | 6,028 | 5,197 | |||||||||
Net investment income | 19,586 | 17,494 | 14,729 | |||||||||
Other revenues | 2,532 | 2,328 | 2,329 | |||||||||
Net investment gains (losses): | ||||||||||||
Other-than-temporary impairments on fixed maturity securities | (924 | ) | (682 | ) | (2,432 | ) | ||||||
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income (loss) | (31 | ) | 212 | 939 | ||||||||
Other net investment gains (losses) | 88 | 62 | (1,408 | ) | ||||||||
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Total net investment gains (losses) | (867 | ) | (408 | ) | (2,901 | ) | ||||||
Net derivative gains (losses) | 4,824 | (265 | ) | (4,866 | ) | |||||||
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| |||||||
Total revenues | 70,242 | 52,248 | 40,645 | |||||||||
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| |||||||
Expenses | ||||||||||||
Policyholder benefits and claims | 35,471 | 29,187 | 28,005 | |||||||||
Interest credited to policyholder account balances | 5,603 | 4,919 | 4,845 | |||||||||
Policyholder dividends | 1,446 | 1,485 | 1,649 | |||||||||
Other expenses | 18,537 | 12,927 | 10,761 | |||||||||
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| |||||||
Total expenses | 61,057 | 48,518 | 45,260 | |||||||||
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| |||||||
Income (loss) from continuing operations before provision for income tax | 9,185 | 3,730 | (4,615 | ) | ||||||||
Provision for income tax expense (benefit) | 2,793 | 1,110 | (2,106 | ) | ||||||||
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| |||||||
Income (loss) from continuing operations, net of income tax | 6,392 | 2,620 | (2,509 | ) | ||||||||
Income (loss) from discontinued operations, net of income tax | 23 | 43 | 62 | |||||||||
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| |||||||
Net income (loss) | 6,415 | 2,663 | (2,447 | ) | ||||||||
Less: Net income (loss) attributable to noncontrolling interests | (8 | ) | (4 | ) | (36 | ) | ||||||
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Net income (loss) attributable to MetLife, Inc. | 6,423 | 2,667 | (2,411 | ) | ||||||||
Less: Preferred stock dividends | 122 | 122 | 122 | |||||||||
Preferred stock redemption premium | 146 | — | — | |||||||||
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Net income (loss) available to MetLife, Inc.’s common shareholders | $ | 6,155 | $ | 2,545 | $ | (2,533 | ) | |||||
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Income (loss) from continuing operations, net of income tax, available to MetLife, Inc.’s common shareholders per common share: | ||||||||||||
Basic | $ | 5.79 | $ | 2.83 | $ | (3.17 | ) | |||||
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Diluted | $ | 5.74 | $ | 2.81 | $ | (3.17 | ) | |||||
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Net income (loss) available to MetLife, Inc.’s common shareholders per common share: | ||||||||||||
Basic | $ | 5.81 | $ | 2.88 | $ | (3.09 | ) | |||||
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Diluted | $ | 5.76 | $ | 2.86 | $ | (3.09 | ) | |||||
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Cash dividends declared per common share | $ | 0.74 | $ | 0.74 | $ | 0.74 | ||||||
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See accompanying notes to the consolidated financial statements.
56
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2011, 2010 and 2009
(In millions)
2011 | 2010 | 2009 | ||||||||||
Net income (loss) attributable to MetLife, Inc. | $ | 6,423 | $ | 2,667 | $ | (2,411 | ) | |||||
Net income (loss) attributable to noncontrolling interests (1) | 5 | (2 | ) | (36 | ) | |||||||
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| |||||||
Net income (loss) (1) | 6,428 | 2,665 | (2,447 | ) | ||||||||
Other comprehensive income (loss): | ||||||||||||
Unrealized investment gains (losses), net of related offsets | 6,867 | 6,744 | 17,655 | |||||||||
Unrealized gains (losses) on derivative instruments | 1,573 | 17 | (158 | ) | ||||||||
Foreign currency translation adjustments | 9 | (580 | ) | 41 | ||||||||
Defined benefit plans adjustment | (760 | ) | 165 | (173 | ) | |||||||
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Other comprehensive income (loss), before income tax | 7,689 | 6,346 | 17,365 | |||||||||
Income tax (expense) benefit related to items of other comprehensive income (loss) | (2,789 | ) | (2,199 | ) | (5,837 | ) | ||||||
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Other comprehensive income (loss), net of income tax | 4,900 | 4,147 | 11,528 | |||||||||
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Comprehensive income (loss) | 11,328 | 6,812 | 9,081 | |||||||||
Less: Comprehensive income (loss) attributable to noncontrolling interest, net of income tax | (33 | ) | 3 | (47 | ) | |||||||
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Comprehensive income (loss) attributable to MetLife, Inc., excluding cumulative effect of change in accounting principle | 11,361 | 6,809 | 9,128 | |||||||||
Cumulative effect of change in accounting principle, net of income tax | — | 52 | (335 | ) | ||||||||
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Comprehensive income (loss) attributable to MetLife, Inc. | $ | 11,361 | $ | 6,861 | $ | 8,793 | ||||||
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(1) | Net income (loss) attributable to noncontrolling interests and net income (loss) exclude gains (losses) of redeemable noncontrolling interests in partially owned consolidated subsidiaries of ($13) million, ($2) million and $0 for the years ended December 31, 2011, 2010 and 2009, respectively. |
See accompanying notes to the consolidated financial statements.
57
Consolidated Statements of Equity
For the Year Ended December 31, 2011
(In millions)
Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Convertible Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock at Cost | Net Unrealized Investment Gains (Losses) | Other-Than- Temporary Impairments | Foreign Currency Translation Adjustments | Defined Benefit Plans Adjustment | Total MetLife, Inc.’s Stockholders’ Equity | Noncontrolling Interests (1) | Total Equity | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2010 | $ | 1 | $ | — | $ | 10 | $ | 26,423 | $ | 19,446 | $ | (172 | ) | $ | 3,488 | $ | (366 | ) | $ | (528 | ) | $ | (1,449 | ) | $ | 46,853 | $ | 365 | $ | 47,218 | ||||||||||||||||||||||
Redemption of convertible preferred stock | (2,805 | ) | (2,805 | ) | (2,805 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Preferred stock redemption premium | (146 | ) | (146 | ) | (146 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Common stock issuance — newly issued shares | 1 | 2,949 | 2,950 | 2,950 | ||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 215 | 215 | 215 | |||||||||||||||||||||||||||||||||||||||||||||||||
Dividends on preferred stock | (122 | ) | (122 | ) | (122 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Dividends on common stock | (787 | ) | (787 | ) | (787 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Change in equity of noncontrolling interests | 38 | 38 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | 6,423 | 6,423 | 5 | 6,428 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of income tax | 5,627 | (75 | ) | (120 | ) | (494 | ) | 4,938 | (38 | ) | 4,900 | |||||||||||||||||||||||||||||||||||||||||
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Balance at December 31, 2011 | $ | 1 | $ | — | $ | 11 | $ | 26,782 | $ | 24,814 | $ | (172 | ) | $ | 9,115 | $ | (441 | ) | $ | (648 | ) | $ | (1,943 | ) | $ | 57,519 | $ | 370 | $ | 57,889 | ||||||||||||||||||||||
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(1) | Net income (loss) attributable to noncontrolling interests excludes gains (losses) of redeemable noncontrolling interests in partially owned consolidated subsidiaries of ($13) million. |
See accompanying notes to the consolidated financial statements.
58
MetLife, Inc.
Consolidated Statements of Equity — (Continued)
For the Year Ended December 31, 2010
(In millions)
Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Convertible Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock at Cost | Net Unrealized Investment Gains (Losses) | Other-Than- Temporary Impairments | Foreign Currency Translation Adjustments | Defined Benefit Plans Adjustment | Total MetLife, Inc.’s Stockholders’ Equity | Noncontrolling Interests (1) | Total Equity | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2009 | $ | 1 | $ | — | $ | 8 | $ | 16,859 | $ | 17,707 | $ | (190 | ) | $ | (825 | ) | $ | (513 | ) | $ | (166 | ) | $ | (1,545 | ) | $ | 31,336 | $ | 371 | $ | 31,707 | |||||||||||||||||||||
Cumulative effect of change in accounting principle, | (12 | ) | 31 | 11 | 30 | 30 | ||||||||||||||||||||||||||||||||||||||||||||||
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Balance at January 1, 2010 | 1 | — | 8 | 16,859 | 17,695 | (190 | ) | (794 | ) | (502 | ) | (166 | ) | (1,545 | ) | 31,366 | 371 | 31,737 | ||||||||||||||||||||||||||||||||||
Cumulative effect of change in accounting principle, | (10 | ) | 10 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
Convertible preferred stock issuance | — | 2,805 | 2,805 | 2,805 | ||||||||||||||||||||||||||||||||||||||||||||||||
Common stock issuance — newly issued shares related to business | 2 | 6,727 | 6,729 | 6,729 | ||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of stock purchase contracts related to common | (69 | ) | (69 | ) | (69 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 101 | 18 | 119 | 119 | ||||||||||||||||||||||||||||||||||||||||||||||||
Dividends on preferred stock | (122 | ) | (122 | ) | (122 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Dividends on common stock | (784 | ) | (784 | ) | (784 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Change in equity of noncontrolling interests | (9 | ) | (9 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | 2,667 | 2,667 | (2 | ) | 2,665 | |||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of income tax | 4,272 | 136 | (362 | ) | 96 | 4,142 | 5 | 4,147 | ||||||||||||||||||||||||||||||||||||||||||||
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Balance at December 31, 2010 | $ | 1 | $ | — | $ | 10 | $ | 26,423 | $ | 19,446 | $ | (172 | ) | $ | 3,488 | $ | (366 | ) | $ | (528 | ) | $ | (1,449 | ) | $ | 46,853 | $ | 365 | $ | 47,218 | ||||||||||||||||||||||
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(1) | Net income (loss) attributable to noncontrolling interests excludes gains (losses) of redeemable noncontrolling interests in partially owned consolidated subsidiaries of ($2) million. |
See accompanying notes to the consolidated financial statements.
59
MetLife, Inc.
Consolidated Statements of Equity — (Continued)
For the Year Ended December 31, 2009
(In millions)
Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock at Cost | Net Unrealized Investment Gains (Losses) | Other-Than- Temporary Impairments | Foreign Currency Translation Adjustments | Defined Benefit Plans Adjustment | Total MetLife, Inc.’s Stockholders’ Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||
Balance at December 31, 2008 | $ | 1 | $ | 8 | $ | 15,811 | $ | 22,403 | $ | (236 | ) | $ | (12,564 | ) | $ | — | $ | (246 | ) | $ | (1,443 | ) | $ | 23,734 | $ | 251 | $ | 23,985 | ||||||||||||||||||||
Cumulative effect of change in accounting principle, net of income tax | (1,629 | ) | (310 | ) | 51 | (1,888 | ) | (2 | ) | (1,890 | ) | |||||||||||||||||||||||||||||||||||||
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Balance at January 1, 2009 | 1 | 8 | 15,811 | 20,774 | (236 | ) | (12,874 | ) | — | (195 | ) | (1,443 | ) | 21,846 | 249 | 22,095 | ||||||||||||||||||||||||||||||||
Cumulative effect of change in accounting principle, net of income tax | 76 | (76 | ) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Common stock issuance — newly issued shares | 1,035 | 1,035 | 1,035 | |||||||||||||||||||||||||||||||||||||||||||||
Treasury stock transactions, net | (7 | ) | 14 | 7 | 7 | |||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 20 | 32 | 52 | 52 | ||||||||||||||||||||||||||||||||||||||||||||
Dividends on preferred stock | (122 | ) | (122 | ) | (122 | ) | ||||||||||||||||||||||||||||||||||||||||||
Dividends on common stock | (610 | ) | (610 | ) | (610 | ) | ||||||||||||||||||||||||||||||||||||||||||
Change in equity of noncontrolling interests | 169 | 169 | ||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | (2,411 | ) | (2,411 | ) | (36 | ) | (2,447 | ) | ||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of income tax | 12,049 | (437 | ) | 29 | (102 | ) | 11,539 | (11 | ) | 11,528 | ||||||||||||||||||||||||||||||||||||||
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Balance at December 31, 2009 | $ | 1 | $ | 8 | $ | 16,859 | $ | 17,707 | $ | (190 | ) | $ | (825 | ) | $ | (513 | ) | $ | (166 | ) | $ | (1,545 | ) | $ | 31,336 | $ | 371 | $ | 31,707 | |||||||||||||||||||
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See accompanying notes to the consolidated financial statements.
60
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2011, 2010 and 2009
(In millions)
2011 | 2010 | 2009 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income (loss) | $ | 6,415 | $ | 2,663 | $ | (2,447 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization expenses | 679 | 585 | 520 | |||||||||
Amortization of premiums and accretion of discounts associated with investments, net | (477 | ) | (1,078 | ) | (967 | ) | ||||||
(Gains) losses on investments and derivatives and from sales of businesses, net | (3,181 | ) | 854 | 7,715 | ||||||||
(Income) loss from equity method investments, net of dividends or distributions | 315 | 48 | 1,279 | |||||||||
Interest credited to policyholder account balances | 5,603 | 4,925 | 4,852 | |||||||||
Interest credited to bank deposits | 95 | 137 | 163 | |||||||||
Universal life and investment-type product policy fees | (7,806 | ) | (6,037 | ) | (5,218 | ) | ||||||
Change in trading and other securities | 648 | (1,369 | ) | (1,152 | ) | |||||||
Change in residential mortgage loans held-for-sale, net | (4,530 | ) | (487 | ) | (800 | ) | ||||||
Change in mortgage servicing rights | (60 | ) | (165 | ) | (687 | ) | ||||||
Change in accrued investment income | 525 | (206 | ) | (110 | ) | |||||||
Change in premiums, reinsurance and other receivables | 58 | (1,023 | ) | (1,653 | ) | |||||||
Change in deferred policy acquisition costs, net | (591 | ) | (370 | ) | (1,609 | ) | ||||||
Change in income tax recoverable (payable) | 1,742 | 1,231 | (2,681 | ) | ||||||||
Change in other assets | 2,360 | 1,948 | (660 | ) | ||||||||
Change in insurance-related liabilities and policy-related balances | 7,081 | 6,491 | 6,403 | |||||||||
Change in other liabilities | 1,136 | (315 | ) | 865 | ||||||||
Other, net | 261 | 153 | (16 | ) | ||||||||
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Net cash provided by operating activities | 10,273 | 7,985 | 3,797 | |||||||||
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Cash flows from investing activities | ||||||||||||
Sales, maturities and repayments of: | ||||||||||||
Fixed maturity securities | 104,302 | 86,529 | 64,428 | |||||||||
Equity securities | 2,006 | 1,371 | 2,545 | |||||||||
Mortgage loans | 13,486 | 6,361 | 5,769 | |||||||||
Real estate and real estate joint ventures | 1,296 | 322 | 43 | |||||||||
Other limited partnership interests | 1,121 | 522 | 947 | |||||||||
Purchases of: | ||||||||||||
Fixed maturity securities | (116,939 | ) | (100,713 | ) | (83,940 | ) | ||||||
Equity securities | (1,481 | ) | (949 | ) | (1,986 | ) | ||||||
Mortgage loans | (14,694 | ) | (8,967 | ) | (4,692 | ) | ||||||
Real estate and real estate joint ventures | (1,534 | ) | (786 | ) | (579 | ) | ||||||
Other limited partnership interests | (1,147 | ) | (1,008 | ) | (803 | ) | ||||||
Cash received in connection with freestanding derivatives | 2,815 | 1,814 | 3,292 | |||||||||
Cash paid in connection with freestanding derivatives | (3,478 | ) | (2,548 | ) | (5,393 | ) | ||||||
Sales of businesses, net of cash and cash equivalents disposed of $54, $0 and $180, respectively | 126 | — | (50 | ) | ||||||||
Sale of interest in joint venture | 265 | — | — | |||||||||
Disposal of subsidiary | 4 | — | (19 | ) | ||||||||
Purchases of businesses, net of cash and cash equivalents acquired of $70, $4,175 and $0, respectively | (163 | ) | (3,021 | ) | — | |||||||
Net change in policy loans | (66 | ) | (225 | ) | (259 | ) | ||||||
Net change in short-term investments | (7,949 | ) | 3,033 | 5,534 | ||||||||
Net change in other invested assets | (19 | ) | 148 | 1,394 | ||||||||
Other, net | (169 | ) | (186 | ) | (160 | ) | ||||||
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Net cash used in investing activities | $ | (22,218 | ) | $ | (18,303 | ) | $ | (13,929 | ) | |||
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See accompanying notes to the consolidated financial statements.
61
MetLife, Inc.
Consolidated Statements of Cash Flows — (Continued)
For the Years Ended December 31, 2011, 2010 and 2009
(In millions)
2011 | 2010 | 2009 | ||||||||||
Cash flows from financing activities | ||||||||||||
Policyholder account balances: | ||||||||||||
Deposits | $ | 91,946 | $ | 74,296 | $ | 77,517 | ||||||
Withdrawals | (87,625 | ) | (69,739 | ) | (79,799 | ) | ||||||
Net change in payables for collateral under securities loaned and other transactions | 6,444 | 3,076 | (6,863 | ) | ||||||||
Net change in bank deposits | 96 | (32 | ) | 3,164 | ||||||||
Net change in short-term debt | 380 | (606 | ) | (1,747 | ) | |||||||
Long-term debt issued | 1,346 | 5,090 | 2,961 | |||||||||
Long-term debt repaid | (2,042 | ) | (1,061 | ) | (555 | ) | ||||||
Collateral financing arrangements issued | — | — | 105 | |||||||||
Collateral financing arrangements repaid | (502 | ) | — | — | ||||||||
Cash received in connection with collateral financing arrangements | 100 | — | 775 | |||||||||
Cash paid in connection with collateral financing arrangements | (63 | ) | — | (400 | ) | |||||||
Junior subordinated debt securities issued | — | — | 500 | |||||||||
Debt issuance costs | (1 | ) | (14 | ) | (30 | ) | ||||||
Common stock issued, net of issuance costs | 2,950 | 3,529 | — | |||||||||
Stock options exercised | 88 | 52 | 8 | |||||||||
Redemption of convertible preferred stock | (2,805 | ) | — | — | ||||||||
Preferred stock redemption premium | (146 | ) | — | — | ||||||||
Common stock issued to settle stock forward contracts | — | — | 1,035 | |||||||||
Dividends on preferred stock | (122 | ) | (122 | ) | (122 | ) | ||||||
Dividends on common stock | (787 | ) | (784 | ) | (610 | ) | ||||||
Other, net | 125 | (304 | ) | (42 | ) | |||||||
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Net cash provided by (used in) financing activities | 9,382 | 13,381 | (4,103 | ) | ||||||||
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Effect of change in foreign currency exchange rates on cash and cash equivalents balances | (22 | ) | (129 | ) | 108 | |||||||
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Change in cash and cash equivalents | (2,585 | ) | 2,934 | (14,127 | ) | |||||||
Cash and cash equivalents, beginning of year | 13,046 | 10,112 | 24,239 | |||||||||
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Cash and cash equivalents, end of year | $ | 10,461 | $ | 13,046 | $ | 10,112 | ||||||
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Cash and cash equivalents, subsidiaries held-for-sale, beginning of year | $ | 89 | $ | 88 | $ | 108 | ||||||
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Cash and cash equivalents, subsidiaries held-for-sale, end of year | $ | — | $ | 89 | $ | 88 | ||||||
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Cash and cash equivalents, from continuing operations, beginning of year | $ | 12,957 | $ | 10,024 | $ | 24,131 | ||||||
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Cash and cash equivalents, from continuing operations, end of year | $ | 10,461 | $ | 12,957 | $ | 10,024 | ||||||
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Supplemental disclosures of cash flow information: | ||||||||||||
Net cash paid (received) during the year for: | ||||||||||||
Interest | $ | 1,565 | $ | 1,489 | $ | 989 | ||||||
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Income tax | $ | 676 | $ | (23 | ) | $ | 397 | |||||
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Non-cash transactions during the year: | ||||||||||||
Business acquisitions: | ||||||||||||
Assets acquired (1) | $ | 327 | $ | 125,728 | $ | — | ||||||
Liabilities assumed (1) | (94 | ) | (109,306 | ) | — | |||||||
Redeemable and non-redeemable noncontrolling interests assumed | — | (130 | ) | — | ||||||||
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Net assets acquired | 233 | 16,292 | — | |||||||||
Cash paid, excluding transaction costs of $0, $88 and $0, respectively | (233 | ) | (7,196 | ) | — | |||||||
Other purchase price adjustments | — | 98 | — | |||||||||
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Securities issued | $ | — | $ | 9,194 | $ | — | ||||||
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Remarketing of debt securities: | ||||||||||||
Fixed maturity securities redeemed | $ | — | $ | — | $ | 32 | ||||||
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Long-term debt issued | $ | — | $ | — | $ | 1,035 | ||||||
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Junior subordinated debt securities redeemed | $ | — | $ | — | $ | 1,067 | ||||||
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Purchase money mortgage loans on sales of real estate joint ventures | $ | — | $ | 2 | $ | 93 | ||||||
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Real estate and real estate joint ventures acquired in satisfaction of debt | $ | 292 | $ | 93 | $ | 211 | ||||||
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Collateral financing arrangements repaid | $ | 148 | $ | — | $ | — | ||||||
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(1) | The 2010 amounts include measurement period adjustments described in Note 2. |
See accompanying notes to the consolidated financial statements.
62
Notes to the Consolidated Financial Statements
1. Business, Basis of Presentation and Summary of Significant Accounting Policies
Business
“MetLife” or the “Company” refers to MetLife, Inc., a Delaware corporation incorporated in 1999, its subsidiaries and affiliates. MetLife is a leading global provider of insurance, annuities and employee benefit programs throughout the United States, Japan, Latin America, Asia, Europe and the Middle East. Through its subsidiaries and affiliates, MetLife offers life insurance, annuities, property & casualty insurance, and other financial services to individuals, as well as group insurance and retirement & savings products and services to corporations and other institutions.
MetLife is organized into six segments: Retail; Group, Voluntary & Worksite Benefits; Corporate Benefit Funding; and Latin America (collectively, “The Americas”); Asia; and Europe, the Middle East and Africa (“EMEA”). See Note 22 for information on the reorganization of the Company’s segments and continued realignment of certain products and businesses among its existing segments during 2012, which were retrospectively applied.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of MetLife, Inc. and its subsidiaries, as well as partnerships and joint ventures in which the Company has control, and variable interest entities (“VIEs”) for which the Company is the primary beneficiary. See “— Adoption of New Accounting Pronouncements.” Closed block assets, liabilities, revenues and expenses are combined on a line-by-line basis with the assets, liabilities, revenues and expenses outside the closed block based on the nature of the particular item. See Note 10. Intercompany accounts and transactions have been eliminated.
On November 1, 2010 (the “Acquisition Date”), MetLife, Inc. completed the acquisition of American Life Insurance Company (“American Life”) from AM Holdings LLC (formerly known as ALICO Holdings LLC) (“AM Holdings”), a subsidiary of American International Group, Inc. (“AIG”), and Delaware American Life Insurance Company (“DelAm”) from AIG (American Life, together with DelAm, collectively, “ALICO”) (the “Acquisition”). The Acquisition was accounted for using the acquisition method of accounting. ALICO’s fiscal year-end is November 30. Accordingly, the Company’s consolidated financial statements reflect the assets and liabilities of ALICO as of November 30, 2011 and 2010, and the operating results of ALICO for the year ended November 30, 2011 and the one month ended November 30, 2010. The accounting policies of ALICO were conformed to those of MetLife upon the Acquisition. See Note 2.
Certain amounts in the prior years’ consolidated financial statements and related footnotes thereto have been reclassified to conform with the 2011 presentation as discussed throughout the Notes to the Consolidated Financial Statements. See “— Adoption of New Accounting Pronouncements” for discussion of adoptions in 2012, which were retrospectively applied.
Summary of Significant Accounting Policies and 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 in the consolidated financial statements.
A description of critical estimates is incorporated within the discussion of the related accounting policies which follows. In applying these policies, management makes 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 the Company’s business and operations. Actual results could differ from these estimates.
63
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Investments
The accounting policies for the Company’s principal investments are as follows:
Fixed Maturity and Equity Securities. The Company’s fixed maturity and equity securities are classified as available-for-sale and are reported at their estimated fair value.
Unrealized investment gains and losses on these securities are recorded as a separate component of other comprehensive income (loss), net of policyholder-related amounts and deferred income taxes. All security transactions are recorded on a trade date basis. Investment gains and losses on sales of securities are determined on a specific identification basis.
Interest income on fixed maturity securities is recorded when earned using an effective yield method giving effect to amortization of premiums and accretion of discounts. Dividends on equity securities are recorded when declared. Interest, dividends and prepayment fees are recorded in net investment income.
Included within fixed maturity securities are structured securities including mortgage-backed and asset-backed securities (“ABS”). Amortization of the premium or discount considers the estimated timing and amount of prepayments of the underlying loans. Actual prepayment experience is periodically reviewed and effective yields are recalculated when differences arise between the originally anticipated and the actual prepayments received and currently anticipated. Prepayment assumptions for single class and multi-class mortgage-backed and ABS are estimated by management using inputs obtained from third-party specialists, including broker-dealers, and based on management’s knowledge of the current market. For credit-sensitive mortgage-backed and ABS and certain prepayment-sensitive securities, the effective yield is recalculated on a prospective basis. For all other mortgage-backed and ABS, the effective yield is recalculated on a retrospective basis.
The Company periodically evaluates fixed maturity and equity securities for impairment. The assessment of whether impairments have occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in estimated fair value. The Company’s review of its fixed maturity and equity securities for impairments includes an analysis of the total gross unrealized losses by three categories of severity and/or age of the gross unrealized loss, as summarized in Note 3 “— Aging of Gross Unrealized Loss and OTTI Loss for Fixed Maturity and Equity Securities Available-for-Sale.”
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 by the Company 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 cost or amortized cost; (ii) the potential for impairments of securities 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 of securities where the issuer, series of issuers or industry has suffered a catastrophic type of loss or has exhausted natural resources; (vi) with respect to fixed maturity securities, 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; and (viii) other subjective factors, including concentrations and information obtained from regulators and rating agencies.
64
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
For fixed maturity securities in an unrealized loss position, an other-than-temporary impairment (“OTTI”) is recognized in earnings when it is anticipated that the amortized cost will not be recovered. In such situations, the OTTI recognized in earnings is the entire difference between the fixed maturity security’s amortized cost and its estimated fair value only when either: (i) the Company has the intent to sell the fixed maturity security; or (ii) it is more likely than not that the Company will be required to sell the fixed maturity security before recovery of the decline in estimated fair value below amortized cost. If neither of these two conditions exist, the difference between the amortized cost of the fixed maturity security and the present value of projected future cash flows expected to be collected is recognized as an OTTI in earnings (“credit loss”). If the estimated fair value is less than the present value of projected future cash flows expected to be collected, this portion of OTTI related to other-than credit factors (“noncredit loss”) is recorded in other comprehensive income (loss). Adjustments are not made for subsequent recoveries in value.
With respect to equity securities, the Company considers in its OTTI analysis its intent and ability to hold a particular equity security for a period of time sufficient to allow for the recovery of its estimated fair value to an amount equal to or greater than cost. If a sale decision is made for an equity security and it is not expected to recover to an amount at least equal to cost prior to the expected time of the sale, the security will be deemed other-than-temporarily impaired in the period that the sale decision was made and an OTTI loss will be recorded in earnings. When an OTTI loss has occurred, the OTTI loss is the entire difference between the equity security’s cost and its estimated fair value with a corresponding charge to earnings.
Upon acquisition, the Company classifies perpetual securities that have attributes of both debt and equity as fixed maturity securities if the securities have an interest rate step-up feature which, when combined with other qualitative factors, indicates that the securities have more debt-like characteristics; while those with more equity-like characteristics are classified as equity securities within non-redeemable preferred stock. Many of such securities, commonly referred to as “perpetual hybrid securities,” have been issued by non-U.S. financial institutions that are accorded the highest two capital treatment categories by their respective regulatory bodies (i.e. core capital, or “Tier 1 capital” and perpetual deferrable securities, or “Upper Tier 2 capital”). With respect to perpetual hybrid securities, the Company considers in its OTTI analysis whether there has been any deterioration in credit of the issuer and the likelihood of recovery in value of the securities that are in a severe and extended unrealized loss position. The Company also considers whether any perpetual hybrid securities, with an unrealized loss, regardless of credit rating, have deferred any dividend payments. When an OTTI loss has occurred, the OTTI loss is the entire difference between the perpetual hybrid security’s cost and its estimated fair value with a corresponding charge to earnings.
The Company’s methodology and significant inputs used to determine the amount of the credit loss on fixed maturity securities are as follows:
(i) The Company calculates the recovery value by performing a discounted cash flow analysis based on the present value of future cash flows expected to be received. The discount rate is generally the effective interest rate of the fixed maturity security prior to impairment.
(ii) When determining the collectability and the period over which value is expected to recover, the Company applies the same considerations utilized in its overall impairment evaluation process which incorporates information regarding the specific security, fundamentals of the industry and geographic area in which the security issuer operates, and overall macroeconomic conditions. Projected future cash flows are estimated using assumptions derived from management’s best estimates of likely scenario-based outcomes after giving consideration to a variety of variables that include, but are not limited to: general payment terms of the security; the likelihood that the issuer can service the scheduled interest and principal payments; the quality and amount of any credit enhancements; the security’s position within the capital structure of the issuer; possible corporate restructurings or asset sales by the issuer; and changes to the rating of the security or the issuer by rating agencies.
65
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
(iii) Additional considerations are made when assessing the unique features that apply to certain structured securities such as residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and ABS. These additional factors for structured securities include, but are not limited to: 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.
(iv) When determining the amount of the credit loss for U.S. and foreign corporate securities, foreign government securities and state and political subdivision securities, management considers the estimated fair value as the recovery value when available information does not indicate that another value is more appropriate. When information is identified that indicates a recovery value other than estimated fair value, management considers in the determination of recovery value the same considerations utilized in its overall impairment evaluation process as described in (ii) above, as well as private and public sector programs to restructure foreign government securities.
The cost or amortized cost of fixed maturity and equity securities is adjusted for OTTI in the period in which the determination is made. The Company does not change the revised cost basis for subsequent recoveries in value.
In periods subsequent to the recognition of OTTI on a fixed maturity security, the Company accounts for the impaired security as if it had been purchased on the measurement date of the impairment. Accordingly, the discount (or reduced premium) based on the new cost basis is accreted into net investment income over the remaining term of the fixed maturity security in a prospective manner based on the amount and timing of estimated future cash flows.
Trading and Other Securities. Trading and other securities are stated at estimated fair value. Trading and other securities include investments that are actively purchased and sold (“Actively Traded Securities”). These Actively Traded Securities are principally fixed maturity securities. Short sale agreement liabilities related to Actively Traded Securities, included in other liabilities, are also stated at estimated fair value. Trading and other securities also includes securities for which the fair value option (“FVO”) has been elected (“FVO Securities”). FVO Securities include certain fixed maturity and equity securities held-for-investment by the general account to support asset and liability matching strategies for certain insurance products. FVO Securities also include contractholder-directed investments supporting unit-linked variable annuity type liabilities which do not qualify for presentation and reporting as separate account summary total assets and liabilities. These investments are primarily mutual funds and, to a lesser extent, fixed maturity and equity securities, short-term investments and cash and cash equivalents. The investment returns on these investments inure to contractholders and are offset by a corresponding change in policyholder account balances (“PABs”) through interest credited to policyholder account balances. Changes in estimated fair value of these securities subsequent to purchase are included in net investment income, except for certain fixed maturity securities included in FVO Securities where changes are included in net investment gains (losses). FVO Securities also include securities held by consolidated securitization entities (“CSEs”) with changes in estimated fair value subsequent to consolidation included in net investment gains (losses). Interest and dividends related to all trading and other securities are included in net investment income.
Securities Lending. Securities lending transactions, whereby blocks of securities, which are included in fixed maturity securities and short-term investments, are loaned to third parties, are treated as financing arrangements and the associated liability is recorded at the amount of cash received. At the inception of a loan, the Company obtains collateral, usually cash, in an amount generally equal to 102% of the estimated fair value of the securities loaned and maintains it at a level greater than or equal to 100% for the duration of the loan. The Company
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monitors the estimated fair value of the securities loaned on a daily basis with additional collateral obtained as necessary. Income and expenses associated with securities lending transactions are reported as investment income and investment expense, respectively, within net investment income.
Mortgage Loans — Mortgage Loans Held-For-Investment. For the purposes of determining valuation allowances the Company disaggregates its mortgage loan investments into three portfolio segments: commercial, agricultural, and residential. The accounting and valuation allowance policies that are applicable to all portfolio segments are presented below, followed by the policies applicable to both commercial and agricultural loans, which are very similar, as well as policies applicable to residential loans. Also included in mortgage loans held-for-investment are commercial mortgage loans held by CSEs that were consolidated by the Company on January 1, 2010 upon the adoption of new guidance. The FVO was elected for these commercial mortgage loans, and thus they are stated at estimated fair value with changes in estimated fair value subsequent to consolidation recognized in net investment gains (losses).
Commercial, Agricultural and Residential Mortgage Loans— Mortgage loans held-for-investment are stated at unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or expenses, and net of valuation allowances. Interest income is accrued on the principal amount of the loan based on the loan’s contractual interest rate. Amortization of premiums and discounts is recorded using the effective yield method. Interest income, amortization of premiums and discounts and prepayment fees are reported in net investment income. Interest ceases to accrue when collection of interest is not considered probable and/or when interest or principal payments are past due as follows: commercial — 60 days; and agricultural and residential — 90 days, unless, in the case of a residential loan, it is both well-secured and in the process of collection. When a loan is placed on non-accrual status, uncollected past due interest is charged-off against net investment income. Generally, the accrual of interest income resumes after all delinquent amounts are paid and management believes all future principal and interest payments will be collected. Cash receipts on non-accruing loans are recorded in accordance with the loan agreement as a reduction of principal and/or interest income. Charge-offs occur upon the realization of a credit loss, typically through foreclosure or after a decision is made to sell a loan, or for residential loans when, after considering the individual consumer’s financial status, management believes that uncollectability is other-than-temporary. Gain or loss upon charge-off is recorded, net of previously established valuation allowances, in net investment gains (losses). Cash recoveries on principal amounts previously charged-off are generally recorded as an increase to the valuation allowance, unless the valuation allowance adequately provides for expected credit losses; then the recovery is recorded in net investment gains (losses). Gains and losses from sales of loans and increases or decreases to valuation allowances are recorded in net investment gains (losses).
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 contractual terms of the loan agreement. Specific valuation allowances are established using the same methodology for all three portfolio segments as the excess carrying value of a loan over either (i) the present value of expected future cash flows discounted at the loan’s original effective interest rate, (ii) the estimated fair value of the loan’s underlying collateral if the loan is in the process of foreclosure or otherwise collateral dependent, or (iii) the loan’s observable market price. A common evaluation framework is used for establishing non-specific valuation allowances for all loan portfolio segments; however, a separate non-specific valuation allowance is calculated and maintained for each loan portfolio segment that is based on inputs unique to each loan portfolio segment. Non-specific valuation allowances are established for pools of loans with similar risk characteristics where a property-specific or market-specific risk has not been identified, but for which the Company expects to incur a credit loss. These evaluations are based upon several loan portfolio segment-specific factors, including the Company’s experience for loan losses, defaults and loss severity, and loss expectations for loans with similar risk characteristics. These evaluations are revised as conditions change and new information becomes available.
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For commercial and agricultural mortgage loans, the Company typically uses 10 years or more of historical experience in establishing non-specific valuation allowances. For commercial mortgage loans, 20 years of historical experience is used which captures multiple economic cycles. For evaluations of commercial mortgage loans, in addition to historical experience, management considers factors that include the impact of a rapid change to the economy, which may not be reflected in the loan portfolio, and recent loss and recovery trend experience as compared to historical loss and recovery experience. For agricultural mortgage loans, ten years of historical experience is used which captures a full economic cycle. For evaluations of agricultural loans, in addition to historical experience, management considers factors that include increased stress in certain sectors, which may be evidenced by higher delinquency rates, or a change in the number of higher risk loans. For commercial and agricultural mortgage loans, on a quarterly basis, management incorporates the impact of these current market events and conditions on historical experience in determining the non-specific valuation allowance established for each portfolio segment level. For evaluations of residential mortgage loans, the key inputs of expected frequency and expected loss reflect current market conditions, with expected frequency adjusted, when appropriate, for differences from market conditions and the Company’s experience.
Commercial and Agricultural Mortgage Loans — All commercial loans are reviewed on an ongoing basis which may include an analysis of the property financial statements and rent roll, lease rollover analysis, property inspections, market analysis, estimated valuations of the underlying collateral, loan-to-value ratios, debt service coverage ratios, and tenant creditworthiness. All agricultural loans are monitored on an ongoing basis. The monitoring process focuses on higher risk loans, which include those that are classified as restructured, potentially delinquent, delinquent or in foreclosure, as well as loans with higher loan-to-value ratios and lower debt service coverage ratios. The monitoring process for agricultural loans is generally similar, with a focus on higher risk loans, including reviews on a geographic and property-type basis. Higher risk commercial and agricultural loans are reviewed individually on an ongoing basis for potential credit loss and specific valuation allowances are established using the methodology described above for all loan portfolio segments. Quarterly, the remaining loans are reviewed on a pool basis by aggregating groups of loans that have similar risk characteristics for potential credit loss, and non-specific valuation allowances are established as described above using inputs that are unique to each segment of the loan portfolio.
For commercial loans, the Company’s primary credit quality indicator is the debt service coverage ratio, which compares a property’s net operating income to amounts needed to service the principal and interest due under the loan. Generally, the lower the debt service coverage ratio, the higher the risk of experiencing a credit loss. The Company also reviews the loan-to-value ratio of its commercial loan portfolio. Loan-to-value ratios compare the unpaid principal balance of the loan to the estimated fair value of the underlying collateral. A loan-to-value ratio greater than 100% indicates that the loan’s unpaid principal balance is greater than the collateral value. A loan-to-value ratio of less than 100% indicates an excess of collateral value over the loan’s unpaid principal balance. Generally, the higher the loan-to-value ratio, the higher the risk of experiencing a credit loss. The debt service coverage ratio and loan-to-value ratio, as well as the values utilized in calculating these ratios, are updated annually, on a rolling basis, with a portion of the loan portfolio updated each quarter.
For agricultural loans, the Company’s primary credit quality indicator is the loan-to-value ratio. The values utilized in calculating this ratio are developed in connection with the ongoing review of the agricultural loan portfolio and are routinely updated.
Residential Mortgage Loans — The Company’s residential loan portfolio is comprised primarily of closed end, amortizing residential loans and home equity lines of credit and it does not hold any optional adjustable rate mortgages, sub-prime, or low teaser rate loans.
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In contrast to the commercial and agricultural loan portfolios, residential loans are smaller-balance homogeneous loans that are collectively evaluated for impairment. Non-specific valuation allowances are established using the evaluation framework described above for pools of loans with similar risk characteristics from inputs that are unique to the residential segment of the loan portfolio. Loan specific valuation allowances are only established on residential loans when they have been restructured and are established using the methodology described above for all loan portfolio segments.
For residential loans, the Company’s primary credit quality indicator is whether the loan is performing or non-performing. The Company generally defines non-performing residential loans as those that are 90 or more days past due and/or in non-accrual status. The determination of performing or non-performing status is assessed monthly. Generally, non-performing residential loans have a higher risk of experiencing a credit loss.
Mortgage Loans Modified in a Troubled Debt Restructuring. For a small portion of the portfolio, classified as troubled debt restructurings, concessions are granted related to the borrowers’ financial difficulties. Generally, the types of concessions include: reduction of the contractual interest rate, extension of the maturity date at an interest rate lower than current market interest rates and/or a reduction of accrued interest. The amount, timing and extent of the concession granted is considered in determining any impairment or changes in the specific valuation allowance recorded in connection with the troubled debt restructuring. Through the continuous portfolio monitoring process, a specific valuation allowance may have been recorded prior to the quarter when the mortgage loan is modified in a troubled debt restructuring. Accordingly, the carrying value (after specific valuation allowance) before and after modification through a troubled debt restructuring may not change significantly, or may increase if the expected recovery is higher than the pre-modification recovery assessment.
Mortgage Loans — Mortgage Loans Held-For-Sale. This caption includes three categories of mortgage loans:
Residential mortgage loans — held-for-sale. Forward and reverse residential mortgage loans originated with the intent to sell, for which the FVO was elected, are stated at estimated fair value. Subsequent changes in estimated fair value are recognized in other revenues.
Mortgage loans — held-for-sale — lower of amortized cost or estimated fair value. Mortgage loans that were previously designated as held-for-investment, but now are designated as held-for-sale, are stated at the lower of amortized cost or estimated fair value. At the time of transfer to held-for-sale status, such mortgage loans are recorded at the lower of amortized cost or estimated fair value, or for collateral dependent loans, estimated fair value less expected disposition costs, with any loss recognized in net investment gains (losses).
Securitized reverse residential mortgage loans. Reverse residential mortgage loans originated with the intent to sell which have been sold into Government National Mortgage Association (“GNMA”) securitizations, for which the FVO was elected, are stated at estimated fair value. Prior to December 31, 2011, consistent with historical industry practice, these standard form loans were de-recognized from the balance sheet upon the GNMA securitization. However, after an industry led review of the GNMA securitization program, the Company has determined that these securitized reverse residential mortgage loans do not qualify for de-recognition. Therefore, as of December 31, 2011 the Company recorded $7.7 billion of reverse mortgage loans, included within mortgage loans held-for-sale. The FVO was also elected for the $7.6 billion corresponding liability, included within other liabilities. Subsequent changes in estimated fair value of both the asset and liability are recognized in other revenues. The Company’s economic exposure is generally limited to its servicing rights. Prior year amounts have not been included in the financial statements as these amounts were not material to such financial statements.
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Policy Loans. Policy loans are stated at unpaid principal balances. Interest income on such loans is recorded as earned in net investment income using the contractually agreed upon interest rate. Generally, interest is capitalized on the policy’s anniversary date. Valuation allowances are not established for policy loans, as these loans are fully collateralized by the cash surrender value of the underlying insurance policies. Any unpaid principal or interest on the loan is deducted from the cash surrender value or the death benefit prior to settlement of the policy.
Real Estate. Real estate held-for-investment, including related improvements, is stated at cost less accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated useful life of the asset (typically 20 to 55 years). Rental income is recognized on a straight-line basis over the term of the respective leases. The Company classifies a property as held-for-sale if it commits to a plan to sell a property within one year and actively markets the property in its current condition for a price that is reasonable in comparison to its estimated fair value. The Company classifies the results of operations and the gain or loss on sale of a property that either has been disposed of or classified as held-for-sale as discontinued operations, if the ongoing operations of the property will be eliminated from the ongoing operations of the Company and if the Company will not have any significant continuing involvement in the operations of the property after the sale. Real estate held-for-sale is stated at the lower of depreciated cost or estimated fair value less expected disposition costs. Real estate is not depreciated while it is classified as held-for-sale. The Company periodically reviews its properties held-for-investment for impairment and tests properties for recoverability whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable and the carrying value of the property exceeds its estimated fair value. Properties whose carrying values are greater than their undiscounted cash flows are written down to their estimated fair value, with the impairment loss included in net investment gains (losses). Impairment losses are based upon the estimated fair value of real estate, which is generally computed using the present value of expected future cash flows discounted at a rate commensurate with the underlying risks. Real estate acquired upon foreclosure is recorded at the lower of estimated fair value or the carrying value of the mortgage loan at the date of foreclosure.
Real Estate Joint Ventures and Other Limited Partnership Interests. The Company uses the equity method of accounting for investments in real estate joint ventures and other limited partnership interests consisting of leveraged buy-out funds, hedge funds and other private equity funds in which it has more than a minor ownership interest or more than a minor influence over the joint venture’s or partnership’s operations, but does not have a controlling interest and is not the primary beneficiary. The equity method is also used for such investments in which the Company has more than a minor influence or more than a 20% interest. Generally, the Company records its share of earnings using a three-month lag methodology for instances where the timely financial information is not available and the contractual agreements provide for the delivery of the investees’ financial information after the end of the Company’s reporting period. The Company uses the cost method of accounting for investments in real estate joint ventures and other limited partnership interests in which it has a minor equity investment and virtually no influence over the joint venture’s or the partnership’s operations. Based on the nature and structure of these investments, they do not meet the characteristics of an equity security. The Company reports the distributions from real estate joint ventures and other limited partnership interests accounted for under the cost method and equity in earnings from real estate joint ventures and other limited partnership interests accounted for under the equity method in net investment income. In addition to the investees performing regular evaluations for the impairment of underlying investments, the Company routinely evaluates its investments in real estate joint ventures and other limited partnerships for impairments. The Company considers its cost method investments for OTTI when the carrying value of real estate joint ventures and other limited partnership interests exceeds the net asset value (“NAV”). The Company takes into consideration the severity and duration of this excess when deciding if the cost method investment is other-than-temporarily impaired. For equity method investees, the Company considers financial and other information provided by the investee, other known information and inherent risks in the
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underlying investments, as well as future capital commitments, in determining whether an impairment has occurred. When an OTTI is deemed to have occurred, the Company records a realized capital loss within net investment gains (losses) to record the investment at its estimated fair value.
Short-term Investments. Short-term investments include securities and other investments with remaining maturities of one year or less, but greater than three months, at the time of purchase and are stated at estimated fair value or amortized cost, which approximates estimated fair value.
Other Invested Assets. Other invested assets consist principally of freestanding derivatives with positive estimated fair values, leveraged leases, investments in insurance enterprise joint ventures, tax credit partnerships, funding agreements, mortgage servicing rights (“MSRs”) and funds withheld.
Freestanding derivatives with positive estimated fair values are described in “— Derivative Financial Instruments” below.
Leveraged leases are recorded net of non-recourse debt. The Company recognizes income on the leveraged leases by applying the leveraged lease’s estimated rate of return to the net investment in the lease. The Company regularly reviews residual values and impairs them to expected values.
Joint venture investments represent the Company’s investments in entities that engage in insurance underwriting activities and are accounted for under the equity method.
Tax credit partnerships are established for the purpose of investing in low-income housing and other social causes, where the primary return on investment is in the form of income tax credits and are accounted for under the equity method or under the effective yield method. The Company reports the equity in earnings of joint venture investments and tax credit partnerships in net investment income.
Funding agreements represent arrangements where the Company has long-term interest bearing amounts on deposit with third parties and are generally stated at amortized cost.
MSRs are measured at estimated fair value and are either acquired or are generated from the sale of originated residential mortgage loans where the servicing rights are retained by the Company. Changes in estimated fair value of MSRs are reported in other revenues in the period in which the change occurs.
Funds withheld represent a receivable for amounts contractually withheld by ceding companies in accordance with reinsurance agreements. The Company recognizes interest on funds withheld at rates defined by the terms of the agreement which may be contractually specified or directly related to the underlying investments and records it in net investment income.
Investments Risks and Uncertainties. The Company’s investments are exposed to four primary sources of risk: credit, interest rate, liquidity risk, and market valuation. The financial statement risks, stemming from such investment risks, are those associated with the determination of estimated fair values, the diminished ability to sell certain investments in times of strained market conditions, the recognition of impairments, the recognition of income on certain investments and the potential consolidation of VIEs. The use of different methodologies, assumptions and inputs relating to these financial statement risks may have a material effect on the amounts presented within the consolidated financial statements.
When available, the estimated fair value of the Company’s fixed maturity and equity securities are based on quoted prices in active markets that are readily and regularly obtainable. Generally, these are the most liquid of the Company’s securities holdings and valuation of these securities does not involve management judgment.
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When quoted prices in active markets are not available, the determination of estimated fair value is based on market standard valuation methodologies as described in “— Fair Value” below and in Note 5. Such estimated fair values are based on available market information and management’s judgments about financial instruments. The observable and unobservable inputs used in the standard market valuation methodologies are described in Note 5.
The estimated fair value of residential mortgage loans held-for-sale and securitized reverse residential mortgage loans are primarily based on observable pricing for securities backed by similar types of loans, adjusted to convert the securities prices to loan prices, or from independent broker quotations, which is intended to approximate the amounts that would be received from third parties. Certain other mortgage loans designated as held-for-sale are recorded at the lower of amortized cost or estimated fair value, or for collateral dependent loans, estimated fair value of the collateral less expected disposition costs. For these loans, estimated fair value is determined using independent broker quotations or values provided by independent valuation specialists or, when the loan is in foreclosure or otherwise collateral dependent, the estimated fair value of the underlying collateral is estimated using internal models.
The estimated fair value of MSRs is principally determined through the use of internal discounted cash flow models which utilize various valuation inputs and assumptions which are described in Note 5. The use of different valuation assumptions and inputs, as well as assumptions relating to the collection of expected cash flows, may have a material effect on the estimated fair values of MSRs.
Financial markets are susceptible to severe events evidenced by rapid depreciation in asset values accompanied by a reduction in asset liquidity. The Company’s ability to sell securities, or the price ultimately realized for these securities, depends upon the demand and liquidity in the market and increases the use of judgment in determining the estimated fair value of certain securities.
The determination of the amount of valuation allowances and impairments, as applicable, is described previously by investment type. The determination of such valuation allowances and impairments is highly subjective and is based upon the Company’s periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available.
The recognition of income on certain investments (e.g. structured securities, including mortgage-backed and ABS, certain structured investment transactions, trading and other securities) is dependent upon prepayments and defaults, which could result in changes in amounts to be earned.
The Company has invested in certain structured transactions that are VIEs. These structured transactions include asset-backed securitizations, hybrid securities, real estate joint ventures, other limited partnership interests, and limited liability companies. The Company consolidates those VIEs for which it is deemed to be the primary beneficiary.
The accounting guidance for the determination of when an entity is a VIE and when to consolidate a VIE is complex and requires significant management judgment. 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. The Company generally uses a qualitative approach to determine whether it is the primary beneficiary.
For most VIEs, the entity that has both the ability to direct the most significant activities of the VIE and the obligation to absorb losses or receive benefits that could be significant to the VIE is considered the primary beneficiary. However, for VIEs that are investment companies or apply measurement principles consistent with
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those utilized by investment companies, the primary beneficiary is based on a risks and rewards model and is defined as the entity that will absorb a majority of a VIE’s expected losses, receive a majority of a VIE’s expected residual returns if no single entity absorbs a majority of expected losses, or both. The Company reassesses its involvement with VIEs on a quarterly basis. The use of different methodologies, assumptions and inputs in the determination of the primary beneficiary could have a material effect on the amounts presented within the consolidated financial statements.
Derivative Financial Instruments
Derivatives are financial instruments whose values are 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. The Company uses a variety of derivatives, including swaps, forwards, futures and option contracts, to manage various risks relating to its ongoing business operations. To a lesser extent, the Company uses credit derivatives, such as credit default swaps, to synthetically replicate investment risks and returns which are not readily available in the cash market. The Company also purchases certain securities, issues certain insurance policies and investment contracts and engages in certain reinsurance agreements that have embedded derivatives.
Freestanding derivatives are carried in the Company’s consolidated balance sheets either as assets within other invested assets or as liabilities within other liabilities at estimated fair value as determined through the use of quoted market prices for exchange-traded derivatives and interest rate forwards to sell certain to be announced securities or through the use of pricing models for OTC derivatives. The determination of estimated fair value of freestanding derivatives, when quoted market values are not available, is based on market standard valuation methodologies and inputs that management believes are consistent with what other market participants would use when pricing the instruments. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, default risk, nonperformance risk, volatility, liquidity and changes in estimates and assumptions used in the pricing models.
Accruals on derivatives are generally recorded in accrued investment income or within other liabilities in the consolidated balance sheets. However, accruals that are not expected to settle within one year are included with the derivative carrying value in other invested assets or other liabilities.
The Company does not offset the fair value amounts recognized for derivatives executed with the same counterparty under the same master netting agreement.
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) except for those (i) in policyholder benefits and claims for economic hedges of variable annuity guarantees included in future policy benefits; (ii) in net investment income for (a) economic hedges of equity method investments in joint ventures, (b) all derivatives held in relation to the trading portfolios, and (c) derivatives held within contractholder-directed unit-linked investments; (iii) in other revenues for derivatives held in connection with the Company’s mortgage banking activities; and (iv) in other expenses for economic hedges of foreign currency exposure related to the Company’s international subsidiaries. The fluctuations in estimated fair value of derivatives which have not been designated for hedge accounting can result in significant volatility in net income.
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 as either (i) a hedge of the estimated fair value of a recognized asset or liability (“fair value hedge”); (ii) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid
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related to a recognized asset or liability (“cash flow hedge”); or (iii) a hedge of a net investment in a foreign operation. In this 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 which 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 periodically throughout the life of the designated hedging relationship. Assessments of hedge effectiveness and measurements of ineffectiveness are also subject to interpretation and estimation and different interpretations or estimates may have a material effect on the amount reported in net income.
The accounting for derivatives is complex and interpretations of the primary accounting guidance continue to evolve in practice. Judgment is applied in determining the availability and application of hedge accounting designations and the appropriate accounting treatment under such accounting guidance. If it was determined that hedge accounting designations were not appropriately applied, reported net income could be materially affected.
Under a fair value hedge, changes in the estimated fair value of the hedging derivative, including amounts measured as ineffectiveness, and changes in the estimated fair value of the hedged item related to the designated risk being hedged, are reported within net derivative gains (losses). The estimated fair values of the hedging derivatives are exclusive of any accruals that are separately reported in the consolidated statement of operations within interest income or interest expense to match the location of the hedged item.
Under a cash flow hedge, changes in the estimated fair value of the hedging derivative measured as effective are reported within other comprehensive income (loss), a separate component of stockholders’ equity and the deferred gains or losses on the derivative are reclassified into the consolidated statement of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item. Changes in the estimated fair value of the hedging instrument measured as ineffectiveness are reported within net derivative gains (losses). The estimated fair values of the hedging derivatives are exclusive of any accruals that are separately reported in the consolidated statement of operations within interest income or interest expense to match the location of the hedged item.
In a hedge of a net investment in a foreign operation, changes in the estimated fair value of the hedging derivative that are measured as effective are reported within other comprehensive income (loss) consistent with the translation adjustment for the hedged net investment in the foreign operation. Changes in the estimated fair value of the hedging instrument measured as ineffectiveness are reported within net derivative gains (losses).
The Company discontinues hedge accounting prospectively when: (i) it is determined that the derivative is no longer highly effective in offsetting changes in the estimated fair value or 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 estimated fair value or cash flows of a hedged item, the derivative continues to be carried in the consolidated balance sheets at its estimated fair value, with changes in estimated fair value recognized currently in net derivative gains (losses). The carrying value of the hedged recognized asset or liability under a fair value hedge is no longer adjusted for changes in its estimated fair value due to the hedged risk, and the cumulative adjustment to its carrying value is amortized into income over the remaining life of the hedged item. Provided the hedged forecasted transaction is still probable of occurrence, the changes in estimated fair value of derivatives recorded in other comprehensive income (loss) related to discontinued cash flow hedges are released into the consolidated statements of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item.
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When hedge accounting is discontinued because it is no longer probable that the forecasted transactions will occur on the anticipated date or within two months of that date, the derivative continues to be carried in the consolidated balance sheets at its estimated fair value, with changes in estimated fair value recognized currently in net derivative gains (losses). Deferred gains and losses of a derivative recorded in other comprehensive income (loss) pursuant to the discontinued cash flow hedge of a forecasted transaction that is no longer probable are recognized immediately in net derivative gains (losses).
In all other situations in which hedge accounting is discontinued, the derivative is carried at its estimated fair value in the consolidated balance sheets, with changes in its estimated fair value recognized in the current period as net derivative gains (losses).
The Company issues certain products and purchases certain investments that contain embedded derivatives. The Company assesses each identified embedded derivative to determine whether it is required to be bifurcated. If the instrument would not be accounted for in its entirety at estimated fair value and it is determined that the terms of the embedded derivative are not clearly and closely related to the economic characteristics of the host contract, and that a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host contract and accounted for as a freestanding derivative. Such embedded derivatives are carried in the consolidated balance sheets at estimated fair value with the host contract and changes in their estimated fair value are generally reported in net derivative gains (losses) except for those in policyholder benefits and claims related to ceded reinsurance of guaranteed minimum income benefits (“GMIB”). 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.
Fair Value
As described below, certain assets and liabilities are measured at estimated fair value in the Company’s consolidated balance sheets. In addition, the notes to these consolidated financial statements include further disclosures of estimated fair values. The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In most cases, the exit price and the transaction (or entry) price will be the same at initial recognition.
Subsequent to initial recognition, fair values are based on unadjusted quoted prices for identical assets or liabilities in active markets that are readily and regularly obtainable. When such quoted prices are not available, fair values are based on quoted prices in markets that are not active, quoted prices for similar but not identical assets or liabilities, or other observable inputs. If these inputs are not available, or observable inputs are not determinative, unobservable inputs and/or adjustments to observable inputs requiring management judgment are used to determine the fair value of assets and liabilities.
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The Company considers three broad valuation techniques: (i) the market approach, (ii) the income approach, and (iii) the cost approach. The Company determines the most appropriate valuation technique to use, given what is being measured and the availability of sufficient inputs, giving priority to observable inputs. The Company categorizes its assets and liabilities measured at estimated fair value into a three-level hierarchy, based on the significant input with the lowest level in its valuation. The input levels are as follows:
Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities. The Company defines active markets based on average trading volume for equity securities. The size of the bid/ask spread is used as an indicator of market activity for fixed maturity securities. | |
Level 2 | Quoted prices in markets that are not active or inputs that are observable either directly or indirectly. These inputs can include quoted prices for similar assets or liabilities other than quoted prices in Level 1, quoted prices in markets that are not active, or other significant inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. | |
Level 3 | Unobservable inputs that are supported by little or no market activity and are significant to the estimated fair value of the assets or liabilities. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. |
Cash and Cash Equivalents
The Company considers all highly liquid securities and other investments purchased with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. Cash equivalents are stated at amortized cost, which approximates estimated fair value.
Property, Equipment, Leasehold Improvements and Computer Software
Property, equipment and leasehold improvements, which are included in other assets, are stated at cost, less accumulated depreciation and amortization. Depreciation is determined using the straight-line method over the estimated useful lives of the assets, as appropriate. The estimated life for company occupied real estate property is generally 40 years. Estimated lives generally range from five to 10 years for leasehold improvements and three to seven years for all other property and equipment. The cost basis of the property, equipment and leasehold improvements was $2.5 billion and $2.4 billion at December 31, 2011 and 2010, respectively. Accumulated depreciation and amortization of property, equipment and leasehold improvements was $1.2 billion at both December 31, 2011 and 2010. Related depreciation and amortization expense was $199 million, $151 million and $151 million for the years ended December 31, 2011, 2010 and 2009, respectively.
Computer software, which is included in other assets, is stated at cost, less accumulated amortization. Purchased software costs, as well as certain internal and external costs incurred to develop internal-use computer software during the application development stage, are capitalized. Such costs are amortized generally over a four-year period using the straight-line method. The cost basis of computer software was $2.2 billion and $2.0 billion at December 31, 2011 and 2010, respectively. Accumulated amortization of capitalized software was $1.5 billion and $1.4 billion at December 31, 2011 and 2010, respectively. Related amortization expense was $217 million, $189 million and $171 million for the years ended December 31, 2011, 2010 and 2009, respectively.
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Deferred Policy Acquisition Costs and Value of Business Acquired
The Company incurs significant costs in connection with acquiring new and renewal insurance business. Costs that are related directly to the successful acquisition or renewal of insurance contracts are deferred as deferred policy acquisition costs (“DAC”). Such costs include: (1) incremental direct costs of contract acquisition, such as commissions, (2) the portion of an employee’s total compensation and benefits related to time spent selling, underwriting or processing the issuance of new and renewal insurance business only with respect to actual policies acquired or renewed, (3) other direct costs essential to contract acquisition that would not have been incurred had a policy not been acquired or renewed, and (4) in limited circumstances, the costs of direct-response advertising whose primary purpose is to elicit sales to customers who could be shown to have responded specifically to the advertising and that results in probable future benefits. All other acquisition-related costs, including those related to general advertising and solicitation, market research, agent training, product development, unsuccessful sales and underwriting efforts, as well as all indirect costs, are expensed as incurred.
Value of business acquired (“VOBA”) is an intangible asset resulting from a business combination that represents the excess of book value over the estimated fair value of acquired insurance, annuity, and investment-type contracts in-force at the acquisition date. The estimated fair value of the acquired liabilities is based on actuarially determined projections, by each block of business, of future policy and contract charges, premiums, mortality and morbidity, separate account performance, surrenders, operating expenses, investment returns, nonperformance risk adjustment and other factors. Actual experience on the purchased business may vary from these projections.
The recovery of DAC and VOBA is dependent upon the future profitability of the related business. DAC and VOBA are aggregated in the consolidated financial statements for reporting purposes.
The Company amortizes DAC for credit life insurance, property and casualty insurance and other short-duration contracts, which is primarily composed of commissions and certain underwriting expenses, in proportion to historic and future earned premium over the applicable contract term.
The Company amortizes DAC and VOBA on life insurance, accident and health and investment-type contracts in proportion to gross premiums, gross margins or gross profits, depending on the type of contract as described below.
The Company amortizes DAC and VOBA related to non-participating and non-dividend-paying traditional contracts (term insurance, non-participating whole life insurance, traditional group life insurance, non-medical health insurance, and accident and health insurance) over the appropriate premium paying period in proportion to the present value of actual historic and expected future gross premiums. The present value of expected premiums is based upon the premium requirement of each policy and assumptions for mortality, morbidity, persistency and investment returns at policy issuance, or policy acquisition (as it relates to VOBA), that include provisions for adverse deviation that are consistent with the assumptions used to calculate future policyholder benefit liabilities. These assumptions are not revised after policy issuance or acquisition unless the DAC or VOBA balance is deemed to be unrecoverable from future expected profits. Absent a premium deficiency, variability in amortization after policy issuance or acquisition is caused only by variability in premium volumes.
The Company amortizes DAC and VOBA related to participating, dividend-paying traditional contracts over the estimated lives of the contracts in proportion to actual and expected future gross margins. The amortization includes interest based on rates in effect at inception or acquisition of the contracts. The future gross margins are dependent principally on investment returns, policyholder dividend scales, mortality, persistency, expenses to administer the business, creditworthiness of reinsurance counterparties and certain economic variables, such as inflation. For participating contracts within the closed block (dividend paying traditional contracts) future gross
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margins are also dependent upon changes in the policyholder dividend obligation. Of these factors, the Company anticipates that investment returns, expenses, persistency and other factor changes, as well as policyholder dividend scales are reasonably likely to impact significantly the rate of DAC and VOBA amortization. Each reporting period, the Company updates the estimated gross margins with the actual gross margins for that period. When the actual gross margins change from previously estimated gross margins, the cumulative DAC and VOBA amortization is re-estimated and adjusted by a cumulative charge or credit to current operations. When actual gross margins exceed those previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when the actual gross margins are below the previously estimated gross margins. Each reporting period, the Company also updates the actual amount of business in-force, which impacts expected future gross margins. When expected future gross margins are below those previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when the expected future gross margins are above the previously estimated expected future gross margins. Each period, the Company also reviews the estimated gross margins for each block of business to determine the recoverability of DAC and VOBA balances.
The Company amortizes DAC and VOBA related to fixed and variable universal life contracts and fixed and variable deferred annuity contracts over the estimated lives of the contracts in proportion to actual and expected future gross profits. The amortization includes interest based on rates in effect at inception or acquisition of the contracts. The amount of future gross profits is dependent principally upon returns in excess of the amounts credited to policyholders, mortality, persistency, interest crediting rates, expenses to administer the business, creditworthiness of reinsurance counterparties, the effect of any hedges used and certain economic variables, such as inflation. Of these factors, the Company anticipates that investment returns, expenses and persistency are reasonably likely to impact significantly the rate of DAC and VOBA amortization. Each reporting period, the Company updates the estimated gross profits with the actual gross profits for that period. When the actual gross profits change from previously estimated gross profits, the cumulative DAC and VOBA amortization is re-estimated and adjusted by a cumulative charge or credit to current operations. When actual gross profits exceed those previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when the actual gross profits are below the previously estimated gross profits. Each reporting period, the Company also updates the actual amount of business remaining in-force, which impacts expected future gross profits. When expected future gross profits are below those previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when the expected future gross profits are above the previously estimated expected future gross profits. Each period, the Company also reviews the estimated gross profits for each block of business to determine the recoverability of DAC and VOBA balances.
Separate account rates of return on variable universal life contracts and variable deferred annuity contracts affect in-force account balances on such contracts each reporting period which can result in significant fluctuations in amortization of DAC and VOBA. Returns that are higher than the Company’s long-term expectation produce higher account balances, which increases the Company’s future fee expectations and decreases future benefit payment expectations on minimum death and living benefit guarantees, resulting in higher expected future gross profits. The opposite result occurs when returns are lower than the Company’s long-term expectation. The Company’s practice to determine the impact of gross profits resulting from returns on separate accounts assumes that long-term appreciation in equity markets is not changed by short-term market fluctuations, but is only changed when sustained interim deviations are expected. The Company monitors these events and only changes the assumption when its long-term expectation changes.
The Company also periodically reviews other long-term assumptions underlying the projections of estimated gross margins and profits. These include investment returns, policyholder dividend scales, interest crediting rates, mortality, persistency and expenses to administer business. Management annually updates assumptions used in
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the calculation of estimated gross margins and profits which may have significantly changed. If the update of assumptions causes expected future gross margins and profits to increase, DAC and VOBA amortization will decrease, resulting in a current period increase to earnings. The opposite result occurs when the assumption update causes expected future gross margins and profits to decrease.
Periodically, the Company modifies product benefits, features, rights or coverages that occur by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by election or coverage within a contract. If such modification, referred to as an internal replacement, substantially changes the contract, the associated DAC or VOBA is written off immediately through income and any new deferrable costs associated with the replacement contract are deferred. If the modification does not substantially change the contract, the DAC or VOBA amortization on the original contract will continue and any acquisition costs associated with the related modification are expensed.
Sales Inducements
The Company generally has two different types of sales inducements which are included in other assets: (i) the policyholder receives a bonus whereby the policyholder’s initial account balance is increased by an amount equal to a specified percentage of the customer’s deposit; and (ii) the policyholder receives a higher interest rate using a dollar cost averaging method than would have been received based on the normal general account interest rate credited. The Company defers sales inducements and amortizes them over the life of the policy using the same methodology and assumptions used to amortize DAC. The amortization of sales inducements is included in policyholder benefits and claims. Each year, or more frequently if circumstances indicate a potentially significant recoverability issue exists, the Company reviews the deferred sales inducements to determine the recoverability of these balances.
Value of Distribution Agreements and Customer Relationships Acquired
Value of distribution agreements acquired (“VODA”) is reported in other assets and represents the present value of expected future profits associated with the expected future business derived from the distribution agreements acquired as part of a business combination. Value of customer relationships acquired (“VOCRA”) is also reported in other assets and represents the present value of the expected future profits associated with the expected future business acquired through existing customers of the acquired company or business. The VODA and VOCRA associated with past acquisitions are amortized over useful lives ranging from 10 to 40 years and such amortization is included in other expenses. Each year, or more frequently if circumstances indicate a potentially significant recoverability issue exists, the Company reviews VODA and VOCRA to determine the recoverability of these balances.
Goodwill
Goodwill is the excess of cost over the estimated fair value of net assets acquired which represents the future economic benefits arising from such net assets acquired that could not be individually identified. Goodwill is not amortized but is tested for impairment at least annually or more frequently if events or circumstances, such as adverse changes in the business climate, indicate that there may be justification for conducting an interim test. The Company performs its annual goodwill impairment testing during the third quarter of each year based upon data as of the close of the second quarter. Goodwill associated with a business acquisition is not tested for impairment during the year the business is acquired unless there is a significant identified impairment event.
Impairment testing is performed using the fair value approach, which requires the use of estimates and judgment, at the “reporting unit” level. A reporting unit is the operating segment or a business one level below
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the operating segment, if discrete financial information is prepared and regularly reviewed by management at that level. For purposes of goodwill impairment testing, a significant portion of goodwill within Corporate & Other is allocated to reporting units within the Company’s segments.
For purposes of goodwill impairment testing, if the carrying value of a reporting unit exceeds its estimated fair value, there might be an indication of impairment. In such instances, the implied fair value of the goodwill is determined in the same manner as the amount of goodwill that would be determined in a business acquisition. The excess of the carrying value of goodwill over the implied fair value of goodwill would be recognized as an impairment and recorded as a charge against net income.
In performing the Company’s goodwill impairment tests, the estimated fair values of the reporting units are first determined using a market multiple approach. When further corroboration is required, the Company uses a discounted cash flow approach. For reporting units which are particularly sensitive to market assumptions, such as the annuities and life reporting units, the Company may use additional valuation methodologies to estimate the reporting units’ fair values.
The key inputs, judgments and assumptions necessary in determining estimated fair value of the reporting units include projected operating earnings, current book value (with and without accumulated other comprehensive income), the level of economic capital required to support the mix of business, long-term growth rates, comparative market multiples, the account value of in-force business, projections of new and renewal business, as well as margins on such business, the level of interest rates, credit spreads, equity market levels and the discount rate that the Company believes is appropriate for the respective reporting unit. The estimated fair values of the annuities and life reporting units are particularly sensitive to the equity market levels.
When testing goodwill for impairment, the Company also considers its market capitalization in relation to the aggregate estimated fair value of its reporting units.
The Company applies significant judgment when determining the estimated fair value of the Company’s reporting units and when assessing the relationship of market capitalization to the aggregate estimated fair value of its reporting units. The valuation methodologies utilized are subject to key judgments and assumptions that are sensitive to change. Estimates of fair value are inherently uncertain and represent only management’s reasonable expectation regarding future developments. These estimates and the judgments and assumptions upon which the estimates are based will, in all likelihood, differ in some respects from actual future results. Declines in the estimated fair value of the Company’s reporting units could result in goodwill impairments in future periods which could materially adversely affect the Company’s results of operations or financial position.
On an ongoing basis, the Company evaluates potential triggering events that may affect the estimated fair value of the Company’s reporting units to assess whether any goodwill impairment exists. Deteriorating or adverse market conditions for certain reporting units may have a significant impact on the estimated fair value of these reporting units and could result in future impairments of goodwill.
See Note 7 for discussion of goodwill impairment testing during 2011.
Liability for Future Policy Benefits and PABs
The Company establishes liabilities for amounts payable under insurance policies, including traditional life insurance, traditional annuities, certain accident and health, and non-medical health insurance. Generally, amounts are payable over an extended period of time and related liabilities are calculated as the present value of future expected benefits to be paid reduced by the present value of future expected premiums. Such liabilities are established based on methods and underlying assumptions in accordance with GAAP and applicable actuarial
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standards. Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, morbidity, policy lapse, renewal, retirement, disability incidence, disability terminations, investment returns, inflation, expenses and other contingent events as appropriate to the respective product type and geographical area. These assumptions are established at the time the policy is issued and are intended to estimate the experience for the period the policy benefits are payable. Utilizing these assumptions, liabilities are established on a block of business basis. For long duration insurance contracts, assumptions such as mortality, morbidity and interest rates are “locked in” upon the issuance of new business. However, significant adverse changes in experience on such contracts may require us to establish premium deficiency reserves. Such reserves are determined based on assumptions at the time the premium deficiency reserve is established and do not include a provision for adverse deviation.
Premium deficiency reserves may also be established for short duration contracts to provide for expected future losses. These reserves on short duration contracts are based on actuarial estimates of the amount of loss inherent in that period, including losses incurred for which claims have not been reported. The provisions for unreported claims are calculated using studies that measure the historical length of time between the incurred date of a claim and its eventual reporting to the company. Anticipated investment income is considered in the calculation of premium deficiency losses for short duration contracts.
Future policy benefit liabilities for participating traditional life insurance policies are equal to the aggregate of (i) net level premium reserves for death and endowment policy benefits (calculated based upon the non-forfeiture interest rate, ranging from 3% to 7% for domestic business and 1% to 18% for international business, and mortality rates guaranteed in calculating the cash surrender values described in such contracts); and (ii) the liability for terminal dividends for domestic business.
Participating business represented approximately 6% of the Company’s life insurance in-force at both December 31, 2011 and 2010. Participating policies represented approximately 21%, 26% and 28% of gross life insurance premiums for the years ended December 31, 2011, 2010 and 2009, respectively.
Future policy benefit liabilities for non-participating traditional life insurance policies are equal to the aggregate of the present value of expected future benefit payments and related expenses less the present value of expected future net premiums. Assumptions as to mortality and persistency are based upon the Company’s experience when the basis of the liability is established. Interest rate assumptions for the aggregate future policy benefit liabilities range from 2% to 10% for domestic business and 1% to 14% for international business.
Future policy benefit liabilities for individual and group traditional fixed annuities after annuitization are equal to the present value of expected future payments. Interest rate assumptions used in establishing such liabilities range from 2% to 11% for domestic business and 2% to 12% for international business.
Future policy benefit liabilities for non-medical health insurance, primarily related to domestic business, are calculated using the net level premium method and assumptions as to future morbidity, withdrawals and interest, which provide a margin for adverse deviation. Interest rate assumptions used in establishing such liabilities range from 4% to 7%.
Future policy benefit liabilities for disabled lives are estimated using the present value of benefits method and experience assumptions as to claim terminations, expenses and interest. Interest rate assumptions used in establishing such liabilities range from 2% to 9% for domestic business and 2% to 9% for international business.
Liabilities for unpaid claims and claim expenses for property and casualty insurance are included in future policyholder benefits and represent the amount estimated for claims that have been reported but not settled and claims incurred but not reported. Other policy-related balances include claims that have been reported but not
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settled and claims incurred but not reported on life and non-medical health insurance. Liabilities for unpaid claims are estimated based upon the Company’s historical experience and other actuarial assumptions that consider the effects of current developments, anticipated trends and risk management programs, reduced for anticipated salvage and subrogation. The effects of changes in such estimated liabilities are included in the results of operations in the period in which the changes occur.
Liabilities for universal and variable life secondary guarantees and paid-up guarantees are determined by estimating the expected value of death benefits payable when the account balance is projected to be zero and recognizing those benefits ratably over the accumulation period based on total expected assessments. The assumptions used in estimating the secondary and paid-up guarantee liabilities are consistent with those used for amortizing DAC, and are thus subject to the same variability and risk. The assumptions of investment performance and volatility for variable products are consistent with historical Standard & Poor’s (“S&P”) experience of the appropriate underlying equity index, such as the S&P 500 Index. The benefits used in calculating the liabilities are based on the average benefits payable over a range of scenarios.
Future policy benefit liabilities are established for certain variable annuity products with guaranteed minimum benefits as described below under “— Variable Annuity Guaranteed Minimum Benefits.”
The Company regularly reviews its estimates of actuarial liabilities for future policy benefits and compares them with its actual experience. Differences between actual experience and the assumptions used in pricing these policies and guarantees, and in the establishment of the related liabilities, result in changes in the additional liability balances with related charges or credits to benefit expenses in the period in which the changes occur.
PABs relate to investment-type contracts, universal life-type policies and certain guaranteed minimum benefits. Investment-type contracts principally include traditional individual fixed annuities in the accumulation phase and non-variable group annuity contracts. PABs for these contracts are equal to: (i) policy account values, which consist of an accumulation of gross premium payments and investment performance; (ii) credited interest, ranging from 1% to 13% for domestic business and 1% to 14% for international business, less expenses, mortality charges and withdrawals; and (iii) fair value adjustments relating to business combinations.
Variable Annuity Guaranteed Minimum Benefits
The Company issues, directly and through assumed reinsurance, certain variable annuity products with guaranteed minimum benefits that provide the policyholder a minimum return based on their initial deposit (i.e., the benefit base) less withdrawals. In some cases the benefit base may be increased by additional deposits, bonus amounts, accruals or optional market value resets. These guarantees are accounted for as insurance liabilities or as embedded derivatives depending on how and when the benefit is paid. Specifically, a guarantee is accounted for as an embedded derivative if a guarantee is paid without requiring (i) the occurrence of specific insurable event, or (ii) the policyholder to annuitize. Alternatively, a guarantee is accounted for as an insurance liability if the guarantee is paid only upon either (i) the occurrence of a specific insurable event, or (ii) annuitization. In certain cases, a guarantee may have elements of both an insurance liability and an embedded derivative and in such cases the guarantee is accounted for under a split of the two models.
These guarantees include:
• | Guaranteed minimum death benefit (“GMDB”) that guarantees the contractholder a return of their purchase payment upon death even if the account value is reduced to zero. An enhanced death benefit may be available for an additional fee. |
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• | GMIB that provides the contractholder, after a specified period of time determined at the time of issuance of the variable annuity contract, with a minimum accumulation of their purchase payments, even if the account value is reduced to zero, that can be annuitized to receive a monthly income stream that is not less than a specified amount. Certain of these contracts also provide for a guaranteed lump sum return of purchase premium in lieu of the annuitization benefit. |
• | Guaranteed minimum withdrawal benefits (“GMWB”) that guarantee the contractholder a return of their purchase payment via partial withdrawals, even if the account value is reduced to zero, provided that the contractholder’s cumulative withdrawals in a contract year do not exceed a certain limit. Certain of these contacts include guaranteed withdrawals that are life contingent. |
• | Guaranteed minimum accumulation benefits (“GMAB”) that provide the contractholder, after a specified period of time determined at the time of issuance of the variable annuity contract, with a minimum accumulation of their purchase payments even if the account value is reduced to zero. |
Guarantees accounted for as insurance liabilities in future policy benefits include GMDB, the portion of GMIB that require annuitization, and the life-contingent portion of certain GMWB. These liabilities are established as follows:
GMDB liabilities are determined by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected assessments. The assumptions used in estimating the GMDB liabilities are consistent with those used for amortizing DAC, and are thus subject to the same variability and risk. The assumptions of investment performance and volatility are consistent with the historical experience of the appropriate underlying equity index, such as the S&P 500 Index. The benefit assumptions used in calculating the liabilities are based on the average benefits payable over a range of scenarios.
GMIB liabilities are determined by estimating the expected value of the income benefits in excess of the projected account balance at any future date of annuitization and recognizing the excess ratably over the accumulation period based on total expected assessments. The assumptions used for estimating the GMIB liabilities are consistent with those used for estimating the GMDB liabilities. In addition, the calculation of guaranteed annuitization benefit liabilities incorporates an assumption for the percentage of the potential annuitizations that may be elected by the contractholder. Certain GMIB have settlement features that result in a portion of that guarantee being accounted for as an embedded derivative and are recorded in PABs as described below.
The liability for the life contingent portion of GMWB is determined based on the expected value of the life contingent payments and expected assessments using assumptions consistent with those used for estimating the GMDB liabilities.
Guarantees accounted for as embedded derivatives in PABs include the non life-contingent portion of GMWB, GMAB and the portion of certain GMIB that do not require annuitization. These guarantees are recorded at estimated fair value separately from the host variable annuity with changes in estimated fair value reported in net derivative gains (losses). 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.
The estimated fair values of these embedded derivatives are then determined based on the present value of projected future benefits minus the present value of projected future fees. The projections of future benefits and future fees require capital market and actuarial assumptions including expectations concerning policyholder
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behavior. A risk neutral valuation methodology is used under which the cash flows from the guarantees are projected under multiple capital market scenarios using observable risk free rates. The valuation of these embedded derivatives also includes an adjustment for the Company’s nonperformance risk and risk margins related to non-capital market inputs. The nonperformance adjustment, which is captured as a spread over the risk free rate in determining the discount rate to discount the cash flows of the liability, is determined by taking into consideration publicly available information relating to spreads in the secondary market for MetLife, Inc.’s debt, including related credit default swaps. These observable spreads are then adjusted, as necessary, to reflect the priority of these liabilities and the claims paying ability of the issuing insurance subsidiaries compared to MetLife, Inc. 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 in certain actuarial assumptions. 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, 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 the risk associated with certain of the GMIB and GMWB described in the preceding paragraphs. With respect to GMIB, a portion of the directly written GMIB guarantees that are accounted for as insurance (i.e., not as embedded derivatives) but where the reinsurance agreements contain embedded derivatives. These embedded derivatives are included in premiums, reinsurance, and other receivables in the consolidated balance sheet with changes in estimated fair value reported in net derivative gains (losses) or policyholder benefits and claims in the consolidated statements of operations, depending on the classification of the direct risk. 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.
Other Policy-Related Balances
Other policy-related balances include policy and contract claims, unearned revenue liabilities, premiums received in advance, negative VOBA, policyholder dividends due and unpaid and policyholder dividends left on deposit.
The liability for policy and contract claims generally relates to incurred but not reported death, disability, long-term care (“LTC”) and dental claims, as well as claims which have been reported but not yet settled. The liability for these claims is based on the Company’s estimated ultimate cost of settling all claims. The Company derives estimates for the development of incurred but not reported claims principally from actuarial analyses of historical patterns of claims and claims development for each line of business. The methods used to determine these estimates are continually reviewed. Adjustments resulting from this continuous review process and differences between estimates and payments for claims are recognized in policyholder benefits and claims expense in the period in which the estimates are changed or payments are made.
The unearned revenue liability relates to universal life-type and investment-type products and represents policy charges for services to be provided in future periods. The charges are deferred as unearned revenue and amortized using the product’s estimated gross profits and margins, similar to DAC. Such amortization is recorded in universal life and investment-type product policy fees.
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The Company accounts for the prepayment of premiums on its individual life, group life and health contracts as premium received in advance and applies the cash received to premiums when due.
For certain acquired blocks of business, the estimated fair value of the in-force contract obligations exceeded the book value of assumed in-force insurance policy liabilities, resulting in negative VOBA, which is presented separately from VOBA as an additional insurance liability. The fair value of the in-force contract obligations is based on actuarial determined projections by each block of business. Negative VOBA is amortized over the policy period in proportion to the approximate consumption of losses included in the liability usually expressed in terms of insurance in-force or account value. Such amortization is recorded as a contra-expense in other expenses in the consolidated statements of operations.
Also included in other policy-related balances are policyholder dividends due and unpaid on participating policies and policyholder dividends left on deposit. Such liabilities are presented at amounts contractually due to policyholders.
Recognition of Insurance Revenue and Related Benefits
Premiums related to traditional life and annuity policies with life contingencies and long-duration accident and health and credit insurance policies are recognized as revenues when due from policyholders. Policyholder benefits and expenses are provided against such revenues to recognize profits over the estimated lives of the policies. When premiums are due over a significantly shorter period than the period over which benefits are provided, any excess profit is deferred and recognized into operations in a constant relationship to insurance in-force or, for annuities, the amount of expected future policy benefit payments.
Premiums related to short-duration non-medical health and disability, accident and health, and certain credit life insurance contracts are recognized on a pro rata basis over the applicable contract term.
Deposits related to universal life-type and investment-type products are credited to PABs. Revenues from such contracts consist of amounts assessed against PABs for mortality, policy administration and surrender charges and are recorded in universal life and investment-type product policy fees in the period in which services are provided. Amounts that are charged to operations include interest credited and benefit claims incurred in excess of related PABs.
Premiums related to property and casualty contracts are recognized as revenue on a pro rata basis over the applicable contract term. Unearned premiums, representing the portion of premium written relating to the unexpired coverage, are also included in future policy benefits.
Premiums, policy fees, policyholder benefits and expenses are presented net of reinsurance.
The portion of fees allocated to embedded derivatives described previously is recognized within net derivative gains (losses) as part of the estimated fair value of embedded derivatives.
Other Revenues
Other revenues include, in addition to items described elsewhere herein, advisory fees, broker-dealer commissions and fees and administrative service fees. Such fees and commissions are recognized in the period in which services are performed. Other revenues also include changes in account value relating to corporate-owned life insurance (“COLI”). Under certain COLI contracts, if the Company reports certain unlikely adverse results in its consolidated financial statements, withdrawals would not be immediately available and would be subject to market value adjustment, which could result in a reduction of the account value.
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Policyholder Dividends
Policyholder dividends are approved annually by the insurance subsidiaries’ boards of directors. The aggregate amount of policyholder dividends is related to actual interest, mortality, morbidity and expense experience for the year, as well as management’s judgment as to the appropriate level of statutory surplus to be retained by the insurance subsidiaries.
Income Taxes
MetLife, Inc. and its includable life insurance and non-life insurance subsidiaries file a consolidated U.S. federal income tax return in accordance with the provisions of the Internal Revenue Code of 1986, as amended (the “Code”). Non-includable subsidiaries file either separate individual corporate tax returns or separate consolidated tax returns.
The Company’s accounting for income taxes represents management’s best estimate of various events and transactions.
Deferred tax assets and liabilities resulting from temporary differences between the financial reporting and tax bases of assets and liabilities are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse.
For U.S. federal income tax purposes, the Company made an election under Section 338 of the Code (the “Section 338 Election”) relating to the Acquisition. Pursuant to such election, the historical tax basis in the acquired assets and liabilities was adjusted to the fair market value as of the Acquisition Date resulting in a change to the related deferred income taxes. See Note 15.
The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryback or carryforward periods under the tax law in the applicable tax jurisdiction. Valuation allowances are established when management determines, based on available information, that it is more likely than not that deferred income tax assets will not be realized. Factors in management’s determination include the performance of the business and its ability to generate capital gains. Significant judgment is required in determining whether valuation allowances should be established, as well as the amount of such allowances. When making such determination, consideration is given to, among other things, the following:
(i) | future taxable income exclusive of reversing temporary differences and carryforwards; |
(ii) | future reversals of existing taxable temporary differences; |
(iii) | taxable income in prior carryback years; and |
(iv) | tax planning strategies. |
The Company may be required to change its provision for income taxes in certain circumstances. Examples of such circumstances include when estimates used in determining valuation allowances on deferred tax assets significantly change or when receipt of new information indicates the need for adjustment in valuation allowances. Additionally, future events, such as changes in tax laws, tax regulations, or interpretations of such laws or regulations, could have an impact on the provision for income tax and the effective tax rate. Any such changes could significantly affect the amounts reported in the consolidated financial statements in the year these changes occur.
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The Company determines whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Unrecognized tax benefits due to tax uncertainties that do not meet the threshold are included within other liabilities and are charged to earnings in the period that such determination is made.
The Company classifies interest recognized as interest expense and penalties recognized as a component of income tax.
Reinsurance
The Company enters into reinsurance agreements primarily as a purchaser of reinsurance for its various insurance products and also as a provider of reinsurance for some insurance products issued by third parties.
For each of its reinsurance agreements, the Company determines whether the agreement provides indemnification against loss or liability relating to insurance risk in accordance with applicable accounting standards. The Company reviews all contractual features, particularly those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims.
For reinsurance of existing in-force blocks of long-duration contracts that transfer significant insurance risk, the difference, if any, between the amounts paid (received), and the liabilities ceded (assumed) related to the underlying contracts is considered the net cost of reinsurance at the inception of the reinsurance agreement. The net cost of reinsurance is recorded as an adjustment to DAC and recognized as a component of other expenses on a basis consistent with the way the acquisition costs on the underlying reinsured contracts would be recognized. Subsequent amounts paid (received) on the reinsurance of in-force blocks, as well as amounts paid (received) related to new business, are recorded as ceded (assumed) premiums and ceded (assumed) future policy benefit liabilities are established.
For prospective reinsurance of short-duration contracts that meet the criteria for reinsurance accounting, amounts paid (received) are recorded as ceded (assumed) premiums and ceded (assumed) unearned premiums and are reflected as a component of premiums, reinsurance and other receivables (future policy benefits). Such amounts are amortized through earned premiums over the remaining contract period in proportion to the amount of protection provided. For retroactive reinsurance of short-duration contracts that meet the criteria of reinsurance accounting, amounts paid (received) in excess of (which do not exceed) the related insurance liabilities ceded (assumed) are recognized immediately as a loss. Any gains on such retroactive agreements are deferred and recorded in other liabilities. The gains are amortized primarily using the recovery method.
The assumptions used to account for both long and short-duration reinsurance agreements are consistent with those used for the underlying contracts. Ceded policyholder and contract related liabilities, other than those currently due, are reported gross on the balance sheet.
Amounts currently recoverable under reinsurance agreements are included in premiums, reinsurance and other receivables and amounts currently payable are included in other liabilities. Such assets and liabilities relating to reinsurance agreements with the same reinsurer may be recorded net on the balance sheet, if a right of offset exists within the reinsurance agreement. In the event that reinsurers do not meet their obligations to the Company under the terms of the reinsurance agreements, reinsurance balances recoverable could become uncollectible. In such instances, reinsurance recoverable balances are stated net of allowances for uncollectible reinsurance.
Premiums, fees and policyholder benefits and claims include amounts assumed under reinsurance agreements and are net of reinsurance ceded. Amounts received from reinsurers for policy administration are reported in other revenues.
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MetLife, Inc.
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If the Company determines that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company records the agreement using the deposit method of accounting. Deposits received are included in other liabilities and deposits made are included within premiums, reinsurance and other receivables. As amounts are paid or received, consistent with the underlying contracts, the deposit assets or liabilities are adjusted. Interest on such deposits is recorded as other revenues or other expenses, as appropriate. Periodically, the Company evaluates the adequacy of the expected payments or recoveries and adjusts the deposit asset or liability through other revenues or other expenses, as appropriate.
Accounting for reinsurance requires extensive use of assumptions and estimates, particularly related to the future performance of the underlying business and the potential impact of counterparty credit risks. The Company periodically reviews actual and anticipated experience compared to the aforementioned assumptions used to establish assets and liabilities relating to ceded and assumed reinsurance and evaluates the financial strength of counterparties to its reinsurance agreements using criteria similar to that evaluated in the security impairment process discussed previously.
Cessions under reinsurance agreements do not discharge the Company’s obligations as the primary insurer.
Employee Benefit Plans
Certain subsidiaries of MetLife, Inc. (the “Subsidiaries”) sponsor and/or administer various plans that provide defined benefit pension and other postretirement benefits covering eligible employees and sales representatives. Measurement dates used for all of the Subsidiaries’ defined benefit pension and other postretirement benefit plans correspond with the fiscal year ends of sponsoring Subsidiaries, which are December 31 for U.S. Subsidiaries and November 30 for most foreign Subsidiaries.
The U.S. pension benefits are provided utilizing either a traditional formula or cash balance formula. The traditional formula provides benefits based upon years of credited service and either final average or career average earnings. The cash balance formula utilizes hypothetical or notional accounts which credit participants with benefits equal to a percentage of eligible pay, as well as earnings credits, determined annually based upon the average annual rate of interest on 30-year U.S. Treasury securities, for each account balance. The non-U.S. pension plans generally provide benefits based either upon years of credited service and earnings preceding retirement or on points earned on job grades and other factors related to years of service.
The Subsidiaries also provide certain postemployment benefits and certain postretirement medical and life insurance benefits for retired employees. Employees of the Subsidiaries who were hired prior to 2003 (or, in certain cases, rehired during or after 2003) and meet age and service criteria while working for one of the Subsidiaries, may become eligible for these other postretirement benefits, at various levels, in accordance with the applicable plans. Virtually all retirees, or their beneficiaries, contribute a portion of the total cost of postretirement medical benefits. Employees hired after 2003 are not eligible for any employer subsidy for postretirement medical benefits.
The projected pension benefit obligation (“PBO”) is defined as the actuarially calculated present value of vested and non-vested pension benefits accrued based on future salary levels. The accumulated pension benefit obligation (“ABO”) is the actuarial present value of vested and non-vested pension benefits accrued based on current salary levels. Obligations, both PBO and ABO, of the defined benefit pension plans are determined using a variety of actuarial assumptions, from which actual results may vary, as described below.
The expected postretirement plan benefit obligations (“EPBO”) represent the actuarial present value of all other postretirement benefits expected to be paid after retirement to employees and their dependents and is used in measuring the periodic postretirement benefit expense. The accumulated postretirement plan benefit
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
obligations (“APBO”) represent the actuarial present value of future other postretirement benefits attributed to employee services rendered through a particular date and is the valuation basis upon which liabilities are established. The APBO is determined using a variety of actuarial assumptions, from which actual results may vary, as described below.
The Company recognizes the funded status of the PBO for pension plans and the APBO for other postretirement plans for each of its plans in the consolidated balance sheets. The actuarial gains or losses, prior service costs and credits and the remaining net transition asset or obligation that had not yet been included in net periodic benefit costs are charged, net of income tax, to accumulated other comprehensive income (loss).
Net periodic benefit cost is determined using management estimates and actuarial assumptions to derive service cost, interest cost, and expected return on plan assets for a particular year. Net periodic benefit cost also includes the applicable amortization of any prior service cost (credit) arising from the increase (decrease) in prior years’ benefit costs due to plan amendments or initiation of new plans. These costs are amortized into net periodic benefit cost over the expected service years of employees whose benefits are affected by such plan amendments. Actual experience related to plan assets and/or the benefit obligations may differ from that originally assumed when determining net periodic benefit cost for a particular period, resulting in gains or losses. To the extent such aggregate gains or losses exceed 10 percent of the greater of the benefit obligations or the market-related asset value of the plans, they are amortized into net periodic benefit cost over the expected service years of employees expected to receive benefits under the plans.
The obligations and expenses associated with these plans require an extensive use of assumptions such as the discount rate, expected rate of return on plan assets, rate of future compensation increases, healthcare cost trend rates, as well as assumptions regarding participant demographics such as rate and age of retirements, withdrawal rates and mortality. Management, in consultation with its external consulting actuarial firms, determines these assumptions based upon a variety of factors such as historical performance of the plan and its assets, currently available market and industry data and expected benefit payout streams. The assumptions used may differ materially from actual results due to, among other factors, changing market and economic conditions and changes in participant demographics. These differences may have a significant effect on the Company’s consolidated financial statements and liquidity.
The Subsidiaries also sponsor defined contribution savings and investment plans (“SIP”) for substantially all employees under which a portion of employee contributions is matched. Applicable matching contributions are made each payroll period. Accordingly, the Company recognizes compensation cost for current matching contributions. As all contributions are transferred currently as earned to the SIP trust, no liability for matching contributions is recognized in the consolidated balance sheets.
Stock-Based Compensation
As more fully described in Note 18, the Company grants certain employees and directors stock-based compensation awards under various plans that are subject to specific vesting conditions. The cost of all stock-based transactions is measured at fair value at grant date and recognized over the period during which a grantee is required to provide goods or services in exchange for the award. Although the terms of the Company’s stock-based plans do not accelerate vesting upon retirement, or the attainment of retirement eligibility, the requisite service period subsequent to attaining such eligibility is considered nonsubstantive. Accordingly, the Company recognizes compensation expense related to stock-based awards over the shorter of the requisite service period or the period to attainment of retirement eligibility. An estimation of future forfeitures of stock-based awards is incorporated into the determination of compensation expense when recognizing expense over the requisite service period.
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Notes to the Consolidated Financial Statements — (Continued)
Foreign Currency
Assets, liabilities and operations of foreign affiliates and subsidiaries are recorded based on the functional currency of each entity. The determination of the functional currency is made based on the appropriate economic and management indicators. With the exception of certain foreign operations, primarily Japan, where multiple functional currencies exist, the local currencies of foreign operations are the functional currencies. Assets and liabilities of foreign affiliates and subsidiaries are translated from the functional currency to U.S. dollars at the exchange rates in effect at each year-end and income and expense accounts are translated at the average rates of exchange prevailing during the year. The resulting translation adjustments are charged or credited directly to other comprehensive income or loss, net of applicable taxes. Gains and losses from foreign currency transactions, including the effect of re-measurement of monetary assets and liabilities to the appropriate functional currency, are reported as part of net investment gains (losses) in the period in which they occur.
Discontinued Operations
The results of operations of a component of the Company that either has been disposed of or is classified as held-for-sale are reported in discontinued operations if the operations and cash flows of the component have been or will be eliminated from the ongoing operations of the Company as a result of the disposal transaction and the Company will not have any significant continuing involvement in the operations of the component after the disposal transaction.
Earnings Per Common Share
Basic earnings per common share are computed based on the weighted average number of common shares, or their equivalent, outstanding during the period. The difference between the number of shares assumed issued and number of shares assumed purchased represents the dilutive shares. Diluted earnings per common share include the dilutive effect of the assumed: (i) exercise or issuance of stock-based awards using the treasury stock method; (ii) settlement of stock purchase contracts underlying common equity units using the treasury stock method; and (iii) settlement of accelerated common stock repurchase contracts. Under the treasury stock method, exercise or issuance of stock-based awards and settlement of the stock purchase contracts underlying common equity units is assumed to occur with the proceeds used to purchase common stock at the average market price for the period. See Notes 14, 18 and 20.
Litigation Contingencies
The Company is a party to a number of legal actions and is involved in a number of regulatory investigations. Given the inherent unpredictability of these matters, it is difficult to estimate the impact on the Company’s financial position. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Except as otherwise disclosed in Note 16, legal costs are recognized in other expenses as incurred. On a quarterly and annual basis, the Company reviews relevant information with respect to liabilities for litigation, regulatory investigations and litigation-related contingencies to be reflected in the Company’s consolidated financial statements. It is possible that an adverse outcome in certain of the Company’s litigation and regulatory investigations, or the use of different assumptions in the determination of amounts recorded, could have a material effect upon the Company’s consolidated net income or cash flows in particular quarterly or annual periods.
Separate Accounts
Separate accounts are established in conformity with insurance laws and are generally not chargeable with liabilities that arise from any other business of the Company. Separate account assets are subject to general account claims only to the extent the value of such assets exceeds the separate account liabilities. Assets within
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
the Company’s separate accounts primarily include: mutual funds, fixed maturity and equity securities, mortgage loans, derivatives, hedge funds, other limited partnership interests, short-term investments and cash and cash equivalents. The Company reports separately, as assets and liabilities, investments held in separate accounts and liabilities of the separate accounts if (i) such separate accounts are legally recognized; (ii) assets supporting the contract liabilities are legally insulated from the Company’s general account liabilities; (iii) investments are directed by the contractholder; and (iv) all investment performance, net of contract fees and assessments, is passed through to the contractholder. The Company reports separate account assets meeting such criteria at their fair value which is based on the estimated fair values of the underlying assets comprising the portfolios of an individual separate account. Investment performance (including investment income, net investment gains (losses) and changes in unrealized gains (losses)) and the corresponding amounts credited to contractholders of such separate accounts are offset within the same line in the consolidated statements of operations. Separate accounts credited with a contractual investment return are combined on a line-by-line basis with the Company’s general account assets, liabilities, revenues and expenses and the accounting for these investments is consistent with the methodologies described herein for similar financial instruments held within the general account. Unit-linked separate account investments which are directed by contractholders but do not meet one or more of the other above criteria are included in trading and other securities.
The Company’s revenues reflect fees charged to the separate accounts, including mortality charges, risk charges, policy administration fees, investment management fees and surrender charges. Such fees are included in universal life and investment-type product policy fees in the consolidated statements of operations.
Adoption of New Accounting Pronouncements
Financial Instruments
Effective January 1, 2012, the Company adopted new guidance regarding effective control in repurchase agreements. The guidance removes from the assessment of effective control, the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets. The adoption did not have a material impact on the Company’s consolidated financial statements.
Effective July 1, 2011, the Company adopted new guidance regarding accounting for troubled debt restructurings. This guidance clarifies whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for the purpose of determining when a restructuring constitutes a troubled debt restructuring. Additionally, the guidance prohibits creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower. The adoption did not have a material impact on the Company’s consolidated financial statements. See also expanded disclosures in Note 3.
Effective January 1, 2011, the Company adopted new guidance regarding accounting for investment funds determined to be VIEs. Under this guidance, an insurance entity would not be required to consolidate a voting-interest investment fund when it holds the majority of the voting interests of the fund through its separate accounts. In addition, an insurance entity would not consider the interests held through separate accounts for the benefit of policyholders in the insurer’s evaluation of its economic interest in a VIE, unless the separate account contractholder is a related party. The adoption did not have a material impact on the Company’s consolidated financial statements.
Effective December 31, 2010, the Company adopted guidance regarding disclosures about the credit quality of financing receivables and valuation allowances for credit losses, including credit quality indicators. Such disclosures must be disaggregated by portfolio segment or class based on how a company develops its valuation allowances for credit losses and how it manages its credit exposure. The Company has provided all material required disclosures in its consolidated financial statements.
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Effective July 1, 2010, the Company adopted guidance regarding accounting for embedded credit derivatives within structured securities. This guidance clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Specifically, embedded credit derivatives resulting only from subordination of one financial instrument to another continue to qualify for the scope exception. Embedded credit derivative features other than subordination must be analyzed to determine whether they require bifurcation and separate accounting. As a result of the adoption of this guidance, the Company elected FVO for certain structured securities that were previously accounted for as fixed maturity securities. Upon adoption, the Company reclassified $50 million of securities from fixed maturity securities to trading and other securities. These securities had cumulative unrealized losses of $10 million, net of income tax, which was recognized as a cumulative effect adjustment to decrease retained earnings with a corresponding increase to accumulated other comprehensive income (loss) as of July 1, 2010.
Effective January 1, 2010, the Company adopted guidance related to financial instrument transfers and consolidation of VIEs. The financial instrument transfer guidance eliminates the concept of a qualified special purpose entity (“QSPE”), eliminates the guaranteed mortgage securitization exception, changes the criteria for achieving sale accounting when transferring a financial asset and changes the initial recognition of retained beneficial interests. The new consolidation guidance changes the definition of the primary beneficiary, as well as the method of determining whether an entity is a primary beneficiary of a VIE from a quantitative model to a qualitative model. Under the new qualitative model, the entity that has both the ability to direct the most significant activities of the VIE and the obligation to absorb losses or receive benefits that could be significant to the VIE is considered to be the primary beneficiary of the VIE. The guidance requires a quarterly reassessment, as well as enhanced disclosures, including the effects of a company’s involvement with VIEs on its financial statements.
As a result of the adoption of this guidance, the Company consolidated certain former QSPEs that were previously accounted for as fixed maturity CMBS and equity security collateralized debt obligations. The Company also elected FVO for all of the consolidated assets and liabilities of these entities. Upon consolidation, the Company recorded $278 million of securities classified as trading and other securities, $6.8 billion of commercial mortgage loans and $6.8 billion of long-term debt based on estimated fair values at January 1, 2010 and de-recognized $179 million in fixed maturity securities and less than $1 million in equity securities. The consolidation also resulted in a decrease in retained earnings of $12 million, net of income tax, and an increase in accumulated other comprehensive income (loss) of $42 million, net of income tax, at January 1, 2010. For the year ended December 31, 2010, the Company recorded $426 million of net investment income on the consolidated assets, $411 million of interest expense in other expenses on the related long-term debt, and $6 million in net investment gains (losses) to remeasure the assets and liabilities at their estimated fair values.
In addition, the Company also deconsolidated certain partnerships for which the Company does not have the power to direct activities and for which the Company has concluded it is no longer the primary beneficiary. These deconsolidations did not result in a cumulative effect adjustment to retained earnings and did not have a material impact on the Company’s consolidated financial statements.
Also effective January 1, 2010, the Company adopted guidance that indefinitely defers the above changes relating to the Company’s interests in entities that have all the attributes of an investment company or for which it is industry practice to apply measurement principles for financial reporting that are consistent with those applied by an investment company. As a result of the deferral, the above guidance did not apply to certain real estate joint ventures and other limited partnership interests held by the Company.
Effective April 1, 2009, the Company adopted OTTI guidance. This guidance amends the previously used methodology for determining whether an OTTI exists for fixed maturity securities, changes the presentation of OTTI for fixed maturity securities and requires additional disclosures for OTTI on fixed maturity and equity
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
securities in interim and annual financial statements. The Company’s net cumulative effect adjustment of adopting the OTTI guidance was an increase of $76 million to retained earnings with a corresponding increase to accumulated other comprehensive loss to reclassify the noncredit loss portion of previously recognized OTTI losses on fixed maturity securities held at April 1, 2009. This cumulative effect adjustment was comprised of an increase in the amortized cost basis of fixed maturity securities of $126 million, net of policyholder related amounts of $10 million and net of deferred income taxes of $40 million, resulting in the net cumulative effect adjustment of $76 million. The increase in the amortized cost basis of fixed maturity securities of $126 million by sector was as follows: $53 million — ABS, $43 million — RMBS, $17 million — U.S. corporate securities and $13 million — CMBS. As a result of the adoption of the OTTI guidance, the Company’s pre-tax earnings for the year ended December 31, 2009 increased by $857 million, offset by an increase in other comprehensive loss representing OTTI relating to noncredit losses recognized during the year ended December 31, 2009.
Effective January 1, 2009, the Company adopted guidance on disclosures about derivative instruments and hedging. This guidance requires enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments and disclosures about credit risk-related contingent features in derivative agreements. The Company has provided all of the material disclosures in its consolidated financial statements.
Effective January 1, 2009, the Company adopted prospectively an update on accounting for transfers of financial assets and repurchase financing transactions. This update provides guidance for evaluating whether to account for a transfer of a financial asset and repurchase financing as a single transaction or as two separate transactions. The adoption did not have a material impact on the Company’s consolidated financial statements.
Business Combinations and Noncontrolling Interests
Effective January 1, 2011, the Company adopted new guidance that addresses when a business combination should be assumed to have occurred for the purpose of providing pro forma disclosure. Under the new guidance, if an entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The guidance also expands the supplemental pro forma disclosures to include additional narratives. The adoption did not have an impact on the Company’s consolidated financial statements.
Effective January 1, 2009, the Company adopted revised guidance on business combinations and accounting for noncontrolling interests in the consolidated financial statements. Under this guidance:
• | All business combinations (whether full, partial or “step” acquisitions) result in all assets and liabilities of an acquired business being recorded at fair value, with limited exceptions. |
• | Acquisition costs are generally expensed as incurred; restructuring costs associated with a business combination are generally expensed as incurred subsequent to the acquisition date. |
• | The fair value of the purchase price, including the issuance of equity securities, is determined on the acquisition date. |
• | Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value if the acquisition-date fair value can be reasonably determined. If the fair value is not estimable, an asset or liability is recorded if existence or incurrence at the acquisition date is probable and its amount is reasonably estimable. |
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• | Changes in deferred income tax asset valuation allowances and income tax uncertainties after the acquisition date generally affect income tax expense. |
• | Noncontrolling interests (formerly known as “minority interests”) are valued at fair value at the acquisition date and are presented as equity rather than liabilities. |
• | Net income (loss) includes amounts attributable to noncontrolling interests. |
• | When control is attained on previously noncontrolling interests, the previously held equity interests are remeasured at fair value and a gain or loss is recognized. |
• | Purchases or sales of equity interests that do not result in a change in control are accounted for as equity transactions. |
• | When control is lost in a partial disposition, realized gains or losses are recorded on equity ownership sold and the remaining ownership interest is remeasured and holding gains or losses are recognized. |
The adoption of this guidance on a prospective basis did not have an impact on the Company’s consolidated financial statements.
Effective January 1, 2009, the Company adopted prospectively guidance on determination of the useful life of intangible assets. This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This change is intended to improve the consistency between the useful life of a recognized intangible asset and the period of expected future cash flows used to measure the fair value of the asset. The Company determines useful lives and provides all of the material disclosures prospectively on intangible assets acquired on or after January 1, 2009 in accordance with this guidance.
Fair Value
Effective January 1, 2012, the Company adopted new guidance regarding fair value measurements that establishes common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards (“IFRS”). Some of the amendments clarify the Financial Accounting Standards Board’s (“FASB”) intent on the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The adoption did not have a material impact on the Company’s consolidated financial statements.
Effective January 1, 2010, the Company adopted guidance that requires disclosures about significant transfers into and/or out of Levels 1 and 2 of the fair value hierarchy and activity in Level 3. In addition, this guidance provides clarification of existing disclosure requirements about level of disaggregation and inputs and valuation techniques. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.
The following pronouncements relating to fair value had no material impact on the Company’s consolidated financial statements:
• | Effective January 1, 2009, the Company implemented fair value measurements guidance for certain nonfinancial assets and liabilities that are recorded at fair value on a non-recurring basis. This guidance applies to such items as: (i) nonfinancial assets and nonfinancial liabilities initially measured at estimated fair value in a business combination; (ii) reporting units measured at estimated fair value in the first step of a goodwill impairment test; and (iii) indefinite-lived intangible assets measured at estimated fair value for impairment assessment. |
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
• | Effective January 1, 2009, the Company adopted prospectively guidance on issuer’s accounting for liabilities measured at fair value with a third-party credit enhancement. This guidance states that an issuer of a liability with a third-party credit enhancement should not include the effect of the credit enhancement in the fair value measurement of the liability. In addition, it requires disclosures about the existence of any third-party credit enhancement related to liabilities that are measured at fair value. |
• | Effective April 1, 2009, the Company adopted guidance on: (i) estimating the fair value of an asset or liability if there was a significant decrease in the volume and level of trading activity for these assets or liabilities; and (ii) identifying transactions that are not orderly. The Company has provided all of the material disclosures in its consolidated financial statements. |
• | Effective December 31, 2009, the Company adopted guidance on: (i) measuring the fair value of investments in certain entities that calculate NAV per share; (ii) how investments within its scope would be classified in the fair value hierarchy; and (iii) enhanced disclosure requirements, for both interim and annual periods, about the nature and risks of investments measured at fair value on a recurring or non-recurring basis. |
• | Effective December 31, 2009, the Company adopted guidance on measuring liabilities at fair value. This guidance provides clarification for measuring fair value in circumstances in which a quoted price in an active market for the identical liability is not available. In such circumstances a company is required to measure fair value using either a valuation technique that uses: (i) the quoted price of the identical liability when traded as an asset; or (ii) quoted prices for similar liabilities or similar liabilities when traded as assets; or (iii) another valuation technique that is consistent with the principles of fair value measurement such as an income approach (e.g., present value technique) or a market approach (e.g., “entry” value technique). |
Deferred Policy Acquisition Costs
On January 1, 2012, the Company adopted new guidance regarding accounting for DAC, which was applied retrospectively. The guidance specifies that only costs related directly to successful acquisition of new or renewal contracts can be capitalized as DAC; all other acquisition-related costs must be expensed as incurred. Under the new guidance, advertising costs may only be included in DAC if the capitalization criteria in the direct-response advertising guidance in Subtopic 340-20, Other Assets and Deferred Costs — Capitalized Advertising Costs, are met. As a result, certain direct marketing, sales manager compensation and administrative costs previously capitalized by the Company will no longer be deferred.
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The following table presents the effects of the retrospective application of the adoption of such new accounting guidance to the Company’s previously reported consolidated balance sheets:
As Previously Reported | Adjustment | As Adjusted | ||||||||||||||||||||||
December 31, | December 31, | December 31, | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Other invested assets, principally at estimated fair value | $ | 23,628 | $ | 15,430 | $ | (47 | ) | $ | (30 | ) | $ | 23,581 | $ | 15,400 | ||||||||||
Deferred policy acquisition costs and value of business acquired (1) | $ | 27,971 | $ | 27,092 | $ | (3,352 | ) | $ | (2,627 | ) | $ | 24,619 | $ | 24,465 | ||||||||||
Liabilities | ||||||||||||||||||||||||
Future policy benefits | $ | 184,252 | $ | 170,912 | $ | 23 | $ | 10 | $ | 184,275 | $ | 170,922 | ||||||||||||
Deferred income tax liability | $ | 7,535 | $ | 1,856 | $ | (1,140 | ) | $ | (889 | ) | $ | 6,395 | $ | 967 | ||||||||||
Equity | ||||||||||||||||||||||||
Retained earnings | $ | 27,289 | $ | 21,363 | $ | (2,475 | ) | $ | (1,917 | ) | $ | 24,814 | $ | 19,446 | ||||||||||
Accumulated other comprehensive income (loss) | $ | 5,886 | $ | 1,000 | $ | 197 | $ | 145 | $ | 6,083 | $ | 1,145 | ||||||||||||
Total MetLife, Inc.’s stockholders’ equity | $ | 59,797 | $ | 48,625 | $ | (2,278 | ) | $ | (1,772 | ) | $ | 57,519 | $ | 46,853 | ||||||||||
Noncontrolling interests | $ | 374 | $ | 371 | $ | (4 | ) | $ | (6 | ) | $ | 370 | $ | 365 | ||||||||||
Total equity | $ | 60,171 | $ | 48,996 | $ | (2,282 | ) | $ | (1,778 | ) | $ | 57,889 | $ | 47,218 |
(1) | Value of business acquired was not impacted by the adoption of this guidance. |
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The following table presents the effects of the retrospective application of the adoption of such new accounting guidance to the Company’s previously reported consolidated statements of operations:
As Previously Reported | Adjustment | As Adjusted | ||||||||||||||||||||||||||||||||||
Years Ended December 31, | Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | ||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||||||
Net investment income | $ | 19,601 | (1) | $ | 17,505 | (1) | $ | 14,735 | (1) | $ | (15 | ) | $ | (11 | ) | $ | (6 | ) | $ | 19,586 | $ | 17,494 | $ | 14,729 | ||||||||||||
Expenses | ||||||||||||||||||||||||||||||||||||
Policyholder benefits and claims | $ | 35,457 | $ | 29,185 | $ | 28,003 | $ | 14 | $ | 2 | $ | 2 | $ | 35,471 | $ | 29,187 | $ | 28,005 | ||||||||||||||||||
Other expenses | $ | 17,730 | $ | 12,764 | $ | 10,521 | $ | 807 | $ | 163 | $ | 240 | $ | 18,537 | $ | 12,927 | $ | 10,761 | ||||||||||||||||||
Income (loss) from continuing operations before provision for income tax | $ | 10,021 | (1) | $ | 3,906 | (1) | $ | (4,367 | ) (1) | $ | (836 | ) | $ | (176 | ) | $ | (248 | ) | $ | 9,185 | $ | 3,730 | $ | (4,615 | ) | |||||||||||
Provision for income tax expense (benefit) | $ | 3,073 | (1) | $ | 1,163 | (1) | $ | (2,027 | ) (1) | $ | (280 | ) | $ | (53 | ) | $ | (79 | ) | $ | 2,793 | $ | 1,110 | $ | (2,106 | ) | |||||||||||
Income (loss) from continuing operations, net of income tax | $ | 6,948 | (1) | $ | 2,743 | (1) | $ | (2,340 | ) (1) | $ | (556 | ) | $ | (123 | ) | $ | (169 | ) | $ | 6,392 | $ | 2,620 | $ | (2,509 | ) | |||||||||||
Net income (loss) | $ | 6,971 | $ | 2,786 | $ | (2,278 | ) | $ | (556 | ) | $ | (123 | ) | $ | (169 | ) | $ | 6,415 | $ | 2,663 | $ | (2,447 | ) | |||||||||||||
Less: Net income (loss) attributable to noncontrolling interests | $ | (10 | ) | $ | (4 | ) | $ | (32 | ) | $ | 2 | $ | — | $ | (4 | ) | $ | (8 | ) | $ | (4 | ) | $ | (36 | ) | |||||||||||
Net income (loss) attributable to MetLife, Inc. | $ | 6,981 | $ | 2,790 | $ | (2,246 | ) | $ | (558 | ) | $ | (123 | ) | $ | (165 | ) | $ | 6,423 | $ | 2,667 | $ | (2,411 | ) | |||||||||||||
Net income (loss) available to MetLife, Inc.’s common shareholders | $ | 6,713 | $ | 2,668 | $ | (2,368 | ) | $ | (558 | ) | $ | (123 | ) | $ | (165 | ) | $ | 6,155 | $ | 2,545 | $ | (2,533 | ) | |||||||||||||
Income (loss) from continuing operations, net of income tax, available to MetLife, Inc.’s common shareholders per common share: | ||||||||||||||||||||||||||||||||||||
Basic | $ | 6.32 | $ | 2.98 | $ | (2.96 | ) | $ | (0.53 | ) | $ | (0.15 | ) | $ | (0.21 | ) | $ | 5.79 | $ | 2.83 | $ | (3.17 | ) | |||||||||||||
Diluted | $ | 6.27 | $ | 2.96 | $ | (2.96 | ) | $ | (0.53 | ) | $ | (0.15 | ) | $ | (0.21 | ) | $ | 5.74 | $ | 2.81 | $ | (3.17 | ) | |||||||||||||
Net income (loss) available to MetLife, Inc.’s common shareholders per common share: | ||||||||||||||||||||||||||||||||||||
Basic | $ | 6.34 | $ | 3.02 | $ | (2.89 | ) | $ | (0.53 | ) | $ | (0.14 | ) | $ | (0.20 | ) | $ | 5.81 | $ | 2.88 | $ | (3.09 | ) | |||||||||||||
Diluted | $ | 6.29 | $ | 3.00 | $ | (2.89 | ) | $ | (0.53 | ) | $ | (0.14 | ) | $ | (0.20 | ) | $ | 5.76 | $ | 2.86 | $ | (3.09 | ) |
(1) | Amounts in the table above differ from the amounts previously reported in the consolidated statements of operations due to the inclusion of the impact of discontinued real estate operations of $3 million ($5 million net investment income, net of $2 million income tax), $4 million ($6 million net investment income, net of $2 million income tax), and $4 million ($6 million net investment income, net of $2 million income tax), for the years ended December 31, 2011, 2010 and 2009, respectively. |
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The following table presents the effects of the retrospective application of the adoption of such new accounting guidance to the Company’s previously reported consolidated statements of cash flows:
As Previously Reported | Adjustment | As Adjusted | ||||||||||||||||||||||||||||||||||
Years Ended December 31, | Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | ||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||
Cash flows from operating activities | ||||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 6,971 | $ | 2,786 | $ | (2,278 | ) | $ | (556 | ) | $ | (123 | ) | $ | (169 | ) | $ | 6,415 | $ | 2,663 | $ | (2,447 | ) | |||||||||||||
Change in deferred policy acquisition costs, net | $ | (1,397 | ) | $ | (541 | ) | $ | (1,837 | ) | $ | 806 | $ | 171 | $ | 228 | $ | (591 | ) | $ | (370 | ) | $ | (1,609 | ) | ||||||||||||
Change in income tax recoverable (payable) | $ | 2,022 | $ | 1,292 | $ | (2,614 | ) | $ | (280 | ) | $ | (61 | ) | $ | (67 | ) | $ | 1,742 | $ | 1,231 | $ | (2,681 | ) | |||||||||||||
Change in insurance-related liabilities and policy-related balances | $ | 7,068 | $ | 6,489 | $ | 6,401 | $ | 13 | $ | 2 | $ | 2 | $ | 7,081 | $ | 6,491 | $ | 6,403 | ||||||||||||||||||
Cash flows from investing activities | ||||||||||||||||||||||||||||||||||||
Net change in other invested assets | $ | (36 | ) | $ | 137 | $ | 1,388 | $ | 17 | $ | 11 | $ | 6 | $ | (19 | ) | $ | 148 | $ | 1,394 |
Defined Benefit and Other Postretirement Plans
Effective December 31, 2011, the Company adopted guidance regarding enhanced disclosures for employers’ participation in multiemployer pension plans. The revised disclosures require additional qualitative and quantitative information about the employer’s involvement in significant multiemployer pension and other postretirement plans. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.
Effective December 31, 2009, the Company adopted guidance to enhance the transparency surrounding the types of assets and associated risks in an employer’s defined benefit pension or other postretirement benefit plans. This guidance requires an employer to disclose information about the valuation of plan assets similar to that required under other fair value disclosure guidance. The Company provided all of the material disclosures in its consolidated financial statements.
Other Pronouncements
Effective January 1, 2012, the Company adopted new guidance regarding comprehensive income that defers the effective date pertaining to reclassification adjustments out of accumulated other comprehensive income. The amendments in this guidance are being made to allow the FASB time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in the new comprehensive income standard are not affected by this guidance, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements on an annual basis.
On January 1, 2012, the Company adopted new guidance regarding comprehensive income, which was applied retrospectively, that provides companies with the option to present the total of comprehensive income, components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements in annual financial statements. The objective of the standard is to increase the prominence of items reported in other comprehensive income and to facilitate convergence of GAAP and IFRS. The standard eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this guidance do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified in net income. The Company adopted the two-statement approach for annual statements in the first quarter of 2012.
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Effective January 1, 2012, the Company adopted new guidance on goodwill impairment testing that simplifies how an entity tests goodwill for impairment. This new guidance allows an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it needs to perform the quantitative two-step goodwill impairment test. Only if an entity determines, based on qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying value will it be required to calculate the fair value of the reporting unit. The adoption did not have a material impact on the Company’s consolidated financial statements.
Effective January 1, 2011, the Company adopted new guidance regarding goodwill impairment testing. This guidance modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity would be required to perform Step 2 of the test if qualitative factors indicate that it is more likely than not that goodwill impairment exists. The adoption did not have an impact on the Company’s consolidated financial statements.
Effective April 1, 2009, the Company adopted prospectively guidance which establishes general standards for accounting and disclosures of events that occur subsequent to the balance sheet date but before financial statements are issued or available to be issued. The Company has provided all of the material disclosures in its consolidated financial statements.
Effective January 1, 2009, the Company adopted guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. This guidance provides a framework for evaluating the terms of a particular instrument and whether such terms qualify the instrument as being indexed to an entity’s own stock. The adoption did not have a material impact on the Company’s consolidated financial statements.
Future Adoption of New Accounting Pronouncements
In December 2011, the FASB issued new guidance regarding balance sheet offsetting disclosures (Accounting Standards Update (“ASU”) 2011-11,Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities), effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The guidance should be applied retrospectively for all comparative periods presented. The amendments in ASU 2011-11 require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effects of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The objective of ASU 2011-11 is to facilitate comparison between those entities that prepare their financial statements on the basis of GAAP and those entities that prepare their financial statements on the basis of IFRS. The Company is currently evaluating the impact of this guidance on its consolidated financial statements and related disclosures.
In December 2011, the FASB issued new guidance regarding derecognition of in substance real estate (ASU 2011-10 Property, Plant and Equipment (Topic 360): Derecognition of in Substance Real Estate — a Scope Clarification (a consensus of the FASB Emerging Issues Task Force), effective for fiscal years, and interim periods within those fiscal years, beginning on or after June 15, 2012. The amendments should be applied prospectively to deconsolidation events occurring after the effective date. Under the amendments in ASU 2011-10, when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of a default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
In July 2011, the FASB issued new guidance on other expenses (ASU 2011-06,Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers), effective for calendar years beginning after December 31, 2013. The objective of this standard is to address how health insurers should recognize and classify in their income statements fees mandated by the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act. The amendments in this standard specify that the liability for the fee should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using the straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
2. Acquisitions and Dispositions
Pending Dispositions
In December 2011, MetLife Bank National Association (“MetLife Bank”) and MetLife, Inc. entered into a definitive agreement to sell most of the depository business of MetLife Bank. The transaction is expected to close in the second quarter of 2012, subject to certain regulatory approvals and other customary closing conditions. Additionally, in January 2012, MetLife, Inc. announced it is exiting the business of originating forward residential mortgages. In conjunction with these events, for the year ended December 31, 2011, the Company recorded charges totaling $212 million, net of income tax, which included intent-to-sell OTTI investment charges, charges related to the de-designation of certain cash flow hedges, a goodwill impairment charge and other employee-related charges. In addition, the Company expects to incur additional charges of $90 million to $110 million, net of income tax, during 2012, related to exiting the forward residential mortgage origination business. The total assets and liabilities recorded in the consolidated balance sheet related to these two businesses as of December 31, 2011 were approximately $11.0 billion and $10.0 billion, respectively. These transactions did not qualify for discontinued operations accounting treatment under GAAP. See Notes 3, 7 and 24.
In November 2011, the Company entered into an agreement to sell its insurance operations in the Caribbean region, Panama and Costa Rica (the “Caribbean Business”). The total assets and liabilities recorded in the consolidated balance sheet related to these insurance operations as of December 31, 2011 were $859 million and $707 million, respectively. Related to the pending sale, the Company recorded a loss of $21 million, net of income tax, which included intent-to-sell OTTI investment charges, during the year ended December 31, 2011. The sale is expected to close in the second quarter of 2012 subject to regulatory approval and other customary closing conditions. The results of the Caribbean Business are included in continuing operations.
2011 Dispositions
On April 1, 2011, the Company sold its 50% interest in Mitsui Sumitomo MetLife Insurance Co., Ltd. (“MSI MetLife”), a Japan domiciled life insurance company, to its joint venture partner, MS&AD Insurance Group Holdings, Inc. (“MS&AD”), for $269 million (¥22.5 billion) in cash consideration, less $4 million (¥310 million) to reimburse MS&AD for specific expenses incurred related to the transaction. The accumulated other comprehensive losses in the foreign currency translation adjustment component of equity resulting from the hedges of the Company’s investment in the joint venture of $46 million, net of income tax, were released upon sale but did not impact net income for year ended December 31, 2011 as such losses were considered in the overall impairment evaluation of the investment prior to the sale. During the years ended December 31, 2011 and 2010, the Company recorded a loss of $57 million and $136 million, net of income tax, respectively, in net investment gains (losses) within the consolidated statements of operations related to the sale. The Company’s operating earnings relating to its investment in MSI MetLife were included in the Asia segment.
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
On November 1, 2011, the Company sold its wholly-owned subsidiary, MetLife Taiwan Insurance Company Limited (“MetLife Taiwan”) for $180 million in cash consideration. The net assets sold were $282 million, resulting in a loss on disposal of $64 million, net of income tax, recorded in discontinued operations, for the year ended December 31, 2011. Income (loss) from the operations of MetLife Taiwan of $20 million, $22 million and $9 million, net of income tax, for the years ended December 31, 2011, 2010 and 2009, respectively, was also recorded in discontinued operations. See Note 23.
2010 Acquisition of ALICO
Description of Transaction
On the Acquisition Date, MetLife, Inc. acquired all of the issued and outstanding capital stock of American Life from AM Holdings, a subsidiary of AIG, and DelAm from AIG for a total purchase price of $16.4 billion, which consisted of (i) cash of $7.2 billion (includes settlement of intercompany balances and certain other adjustments), and (ii) securities of MetLife, Inc. valued at $9.2 billion.
The $7.2 billion cash portion of the purchase price was funded through the issuance of common stock as described in Note 18, fixed and floating rate senior debt as described in Note 11 as well as cash on hand. The securities issued to AM Holdings included (a) 78,239,712 shares of MetLife, Inc.’s common stock; (b) 6,857,000 shares of Series B Contingent Convertible Junior Participating Non-Cumulative Perpetual Preferred Stock (the “convertible preferred stock”) of MetLife, Inc.; and (c) 40 million common equity units of MetLife, Inc. (the “Equity Units”) with an aggregate stated amount at issuance of $3.0 billion, initially consisting of (i) three purchase contracts (the “Series C Purchase Contracts,” the “Series D Purchase Contracts” and the “Series E Purchase Contracts” and, together, the “Purchase Contracts”), obligating the holder to purchase, on specified future settlement dates, a variable number of shares of MetLife, Inc.’s common stock for a fixed price; and (ii) an interest in each of three series of debt securities (the “Series C Debt Securities,” the “Series D Debt Securities” and the “Series E Debt Securities,” and, together, the “Debt Securities”) issued by MetLife, Inc. Distributions on the Equity Units will be made quarterly, through contract payments on the Purchase Contracts and interest payments on the Debt Securities, initially at an aggregate annual rate of 5.00% (an average annual rate of 3.02% on the Purchase Contracts and an average annual rate of 1.98% on the Debt Securities) as described in Note 14.
On March 8, 2011, AM Holdings sold, in public offering transactions, all the shares of common stock and Equity Units it received as consideration from MetLife in connection with the Acquisition. The Company did not receive any of the proceeds from the sale of either the shares of common stock or the Equity Units owned by AM Holdings. On March 8, 2011, MetLife, Inc. issued 68,570,000 shares of common stock for gross proceeds of $3.0 billion, which were used to repurchase and cancel 6,857,000 shares of convertible preferred stock received as consideration by AM Holdings from MetLife in connection with the Acquisition. See Note 18.
ALICO is an international life insurance company, providing consumers and businesses with products and services for life insurance, accident and health insurance, retirement and wealth management solutions. The Acquisition significantly broadened the Company’s diversification by product, distribution and geography, meaningfully accelerated MetLife’s global growth strategy, and provides the opportunity to build an international franchise leveraging the key strengths of ALICO.
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Fair Value and Allocation of Purchase Price
The computation of total purchase consideration and the amounts recognized for each major class of assets acquired and liabilities assumed, based upon their respective fair values at the Acquisition Date, and the resulting goodwill, are presented below:
November 1, 2010 | ||||
(In millions) | ||||
Cash | $ | 6,800 | ||
MetLife, Inc.’s common stock (78,239,712 shares) (1) | 3,200 | |||
MetLife, Inc.’s convertible preferred stock (1), (2) | 2,805 | |||
MetLife, Inc.’s Equity Units ($3.0 billion aggregate stated amount) (3) | 3,189 | |||
|
| |||
Total cash paid and securities issued to AM Holdings | $ | 15,994 | ||
Contractual purchase price adjustments (4) | 396 | |||
|
| |||
Total purchase price | $ | 16,390 | ||
Effective settlement of pre-existing relationships (5) | (186 | ) | ||
Contingent consideration (6) | 88 | |||
|
| |||
Total purchase consideration for ALICO | $ | 16,292 | ||
|
|
(1) | Fair value is based on the opening price of MetLife, Inc.’s common stock of $40.90 on the New York Stock Exchange (“NYSE”) on November 1, 2010. |
(2) | On March 8, 2011, MetLife, Inc. repurchased and canceled all of the convertible preferred stock. |
(3) | The Equity Units include the Debt Securities and the Purchase Contracts that will settle in MetLife, Inc.’s common stock on specified future dates. See Note 14. |
(4) | Relates to the cash settlement of intercompany balances prior to the Acquisition for amounts in excess of certain agreed-upon thresholds and certain other adjustments. |
(5) | Effective settlement of debt securities issued by MetLife, Inc. that were owned by ALICO on the Acquisition Date and which reduced the total purchase consideration. Such debt securities were sold to a third party in the second quarter of 2011. |
(6) | Estimated fair value of potential payments related to the adequacy of reserves for guarantees on the fair value of a fund of assets backing certain United Kingdom (“U.K.”) unit-linked contracts. |
At the Acquisition Date, management expected the aggregate amount of MetLife, Inc.’s common stock to be issued to AM Holdings to be between 214.6 million to 231.5 million shares, consisting of 78.2 million shares issued at closing, 68.6 million shares to be issued upon conversion of the convertible preferred stock and between 67.8 million and 84.7 million shares of common stock, in total, issuable upon settlement of the Purchase Contracts forming part of the Equity Units. On March 8, 2011, MetLife, Inc. issued 68.6 million shares of common stock and used the gross proceeds to repurchase and cancel the convertible preferred stock. On the same date, AM Holdings sold, in a public offering, all the Equity Units it received as consideration from MetLife in connection with the Acquisition. See Notes 14 and 18.
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Recording of Assets Acquired and Liabilities Assumed
The following table summarizes the amounts recognized at fair value for each major class of assets acquired and liabilities assumed and the resulting goodwill as of the Acquisition Date, inclusive of adjustments made in the first year after the Acquisition Date to the amounts initially recorded (“measurement period adjustments”).
November 1, 2010 | ||||
(In millions) | ||||
Assets acquired: | ||||
Total investments | $ | 101,036 | ||
Cash and cash equivalents | 4,175 | |||
Accrued investment income | 948 | |||
Premiums, reinsurance and other receivables | 1,971 | |||
VOBA | 9,210 | |||
Other assets | 1,146 | |||
Separate account assets | 244 | |||
|
| |||
Total assets | $ | 118,730 | ||
|
| |||
Liabilities assumed: | ||||
Future policy benefits | $ | 31,811 | ||
Policyholder account balances | 66,652 | |||
Other policy-related balances | 7,306 | |||
Current and deferred income tax liability | 375 | |||
Other liabilities | 2,918 | |||
Separate account liabilities | 244 | |||
|
| |||
Total liabilities | $ | 109,306 | ||
|
| |||
Redeemable noncontrolling interests in partially owned consolidated subsidiaries assumed | $ | 109 | ||
|
| |||
Noncontrolling interests | (21 | ) | ||
Goodwill | 6,998 | |||
|
| |||
Net assets acquired | $ | 16,292 | ||
|
|
The measurement period adjustments, which related to the finalization of American Life’s current and deferred income tax liability, did not have an impact on the Company’s earnings or cash flows and, therefore, the financial statements were not retrospectively adjusted. See Note 15.
Goodwill
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired and liabilities assumed that could not be individually identified. The goodwill recorded as part of the Acquisition includes the expected synergies and other benefits that management believes will result from combining the operations of ALICO with the operations of MetLife, including further diversification in geographic mix and product offerings and an increase in distribution strength.
As of the Acquisition Date, of the $7.0 billion of goodwill, approximately $4.0 billion was estimated to be deductible for tax purposes. Of the $4.0 billion, approximately $573 million was estimated to be deductible for U.S. tax purposes prior to the completion of the anticipated restructuring of American Life’s foreign branches. See “— Branch Restructuring.”
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Identified Intangibles
VOBA reflects the estimated fair value of in-force contracts acquired and represents the portion of the purchase price that is allocated to the value of future profits embedded in acquired insurance annuity and investment-type contracts in-force at the Acquisition Date.
The value of VODA and VOCRA, included in other assets, reflects the estimated fair value of ALICO’s distribution agreements and customer relationships acquired at November 1, 2010 and will be amortized over the useful lives. Each year the Company reviews VODA and VOCRA to determine the recoverability of these balances.
The use of discount rates was necessary to establish the fair value of VOBA and the identifiable intangibles. In selecting the appropriate discount rates, management considered its weighted average cost of capital, as well as the weighted average cost of capital required by market participants. The fair value of acquired liabilities was determined using risk free rates adjusted for a nonperformance risk premium. The nonperformance adjustment was determined by taking into consideration publicly available information relating to spreads in the secondary market for MetLife Inc.’s debt, including related credit default swaps. These observable spreads were then adjusted to reflect the priority of these liabilities, the claims paying ability of the insurance subsidiaries compared to MetLife, Inc. and, as necessary, the relative credit spreads of the liabilities’ currencies of denomination as compared to USD spreads.
The fair values of business acquired, distribution agreements and customer relationships and the weighted average amortization periods were as follows as of November 1, 2010:
November 1, 2010 | Weighted Average Amortization Period | |||||||
(In millions) | (In years) | |||||||
VOBA | $ | 9,210 | 8.2 | |||||
VODA and VOCRA | 341 | 10.3 | ||||||
|
| |||||||
Total value of amortizable intangible assets acquired | $ | 9,551 | 8.6 | |||||
|
|
Negative VOBA
For certain acquired blocks of business, the estimated fair value of acquired liabilities exceeded the initial policy reserves assumed at the Acquisition Date, resulting in negative VOBA of $4.4 billion recorded at the Acquisition Date. Negative VOBA is recorded in other policy-related balances. See Note 8. The following summarizes the major blocks of business, all included within the Asia segment, for which negative VOBA was recorded and describes why the fair value of the liabilities associated with these blocks of business exceeded the initial policy reserves assumed:
• | Fixed Annuities — This block of business provides a fixed rate of return to the policyholders. A decrease in market interest rates since the time of issuance was the primary driver that resulted in the fair value of the liabilities associated with this block being significantly greater than the initial policy reserves assumed at the Acquisition Date. |
• | Interest Sensitive Whole Life and Retirement Savings Products — These contracts contain guaranteed minimum benefit features. The recorded reserves for these guarantees increase ratably over the life of the policies in relation to future gross revenues. In contrast, the fair value of the guaranteed minimum benefit component of the initial policy reserves assumed represents the amount that would be required to be |
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
transferred to a market participant to assume the full liability at the acquisition date, implicitly incorporating market participant views as to all expected future cash flows. This results in a fair value significantly in excess of the initial guaranteed minimum benefit liability assumed at the Acquisition Date. |
Trademark Assets
In connection with the Acquisition, the Company recognized $47 million in trademark assets recorded in other assets. The fair value of the trademark assets will be recognized ratably over their expected useful lives which is generally between five to 10 years.
Indemnification Assets and Contingent Consideration
The stock purchase agreement dated as of March 7, 2010, as amended by and among MetLife, Inc., AIG and AM Holdings (formerly known as ALICO Holdings LLC) (the “Stock Purchase Agreement”) and related agreements include indemnification provisions that allocate the risk of losses arising out of contingencies or other uncertainties that existed as of the Acquisition Date in accordance with the terms, and subject to the limitations and procedures, provided by such provisions. As applicable, the Company recognizes an indemnification asset at the same time that it recognizes the indemnified item, measured on the same basis as the indemnified item. The Company recognized the following indemnification assets and contingencies as of the Acquisition Date in accordance with the indemnification provisions of the Stock Purchase Agreement and related agreements:
Investments — The Company established indemnification assets for the fair value of amounts expected to be recovered from defaults of certain fixed maturity securities, CMBS and mortgage loans. These indemnification assets were included in other invested assets at December 31, 2011 and 2010.
Litigation — The Company established indemnification assets associated with certain settlements expected to be made in connection with the suspension of withdrawals from certain unit-linked funds offered to certain policyholders. These indemnification assets were included in other assets at December 31, 2011 and 2010.
Section 338 Election — See Note 1.
The Company recognized an aggregate amount of $574 million for indemnification assets as of the Acquisition Date in accordance with the indemnification provisions of the Stock Purchase Agreement and related agreements.
Contingent Consideration— The Company has guaranteed that the fair value of a fund of assets backing certain U.K. unit-linked contracts will have a value of at least £1 per unit on July 1, 2012. If the shortfall between the aggregate guaranteed amount and the fair value of the fund exceeds £106 million (as adjusted for withdrawals), AIG will pay the difference to the Company and, conversely, if the shortfall at July 1, 2012 is less than £106 million, the Company will pay the difference to AIG. The Company believes that the fair value of the fund will equal or exceed the aggregate guaranteed amount by July 1, 2012. The contingent consideration liability was $109 million at December 31, 2011 and $88 million at the Acquisition Date. The increase in the contingent consideration liability amount from the Acquisition Date to December 31, 2011 was recorded in net derivative gains (losses) in the consolidated statement of operations.
Branch Restructuring
On March 4, 2010, American Life entered into a closing agreement (the “Closing Agreement”) with the Commissioner of the Internal Revenue Service (“IRS”) with respect to a U.S. withholding tax issue arising as a result of payments made by its foreign branches. The Closing Agreement provides that American Life’s foreign
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
branches will not be required to withhold U.S. income tax on the income portion of payments made pursuant to American Life’s life insurance and annuity contracts (“Covered Payments”) for any tax periods beginning on January 1, 2005 and ending on December 31, 2013 (the “Deferral Period”). The Closing Agreement required that American Life submit a plan to the IRS within 90 days after the close of the Acquisition, indicating the steps American Life would take (on a country by country basis) to ensure that no substantial amount of U.S. withholding tax will arise from Covered Payments made by American Life’s foreign branches to foreign customers after the Deferral Period. Such plan, which was submitted to the IRS on January 29, 2011, involves the transfer of businesses from certain of the foreign branches of American Life to one or more existing or newly-formed subsidiaries of MetLife, Inc. or American Life.
A liability of $277 million was recognized in purchase accounting as of the Acquisition Date for the anticipated and estimated costs associated with restructuring American Life’s foreign branches into subsidiaries in connection with the Closing Agreement.
See Notes 7, 15 and 19 for additional information related to the Acquisition.
Revenues and Earnings of ALICO
The following table presents information for ALICO that is included in the Company’s consolidated statement of operations from the Acquisition Date through November 30, 2010:
ALICO’s Operations Included in MetLife’s Results for the Year Ended December 31, 2010 | ||||
(In millions) | ||||
Total revenues | $ | 950 | ||
Income (loss) from continuing operations, net of income tax | $ | (2 | ) |
Supplemental Pro Forma Information (unaudited)
The following table presents unaudited supplemental pro forma information as if the Acquisition had occurred on January 1, 2010 for the year ended December 31, 2010 and on January 1, 2009 for the year ended December 31, 2009.
Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
(In millions, except per share data) | ||||||||
Total revenues | $ | 64,680 | $ | 54,282 | ||||
Income (loss) from continuing operations, net of income tax, attributable to common shareholders | $ | 3,888 | $ | (1,353 | ) | |||
Income (loss) from continuing operations, net of income tax, attributable to common shareholders per common share: | ||||||||
Basic | $ | 3.60 | $ | (1.29 | ) | |||
Diluted | $ | 3.57 | $ | (1.29 | ) |
The pro forma information was derived from the historical financial information of MetLife and ALICO, reflecting the results of operations of MetLife and ALICO for 2010 and 2009. The historical financial information has been adjusted to give effect to the pro forma events that are directly attributable to the Acquisition and factually supportable and expected to have a continuing impact on the combined results. Discontinued operations and the related earnings per share have been excluded from the presentation as they are non-recurring in nature. The pro forma information is not intended to reflect the results of operations of the
106
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
combined company that would have resulted had the Acquisition been effective during the periods presented or the results that may be obtained by the combined company in the future. The pro forma information does not reflect future events that may occur after the Acquisition, including, but not limited to, expense efficiencies or revenue enhancements arising from the Acquisition and also does not give effect to certain one-time charges that MetLife expects to incur, such as restructuring and integration costs.
The pro forma information primarily reflects the following pro forma adjustments:
• | reduction in net investment income to reflect the amortization or accretion associated with the new cost basis of the acquired fixed maturities available-for-sale portfolio; |
• | elimination of amortization associated with the elimination of ALICO’s historical DAC; |
• | amortization of VOBA, VODA and VOCRA associated with the establishment of VOBA, VODA and VOCRA arising from the Acquisition; |
• | reduction in other expenses associated with the amortization of negative VOBA; |
• | reduction in revenues associated with the elimination of ALICO’s historical unearned revenue liability; |
• | interest expense associated with the issuance of the Debt Securities to AM Holdings and the public issuance of senior notes in connection with the financing of the Acquisition; |
• | certain adjustments to conform to MetLife’s accounting policies; and |
• | reversal of investment and derivative gains (losses) associated with certain transactions that were completed prior to the Acquisition Date (conditions of closing). |
2009 Disposition
In March 2009, the Company sold Cova Corporation (“Cova”), the parent company of Texas Life Insurance Company (“Texas Life”) to a third-party for $130 million in cash consideration, excluding $1 million of transaction costs. The net assets sold were $101 million, resulting in a gain on disposal of $28 million, net of income tax. The Company also reclassified $4 million, net of income tax, of the 2009 operations of Texas Life into discontinued operations in the consolidated financial statements. As a result, the Company recognized income from discontinued operations of $32 million, net of income tax, during the year ended December 31, 2009. See Note 23.
2009 Disposition through Assumption Reinsurance
On October 30, 2009, the Company completed the disposal, through assumption reinsurance, of substantially all of the insurance business of MetLife Canada, a wholly-owned indirect subsidiary, to a third-party. Pursuant to the assumption reinsurance agreement, the consideration paid by the Company was $259 million, comprised of cash of $14 million and fixed maturity securities, mortgage loans and other assets totaling $245 million. At the date of the assumption reinsurance agreement, the carrying value of insurance liabilities transferred was $267 million, resulting in a gain of $5 million, net of income tax. The gain was recognized in net investment gains (losses).
107
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
3. Investments
Fixed Maturity and Equity Securities Available-for-Sale
The following tables present the cost or amortized cost, gross unrealized gains and losses, estimated fair value of fixed maturity and equity securities and the percentage that each sector represents by the respective total holdings for the periods shown. The unrealized loss amounts presented below include the noncredit loss component of OTTI losses:
December 31, 2011 | ||||||||||||||||||||||||
Cost or Amortized Cost | Gross Unrealized | Estimated Fair Value | % of Total | |||||||||||||||||||||
Gains | Temporary Losses | OTTI Losses | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Fixed Maturity Securities: | ||||||||||||||||||||||||
U.S. corporate securities | $ | 98,621 | $ | 8,544 | $ | 1,380 | $ | — | $ | 105,785 | 30.2 | % | ||||||||||||
Foreign corporate securities | 61,568 | 3,789 | 1,338 | 1 | 64,018 | 18.3 | ||||||||||||||||||
Foreign government securities | 49,840 | 3,053 | 357 | — | 52,536 | 15.0 | ||||||||||||||||||
RMBS | 42,092 | 2,281 | 1,033 | 703 | 42,637 | 12.2 | ||||||||||||||||||
U.S. Treasury and agency securities | 34,132 | 5,882 | 2 | — | 40,012 | 11.4 | ||||||||||||||||||
CMBS | 18,565 | 730 | 218 | 8 | 19,069 | 5.4 | ||||||||||||||||||
State and political subdivision securities | 11,975 | 1,416 | 156 | — | 13,235 | 3.8 | ||||||||||||||||||
ABS | 13,018 | 278 | 305 | 12 | 12,979 | 3.7 | ||||||||||||||||||
Other fixed maturity securities | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total fixed maturity securities | $ | 329,811 | $ | 25,973 | $ | 4,789 | $ | 724 | $ | 350,271 | 100.0 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Equity Securities: | ||||||||||||||||||||||||
Common stock | $ | 2,219 | $ | 83 | $ | 97 | $ | — | $ | 2,205 | 72.9 | % | ||||||||||||
Non-redeemable preferred stock | 989 | 31 | 202 | — | 818 | 27.1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total equity securities | $ | 3,208 | $ | 114 | $ | 299 | $ | — | $ | 3,023 | 100.0 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
108
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
December 31, 2010 | ||||||||||||||||||||||||
Cost or Amortized Cost | Gross Unrealized | Estimated Fair Value | % of Total | |||||||||||||||||||||
Gains | Temporary Losses | OTTI Losses | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Fixed Maturity Securities: | ||||||||||||||||||||||||
U.S. corporate securities | $ | 88,905 | $ | 4,469 | $ | 1,602 | $ | — | $ | 91,772 | 28.3 | % | ||||||||||||
Foreign corporate securities | 65,487 | 3,326 | 925 | — | 67,888 | 20.9 | ||||||||||||||||||
Foreign government securities | 40,871 | 1,733 | 602 | — | 42,002 | 12.9 | ||||||||||||||||||
RMBS | 45,904 | 1,661 | 1,180 | 533 | 45,852 | 14.1 | ||||||||||||||||||
U.S. Treasury and agency securities | 32,469 | 1,394 | 559 | — | 33,304 | 10.2 | ||||||||||||||||||
CMBS | 20,213 | 740 | 266 | 12 | 20,675 | 6.4 | ||||||||||||||||||
State and political subdivision securities | 10,476 | 171 | 518 | — | 10,129 | 3.1 | ||||||||||||||||||
ABS | 13,286 | 265 | 327 | 56 | 13,168 | 4.1 | ||||||||||||||||||
Other fixed maturity securities | 6 | 1 | — | — | 7 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total fixed maturity securities | $ | 317,617 | $ | 13,760 | $ | 5,979 | $ | 601 | $ | 324,797 | 100.0 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Equity Securities: | ||||||||||||||||||||||||
Common stock | $ | 2,059 | $ | 146 | $ | 12 | $ | — | $ | 2,193 | 60.9 | % | ||||||||||||
Non-redeemable preferred stock | 1,562 | 76 | 229 | — | 1,409 | 39.1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total equity securities | $ | 3,621 | $ | 222 | $ | 241 | $ | — | $ | 3,602 | 100.0 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Within fixed maturity securities, a reclassification from the ABS sector to the RMBS sector has been made to the prior year amounts to conform to the current year presentation for securities backed by sub-prime residential mortgage loans to be consistent with market convention relating to the risks inherent in such securities and the Company’s management of its investments within these asset sectors.
The Company held non-income producing fixed maturity securities with an estimated fair value of $62 million and $130 million with unrealized gains (losses) of ($19) million and ($23) million at December 31, 2011 and 2010, respectively.
The Company held foreign currency derivatives with notional amounts of $15.3 billion and $12.2 billion to hedge the exchange rate risk associated with foreign denominated fixed maturity securities at December 31, 2011 and 2010, respectively.
Concentrations of Credit Risk (Fixed Maturity Securities) — Summary. The following section contains a summary of the concentrations of credit risk related to fixed maturity securities holdings.
The Company was not exposed to any concentrations of credit risk of any single issuer greater than 10% of the Company’s equity, other than the government securities summarized in the table below. The par value, amortized cost and estimated fair value of holdings in sovereign fixed maturity securities of Portugal, Ireland, Italy, Greece and Spain, commonly referred to as “Europe’s perimeter region,” was $874 million, $254 million and $264 million at December 31, 2011, respectively, and $1.9 billion, $1.6 billion and $1.6 billion at December 31, 2010, respectively. The estimated fair value of these Europe perimeter region sovereign fixed maturity securities represented 0.4% and 3.2% of the Company’s equity at December 31, 2011 and 2010, respectively, and 0.1% and 0.3% of total cash and invested assets at December 31, 2011 and 2010, respectively.
109
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Concentrations of Credit Risk (Government and Agency Securities). The following section contains a summary of the concentrations of credit risk related to government and agency fixed maturity and fixed-income securities holdings, which were greater than 10% of the Company’s equity at:
December 31, | ||||||||
2011 | 2010 | |||||||
Carrying Value (1) | ||||||||
(In millions) | ||||||||
Government and agency fixed maturity securities: | ||||||||
United States | $ | 40,012 | $ | 33,304 | ||||
Japan | $ | 21,003 | $ | 15,591 | ||||
Mexico (2) | $ | — | $ | 5,050 | ||||
U.S. Treasury and agency fixed-income securities included in: | ||||||||
Short-term investments | $ | 15,775 | $ | 4,048 | ||||
Cash equivalents | $ | 1,748 | $ | 5,762 |
(1) | Represents estimated fair value for fixed maturity securities, and for short-term investments and cash equivalents, estimated fair value or amortized cost, which approximates estimated fair value. |
(2) | The Company’s investment in Mexico government and agency fixed maturity securities at December 31, 2011 of $5.0 billion is less than 10% of the Company’s equity. |
Concentrations of Credit Risk (Equity Securities). The Company was not exposed to any concentrations of credit risk in its equity securities holdings of any single issuer greater than 10% of the Company’s equity or 1% of total investments at December 31, 2011 and 2010.
Maturities of Fixed Maturity Securities. The amortized cost and estimated fair value of fixed maturity securities, by contractual maturity date (excluding scheduled sinking funds), were as follows at:
December 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | |||||||||||||
(In millions) | ||||||||||||||||
Due in one year or less | $ | 16,747 | $ | 16,862 | $ | 8,580 | $ | 8,702 | ||||||||
Due after one year through five years | 62,819 | 64,414 | 65,143 | 66,796 | ||||||||||||
Due after five years through ten years | 82,694 | 88,036 | 76,508 | 79,571 | ||||||||||||
Due after ten years | 93,876 | 106,274 | 87,983 | 90,033 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Subtotal | 256,136 | 275,586 | 238,214 | 245,102 | ||||||||||||
RMBS, CMBS and ABS | 73,675 | 74,685 | 79,403 | 79,695 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed maturity securities | $ | 329,811 | $ | 350,271 | $ | 317,617 | $ | 324,797 | ||||||||
|
|
|
|
|
|
|
|
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 included in the above table in the year of final contractual maturity. RMBS, CMBS and ABS are shown separately in the table, as they are not due at a single maturity.
As discussed further in Note 2, an indemnification asset has been established in connection with certain investments acquired from American Life.
110
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Evaluating Available-for-Sale Securities for Other-Than-Temporary Impairment
As described more fully in Note 1, the Company performs a regular evaluation, on a security-by-security basis, of its available-for-sale securities holdings, including fixed maturity securities, equity securities and perpetual hybrid securities, in accordance with its impairment policy in order to evaluate whether such investments are other-than-temporarily impaired.
Net Unrealized Investment Gains (Losses)
The components of net unrealized investment gains (losses), included in accumulated other comprehensive income (loss), were as follows:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Fixed maturity securities | $ | 21,096 | $ | 7,817 | $ | (1,208) | ||||||
Fixed maturity securities with noncredit OTTI losses in accumulated other comprehensive income (loss) | (724 | ) | (601 | ) | (859 | ) | ||||||
|
|
|
|
|
| |||||||
Total fixed maturity securities | 20,372 | 7,216 | (2,067 | ) | ||||||||
Equity securities | (167 | ) | (3 | ) | (103 | ) | ||||||
Derivatives | 1,514 | (59 | ) | (144 | ) | |||||||
Other | 72 | 42 | 71 | |||||||||
|
|
|
|
|
| |||||||
Subtotal | 21,791 | 7,196 | (2,243 | ) | ||||||||
|
|
|
|
|
| |||||||
Amounts allocated from: | ||||||||||||
Insurance liability loss recognition | (3,996 | ) | (672 | ) | (118 | ) | ||||||
DAC and VOBA related to noncredit OTTI losses recognized in accumulated other comprehensive income (loss) | 47 | 38 | 71 | |||||||||
DAC and VOBA | (1,800 | ) | (1,003 | ) | 132 | |||||||
Policyholder dividend obligation | (2,919 | ) | (876 | ) | — | |||||||
|
|
|
|
|
| |||||||
Subtotal | (8,668 | ) | (2,513 | ) | 85 | |||||||
Deferred income tax benefit (expense) related to noncredit OTTI losses recognized in accumulated other comprehensive income (loss) | 236 | 197 | 275 | |||||||||
Deferred income tax benefit (expense) | (4,694 | ) | (1,762 | ) | 544 | |||||||
|
|
|
|
|
| |||||||
Net unrealized investment gains (losses) | 8,665 | 3,118 | (1,339 | ) | ||||||||
Net unrealized investment gains (losses) attributable to noncontrolling interests | 9 | 4 | 1 | |||||||||
|
|
|
|
|
| |||||||
Net unrealized investment gains (losses) attributable to MetLife, Inc. | $ | 8,674 | $ | 3,122 | $ | (1,338 | ) | |||||
|
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|
|
|
|
111
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The changes in fixed maturity securities with noncredit OTTI losses included in accumulated other comprehensive income (loss) were as follows:
December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Balance, beginning of period | $ | (601 | ) | $ | (859 | ) | ||
Noncredit OTTI losses recognized (1) | 31 | (212 | ) | |||||
Transferred to retained earnings (2) | — | 16 | ||||||
Securities sold with previous noncredit OTTI loss | 125 | 137 | ||||||
Subsequent changes in estimated fair value | (279 | ) | 317 | |||||
|
|
|
| |||||
Balance, end of period | $ | (724 | ) | $ | (601 | ) | ||
|
|
|
|
(1) | Noncredit OTTI losses recognized, net of DAC, were $33 million and ($202) million for the years ended December 31, 2011 and 2010, respectively. |
(2) | Amounts transferred to retained earnings were in connection with the adoption of guidance related to the consolidation of VIEs as described in Note 1. |
112
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The changes in net unrealized investment gains (losses) were as follows:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Balance, beginning of period | $ | 3,122 | $ | (1,338 | ) | $ | (12,564 | ) | ||||
Cumulative effect of change in accounting principles, net of income tax | — | 52 | (386 | ) | ||||||||
Fixed maturity securities on which noncredit OTTI losses have been recognized | (123 | ) | 242 | (733 | ) | |||||||
Unrealized investment gains (losses) during the year | 14,823 | 9,117 | 20,745 | |||||||||
Unrealized investment gains (losses) of subsidiary at the date of disposal | (105 | ) | — | — | ||||||||
Unrealized investment gains (losses) relating to: | ||||||||||||
Insurance liability gain (loss) recognition | (3,406 | ) | (554 | ) | (160 | ) | ||||||
Insurance liability gain (loss) recognition of subsidiary at the date of disposal | 82 | — | — | |||||||||
DAC and VOBA related to noncredit OTTI losses recognized in accumulated other comprehensive income (loss) | 9 | (33 | ) | 61 | ||||||||
DAC and VOBA | (808 | ) | (1,135 | ) | (2,416 | ) | ||||||
DAC and VOBA of subsidiary at date of disposal | 11 | — | — | |||||||||
Policyholder dividend obligation | (2,043 | ) | (876 | ) | — | |||||||
Deferred income tax benefit (expense) related to noncredit OTTI losses recognized in accumulated other comprehensive income (loss) | 39 | (73 | ) | 235 | ||||||||
Deferred income tax benefit (expense) | (2,936 | ) | (2,283 | ) | (6,131 | ) | ||||||
Deferred income tax benefit (expense) of subsidiary at date of disposal | 4 | — | — | |||||||||
|
|
|
|
|
| |||||||
Net unrealized investment gains (losses) | 8,669 | 3,119 | (1,349 | ) | ||||||||
Net unrealized investment gains (losses) attributable to noncontrolling interests | 5 | 3 | 11 | |||||||||
|
|
|
|
|
| |||||||
Balance, end of period | $ | 8,674 | $ | 3,122 | $ | (1,338 | ) | |||||
|
|
|
|
|
| |||||||
Change in net unrealized investment gains (losses) | $ | 5,547 | $ | 4,457 | $ | 11,215 | ||||||
Change in net unrealized investment gains (losses) attributable to noncontrolling interests | 5 | 3 | 11 | |||||||||
|
|
|
|
|
| |||||||
Change in net unrealized investment gains (losses) attributable to | $ | 5,552 | $ | 4,460 | $ | 11,226 | ||||||
|
|
|
|
|
|
113
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Continuous Gross Unrealized Losses and OTTI Losses for Fixed Maturity and Equity Securities Available-for-Sale by Sector
The following tables present the estimated fair value and gross unrealized losses of fixed maturity and equity securities in an unrealized loss position, aggregated by sector and by length of time that the securities have been in a continuous unrealized loss position. The unrealized loss amounts presented below include the noncredit component of OTTI loss. Fixed maturity securities on which a noncredit OTTI loss has been recognized in accumulated other comprehensive income (loss) are categorized by length of time as being “less than 12 months” or “equal to or greater than 12 months” in a continuous unrealized loss position based on the point in time that the estimated fair value initially declined to below the amortized cost basis and not the period of time since the unrealized loss was deemed a noncredit OTTI loss.
December 31, 2011 | ||||||||||||||||||||||||
Less than 12 Months | Equal to or Greater than 12 Months | Total | ||||||||||||||||||||||
Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | |||||||||||||||||||
(In millions, except number of securities) | ||||||||||||||||||||||||
Fixed Maturity Securities: | ||||||||||||||||||||||||
U.S. corporate securities | $ | 15,642 | $ | 590 | $ | 5,135 | $ | 790 | $ | 20,777 | $ | 1,380 | ||||||||||||
Foreign corporate securities | 12,618 | 639 | 5,957 | 700 | 18,575 | 1,339 | ||||||||||||||||||
Foreign government securities | 11,227 | 230 | 1,799 | 127 | 13,026 | 357 | ||||||||||||||||||
RMBS | 4,040 | 547 | 4,724 | 1,189 | 8,764 | 1,736 | ||||||||||||||||||
U.S. Treasury and agency securities | 2,611 | 1 | 50 | 1 | 2,661 | 2 | ||||||||||||||||||
CMBS | 2,825 | 135 | 678 | 91 | 3,503 | 226 | ||||||||||||||||||
State and political subdivision securities | 177 | 2 | 1,007 | 154 | 1,184 | 156 | ||||||||||||||||||
ABS | 4,972 | 103 | 1,316 | 214 | 6,288 | 317 | ||||||||||||||||||
Other fixed maturity securities | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total fixed maturity securities | $ | 54,112 | $ | 2,247 | $ | 20,666 | $ | 3,266 | $ | 74,778 | $ | 5,513 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Equity Securities: | ||||||||||||||||||||||||
Common stock | $ | 581 | $ | 96 | $ | 5 | $ | 1 | $ | 586 | $ | 97 | ||||||||||||
Non-redeemable preferred stock | 204 | 30 | 370 | 172 | 574 | 202 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total equity securities | $ | 785 | $ | 126 | $ | 375 | $ | 173 | $ | 1,160 | $ | 299 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total number of securities in an unrealized loss position | 3,978 | 1,963 | ||||||||||||||||||||||
|
|
|
|
114
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
December 31, 2010 | ||||||||||||||||||||||||
Less than 12 Months | Equal to or Greater than 12 Months | Total | ||||||||||||||||||||||
Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | Estimated Fair Value | Gross Unrealized Losses | |||||||||||||||||||
(In millions, except number of securities) | ||||||||||||||||||||||||
Fixed Maturity Securities: | ||||||||||||||||||||||||
U.S. corporate securities | $ | 22,954 | $ | 447 | $ | 8,319 | $ | 1,155 | $ | 31,273 | $ | 1,602 | ||||||||||||
Foreign corporate securities | 22,415 | 410 | 3,976 | 515 | 26,391 | 925 | ||||||||||||||||||
Foreign government securities | 26,659 | 585 | 189 | 17 | 26,848 | 602 | ||||||||||||||||||
RMBS | 7,630 | 221 | 7,624 | 1,492 | 15,254 | 1,713 | ||||||||||||||||||
U.S. Treasury and agency securities | 13,401 | 530 | 118 | 29 | 13,519 | 559 | ||||||||||||||||||
CMBS | 3,787 | 29 | 1,363 | 249 | 5,150 | 278 | ||||||||||||||||||
State and political subdivision securities | 5,061 | 246 | 988 | 272 | 6,049 | 518 | ||||||||||||||||||
ABS | 2,671 | 33 | 2,102 | 350 | 4,773 | 383 | ||||||||||||||||||
Other fixed maturity securities | 1 | — | — | — | 1 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total fixed maturity securities | $ | 104,579 | $ | 2,501 | $ | 24,679 | $ | 4,079 | $ | 129,258 | $ | 6,580 | ||||||||||||
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|
| |||||||||||||
Equity Securities: | ||||||||||||||||||||||||
Common stock | $ | 89 | $ | 12 | $ | 1 | $ | — | $ | 90 | $ | 12 | ||||||||||||
Non-redeemable preferred stock | 191 | 9 | 824 | 220 | 1,015 | 229 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total equity securities | $ | 280 | $ | 21 | $ | 825 | $ | 220 | $ | 1,105 | $ | 241 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total number of securities in an unrealized loss position | 5,609 | 1,704 | ||||||||||||||||||||||
|
|
|
|
115
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Aging of Gross Unrealized Losses and OTTI Losses for Fixed Maturity and Equity Securities Available-for-Sale
The following tables present the cost or amortized cost, gross unrealized losses, including the portion of OTTI loss on fixed maturity securities recognized in accumulated other comprehensive income (loss), gross unrealized losses as a percentage of cost or amortized cost and number of securities for fixed maturity and equity securities where the estimated fair value had declined and remained below cost or amortized cost by less than 20%, or 20% or more at:
December 31, 2011 | ||||||||||||||||||||||||
Cost or Amortized Cost | Gross Unrealized Losses | Number of Securities | ||||||||||||||||||||||
Less than 20% | 20% or more | Less than 20% | 20% or more | Less than 20% | 20% or more | |||||||||||||||||||
(In millions, except number of securities) | ||||||||||||||||||||||||
Fixed Maturity Securities: | ||||||||||||||||||||||||
Less than six months | $ | 49,249 | $ | 4,736 | $ | 1,346 | $ | 1,332 | 3,260 | 320 | ||||||||||||||
Six months or greater but less than nine months | 4,104 | 1,049 | 279 | 349 | 375 | 63 | ||||||||||||||||||
Nine months or greater but less than twelve months | 1,160 | 288 | 55 | 93 | 143 | 14 | ||||||||||||||||||
Twelve months or greater | 17,590 | 2,115 | 1,216 | 843 | 1,523 | 167 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 72,103 | $ | 8,188 | $ | 2,896 | $ | 2,617 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Percentage of amortized cost | 4 | % | 32 | % | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Equity Securities: | ||||||||||||||||||||||||
Less than six months | $ | 714 | $ | 376 | $ | 64 | $ | 123 | 154 | 42 | ||||||||||||||
Six months or greater but less than nine months | 22 | 8 | 2 | 4 | 19 | 3 | ||||||||||||||||||
Nine months or greater but less than twelve months | 18 | — | 2 | — | 8 | — | ||||||||||||||||||
Twelve months or greater | 98 | 223 | 8 | 96 | 24 | 20 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 852 | $ | 607 | $ | 76 | $ | 223 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Percentage of cost | 9 | % | 37 | % | ||||||||||||||||||||
|
|
|
|
116
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
December 31, 2010 | ||||||||||||||||||||||||
Cost or Amortized Cost | Gross Unrealized Losses | Number of Securities | ||||||||||||||||||||||
Less than 20% | 20% or more | Less than 20% | 20% or more | Less than 20% | 20% or more | |||||||||||||||||||
(In millions, except number of securities) | ||||||||||||||||||||||||
Fixed Maturity Securities: | ||||||||||||||||||||||||
Less than six months | $ | 105,301 | $ | 1,403 | $ | 2,348 | $ | 368 | 5,320 | 121 | ||||||||||||||
Six months or greater but less than nine months | 1,125 | 376 | 29 | 102 | 104 | 29 | ||||||||||||||||||
Nine months or greater but less than twelve months | 371 | 89 | 28 | 27 | 50 | 9 | ||||||||||||||||||
Twelve months or greater | 21,627 | 5,546 | 1,863 | 1,815 | 1,245 | 311 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 128,424 | $ | 7,414 | $ | 4,268 | $ | 2,312 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Percentage of amortized cost | 3 | % | 31 | % | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Equity Securities: | ||||||||||||||||||||||||
Less than six months | $ | 247 | $ | 94 | $ | 10 | $ | 22 | 106 | 33 | ||||||||||||||
Six months or greater but less than nine months | 29 | 65 | 5 | 16 | 3 | 2 | ||||||||||||||||||
Nine months or greater but less than twelve months | 6 | 47 | — | 16 | 3 | 2 | ||||||||||||||||||
Twelve months or greater | 518 | 340 | 56 | 116 | 35 | 14 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 800 | $ | 546 | $ | 71 | $ | 170 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Percentage of cost | 9 | % | 31 | % | ||||||||||||||||||||
|
|
|
|
Equity securities with gross unrealized losses of 20% or more for twelve months or greater decreased from $116 million at December 31, 2010 to $96 million at December 31, 2011. As shown in the section “— Evaluating Temporarily Impaired Available-for-Sale Securities” below, all of the equity securities with gross unrealized losses of 20% or more for twelve months or greater at December 31, 2011 were financial services industry investment grade non-redeemable preferred stock, of which 71% were rated A or better.
117
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Concentration of Gross Unrealized Losses and OTTI Losses for Fixed Maturity and Equity Securities Available-for-Sale
The gross unrealized losses related to fixed maturity and equity securities, including the portion of OTTI losses on fixed maturity securities recognized in accumulated other comprehensive income (loss) were $5.8 billion and $6.8 billion at December 31, 2011 and 2010, respectively. The concentration, calculated as a percentage of gross unrealized losses (including OTTI losses), by sector and industry was as follows at:
December 31, | ||||||||
2011 | 2010 | |||||||
Sector: | ||||||||
RMBS | 30 | % | 25 | % | ||||
U.S. corporate securities | 24 | 23 | ||||||
Foreign corporate securities | 23 | 14 | ||||||
Foreign government securities | 6 | 9 | ||||||
ABS | 5 | 5 | ||||||
CMBS | 4 | 4 | ||||||
State and political subdivision securities | 3 | 8 | ||||||
U.S. Treasury and agency securities | — | 8 | ||||||
Other | 5 | 4 | ||||||
|
|
|
| |||||
Total | 100 | % | 100 | % | ||||
|
|
|
| |||||
Industry: | ||||||||
Mortgage-backed | 34 | % | 29 | % | ||||
Finance | 27 | 21 | ||||||
Utility | 8 | 5 | ||||||
Foreign government securities | 6 | 9 | ||||||
Consumer | 6 | 4 | ||||||
Asset-backed | 5 | 5 | ||||||
Communications | 3 | 2 | ||||||
State and political subdivision securities | 3 | 8 | ||||||
Industrial | 2 | 2 | ||||||
U.S. Treasury and agency securities | — | 8 | ||||||
Other | 6 | 7 | ||||||
|
|
|
| |||||
Total | 100 | % | 100 | % | ||||
|
|
|
|
Evaluating Temporarily Impaired Available-for-Sale Securities
The following table presents fixed maturity and equity securities, each with gross unrealized losses of greater than $10 million, the number of securities, total gross unrealized losses and percentage of total gross unrealized losses at:
December 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Fixed Maturity Securities | Equity Securities | Fixed Maturity Securities | Equity Securities | |||||||||||||
(In millions, except number of securities) | ||||||||||||||||
Number of securities | 96 | 8 | 107 | 6 | ||||||||||||
Total gross unrealized losses | $ | 1,703 | $ | 117 | $ | 2,014 | $ | 103 | ||||||||
Percentage of total gross unrealized losses | 31 | % | 39 | % | 31 | % | 43 | % |
118
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Fixed maturity and equity securities, each with gross unrealized losses greater than $10 million, decreased $297 million during the year ended December 31, 2011. The decline in, or improvement in, gross unrealized losses for the year ended December 31, 2011, was primarily attributable to a decrease in interest rates, partially offset by widening credit spreads. These securities were included in the Company’s OTTI review process.
As of December 31, 2011, $1.3 billion of unrealized losses were from fixed maturity securities with an unrealized loss position of 20% or more of amortized cost for six months or greater. Of the $1.3 billion, $526 million, or 41%, are related to unrealized losses on investment grade securities. Unrealized losses on investment grade securities are principally related to widening credit spreads or rising interest rates since purchase. Of the $1.3 billion, $759 million, or 59%, are related to unrealized losses on below investment grade securities. Unrealized losses on below investment grade securities are principally related to RMBS (primarily alternative residential mortgage loans and sub-prime residential mortgage loans), U.S and foreign corporate securities (primarily utility, industrial and financial services industry securities) and ABS (primarily collateralized debt obligations) and were the result of significantly wider credit spreads resulting from higher risk premiums since purchase, largely due to economic and market uncertainties including concerns over the financial services industry sector, unemployment levels and valuations of residential real estate supporting non-agency RMBS. As explained further in Note 1, management evaluates these U.S. and foreign corporate securities based on factors such as expected cash flows and the financial condition and near-term and long-term prospects of the issuer; and evaluates non-agency RMBS and ABS based on actual and projected 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. See “— Aging of Gross Unrealized Losses and OTTI Losses for Fixed Maturity and Equity Securities Available-for-Sale” for a discussion of equity securities with an unrealized loss position of 20% or more of cost for 12 months or greater.
In the Company’s impairment review process, the duration and severity of an unrealized loss position for equity securities are given greater weight and consideration than for fixed maturity securities. An extended and severe unrealized loss position on a fixed maturity security may not have any impact on the ability of the issuer to service all scheduled interest and principal payments and the Company’s evaluation of recoverability of all contractual cash flows or the ability to recover an amount at least equal to its amortized cost based on the present value of the expected future cash flows to be collected. In contrast, for an equity security, greater weight and consideration are given by the Company to a decline in market value and the likelihood such market value decline will recover.
119
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The following table presents certain information about the Company’s equity securities available-for-sale with gross unrealized losses of 20% or more at December 31, 2011:
Non-Redeemable Preferred Stock | ||||||||||||||||||||||||||||||||
All Equity Securities | All Types of Non-Redeemable Preferred Stock | Investment Grade | ||||||||||||||||||||||||||||||
All Industries | Financial Services Industry | |||||||||||||||||||||||||||||||
Gross Unrealized Losses | Gross Unrealized Losses | % of All Equity Securities | Gross Unrealized Losses | % of All Non-Redeemable Preferred Stock | Gross Unrealized Losses | % of All Industries | % A Rated or Better | |||||||||||||||||||||||||
(In millions) | (In millions) | (In millions) | ||||||||||||||||||||||||||||||
Less than six months | $ | 123 | $ | 87 | 71 | % | $ | 46 | 53 | % | $ | 46 | 100 | % | 22 | % | ||||||||||||||||
Six months or greater but less than twelve months | 4 | — | — | % | — | — | % | — | — | % | — | % | ||||||||||||||||||||
Twelve months or greater | 96 | 96 | 100 | % | 96 | 100 | % | 96 | 100 | % | 71 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
All equity securities with gross unrealized losses of 20% or more | $ | 223 | $ | 183 | 82 | % | $ | 142 | 78 | % | $ | 142 | 100 | % | 55 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
In connection with the equity securities impairment review process, the Company evaluated its holdings in non-redeemable preferred stock, particularly those in the financial services industry. The Company considered several factors including whether there has been any deterioration in credit of the issuer and the likelihood of recovery in value of non-redeemable preferred stock with a severe or an extended unrealized loss. The Company also considered whether any issuers of non-redeemable preferred stock with an unrealized loss held by the Company, regardless of credit rating, have deferred any dividend payments. No such dividend payments had been deferred.
With respect to common stock holdings, the Company considered the duration and severity of the unrealized losses for securities in an unrealized loss position of 20% or more; and the duration of unrealized losses for securities in an unrealized loss position of less than 20% in an extended unrealized loss position (i.e., 12 months or greater).
Based on the Company’s current evaluation of available-for-sale 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 has concluded that these securities are not other-than-temporarily impaired.
Future OTTIs will depend primarily on economic fundamentals, issuer performance (including changes in the present value of future cash flows expected to be collected), changes in credit ratings, changes in collateral valuation, changes in interest rates and changes in credit spreads. If economic fundamentals or any of the above factors deteriorate, additional OTTIs may be incurred in upcoming quarters.
120
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Trading and Other Securities
The table below presents certain information about the Company’s trading and other securities.
December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Actively Traded Securities | $ | 473 | $ | 463 | ||||
FVO general account securities | 267 | 131 | ||||||
FVO contractholder-directed unit-linked investments | 17,411 | 17,794 | ||||||
FVO securities held by CSEs | 117 | 201 | ||||||
|
|
|
| |||||
Total trading and other securities — at estimated fair value | $ | 18,268 | $ | 18,589 | ||||
|
|
|
| |||||
Actively Traded Securities — at estimated fair value | $ | 473 | $ | 463 | ||||
Short sale agreement liabilities — at estimated fair value | (127 | ) | (46 | ) | ||||
|
|
|
| |||||
Net long/short position — at estimated fair value | $ | 346 | $ | 417 | ||||
|
|
|
| |||||
Investments pledged to secure short sale agreement liabilities | $ | 558 | $ | 465 | ||||
|
|
|
|
See Note 1 for discussion of FVO contractholder-directed unit-linked investments and “— Variable Interest Entities” for discussion of CSEs included in the table above. See “— Net Investment Income” and “— Net Investment Gains (Losses)” for the net investment income recognized on trading and other securities and the related changes in estimated fair value subsequent to purchase included in net investment income and net investment gains (losses) for securities still held as of the end of the respective years, as applicable.
121
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Net Investment Gains (Losses)
The components of net investment gains (losses) were as follows:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Total gains (losses) on fixed maturity securities: | ||||||||||||
Total OTTI losses recognized | $ | (924 | ) | $ | (682 | ) | $ | (2,432 | ) | |||
Less: Noncredit portion of OTTI losses transferred to and recognized in other comprehensive income (loss) | (31 | ) | 212 | 939 | ||||||||
|
|
|
|
|
| |||||||
Net OTTI losses on fixed maturity securities recognized in earnings (1) | (955 | ) | (470 | ) | (1,493 | ) | ||||||
Fixed maturity securities — net gains (losses) on sales and disposals | 25 | 215 | (165 | ) | ||||||||
|
|
|
|
|
| |||||||
Total gains (losses) on fixed maturity securities | (930 | ) | (255 | ) | (1,658 | ) | ||||||
Other net investment gains (losses): | ||||||||||||
Equity securities | (23 | ) | 104 | (399 | ) | |||||||
Trading and other securities — FVO general account securities — changes in estimated fair value | (2 | ) | — | — | ||||||||
Mortgage loans | 175 | 22 | (442 | ) | ||||||||
Real estate and real estate joint ventures | 134 | (54 | ) | (164 | ) | |||||||
Other limited partnership interests | 4 | (18 | ) | (356 | ) | |||||||
Other investment portfolio gains (losses) | (7 | ) | (6 | ) | (26 | ) | ||||||
|
|
|
|
|
| |||||||
Subtotal — investment portfolio gains (losses) | (649 | ) | (207 | ) | (3,045 | ) | ||||||
|
|
|
|
|
| |||||||
FVO CSEs — changes in estimated fair value: | ||||||||||||
Commercial mortgage loans | (84 | ) | 758 | — | ||||||||
Securities | — | (78 | ) | — | ||||||||
Long-term debt — related to commercial mortgage loans | 97 | (722 | ) | — | ||||||||
Long-term debt — related to securities | (8 | ) | 48 | — | ||||||||
Other gains (losses) (2) | (223 | ) | (207 | ) | 144 | |||||||
|
|
|
|
|
| |||||||
Subtotal FVO CSEs and other gains (losses) | (218 | ) | (201 | ) | 144 | |||||||
|
|
|
|
|
| |||||||
Total net investment gains (losses) | $ | (867 | ) | $ | (408 | ) | $ | (2,901 | ) | |||
|
|
|
|
|
|
(1) | Investment portfolio gains (losses) for the year ended December 31, 2011 includes intent-to-sell impairments of ($154) million as a result of the pending disposition of certain operations of MetLife Bank and the Caribbean Business. See Note 2. |
(2) | Other gains (losses) includes a loss of $87 million and $209 million for the years ended December 31, 2011 and 2010, respectively, related to the sale of the Company’s investment in MSI MetLife. See Note 2. Other gains (losses) for the year ended December 31, 2011 includes a goodwill impairment loss of $65 million and a loss of $19 million related to the Company’s pending sale of the Caribbean Business. See Notes 2 and 7. |
See “— Variable Interest Entities” for discussion of CSEs included in the table above.
Gains (losses) from foreign currency transactions included within net investment gains (losses) were $37 million, $230 million and $226 million for the years ended December 31, 2011, 2010 and 2009, respectively.
122
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Proceeds from sales or disposals of fixed maturity and equity securities and the components of fixed maturity and equity securities net investment gains (losses) were as shown in the table below. Investment gains and losses on sales of securities are determined on a specific identification basis.
Years Ended December 31, | Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | ||||||||||||||||||||||||||||
Fixed Maturity Securities | Equity Securities | Total | ||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||
Proceeds | $ | 67,449 | $ | 54,514 | $ | 38,972 | $ | 1,241 | $ | 616 | $ | 940 | $ | 68,690 | $ | 55,130 | $ | 39,912 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Gross investment gains | $ | 892 | $ | 831 | $ | 939 | $ | 108 | $ | 129 | $ | 134 | $ | 1,000 | $ | 960 | $ | 1,073 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Gross investment losses | (867 | ) | (616 | ) | (1,104 | ) | (71 | ) | (11 | ) | (133 | ) | (938 | ) | (627 | ) | (1,237 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total OTTI losses recognized in earnings: | ||||||||||||||||||||||||||||||||||||
Credit-related | (645 | ) | (423 | ) | (1,130 | ) | — | — | — | (645 | ) | (423 | ) | (1,130 | ) | |||||||||||||||||||||
Other (1) | (310 | ) | (47 | ) | (363 | ) | (60 | ) | (14 | ) | (400 | ) | (370 | ) | (61 | ) | (763 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total OTTI losses recognized in | (955 | ) | (470 | ) | (1,493 | ) | (60 | ) | (14 | ) | (400 | ) | (1,015 | ) | (484 | ) | (1,893 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Net investment gains (losses) | $ | (930 | ) | $ | (255 | ) | $ | (1,658 | ) | $ | (23 | ) | $ | 104 | $ | (399 | ) | $ | (953 | ) | $ | (151 | ) | $ | (2,057 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Other OTTI losses recognized in earnings include impairments on equity securities, impairments on perpetual hybrid securities classified within fixed maturity securities where the primary reason for the impairment was the severity and/or the duration of an unrealized loss position and fixed maturity securities where there is an intent to sell or it is more likely than not that the Company will be required to sell the security before recovery of the decline in estimated fair value. |
Fixed maturity security OTTI losses recognized in earnings related to the following sectors and industries within the U.S. and foreign corporate securities sector:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Sector: | ||||||||||||
U.S. and foreign corporate securities — by industry: | ||||||||||||
Finance | $ | 56 | $ | 126 | $ | 452 | ||||||
Consumer | 50 | 36 | 211 | |||||||||
Communications | 41 | 16 | 235 | |||||||||
Industrial | 11 | 2 | 30 | |||||||||
Utility | 10 | 3 | 89 | |||||||||
Other industries | 1 | — | 26 | |||||||||
|
|
|
|
|
| |||||||
Total U.S. and foreign corporate securities | 169 | 183 | 1,043 | |||||||||
Foreign government securities | 486 | — | 1 | |||||||||
RMBS | 214 | 117 | 258 | |||||||||
ABS | 54 | 84 | 103 | |||||||||
CMBS | 32 | 86 | 88 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 955 | $ | 470 | $ | 1,493 | ||||||
|
|
|
|
|
|
123
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Equity security OTTI losses recognized in earnings related to the following sectors and industries:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Sector: | ||||||||||||
Non-redeemable preferred stock | $ | 38 | $ | 7 | $ | 333 | ||||||
Common stock | 22 | 7 | 67 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 60 | $ | 14 | $ | 400 | ||||||
|
|
|
|
|
| |||||||
Industry: | ||||||||||||
Financial services industry: | ||||||||||||
Perpetual hybrid securities | $ | 38 | $ | 3 | $ | 310 | ||||||
Common and remaining non-redeemable preferred stock | — | — | 30 | |||||||||
|
|
|
|
|
| |||||||
Total financial services industry | 38 | 3 | 340 | |||||||||
Other industries | 22 | 11 | 60 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 60 | $ | 14 | $ | 400 | ||||||
|
|
|
|
|
|
Credit Loss Rollforward — Rollforward of the Cumulative Credit Loss Component of OTTI Loss Recognized in Earnings on Fixed Maturity Securities Still Held for Which a Portion of the OTTI Loss Was Recognized in Other Comprehensive Income (Loss)
The table below presents a rollforward of the cumulative credit loss component of OTTI loss recognized in earnings on fixed maturity securities still held for which a portion of the OTTI loss was recognized in other comprehensive income (loss):
Years Ended December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Balance, at January 1, | $ | 443 | $ | 581 | ||||
Additions: | ||||||||
Initial impairments — credit loss OTTI recognized on securities not previously impaired | 45 | 109 | ||||||
Additional impairments — credit loss OTTI recognized on securities previously impaired | 143 | 125 | ||||||
Reductions: | ||||||||
Sales (maturities, pay downs or prepayments) during the period of securities previously impaired as credit loss OTTI | (90 | ) | (260 | ) | ||||
Securities de-recognized in connection with the adoption of new guidance | — | (100 | ) | |||||
Securities impaired to net present value of expected future cash flows | (57 | ) | (2 | ) | ||||
Increases in cash flows — accretion of previous credit loss OTTI | (13 | ) | (10 | ) | ||||
|
|
|
| |||||
Balance, at December 31, | $ | 471 | $ | 443 | ||||
|
|
|
|
124
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Net Investment Income
The components of net investment income were as follows:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Investment income: | ||||||||||||
Fixed maturity securities | $ | 15,037 | $ | 12,407 | $ | 11,545 | ||||||
Equity securities | 141 | 128 | 178 | |||||||||
Trading and other securities — Actively Traded Securities and FVO general account securities (1) | 31 | 73 | 116 | |||||||||
Mortgage loans | 3,164 | 2,824 | 2,741 | |||||||||
Policy loans | 641 | 649 | 641 | |||||||||
Real estate and real estate joint ventures | 692 | 376 | (270 | ) | ||||||||
Other limited partnership interests | 681 | 879 | 174 | |||||||||
Cash, cash equivalents and short-term investments | 167 | 101 | 128 | |||||||||
International joint ventures (2) | (12 | ) | (92 | ) | (121 | ) | ||||||
Other | 178 | 236 | 205 | |||||||||
|
|
|
|
|
| |||||||
Subtotal | 20,720 | 17,581 | 15,337 | |||||||||
Less: Investment expenses | 1,022 | 885 | 892 | |||||||||
|
|
|
|
|
| |||||||
Subtotal, net | 19,698 | 16,696 | 14,445 | |||||||||
|
|
|
|
|
| |||||||
Trading and other securities — FVO contractholder-directed unit-linked investments (1) | (453 | ) | 372 | 284 | ||||||||
FVO CSEs: | ||||||||||||
Commercial mortgage loans | 332 | 411 | — | |||||||||
Securities | 9 | 15 | — | |||||||||
|
|
|
|
|
| |||||||
Subtotal | (112 | ) | 798 | 284 | ||||||||
|
|
|
|
|
| |||||||
Net investment income | $ | 19,586 | $ | 17,494 | $ | 14,729 | ||||||
|
|
|
|
|
|
(1) | Changes in estimated fair value subsequent to purchase for securities still held as of the end of the respective years included in net investment income were: |
Trading and other securities — Actively Traded Securities and FVO general account securities | $ | (3 | ) | $ | 30 | $ | 34 | |||||
Trading and other securities — FVO contractholder-directed unit-linked investments | $ | (647 | ) | $ | 322 | $ | 275 |
(2) | Amounts are presented net of changes in estimated fair value of derivatives related to economic hedges of the Company’s investment in these equity method international joint venture investments that do not qualify for hedge accounting of ($23) million, $36 million, and ($143) million for the years ended December 31, 2011, 2010, and 2009, respectively. |
See “— Variable Interest Entities” for discussion of CSEs included in the table above.
125
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Securities Lending
As described more fully in Note 1, the Company participates in a securities lending program whereby blocks of securities are loaned to third parties. These transactions are treated as financing arrangements and the associated cash collateral received is recorded as a liability. The Company is obligated to return the cash collateral received to its counterparties.
Elements of the securities lending program are presented below at:
December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Securities on loan: (1) | ||||||||
Amortized cost | $ | 20,613 | $ | 23,715 | ||||
Estimated fair value | $ | 24,072 | $ | 24,230 | ||||
Cash collateral on deposit from counterparties (2) | $ | 24,223 | $ | 24,647 | ||||
Security collateral on deposit from counterparties | $ | 371 | $ | — | ||||
Reinvestment portfolio — estimated fair value | $ | 23,940 | $ | 24,177 |
(1) | Included within fixed maturity securities and short-term investments. |
(2) | Included within payables for collateral under securities loaned and other transactions. |
Security collateral on deposit from counterparties in connection with the securities lending transactions may not be sold or repledged, unless the counterparty is in default, and is not reflected in the consolidated financial statements.
Invested Assets on Deposit, Held in Trust and Pledged as Collateral
Invested assets on deposit, held in trust and pledged as collateral are presented in the table below at estimated fair value for cash and cash equivalents, short-term investments, fixed maturity securities, equity securities, and trading and other securities and at carrying value for mortgage loans.
December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Invested assets on deposit (1) | $ | 1,660 | $ | 2,110 | ||||
Invested assets held in trust (2) | 11,135 | 8,430 | ||||||
Invested assets pledged as collateral (3) | 29,899 | 29,470 | ||||||
|
|
|
| |||||
Total invested assets on deposit, held in trust and pledged as collateral | $ | 42,694 | $ | 40,010 | ||||
|
|
|
|
(1) | The Company has invested assets on deposit with regulatory agencies consisting primarily of cash and cash equivalents, short-term investments, fixed maturity securities and equity securities. |
(2) | The Company held in trust cash and securities, primarily fixed maturity and equity securities, to satisfy requirements under certain collateral financing agreements and certain reinsurance agreements. |
126
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
(3) | The Company has pledged fixed maturity securities, mortgage loans and cash and cash equivalents in connection with various agreements and transactions, including funding and advances agreements (see Notes 8 and 11), collateralized borrowings (see Note 11), collateral financing arrangements (see Note 12), derivative transactions (see Note 4), and short sale agreements (see “— Trading and Other Securities”). |
Mortgage Loans
Mortgage loans are summarized as follows at:
December 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Carrying Value | % of Total | Carrying Value | % of Total | |||||||||||||
(In millions) | ||||||||||||||||
Mortgage loans held-for-investment: | ||||||||||||||||
Commercial | $ | 40,440 | 56.1 | % | $ | 37,818 | 60.7 | % | ||||||||
Agricultural | 13,129 | 18.2 | 12,751 | 20.4 | ||||||||||||
Residential (1) | 689 | 1.0 | 2,231 | 3.7 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Subtotal | 54,258 | 75.3 | 52,800 | 84.8 | ||||||||||||
Valuation allowances (1) | (481 | ) | (0.7 | ) | (664 | ) | (1.1 | ) | ||||||||
|
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|
|
|
|
|
| |||||||||
Subtotal mortgage loans held-for-investment, net | 53,777 | 74.6 | 52,136 | 83.7 | ||||||||||||
Commercial mortgage loans held by CSEs | 3,138 | 4.4 | 6,840 | 11.0 | ||||||||||||
|
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|
|
|
|
|
| |||||||||
Total mortgage loans held-for-investment, net | 56,915 | 79.0 | 58,976 | 94.7 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Mortgage loans held-for-sale: | ||||||||||||||||
Residential | 3,064 | 4.2 | 2,510 | 4.0 | ||||||||||||
Mortgage loans — lower of amortized cost or estimated fair value (1) | 4,462 | 6.2 | 811 | 1.3 | ||||||||||||
Securitized reverse residential mortgage loans (2) | 7,652 | 10.6 | — | — | ||||||||||||
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|
|
|
|
|
| |||||||||
Total mortgage loans held-for-sale | 15,178 | 21.0 | 3,321 | 5.3 | ||||||||||||
|
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|
|
|
|
|
| |||||||||
Total mortgage loans, net | $ | 72,093 | 100.0 | % | $ | 62,297 | 100.0 | % | ||||||||
|
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|
|
|
|
|
|
(1) | The valuation allowance on and the related carrying value of certain residential mortgage loans held-for-investment was transferred to mortgage loans held-for-sale in connection with the pending disposition of certain operations of MetLife Bank. See Note 2. |
(2) | See Note 1 for a discussion of the securitized reverse residential mortgage loans. |
See “— Variable Interest Entities” for discussion of CSEs included in the table above and the decrease in commercial mortgage loans held by CSEs.
Certain of the Company’s real estate joint ventures have mortgage loans with the Company. The carrying values of such mortgage loans were $286 million and $283 million at December 31, 2011 and 2010, respectively.
127
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The following tables present the recorded investment in mortgage loans held for investment, by portfolio segment, by method of evaluation of credit loss, and the related valuation allowances, by type of credit loss, at:
Commercial | Agricultural | Residential | Total | |||||||||||||
(In millions) | ||||||||||||||||
December 31, 2011: | ||||||||||||||||
Mortgage loans: | ||||||||||||||||
Evaluated individually for credit losses | $ | 96 | $ | 159 | $ | 13 | $ | 268 | ||||||||
Evaluated collectively for credit losses | 40,344 | 12,970 | 676 | 53,990 | ||||||||||||
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|
|
|
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| |||||||||
Total mortgage loans | 40,440 | 13,129 | 689 | 54,258 | ||||||||||||
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| |||||||||
Valuation allowances: | ||||||||||||||||
Specific credit losses | 59 | 45 | 1 | 105 | ||||||||||||
Non-specifically identified credit losses | 339 | 36 | 1 | 376 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Total valuation allowances | 398 | 81 | 2 | 481 | ||||||||||||
|
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|
|
|
|
|
| |||||||||
Mortgage loans, net of valuation allowance | $ | 40,042 | $ | 13,048 | $ | 687 | $ | 53,777 | ||||||||
|
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|
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|
|
|
| |||||||||
December 31, 2010: | ||||||||||||||||
Mortgage loans: | ||||||||||||||||
Evaluated individually for credit losses | $ | 120 | $ | 146 | $ | 13 | $ | 279 | ||||||||
Evaluated collectively for credit losses | 37,698 | 12,605 | 2,218 | 52,521 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total mortgage loans | 37,818 | 12,751 | 2,231 | 52,800 | ||||||||||||
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|
|
|
|
|
| |||||||||
Valuation allowances: | ||||||||||||||||
Specific credit losses | 36 | 52 | — | 88 | ||||||||||||
Non-specifically identified credit losses | 526 | 36 | 14 | 576 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Total valuation allowances | 562 | 88 | 14 | 664 | ||||||||||||
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|
| |||||||||
Mortgage loans, net of valuation allowance | $ | 37,256 | $ | 12,663 | $ | 2,217 | $ | 52,136 | ||||||||
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|
|
|
|
|
The following tables present the changes in the valuation allowance, by portfolio segment:
Mortgage Loan Valuation Allowances | ||||||||||||||||
Commercial | Agricultural | Residential | Total | |||||||||||||
(In millions) | ||||||||||||||||
Balance at January 1, 2009 | $ | 232 | $ | 61 | $ | 11 | $ | 304 | ||||||||
Provision (release) | 384 | 79 | 12 | 475 | ||||||||||||
Charge-offs, net of recoveries | (27 | ) | (25 | ) | (6 | ) | (58 | ) | ||||||||
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| |||||||||
Balance at December 31, 2009 | 589 | 115 | 17 | 721 | ||||||||||||
Provision (release) | (5 | ) | 12 | 2 | 9 | |||||||||||
Charge-offs, net of recoveries | (22 | ) | (39 | ) | (5 | ) | (66 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at December 31, 2010 | 562 | 88 | 14 | 664 | ||||||||||||
Provision (release) | (152 | ) | (3 | ) | 10 | (145 | ) | |||||||||
Charge-offs, net of recoveries | (12 | ) | (4 | ) | (3 | ) | (19 | ) | ||||||||
Transfer to held-for-sale (1) | — | — | (19 | ) | (19 | ) | ||||||||||
|
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|
|
|
|
|
| |||||||||
Balance at December 31, 2011 | $ | 398 | $ | 81 | $ | 2 | $ | 481 | ||||||||
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|
|
(1) | The valuation allowance on and the related carrying value of certain residential mortgage loans held-for-investment was transferred to mortgage loans held-for-sale in connection with the pending disposition of certain operations of MetLife Bank. See Note 2. |
128
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Commercial Mortgage Loans — by Credit Quality Indicators with Estimated Fair Value. See Note 1 for a discussion of all credit quality indicators presented herein. Presented below for the commercial mortgage loans held-for-investment is the recorded investment, prior to valuation allowances, by the indicated loan-to-value ratio categories and debt service coverage ratio categories and estimated fair value of such mortgage loans by the indicated loan-to-value ratio categories at:
Commercial | ||||||||||||||||||||||||||||
Recorded Investment | ||||||||||||||||||||||||||||
Debt Service Coverage Ratios | % of Total | Estimated Fair Value | % of Total | |||||||||||||||||||||||||
> 1.20x | 1.00x - 1.20x | < 1.00x | Total | |||||||||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||||||
December 31, 2011: | ||||||||||||||||||||||||||||
Loan-to-value ratios: | ||||||||||||||||||||||||||||
Less than 65% | $ | 24,983 | $ | 448 | $ | 564 | $ | 25,995 | 64.3 | % | $ | 27,581 | 65.5 | % | ||||||||||||||
65% to 75% | 8,275 | 336 | 386 | 8,997 | 22.3 | 9,387 | 22.3 | |||||||||||||||||||||
76% to 80% | 1,150 | 98 | 226 | 1,474 | 3.6 | 1,473 | 3.5 | |||||||||||||||||||||
Greater than 80% | 2,714 | 880 | 380 | 3,974 | 9.8 | 3,664 | 8.7 | |||||||||||||||||||||
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| |||||||||||||||
Total | $ | 37,122 | $ | 1,762 | $ | 1,556 | $ | 40,440 | 100.0 | % | $ | 42,105 | 100.0 | % | ||||||||||||||
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| |||||||||||||||
December 31, 2010: | ||||||||||||||||||||||||||||
Loan-to-value ratios: | ||||||||||||||||||||||||||||
Less than 65% | $ | 16,663 | $ | 125 | $ | 483 | $ | 17,271 | 45.7 | % | $ | 18,183 | 46.9 | % | ||||||||||||||
65% to 75% | 9,022 | 765 | 513 | 10,300 | 27.2 | 10,685 | 27.6 | |||||||||||||||||||||
76% to 80% | 3,033 | 304 | 135 | 3,472 | 9.2 | 3,535 | 9.1 | |||||||||||||||||||||
Greater than 80% | 4,155 | 1,813 | 807 | 6,775 | 17.9 | 6,374 | 16.4 | |||||||||||||||||||||
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| |||||||||||||||
Total | $ | 32,873 | $ | 3,007 | $ | 1,938 | $ | 37,818 | 100.0 | % | $ | 38,777 | 100.0 | % | ||||||||||||||
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Agricultural Mortgage Loans — by Credit Quality Indicator. The recorded investment in agricultural mortgage loans held-for-investment, prior to valuation allowances, by credit quality indicator, is as shown below. The estimated fair value of agricultural mortgage loans held-for-investment was $13.6 billion and $12.9 billion at December 31, 2011 and 2010, respectively.
Agricultural | ||||||||||||||||
December 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Recorded Investment | % of Total | Recorded Investment | % of Total | |||||||||||||
(In millions) | (In millions) | |||||||||||||||
Loan-to-value ratios: | ||||||||||||||||
Less than 65% | $ | 11,802 | 89.9 | % | $ | 11,483 | 90.1 | % | ||||||||
65% to 75% | 874 | 6.7 | 885 | 6.9 | ||||||||||||
76% to 80% | 76 | 0.6 | 48 | 0.4 | ||||||||||||
Greater than 80% | 377 | 2.8 | 335 | 2.6 | ||||||||||||
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| |||||||||
Total | $ | 13,129 | 100.0 | % | $ | 12,751 | 100.0 | % | ||||||||
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|
129
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Residential Mortgage Loans — by Credit Quality Indicator. The recorded investment in residential mortgage loans held-for-investment, prior to valuation allowances, by credit quality indicator, is as shown below. The estimated fair value of residential mortgage loans held-for-investment was $737 million and $2.3 billion at December 31, 2011 and 2010, respectively.
Residential | ||||||||||||||||
December 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Recorded Investment | % of Total | Recorded Investment | % of Total | |||||||||||||
(In millions) | (In millions) | |||||||||||||||
Performance indicators: | ||||||||||||||||
Performing | $ | 671 | 97.4 | % | $ | 2,149 | 96.3 | % | ||||||||
Nonperforming | 18 | 2.6 | 82 | 3.7 | ||||||||||||
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| |||||||||
Total | $ | 689 | 100.0 | % | $ | 2,231 | 100.0 | % | ||||||||
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|
|
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|
|
Past Due and Interest Accrual Status of Mortgage Loans. The Company has a high quality, well performing, mortgage loan portfolio, with approximately 99% of all mortgage loans classified as performing at both December 31, 2011 and December 31, 2010. The Company defines delinquent mortgage loans consistent with industry practice, when interest and principal payments are past due as follows: commercial mortgage loans — 60 days or more; agricultural mortgage loans — 90 days or more; and residential mortgage loans — 60 days or more. The recorded investment in mortgage loans held-for-investment, prior to valuation allowances, past due according to these aging categories, greater than 90 days past due and still accruing interest and in nonaccrual status, by portfolio segment, were as follows at:
Past Due | Greater than 90 Days Past Due Still Accruing Interest | Nonaccrual Status | ||||||||||||||||||||||
December 31, 2011 | December 31, 2010 | December 31, 2011 | December 31, 2010 | December 31, 2011 | December 31, 2010 | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Commercial | $ | 63 | $ | 58 | $ | — | $ | 1 | $ | 63 | $ | 7 | ||||||||||||
Agricultural | 146 | 159 | 29 | 13 | 157 | 177 | ||||||||||||||||||
Residential | 8 | 79 | — | 11 | 17 | 25 | ||||||||||||||||||
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| |||||||||||||
Total | $ | 217 | $ | 296 | $ | 29 | $ | 25 | $ | 237 | $ | 209 | ||||||||||||
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130
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Impaired Mortgage Loans. The unpaid principal balance, recorded investment, valuation allowances and carrying value, net of valuation allowances, for impaired mortgage loans held-for-investment, including those modified in a troubled debt restructuring, by portfolio segment, were as follows at:
Impaired Mortgage Loans | ||||||||||||||||||||||||||||||||
Loans with a Valuation Allowance | Loans without a Valuation Allowance | All Impaired Loans | ||||||||||||||||||||||||||||||
Unpaid Principal Balance | Recorded Investment | Valuation Allowances | Carrying Value | Unpaid Principal Balance | Recorded Investment | Unpaid Principal Balance | Carrying Value | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
December 31, 2011: | ||||||||||||||||||||||||||||||||
Commercial | $ | 96 | $ | 96 | $ | 59 | $ | 37 | $ | 252 | $ | 237 | $ | 348 | $ | 274 | ||||||||||||||||
Agricultural | 160 | 159 | 45 | 114 | 71 | 69 | 231 | 183 | ||||||||||||||||||||||||
Residential | 13 | 13 | 1 | 12 | 1 | 1 | 14 | 13 | ||||||||||||||||||||||||
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| |||||||||||||||||
Total | $ | 269 | $ | 268 | $ | 105 | $ | 163 | $ | 324 | $ | 307 | $ | 593 | $ | 470 | ||||||||||||||||
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| |||||||||||||||||
December 31, 2010: | ||||||||||||||||||||||||||||||||
Commercial | $ | 120 | $ | 120 | $ | 36 | $ | 84 | $ | 99 | $ | 87 | $ | 219 | $ | 171 | ||||||||||||||||
Agricultural | 146 | 146 | 52 | 94 | 123 | 119 | 269 | 213 | ||||||||||||||||||||||||
Residential | 3 | 3 | — | 3 | 16 | 16 | 19 | 19 | ||||||||||||||||||||||||
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| |||||||||||||||||
Total | $ | 269 | $ | 269 | $ | 88 | $ | 181 | $ | 238 | $ | 222 | $ | 507 | $ | 403 | ||||||||||||||||
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Unpaid principal balance is generally prior to any charge-offs.
The average investment in impaired mortgage loans held-for-investment, including those modified in a troubled debt restructuring, and the related interest income, by portfolio segment, for the years ended December 31, 2011 and 2010, respectively, and for all mortgage loans for the year ended December 31, 2009, was:
Impaired Mortgage Loans | ||||||||||||
Average Investment | Interest Income Recognized | |||||||||||
Cash Basis | Accrual Basis | |||||||||||
(In millions) | ||||||||||||
For the Year Ended December 31, 2011: | ||||||||||||
Commercial | $ | 313 | $ | 5 | $ | 1 | ||||||
Agricultural | 252 | 4 | 1 | |||||||||
Residential | 23 | — | — | |||||||||
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|
|
| |||||||
Total | $ | 588 | $ | 9 | $ | 2 | ||||||
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|
|
|
| |||||||
For the Year Ended December 31, 2010: | ||||||||||||
Commercial | $ | 192 | $ | 5 | $ | 1 | ||||||
Agricultural | 284 | 6 | 2 | |||||||||
Residential | 16 | — | — | |||||||||
|
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|
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| |||||||
Total | $ | 492 | $ | 11 | $ | 3 | ||||||
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| |||||||
For the Year Ended December 31, 2009 | $ | 338 | $ | 8 | $ | 1 | ||||||
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131
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Mortgage Loans Modified in a Troubled Debt Restructuring. See Note 1 for a discussion of loan modifications that are classified as trouble debt restructuring and the types of concession typically granted. At December 31, 2011, the number of mortgage loans and carrying value after specific valuation allowance of mortgage loans modified during the period in a troubled debt restructuring were as follows:
Mortgage Loans Modified in a Troubled Debt Restructuring | ||||||||||||
December 31, 2011 | ||||||||||||
Number of Mortgage Loans | Carrying Value after Specific Valuation Allowance | |||||||||||
Pre- Modification | Post- Modification | |||||||||||
(In millions) | ||||||||||||
Commercial | 5 | $ | 147 | $ | 111 | |||||||
Agricultural | 10 | 42 | 42 | |||||||||
Residential | — | — | — | |||||||||
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| |||||||
Total | 15 | $ | 189 | $ | 153 | |||||||
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|
During the previous 12 months, the Company had four agricultural mortgage loans, with a carrying value after specific valuation allowance of $13 million, modified in a troubled debt restructuring with a subsequent payment default at December 31, 2011. There were no commercial or residential mortgage loans during the previous 12 months modified in a troubled debt restructuring with a subsequent payment default at December 31, 2011. Payment default is determined in the same manner as delinquency status — when interest and principal payments are past due as follows: commercial mortgage loans — 60 days or more; agricultural mortgage loans — 90 days or more; and residential mortgage loans — 60 days or more.
Real Estate and Real Estate Joint Ventures
Real estate investments by type consisted of the following:
December 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Carrying Value | % of Total | Carrying Value | % of Total | |||||||||||||
(In millions) | (In millions) | |||||||||||||||
Traditional | $ | 5,845 | 68.3 | % | $ | 4,871 | 60.7 | % | ||||||||
Real estate joint ventures and funds | 2,340 | 27.3 | 2,707 | 33.7 | ||||||||||||
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| |||||||||
Real estate and real estate joint ventures | 8,185 | 95.6 | 7,578 | 94.4 | ||||||||||||
Foreclosed (commercial, agricultural and residential) | 264 | 3.1 | 152 | 1.9 | ||||||||||||
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| |||||||||
Real estate held-for-investment | 8,449 | 98.7 | 7,730 | 96.3 | ||||||||||||
Real estate held-for-sale | 114 | 1.3 | 300 | 3.7 | ||||||||||||
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|
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|
| |||||||||
Total real estate and real estate joint ventures | $ | 8,563 | 100.0 | % | $ | 8,030 | 100.0 | % | ||||||||
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|
|
|
|
|
|
The Company classifies within traditional real estate its investment in income-producing real estate, which is comprised primarily of wholly-owned real estate and, to a much lesser extent, joint ventures with interests in single property income-producing real estate. The estimated fair value of the traditional real estate investment portfolio was $7.6 billion and $6.2 billion at December 31, 2011 and 2010, respectively. The Company classifies within real estate joint ventures and funds, its investments in joint ventures with interests in multi-property
132
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
projects with varying strategies ranging from the development of properties to the operation of income-producing properties; as well as its investments in real estate private equity funds. From time to time, the Company transfers investments from these joint ventures to traditional real estate, if the Company retains an interest in the joint venture after a completed property commences operations and the Company intends to retain an interest in the property.
Properties acquired through foreclosure were $295 million, $165 million and $127 million for the years ended December 31, 2011, 2010 and 2009, respectively, and include commercial, agricultural and residential properties. After the Company acquires properties through foreclosure, it evaluates whether the properties are appropriate for retention in its traditional real estate portfolio. Foreclosed real estate held at December 31, 2011 and 2010 includes those properties the Company has not selected for retention in its traditional real estate portfolio and which do not meet the criteria to be classified as held-for-sale.
The wholly-owned real estate within traditional real estate is net of accumulated depreciation of $1.3 billion and $1.5 billion at December 31, 2011 and 2010, respectively. Related depreciation expense on traditional wholly-owned real estate was $164 million, $151 million and $135 million for the years ended December 31, 2011, 2010 and 2009, respectively. These amounts include depreciation expense related to discontinued operations of $9 million, $20 million and $21 million for the years ended December 31, 2011, 2010 and 2009, respectively.
There were no impairments recognized on real estate held-for-investment for the year ended December 31, 2011. Impairments recognized on real estate held-for-investment were $48 million and $160 million for the years ended December 31, 2010 and 2009, respectively. Impairments recognized on real estate held-for-sale were $2 million and $1 million for the years ended December 31, 2011 and 2010, respectively. There were no impairments recognized on real estate held-for-sale for the year ended December 31, 2009. The Company’s carrying value of real estate held-for-sale has been reduced by impairments recorded prior to 2009 of $1 million at both December 31, 2011 and 2010. The carrying value of non-income producing real estate was $182 million and $137 million at December 31, 2011 and 2010, respectively.
Other Limited Partnership Interests
The carrying value of other limited partnership interests (which primarily represent ownership interests in pooled investment funds that principally make private equity investments in companies in the United States and overseas) was $6.4 billion at both December 31, 2011 and 2010. Included within other limited partnership interests were $1.1 billion and $1.0 billion at December 31, 2011 and 2010, respectively, of investments in hedge funds. Impairments of other limited partnership interests, principally other limited partnership interests accounted for under the cost method, were $5 million, $12 million and $354 million for the years ended December 31, 2011, 2010 and 2009, respectively.
Collectively Significant Equity Method Investments
The Company holds investments in real estate joint ventures, real estate funds and other limited partnership interests consisting of leveraged buy-out funds, hedge funds, private equity funds, joint ventures and other funds. The portion of these investments accounted for under the equity method had a carrying value of $9.5 billion as of December 31, 2011. The Company’s maximum exposure to loss related to these equity method investments is limited to the carrying value of these investments plus unfunded commitments of $3.5 billion as of December 31, 2011. Except for certain real estate joint ventures, the Company’s investments in real estate funds and other limited partnership interests are generally of a passive nature in that the Company does not participate in the management of the entities.
133
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
As further described in Note 1, the Company generally records its share of earnings in its equity method investments using a three-month lag methodology and within net investment income. Aggregate net investment income from these equity method real estate joint ventures, real estate funds and other limited partnership interests exceeded 10% of the Company’s consolidated pre-tax income (loss) from continuing operations for two of the three most recent annual periods: 2010 and 2009. The Company is providing the following aggregated summarized financial data for such equity method investments, for the most recent annual periods, in order to provide comparative information. This aggregated summarized financial data does not represent the Company’s proportionate share of the assets, liabilities, or earnings of such entities.
As of, and for the year ended December 31, 2011, the aggregated summarized financial data presented below reflects the latest available financial information. Aggregate total assets of these entities totaled $266.4 billion and $262.9 billion as of December 31, 2011 and 2010, respectively. Aggregate total liabilities of these entities totaled $31.2 billion and $77.6 billion as of December 31, 2011 and 2010, respectively. Aggregate net income (loss) of these entities totaled $9.7 billion, $18.7 billion and $22.8 billion for the years ended December 31, 2011, 2010 and 2009, respectively. Aggregate net income (loss) from real estate joint ventures, real estate funds and other limited partnership interests is primarily comprised of investment income, including recurring investment income and realized and unrealized investment gains (losses).
Other Invested Assets
The following table presents the carrying value of the Company’s other invested assets by type at:
December 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Carrying Value | % of Total | Carrying Value | % of Total | |||||||||||||
(In millions) | (In millions) | |||||||||||||||
Freestanding derivatives with positive fair values | $ | 16,200 | 68.7 | % | $ | 7,777 | 50.5 | % | ||||||||
Leveraged leases, net of non-recourse debt | 2,248 | 9.5 | 2,191 | 14.2 | ||||||||||||
Tax credit partnerships | 1,531 | 6.5 | 976 | 6.3 | ||||||||||||
MSRs | 666 | 2.8 | 950 | 6.2 | ||||||||||||
Funds withheld | 608 | 2.6 | 551 | 3.6 | ||||||||||||
Joint venture investments | 171 | 0.7 | 664 | 4.3 | ||||||||||||
Other | 2,157 | 9.2 | 2,291 | 14.9 | ||||||||||||
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| |||||||||
Total | $ | 23,581 | 100.0 | % | $ | 15,400 | 100.0 | % | ||||||||
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|
|
See Note 4 for information regarding the freestanding derivatives with positive estimated fair values. See “— Leveraged Leases” for the composition of leveraged leases. Tax credit partnerships are established for the purpose of investing in low-income housing and other social causes, where the primary return on investment is in the form of income tax credits, and are accounted for under the equity method or under the effective yield method. See Note 5 for activity rollforwards for MSRs. Funds withheld represent amounts contractually withheld by ceding companies in accordance with reinsurance agreements. Joint venture investments are accounted for under the equity method and represent the Company’s investment in insurance underwriting joint ventures in China, Japan (see Note 2) and Chile.
134
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Leveraged Leases
Investment in leveraged leases, included in other invested assets, consisted of the following:
December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Rental receivables, net | $ | 1,859 | $ | 1,882 | ||||
Estimated residual values | 1,657 | 1,682 | ||||||
|
|
|
| |||||
Subtotal | 3,516 | 3,564 | ||||||
Unearned income | (1,268 | ) | (1,373 | ) | ||||
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|
| |||||
Investment in leveraged leases | $ | 2,248 | $ | 2,191 | ||||
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Rental receivables are generally due in periodic installments. The payment periods range from one to 15 years, but in certain circumstances are as long as 34 years. For rental receivables, the primary credit quality indicator is whether the rental receivable is performing or non-performing, which is assessed monthly. The Company generally defines non-performing rental receivables as those that are 90 days or more past due. As of December 31, 2011 and 2010, all rental receivables were performing.
The deferred income tax liability related to leveraged leases was $1.5 billion and $1.4 billion at December 31, 2011 and 2010, respectively.
The components of income from investment in leveraged leases, excluding realized gains (losses) were as follows:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Net income from investment in leveraged leases | $ | 125 | $ | 123 | $ | 114 | ||||||
Less: Income tax expense on leveraged leases | (44 | ) | (43 | ) | (40 | ) | ||||||
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| |||||||
Net investment income after income tax from investment in leveraged leases | $ | 81 | $ | 80 | $ | 74 | ||||||
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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 $5.0 billion and $9.6 billion at December 31, 2011 and 2010, respectively.
Purchased Credit Impaired Investments
Investments acquired with evidence of credit quality deterioration since origination and for which it is probable at the acquisition date that the Company will be unable to collect all contractually required payments are classified as purchased credit impaired investments. For each investment, the excess of the cash flows expected to be collected as of the acquisition date over its acquisition-date fair value is referred to as the accretable yield and is recognized as net investment income on an effective yield basis. If subsequently, based on current information and events, it is probable that there is a significant increase in cash flows previously expected to be collected or if actual cash flows are significantly greater than cash flows previously expected to be collected, the accretable yield is adjusted prospectively. The excess of the contractually required payments
135
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
(including interest) as of the acquisition date over the cash flows expected to be collected as of the acquisition date is referred to as the nonaccretable difference, and this amount is not expected to be realized as net investment income. Decreases in cash flows expected to be collected can result in OTTI or the recognition of mortgage loan valuation allowances (see Note 1).
The table below presents the purchased credit impaired investments, by invested asset class, held at:
Fixed Maturity Securities | Mortgage Loans | |||||||||||||||
December 31, | ||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Outstanding principal and interest balance (1) | $ | 4,547 | $ | 1,548 | $ | 471 | $ | 504 | ||||||||
Carrying value (2) | $ | 3,130 | $ | 1,050 | $ | 173 | $ | 195 |
(1) | Represents the contractually required payments which is the sum of contractual principal, whether or not currently due, and accrued interest. |
(2) | Estimated fair value plus accrued interest for fixed maturity securities and amortized cost, plus accrued interest, less any valuation allowances, for mortgage loans. |
The following table presents information about purchased credit impaired investments acquired during the periods, as of their respective acquisition dates:
Fixed Maturity Securities | Mortgage Loans | |||||||||||||||
Years Ended December 31, | ||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Contractually required payments (including interest) | $ | 5,141 | $ | 2,126 | $ | — | $ | 553 | ||||||||
Cash flows expected to be collected (1), (2) | $ | 4,365 | $ | 1,782 | $ | — | $ | 374 | ||||||||
Fair value of investments acquired | $ | 2,590 | $ | 1,076 | $ | — | $ | 201 |
(1) | Represents undiscounted principal and interest cash flow expectations, at the date of acquisition. |
(2) | A portion of the difference between the contractually required payments (including interest) and the cash flows expected to be collected on certain of the investments acquired in the Acquisition has been established as an indemnification asset as discussed further in Note 2. |
136
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The following table presents activity for the accretable yield on purchased credit impaired investments for:
Fixed Maturity Securities | Mortgage Loans | |||||||||||||||
Years Ended December 31, | ||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Accretable yield, January 1, | $ | 541 | $ | — | $ | 170 | $ | — | ||||||||
Investments purchased | 1,775 | 606 | — | — | ||||||||||||
Acquisition (1) | — | 100 | — | 173 | ||||||||||||
Accretion recognized in earnings | (114 | ) | (62 | ) | (56 | ) | (3 | ) | ||||||||
Disposals | (65 | ) | — | — | — | |||||||||||
Reclassification (to) from nonaccretable difference | 174 | (103 | ) | 140 | — | |||||||||||
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| |||||||||
Accretable yield, December 31, | $ | 2,311 | $ | 541 | $ | 254 | $ | 170 | ||||||||
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(1) | As described further in Note 2, all investments acquired in the Acquisition were recorded at estimated fair value as of the Acquisition Date. This activity relates to acquired fixed maturity securities and mortgage loans with a credit impairment inherent in the estimated fair value. |
Variable Interest Entities
The Company holds investments in certain 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 following table presents the total assets and total liabilities relating to VIEs for which the Company has concluded that it is the primary beneficiary and which are consolidated at December 31, 2011 and 2010. Creditors or beneficial interest holders of VIEs where the Company is the primary beneficiary have no recourse to the general credit of the Company, as the Company’s obligation to the VIEs is limited to the amount of its committed investment.
December 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Total Assets | Total Liabilities | Total Assets | Total Liabilities | |||||||||||||
(In millions) | ||||||||||||||||
Consolidated securitization entities (1) | $ | 3,299 | $ | 3,103 | $ | 7,114 | $ | 6,892 | ||||||||
MRSC collateral financing arrangement (2) | 3,333 | — | 3,333 | — | ||||||||||||
Other limited partnership interests | 360 | 6 | 319 | 85 | ||||||||||||
Trading and other securities | 163 | — | 186 | — | ||||||||||||
Other invested assets | 102 | 1 | 108 | 1 | ||||||||||||
Real estate joint ventures | 16 | 18 | 20 | 17 | ||||||||||||
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| |||||||||
Total | $ | 7,273 | $ | 3,128 | $ | 11,080 | $ | 6,995 | ||||||||
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(1) | The Company consolidates former QSPEs that are structured as CMBS and former QSPEs that are structured as collateralized debt obligations. The assets of these entities can only be used to settle their respective liabilities, and under no circumstances is the Company liable for any principal or interest shortfalls should any arise. The Company’s exposure was limited to that of its remaining investment in the former QSPEs of $172 million and $201 million at estimated fair value at December 31, 2011 and 2010, respectively. The long-term debt presented below bears interest primarily at fixed rates ranging from 2.25% to 5.57%, payable primarily on a monthly basis and is expected to be repaid over the next six years. Interest |
137
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
expense related to these obligations, included in other expenses, was $324 million and $411 million for the years ended December 31, 2011 and 2010, respectively. The Company sold certain of these CMBS investments in the third quarter of 2011, resulting in the deconsolidation of such entities and their related mortgage loans held-for-investment and long-term debt. The assets and liabilities of these CSEs, at estimated fair value, were as follows at: |
December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Assets: | ||||||||
Mortgage loans held-for-investment (commercial mortgage loans) | $ | 3,138 | $ | 6,840 | ||||
Trading and other securities | 117 | 201 | ||||||
Accrued investment income | 16 | 34 | ||||||
Cash and cash equivalents | 21 | 39 | ||||||
Premiums, reinsurance and other receivables | 7 | — | ||||||
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| |||||
Total assets | $ | 3,299 | $ | 7,114 | ||||
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|
| |||||
Liabilities: | ||||||||
Long-term debt | $ | 3,068 | $ | 6,820 | ||||
Other liabilities | 35 | 72 | ||||||
|
|
|
| |||||
Total liabilities | $ | 3,103 | $ | 6,892 | ||||
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|
(2) | See Note 12 for a description of the MetLife Reinsurance Company of South Carolina (“MRSC”) collateral financing arrangement. These assets consist of the following, at estimated fair value, at: |
December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Fixed maturity securities available-for-sale: | ||||||||
ABS | $ | 1,356 | $ | 1,333 | ||||
U.S. corporate securities | 833 | 893 | ||||||
RMBS | 502 | 547 | ||||||
CMBS | 369 | 383 | ||||||
Foreign corporate securities | 126 | 139 | ||||||
State and political subdivision securities | 39 | 30 | ||||||
Foreign government securities | — | 5 | ||||||
Mortgage loans | 49 | — | ||||||
Cash and cash equivalents | 59 | 3 | ||||||
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| |||||
Total | $ | 3,333 | $ | 3,333 | ||||
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|
138
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The following table presents the carrying amount and maximum exposure to loss relating to VIEs for which the Company holds significant variable interests but is not the primary beneficiary and which have not been consolidated at:
December 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Carrying Amount | Maximum Exposure to Loss (1) | Carrying Amount | Maximum Exposure to Loss (1) | |||||||||||||
(In millions) | ||||||||||||||||
Fixed maturity securities available-for-sale: | ||||||||||||||||
RMBS (2) | $ | 42,637 | $ | 42,637 | $ | 45,852 | $ | 45,852 | ||||||||
CMBS (2) | 19,069 | 19,069 | 20,675 | 20,675 | ||||||||||||
ABS (2) | 12,979 | 12,979 | 13,168 | 13,168 | ||||||||||||
U.S. corporate securities | 2,911 | 2,911 | 2,435 | 2,435 | ||||||||||||
Foreign corporate securities | 2,087 | 2,087 | 2,950 | 2,950 | ||||||||||||
Other limited partnership interests | 4,340 | 6,084 | 4,383 | 6,479 | ||||||||||||
Other invested assets | 799 | 1,194 | 576 | 773 | ||||||||||||
Trading and other securities | 671 | 671 | 789 | 789 | ||||||||||||
Mortgage loans | 456 | 456 | 350 | 350 | ||||||||||||
Real estate joint ventures | 61 | 79 | 40 | 108 | ||||||||||||
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| |||||||||
Total | $ | 86,010 | $ | 88,167 | $ | 91,218 | $ | 93,579 | ||||||||
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|
(1) | The maximum exposure to loss relating to the fixed maturity and trading and other securities is equal to the carrying amounts or carrying amounts of retained interests. The maximum exposure to loss relating to the other limited partnership interests and real estate joint ventures is equal to the carrying amounts plus any unfunded commitments of the Company. Such a maximum loss would be expected to occur only upon bankruptcy of the issuer or investee. The maximum exposure to loss relating to mortgage loans is equal to the carrying amounts plus any unfunded commitments of the Company. For certain of its investments in other invested assets, the Company’s return is in the form of income tax credits which are guaranteed by a creditworthy third party. For such investments, the maximum exposure to loss is equal to the carrying amounts plus any unfunded commitments, reduced by income tax credits guaranteed by third parties of $267 million and $231 million at December 31, 2011 and 2010, respectively. |
(2) | For these variable interests, the Company’s involvement is limited to that of a passive investor. |
As described in Note 16, the Company makes commitments to fund partnership investments in the normal course of business. Excluding these commitments, the Company did not provide financial or other support to investees designated as VIEs during the years ended December 31, 2011, 2010 and 2009.
139
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
4. Derivative Financial Instruments
Accounting for Derivative Financial Instruments
See Note 1 for a description of the Company’s accounting policies for derivative financial instruments.
See Note 5 for information about the fair value hierarchy for derivatives.
Primary Risks Managed by Derivative Financial Instruments and Non-Derivative Financial Instruments
The Company is exposed to various risks relating to its ongoing business operations, including interest rate risk, foreign currency risk, credit risk and equity market risk. The Company uses a variety of strategies to manage these risks, including the use of derivative instruments. The following table presents the gross notional amount, estimated fair value and primary underlying risk exposure of the Company’s derivative financial instruments, excluding embedded derivatives, held at:
December 31, | ||||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||||
Primary Underlying Risk Exposure | Instrument Type | Notional Amount | Estimated Fair Value (1) | Notional Amount | Estimated Fair Value (1) | |||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||
Interest rate | Interest rate swaps | $ | 79,733 | $ | 8,241 | $ | 2,199 | $ | 54,803 | $ | 2,654 | $ | 1,516 | |||||||||||||
Interest rate floors | 23,866 | 1,246 | 165 | 23,866 | 630 | 66 | ||||||||||||||||||||
Interest rate caps | 49,665 | 102 | — | 35,412 | 176 | 1 | ||||||||||||||||||||
Interest rate futures | 14,965 | 25 | 19 | 9,385 | 43 | 17 | ||||||||||||||||||||
Interest rate options | 16,988 | 896 | 6 | 8,761 | 144 | 23 | ||||||||||||||||||||
Interest rate forwards | 14,033 | 286 | 91 | 10,374 | 106 | 135 | ||||||||||||||||||||
Synthetic GICs | 4,454 | — | — | 4,397 | — | — | ||||||||||||||||||||
Foreign currency | Foreign currency swaps | 16,461 | 1,172 | 1,060 | 17,626 | 1,616 | 1,282 | |||||||||||||||||||
Foreign currency forwards | 10,149 | 200 | 60 | 10,443 | 119 | 91 | ||||||||||||||||||||
Currency futures | 633 | — | — | 493 | 2 | — | ||||||||||||||||||||
Currency options | 1,321 | 6 | — | 5,426 | 50 | — | ||||||||||||||||||||
Non-derivative hedging instruments (2) | — | — | — | 169 | — | 185 | ||||||||||||||||||||
Credit | Credit default swaps | 13,136 | 326 | 113 | 10,957 | 173 | 104 | |||||||||||||||||||
Credit forwards | 20 | 4 | — | 90 | 2 | 3 | ||||||||||||||||||||
Equity market | Equity futures | 7,053 | 26 | 10 | 8,794 | 21 | 9 | |||||||||||||||||||
Equity options | 17,099 | 3,263 | 179 | 33,688 | 1,843 | 1,197 | ||||||||||||||||||||
Variance swaps | 18,801 | 397 | 75 | 18,022 | 198 | 118 | ||||||||||||||||||||
Total rate of return swaps | 1,644 | 10 | 34 | 1,547 | — | — | ||||||||||||||||||||
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|
|
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|
|
|
|
|
| |||||||||||||||
Total | $ | 290,021 | $ | 16,200 | $ | 4,011 | $ | 254,253 | $ | 7,777 | $ | 4,747 | ||||||||||||||
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(1) | The estimated fair value of all derivatives in an asset position is reported within other invested assets in the consolidated balance sheets and the estimated fair value of all derivatives in a liability position is reported within other liabilities in the consolidated balance sheets. |
(2) | The estimated fair value of non-derivative hedging instruments represents the amortized cost of the instruments, as adjusted for foreign currency transaction gains or losses. Non-derivative hedging instruments are reported within PABs in the consolidated balance sheets. |
140
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The following table presents the gross notional amount of derivative financial instruments by maturity at December 31, 2011:
Remaining Life | ||||||||||||||||||||
One Year or Less | After One Year Through Five Years | After Five Years Through Ten Years | After Ten Years | Total | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Interest rate swaps | $ | 5,709 | $ | 26,479 | $ | 18,989 | $ | 28,556 | $ | 79,733 | ||||||||||
Interest rate floors | — | 16,866 | 4,000 | 3,000 | 23,866 | |||||||||||||||
Interest rate caps | 5,000 | 40,151 | 4,514 | — | 49,665 | |||||||||||||||
Interest rate futures | 14,965 | — | — | — | 14,965 | |||||||||||||||
Interest rate options | 707 | 11,976 | 4,305 | — | 16,988 | |||||||||||||||
Interest rate forwards | 13,358 | 675 | — | — | 14,033 | |||||||||||||||
Synthetic GICs | 4,454 | — | — | — | 4,454 | |||||||||||||||
Foreign currency swaps | 1,255 | 6,593 | 5,793 | 2,820 | 16,461 | |||||||||||||||
Foreign currency forwards | 9,834 | 237 | 19 | 59 | 10,149 | |||||||||||||||
Currency futures | 633 | — | — | — | 633 | |||||||||||||||
Currency options | 1,321 | — | — | — | 1,321 | |||||||||||||||
Credit default swaps | 174 | 12,315 | 647 | — | 13,136 | |||||||||||||||
Credit forwards | 20 | — | — | — | 20 | |||||||||||||||
Equity futures | 7,053 | — | — | — | 7,053 | |||||||||||||||
Equity options | 538 | 5,254 | 11,307 | — | 17,099 | |||||||||||||||
Variance swaps | 1,015 | 2,067 | 15,396 | 323 | 18,801 | |||||||||||||||
Total rate of return swaps | 1,597 | 47 | — | — | 1,644 | |||||||||||||||
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|
|
|
|
|
| |||||||||||
Total | $ | 67,633 | $ | 122,660 | $ | 64,970 | $ | 34,758 | $ | 290,021 | ||||||||||
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Interest rate swaps are used by the Company primarily to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and liabilities (duration mismatches). In an interest rate swap, the Company agrees with another party to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts as calculated by reference to an agreed notional principal amount. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by the counterparty at each due date. The Company utilizes interest rate swaps in fair value, cash flow and non-qualifying hedging relationships.
The Company also enters into basis swaps to better match the cash flows from assets and related liabilities. In a basis swap, both legs of the swap are floating with each based on a different index. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. A single net payment is usually made by one counterparty at each due date. Basis swaps are included in interest rate swaps in the preceding table. The Company utilizes basis swaps in non-qualifying hedging relationships.
Inflation swaps are used as an economic hedge to reduce inflation risk generated from inflation-indexed liabilities. Inflation swaps are included in interest rate swaps in the preceding table. The Company utilizes inflation swaps in non-qualifying hedging relationships.
Implied volatility swaps are used by the Company primarily as economic hedges of interest rate risk associated with the Company’s investments in mortgage-backed securities. In an implied volatility swap, the Company exchanges fixed payments for floating payments that are linked to certain market volatility measures. If implied volatility rises, the floating payments that the Company receives will increase, and if implied volatility
141
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
falls, the floating payments that the Company receives will decrease. Implied volatility swaps are included in interest rate swaps in the preceding table. The Company utilizes implied volatility swaps in non-qualifying hedging relationships.
The Company uses structured interest rate swaps to synthetically create investments that are either more expensive to acquire or otherwise unavailable in the cash markets. These transactions are a combination of a derivative and a cash instrument such as a U.S. Treasury, agency, or other fixed maturity security. Structured interest rate swaps are included in interest rate swaps in the preceding table. Structured interest rate swaps are not designated as hedging instruments.
The Company purchases interest rate caps and floors primarily to protect its floating rate liabilities against rises in interest rates above a specified level, and against interest rate exposure arising from mismatches between assets and liabilities (duration mismatches), as well as to protect its minimum rate guarantee liabilities against declines in interest rates below a specified level, respectively. In certain instances, the Company locks in the economic impact of existing purchased caps and floors by entering into offsetting written caps and floors. The Company utilizes interest rate caps and floors in non-qualifying hedging relationships.
In exchange-traded interest rate (Treasury and swap) futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which is determined by the different classes of interest rate securities, and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. The Company enters into exchange-traded futures with regulated futures commission merchants that are members of the exchange. Exchange-traded interest rate (Treasury and swap) futures are used primarily to hedge mismatches between the duration of assets in a portfolio and the duration of liabilities supported by those assets, to hedge against changes in value of securities the Company owns or anticipates acquiring and to hedge against changes in interest rates on anticipated liability issuances by replicating Treasury or swap curve performance. The Company utilizes exchange-traded interest rate futures in non-qualifying hedging relationships.
Swaptions are used by the Company to hedge interest rate risk associated with the Company’s long-term liabilities and invested assets. A swaption is an option to enter into a swap with a forward starting effective date. In certain instances, the Company locks in the economic impact of existing purchased swaptions by entering into offsetting written swaptions. The Company pays a premium for purchased swaptions and receives a premium for written swaptions. Swaptions are included in interest rate options in the preceding table. The Company utilizes swaptions in non-qualifying hedging relationships.
The Company writes covered call options on its portfolio of U.S. Treasury securities as an income generation strategy. In a covered call transaction, the Company receives a premium at the inception of the contract in exchange for giving the derivative counterparty the right to purchase the referenced security from the Company at a predetermined price. The call option is “covered” because the Company owns the referenced security over the term of the option. Covered call options are included in interest rate options in the preceding table. The Company utilizes covered call options in non-qualifying hedging relationships.
The Company enters into interest rate forwards to buy and sell securities. The price is agreed upon at the time of the contract and payment for such a contract is made at a specified future date. The Company also uses interest rate forwards to sell to be announced securities as economic hedges against the risk of changes in the fair value of mortgage loans held-for-sale and interest rate lock commitments. The Company utilizes interest rate forwards in cash flow and non-qualifying hedging relationships.
Interest rate lock commitments are short-term commitments to fund mortgage loan applications in process (the pipeline) for a fixed term for a fixed rate or spread. During the term of an interest rate lock commitment, the Company is exposed to the risk that interest rates will change from the rate quoted to the potential borrower.
142
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Interest rate lock commitments to fund mortgage loans that will be held-for-sale are considered derivative instruments. Interest rate lock commitments are included in interest rate forwards in the preceding table. Interest rate lock commitments are not designated as hedging instruments.
A synthetic GIC is a contract that simulates the performance of a traditional guaranteed interest contract through the use of financial instruments. Under a synthetic GIC, the policyholder owns the underlying assets. The Company guarantees a rate return on those assets for a premium. Synthetic GICs are not designated as hedging instruments.
Foreign currency derivatives, including foreign currency swaps, foreign currency forwards, currency options, and currency futures contracts, are used by the Company to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated in foreign currencies. The Company also uses foreign currency forwards and swaps to hedge the foreign currency risk associated with certain of its net investments in foreign operations.
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 principal amount. The principal 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 fair value, cash flow, net investment in foreign operations and non-qualifying hedging relationships.
In a foreign currency forward transaction, the Company agrees with another party to deliver a specified amount of an identified currency at a specified future date. The price is agreed upon at the time of the contract and payment for such a contract is made in a different currency at the specified future date. The Company utilizes foreign currency forwards in fair value, net investment in foreign operations and non-qualifying hedging relationships.
In exchange-traded currency futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which is determined by referenced currencies, and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. The Company enters into exchange-traded futures with regulated futures commission merchants that are members of the exchange. Exchange-traded currency futures are used primarily to hedge currency mismatches between assets and liabilities. The Company utilizes exchange-traded currency futures in non-qualifying hedging relationships.
The Company enters into currency option contracts that give it the right, but not the obligation, to sell the foreign currency amount in exchange for a functional currency amount within a limited time at a contracted price. The contracts may also be net settled in cash, based on differentials in the foreign exchange rate and the strike price. The Company uses currency options to hedge against the foreign currency exposure inherent in certain of its variable annuity products. The Company also uses currency options as an economic hedge of foreign currency exposure related to the Company’s international subsidiaries. The Company utilizes currency options in non-qualifying hedging relationships.
The Company uses certain of its foreign currency denominated funding agreements to hedge portions of its net investments in foreign operations against adverse movements in exchange rates. Such contracts are included in non-derivative hedging instruments in the preceding table.
Swap spreadlocks are used by the Company to hedge invested assets on an economic basis against the risk of changes in credit spreads. Swap spreadlocks are forward transactions between two parties whose underlying reference index is a forward starting interest rate swap where the Company agrees to pay a coupon based on a predetermined reference swap spread in exchange for receiving a coupon based on a floating rate. The Company
143
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
has the option to cash settle with the counterparty in lieu of maintaining the swap after the effective date. The Company utilizes swap spreadlocks in non-qualifying hedging relationships.
Certain credit default swaps are used by the Company to hedge against credit-related changes in the value of its investments. In a credit default swap transaction, the Company agrees with another party, at specified intervals, to pay a premium to hedge credit risk. If a credit event, as defined by the contract, occurs, the contract may be cash settled or it may be settled gross by the delivery of par quantities of the referenced investment equal to the specified swap notional in exchange for the payment of cash amounts by the counterparty equal to the par value of the investment surrendered. The Company utilizes credit default swaps in non-qualifying hedging relationships.
Credit default swaps are also used to synthetically create investments that are either more expensive to acquire or otherwise unavailable in the cash markets. These transactions are a combination of a derivative and one or more cash instruments such as U.S. Treasury securities, agency securities or other fixed maturity securities. The Company also enters into certain credit default swaps held in relation to trading portfolios for the purpose of generating profits on short-term differences in price. These credit default swaps are not designated as hedging instruments.
The Company enters into forwards to lock in the price to be paid for forward purchases of certain securities. The price is agreed upon at the time of the contract and payment for the contract is made at a specified future date. When the primary purpose of entering into these transactions is to hedge against the risk of changes in purchase price due to changes in credit spreads, the Company designates these as credit forwards. The Company utilizes credit forwards in cash flow hedging relationships.
In exchange-traded equity futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which is determined by the different classes of equity securities, and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. The Company enters into exchange-traded futures with regulated futures commission merchants that are members of the exchange. Exchange-traded equity futures are used primarily to hedge liabilities embedded in certain variable annuity products offered by the Company. The Company utilizes exchange-traded equity futures in non-qualifying hedging relationships.
Equity index options are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. To hedge against adverse changes in equity indices, the Company enters into contracts to sell the equity index within a limited time at a contracted price. The contracts will be net settled in cash based on differentials in the indices at the time of exercise and the strike price. Certain of these contracts may also contain settlement provisions linked to interest rates. In certain instances, the Company may enter into a combination of transactions to hedge adverse changes in equity indices within a pre-determined range through the purchase and sale of options. Equity index options are included in equity options in the preceding table. The Company utilizes equity index options in non-qualifying hedging relationships.
Equity variance swaps are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. In an equity variance swap, the Company agrees with another party to exchange amounts in the future, based on changes in equity volatility over a defined period. Equity variance swaps are included in variance swaps in the preceding table. The Company utilizes equity variance swaps in non-qualifying hedging relationships.
Total rate of return swaps (“TRRs”) are swaps whereby the Company agrees with another party to exchange, at specified intervals, the difference between the economic risk and reward of an asset or a market index and the
144
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
London Inter-Bank Offered Rate (“LIBOR”), calculated by reference to an agreed notional principal amount. No cash is exchanged at the outset of the contract. Cash is paid and received over the life of the contract based on the terms of the swap. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by the counterparty at each due date. The Company uses TRRs to hedge its equity market guarantees in certain of its insurance products. TRRs can be used as hedges or to synthetically create investments. The Company utilizes TRRs in non-qualifying hedging relationships.
Hedging
The following table presents the gross notional amount and estimated fair value of derivatives designated as hedging instruments by type of hedge designation at:
December 31, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Derivatives Designated as Hedging Instruments | Notional Amount | Estimated Fair Value | Notional Amount | Estimated Fair Value | ||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Fair value hedges: | ||||||||||||||||||||||||
Foreign currency swaps | $ | 3,220 | $ | 500 | $ | 98 | $ | 4,524 | $ | 907 | $ | 145 | ||||||||||||
Foreign currency forwards | 1,830 | 2 | 10 | — | — | — | ||||||||||||||||||
Interest rate swaps | 4,580 | 1,884 | 92 | 5,108 | 823 | 169 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal | 9,630 | 2,386 | 200 | 9,632 | 1,730 | 314 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||
Foreign currency swaps | 6,370 | 352 | 306 | 5,556 | 213 | 347 | ||||||||||||||||||
Interest rate swaps | 3,230 | 947 | — | 3,562 | 102 | 116 | ||||||||||||||||||
Interest rate forwards | 965 | 210 | — | 1,140 | — | 107 | ||||||||||||||||||
Credit forwards | 20 | 4 | — | 90 | 2 | 3 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal | 10,585 | 1,513 | 306 | 10,348 | 317 | 573 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Foreign operations hedges: | ||||||||||||||||||||||||
Foreign currency forwards | 1,689 | 53 | 12 | 1,935 | 9 | 26 | ||||||||||||||||||
Non-derivative hedging instruments | — | — | — | 169 | — | 185 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal | 1,689 | 53 | 12 | 2,104 | 9 | 211 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total qualifying hedges | $ | 21,904 | $ | 3,952 | $ | 518 | $ | 22,084 | $ | 2,056 | $ | 1,098 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
145
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The following table presents the gross notional amount and estimated fair value of derivatives that were not designated or do not qualify as hedging instruments by derivative type at:
December 31, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Derivatives Not Designated or Not Qualifying as Hedging Instruments | Notional Amount | Estimated Fair Value | Notional Amount | Estimated Fair Value | ||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Interest rate swaps | $ | 71,923 | $ | 5,410 | $ | 2,107 | $ | 46,133 | $ | 1,729 | $ | 1,231 | ||||||||||||
Interest rate floors | 23,866 | 1,246 | 165 | 23,866 | 630 | 66 | ||||||||||||||||||
Interest rate caps | 49,665 | 102 | — | 35,412 | 176 | 1 | ||||||||||||||||||
Interest rate futures | 14,965 | 25 | 19 | 9,385 | 43 | 17 | ||||||||||||||||||
Interest rate options | 16,988 | 896 | 6 | 8,761 | 144 | 23 | ||||||||||||||||||
Interest rate forwards | 13,068 | 76 | 91 | 9,234 | 106 | 28 | ||||||||||||||||||
Synthetic GICs | 4,454 | — | — | 4,397 | — | — | ||||||||||||||||||
Foreign currency swaps | 6,871 | 320 | 656 | 7,546 | 496 | 790 | ||||||||||||||||||
Foreign currency forwards | 6,630 | 145 | 38 | 8,508 | 110 | 65 | ||||||||||||||||||
Currency futures | 633 | — | — | 493 | 2 | — | ||||||||||||||||||
Currency options | 1,321 | 6 | — | 5,426 | 50 | — | ||||||||||||||||||
Credit default swaps | 13,136 | 326 | 113 | 10,957 | 173 | 104 | ||||||||||||||||||
Equity futures | 7,053 | 26 | 10 | 8,794 | 21 | 9 | ||||||||||||||||||
Equity options | 17,099 | 3,263 | 179 | 33,688 | 1,843 | 1,197 | ||||||||||||||||||
Variance swaps | 18,801 | 397 | 75 | 18,022 | 198 | 118 | ||||||||||||||||||
Total rate of return swaps | 1,644 | 10 | 34 | 1,547 | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total non-designated or non-qualifying derivatives | $ | 268,117 | $ | 12,248 | $ | 3,493 | $ | 232,169 | $ | 5,721 | $ | 3,649 | ||||||||||||
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|
|
|
|
|
|
|
|
|
|
Net Derivative Gains (Losses)
The components of net derivative gains (losses) were as follows:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Derivatives and hedging gains (losses) (1) | $ | 6,108 | $ | 122 | $ | (6,624 | ) | |||||
Embedded derivatives | (1,284 | ) | (387 | ) | 1,758 | |||||||
|
|
|
|
|
| |||||||
Total net derivative gains (losses) | $ | 4,824 | $ | (265 | ) | $ | (4,866 | ) | ||||
|
|
|
|
|
|
(1) | Includes foreign currency transaction gains (losses) on hedged items in cash flow and non-qualifying hedging relationships, which are not presented elsewhere in this note. |
146
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The following table presents earned income on derivatives for the:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Qualifying hedges: | ||||||||||||
Net investment income | $ | 98 | $ | 83 | $ | 49 | ||||||
Interest credited to policyholder account balances | 214 | 233 | 220 | |||||||||
Other expenses | (4 | ) | (6 | ) | (3 | ) | ||||||
Non-qualifying hedges: | ||||||||||||
Net investment income | (8 | ) | (3 | ) | (2 | ) | ||||||
Other revenues | 75 | 108 | 77 | |||||||||
Net derivative gains (losses) | 411 | 65 | 91 | |||||||||
Policyholder benefits and claims | 17 | — | — | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 803 | $ | 480 | $ | 432 | ||||||
|
|
|
|
|
|
Fair Value Hedges
The Company designates and accounts for the following as fair value hedges when they have met the requirements of fair value hedging: (i) interest rate swaps to convert fixed rate investments to floating rate investments; (ii) interest rate swaps to convert fixed rate liabilities to floating rate liabilities; (iii) foreign currency swaps to hedge the foreign currency fair value exposure of foreign currency denominated investments and liabilities; and (iv) foreign currency forwards to hedge the foreign currency fair value exposure of foreign currency denominated fixed rate investments.
147
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The Company recognizes gains and losses on derivatives and the related hedged items in fair value hedges within net derivative gains (losses). The following table represents the amount of such net derivative gains (losses):
Derivatives in Fair Value | Hedged Items in Fair Value Hedging Relationships | Net Derivative Gains (Losses) Recognized for Derivatives | Net Derivative Gains (Losses) Recognized for Hedged Items | Ineffectiveness Recognized in Net Derivative Gains (Losses) | ||||||||||
(In millions) | ||||||||||||||
For the Year Ended December 31, 2011: | ||||||||||||||
Interest rate swaps: | Fixed maturity securities | $ | (25 | ) | $ | 22 | $ | (3 | ) | |||||
PABs (1) | 1,054 | (1,030 | ) | 24 | ||||||||||
Foreign currency swaps: | Foreign-denominated fixed maturity securities | 1 | 3 | 4 | ||||||||||
Foreign-denominated PABs (2) | (24 | ) | (25 | ) | (49 | ) | ||||||||
Foreign currency forwards: | Foreign-denominated fixed maturity securities | (25 | ) | 25 | — | |||||||||
|
|
|
|
|
| |||||||||
Total | $ | 981 | $ | (1,005 | ) | $ | (24 | ) | ||||||
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|
|
| |||||||||
For the Year Ended December 31, 2010: | ||||||||||||||
Interest rate swaps: | Fixed maturity securities | $ | (14 | ) | $ | 16 | $ | 2 | ||||||
PABs (1) | 140 | (142 | ) | (2 | ) | |||||||||
Foreign currency swaps: | Foreign-denominated fixed maturity securities | 14 | (14 | ) | — | |||||||||
Foreign-denominated PABs (2) | 9 | (20 | ) | (11 | ) | |||||||||
Foreign currency forwards: | Foreign-denominated fixed maturity securities | — | — | — | ||||||||||
|
|
|
|
|
| |||||||||
Total | $ | 149 | $ | (160 | ) | $ | (11 | ) | ||||||
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|
|
| |||||||||
For the Year Ended December 31, 2009: | ||||||||||||||
Interest rate swaps: | Fixed maturity securities | $ | 49 | $ | (42 | ) | $ | 7 | ||||||
PABs (1) | (963 | ) | 951 | (12 | ) | |||||||||
Foreign currency swaps: | Foreign-denominated fixed maturity securities | (13 | ) | 10 | (3 | ) | ||||||||
Foreign-denominated PABs (2) | 462 | (449 | ) | 13 | ||||||||||
Foreign currency forwards: | Foreign-denominated fixed maturity securities | — | — | — | ||||||||||
|
|
|
|
|
| |||||||||
Total | $ | (465 | ) | $ | 470 | $ | 5 | |||||||
|
|
|
|
|
|
(1) | Fixed rate liabilities. |
(2) | Fixed rate or floating rate liabilities. |
For the Company’s foreign currency forwards, the change in the fair value of the derivative related to the changes in the difference between the spot price and the forward price is excluded from the assessment of hedge effectiveness. For all other derivatives, all components of each derivative’s gain or loss were included in the assessment of hedge effectiveness. For the year ended December 31, 2011, ($3) million of the change in fair value of derivatives was excluded from the assessment of hedge effectiveness. For the years ended December 31, 2010 and 2009, no component of the change in fair value of derivatives was excluded from the assessment of hedge effectiveness.
148
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Cash Flow Hedges
The Company designates and accounts for the following as cash flow hedges when they have met the requirements of cash flow hedging: (i) interest rate swaps to convert floating rate investments to fixed rate investments; (ii) interest rate swaps to convert floating rate liabilities to fixed rate liabilities; (iii) foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments and liabilities; (iv) interest rate forwards and credit forwards to lock in the price to be paid for forward purchases of investments; (v) interest rate swaps and interest rate forwards to hedge the forecasted purchases of fixed-rate investments; and (vi) interest rate swaps and interest rate forwards to hedge forecasted fixed-rate borrowings.
In certain instances, the Company discontinued cash flow hedge accounting because the forecasted transactions did not occur on the anticipated date, within two months of that date, or were no longer probable of occurring. The net amounts reclassified into net derivative gains (losses) for the years ended December 31, 2011, 2010 and 2009 related to such discontinued cash flow hedges were gains (losses) of ($13) million, $9 million and ($7) million, respectively.
At December 31, 2011 and 2010, the maximum length of time over which the Company was hedging its exposure to variability in future cash flows for forecasted transactions did not exceed nine years and seven years, respectively.
The following table presents the components of accumulated other comprehensive income (loss), before income tax, related to cash flow hedges:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Accumulated other comprehensive income (loss), balance at January 1, | $ | (59 | ) | $ | (76 | ) | $ | 82 | ||||
Gains (losses) deferred in other comprehensive income (loss) on the effective portion of cash flow hedges | 1,552 | (51 | ) | (221 | ) | |||||||
Amounts reclassified to net derivative gains (losses) | 9 | 65 | 54 | |||||||||
Amounts reclassified to net investment income | 3 | 4 | 8 | |||||||||
Amounts reclassified to other expenses | 9 | (1 | ) | 3 | ||||||||
Amortization of transition adjustment | — | — | (2 | ) | ||||||||
|
|
|
|
|
| |||||||
Accumulated other comprehensive income (loss), balance at December 31, | $ | 1,514 | $ | (59 | ) | $ | (76 | ) | ||||
|
|
|
|
|
|
At December 31, 2011, $13 million of deferred net gains (losses) on derivatives in accumulated other comprehensive income (loss) was expected to be reclassified to earnings within the next 12 months.
149
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The following table presents the effects of derivatives in cash flow hedging relationships on the consolidated statements of operations and the consolidated statements of equity:
Derivatives in Cash Flow Hedging Relationships | Amount of Gains (Losses) Deferred in Accumulated Other Comprehensive Income (Loss) on Derivatives | Amount and Location of Gains (Losses) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (Loss) | Amount and Location of Gains (Losses) Recognized in Income (Loss) on Derivatives | |||||||||||||||||||||
(Effective Portion) | (Effective Portion) | (Ineffective Portion and Amount Excluded from Effectiveness Testing) | ||||||||||||||||||||||
Net Derivative Gains (Losses) | Net Investment Income | Other Expenses | Net Derivative Gains (Losses) | Net Investment Income | ||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
For the Year Ended December 31, 2011: | ||||||||||||||||||||||||
Interest rate swaps | $ | 1,023 | $ | (42 | ) | $ | 1 | $ | (10 | ) | $ | 1 | $ | — | ||||||||||
Foreign currency swaps | 175 | — | (6 | ) | 2 | 2 | — | |||||||||||||||||
Interest rate forwards | 336 | 31 | 1 | (1 | ) | 2 | — | |||||||||||||||||
Credit forwards | 18 | 2 | 1 | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 1,552 | $ | (9 | ) | $ | (3 | ) | $ | (9 | ) | $ | 5 | $ | — | |||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
For the Year Ended December 31, 2010: | ||||||||||||||||||||||||
Interest rate swaps | $ | 13 | $ | — | $ | — | $ | (1 | ) | $ | 3 | $ | — | |||||||||||
Foreign currency swaps | 34 | (79 | ) | (6 | ) | 2 | — | — | ||||||||||||||||
Interest rate forwards | (117 | ) | 14 | 2 | — | (2 | ) | — | ||||||||||||||||
Credit forwards | 19 | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | (51 | ) | $ | (65 | ) | $ | (4 | ) | $ | 1 | $ | 1 | $ | — | |||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
For the Year Ended December 31, 2009: | ||||||||||||||||||||||||
Interest rate swaps | $ | (45 | ) | $ | — | $ | — | $ | (4 | ) | $ | (2 | ) | $ | — | |||||||||
Foreign currency swaps | (319 | ) | (133 | ) | (6 | ) | 1 | (1 | ) | — | ||||||||||||||
Interest rate forwards | 147 | 79 | — | — | — | — | ||||||||||||||||||
Credit forwards | (4 | ) | — | — | — | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | (221 | ) | $ | (54 | ) | $ | (6 | ) | $ | (3 | ) | $ | (3 | ) | $ | — | |||||||
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|
|
|
|
|
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|
|
|
All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
Hedges of Net Investments in Foreign Operations
The Company uses foreign exchange contracts, which may include foreign currency swaps, forwards and options, to hedge portions of its net investments in foreign operations against adverse movements in exchange rates. The Company measures ineffectiveness on these contracts based upon the change in forward rates. In addition, the Company may also use non-derivative financial instruments to hedge portions of its net investments in foreign operations against adverse movements in exchange rates. The Company measures ineffectiveness on non-derivative financial instruments based upon the change in spot rates.
When net investments in foreign operations are sold or substantially liquidated, the amounts in accumulated other comprehensive income (loss) are reclassified to the consolidated statements of operations, while a pro rata portion will be reclassified upon partial sale of the net investments in foreign operations.
150
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The following table presents the effects of derivatives and non-derivative financial instruments in net investment hedging relationships in the consolidated statements of operations and the consolidated statements of equity:
Derivatives and Non-Derivative Hedging Instruments in Net | Amount of Gains (Losses) Deferred in Accumulated Other Comprehensive Income (Loss) (Effective Portion) | Amount and Location of Gains (Losses) Reclassified From Accumulated Other Comprehensive Income (Loss) into Income (Loss) (Effective Portion) | ||||||||||||||||||||||
Net Investment Gains (Losses) | ||||||||||||||||||||||||
Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Foreign currency forwards | $ | 62 | $ | (167 | ) | $ | (244 | ) | $ | — | $ | — | $ | (59 | ) | |||||||||
Foreign currency swaps | — | — | (18 | ) | — | — | (63 | ) | ||||||||||||||||
Non-derivative hedging instruments | 6 | (16 | ) | (37 | ) | — | — | (11 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 68 | $ | (183 | ) | $ | (299 | ) | $ | — | $ | — | $ | (133 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | During the year ended December 31, 2011, the Company sold its interest in MSI MetLife, which was a hedged item in a net investment hedging relationship. As a result, the Company released losses of $71 million from accumulated other comprehensive income (loss) upon the sale. This release did not impact net income for the year ended December 31, 2011 as such losses were considered in the overall impairment evaluation of the investment prior to sale. During the year ended December 31, 2010, there were no sales or substantial liquidations of net investments in foreign operations that would have required the reclassification of gains or losses from accumulated other comprehensive income (loss) into earnings. During the year ended December 31, 2009, the Company substantially liquidated, through assumption reinsurance, the portion of its Canadian operations that was being hedged in a net investment hedging relationship. As a result, the Company reclassified losses of $133 million from accumulated other comprehensive income (loss) into earnings. See Note 2. |
(2) | There was no ineffectiveness recognized for the Company’s hedges of net investments in foreign operations. All components of each derivative and non-derivative hedging instrument’s gain or loss were included in the assessment of hedge effectiveness. |
At December 31, 2011 and 2010, the cumulative foreign currency translation gain (loss) recorded in accumulated other comprehensive income (loss) related to hedges of net investments in foreign operations was ($84) million and ($223) million, respectively.
Non-Qualifying Derivatives and Derivatives for Purposes Other Than Hedging
The Company enters into the following derivatives that do not qualify for hedge accounting or for purposes other than hedging: (i) interest rate swaps, implied volatility swaps, caps and floors and interest rate futures to economically hedge its exposure to interest rates; (ii) foreign currency forwards, swaps, option contracts and future contracts to economically hedge its exposure to adverse movements in exchange rates; (iii) credit default swaps to economically hedge exposure to adverse movements in credit; (iv) equity futures, equity index options, interest rate futures, TRRs and equity variance swaps to economically hedge liabilities embedded in certain variable annuity products; (v) swap spreadlocks to economically hedge invested assets against the risk of changes in credit spreads; (vi) interest rate forwards to buy and sell securities to economically hedge its exposure to
151
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
interest rates; (vii) credit default swaps, TRRs and structured interest rate swaps to synthetically create investments; (viii) basis swaps to better match the cash flows of assets and related liabilities; (ix) credit default swaps held in relation to trading portfolios; (x) swaptions to hedge interest rate risk; (xi) inflation swaps to reduce risk generated from inflation-indexed liabilities; (xii) covered call options for income generation; (xiii) interest rate lock commitments; (xiv) synthetic GICs; and (xv) equity options to economically hedge certain invested assets against adverse changes in equity indices.
152
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The following tables present the amount and location of gains (losses) recognized in income for derivatives that were not designated or qualifying as hedging instruments:
Net Derivative Gains (Losses) | Net Investment Income (1) | Policyholder Benefits and Claims (2) | Other Revenues (3) | Other Expenses (4) | ||||||||||||||||
(In millions) | ||||||||||||||||||||
For the Year Ended December 31, 2011: | ||||||||||||||||||||
Interest rate swaps | $ | 2,544 | $ | (2 | ) | $ | — | $ | 367 | $ | — | |||||||||
Interest rate floors | 517 | — | — | — | — | |||||||||||||||
Interest rate caps | (228 | ) | — | — | — | — | ||||||||||||||
Interest rate futures | 100 | 1 | — | (11 | ) | — | ||||||||||||||
Equity futures | (3 | ) | (6 | ) | (99 | ) | — | — | ||||||||||||
Foreign currency swaps | 70 | — | — | — | — | |||||||||||||||
Foreign currency forwards | 310 | (9 | ) | — | — | — | ||||||||||||||
Currency futures | 32 | — | — | — | — | |||||||||||||||
Currency options | (69 | ) | — | — | — | — | ||||||||||||||
Equity options | 941 | (26 | ) | 5 | — | — | ||||||||||||||
Interest rate options | 1,021 | — | — | 24 | — | |||||||||||||||
Interest rate forwards | (14 | ) | — | — | (144 | ) | — | |||||||||||||
Variance swaps | 244 | (3 | ) | 7 | — | — | ||||||||||||||
Credit default swaps | 175 | 5 | — | — | — | |||||||||||||||
Total rate of return swaps | (4 | ) | — | — | — | — | ||||||||||||||
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|
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| |||||||||||
Total | $ | 5,636 | $ | (40 | ) | $ | (87 | ) | $ | 236 | $ | — | ||||||||
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|
| |||||||||||
For the Year Ended December 31, 2010: | ||||||||||||||||||||
Interest rate swaps | $ | 622 | $ | 4 | $ | 39 | $ | 172 | $ | — | ||||||||||
Interest rate floors | 144 | — | — | — | — | |||||||||||||||
Interest rate caps | (185 | ) | — | — | — | — | ||||||||||||||
Interest rate futures | 77 | (4 | ) | — | (3 | ) | — | |||||||||||||
Equity futures | (58 | ) | (25 | ) | (314 | ) | — | — | ||||||||||||
Foreign currency swaps | 52 | — | — | — | — | |||||||||||||||
Foreign currency forwards | 250 | 55 | — | — | — | |||||||||||||||
Currency futures | (23 | ) | — | — | — | — | ||||||||||||||
Currency options | (83 | ) | (1 | ) | — | — | (4 | ) | ||||||||||||
Equity options | (683 | ) | (16 | ) | — | — | — | |||||||||||||
Interest rate options | 25 | — | — | (6 | ) | — | ||||||||||||||
Interest rate forwards | 8 | — | — | (74 | ) | — | ||||||||||||||
Variance swaps | (55 | ) | — | — | — | — | ||||||||||||||
Credit default swaps | 34 | (2 | ) | — | — | — | ||||||||||||||
Total rate of return swaps | 14 | — | — | — | — | |||||||||||||||
|
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|
|
|
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| |||||||||||
Total | $ | 139 | $ | 11 | $ | (275 | ) | $ | 89 | $ | (4 | ) | ||||||||
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|
|
|
| |||||||||||
For the Year Ended December 31, 2009: | ||||||||||||||||||||
Interest rate swaps | $ | (1,700 | ) | $ | (5 | ) | $ | (13 | ) | $ | (161 | ) | $ | — | ||||||
Interest rate floors | (907 | ) | — | — | — | — | ||||||||||||||
Interest rate caps | 33 | — | — | — | — | |||||||||||||||
Interest rate futures | (366 | ) | 2 | — | — | — | ||||||||||||||
Equity futures | (681 | ) | (38 | ) | (363 | ) | — | — | ||||||||||||
Foreign currency swaps | (405 | ) | — | — | — | — | ||||||||||||||
Foreign currency forwards | (102 | ) | (24 | ) | — | — | — | |||||||||||||
Currency options | (36 | ) | (1 | ) | — | — | (3 | ) | ||||||||||||
Equity options | (1,713 | ) | (68 | ) | — | — | — | |||||||||||||
Interest rate options | (379 | ) | — | — | — | — | ||||||||||||||
Interest rate forwards | (7 | ) | — | — | (4 | ) | — | |||||||||||||
Variance swaps | (276 | ) | (13 | ) | — | — | — | |||||||||||||
Swap spreadlocks | (38 | ) | — | — | — | — | ||||||||||||||
Credit default swaps | (243 | ) | (11 | ) | — | — | — | |||||||||||||
Total rate of return swaps | 63 | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | (6,757 | ) | $ | (158 | ) | $ | (376 | ) | $ | (165 | ) | $ | (3 | ) | |||||
|
|
|
|
|
|
|
|
|
|
153
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
(1) | Changes in estimated fair value related to economic hedges of equity method investments in joint ventures; changes in estimated fair value related to derivatives held in relation to trading portfolios; and changes in estimated fair value related to derivatives held within contractholder-directed unit-linked investments. |
(2) | Changes in estimated fair value related to economic hedges of variable annuity guarantees included in future policy benefits. |
(3) | Changes in estimated fair value related to derivatives held in connection with the Company’s mortgage banking activities. |
(4) | Changes in estimated fair value related to economic hedges of foreign currency exposure associated with the Company’s international subsidiaries. |
Credit Derivatives
In connection with synthetically created investment transactions and credit default swaps held in relation to the trading portfolio, the Company writes credit default swaps for which it receives a premium to insure credit risk. Such credit derivatives are included within the non-qualifying derivatives and derivatives for purposes other than hedging table. If a credit event occurs, as defined by the contract, the contract may be cash settled or it may be settled gross by the Company paying the counterparty the specified swap notional amount in exchange for the delivery of par quantities of the referenced credit obligation. The Company’s maximum amount at risk, assuming the value of all referenced credit obligations is zero, was $7.7 billion and $5.1 billion at December 31, 2011 and 2010, respectively. The Company can terminate these contracts at any time through cash settlement with the counterparty at an amount equal to the then current fair value of the credit default swaps. At December 31, 2011, the Company would have paid $41 million to terminate all of these contracts, and at December 31, 2010, the Company would have received $62 million to terminate all of these contracts.
154
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The following table presents the estimated fair value, maximum amount of future payments and weighted average years to maturity of written credit default swaps at:
December 31, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Rating Agency Designation of Referenced Credit Obligations (1) | Estimated Fair Value of Credit Default Swaps | Maximum Amount of Future Payments under Credit Default Swaps (2) | Weighted Average Years to Maturity (3) | Estimated Fair Value of Credit Default Swaps | Maximum Amount of Future Payments under Credit Default Swaps (2) | Weighted Average Years to Maturity (3) | ||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
Aaa/Aa/A | ||||||||||||||||||||||||
Single name credit default swaps (corporate) | $ | 5 | $ | 737 | 3.5 | $ | 5 | $ | 470 | 3.8 | ||||||||||||||
Credit default swaps referencing indices | (1 | ) | 2,813 | 3.0 | 45 | 2,928 | 3.7 | |||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Subtotal | 4 | 3,550 | 3.1 | 50 | 3,398 | 3.7 | ||||||||||||||||||
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| |||||||||||||||||
Baa | ||||||||||||||||||||||||
Single name credit default swaps (corporate) | (17 | ) | 1,234 | 4.0 | 5 | 735 | 4.3 | |||||||||||||||||
Credit default swaps referencing indices | (26 | ) | 2,847 | 4.9 | 7 | 931 | 5.0 | |||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Subtotal | (43 | ) | 4,081 | 4.6 | 12 | 1,666 | 4.7 | |||||||||||||||||
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|
| |||||||||||||||||
Ba | ||||||||||||||||||||||||
Single name credit default swaps (corporate) | — | 25 | 3.5 | — | 25 | 4.4 | ||||||||||||||||||
Credit default swaps referencing indices | — | — | — | — | — | — | ||||||||||||||||||
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|
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|
|
|
|
| |||||||||||||||||
Subtotal | — | 25 | 3.5 | — | 25 | 4.4 | ||||||||||||||||||
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| |||||||||||||||||
B | ||||||||||||||||||||||||
Single name credit default swaps (corporate) | — | — | — | — | — | — | ||||||||||||||||||
Credit default swaps referencing indices | (2 | ) | 25 | 4.8 | — | — | — | |||||||||||||||||
|
|
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|
|
|
| |||||||||||||||||
Subtotal | (2 | ) | 25 | 4.8 | — | — | — | |||||||||||||||||
|
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|
|
|
|
|
| |||||||||||||||||
Total | $ | (41 | ) | $ | 7,681 | 3.9 | $ | 62 | $ | 5,089 | 4.1 | |||||||||||||
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|
|
|
(1) | The rating agency designations are based on availability and the midpoint of the applicable ratings among Moody’s Investors Service, S&P and Fitch Ratings. If no rating is available from a rating agency, then an internally developed rating is used. |
(2) | Assumes the value of the referenced credit obligations is zero. |
(3) | The weighted average years to maturity of the credit default swaps is calculated based on weighted average notional amounts. |
The Company has also entered into credit default swaps to purchase credit protection on certain of the referenced credit obligations in the table above. As a result, the maximum amounts of potential future recoveries available to offset the $7.7 billion and $5.1 billion from the table above were $115 million and $120 million at December 31, 2011 and 2010, respectively.
Credit Risk on Freestanding Derivatives
The Company may be exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. Generally, the current credit exposure of the Company’s derivative contracts is limited to the net positive estimated fair value of derivative contracts at the reporting date after taking into consideration the existence of netting agreements and any collateral received pursuant to credit support annexes.
155
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The Company manages its credit risk related to OTC derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master agreements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. Because exchange-traded futures and options are effected through regulated exchanges, and positions are marked to market on a daily basis, the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to such derivative instruments. See Note 5 for a description of the impact of credit risk on the valuation of derivative instruments.
The Company enters into various collateral arrangements which require both the pledging and accepting of collateral in connection with its OTC derivative instruments. At December 31, 2011 and 2010, the Company was obligated to return cash collateral under its control of $9.5 billion and $2.6 billion, respectively. This cash collateral is included in cash and cash equivalents or in short-term investments and the obligation to return it is included in payables for collateral under securities loaned and other transactions in the consolidated balance sheets. At December 31, 2011 and 2010, the Company had received collateral consisting of various securities with a fair market value of $2.5 billion and $984 million, respectively, which were held in separate custodial accounts. Subject to certain constraints, the Company is permitted by contract to sell or repledge this collateral, but at December 31, 2011, none of the collateral had been sold or repledged.
The Company’s collateral arrangements for its OTC derivatives generally require the counterparty in a net liability position, after considering the effect of netting agreements, to pledge collateral when the fair value of that counterparty’s derivatives reaches a pre-determined threshold. Certain of these arrangements also include credit-contingent provisions that provide for a reduction of these thresholds (on a sliding scale that converges toward zero) in the event of downgrades in the credit ratings of the Company and/or the counterparty. In addition, certain of the Company’s netting agreements for derivative instruments contain provisions that require the Company to maintain a specific investment grade credit rating from at least one of the major credit rating agencies. If the Company’s credit ratings were to fall below that specific investment grade credit rating, it would be in violation of these provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments that are in a net liability position after considering the effect of netting agreements.
156
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The following table presents the estimated fair value of the Company’s OTC derivatives that are in a net liability position after considering the effect of netting agreements, together with the estimated fair value and balance sheet location of the collateral pledged. The table also presents the incremental collateral that the Company would be required to provide if there was a one notch downgrade in the Company’s credit rating at the reporting date or if the Company’s credit rating sustained a downgrade to a level that triggered full overnight collateralization or termination of the derivative position at the reporting date. Derivatives that are not subject to collateral agreements are not included in the scope of this table.
Estimated Fair Value of Collateral Provided: | Fair Value of Incremental Collateral Provided Upon: | |||||||||||||||||||
Estimated Fair Value (1) of Derivatives in Net Liability Position | Fixed Maturity Securities (2) | Cash (3) | One Notch Downgrade in the Company’s Credit Rating | Downgrade in the Company’s Credit Rating to a Level that Triggers Full Overnight Collateralization or Termination of the Derivative Position | ||||||||||||||||
(In millions) | ||||||||||||||||||||
December 31, 2011: | ||||||||||||||||||||
Derivatives subject to | $ | 447 | $ | 405 | $ | 4 | $ | 48 | $ | 104 | ||||||||||
Derivatives not subject | 28 | 11 | 4 | — | — | |||||||||||||||
|
|
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|
|
|
|
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|
| |||||||||||
Total | $ | 475 | $ | 416 | $ | 8 | $ | 48 | $ | 104 | ||||||||||
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|
|
|
| |||||||||||
December 31, 2010: | ||||||||||||||||||||
Derivatives subject to | $ | 1,167 | $ | 1,024 | $ | — | $ | 99 | $ | 231 | ||||||||||
Derivatives not subject | 22 | — | 43 | — | — | |||||||||||||||
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|
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|
| |||||||||||
Total | $ | 1,189 | $ | 1,024 | $ | 43 | $ | 99 | $ | 231 | ||||||||||
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(1) | After taking into consideration the existence of netting agreements. |
(2) | Included in fixed maturity securities in the consolidated balance sheets. Subject to certain constraints, the counterparties are permitted by contract to sell or repledge this collateral. |
(3) | Included in premiums, reinsurance and other receivables in the consolidated balance sheets. |
Without considering the effect of netting agreements, the estimated fair value of the Company’s OTC derivatives with credit-contingent provisions that were in a gross liability position at December 31, 2011 was $777 million. At December 31, 2011, the Company provided collateral of $409 million in connection with these derivatives. In the unlikely event that both: (i) the Company’s credit rating was downgraded to a level that triggers full overnight collateralization or termination of all derivative positions; and (ii) the Company’s netting agreements were deemed to be legally unenforceable, then the additional collateral that the Company would be required to provide to its counterparties in connection with its derivatives in a gross liability position at December 31, 2011 would be $368 million. This amount does not consider gross derivative assets of $330 million for which the Company has the contractual right of offset.
157
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The Company also has exchange-traded futures and options, which require the pledging of collateral. At December 31, 2011 and 2010, the Company pledged securities collateral for exchange-traded futures and options of $42 million and $40 million, respectively, which is included in fixed maturity securities. Subject to certain constraints, the counterparties are permitted by contract to sell or repledge this collateral. At December 31, 2011 and 2010, the Company provided cash collateral for exchange-traded futures and options of $680 million and $662 million, respectively, which is included in premiums, reinsurance and other receivables.
Embedded Derivatives
The Company issues certain products or purchases certain investments 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; ceded reinsurance of guaranteed minimum benefits related to GMABs and certain GMIBs; assumed reinsurance of guaranteed minimum benefits related to GMWBs and GMABs; funding agreements with equity or bond indexed crediting rates; funds withheld on assumed and ceded reinsurance; and options embedded in debt or equity securities.
The following table presents the estimated fair value of the Company’s embedded derivatives at:
December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Net embedded derivatives within asset host contracts: | ||||||||
Ceded guaranteed minimum benefits | $ | 327 | $ | 185 | ||||
Funds withheld on assumed reinsurance | 35 | — | ||||||
Options embedded in debt or equity securities | (70 | ) | (57 | ) | ||||
Other | 1 | — | ||||||
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|
|
| |||||
Net embedded derivatives within asset host contracts | $ | 293 | $ | 128 | ||||
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|
|
| |||||
Net embedded derivatives within liability host contracts: | ||||||||
Direct guaranteed minimum benefits | $ | 2,104 | $ | 370 | ||||
Funds withheld on ceded reinsurance | 122 | 66 | ||||||
Assumed guaranteed minimum benefits (1) | 2,340 | 2,186 | ||||||
Other | 18 | 12 | ||||||
|
|
|
| |||||
Net embedded derivatives within liability host contracts | $ | 4,584 | $ | 2,634 | ||||
|
|
|
|
(1) | Assumed reinsurance of guaranteed minimum benefits related to GMWBs and GMABs of MSI MetLife, which was sold during the second quarter of 2011, have been separately presented in the current period. See Note 2. Comparative prior year balances, which were previously presented in direct guaranteed minimum benefits, have been conformed to the current period presentation. |
The following table presents changes in estimated fair value related to embedded derivatives:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Net derivative gains (losses) (1) | $ | (1,284 | ) | $ | (387 | ) | $ | 1,758 | ||||
Policyholder benefits and claims | $ | 86 | $ | 8 | $ | (114 | ) |
158
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
(1) | The valuation of guaranteed minimum benefits includes an adjustment for nonperformance risk. The amounts included in net derivative gains (losses), in connection with this adjustment, were $1.8 billion, ($96) million and ($1.9) billion, for the years ended December 31, 2011, 2010 and 2009, respectively. |
5. 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.
159
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Assets and Liabilities Measured at Fair Value
Recurring Fair Value Measurements
The assets and liabilities measured at estimated fair value on a recurring basis, including those items for which the Company has elected the FVO, were determined as described below. These estimated fair values and their corresponding placement in the fair value hierarchy are summarized as follows:
December 31, 2011 | ||||||||||||||||
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Estimated Fair Value | |||||||||||||
(In millions) | ||||||||||||||||
Assets: | ||||||||||||||||
Fixed maturity securities: | ||||||||||||||||
U.S. corporate securities | $ | — | $ | 99,001 | $ | 6,784 | $ | 105,785 | ||||||||
Foreign corporate securities | — | 59,648 | 4,370 | 64,018 | ||||||||||||
Foreign government securities | 76 | 50,138 | 2,322 | 52,536 | ||||||||||||
RMBS | — | 41,035 | 1,602 | 42,637 | ||||||||||||
U.S. Treasury and agency securities | 19,911 | 20,070 | 31 | 40,012 | ||||||||||||
CMBS | — | 18,316 | 753 | 19,069 | ||||||||||||
State and political subdivision securities | — | 13,182 | 53 | 13,235 | ||||||||||||
ABS | — | 11,129 | 1,850 | 12,979 | ||||||||||||
Other fixed maturity securities | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed maturity securities | 19,987 | 312,519 | 17,765 | 350,271 | ||||||||||||
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|
|
|
|
| |||||||||
Equity securities: | ||||||||||||||||
Common stock | 819 | 1,105 | 281 | 2,205 | ||||||||||||
Non-redeemable preferred stock | — | 380 | 438 | 818 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total equity securities | 819 | 1,485 | 719 | 3,023 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Trading and other securities: | ||||||||||||||||
Actively Traded Securities | — | 473 | — | 473 | ||||||||||||
FVO general account securities | — | 244 | 23 | 267 | ||||||||||||
FVO contractholder-directed unit-linked investments | 7,572 | 8,453 | 1,386 | 17,411 | ||||||||||||
FVO securities held by CSEs | — | 117 | — | 117 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Total trading and other securities | 7,572 | 9,287 | 1,409 | 18,268 | ||||||||||||
Short-term investments (1) | 8,150 | 8,120 | 590 | 16,860 | ||||||||||||
Mortgage loans: | ||||||||||||||||
Commercial mortgage loans held by CSEs | — | 3,138 | — | 3,138 | ||||||||||||
Mortgage loans held-for-sale: (2) | ||||||||||||||||
Residential mortgage loans | — | 2,836 | 228 | 3,064 | ||||||||||||
Securitized reverse residential mortgage loans | — | 6,466 | 1,186 | 7,652 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total mortgage loans held-for-sale | — | 9,302 | 1,414 | 10,716 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total mortgage loans | — | 12,440 | 1,414 | 13,854 | ||||||||||||
Other invested assets: | ||||||||||||||||
MSRs | — | — | 666 | 666 | ||||||||||||
Other investments | 312 | 124 | — | 436 | ||||||||||||
Derivative assets: (3) | ||||||||||||||||
Interest rate contracts | 32 | 10,426 | 338 | 10,796 | ||||||||||||
Foreign currency contracts | 1 | 1,316 | 61 | 1,378 | ||||||||||||
Credit contracts | — | 301 | 29 | 330 | ||||||||||||
Equity market contracts | 29 | 2,703 | 964 | 3,696 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total derivative assets | 62 | 14,746 | 1,392 | 16,200 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total other invested assets | 374 | 14,870 | 2,058 | 17,302 | ||||||||||||
Net embedded derivatives within asset host contracts (4) | — | 1 | 362 | 363 | ||||||||||||
Separate account assets (5) | 28,191 | 173,507 | 1,325 | 203,023 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets | $ | 65,093 | $ | 532,229 | $ | 25,642 | $ | 622,964 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities: | ||||||||||||||||
Derivative liabilities: (3) | ||||||||||||||||
Interest rate contracts | $ | 91 | $ | 2,351 | $ | 38 | $ | 2,480 | ||||||||
Foreign currency contracts | — | 1,103 | 17 | 1,120 | ||||||||||||
Credit contracts | — | 85 | 28 | 113 | ||||||||||||
Equity market contracts | 12 | 211 | 75 | 298 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total derivative liabilities | 103 | 3,750 | 158 | 4,011 | ||||||||||||
Net embedded derivatives within liability host contracts (4) | — | 19 | 4,565 | 4,584 | ||||||||||||
Long-term debt of CSEs | — | 2,952 | 116 | 3,068 | ||||||||||||
Liability related to securitized reverse residential mortgage loans (6) | — | 6,451 | 1,175 | 7,626 | ||||||||||||
Trading liabilities (6) | 124 | 3 | — | 127 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities | $ | 227 | $ | 13,175 | $ | 6,014 | $ | 19,416 | ||||||||
|
|
|
|
|
|
|
|
160
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
December 31, 2010 | ||||||||||||||||
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Estimated Fair Value | |||||||||||||
(In millions) | ||||||||||||||||
Assets: | ||||||||||||||||
Fixed maturity securities: | ||||||||||||||||
U.S. corporate securities | $ | — | $ | 84,623 | $ | 7,149 | $ | 91,772 | ||||||||
Foreign corporate securities | — | 62,162 | 5,726 | 67,888 | ||||||||||||
Foreign government securities | 149 | 38,719 | 3,134 | 42,002 | ||||||||||||
RMBS | 274 | 43,037 | 2,541 | 45,852 | ||||||||||||
U.S. Treasury and agency securities | 14,602 | 18,623 | 79 | 33,304 | ||||||||||||
CMBS | — | 19,664 | 1,011 | 20,675 | ||||||||||||
State and political subdivision securities | — | 10,083 | 46 | 10,129 | ||||||||||||
ABS | — | 10,142 | 3,026 | 13,168 | ||||||||||||
Other fixed maturity securities | — | 3 | 4 | 7 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed maturity securities | 15,025 | 287,056 | 22,716 | 324,797 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Equity securities: | ||||||||||||||||
Common stock | 831 | 1,094 | 268 | 2,193 | ||||||||||||
Non-redeemable preferred stock | — | 504 | 905 | 1,409 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total equity securities | 831 | 1,598 | 1,173 | 3,602 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Trading and other securities: | ||||||||||||||||
Actively Traded Securities | — | 453 | 10 | 463 | ||||||||||||
FVO general account securities | — | 54 | 77 | 131 | ||||||||||||
FVO contractholder-directed unit-linked investments | 6,270 | 10,789 | 735 | 17,794 | ||||||||||||
FVO securities held by CSEs | — | 201 | — | 201 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total trading and other securities | 6,270 | 11,497 | 822 | 18,589 | ||||||||||||
Short-term investments (1) | 3,026 | 4,681 | 858 | 8,565 | ||||||||||||
Mortgage loans: | ||||||||||||||||
Commercial mortgage loans held by CSEs | — | 6,840 | — | 6,840 | ||||||||||||
Residential mortgage loans held-for-sale (2) | — | 2,486 | 24 | 2,510 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total mortgage loans | — | 9,326 | 24 | 9,350 | ||||||||||||
Other invested assets: | ||||||||||||||||
MSRs | — | — | 950 | 950 | ||||||||||||
Other investments | 373 | 121 | — | 494 | ||||||||||||
Derivative assets: (3) | ||||||||||||||||
Interest rate contracts | 131 | 3,583 | 39 | 3,753 | ||||||||||||
Foreign currency contracts | 2 | 1,711 | 74 | 1,787 | ||||||||||||
Credit contracts | — | 125 | 50 | 175 | ||||||||||||
Equity market contracts | 23 | 1,757 | 282 | 2,062 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total derivative assets | 156 | 7,176 | 445 | 7,777 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total other invested assets | 529 | 7,297 | 1,395 | 9,221 | ||||||||||||
Net embedded derivatives within asset host contracts (4) | — | — | 185 | 185 | ||||||||||||
Separate account assets (5) | 25,566 | 155,589 | 1,983 | 183,138 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets | $ | 51,247 | $ | 477,044 | $ | 29,156 | $ | 557,447 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities: | ||||||||||||||||
Derivative liabilities: (3) | ||||||||||||||||
Interest rate contracts | $ | 35 | $ | 1,598 | $ | 125 | $ | 1,758 | ||||||||
Foreign currency contracts | — | 1,372 | 1 | 1,373 | ||||||||||||
Credit contracts | — | 101 | 6 | 107 | ||||||||||||
Equity market contracts | 10 | 1,174 | 140 | 1,324 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total derivative liabilities | 45 | 4,245 | 272 | 4,562 | ||||||||||||
Net embedded derivatives within liability host contracts (4) | — | 11 | 2,623 | 2,634 | ||||||||||||
Long-term debt of CSEs | — | 6,636 | 184 | 6,820 | ||||||||||||
Trading liabilities (6) | 46 | — | — | 46 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities | $ | 91 | $ | 10,892 | $ | 3,079 | $ | 14,062 | ||||||||
|
|
|
|
|
|
|
|
161
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
(1) | Short-term investments as presented in the tables above differ from the amounts presented in the consolidated balance sheets because certain short-term investments are not measured at estimated fair value (e.g., time deposits, etc.), and therefore are excluded from the tables presented above. |
(2) | Mortgage loans held-for-sale as presented in the tables above differ from the amount presented in the consolidated balance sheets as these tables do not include mortgage loans that were previously designated as held-for-investment, but now are designated as held-for-sale and stated at lower of amortized cost or estimated fair value. |
(3) | Derivative liabilities are presented within other liabilities in the consolidated balance sheets. The amounts are presented gross in the tables above to reflect the presentation in the consolidated balance sheets, but are presented net for purposes of the rollforward in the Fair Value Measurements Using Significant Unobservable Inputs (Level 3) tables which follow. At December 31, 2010 there were $185 million of non-derivative hedging instruments, carried at amortized cost, which are included within the liabilities total in Note 4 but excluded from derivative liabilities in the tables above as they are not derivative instruments. At December 31, 2011, there were no non-derivative hedging instruments. |
(4) | Net embedded derivatives within asset host contracts are presented primarily within premiums, reinsurance and other receivables in the consolidated balance sheets. Net embedded derivatives within liability host contracts are presented primarily within PABs in the consolidated balance sheets. At December 31, 2011, fixed maturity securities and equity securities also included embedded derivatives of $2 million and ($72) million, respectively. At December 31, 2010, fixed maturity securities and equity securities included embedded derivatives of $5 million and ($62) million, respectively. |
(5) | Separate account assets are measured at estimated fair value. Investment performance related to separate account assets is fully offset by corresponding amounts credited to contractholders whose liability is reflected within separate account liabilities. Separate account liabilities are set equal to the estimated fair value of separate account assets. |
(6) | The liability related to securitized reverse residential mortgage loans and trading liabilities are presented within other liabilities in the consolidated balance sheets. |
See Note 3 for discussion of CSEs included in the tables above and for certain amounts in prior year footnote disclosures which have been reclassified to conform with the 2011 presentation.
The methods and assumptions used to estimate the fair value of financial instruments are summarized as follows:
Fixed Maturity Securities, Equity Securities, Trading and Other Securities and Short-term Investments
When available, the estimated fair value of the Company’s fixed maturity securities, equity securities, trading and other securities and short-term investments are based on quoted prices in active markets that are readily and regularly obtainable. Generally, these are the most liquid of the Company’s securities holdings and valuation of these securities does not involve management’s judgment.
When quoted prices in active markets are not available, the determination of estimated fair value is based on market standard valuation methodologies, giving priority to observable inputs. The market standard valuation methodologies utilized include: discounted cash flow methodologies, matrix pricing or other similar techniques. The inputs in applying these market standard valuation methodologies include, but are not limited to: interest
162
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
rates, credit standing of the issuer or counterparty, industry sector of the issuer, coupon rate, call provisions, sinking fund requirements, maturity and management’s assumptions regarding estimated duration, liquidity and estimated future cash flows. Accordingly, the estimated fair values are based on available market information and management’s judgments about financial instruments.
The significant inputs to the market standard valuation methodologies for certain types of securities with reasonable levels of price transparency are inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Such observable inputs include benchmarking prices for similar assets in active markets, quoted prices in markets that are not active and observable yields and spreads in the market.
When observable inputs are not available, the market standard valuation methodologies for determining the estimated fair value of certain types of securities that trade infrequently, and therefore have little or no price transparency, 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 can be based in large part on management’s judgment or estimation and cannot be supported by reference to market activity. Even though these inputs are unobservable, management believes they are consistent with what other market participants would use when pricing such securities and are considered appropriate given the circumstances.
The estimated fair value of FVO securities held by CSEs is determined on a basis consistent with the methodologies described herein for fixed maturity securities and equity securities. The Company consolidates certain securitization entities that hold securities that have been accounted for under the FVO and classified within trading and other securities.
The use of different methodologies, assumptions and inputs may have a material effect on the estimated fair values of the Company’s securities holdings.
Mortgage Loans
The Company has elected the FVO for commercial mortgage loans held by CSEs, residential mortgage loans held-for-sale and securitized reverse residential mortgage loans. See Note 1 for a discussion of these mortgage loans. See “— Valuation Techniques and Inputs by Level Within the Three-Level Fair Value Hierarchy by Major Classes of Assets and Liabilities” below for a discussion of the methods and assumptions used to estimate the fair value of these financial instruments.
MSRs
Although MSRs are not financial instruments, the Company has included them in the preceding table as a result of its election to carry MSRs at estimated fair value. See “— Valuation Techniques and Inputs by Level Within the Three-Level Fair Value Hierarchy by Major Classes of Assets and Liabilities” below for a discussion of the methods and assumptions used to estimate the fair value of these financial instruments.
Other Investments
Other investments is primarily comprised of investment funds. The estimated fair value of these investment funds is determined on a basis consistent with the methodologies described herein for trading and other securities.
163
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Derivatives
The estimated fair value of derivatives is determined through the use of quoted market prices for exchange-traded derivatives and interest rate forwards to sell certain to be announced securities, or through the use of pricing models for OTC derivatives. The determination of estimated fair value, when quoted market values are not available, is based on market standard valuation methodologies and inputs that management believes are consistent with what other market participants would use when pricing the instruments. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, default risk, nonperformance risk, volatility, liquidity and changes in estimates and assumptions used in the pricing models.
The significant inputs to the pricing models for most OTC derivatives are inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Significant inputs that are observable generally include: interest rates, foreign currency exchange rates, interest rate curves, credit curves and volatility. However, certain OTC 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. Significant inputs that are unobservable generally include: independent broker quotes, references to emerging market currencies and inputs that are outside the observable portion of the interest rate curve, credit curve, volatility or other relevant market measure. 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.
The credit risk of both the counterparty and the Company are considered in determining the estimated fair value for all OTC 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 derivative positions using the standard swap curve which includes a spread to the risk free rate. This credit spread is appropriate for those parties that execute trades at pricing levels consistent with the standard swap curve. As the Company and its significant derivative counterparties consistently execute trades at such pricing levels, 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. The evaluation of the requirement to make additional credit risk adjustments is performed by the Company each reporting period.
Most inputs for OTC derivatives are mid market inputs but, in certain cases, bid level inputs are used 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.
Embedded Derivatives Within Asset and Liability Host Contracts
Embedded derivatives principally include certain direct, assumed and ceded variable annuity guarantees and equity or bond indexed crediting rates within certain funding agreements. Embedded derivatives are recorded at estimated fair value with changes in estimated fair value reported in net income.
The Company issues and assumes certain variable annuity products with guaranteed minimum benefits. GMWBs, GMABs and certain GMIBs are 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 PABs in the consolidated balance sheets.
164
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The fair value of these guarantees is estimated using 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. A risk neutral valuation methodology is used under which the cash flows from the guarantees are projected under multiple capital market scenarios using observable risk free rates. The valuation of these guarantee liabilities includes adjustments for nonperformance risk and 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 MetLife, Inc.’s debt, including related credit default swaps. These observable spreads are then adjusted, as necessary, to reflect the priority of these liabilities and the claims paying ability of the issuing insurance subsidiaries compared to MetLife, Inc.
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 the risk associated with certain of the GMIBs and GMABs previously described. These reinsurance agreements contain embedded derivatives which are included within premiums, reinsurance and other receivables in the consolidated balance sheets with changes in estimated fair value reported in net derivative gains (losses) or policyholder benefits and claims depending on the statement of operations classification of the direct risk. 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.
The estimated fair value of the embedded derivatives within funds withheld related to certain ceded reinsurance is determined based on the change in estimated fair value of the underlying assets held by the Company in a reference portfolio backing the funds withheld liability. The estimated fair value of the underlying assets is determined as previously described in “— Fixed Maturity Securities, Equity Securities, Trading and Other Securities and Short-term Investments.” The estimated fair value of these embedded derivatives is included, along with their funds withheld hosts, in other liabilities in the consolidated balance sheets with changes in estimated fair value recorded in net derivative gains (losses). Changes in the credit spreads on the underlying assets, interest rates and market volatility may result in significant fluctuations in the estimated fair value of these embedded derivatives that could materially affect net income.
The estimated fair value of the embedded equity and bond indexed derivatives contained in certain funding agreements is determined using market standard swap valuation models and observable market inputs, including an adjustment for nonperformance risk. The estimated fair value of these embedded derivatives are included, along with their funding agreements host, within PABs with changes in estimated fair value recorded in net derivative gains (losses). Changes in equity and bond indices, interest rates and the Company’s credit standing may result in significant fluctuations in the estimated fair value of these embedded derivatives that could materially affect net income.
165
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Separate Account Assets
Separate account assets are carried at estimated fair value and reported as a summarized total on the consolidated balance sheets. The estimated fair value of separate account assets is based on the estimated fair value of the underlying assets. Assets within the Company’s separate accounts include: mutual funds, fixed maturity securities, equity securities, mortgage loans, derivatives, hedge funds, other limited partnership interests, short-term investments and cash and cash equivalents. See “— Valuation Techniques and Inputs by Level Within the Three-Level Fair Value Hierarchy by Major Classes of Assets and Liabilities” below for a discussion of the methods and assumptions used to estimate the fair value of these financial instruments.
Long-term Debt of CSEs
The Company has elected the FVO for the long-term debt of CSEs. See “— Valuation Techniques and Inputs by Level Within the Three-Level Fair Value Hierarchy by Major Classes of Assets and Liabilities” below for a discussion of the methods and assumptions used to estimate the fair value of these financial instruments.
Liability Related to Securitized Reverse Residential Mortgage Loans
The Company has elected the FVO for the liability related to securitized reverse residential mortgage loans. See “— Valuation Techniques and Inputs by Level Within the Three-Level Fair Value Hierarchy by Major Classes of Assets and Liabilities” below for a discussion of the methods and assumptions used to estimate the fair value of this financial instrument.
Trading Liabilities
Trading liabilities are recorded at estimated fair value with subsequent changes in estimated fair value recognized in net investment income. The estimated fair value of trading liabilities is determined on a basis consistent with the methodologies described in “— Fixed Maturity Securities, Equity Securities, Trading and Other Securities and Short-term Investments.”
Valuation Techniques and Inputs by Level Within the Three-Level Fair Value Hierarchy by Major Classes of Assets and Liabilities
A description of the significant valuation techniques and inputs to the determination of estimated fair value for the more significant asset and liability classes measured at fair value on a recurring basis is as follows:
The Company determines the estimated fair value of its investments using primarily the market approach and the income approach. The use of quoted prices for identical assets and matrix pricing or other similar techniques are examples of market approaches, while the use of discounted cash flow methodologies is an example of the income approach. The Company attempts to maximize the use of observable inputs and minimize the use of unobservable inputs in selecting whether the market or income approach is used.
While certain investments have been classified as Level 1 from the use of unadjusted quoted prices for identical investments supported by high volumes of trading activity and narrow bid/ask spreads, most investments have been classified as Level 2 because the significant inputs used to measure the fair value on a recurring basis of the same or similar investment are market observable or can be corroborated using market observable information for the full term of the investment. Level 3 investments include those where estimated fair values are based on significant unobservable inputs that are supported by little or no market activity and may reflect management’s own assumptions about what factors market participants would use in pricing these investments.
166
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Level 1 Measurements:
Fixed Maturity Securities, Equity Securities, Trading and Other Securities and Short-term Investments
These securities are comprised of U.S. Treasury and agency securities, foreign government securities, RMBS principally to-be-announced securities, exchange traded common stock, exchange traded registered mutual fund interests included in trading and other securities and short-term money market securities, including U.S. Treasury bills. Valuation of these securities is based on unadjusted quoted prices in active markets that are readily and regularly available. Contractholder-directed unit-linked investments reported within trading and other securities include certain registered mutual fund interests priced using daily NAV provided by the fund managers.
Derivative Assets and Derivative Liabilities
These assets and liabilities are comprised of exchange-traded derivatives, as well as interest rate forwards to sell certain to-be-announced securities. Valuation of these assets and liabilities is based on unadjusted quoted prices in active markets that are readily and regularly available.
Separate Account Assets
These assets are comprised of (i) securities that are similar in nature to the fixed maturity securities, equity securities and short-term investments referred to above; and (ii) certain exchange-traded derivatives, including financial futures and owned options. Valuation of these assets is based on unadjusted quoted prices in active markets that are readily and regularly available.
Level 2 Measurements:
Fixed Maturity Securities, Equity Securities, Trading and Other Securities and Short-term Investments
This level includes fixed maturity securities and equity securities priced principally by independent pricing services using observable inputs. Trading and other securities and short-term investments within this level are of a similar nature and class to the Level 2 securities described below. Contractholder-directed unit-linked investments reported within trading and other securities include certain mutual fund interests without readily determinable fair values given prices are not published publicly. Valuation of these mutual funds is based upon quoted prices or reported NAV provided by the fund managers, which were based on observable inputs.
U.S. corporate and foreign corporate securities. These securities are principally valued using the market and income approaches. Valuation is based primarily on quoted prices in markets that are not active, or using matrix pricing or other similar techniques that use standard market observable inputs such as benchmark yields, spreads off benchmark yields, new issuances, issuer rating, duration, and trades of identical or comparable securities. Investment grade privately placed securities are valued using discounted cash flow methodologies using standard market observable inputs, and inputs derived from, or corroborated by, market observable data including market yield curve, duration, call provisions, observable prices and spreads for similar publicly traded or privately traded issues that incorporate the credit quality and industry sector of the issuer. This level also includes certain below investment grade privately placed fixed maturity securities priced by independent pricing services that use observable inputs.
Structured securities comprised of RMBS, CMBS and ABS. These securities are principally valued using the market approach. Valuation is based primarily on matrix pricing or other similar techniques using standard market inputs including spreads for actively traded securities, spreads off benchmark yields, expected prepayment speeds and volumes, current and forecasted loss severity, rating, weighted average coupon,
167
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
weighted average maturity, average delinquency rates, geographic region, debt-service coverage ratios and issuance-specific information including, but not limited to: collateral type, payment terms of the underlying assets, payment priority within the tranche, structure of the security, deal performance and vintage of loans.
U.S. Treasury and agency securities. These securities are principally valued using the market approach. Valuation is based primarily on quoted prices in markets that are not active, or using matrix pricing or other similar techniques using standard market observable inputs such as benchmark U.S. Treasury yield curve, the spread off the U.S. Treasury curve for the identical security and comparable securities that are actively traded.
Foreign government and state and political subdivision securities. These securities are principally valued using the market approach. Valuation is based primarily on matrix pricing or other similar techniques using standard market observable inputs including benchmark U.S. Treasury or other yields, issuer ratings, broker-dealer quotes, issuer spreads and reported trades of similar securities, including those within the same sub-sector or with a similar maturity or credit rating.
Common and non-redeemable preferred stock. These securities are principally valued using the market approach where market quotes are available but are not considered actively traded. Valuation is based principally on observable inputs including quoted prices in markets that are not considered active.
Commercial Mortgage Loans Held by CSEs
These commercial mortgage loans are principally valued using the market approach. The principal market for these commercial loan portfolios is the securitization market. The Company uses the quoted securitization market price of the obligations of the CSEs to determine the estimated fair value of these commercial loan portfolios. These market prices are determined principally by independent pricing services using observable inputs.
Residential Mortgage Loans Held-For-Sale
Residential mortgage loans held-for-sale are principally valued using the market approach. Valuation is based primarily on readily available observable pricing for securities backed by similar loans. The unobservable adjustments to such prices are insignificant.
Securitized Reverse Residential Mortgage Loans
Securitized reverse residential mortgage loans are principally valued using the market approach. Valuation is based primarily on readily available observable pricing for securities backed by similar fixed-rate loans. The unobservable adjustments to such prices are not significant.
Derivative Assets and Derivative Liabilities
This level includes all types of derivative instruments utilized by the Company with the exception of exchange-traded derivatives and interest rate forwards to sell certain to-be-announced securities included within Level 1 and those derivative instruments with unobservable inputs as described in Level 3. These derivatives are principally valued using an income approach.
Interest rate contracts.
Non-option-based — Valuations are based on present value techniques, which utilize significant inputs that may include the swap yield curve, LIBOR basis curves and repurchase rates.
Option-based — Valuations are based on option pricing models, which utilize significant inputs that may include the swap yield curve, LIBOR basis curves and interest rate volatility.
168
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Foreign currency contracts.
Non-option-based — Valuations are based on present value techniques, which utilize significant inputs that may include the swap yield curve, LIBOR basis curves, currency spot rates and cross currency basis curves.
Option-based — Valuations are based on option pricing models, which utilize significant inputs that may include the swap yield curve, LIBOR basis curves, currency spot rates, cross currency basis curves and currency volatility.
Credit contracts.
Non-option-based — Valuations are based on present value techniques, which utilize significant inputs that may include the swap yield curve, credit curves and recovery rates.
Equity market contracts.
Non-option-based — Valuations are based on present value techniques, which utilize significant inputs that may include the swap yield curve, spot equity index levels and dividend yield curves.
Option-based — Valuations are based on option pricing models, which utilize significant inputs that may include the swap yield curve, spot equity index levels, dividend yield curves and equity volatility.
Embedded Derivatives Contained in Certain Funding Agreements
These derivatives are principally valued using an income approach. Valuations are based on present value techniques, which utilize significant inputs that may include the swap yield curve and the spot equity and bond index level.
Separate Account Assets
These assets are comprised of investments that are similar in nature to the fixed maturity securities, equity securities, short-term investments and derivative assets referred to above. Also included are certain mutual funds and hedge funds without readily determinable fair values given prices are not published publicly. Valuation of the mutual funds and hedge funds is based upon quoted prices or reported NAV provided by the fund managers.
Long-term Debt of CSEs
The estimated fair value of the long-term debt of the Company’s CSEs is based on quoted prices when traded as assets in active markets or, if not available, based on market standard valuation methodologies, consistent with the Company’s methods and assumptions used to estimate the fair value of comparable fixed maturity securities.
Liability Related to Securitized Reverse Residential Mortgage Loans
The estimated fair value of the liability related to securitized reverse residential mortgage loans, is based on quoted prices when traded as assets in active markets or, if not available, based on market standard valuation methodologies, consistent with the Company’s methods and assumptions used to estimate the fair value of comparable financial instruments.
169
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Level 3 Measurements:
In general, investments classified within Level 3 use many of the same valuation techniques and inputs as described in Level 2 Measurements. However, if key inputs are unobservable, or if the investments are less liquid and there is very limited trading activity, the investments are generally classified as Level 3. The use of independent non-binding broker quotations to value investments generally indicates there is a lack of liquidity or a lack of transparency in the process to develop the valuation estimates generally causing these investments to be classified in Level 3.
Fixed Maturity Securities, Equity Securities, Trading and Other Securities and Short-term Investments
This level includes fixed maturity securities and equity securities priced principally by independent broker quotations or market standard valuation methodologies using inputs that are not market observable or cannot be derived principally from or corroborated by observable market data. Trading and other securities and short-term investments within this level are of a similar nature and class to the Level 3 securities described below; accordingly, the valuation techniques and significant market standard observable inputs used in their valuation are also similar to those described below.
U.S. corporate and foreign corporate securities. These securities, including financial services industry hybrid securities classified within fixed maturity securities, are principally valued using the market and income approaches. Valuations are based primarily on matrix pricing or other similar techniques that utilize unobservable inputs or cannot be derived principally from, or corroborated by, observable market data, including illiquidity premiums and spread adjustments to reflect industry trends or specific credit-related issues. Valuations may be based on independent non-binding broker quotations. Generally, below investment grade privately placed or distressed securities included in this level are valued using discounted cash flow methodologies which rely upon significant, unobservable inputs and inputs that cannot be derived principally from, or corroborated by, observable market data.
Structured securities comprised of RMBS, CMBS and ABS. These securities are principally valued using the market approach. Valuation is based primarily on matrix pricing or other similar techniques that utilize inputs that are unobservable or cannot be derived principally from, or corroborated by, observable market data, or are based on independent non-binding broker quotations. Below investment grade securities and RMBS supported by sub-prime mortgage loans included in this level are valued based on inputs including 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, and certain of these securities are valued based on independent non-binding broker quotations.
Foreign government and state and political subdivision securities. These securities are principally valued using the market approach. Valuation is based primarily on matrix pricing or other similar techniques, however these securities are less liquid and certain of the inputs are based on very limited trading activity.
Common and non-redeemable preferred stock. These securities, including privately held securities and financial services industry hybrid securities classified within equity securities, are principally valued using the market and income approaches. Valuations are based primarily on matrix pricing or other similar techniques using inputs such as comparable credit rating and issuance structure. Equity securities valuations determined with discounted cash flow methodologies use inputs such as earnings multiples based on comparable public companies, and industry-specific non-earnings based multiples. Certain of these securities are valued based on independent non-binding broker quotations.
170
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Residential Mortgage Loans Held-For-Sale
Residential mortgage loans held-for-sale for which pricing for securities backed by similar loans is not observable, the estimated fair value is determined using unobservable independent broker quotations or valuation models using significant unobservable inputs.
Securitized Reverse Residential Mortgage Loans
Securitized reverse residential mortgage loans for which pricing for securities backed by similar adjustable-rate loans is not observable, the estimated fair value is determined using unobservable independent broker quotations or valuation models using significant unobservable inputs.
MSRs
MSRs, which are valued using an income approach, are carried at estimated fair value and have multiple significant unobservable inputs including assumptions regarding estimates of discount rates, loan prepayments and servicing costs. Sales of MSRs tend to occur in private transactions where the precise terms and conditions of the sales are typically not readily available and observable market valuations are limited. As such, the Company relies primarily on a discounted cash flow model to estimate the fair value of the MSRs. The model requires inputs such as type of loan (fixed vs. variable and agency vs. other), age of loan, loan interest rates and current market interest rates that are generally observable. The model also requires the use of unobservable inputs including assumptions regarding estimates of discount rates, loan prepayments and servicing costs.
Derivative Assets and Derivative Liabilities
These derivatives are principally valued using an income approach. Valuations of non-option-based derivatives utilize present value techniques, whereas valuations of option-based derivatives utilize option pricing models. These valuation methodologies generally use the same inputs as described in the corresponding sections above for Level 2 measurements of derivatives. However, these derivatives result in Level 3 classification because one or more of the significant inputs are not observable in the market or cannot be derived principally from, or corroborated by, observable market data.
Interest rate contracts.
Non-option-based — Significant unobservable inputs may include pull through rates on interest rate lock commitments and the extrapolation beyond observable limits of the swap yield curve and LIBOR basis curves.
Option-based — Significant unobservable inputs may include the extrapolation beyond observable limits of the swap yield curve, LIBOR basis curves and interest rate volatility.
Foreign currency contracts.
Non-option-based — Significant unobservable inputs may include the extrapolation beyond observable limits of the swap yield curve, LIBOR basis curves and cross currency basis curves. Certain of these derivatives are valued based on independent non-binding broker quotations.
Option-based — Significant unobservable inputs may include currency correlation and the extrapolation beyond observable limits of the swap yield curve, LIBOR basis curves, cross currency basis curves and currency volatility.
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Credit contracts.
Non-option-based — Significant unobservable inputs may include credit spreads, repurchase rates, and the extrapolation beyond observable limits of the swap yield curve and credit curves. Certain of these derivatives are valued based on independent non-binding broker quotations.
Equity market contracts.
Non-option-based — Significant unobservable inputs may include the extrapolation beyond observable limits of dividend yield curves.
Option-based — Significant unobservable inputs may include the extrapolation beyond observable limits of dividend yield curves, equity volatility and unobservable correlations between model inputs. Certain of these derivatives are valued based on independent non-binding broker quotations.
Direct and Assumed Guaranteed Minimum Benefits
These embedded derivatives are principally valued using an income approach. Valuations are based on option pricing techniques, which utilize significant inputs that may include swap yield curve, currency exchange rates and implied volatilities. These embedded derivatives result in Level 3 classification because one or more of the significant inputs are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. Significant unobservable inputs generally include: the extrapolation beyond observable limits of the swap yield curve and implied volatilities, actuarial assumptions for policyholder behavior and mortality and the potential variability in policyholder behavior and mortality, nonperformance risk and cost of capital for purposes of calculating the risk margin.
Reinsurance Ceded on Certain Guaranteed Minimum Benefits
These embedded derivatives are principally valued using an income approach. The valuation techniques and significant market standard unobservable inputs used in their valuation are similar to those previously described under “Direct and Assumed Guaranteed Minimum Benefits” and also include counterparty credit spreads.
Embedded Derivatives Within Funds Withheld Related to Certain Ceded Reinsurance
These embedded derivatives are principally valued using an income approach. Valuations are based on present value techniques, which utilize significant inputs that may include the swap yield curve and the fair value of assets within the reference portfolio. These embedded derivatives result in Level 3 classification because one or more of the significant inputs are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. Significant unobservable inputs generally include: the fair value of certain assets within the reference portfolio which are not observable in the market and cannot be derived principally from, or corroborated by, observable market data.
Separate Account Assets
These assets are comprised of investments that are similar in nature to the fixed maturity securities, equity securities and derivative assets referred to above. Separate account assets within this level also include mortgage loans and other limited partnership interests. The estimated fair value of mortgage loans is determined by discounting expected future cash flows, using current interest rates for similar loans with similar credit risk. Other limited partnership interests are valued giving consideration to the value of the underlying holdings of the partnerships and by applying a premium or discount, if appropriate, for factors such as liquidity, bid/ask spreads, the performance record of the fund manager or other relevant variables which may impact the exit value of the particular partnership interest.
172
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Long-term Debt of CSEs
The estimated fair value of the long-term debt of the Company’s CSEs are priced principally through independent broker quotations or market standard valuation methodologies using inputs that are not market observable or cannot be derived from or corroborated by observable market data.
Liability Related to Securitized Reverse Residential Mortgage Loans
The estimated fair value of the liability related to securitized reverse residential mortgage loans is based on quoted prices when traded as assets in less active markets or, if not available, based on market standard valuation methodologies using unobservable inputs, consistent with the Company’s methods and assumptions used to estimate the fair value of comparable financial instruments.
Transfers between Levels 1 and 2:
During the years ended December 31, 2011 and 2010, transfers between Levels 1 and 2 were not significant.
Transfers into or out of Level 3:
Overall, transfers into and/or out of Level 3 are attributable to a change in the observability of inputs. 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. Transfers into and/or out of any level are assumed to occur at the beginning of the period. Significant transfers into and/or out of Level 3 assets and liabilities for the years ended December 31, 2011 and 2010 are summarized below.
Transfers into Level 3 were due primarily to a lack of trading activity, decreased liquidity and credit ratings downgrades (e.g., from investment grade to below investment grade), which have resulted in decreased transparency of valuations and an increased use of broker quotations and unobservable inputs to determine estimated fair value.
During the year ended December 31, 2011, transfers into Level 3 for fixed maturity securities of $599 million and for separate account assets of $19 million, were principally comprised of certain U.S. and foreign corporate securities and foreign government securities. During the year ended December 31, 2010, transfers into Level 3 for fixed maturity securities of $1.7 billion and for separate account assets of $46 million were principally comprised of certain U.S. and foreign corporate securities and CMBS.
Transfers out of Level 3 resulted primarily from increased transparency of both new issuances that subsequent to issuance and establishment of trading activity, became priced by independent pricing services and existing issuances that, over time, the Company was able to obtain pricing from, or corroborate pricing received from, independent pricing services with observable inputs, or increases in market activity and upgraded credit ratings. With respect to derivatives, transfers out of Level 3 resulted primarily from increased transparency related to the observable portion of the equity volatility surface.
During the year ended December 31, 2011, transfers out of Level 3 for fixed maturity securities of $6.7 billion and for separate account assets of $257 million, were principally comprised of certain ABS, foreign government securities, U.S. and foreign corporate securities, RMBS and CMBS. During the year ended December 31, 2011,
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
transfers out of Level 3 for derivatives of $75 million were principally comprised of equity options. During the year ended December 31, 2010, transfers out of Level 3 for fixed maturity securities of $1.7 billion and for separate account assets of $234 million were principally comprised of certain U.S. and foreign corporate securities, RMBS and ABS.
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), including realized and unrealized gains (losses) of all assets and (liabilities) and realized and unrealized gains (losses) of all assets and (liabilities) still held at the end of the respective time periods:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||||||||||
Fixed Maturity Securities: | ||||||||||||||||||||||||||||||||||||
U.S. Corporate Securities | Foreign Corporate Securities | Foreign Government Securities | RMBS | U.S. Treasury and Agency Securities | CMBS | State and Political Subdivision Securities | ABS | Other Fixed Maturity Securities | ||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2011: | ||||||||||||||||||||||||||||||||||||
Balance, January 1, | $ | 7,149 | $ | 5,726 | $ | 3,134 | $ | 2,541 | $ | 79 | $ | 1,011 | $ | 46 | $ | 3,026 | $ | 4 | ||||||||||||||||||
Total realized/unrealized gains | ||||||||||||||||||||||||||||||||||||
Earnings: (1), (2) | ||||||||||||||||||||||||||||||||||||
Net investment income | 11 | 27 | 18 | 10 | — | 25 | — | 24 | — | |||||||||||||||||||||||||||
Net investment gains (losses) | 17 | (9 | ) | — | (41 | ) | — | (16 | ) | — | (18 | ) | — | |||||||||||||||||||||||
Net derivative gains (losses) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Other revenues | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Policyholder benefits and claims | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Other expenses | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Other comprehensive income (loss) | 327 | (66 | ) | — | (5 | ) | 3 | 71 | (8 | ) | 81 | — | ||||||||||||||||||||||||
Purchases (3) | 912 | 1,740 | 529 | 393 | 6 | 283 | 11 | 1,033 | — | |||||||||||||||||||||||||||
Sales (3) | (887 | ) | (2,094 | ) | (179 | ) | (213 | ) | (1 | ) | (178 | ) | (4 | ) | (659 | ) | (4 | ) | ||||||||||||||||||
Issuances (3) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Settlements (3) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Transfers into Level 3 (4) | 169 | 211 | 123 | 20 | — | 52 | 10 | 14 | — | |||||||||||||||||||||||||||
Transfers out of Level 3 (4) | (914 | ) | (1,165 | ) | (1,303 | ) | (1,103 | ) | (56 | ) | (495 | ) | (2 | ) | (1,651 | ) | — | |||||||||||||||||||
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Balance, December 31, | $ | 6,784 | $ | 4,370 | $ | 2,322 | $ | 1,602 | $ | 31 | $ | 753 | $ | 53 | $ | 1,850 | $ | — | ||||||||||||||||||
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Changes in unrealized gains (losses) relating | ||||||||||||||||||||||||||||||||||||
Net investment income | $ | 10 | $ | 19 | $ | 18 | $ | 11 | $ | — | $ | 24 | $ | — | $ | 20 | $ | — | ||||||||||||||||||
Net investment gains (losses) | $ | (27 | ) | $ | (31 | ) | $ | (3 | ) | $ | (41 | ) | $ | — | $ | (14 | ) | $ | — | $ | (10 | ) | $ | — | ||||||||||||
Net derivative gains (losses) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
Other revenues | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
Policyholder benefits and claims | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
Other expenses | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
174
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||||||
Equity Securities: | Trading and Other Securities: | Short-term Investments | Residential Mortgage Loans Held- for-sale | Securitized Reverse Residential Mortgage Loans | ||||||||||||||||||||||||||||
Common Stock | Non- redeemable Preferred Stock | Actively Traded Securities | FVO General Account Securities | FVO Contractholder- directed Unit-linked Investments | ||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Year Ended December 31, 2011: | ||||||||||||||||||||||||||||||||
Balance, January 1, | $ | 268 | $ | 905 | $ | 10 | $ | 77 | $ | 735 | $ | 858 | $ | 24 | $ | — | ||||||||||||||||
Total realized/unrealized gains | ||||||||||||||||||||||||||||||||
Earnings: (1), (2) | ||||||||||||||||||||||||||||||||
Net investment income | — | — | — | (7 | ) | 5 | 3 | — | — | |||||||||||||||||||||||
Net investment gains (losses) | 14 | (71 | ) | — | — | — | (2 | ) | — | — | ||||||||||||||||||||||
Net derivative gains (losses) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Other revenues | — | — | — | — | — | — | 5 | — | ||||||||||||||||||||||||
Policyholder benefits and claims | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Other expenses | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Other comprehensive income (loss) | 5 | 5 | — | — | — | 2 | — | — | ||||||||||||||||||||||||
Purchases (3) | 106 | 3 | — | — | 1,246 | 600 | 3 | — | ||||||||||||||||||||||||
Sales (3) | (46 | ) | (416 | ) | (8 | ) | (33 | ) | (478 | ) | (870 | ) | — | — | ||||||||||||||||||
Issuances (3) | — | — | — | — | — | — | 175 | 1,186 | ||||||||||||||||||||||||
Settlements (3) | — | — | — | — | — | — | (87 | ) | — | |||||||||||||||||||||||
Transfers into Level 3 (4) | — | 12 | — | — | 121 | — | 109 | — | ||||||||||||||||||||||||
Transfers out of Level 3 (4) | (66 | ) | — | (2 | ) | (14 | ) | (243 | ) | (1 | ) | (1 | ) | — | ||||||||||||||||||
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Balance, December 31, | $ | 281 | $ | 438 | $ | — | $ | 23 | $ | 1,386 | $ | 590 | $ | 228 | $ | 1,186 | ||||||||||||||||
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Changes in unrealized gains (losses) relating | ||||||||||||||||||||||||||||||||
Net investment income | $ | — | $ | — | $ | — | $ | (8 | ) | $ | (4 | ) | $ | — | $ | — | $ | — | ||||||||||||||
Net investment gains (losses) | $ | (6 | ) | $ | (19 | ) | $ | — | $ | — | $ | — | $ | (1 | ) | $ | — | $ | — | |||||||||||||
Net derivative gains (losses) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Other revenues | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 5 | $ | — | ||||||||||||||||
Policyholder benefits and claims | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Other expenses | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
175
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||||||||||
MSRs (5), (6) | Net Derivatives: (7) | Net Embedded Derivatives (8) | Separate Account Assets (9) | Long-term Debt of CSEs | ||||||||||||||||||||||||||||||||
Interest Rate Contracts | Foreign Currency Contracts | Credit Contracts | Equity Market Contracts | Liability Related to Securitized Reverse Mortgage Loans | ||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2011: | ||||||||||||||||||||||||||||||||||||
Balance, January 1, | $ | 950 | $ | (86 | ) | $ | 73 | $ | 44 | $ | 142 | $ | (2,438 | ) | $ | 1,983 | $ | (184 | ) | $ | — | |||||||||||||||
Total realized/unrealized gains | ||||||||||||||||||||||||||||||||||||
Earnings: (1), (2) | ||||||||||||||||||||||||||||||||||||
Net investment income | — | — | — | — | (3 | ) | — | — | — | — | ||||||||||||||||||||||||||
Net investment gains (losses) | — | — | — | — | — | — | 39 | (8 | ) | — | ||||||||||||||||||||||||||
Net derivative gains (losses) | — | 41 | (28 | ) | (43 | ) | 601 | (1,277 | ) | — | — | — | ||||||||||||||||||||||||
Other revenues | (314 | ) | 62 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
Policyholder benefits and claims | — | — | — | — | 7 | 86 | — | — | — | |||||||||||||||||||||||||||
Other expenses | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Other comprehensive income (loss) | — | 329 | — | 14 | 1 | (119 | ) | — | — | — | ||||||||||||||||||||||||||
Purchases (3) | — | (1 | ) | — | 1 | 228 | — | 284 | — | — | ||||||||||||||||||||||||||
Sales (3) | — | — | — | — | — | — | (743 | ) | — | — | ||||||||||||||||||||||||||
Issuances (3) | 173 | — | — | (3 | ) | (4 | ) | — | — | — | (1,175 | ) | ||||||||||||||||||||||||
Settlements (3) | (143 | ) | (44 | ) | (1 | ) | (12 | ) | (8 | ) | (455 | ) | — | 76 | — | |||||||||||||||||||||
Transfers into Level 3 (4) | — | (1 | ) | — | — | — | — | 19 | — | — | ||||||||||||||||||||||||||
Transfers out of Level 3 (4) | — | — | — | — | (75 | ) | — | (257 | ) | — | — | |||||||||||||||||||||||||
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Balance, December 31, | $ | 666 | $ | 300 | $ | 44 | $ | 1 | $ | 889 | $ | (4,203 | ) | $ | 1,325 | $ | (116 | ) | $ | (1,175 | ) | |||||||||||||||
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Changes in unrealized gains (losses) relating | ||||||||||||||||||||||||||||||||||||
Net investment income | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
Net investment gains (losses) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (8 | ) | $ | — | |||||||||||||||||
Net derivative gains (losses) | $ | — | $ | 24 | $ | (24 | ) | $ | (42 | ) | $ | 601 | $ | (1,303 | ) | $ | — | $ | — | $ | — | |||||||||||||||
Other revenues | $ | (282 | ) | $ | 68 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||
Policyholder benefits and claims | $ | — | $ | — | $ | — | $ | — | $ | 7 | $ | 94 | $ | — | $ | — | $ | — | ||||||||||||||||||
Other expenses | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||||||||||
Fixed Maturity Securities: | ||||||||||||||||||||||||||||||||||||
U.S. Corporate Securities | Foreign Corporate Securities | Foreign Government Securities | RMBS | U.S. Treasury and Agency Securities | CMBS | State and Political Subdivision Securities | ABS | Other Fixed Maturity Securities | ||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2010: | ||||||||||||||||||||||||||||||||||||
Balance, January 1, | $ | 6,694 | $ | 5,244 | $ | 378 | $ | 2,884 | $ | 37 | $ | 139 | $ | 69 | $ | 1,659 | $ | 6 | ||||||||||||||||||
Total realized/unrealized gains | ||||||||||||||||||||||||||||||||||||
Earnings: (1), (2) | ||||||||||||||||||||||||||||||||||||
Net investment income | 22 | 15 | 6 | 64 | — | 1 | — | 9 | 1 | |||||||||||||||||||||||||||
Net investment gains (losses) | (13 | ) | (34 | ) | (5 | ) | (59 | ) | — | (6 | ) | — | (40 | ) | — | |||||||||||||||||||||
Net derivative gains (losses) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Other revenues | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Policyholder benefits and claims | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Other expenses | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Other comprehensive income (loss) | 277 | 318 | (95 | ) | 305 | 2 | 89 | (2 | ) | 168 | 2 | |||||||||||||||||||||||||
Purchases, sales, issuances and | (415 | ) | 305 | 2,965 | (445 | ) | (6 | ) | 684 | 9 | 1,435 | (5 | ) | |||||||||||||||||||||||
Transfers into Level 3 (4) | 898 | 502 | 40 | 91 | 46 | 132 | — | 28 | — | |||||||||||||||||||||||||||
Transfers out of Level 3 (4) | (314 | ) | (624 | ) | (155 | ) | (299 | ) | — | (28 | ) | (30 | ) | (233 | ) | — | ||||||||||||||||||||
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Balance, December 31, | $ | 7,149 | $ | 5,726 | $ | 3,134 | $ | 2,541 | $ | 79 | $ | 1,011 | $ | 46 | $ | 3,026 | $ | 4 | ||||||||||||||||||
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Changes in unrealized gains (losses) relating | ||||||||||||||||||||||||||||||||||||
Net investment income | $ | 13 | $ | 15 | $ | 10 | $ | 63 | $ | — | $ | 1 | $ | — | $ | 9 | $ | 1 | ||||||||||||||||||
Net investment gains (losses) | $ | (44 | ) | $ | (43 | ) | $ | — | $ | (29 | ) | $ | — | $ | (6 | ) | $ | — | $ | (23 | ) | $ | — | |||||||||||||
Net derivative gains (losses) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
Other revenues | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
Policyholder benefits and claims | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
Other expenses | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
177
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||||||
Equity Securities: | Trading and Other Securities: | Short-term Investments | Residential Mortgage Loans Held- for-sale | MSRs (5), (6) | ||||||||||||||||||||||||||||
Common Stock | Non- redeemable Preferred Stock | Actively Traded Securities | FVO General Account Securities | FVO Contractholder- directed Unit-linked Investments | ||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Year Ended December 31, 2010: | ||||||||||||||||||||||||||||||||
Balance, January 1, | $ | 136 | $ | 1,102 | $ | 32 | $ | 51 | $ | — | $ | 23 | $ | 25 | $ | 878 | ||||||||||||||||
Total realized/unrealized gains | ||||||||||||||||||||||||||||||||
Earnings: (1), (2) | ||||||||||||||||||||||||||||||||
Net investment income | — | — | — | 8 | (15 | ) | 2 | — | — | |||||||||||||||||||||||
Net investment gains (losses) | 5 | 46 | — | — | — | — | — | — | ||||||||||||||||||||||||
Net derivative gains (losses) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Other revenues | — | — | — | — | — | — | (2 | ) | (79 | ) | ||||||||||||||||||||||
Policyholder benefits and claims | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Other expenses | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Other comprehensive income (loss) | 7 | 12 | — | — | — | (9 | ) | — | — | |||||||||||||||||||||||
Purchases, sales, issuances and | 128 | (250 | ) | (22 | ) | (1 | ) | 750 | 842 | — | 151 | |||||||||||||||||||||
Transfers into Level 3 (4) | 1 | — | — | 37 | — | — | 10 | — | ||||||||||||||||||||||||
Transfers out of Level 3 (4) | (9 | ) | (5 | ) | — | (18 | ) | — | — | (9 | ) | — | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Balance, December 31, | $ | 268 | $ | 905 | $ | 10 | $ | 77 | $ | 735 | $ | 858 | $ | 24 | $ | 950 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Changes in unrealized gains (losses) relating to assets and liabilities still held at December 31, 2010 included in earnings: | ||||||||||||||||||||||||||||||||
Net investment income | $ | — | $ | — | $ | — | $ | 12 | $ | (15 | ) | $ | 2 | $ | — | $ | — | |||||||||||||||
Net investment gains (losses) | $ | (2 | ) | $ | (3 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Net derivative gains (losses) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Other revenues | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (2 | ) | $ | (28 | ) | ||||||||||||||
Policyholder benefits and claims | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Other expenses | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
178
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||
Net Derivatives: (7) | Net Embedded Derivatives (8) | Separate Account Assets (9) | Long-term Debt of CSEs (10) | |||||||||||||||||||||||||
Interest Rate Contracts | Foreign Currency Contracts | Credit Contracts | Equity Market Contracts | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Year Ended December 31, 2010: | ||||||||||||||||||||||||||||
Balance, January 1, | $ | 7 | $ | 108 | $ | 42 | $ | 199 | $ | (1,455 | ) | $ | 1,797 | $ | — | |||||||||||||
Total realized/unrealized gains | ||||||||||||||||||||||||||||
Earnings: (1), (2) | ||||||||||||||||||||||||||||
Net investment income | — | — | — | — | — | — | — | |||||||||||||||||||||
Net investment gains (losses) | — | — | — | — | — | 132 | 48 | |||||||||||||||||||||
Net derivative gains (losses) | 36 | 46 | 4 | (88 | ) | (343 | ) | — | — | |||||||||||||||||||
Other revenues | 1 | — | — | — | — | — | — | |||||||||||||||||||||
Policyholder benefits and claims | — | — | — | — | 8 | — | — | |||||||||||||||||||||
Other expenses | — | (4 | ) | — | — | — | — | — | ||||||||||||||||||||
Other comprehensive income (loss) | (107 | ) | 2 | 13 | 11 | (226 | ) | — | — | |||||||||||||||||||
Purchases, sales, issuances and | (23 | ) | (57 | ) | (15 | ) | 20 | (422 | ) | 242 | (232 | ) | ||||||||||||||||
Transfers into Level 3 (4) | — | — | — | — | — | 46 | — | |||||||||||||||||||||
Transfers out of Level 3 (4) | — | (22 | ) | — | — | — | (234 | ) | — | |||||||||||||||||||
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| |||||||||||||||
Balance, December 31, | $ | (86 | ) | $ | 73 | $ | 44 | $ | 142 | $ | (2,438 | ) | $ | 1,983 | $ | (184 | ) | |||||||||||
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| |||||||||||||||
Changes in unrealized gains (losses) relating | ||||||||||||||||||||||||||||
Net investment income | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Net investment gains (losses) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 48 | ||||||||||||||
Net derivative gains (losses) | $ | 36 | $ | 45 | $ | 6 | $ | (82 | ) | $ | (363 | ) | $ | — | $ | — | ||||||||||||
Other revenues | $ | 5 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Policyholder benefits and claims | $ | — | $ | — | $ | — | $ | — | $ | 8 | $ | — | $ | — | ||||||||||||||
Other expenses | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
179
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||||||||||
Fixed Maturity Securities: | ||||||||||||||||||||||||||||||||||||
U.S. Corporate Securities | Foreign Corporate Securities | Foreign Government Securities | RMBS | U.S. Treasury and Agency Securities | CMBS | State and Political Subdivision Securities | ABS | Other Fixed Maturity Securities | ||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2009: | ||||||||||||||||||||||||||||||||||||
Balance, January 1, | $ | 7,498 | $ | 5,906 | $ | 386 | $ | 1,655 | $ | 88 | $ | 260 | $ | 123 | $ | 1,383 | $ | 40 | ||||||||||||||||||
Total realized/unrealized gains | ||||||||||||||||||||||||||||||||||||
Earnings: (1), (2) | ||||||||||||||||||||||||||||||||||||
Net investment income | 15 | (4 | ) | 12 | 36 | — | 1 | — | 2 | 1 | ||||||||||||||||||||||||||
Net investment gains (losses) | (444 | ) | (326 | ) | (52 | ) | (27 | ) | — | (37 | ) | — | (101 | ) | — | |||||||||||||||||||||
Net derivative gains (losses) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Other revenues | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Policyholder benefits and claims | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Other expenses | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Other comprehensive income (loss) | 940 | 1,515 | 53 | 210 | (1 | ) | 53 | 7 | 473 | — | ||||||||||||||||||||||||||
Purchases, sales, issuances and settlements (3) | (1,359 | ) | (519 | ) | 12 | 1,126 | (29 | ) | (44 | ) | (19 | ) | (139 | ) | (35 | ) | ||||||||||||||||||||
Transfers into and/or out of level 3 (4) | 44 | (1,328 | ) | (33 | ) | (116 | ) | (21 | ) | (94 | ) | (42 | ) | 41 | — | |||||||||||||||||||||
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|
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| |||||||||||||||||||
Balance, December 31, | $ | 6,694 | $ | 5,244 | $ | 378 | $ | 2,884 | $ | 37 | $ | 139 | $ | 69 | $ | 1,659 | $ | 6 | ||||||||||||||||||
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| |||||||||||||||||||
Changes in unrealized gains (losses) relating | ||||||||||||||||||||||||||||||||||||
Net investment income | $ | 18 | $ | (3 | ) | $ | 11 | $ | 36 | $ | — | $ | 1 | $ | — | $ | 2 | $ | 1 | |||||||||||||||||
Net investment gains (losses) | $ | (412 | ) | $ | (176 | ) | $ | — | $ | (82 | ) | $ | — | $ | (61 | ) | $ | — | $ | (48 | ) | $ | — | |||||||||||||
Net derivative gains (losses) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
Other revenues | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
Policyholder benefits and claims | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
Other expenses | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
180
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
Equity Securities: | ||||||||||||||||||||||||
Common Stock | Non- redeemable Preferred Stock | Trading and Other Securities | Short-term Investments | Residential Mortgage Loans Held- for-sale | MSRs (5), (6) | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Year Ended December 31, 2009: | ||||||||||||||||||||||||
Balance, January 1, | $ | 105 | $ | 1,274 | $ | 175 | $ | 100 | $ | 177 | $ | 191 | ||||||||||||
Total realized/unrealized gains | ||||||||||||||||||||||||
Earnings: (1), (2) | ||||||||||||||||||||||||
Net investment income | — | — | 16 | — | — | — | ||||||||||||||||||
Net investment gains (losses) | (2 | ) | (357 | ) | — | (21 | ) | — | — | |||||||||||||||
Net derivative gains (losses) | — | — | — | — | — | — | ||||||||||||||||||
Other revenues | — | — | — | — | (3 | ) | 172 | |||||||||||||||||
Policyholder benefits claims | — | — | — | — | — | — | ||||||||||||||||||
Other expenses | — | — | — | — | — | — | ||||||||||||||||||
Other comprehensive income (loss) | 6 | 486 | — | — | — | — | ||||||||||||||||||
Purchases, sales, issuances and | 23 | (256 | ) | (108 | ) | (51 | ) | 2 | 515 | |||||||||||||||
Transfers into and/or out of level 3 (4) | 4 | (45 | ) | — | (5 | ) | (151 | ) | — | |||||||||||||||
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|
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|
|
|
| |||||||||||||
Balance, December 31, | $ | 136 | $ | 1,102 | $ | 83 | $ | 23 | $ | 25 | $ | 878 | ||||||||||||
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|
|
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| |||||||||||||
Changes in unrealized gains (losses) relating | ||||||||||||||||||||||||
Net investment income | $ | — | $ | — | $ | 15 | $ | — | $ | — | $ | — | ||||||||||||
Net investment gains (losses) | $ | (1 | ) | $ | (168 | ) | $ | — | $ | 1 | $ | — | $ | — | ||||||||||
Net derivative gains (losses) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Other revenues | $ | — | $ | — | $ | — | $ | — | $ | (3 | ) | $ | 147 | |||||||||||
Policyholder benefits and claims | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Other expenses | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
181
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||
Net Derivatives (7) | Net Embedded Derivatives (8) | Separate Account Assets (9) | Long-term Debt CSEs | |||||||||||||
(In millions) | ||||||||||||||||
Year Ended December 31, 2009: | ||||||||||||||||
Balance, January 1, | $ | 2,547 | $ | (2,929 | ) | $ | 1,677 | $ | — | |||||||
Total realized/unrealized gains | ||||||||||||||||
Earnings: (1), (2) | ||||||||||||||||
Net investment income | (13 | ) | — | — | — | |||||||||||
Net investment gains (losses) | — | — | (223 | ) | — | |||||||||||
Net derivative gains (losses) | (225 | ) | 1,716 | — | — | |||||||||||
Other revenues | (33 | ) | — | — | — | |||||||||||
Policyholder benefits and claims | — | (114 | ) | — | — | |||||||||||
Other expenses | (2 | ) | — | — | — | |||||||||||
Other comprehensive income (loss) | (11 | ) | 15 | — | — | |||||||||||
Purchases, sales, issuances and | 97 | (143 | ) | 478 | — | |||||||||||
Transfers into and/or out of level 3 (4) | (2,004 | ) | — | (135 | ) | — | ||||||||||
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|
| |||||||||
Balance, December 31, | $ | 356 | $ | (1,455 | ) | $ | 1,797 | $ | — | |||||||
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|
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|
|
| |||||||||
Changes in unrealized gains (losses) relating | ||||||||||||||||
Net investment income | $ | (13 | ) | $ | — | $ | — | $ | — | |||||||
Net investment gains (losses) | $ | — | $ | — | $ | — | $ | — | ||||||||
Net derivative gains (losses) | $ | (194 | ) | $ | 1,697 | $ | — | $ | — | |||||||
Other revenues | $ | 5 | $ | — | $ | — | $ | — | ||||||||
Policyholder benefits and claims | $ | — | $ | (114 | ) | $ | — | $ | — | |||||||
Other expenses | $ | (2 | ) | $ | — | $ | — | $ | — |
(1) | Amortization of premium/discount is included within net investment income. Impairments charged to earnings on securities and certain mortgage loans are included within net investment gains (losses) while changes in estimated fair value of certain mortgage loans and MSRs are recorded in other revenues. Lapses associated with net embedded derivatives are included within net derivative gains (losses). |
(2) | Interest and dividend accruals, as well as cash interest coupons and dividends received, are excluded from the rollforward. |
(3) | The amount reported within purchases, sales, issuances and settlements is the purchase or issuance price and the sales or settlement proceeds based upon the actual date purchased or issued and sold or settled, respectively. Items purchased/issued and sold/settled in the same period are excluded from the rollforward. For the year ended December 31, 2011, fees attributed to net embedded derivatives are included within settlements. For the years ended December 31, 2010 and 2009, fees attributed to net embedded derivatives are included within purchases, sales, issuances and settlements. Purchases, sales, issuances and settlements for the year ended December 31, 2010 include financial instruments acquired from ALICO as follows: $5.4 billion of fixed maturity securities, $68 million of equity securities, $582 million of trading and other securities, $216 million of short-term investments, ($10) million of net derivatives, $244 million of separate account assets and ($116) million of net embedded derivatives. |
(4) | Total gains and losses (in earnings and other comprehensive income (loss)) are calculated assuming transfers into and/or out of Level 3 occurred at the beginning of the period. Items transferred into and/or out of Level 3 in the same period are excluded from the rollforward. |
182
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
(5) | The additions for purchases, originations and issuances and the reductions for loan payments, sales and settlements, affecting MSRs were $173 million and ($143) million, respectively, for the year ended December 31, 2011. The additions for purchases, originations and issuances and the reductions for loan payments, sales and settlements, affecting MSRs were $330 million and ($179) million, respectively, for the year ended December 31, 2010. The additions for purchases, originations and issuances and the reductions for loan payments, sales and settlements, affecting MSRs were $628 million and ($113) million, respectively, for the year ended December 31, 2009. |
(6) | The changes in estimated fair value due to changes in valuation model inputs or assumptions were ($314) million, ($79) million and $172 million for the years ended December 31, 2011, 2010 and 2009, respectively. For the years ended December 31, 2011, 2010 and 2009 there were no other changes in estimated fair value affecting MSRs. |
(7) | Freestanding derivative assets and liabilities are presented net for purposes of the rollforward. |
(8) | Embedded derivative assets and liabilities are presented net for purposes of the rollforward. |
(9) | Investment performance related to separate account assets is fully offset by corresponding amounts credited to contractholders within separate account liabilities. Therefore, such changes in estimated fair value are not recorded in net income. For the purpose of this disclosure, these changes are presented within net investment gains (losses). |
(10) | The long-term debt of the CSEs at January 1, 2010 is reported within the purchases, sales, issuances and settlements caption of the rollforward. |
Fair Value Option
Residential Mortgage Loans Held-For-Sale
The following table presents residential mortgage loans held-for-sale carried under the FVO at:
December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Unpaid principal balance | $ | 2,935 | $ | 2,473 | ||||
Excess of estimated fair value over unpaid principal balance | 129 | 37 | ||||||
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|
|
| |||||
Carrying value at estimated fair value | $ | 3,064 | $ | 2,510 | ||||
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|
|
| |||||
Loans in non-accrual status | $ | 3 | $ | 2 | ||||
Loans more than 90 days past due | $ | 20 | $ | 3 | ||||
Loans in non-accrual status or more than 90 days past due, or both — difference between aggregate estimated fair value and unpaid principal balance | $ | (2 | ) | $ | (1 | ) |
183
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Residential mortgage loans held-for-sale accounted for under the FVO are initially measured at estimated fair value. Interest income on residential mortgage loans held-for-sale is recorded based on the stated rate of the loan and is recorded in net investment income. Gains and losses from initial measurement, subsequent changes in estimated fair value and gains or losses on sales are recognized in other revenues. Such changes in estimated fair value for these loans were due to the following:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Instrument-specific credit risk based on changes in credit spreads for non-agency loans and adjustments in individual loan quality | $ | (3 | ) | $ | (1 | ) | $ | (2 | ) | |||
Other changes in estimated fair value | 511 | 487 | 600 | |||||||||
|
|
|
|
|
| |||||||
Total gains (losses) recognized in other revenues | $ | 508 | $ | 486 | $ | 598 | ||||||
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|
|
|
|
Securitized Reverse Residential Mortgage Loans
The following table presents securitized reverse residential mortgage loans carried under the FVO at:
December 31, 2011 | ||||
(In millions) | ||||
Unpaid principal balance | $ | 6,914 | ||
Excess of estimated fair value over unpaid principal balance | 738 | |||
|
| |||
Carrying value at estimated fair value | $ | 7,652 | ||
|
| |||
Loans in non-accrual status | $ | — | ||
Loans more than 90 days past due | $ | 59 | ||
Loans in non-accrual status or more than 90 days past due, or both — difference between aggregate estimated fair value and unpaid principal balance | $ | — |
Securitized reverse residential mortgage loans accounted for under the FVO are initially measured at estimated fair value. Gains and losses from initial measurement and subsequent changes in estimated fair value are recognized in other revenues.
The following table presents the liability related to securitized reverse residential mortgage loans carried under the FVO at:
December 31, 2011 | ||||
(In millions) | ||||
Contractual principal balance | $ | 6,914 | ||
Excess of estimated fair value over contractual principal balance | 712 | |||
|
| |||
Carrying value at estimated fair value | $ | 7,626 | ||
|
|
The liability related to securitized reverse residential mortgage loans accounted for under the FVO is initially measured at estimated fair value. Gains and losses from initial measurement and subsequent changes in estimated fair value are recognized in other revenues.
184
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Assets and Liabilities Held by CSEs
The Company has elected the FVO for the following assets and liabilities held by CSEs: commercial mortgage loans, securities and long-term debt. Information on the estimated fair value of the securities classified as trading and other securities is presented in Note 3. The following table presents these commercial mortgage loans carried under the FVO at:
December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Unpaid principal balance | $ | 3,019 | $ | 6,636 | ||||
Excess of estimated fair value over unpaid principal balance | 119 | 204 | ||||||
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|
|
| |||||
Carrying value at estimated fair value | $ | 3,138 | $ | 6,840 | ||||
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|
|
The following table presents the long-term debt carried under the FVO related to both the commercial mortgage loans and securities classified as trading and other securities at:
December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Contractual principal balance | $ | 2,954 | $ | 6,619 | ||||
Excess of estimated fair value over contractual principal balance | 114 | 201 | ||||||
|
|
|
| |||||
Carrying value at estimated fair value | $ | 3,068 | $ | 6,820 | ||||
|
|
|
|
Interest income on both commercial mortgage loans and securities classified as trading and other securities held by CSEs is recorded in net investment income. Interest expense on long-term debt of CSEs is recorded in other expenses. Gains and losses from initial measurement, subsequent changes in estimated fair value and gains or losses on sales of both the commercial mortgage loans and long-term debt are recognized in net investment gains (losses). See Note 3.
Non-Recurring Fair Value Measurements
Certain assets are measured at estimated fair value on a non-recurring basis and are not included in the tables presented above. The amounts below relate to certain investments measured at estimated fair value during the period and still held at the reporting dates.
Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | ||||||||||||||||||||||||||||||||||
Carrying Value Prior to Measurement | Estimated Fair Value After Measurement | Net Investment Gains (Losses) | Carrying Value Prior to Measurement | Estimated Fair Value After Measurement | Net Investment Gains (Losses) | Carrying Value Prior to Measurement | Estimated Fair Value After Measurement | Net Investment Gains (Losses) | ||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||
Mortgage loans: (1) | ||||||||||||||||||||||||||||||||||||
Held-for-investment | $ | 166 | $ | 151 | $ | (15 | ) | $ | 179 | $ | 164 | $ | (15 | ) | $ | 294 | $ | 202 | $ | (92 | ) | |||||||||||||||
Held-for-sale | 61 | 58 | (3 | ) | 35 | 33 | (2 | ) | 9 | 8 | (1 | ) | ||||||||||||||||||||||||
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Mortgage loans, net | $ | 227 | $ | 209 | $ | (18 | ) | $ | 214 | $ | 197 | $ | (17 | ) | $ | 303 | $ | 210 | $ | (93 | ) | |||||||||||||||
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Other limited partnership interests (2) | $ | 18 | $ | 13 | $ | (5 | ) | $ | 35 | $ | 23 | $ | (12 | ) | $ | 915 | $ | 561 | $ | (354 | ) | |||||||||||||||
Real estate joint ventures (3) | $ | — | $ | — | $ | — | $ | 33 | $ | 8 | $ | (25 | ) | $ | 175 | $ | 93 | $ | (82 | ) | ||||||||||||||||
Goodwill (4) | $ | 65 | $ | — | $ | (65 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
(1) | Mortgage loans —The impaired mortgage loans presented above were written down to their estimated fair values at the date the impairments were recognized and are reported as losses above. Subsequent improvements in estimated fair value on previously impaired loans recorded through a reduction in the previously established valuation allowance are |
185
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
reported as gains above. Estimated fair values for impaired mortgage loans are based on observable market prices or, if the loans are in foreclosure or are otherwise determined to be collateral dependent, on the estimated fair value of the underlying collateral, or the present value of the expected future cash flows. Impairments to estimated fair value and decreases in previous impairments from subsequent improvements in estimated fair value represent non-recurring fair value measurements that have been categorized as Level 3 due to the lack of price transparency inherent in the limited markets for such mortgage loans. |
(2) | Other limited partnership interests — The impaired investments presented above were accounted for using the cost method. Impairments on these cost method investments were recognized at estimated fair value determined from information provided in the financial statements of the underlying entities in the period in which the impairment was incurred. These impairments to estimated fair value represent non-recurring fair value measurements that have been classified as Level 3 due to the limited activity and price transparency inherent in the market for such investments. This category includes several private equity and debt funds that typically invest primarily in a diversified pool of investments using certain investment strategies including domestic and international leveraged buyout funds; power, energy, timber and infrastructure development funds; venture capital funds; and below investment grade debt and mezzanine debt funds. The estimated fair values of these investments have been determined using the NAV of the Company’s ownership interest in the partners’ capital. Distributions from these investments will be generated from investment gains, from operating income from the underlying investments of the funds and from liquidation of the underlying assets of the funds. It is estimated that the underlying assets of the funds will be liquidated over the next two to 10 years. Unfunded commitments for these investments were $4 million and $34 million at December 31, 2011 and 2010, respectively. |
(3) | Real estate joint ventures — The impaired investments presented above were accounted for using the cost method. Impairments on these cost method investments were recognized at estimated fair value determined from information provided in the financial statements of the underlying entities in the period in which the impairment was incurred. These impairments to estimated fair value represent non-recurring fair value measurements that have been classified as Level 3 due to the limited activity and price transparency inherent in the market for such investments. This category includes several real estate funds that typically invest primarily in commercial real estate. The estimated fair values of these investments have been determined using the NAV of the Company’s ownership interest in the partners’ capital. Distributions from these investments will be generated from investment gains, from operating income from the underlying investments of the funds and from liquidation of the underlying assets of the funds. It is estimated that the underlying assets of the funds will be liquidated over the next two to 10 years. There were no unfunded commitments for these investments at December 31, 2011. Unfunded commitments for these investments were $6 million at December 31, 2010. |
(4) | Goodwill — As discussed in Notes 2 and 7, the Company recorded an impairment of goodwill associated with MetLife Bank. This impairment has been categorized as Level 3 due to the significant unobservable inputs used in the determination of the associated estimated fair value. |
186
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Fair Value of Financial Instruments
Amounts related to the Company’s financial instruments that were not measured at fair value on a recurring basis, were as follows:
December 31, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Notional Amount | Carrying Value | Estimated Fair Value | Notional Amount | Carrying Value | Estimated Fair Value | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Mortgage loans: (1) | ||||||||||||||||||||||||
Held-for-investment | $ | 53,777 | $ | 56,422 | $ | 52,136 | $ | 53,927 | ||||||||||||||||
Held-for-sale | 4,462 | 4,462 | 811 | 811 | ||||||||||||||||||||
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Mortgage loans, net | $ | 58,239 | $ | 60,884 | $ | 52,947 | $ | 54,738 | ||||||||||||||||
Policy loans | $ | 11,892 | $ | 14,213 | $ | 11,761 | $ | 13,253 | ||||||||||||||||
Real estate joint ventures (2) | $ | 130 | $ | 183 | $ | 451 | $ | 482 | ||||||||||||||||
Other limited partnership interests (2) | $ | 1,318 | $ | 1,656 | $ | 1,539 | $ | 1,619 | ||||||||||||||||
Short-term investments (3) | $ | 450 | $ | 450 | $ | 819 | $ | 819 | ||||||||||||||||
Other invested assets (2) | $ | 1,434 | $ | 1,434 | $ | 1,490 | $ | 1,490 | ||||||||||||||||
Cash and cash equivalents | $ | 10,461 | $ | 10,461 | $ | 12,957 | $ | 12,957 | ||||||||||||||||
Accrued investment income | $ | 4,344 | $ | 4,344 | $ | 4,328 | $ | 4,328 | ||||||||||||||||
Premiums, reinsurance and other receivables (2) | $ | 4,639 | $ | 5,232 | $ | 3,752 | $ | 4,048 | ||||||||||||||||
Other assets (2) | $ | 310 | $ | 308 | $ | 466 | $ | 453 | ||||||||||||||||
Assets of subsidiaries held-for-sale (2) | $ | — | $ | — | $ | 3,068 | $ | 3,068 | ||||||||||||||||
Liabilities: | ||||||||||||||||||||||||
PABs (2) | $ | 146,890 | $ | 153,304 | $ | 146,822 | $ | 152,745 | ||||||||||||||||
Payables for collateral under securities loaned and | $ | 33,716 | $ | 33,716 | $ | 27,272 | $ | 27,272 | ||||||||||||||||
Bank deposits | $ | 10,507 | $ | 10,507 | $ | 10,316 | $ | 10,371 | ||||||||||||||||
Short-term debt | $ | 686 | $ | 686 | $ | 306 | $ | 306 | ||||||||||||||||
Long-term debt (2), (4) | $ | 20,587 | $ | 22,514 | $ | 20,734 | $ | 21,892 | ||||||||||||||||
Collateral financing arrangements | $ | 4,647 | $ | 4,136 | $ | 5,297 | $ | 4,757 | ||||||||||||||||
Junior subordinated debt securities | $ | 3,192 | $ | 3,491 | $ | 3,191 | $ | 3,461 | ||||||||||||||||
Other liabilities (2), (5) | $ | 4,087 | $ | 4,087 | $ | 2,777 | $ | 2,777 | ||||||||||||||||
Separate account liabilities (2) | $ | 49,610 | $ | 49,610 | $ | 42,160 | $ | 42,160 | ||||||||||||||||
Liabilities of subsidiaries held-for-sale (2) | $ | — | $ | — | $ | 105 | $ | 105 | ||||||||||||||||
Commitments: (6) | ||||||||||||||||||||||||
Mortgage loan commitments | $ | 4,129 | $ | — | $ | 3 | $ | 3,754 | $ | — | $ | (17 | ) | |||||||||||
Commitments to fund bank credit facilities, bridge | $ | 1,432 | $ | — | $ | 51 | $ | 2,437 | $ | — | $ | — |
(1) | Mortgage loans held-for-investment as presented in the table above differ from the amounts presented in the consolidated balance sheets because this table does not include commercial mortgage loans held by CSEs, which are accounted for under the FVO. |
187
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Mortgage loans held-for-sale as presented in the table above differ from the amounts presented in the consolidated balance sheets because this table only includes mortgage loans that were previously designated as held-for-investment but now are designated as held-for-sale and stated at lower of amortized cost or estimated fair value.
(2) | Carrying values presented herein differ from those presented in the consolidated balance sheets because certain items within the respective financial statement caption are not considered financial instruments. Financial statement captions excluded from the table above are not considered financial instruments. |
(3) | Short-term investments as presented in the table above differ from the amounts presented in the consolidated balance sheets because this table does not include short-term investments that meet the definition of a security, which are measured at estimated fair value on a recurring basis. |
(4) | Long-term debt as presented in the table above does not include long-term debt of CSEs, which is accounted for under the FVO. |
(5) | Other liabilities as presented in the table above differ from the amounts presented in the consolidated balance sheets because certain items within other liabilities are not considered financial instruments and this table does not include the liability related to securitized reverse residential mortgage loans, which are accounted for under the FVO. |
(6) | Commitments are off-balance sheet obligations. Negative estimated fair values represent off-balance sheet liabilities. |
The methods and assumptions used to estimate the fair value of financial instruments are summarized as follows:
The assets and liabilities measured at estimated fair value on a recurring basis include: fixed maturity securities, equity securities, trading and other securities, certain short-term investments, mortgage loans held by CSEs, mortgage loans held-for-sale accounted for under the FVO, MSRs, derivative assets and liabilities, net embedded derivatives within asset and liability host contracts, separate account assets, long-term debt of CSEs and trading liabilities. These assets and liabilities are described in the section “— Recurring Fair Value Measurements” and, therefore, are excluded from the table above. The estimated fair value for these financial instruments approximates carrying value.
Mortgage Loans
These mortgage loans are principally comprised of commercial and agricultural mortgage loans, which are originated for investment purposes and are primarily carried at amortized cost. Residential mortgage loans are generally purchased from third parties for investment purposes and are principally carried at amortized cost. Mortgage loans originally held-for-investment, but subsequently held-for-sale are carried at the lower of cost or estimated fair value, or for collateral dependent loans, estimated fair value less expected disposition costs. The estimated fair values of these mortgage loans are determined as follows:
Mortgage loans held-for-investment. — For commercial and agricultural mortgage loans held-for-investment and carried at amortized cost, estimated fair value was primarily determined by estimating expected future cash flows and discounting them using current interest rates for similar mortgage loans with similar credit risk. For residential mortgage loans held-for-investment and carried at amortized cost, estimated fair value is primarily determined from observable pricing for similar loans.
188
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Mortgage loans held-for-sale. — Certain mortgage loans previously classified as held-for-investment have been designated as held-for-sale. For these mortgage loans, estimated fair value is determined using independent broker quotations or values provided by independent valuation specialists, or, when the mortgage loan is in foreclosure or otherwise determined to be collateral dependent, the fair value of the underlying collateral is estimated using internal models.
Policy Loans
For policy loans with fixed interest rates, estimated fair values are determined using a discounted cash flow model applied to groups of similar policy loans determined by the nature of the underlying insurance liabilities. Cash flow estimates are developed by applying a weighted-average interest rate to the outstanding principal balance of the respective group of policy loans and an estimated average maturity determined through experience studies of the past performance of policyholder repayment behavior for similar loans. These cash flows are discounted using current risk-free interest rates with no adjustment for borrower credit risk as these loans are fully collateralized by the cash surrender value of the underlying insurance policy. The estimated fair value for policy loans with variable interest rates approximates carrying value due to the absence of borrower credit risk and the short time period between interest rate resets, which presents minimal risk of a material change in estimated fair value due to changes in market interest rates.
Real Estate Joint Ventures and Other Limited Partnership Interests
Real estate joint ventures and other limited partnership interests included in the preceding table consist of those investments accounted for using the cost method. The remaining carrying value recognized in the consolidated balance sheets represents investments in real estate carried at cost less accumulated depreciation, or real estate joint ventures and other limited partnership interests accounted for using the equity method, which do not meet the definition of financial instruments for which fair value is required to be disclosed.
The estimated fair values for real estate joint ventures and other limited partnership interests accounted for under the cost method are generally based on the Company’s share of the NAV as provided in the financial statements of the investees. In certain circumstances, management may adjust the NAV by a premium or discount when it has sufficient evidence to support applying such adjustments.
Short-term Investments
Certain short-term investments do not qualify as securities and are recognized at amortized cost in the consolidated balance sheets. For these instruments, the Company believes that there is minimal risk of material changes in interest rates or credit of the issuer such that estimated fair value approximates carrying value. In light of recent market conditions, short-term investments have been monitored to ensure there is sufficient demand and maintenance of issuer credit quality and the Company has determined additional adjustment is not required.
Other Invested Assets
Other invested assets within the preceding table are principally comprised of funds withheld, various interest-bearing assets held in foreign subsidiaries and certain amounts due under contractual indemnifications.
For funds withheld and the various interest-bearing assets held in foreign subsidiaries, the Company evaluates the specific facts and circumstances of each instrument to determine the appropriate estimated fair values. These estimated fair values were not materially different from the recognized carrying values.
189
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Cash and Cash Equivalents
Due to the short-term maturities of cash and cash equivalents, the Company believes there is minimal risk of material changes in interest rates or credit of the issuer such that estimated fair value generally approximates carrying value. In light of recent market conditions, cash and cash equivalent instruments have been monitored to ensure there is sufficient demand and maintenance of issuer credit quality, or sufficient solvency in the case of depository institutions, and the Company has determined additional adjustment is not required.
Accrued Investment Income
Due to the short term until settlement of accrued investment income, the Company believes there is minimal risk of material changes in interest rates or credit of the issuer such that estimated fair value approximates carrying value. In light of recent market conditions, the Company has monitored the credit quality of the issuers and has determined additional adjustment is not required.
Premiums, Reinsurance and Other Receivables
Premiums, reinsurance and other receivables in the preceding table are principally comprised of certain amounts recoverable under reinsurance agreements, amounts on deposit with financial institutions to facilitate daily settlements related to certain derivative positions and amounts receivable for securities sold but not yet settled.
Premiums receivable and those amounts recoverable under reinsurance agreements determined to transfer significant risk are not financial instruments subject to disclosure and thus have been excluded from the amounts presented in the preceding table. Amounts recoverable under ceded reinsurance agreements, which the Company has determined do not transfer significant risk such that they are accounted for using the deposit method of accounting, have been included in the preceding table. The estimated fair value is determined as the present value of expected future cash flows, which were discounted using an interest rate determined to reflect the appropriate credit standing of the assuming counterparty.
The amounts on deposit for derivative settlements essentially represent the equivalent of demand deposit balances and amounts due for securities sold are generally received over short periods such that the estimated fair value approximates carrying value. In light of recent market conditions, the Company has monitored the solvency position of the financial institutions and has determined additional adjustments are not required.
Other Assets
Other assets in the preceding table are primarily composed of a receivable for cash paid to an unaffiliated financial institution under the MetLife Reinsurance Company of Charleston (“MRC”) collateral financing arrangement as described in Note 12. The estimated fair value of the receivable for the cash paid to the unaffiliated financial institution under the MRC collateral financing arrangement is determined by discounting the expected future cash flows using a discount rate that reflects the credit rating of the unaffiliated financial institution. The amounts excluded from the preceding table are not considered financial instruments subject to disclosure.
PABs
PABs in the table above include investment contracts. Embedded derivatives on investment contracts and certain variable annuity guarantees accounted for as embedded derivatives are included in this caption in the consolidated financial statements but excluded from this caption in the table above as they are separately
190
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
presented in “— Recurring Fair Value Measurements.” The remaining difference between the amounts reflected as PABs in the preceding table and those recognized in the consolidated balance sheets represents those amounts due under contracts that satisfy the definition of insurance contracts and are not considered financial instruments.
The investment contracts primarily include certain funding agreements, fixed deferred annuities, modified guaranteed annuities, fixed term payout annuities and total control accounts. The fair values for these investment contracts are estimated by discounting best estimate future cash flows using current market risk-free interest rates and adding a spread to reflect the nonperformance risk in the liability.
Payables for Collateral Under Securities Loaned and Other Transactions
The estimated fair value for payables for collateral under securities loaned and other transactions approximates carrying value. The related agreements to loan securities are short-term in nature such that the Company believes there is limited risk of a material change in market interest rates. Additionally, because borrowers are cross-collateralized by the borrowed securities, the Company believes no additional consideration for changes in nonperformance risk are necessary.
Bank Deposits
Due to the frequency of interest rate resets on customer bank deposits held in money market accounts, the Company believes that there is minimal risk of a material change in interest rates such that the estimated fair value approximates carrying value. For time deposits, estimated fair values are estimated by discounting the expected cash flows to maturity using discount rates based on the LIBOR/swap curve at the date of the valuation. The Company has taken into consideration the sale price for the pending disposition of most of the depository business of MetLife Bank to determine the estimated fair value of bank deposits at December 31, 2011. See Note 2.
Short-term and Long-term Debt, Collateral Financing Arrangements and Junior Subordinated Debt Securities
The estimated fair value for short-term debt approximates carrying value due to the short-term nature of these obligations. The determination of estimated fair values of collateral financing arrangements takes into account valuations obtained from the counterparties to the arrangements, as part of the collateral management process. The estimated fair values of long-term debt and junior subordinated debt securities are generally determined by discounting expected future cash flows using market rates currently available for debt with similar remaining maturities and reflecting the credit risk of the Company, including inputs when available, from actively traded debt of the Company or other companies with similar types of borrowing arrangements. Risk-adjusted discount rates applied to the expected future cash flows can vary significantly based upon the specific terms of each individual arrangement, including, but not limited to: subordinated rights, contractual interest rates in relation to current market rates, the structuring of the arrangement, and the nature and observability of the applicable valuation inputs. Use of different risk-adjusted discount rates could result in different estimated fair values.
The carrying value of long-term debt presented in the table above differs from the amounts presented in the consolidated balance sheets as it does not include capital leases which are not required to be disclosed at estimated fair value.
Other Liabilities
Other liabilities included in the table above reflect those other liabilities that satisfy the definition of financial instruments subject to disclosure. These items consist primarily of interest and dividends payable, amounts due for securities purchased but not yet settled, funds withheld amounts payable which are contractually withheld by
191
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
the Company in accordance with the terms of the reinsurance agreements and amounts payable under certain assumed reinsurance agreements are recorded using the deposit method of accounting. The Company evaluates the specific terms, facts and circumstances of each instrument to determine the appropriate estimated fair values, which are not materially different from the carrying values, with the exception of certain deposit type reinsurance payables. For these reinsurance payables, the estimated fair value is determined as the present value of expected future cash flows, which are discounted using an interest rate determined to reflect the appropriate credit standing of the assuming counterparty.
Separate Account Liabilities
Separate account liabilities included in the preceding table represent those balances due to policyholders under contracts that are classified as investment contracts. The remaining amounts presented in the consolidated balance sheets represent those contracts classified as insurance contracts, which do not satisfy the definition of financial instruments.
Separate account liabilities classified as investment contracts primarily represent variable annuities with no significant mortality risk to the Company such that the death benefit is equal to the account balance, funding agreements related to group life contracts and certain contracts that provide for benefit funding.
Separate account liabilities are recognized in the consolidated balance sheets at an equivalent value of the related separate account assets. Separate account assets, which equal net deposits, net investment income and realized and unrealized investment gains and losses, are fully offset by corresponding amounts credited to the contractholders’ liability which is reflected in separate account liabilities. Since separate account liabilities are fully funded by cash flows from the separate account assets which are recognized at estimated fair value as described in the section “— Recurring Fair Value Measurements,” the Company believes the value of those assets approximates the estimated fair value of the related separate account liabilities.
Mortgage Loan Commitments and Commitments to Fund Bank Credit Facilities, Bridge Loans and Private Corporate Bond Investments
The estimated fair values for mortgage loan commitments that will be held for investment and commitments to fund bank credit facilities, bridge loans and private corporate bonds that will be held for investment reflected in the above table represents the difference between the discounted expected future cash flows using interest rates that incorporate current credit risk for similar instruments on the reporting date and the principal amounts of the commitments.
Assets and Liabilities of Subsidiaries Held-For-Sale
The carrying values of the assets and liabilities of subsidiaries held-for-sale reflect those assets and liabilities which were previously determined to be financial instruments and which were reflected in other financial statement captions in the comparable table above in previous periods but have been reclassified to these captions to reflect the discontinued nature of the operations. The estimated fair value of the assets and liabilities of subsidiaries held-for-sale has been determined on a basis consistent with the assets and liabilities as described herein.
192
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
6. Deferred Policy Acquisition Costs and Value of Business Acquired
Information regarding DAC and VOBA was as follows:
DAC | VOBA | Total | ||||||||||
(In millions) | ||||||||||||
Balance at January 1, 2009 | $ | 13,638 | $ | 3,491 | $ | 17,129 | ||||||
Capitalizations | 2,502 | — | 2,502 | |||||||||
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Subtotal | 16,140 | 3,491 | 19,631 | |||||||||
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Amortization related to: | ||||||||||||
Net investment gains (losses) | 568 | 87 | 655 | |||||||||
Other expenses | (1,445 | ) | (265 | ) | (1,710 | ) | ||||||
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Total amortization | (877 | ) | (178 | ) | (1,055 | ) | ||||||
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Unrealized investment gains (losses) | (1,850 | ) | (505 | ) | (2,355 | ) | ||||||
Effect of foreign currency translation and other | 138 | 56 | 194 | |||||||||
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Balance at December 31, 2009 | 13,551 | 2,864 | 16,415 | |||||||||
Capitalizations | 2,770 | — | 2,770 | |||||||||
Acquisitions | — | 9,210 | 9,210 | |||||||||
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Subtotal | 16,321 | 12,074 | 28,395 | |||||||||
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| |||||||
Amortization related to: | ||||||||||||
Net investment gains (losses) | (92 | ) | (16 | ) | (108 | ) | ||||||
Other expenses | (1,875 | ) | (494 | ) | (2,369 | ) | ||||||
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Total amortization | (1,967 | ) | (510 | ) | (2,477 | ) | ||||||
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| |||||||
Unrealized investment gains (losses) | (1,043 | ) | (125 | ) | (1,168 | ) | ||||||
Effect of foreign currency translation and other | 66 | (351 | ) | (285 | ) | |||||||
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| |||||||
Balance at December 31, 2010 | 13,377 | 11,088 | 24,465 | |||||||||
Capitalizations | 5,558 | — | 5,558 | |||||||||
Acquisitions | — | 11 | 11 | |||||||||
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| |||||||
Subtotal | 18,935 | 11,099 | 30,034 | |||||||||
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| |||||||
Amortization related to: | ||||||||||||
Net investment gains (losses) | (478 | ) | (49 | ) | (527 | ) | ||||||
Other expenses | (2,614 | ) | (1,757 | ) | (4,371 | ) | ||||||
|
|
|
|
|
| |||||||
Total amortization | (3,092 | ) | (1,806 | ) | (4,898 | ) | ||||||
|
|
|
|
|
| |||||||
Unrealized investment gains (losses) | (427 | ) | (361 | ) | (788 | ) | ||||||
Effect of foreign currency translation and other | (176 | ) | 447 | 271 | ||||||||
|
|
|
|
|
| |||||||
Balance at December 31, 2011 | $ | 15,240 | $ | 9,379 | $ | 24,619 | ||||||
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|
|
See Note 2 for a description of acquisitions and dispositions.
The estimated future amortization expense allocated to other expenses for the next five years for VOBA is $1.3 billion in 2012, $1.1 billion in 2013, $917 million in 2014, $774 million in 2015 and $661 million in 2016.
193
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Amortization of DAC and VOBA is attributed to both investment gains and losses and to other expenses for the amount of gross margins or profits originating from transactions other than investment gains and losses. Unrealized investment gains and losses represent the amount of DAC and VOBA that would have been amortized if such gains and losses had been recognized.
See Note 1 for information on the retrospective application of the adoption of new accounting guidance related to DAC. See also Note 22 for information on the continued realignment of certain products and businesses among the Company’s existing segments during the third quarter of 2012, which was retrospectively applied.
Information regarding DAC and VOBA by segment, as well as Corporate & Other, was as follows:
DAC | VOBA | Total | ||||||||||||||||||||||
December 31, | ||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Retail | $ | 10,470 | $ | 10,477 | $ | 1,211 | $ | 1,927 | $ | 11,681 | $ | 12,404 | ||||||||||||
Group, Voluntary & Worksite Benefits | 377 | 387 | — | — | 377 | 387 | ||||||||||||||||||
Corporate Benefit Funding | 86 | 61 | 3 | 1 | 89 | 62 | ||||||||||||||||||
Latin America | 693 | 650 | 357 | 442 | 1,050 | 1,092 | ||||||||||||||||||
Asia | 2,990 | 1,632 | 6,564 | 6,998 | 9,554 | 8,630 | ||||||||||||||||||
EMEA | 623 | 168 | 1,243 | 1,719 | 1,866 | 1,887 | ||||||||||||||||||
Corporate & Other | 1 | 2 | 1 | 1 | 2 | 3 | ||||||||||||||||||
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|
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|
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|
| |||||||||||||
Total | $ | 15,240 | $ | 13,377 | $ | 9,379 | $ | 11,088 | $ | 24,619 | $ | 24,465 | ||||||||||||
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7. Goodwill
Goodwill is the excess of cost over the estimated fair value of net assets acquired. Information regarding goodwill was as follows:
December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Balance at January 1, | $ | 11,781 | $ | 5,047 | $ | 5,008 | ||||||
Acquisitions | 39 | 6,959 | — | |||||||||
Impairments (1) | (65 | ) | — | — | ||||||||
Effect of foreign currency translation and other | 180 | (225 | ) | 39 | ||||||||
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| |||||||
Balance at December 31, | $ | 11,935 | $ | 11,781 | $ | 5,047 | ||||||
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(1) | At December 31, 2011, the Company’s accumulated goodwill impairment loss was $65 million. |
194
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
In the first quarter of 2012, the Company reorganized its business into six segments: Retail; Group, Voluntary & Worksite Benefits; Corporate Benefit Funding; Latin America; Asia; and EMEA. As anticipated, in the third quarter of 2012, the Company continued to realign certain products and businesses among its existing segments. As a result, the Company reallocated goodwill from the former segments to and among the new segments based on the relative fair value method. Information regarding allocated goodwill was as follows:
December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Retail | $ | 3,125 | $ | 3,125 | ||||
Group, Voluntary & Worksite Benefits | 138 | 138 | ||||||
Corporate Benefit Funding | 900 | 900 | ||||||
Latin America | 501 | 229 | ||||||
Asia | 5,533 | (1) | 72 | |||||
EMEA | 1,333 | 38 | ||||||
Corporate & Other | 405 | 470 | ||||||
|
|
|
| |||||
Total | $ | 11,935 | $ | 4,972 | ||||
|
|
|
|
(1) | Includes goodwill of $5.4 billion from the Japan operations. |
The table above does not include goodwill of $6.8 billion at December 31, 2010 associated with ALICO, which was allocated to the former International segments in the first quarter of 2011. In connection with the reorganization, $312 million, $5.2 billion and $1.3 billion of goodwill were reallocated to Latin America, Asia and EMEA, respectively. See Note 2 for a description of the ALICO acquisition and Note 22 for a discussion of the reorganization.
As of November 1, 2011, American Life’s current and deferred income taxes were affected by measurement period adjustments, which resulted in a $39 million increase to the goodwill recorded as part of the Acquisition related to Asia. See Note 15.
During the third quarter of 2011, the Company began exploring the sale of MetLife Bank’s depository business. As a result, in September 2011, the Company performed a goodwill impairment test on MetLife Bank, which was a separate reporting unit within Corporate & Other. A comparison of the fair value of the reporting unit, using a market multiple approach, to its carrying value indicated a potential for goodwill impairment. A further comparison of the implied fair value of the reporting unit’s goodwill with its carrying amount indicated that the entire amount of goodwill associated with MetLife Bank was impaired. Consequently, the Company recorded a $65 million goodwill impairment charge that is reflected as a net investment loss for the year ended December 31, 2011.
In addition, the Company performed its annual goodwill impairment tests of its other reporting units during the third quarter of 2011 based upon data at June 30, 2011 and concluded that the fair values of all reporting units were in excess of their carrying values and, therefore, goodwill was not impaired. Such tests are described in more detail in Note 1.
Based on the adverse economic conditions in 2011, which caused both equity markets and interest rates to decline, the Company assessed the need to update the annual impairment tests and identified only one former reporting unit, Retirement Products, which is now included in Retail in the table above, that warranted interim impairment testing. The results of the testing indicated that goodwill for the former Retirement Products reporting unit was not impaired.
195
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Management continues to evaluate current market conditions that may affect the estimated fair value of these reporting units to assess whether any goodwill impairment exists. Deteriorating or adverse market conditions for certain reporting units may have a significant impact on the estimated fair value of these reporting units and could result in future impairments of goodwill.
8. Insurance
Insurance Liabilities
Insurance liabilities were as follows:
Future Policy Benefits | Policyholder Account Balances | Other Policy-Related Balances | ||||||||||||||||||||||
December 31, | ||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Retail | $ | 66,451 | $ | 64,991 | $ | 69,553 | $ | 66,193 | $ | 2,868 | $ | 3,004 | ||||||||||||
Group, Voluntary & Worksite Benefits | 16,309 | 15,369 | 9,273 | 9,676 | 3,317 | 3,124 | ||||||||||||||||||
Corporate Benefit Funding | 49,657 | 43,628 | 56,367 | 57,828 | 201 | 204 | ||||||||||||||||||
Latin America | 6,299 | 6,417 | 6,159 | 6,232 | 1,432 | 1,555 | ||||||||||||||||||
Asia | 32,419 | 28,070 | 59,739 | 54,584 | 6,109 | 6,150 | ||||||||||||||||||
EMEA | 6,864 | 6,601 | 14,235 | 14,017 | 1,249 | 1,281 | ||||||||||||||||||
Corporate & Other | 6,276 | 5,846 | 2,374 | 2,227 | 423 | 432 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 184,275 | $ | 170,922 | $ | 217,700 | $ | 210,757 | $ | 15,599 | $ | 15,750 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
See Note 22 for information on the continued realignment of certain products and businesses among the Company’s existing segments during the third quarter of 2012, which was retrospectively applied.
Value of Distribution Agreements and Customer Relationships Acquired
Information regarding VODA and VOCRA, which are reported in other assets, was as follows:
Amount | ||||
(In millions) | ||||
Balance at January 1, 2009 | $ | 822 | ||
Acquisitions | — | |||
Amortization | (34 | ) | ||
Effect of foreign currency translation and other | 4 | |||
|
| |||
Balance at December 31, 2009 | 792 | |||
Acquisitions | 356 | |||
Amortization | (42 | ) | ||
Effect of foreign currency translation and other | (12 | ) | ||
|
| |||
Balance at December 31, 2010 | 1,094 | |||
Acquisitions | 213 | |||
Amortization | (60 | ) | ||
Effect of foreign currency translation and other | 17 | |||
|
| |||
Balance at December 31, 2011 | $ | 1,264 | ||
|
|
196
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The estimated future amortization expense allocated to other expenses for the next five years for VODA and VOCRA is $82 million in 2012, $89 million in 2013, $94 million in 2014, $92 million in 2015 and $84 million in 2016. See Note 2 for a description of acquisitions and dispositions.
Negative Value of Business Acquired
Information regarding negative VOBA, which is recorded in other policy-related balances, was as follows:
Amount | ||||
(In millions) | ||||
Balance at January 1, 2010 | $ | — | ||
Acquisitions | 4,422 | |||
Amortization | (64 | ) | ||
Effect of foreign currency translation | (71 | ) | ||
|
| |||
Balance at December 31, 2010 | 4,287 | |||
Acquisitions | 7 | |||
Amortization | (697 | ) | ||
Effect of foreign currency translation | 60 | |||
|
| |||
Balance at December 31, 2011 | $ | 3,657 | ||
|
|
The weighted average amortization period for negative VOBA was 6.0 years. The estimated future amortization of credit to expenses recorded in other expenses for the next five years for negative VOBA is $627 million in 2012, $563 million in 2013, $477 million in 2014, $388 million in 2015 and $298 million in 2016.
Sales Inducements
Information regarding deferred sales inducements, which are reported in other assets, was as follows:
Amount | ||||
(In millions) | ||||
Balance at January 1, 2009 | $ | 711 | ||
Capitalization | 193 | |||
Amortization | (63 | ) | ||
|
| |||
Balance at December 31, 2009 | 841 | |||
Capitalization | 157 | |||
Amortization | (80 | ) | ||
|
| |||
Balance at December 31, 2010 | 918 | |||
Capitalization | 140 | |||
Amortization | (132 | ) | ||
|
| |||
Balance at December 31, 2011 | $ | 926 | ||
|
|
Separate Accounts
Separate account assets and liabilities include two categories of account types: pass-through separate accounts totaling $158.8 billion and $149.0 billion at December 31, 2011 and 2010, respectively, for which the policyholder assumes all investment risk, and separate accounts for which the Company contractually guarantees either a minimum return or account value to the policyholder which totaled $44.2 billion and $34.1 billion at
197
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
December 31, 2011 and 2010, respectively. The latter category consisted primarily of funding agreements and participating close-out contracts. The average interest rate credited on these contracts was 3.12% and 3.32% at December 31, 2011 and 2010, respectively.
For the years ended December 31, 2011, 2010 and 2009, there were no investment gains (losses) on transfers of assets from the general account to the separate accounts.
Obligations Under Funding Agreements
The Company issues fixed and floating rate funding agreements, which are denominated in either U.S. dollars or foreign currencies, to certain special purpose entities (“SPEs”) that have issued either debt securities or commercial paper for which payment of interest and principal is secured by such funding agreements. During the years ended December 31, 2011, 2010 and 2009, the Company issued $39.9 billion, $34.1 billion and $28.6 billion, respectively, and repaid $41.6 billion, $30.9 billion and $32.0 billion, respectively, of such funding agreements. At December 31, 2011 and 2010, funding agreements outstanding, which are included in PABs, were $25.5 billion and $27.2 billion, respectively.
Certain subsidiaries of MetLife, Inc. are members of the Federal Home Loan Bank (“FHLB”). Holdings of FHLB common stock by branch, included in equity securities, were as follows at:
December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
FHLB of New York (“FHLB of NY”) | $ | 658 | $ | 890 | ||||
FHLB of Boston | $ | 70 | $ | 70 | ||||
FHLB of Des Moines | $ | 51 | $ | 20 |
Certain subsidiaries of MetLife, Inc. have also entered into funding agreements. The liability for funding agreements is included in PABs. Information related to the funding agreements was as follows:
Liability | Collateral | |||||||||||||||
December 31, | ||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
FHLB of NY (1) | $ | 11,655 | $ | 12,555 | $ | 13,002 (2) | $ | 14,204 (2) | ||||||||
Farmer Mac (3) | $ | 2,750 | $ | 2,750 | $ | 3,157 (4) | $ | 3,159 (4) | ||||||||
FHLB of Boston (1) | $ | 450 | $ | 100 | $ | 518 (2) | $ | 211 (2) | ||||||||
FHLB of Des Moines (1) | $ | 695 | $ | — | $ | 953 (2) | $ | — (2) |
(1) | Represents funding agreements issued to the FHLB in exchange for cash and for which the FHLB has been granted either a blanket lien or a lien on certain assets, including RMBS, to collateralize obligations under the funding agreements. The Company maintains control over these pledged assets, and may use, commingle, encumber or dispose of any portion of the collateral as long as there is no event of default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level. Upon any event of default by the Company, the FHLB’s recovery on the collateral is limited to the amount of the Company’s liability to the FHLB. |
(2) | Advances are collateralized by mortgage-backed securities. The amount of collateral presented is at estimated fair value. |
198
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
(3) | Represents funding agreements issued to certain SPEs that have issued debt securities for which payment of interest and principal is secured by such funding agreements, and such debt securities are also guaranteed as to payment of interest and principal by the Federal Agricultural Mortgage Corporation, a federally chartered instrumentality of the United States (“Farmer Mac”). |
(4) | Secured by a pledge of certain eligible agricultural real estate mortgage loans. The amount of collateral presented is at carrying value. |
Liabilities for Unpaid Claims and Claim Expenses
Information regarding the liabilities for unpaid claims and claim expenses relating to property and casualty, group accident and non-medical health policies and contracts, which are reported in future policy benefits and other policy-related balances, was as follows:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Balance at January 1, | $ | 10,708 | $ | 8,219 | $ | 8,260 | ||||||
Less: Reinsurance recoverables | 2,198 | 547 | 1,042 | |||||||||
|
|
|
|
|
| |||||||
Net balance at January 1, | 8,510 | 7,672 | 7,218 | |||||||||
|
|
|
|
|
| |||||||
Acquisitions, net | — | 583 | — | |||||||||
Incurred related to: | ||||||||||||
Current year | 9,028 | 6,482 | 6,569 | |||||||||
Prior years | (199 | ) | (75 | ) | (152 | ) | ||||||
|
|
|
|
|
| |||||||
Total incurred | 8,829 | 6,407 | 6,417 | |||||||||
|
|
|
|
|
| |||||||
Paid related to: | ||||||||||||
Current year | (6,238 | ) | (4,050 | ) | (3,972 | ) | ||||||
Prior years | (2,420 | ) | (2,102 | ) | (1,991 | ) | ||||||
|
|
|
|
|
| |||||||
Total paid | (8,658 | ) | (6,152 | ) | (5,963 | ) | ||||||
|
|
|
|
|
| |||||||
Net balance at December 31, | 8,681 | 8,510 | 7,672 | |||||||||
Add: Reinsurance recoverables | 1,436 | 2,198 | 547 | |||||||||
|
|
|
|
|
| |||||||
Balance at December 31, | $ | 10,117 | $ | 10,708 | $ | 8,219 | ||||||
|
|
|
|
|
|
During 2011, 2010 and 2009, as a result of changes in estimates of insured events in the respective prior year, claims and claim adjustment expenses associated with prior years decreased by $199 million, $75 million and $152 million, respectively, due to a reduction in prior year automobile bodily injury and homeowners’ severity and improved loss ratio for non-medical health claim liabilities.
Guarantees
The Company issues annuity contracts which may include contractual guarantees to the contractholder for: (i) return of no less than total deposits made to the contract less any partial withdrawals (“return of net deposits”); and (ii) the highest contract value on a specified anniversary date minus any withdrawals following the contract anniversary, or total deposits made to the contract less any partial withdrawals plus a minimum return (“anniversary contract value” or “minimum return”). The Company also issues annuity contracts that apply a lower rate of funds deposited if the contractholder elects to surrender the contract for cash and a higher rate if the contractholder elects to annuitize (“two tier annuities”). These guarantees include benefits that are payable in the event of death, maturity or at annuitization.
199
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The Company also issues universal and variable life contracts where the Company contractually guarantees to the contractholder a secondary guarantee or a guaranteed paid-up benefit.
Information regarding the types of guarantees relating to annuity contracts and universal and variable life contracts was as follows:
December 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
In the Event of Death | At Annuitization | In the Event of Death | At Annuitization | |||||||||||||
(In millions) | ||||||||||||||||
Annuity Contracts(1) | ||||||||||||||||
Return of Net Deposits | ||||||||||||||||
Separate account value | $ | 60,935 | $ | 486 | $ | 55,753 | $ | 390 | ||||||||
Net amount at risk (2) | $ | 8,912 (3) | $ | 404 (4) | $ | 6,194 (3) | $ | 289 (4) | ||||||||
Average attained age of contractholders | 62 years | 66 years | 62 years | 67 years | ||||||||||||
Anniversary Contract Value or Minimum Return | ||||||||||||||||
Separate account value | $ | 102,910 | $ | 71,934 | $ | 92,041 | $ | 55,668 | ||||||||
Net amount at risk (2) | $ | 7,729 (3) | $ | 11,735 (4) | $ | 5,297 (3) | $ | 6,373 (4) | ||||||||
Average attained age of contractholders | 63 years | 62 years | 62 years | 61 years | ||||||||||||
Two Tier Annuities | ||||||||||||||||
General account value | N/A | $ | 386 | N/A | $ | 280 | ||||||||||
Net amount at risk (2) | N/A | $ | 60 (5) | N/A | $ | 49 (5) | ||||||||||
Average attained age of contractholders | N/A | 60 years | N/A | 62 years |
December 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Secondary Guarantees | Paid-Up Guarantees | Secondary Guarantees | Paid-Up Guarantees | |||||||||||||
(In millions) | ||||||||||||||||
Universal and Variable Life Contracts (1) | ||||||||||||||||
Account value (general and separate account) | $ | 12,946 | $ | 3,963 | $ | 11,015 | $ | 4,102 | ||||||||
Net amount at risk (2) | $ | 188,642 (3) | $ | 24,991 (3) | $ | 156,432 (3) | $ | 26,851 (3) | ||||||||
Average attained age of policyholders | 53 years | 59 years | 52 years | 58 years |
(1) | The Company’s annuity and life 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) | The net amount at risk is based on the direct and assumed amount at risk (excluding ceded reinsurance). |
(3) | The net amount at risk for guarantees of amounts in the event of death is defined as the current GMDB in excess of the current account balance at the balance sheet date. |
(4) | The net amount at risk for guarantees of amounts at annuitization is defined as the present value of the minimum guaranteed annuity payments available to the contractholder determined in accordance with the terms of the contract in excess of the current account balance. |
(5) | The net amount at risk for two tier annuities is based on the excess of the upper tier, adjusted for a profit margin, less the lower tier. |
200
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Information regarding the liabilities for guarantees (excluding base policy liabilities) relating to annuity and universal and variable life contracts was as follows:
Annuity Contracts | Universal and Variable Life Contracts | |||||||||||||||||||
Guaranteed Death Benefits | Guaranteed Annuitization Benefits | Secondary Guarantees | Paid-Up Guarantees | Total | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Direct and Assumed | ||||||||||||||||||||
Balance at January 1, 2009 | $ | 251 | $ | 403 | $ | 271 | $ | 140 | $ | 1,065 | ||||||||||
Incurred guaranteed benefits | 118 | (1 | ) | 233 | 34 | 384 | ||||||||||||||
Paid guaranteed benefits | (201 | ) | — | — | — | (201 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at December 31, 2009 | 168 | 402 | 504 | 174 | 1,248 | |||||||||||||||
Acquisitions | 46 | 110 | 2,952 | — | 3,108 | |||||||||||||||
Incurred guaranteed benefits | 149 | 111 | 536 | 24 | 820 | |||||||||||||||
Paid guaranteed benefits | (91 | ) | — | (1 | ) | — | (92 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at December 31, 2010 | 272 | 623 | 3,991 | 198 | 5,084 | |||||||||||||||
Incurred guaranteed benefits | 273 | 269 | 496 | 23 | 1,061 | |||||||||||||||
Paid guaranteed benefits | (113 | ) | (10 | ) | (24 | ) | — | (147 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at December 31, 2011 | $ | 432 | $ | 882 | $ | 4,463 | $ | 221 | $ | 5,998 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Ceded | ||||||||||||||||||||
Balance at January 1, 2009 | $ | 8 | $ | — | $ | 80 | $ | 90 | $ | 178 | ||||||||||
Incurred guaranteed benefits | 26 | — | 102 | 32 | 160 | |||||||||||||||
Paid guaranteed benefits | (28 | ) | — | — | — | (28 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at December 31, 2009 | 6 | — | 182 | 122 | 310 | |||||||||||||||
Acquisitions | 30 | — | — | — | 30 | |||||||||||||||
Incurred guaranteed benefits | 18 | (1 | ) | 412 | 17 | 446 | ||||||||||||||
Paid guaranteed benefits | (15 | ) | — | — | — | (15 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at December 31, 2010 | 39 | (1 | ) | 594 | 139 | 771 | ||||||||||||||
Incurred guaranteed benefits | 35 | 9 | 20 | 16 | 80 | |||||||||||||||
Paid guaranteed benefits | (20 | ) | — | — | — | (20 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at December 31, 2011 | $ | 54 | $ | 8 | $ | 614 | $ | 155 | $ | 831 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net | ||||||||||||||||||||
Balance at January 1, 2009 | $ | 243 | $ | 403 | $ | 191 | $ | 50 | $ | 887 | ||||||||||
Incurred guaranteed benefits | 92 | (1 | ) | 131 | 2 | 224 | ||||||||||||||
Paid guaranteed benefits | (173 | ) | — | — | — | (173 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at December 31, 2009 | 162 | 402 | 322 | 52 | 938 | |||||||||||||||
Acquisitions | 16 | 110 | 2,952 | — | 3,078 | |||||||||||||||
Incurred guaranteed benefits | 131 | 112 | 124 | 7 | 374 | |||||||||||||||
Paid guaranteed benefits | (76 | ) | — | (1 | ) | — | (77 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at December 31, 2010 | 233 | 624 | 3,397 | 59 | 4,313 | |||||||||||||||
Incurred guaranteed benefits | 238 | 260 | 476 | 7 | 981 | |||||||||||||||
Paid guaranteed benefits | (93 | ) | (10 | ) | (24 | ) | — | (127 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at December 31, 2011 | $ | 378 | $ | 874 | $ | 3,849 | $ | 66 | $ | 5,167 | ||||||||||
|
|
|
|
|
|
|
|
|
|
201
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Account balances of contracts with insurance guarantees were invested in separate account asset classes as follows at:
December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Fund Groupings: | ||||||||
Equity | $ | 57,750 | $ | 59,546 | ||||
Balanced | 52,823 | 40,199 | ||||||
Bond | 9,838 | 9,539 | ||||||
Money Market | 1,521 | 1,584 | ||||||
Specialty | 2,034 | 2,192 | ||||||
|
|
|
| |||||
Total | $ | 123,966 | $ | 113,060 | ||||
|
|
|
|
9. Reinsurance
The Company participates in reinsurance activities in order to limit losses, minimize exposure to significant risks and provide additional capacity for future growth.
The Americas — Excluding Latin America
For its Retail Life & Other insurance products, the Company has historically reinsured the mortality risk primarily on an excess of retention basis or a quota share basis. The Company currently reinsures 90% of the mortality risk in excess of $1 million for most products and reinsures up to 90% of the mortality risk for certain other products. In addition to reinsuring mortality risk as described above, the Company reinsures other risks, as well as specific coverages. Placement of reinsurance is done primarily on an automatic basis and also on a facultative basis for risks with specified characteristics. On a case by case basis, the Company may retain up to $20 million per life and reinsure 100% of amounts in excess of the amount the Company retains. The Company evaluates its reinsurance programs routinely and may increase or decrease its retention at any time.
The Company’s Retail Annuities business reinsures a portion of the living and death benefit guarantees issued in connection with its variable annuities. Under these reinsurance agreements, the Company pays a reinsurance premium generally based on fees associated with the guarantees collected from policyholders, and receives reimbursement for benefits paid or accrued in excess of account values, subject to certain limitations.
The Company’s Corporate Benefit Funding segment periodically engages in reinsurance activities, as considered appropriate. The impact of these activities on the financial results of this segment has not been significant.
The Company, through its property & casualty business within both the Retail and Group, Voluntary & Worksite Benefits segments, purchases reinsurance to manage its exposure to large losses (primarily catastrophe losses) and to protect statutory surplus. The Company cedes to reinsurers a portion of losses and premiums based upon the exposure of the policies subject to reinsurance. To manage exposure to large property and casualty losses, the Company utilizes property catastrophe, casualty and property per risk excess of loss agreements.
For other policies within The Americas, excluding Latin America, the Company generally retains most of the risk and only cedes particular risks on certain client arrangements.
202
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Latin America, Asia and EMEA
For life insurance products the Company reinsures, depending on the product, risks above the corporate retention limit of up to $5 million to external reinsurers on a yearly renewable term basis. The Company may also reinsure certain risks with external reinsurers depending upon the nature of the risk and local regulatory requirements. For selected large corporate clients, the Company reinsures group employee benefits or credit insurance business with various client-affiliated reinsurance companies, covering policies issued to the employees or customers of the clients. Additionally, the Company cedes and assumes risk with other insurance companies when either company requires a business partner with the appropriate local licensing to issue certain types of policies in certain countries. In these cases, the assuming company typically underwrites the risks, develops the products and assumes most or all of the risk. The Company also has reinsurance agreements in force that reinsure a portion of the living and death benefit guarantees issued in connection with variable annuity products. Under these agreements, the Company pays reinsurance fees associated with the guarantees collected from policyholders, and receives reimbursement for benefits paid or accrued in excess of account values, subject to certain limitations.
Corporate & Other
The Company also reinsures, through 100% quota share reinsurance agreements, certain run-off LTC and workers’ compensation business written by MetLife Insurance Company of Connecticut (“MICC”).
Corporate & Other also has a reinsurance agreement to reinsure the living and death benefit guarantees issued in connection with variable annuity products. Under this agreement, the Company receives reinsurance fees associated with the guarantees collected from policyholders, and provides reimbursement for benefits paid or accrued in excess of account values, subject to certain limitations.
Catastrophe Coverage
The Company has exposure to catastrophes in The Americas, excluding Latin America, which could contribute to significant fluctuations in the Company’s results of operations. The Company uses excess of retention and quota share reinsurance agreements to provide greater diversification of risk and minimize exposure to larger risks. Currently, for Latin America, Asia and EMEA, the Company purchases catastrophe coverage to insure risks within certain countries deemed by management to be exposed to the greatest catastrophic risks.
Reinsurance Recoverables
The Company reinsures its business through a diversified group of well-capitalized, highly rated reinsurers. The Company analyzes recent trends in arbitration and litigation outcomes in disputes, if any, with its reinsurers. The Company monitors ratings and evaluates the financial strength of its reinsurers by analyzing their financial statements. In addition, the reinsurance recoverable balance due from each reinsurer is evaluated as part of the overall monitoring process. Recoverability of reinsurance recoverable balances is evaluated based on these analyses. The Company generally secures large reinsurance recoverable balances with various forms of collateral, including secured trusts, funds withheld accounts and irrevocable letters of credit. These reinsurance recoverable balances are stated net of allowances for uncollectible reinsurance, which at December 31, 2011 and 2010, were immaterial.
203
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The Company has secured certain reinsurance recoverable balances with various forms of collateral, including secured trusts, funds withheld accounts and irrevocable letters of credit. The Company had $5.6 billion and $5.5 billion of unsecured unaffiliated reinsurance recoverable balances at December 31, 2011 and 2010, respectively.
At December 31, 2011, the Company had $13.5 billion of net unaffiliated ceded reinsurance recoverables. Of this total, $10.3 billion, or 76%, were with the Company’s five largest unaffiliated ceded reinsurers, including $3.2 billion of which were unsecured. At December 31, 2010, the Company had $13.1 billion of net unaffiliated ceded reinsurance recoverables. Of this total, $10.0 billion, or 76%, were with the Company’s five largest unaffiliated ceded reinsurers, including $3.6 billion of which were unsecured.
The Company has reinsured with an unaffiliated third-party reinsurer, 49.25% of the closed block through a modified coinsurance agreement. The Company accounts for this agreement under the deposit method of accounting. The Company, having the right of offset, has offset the modified coinsurance deposit with the deposit recoverable.
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The amounts in the consolidated statements of operations include the impact of reinsurance. Information regarding the effect of reinsurance was as follows:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Premiums: | ||||||||||||
Direct premiums | $ | 37,185 | $ | 27,596 | $ | 27,165 | ||||||
Reinsurance assumed | 1,484 | 1,377 | 1,313 | |||||||||
Reinsurance ceded | (2,308 | ) | (1,902 | ) | (2,321 | ) | ||||||
|
|
|
|
|
| |||||||
Net premiums | $ | 36,361 | $ | 27,071 | $ | 26,157 | ||||||
|
|
|
|
|
| |||||||
Universal life and investment-type product policy fees: | ||||||||||||
Direct universal life and investment-type product policy fees | $ | 8,455 | $ | 6,621 | $ | 5,784 | ||||||
Reinsurance assumed | 154 | 138 | 106 | |||||||||
Reinsurance ceded | (803 | ) | (731 | ) | (693 | ) | ||||||
|
|
|
|
|
| |||||||
Net universal life and investment-type product policy fees | $ | 7,806 | $ | 6,028 | $ | 5,197 | ||||||
|
|
|
|
|
| |||||||
Other revenues: | ||||||||||||
Direct other revenues | $ | 2,468 | $ | 2,256 | $ | 2,264 | ||||||
Reinsurance assumed | 2 | — | 1 | |||||||||
Reinsurance ceded | 62 | 72 | 64 | |||||||||
|
|
|
|
|
| |||||||
Net other revenues | $ | 2,532 | $ | 2,328 | $ | 2,329 | ||||||
|
|
|
|
|
| |||||||
Policyholder benefits and claims: | ||||||||||||
Direct policyholder benefits and claims | $ | 37,588 | $ | 31,402 | $ | 30,031 | ||||||
Reinsurance assumed | 1,101 | 1,275 | 1,024 | |||||||||
Reinsurance ceded | (3,218 | ) | (3,490 | ) | (3,050 | ) | ||||||
|
|
|
|
|
| |||||||
Net policyholder benefits and claims | $ | 35,471 | $ | 29,187 | $ | 28,005 | ||||||
|
|
|
|
|
| |||||||
Interest credited to policyholder account balances: | ||||||||||||
Direct interest credited to policyholder account balances | $ | 5,600 | $ | 4,917 | $ | 4,842 | ||||||
Reinsurance assumed | 3 | 2 | 3 | |||||||||
Reinsurance ceded | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Net interest credited to policyholder account balances | $ | 5,603 | $ | 4,919 | $ | 4,845 | ||||||
|
|
|
|
|
| |||||||
Policyholder dividends: | ||||||||||||
Direct policyholder dividends | $ | 1,446 | $ | 1,485 | $ | 1,649 | ||||||
Reinsurance assumed | 17 | 17 | 13 | |||||||||
Reinsurance ceded | (17 | ) | (17 | ) | (13 | ) | ||||||
|
|
|
|
|
| |||||||
Net policyholder dividends | $ | 1,446 | $ | 1,485 | $ | 1,649 | ||||||
|
|
|
|
|
| |||||||
Other expenses: | ||||||||||||
Direct other expenses | $ | 18,672 | $ | 13,035 | $ | 10,774 | ||||||
Reinsurance assumed | 168 | 116 | 133 | |||||||||
Reinsurance ceded | (303 | ) | (224 | ) | (146 | ) | ||||||
|
|
|
|
|
| |||||||
Net other expenses | $ | 18,537 | $ | 12,927 | $ | 10,761 | ||||||
|
|
|
|
|
|
205
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The amounts in the consolidated balance sheets include the impact of reinsurance. Information regarding the effect of reinsurance was as follows at:
December 31, 2011 | ||||||||||||||||
Direct | Assumed | Ceded | Total Balance Sheet | |||||||||||||
(In millions) | ||||||||||||||||
Assets: | ||||||||||||||||
Premiums, reinsurance and other receivables | $ | 5,601 | $ | 641 | $ | 16,239 | $ | 22,481 | ||||||||
Deferred policy acquisition costs and value of business acquired | 24,412 | 340 | (133 | ) | 24,619 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets | $ | 30,013 | $ | 981 | $ | 16,106 | $ | 47,100 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities: | ||||||||||||||||
Future policy benefits | $ | 182,304 | $ | 1,972 | $ | (1 | ) | $ | 184,275 | |||||||
Policyholder account balances | 214,206 | 3,494 | — | 217,700 | ||||||||||||
Other policy-related balances | 14,880 | 339 | 380 | 15,599 | ||||||||||||
Other liabilities | 25,245 | 630 | 5,039 | 30,914 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities | $ | 436,635 | $ | 6,435 | $ | 5,418 | $ | 448,488 | ||||||||
|
|
|
|
|
|
|
|
December 31, 2010 | ||||||||||||||||
Direct | Assumed | Ceded | Total Balance Sheet | |||||||||||||
(In millions) | ||||||||||||||||
Assets: | ||||||||||||||||
Premiums, reinsurance and other receivables | $ | 5,517 | $ | 722 | $ | 13,560 | $ | 19,799 | ||||||||
Deferred policy acquisition costs and value of business acquired | 24,456 | 176 | (167 | ) | 24,465 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets | $ | 29,973 | $ | 898 | $ | 13,393 | $ | 44,264 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities: | ||||||||||||||||
Future policy benefits | $ | 168,913 | $ | 2,074 | $ | (65 | ) | $ | 170,922 | |||||||
Policyholder account balances | 208,520 | 2,237 | — | 210,757 | ||||||||||||
Other policy-related balances | 14,981 | 265 | 504 | 15,750 | ||||||||||||
Other liabilities | 17,057 | 608 | 2,701 | 20,366 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities | $ | 409,471 | $ | 5,184 | $ | 3,140 | $ | 417,795 | ||||||||
|
|
|
|
|
|
|
|
Reinsurance agreements that do not expose the Company to a reasonable possibility of a significant loss from insurance risk are recorded using the deposit method of accounting. The deposit assets on reinsurance were $2.4 billion and $2.5 billion at December 31, 2011 and 2010, respectively. The deposit liabilities on reinsurance were $66 million and $47 million at December 31, 2011 and 2010, respectively.
10. Closed Block
On April 7, 2000 (the “Demutualization Date”), Metropolitan Life Insurance Company (“MLIC”) converted from a mutual life insurance company to a stock life insurance company and became a wholly-owned subsidiary of MetLife, Inc. The conversion was pursuant to an order by the New York Superintendent of Insurance (the “Superintendent”) approving MLIC’s plan of reorganization, as amended (the “Plan”). On the Demutualization Date, MLIC established a closed block for the benefit of holders of certain individual life insurance policies of MLIC. Assets have been allocated to the closed block in an amount that has been determined to produce cash
206
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
flows which, together with anticipated revenues from the policies included in the closed block, are reasonably expected to be sufficient to support obligations and liabilities relating to these policies, including, but not limited to, provisions for the payment of claims and certain expenses and taxes, and to provide for the continuation of policyholder dividend scales in effect for 1999, if the experience underlying such dividend scales continues, and for appropriate adjustments in such scales if the experience changes. At least annually, the Company compares actual and projected experience against the experience assumed in the then-current dividend scales. Dividend scales are adjusted periodically to give effect to changes in experience.
The closed block assets, the cash flows generated by the closed block assets and the anticipated revenues from the policies in the closed block will benefit only the holders of the policies in the closed block. To the extent that, over time, cash flows from the assets allocated to the closed block and claims and other experience related to the closed block are, in the aggregate, more or less favorable than what was assumed when the closed block was established, total dividends paid to closed block policyholders in the future may be greater than or less than the total dividends that would have been paid to these policyholders if the policyholder dividend scales in effect for 1999 had been continued. Any cash flows in excess of amounts assumed will be available for distribution over time to closed block policyholders and will not be available to stockholders. If the closed block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside of the closed block. The closed block will continue in effect as long as any policy in the closed block remains in-force. The expected life of the closed block is over 100 years.
The Company uses the same accounting principles to account for the participating policies included in the closed block as it used prior to the Demutualization Date. However, the Company establishes a policyholder dividend obligation for earnings that will be paid to policyholders as additional dividends as described below. The excess of closed block liabilities over closed block assets at the Demutualization Date (adjusted to eliminate the impact of related amounts in accumulated other comprehensive income) represents the estimated maximum future earnings from the closed block expected to result from operations attributed to the closed block after income taxes. Earnings of the closed block are recognized in income over the period the policies and contracts in the closed block remain in-force. Management believes that over time the actual cumulative earnings of the closed block will approximately equal the expected cumulative earnings due to the effect of dividend changes. If, over the period the closed block remains in existence, the actual cumulative earnings of the closed block are greater than the expected cumulative earnings of the closed block, the Company will pay the excess of the actual cumulative earnings of the closed block over the expected cumulative earnings to closed block policyholders as additional policyholder dividends unless offset by future unfavorable experience of the closed block and, accordingly, will recognize only the expected cumulative earnings in income with the excess recorded as a policyholder dividend obligation. If over such period, the actual cumulative earnings of the closed block are less than the expected cumulative earnings of the closed block, the Company will recognize only the actual earnings in income. However, the Company may change policyholder dividend scales in the future, which would be intended to increase future actual earnings until the actual cumulative earnings equal the expected cumulative earnings.
Experience within the closed block, in particular mortality and investment yields, as well as realized and unrealized gains and losses, directly impact the policyholder dividend obligation. Amortization of the closed block DAC, which resides outside of the closed block, is based upon cumulative actual and expected earnings within the closed block. Accordingly, the Company’s net income continues to be sensitive to the actual performance of the closed block.
207
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Information regarding the closed block liabilities and assets designated to the closed block was as follows:
December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Closed Block Liabilities | ||||||||
Future policy benefits | $ | 43,169 | $ | 43,456 | ||||
Other policy-related balances | 358 | 316 | ||||||
Policyholder dividends payable | 514 | 579 | ||||||
Policyholder dividend obligation | 2,919 | 876 | ||||||
Current income tax payable | — | 178 | ||||||
Other liabilities | 613 | 627 | ||||||
|
|
|
| |||||
Total closed block liabilities | 47,573 | 46,032 | ||||||
|
|
|
| |||||
Assets Designated to the Closed Block | ||||||||
Investments: | ||||||||
Fixed maturity securities available-for-sale, at estimated fair value | 30,407 | 28,768 | ||||||
Equity securities available-for-sale, at estimated fair value | 35 | 102 | ||||||
Mortgage loans | 6,206 | 6,253 | ||||||
Policy loans | 4,657 | 4,629 | ||||||
Real estate and real estate joint ventures held-for-investment | 364 | 328 | ||||||
Short-term investments | — | 1 | ||||||
Other invested assets | 857 | 729 | ||||||
|
|
|
| |||||
Total investments | 42,526 | 40,810 | ||||||
Cash and cash equivalents | 249 | 236 | ||||||
Accrued investment income | 509 | 518 | ||||||
Premiums, reinsurance and other receivables | 109 | 95 | ||||||
Current income tax recoverable | 53 | — | ||||||
Deferred income tax assets | 362 | 474 | ||||||
|
|
|
| |||||
Total assets designated to the closed block | 43,808 | 42,133 | ||||||
|
|
|
| |||||
Excess of closed block liabilities over assets designated to the closed block | 3,765 | 3,899 | ||||||
|
|
|
| |||||
Amounts included in accumulated other comprehensive income (loss): | ||||||||
Unrealized investment gains (losses), net of income tax | 2,394 | 1,101 | ||||||
Unrealized gains (losses) on derivative instruments, net of income tax | 11 | 10 | ||||||
Allocated to policyholder dividend obligation, net of income tax | (1,897 | ) | (569 | ) | ||||
|
|
|
| |||||
Total amounts included in accumulated other comprehensive income (loss) | 508 | 542 | ||||||
|
|
|
| |||||
Maximum future earnings to be recognized from closed block assets and liabilities | $ | 4,273 | $ | 4,441 | ||||
|
|
|
|
Information regarding the closed block policyholder dividend obligation was as follows:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Balance at January 1, | $ | 876 | $ | — | $ | — | ||||||
Change in unrealized investment and derivative gains (losses) | 2,043 | 876 | — | |||||||||
|
|
|
|
|
| |||||||
Balance at December 31, | $ | 2,919 | $ | 876 | $ | — | ||||||
|
|
|
|
|
|
208
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Information regarding the closed block revenues and expenses was as follows:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Revenues | ||||||||||||
Premiums | $ | 2,306 | $ | 2,461 | $ | 2,708 | ||||||
Net investment income | 2,233 | 2,294 | 2,197 | |||||||||
Net investment gains (losses): | ||||||||||||
Other-than-temporary impairments on fixed maturity securities | (14 | ) | (32 | ) | (107 | ) | ||||||
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income (loss) | 3 | — | 40 | |||||||||
Other net investment gains (losses) | 43 | 71 | 327 | |||||||||
|
|
|
|
|
| |||||||
Total net investment gains (losses) | 32 | 39 | 260 | |||||||||
Net derivative gains (losses) | 8 | (27 | ) | (128 | ) | |||||||
|
|
|
|
|
| |||||||
Total revenues | 4,579 | 4,767 | 5,037 | |||||||||
|
|
|
|
|
| |||||||
Expenses | ||||||||||||
Policyholder benefits and claims | 2,991 | 3,115 | 3,329 | |||||||||
Policyholder dividends | 1,137 | 1,235 | 1,394 | |||||||||
Other expenses | 193 | 199 | 203 | |||||||||
|
|
|
|
|
| |||||||
Total expenses | 4,321 | 4,549 | 4,926 | |||||||||
|
|
|
|
|
| |||||||
Revenues, net of expenses before provision for income tax expense (benefit) | 258 | 218 | 111 | |||||||||
Provision for income tax expense (benefit) | 90 | 72 | 36 | |||||||||
|
|
|
|
|
| |||||||
Revenues, net of expenses and provision for income tax expense (benefit) | $ | 168 | $ | 146 | $ | 75 | ||||||
|
|
|
|
|
|
The change in the maximum future earnings of the closed block was as follows:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Balance at December 31, | $ | 4,273 | $ | 4,441 | $ | 4,587 | ||||||
Less: | ||||||||||||
Closed block adjustment (1) | — | — | 144 | |||||||||
Balance at January 1, | 4,441 | 4,587 | 4,518 | |||||||||
|
|
|
|
|
| |||||||
Change during year | $ | (168 | ) | $ | (146 | ) | $ | (75 | ) | |||
|
|
|
|
|
|
(1) | The closed block adjustment represents an intra-company reallocation of assets which affected the closed block. The adjustment had no impact on the Company’s consolidated financial statements. |
MLIC charges the closed block with federal income taxes, state and local premium taxes and other additive state or local taxes, as well as investment management expenses relating to the closed block as provided in the Plan. MLIC also charges the closed block for expenses of maintaining the policies included in the closed block.
209
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
11. Long-term and Short-term Debt
Long-term and short-term debt outstanding was as follows:
Interest Rates | Maturity | December 31, | ||||||||||||||
Range | Weighted Average | |||||||||||||||
2011 | 2010 | |||||||||||||||
(In millions) | ||||||||||||||||
Senior notes | 0.57%-7.72% | 4.84% | 2012-2045 | $ | 15,666 | $ | 16,258 | |||||||||
Advances agreements | 0.23%-4.86% | 2.28% | 2012-2021 | 4,179 | 3,600 | |||||||||||
Surplus notes | 7.63%-7.88% | 7.85% | 2015-2025 | 700 | 699 | |||||||||||
Fixed rate notes (1) | 7.50%-15.00% | 10.02% | 2012 | — | 82 | |||||||||||
Other notes with varying interest rates | 2.77%-8.00% | 5.23% | 2016-2030 | 42 | 95 | |||||||||||
Capital lease obligations | 37 | 32 | ||||||||||||||
|
|
|
| |||||||||||||
Total long-term debt (2) | 20,624 | 20,766 | ||||||||||||||
Total short-term debt | 686 | 306 | ||||||||||||||
|
|
|
| |||||||||||||
Total | $ | 21,310 | $ | 21,072 | ||||||||||||
|
|
|
|
(1) | Certain of the fixed rate notes were repaid prior to maturity in 2011. |
(2) | Excludes $3.1 billion and $6.8 billion of long-term debt relating to CSEs at December 31, 2011 and 2010, respectively. See Note 3. |
The aggregate maturities of long-term debt at December 31, 2011 for the next five years and thereafter are $1.5 billion in 2012, $1.5 billion in 2013, $1.7 billion in 2014, $2.3 billion in 2015, $2.4 billion in 2016 and $11.2 billion thereafter.
Advances agreements and capital lease obligations are collateralized and rank highest in priority, followed by unsecured senior debt which consists of senior notes, fixed rate notes and other notes with varying interest rates, followed by subordinated debt which consists of junior subordinated debt securities. Payments of interest and principal on the Company’s surplus notes, which are subordinate to all other obligations at the operating company level and senior to obligations at MetLife, Inc., may be made only with the prior approval of the insurance department of the state of domicile. Collateral financing arrangements are supported by either surplus notes of subsidiaries or financing arrangements with MetLife, Inc. and, accordingly, have priority consistent with other such obligations.
Certain of the Company’s debt instruments, credit facilities and committed facilities contain various administrative, reporting, legal and financial covenants. The Company believes it was in compliance with all such covenants at December 31, 2011.
Senior Notes — Senior Debt Securities Underlying Equity Units
In connection with the financing of the Acquisition (see Note 2) in November 2010, MetLife, Inc. issued to AM Holdings $3.0 billion (estimated fair value of $3.0 billion) in three series of Debt Securities, which constitute a part of the Equity Units more fully described in Note 14. The Debt Securities (Series C, D and E) are subject to remarketing, initially bear interest at 1.56%, 1.92% and 2.46%, respectively (an average rate of 1.98%), and carry initial maturity dates of June 15, 2023, June 15, 2024 and June 15, 2045, respectively. The interest rates will be reset in connection with the successful remarketings of the Debt Securities. Prior to the first scheduled attempted remarketing of the Series C Debt Securities, such Debt Securities will be divided into two tranches equal in
210
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
principal amount with maturity dates of June 15, 2018 and June 15, 2023. Prior to the first scheduled attempted remarketing of the Series E Debt Securities, such Debt Securities will be divided into two tranches equal in principal amount with maturity dates of June 15, 2018 and June 15, 2045.
Senior Notes — Other
In August 2010, in anticipation of the Acquisition, MetLife, Inc. issued senior notes as follows:
• | $1.0 billion senior notes due February 6, 2014, which bear interest at a fixed rate of 2.375%, payable semiannually; |
• | $1.0 billion senior notes due February 8, 2021, which bear interest at a fixed rate of 4.75%, payable semiannually; |
• | $750 million senior notes due February 6, 2041, which bear interest at a fixed rate of 5.875%, payable semiannually; and |
• | $250 million floating rate senior notes due August 6, 2013, which bear interest at a rate equal to three-month LIBOR, reset quarterly, plus 1.25%, payable quarterly. |
In connection with these offerings, MetLife, Inc. incurred $15 million of issuance costs which have been capitalized and included in other assets. These costs are being amortized over the terms of the senior notes.
In May 2009, MetLife, Inc. issued $1.3 billion of senior notes due June 1, 2016. The senior notes bear interest at a fixed rate of 6.75%, payable semiannually. In connection with the offering, MetLife, Inc. incurred $6 million of issuance costs which have been capitalized and included in other assets. These costs are being amortized over the term of the senior notes.
In March 2009, MetLife, Inc. issued $397 million of floating rate senior notes due June 29, 2012 under the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program. The senior notes bear interest at a rate equal to three-month LIBOR, reset quarterly, plus 0.32%. The senior notes are not redeemable prior to their maturity. In connection with the offering, MetLife, Inc. incurred $15 million of issuance costs which have been capitalized and included in other assets. These costs are being amortized over the term of the senior notes.
In February 2009, MetLife, Inc. remarketed its existing $1.0 billion 4.91% Series B junior subordinated debt securities as 7.717% senior debt securities, Series B, due 2019. Interest on these senior debt securities is payable semiannually. The Series B junior subordinated debt securities were originally issued in 2005. See Note 13.
Advances from the Federal Home Loan Bank of New York
MetLife Bank is a member of the FHLB of NY and held $234 million and $187 million of common stock of the FHLB of NY at December 31, 2011 and 2010, respectively, which is included in equity securities. MetLife Bank has also entered into advances agreements with the FHLB of NY whereby MetLife Bank has received cash advances and under which the FHLB of NY has been granted a blanket lien on certain of MetLife Bank’s residential mortgage loans held-for-sale, commercial mortgage loans and mortgage-backed securities to collateralize MetLife Bank’s repayment obligations. Upon any event of default by MetLife Bank, the FHLB of NY’s recovery is limited to the amount of MetLife Bank’s liability under the advances agreements. The amount of MetLife Bank’s liability for advances from the FHLB of NY was $4.8 billion and $3.8 billion at December 31, 2011 and 2010, respectively, which is included in long-term debt and short-term debt depending upon the original tenor of the advance. During the years ended December 31, 2011, 2010 and 2009, MetLife Bank
211
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
received advances related to long-term borrowings totaling $1.3 billion, $2.1 billion and $1.3 billion, respectively, from the FHLB of NY. MetLife Bank made repayments to the FHLB of NY of $750 million, $349 million and $497 million related to long-term borrowings for the years ended December 31, 2011, 2010 and 2009, respectively. The advances related to both long-term and short-term debt were collateralized by residential mortgage loans held-for-sale, commercial mortgage loans and mortgage-backed securities with estimated fair values of $8.7 billion and $7.8 billion at December 31, 2011 and 2010, respectively.
Collateralized Borrowing from the Federal Reserve Bank of New York
MetLife Bank is a depository institution that is approved to use the Federal Reserve Bank of New York Discount Window borrowing privileges. In order to utilize these privileges, MetLife Bank has pledged qualifying loans and investment securities to the Federal Reserve Bank of New York as collateral. MetLife Bank had no liability for advances from the Federal Reserve Bank of New York at both December 31, 2011 and 2010. The estimated fair value of loan and investment security collateral pledged by MetLife Bank to the Federal Reserve Bank of New York at December 31, 2011 and 2010 was $1.6 billion and $1.8 billion, respectively. There were no such advances during the years ended December 31, 2011 and 2010. During the year ended December 31, 2009, the weighted average interest rate on these advances was 0.26%. During the year ended December 31, 2009, the average daily balance of these advances was $1.5 billion and these advances were outstanding for an average of 24 days.
Short-term Debt
Short-term debt with maturities of one year or less was as follows:
December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Commercial paper | $ | 101 | $ | 102 | ||||
MetLife Bank, N.A. - Advances agreements with the FHLB of NY | 585 | 190 | ||||||
Other | — | 14 | ||||||
|
|
|
| |||||
Total short-term debt | $ | 686 | $ | 306 | ||||
|
|
|
| |||||
Average daily balance | $ | 447 | $ | 687 | ||||
Average days outstanding | 19 days | 21 days |
During the years ended December 31, 2011, 2010 and 2009, the weighted average interest rate on short-term debt was 0.33%, 0.35% and 0.42%, respectively.
Interest Expense
Interest expense related to the Company’s indebtedness included in other expenses was $975 million, $815 million and $713 million for the years ended December 31, 2011, 2010 and 2009, respectively, and does not include interest expense on collateral financing arrangements, junior subordinated debt securities or common equity units. See Notes 12, 13 and 14.
Credit and Committed Facilities
The Company maintains unsecured credit facilities and committed facilities, which aggregated $4.0 billion and $12.4 billion, respectively, at December 31, 2011. When drawn upon, these facilities bear interest at varying rates in accordance with the respective agreements.
212
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Credit Facilities. The unsecured credit facilities are used for general corporate purposes, to support the borrowers’ commercial paper programs and for the issuance of letters of credit. Total fees expensed associated with these credit facilities were $35 million, $17 million and $43 million for the years ended December 31, 2011, 2010 and 2009, respectively. Information on these credit facilities at December 31, 2011 was as follows:
Borrower(s) | Expiration | Capacity | Letter of Credit Issuances | Drawdowns | Unused Commitments | |||||||||||||
(In millions) | ||||||||||||||||||
MetLife, Inc. and MetLife Funding, Inc. | October 2013 (1), (2) | $ | 1,000 | $ | 104 | $ | — | $ | 896 | |||||||||
MetLife, Inc. and MetLife Funding, Inc. | August 2016 (1) | 3,000 | 2,980 | — | 20 | |||||||||||||
|
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|
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|
|
|
| |||||||||||
Total | $ | 4,000 | $ | 3,084 | $ | — | $ | 916 | ||||||||||
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|
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|
|
(1) | In August 2011, the 364-day, $1.0 billion senior unsecured credit agreement entered into in October 2010 by MetLife, Inc. and MetLife Funding, Inc., a subsidiary, was amended and restated to provide a five-year, $3.0 billion senior unsecured credit facility. Concurrently, MetLife, Inc. and MetLife Funding, Inc. elected to reduce the outstanding commitments under the three-year, $3.0 billion senior unsecured credit facility entered into in October 2010 to $1.0 billion with no change to the original maturity of October 2013. The Company incurred costs of $9 million related to the five-year credit facility, which have been capitalized and included in other assets. These costs will be amortized over the amended terms of the facilities. Due to the reduction in total capacity of the three-year facility, the Company subsequently expensed $4 million of the remaining deferred financing costs associated with the October 2010 credit agreement, which are included in other expenses. |
(2) | All borrowings under the credit agreement must be repaid by October 2013, except that letters of credit outstanding upon termination may remain outstanding until October 2014. |
Committed Facilities. The committed facilities are used for collateral for certain of the Company’s affiliated reinsurance liabilities. Total fees expensed associated with these committed facilities were $93 million, $92 million and $55 million for the years ended December 31, 2011, 2010 and 2009, respectively. Information on these committed facilities at December 31, 2011 was as follows:
Account Party/Borrower(s) | Expiration | Capacity | Letter of Credit Issuances | Drawdowns | Unused Commitments | Maturity (Years) | ||||||||||||||||
(In millions) | ||||||||||||||||||||||
MetLife, Inc. | August 2012 | $ | 300 | $ | 300 | $ | — | $ | — | — | ||||||||||||
Exeter Reassurance Company Ltd., | ||||||||||||||||||||||
MetLife, Inc. & Missouri | ||||||||||||||||||||||
Reinsurance (Barbados), Inc. | June 2016 | 500 | 490 | — | 10 | 4 | ||||||||||||||||
MetLife Reinsurance Company of | ||||||||||||||||||||||
Vermont & MetLife, Inc. | December 2020 (1) | 350 | 350 | — | — | 9 | ||||||||||||||||
Exeter Reassurance Company Ltd. | December 2027 (1) | 650 | 205 | — | 445 | 16 | ||||||||||||||||
MetLife Reinsurance Company of | ||||||||||||||||||||||
South Carolina & MetLife, Inc. | June 2037 (2) | 3,500 | — | 2,797 | 703 | 25 | ||||||||||||||||
MetLife Reinsurance Company of | ||||||||||||||||||||||
Vermont & MetLife, Inc. | December 2037 (1) | 2,896 | 1,715 | — | 1,181 | 26 | ||||||||||||||||
MetLife Reinsurance Company of | ||||||||||||||||||||||
Vermont & MetLife, Inc. | September 2038 (1) | 4,250 | 2,402 | — | 1,848 | 26 | ||||||||||||||||
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| |||||||||||||||
Total | $ | 12,446 | $ | 5,462 | $ | 2,797 | $ | 4,187 | ||||||||||||||
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213
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
(1) | MetLife, Inc. is guarantor under this agreement. |
(2) | The drawdown on this facility is associated with the collateral financing arrangement described more fully in Note 12. |
As a result of the offerings of certain senior notes (see “— Senior Notes — Other”) and common stock (see Note 18), the commitment letter for a $5.0 billion senior credit facility, which MetLife, Inc. signed to partially finance the Acquisition, was terminated. During March 2010, MetLife, Inc. paid $28 million in fees related to this senior credit facility, all of which were expensed during the year ended December 31, 2010.
12. Collateral Financing Arrangements
Associated with the Closed Block
In December 2007, MLIC reinsured a portion of its closed block liabilities to MRC, a wholly-owned subsidiary of MetLife, Inc. In connection with this transaction, MRC issued, to investors placed by an unaffiliated financial institution, $2.5 billion in aggregate principal amount of 35-year surplus notes to provide statutory reserve support for the assumed closed block liabilities. Interest on the surplus notes accrues at an annual rate of three-month LIBOR plus 0.55%, payable quarterly. The ability of MRC to make interest and principal payments on the surplus notes is contingent upon South Carolina regulatory approval.
Simultaneous with the issuance of the surplus notes, MetLife, Inc. entered into an agreement with the unaffiliated financial institution, under which MetLife, Inc. is entitled to the interest paid by MRC on the surplus notes of three-month LIBOR plus 0.55% in exchange for the payment of three-month LIBOR plus 1.12%, payable quarterly on such amount as adjusted, as described below. MetLife, Inc. may also be required to pledge collateral or make payments to the unaffiliated financial institution related to any decline in the estimated fair value of the surplus notes. Any such payments would be accounted for as a receivable and included in other assets on the Company’s consolidated balance sheets and would not reduce the principal amount outstanding of the surplus notes. Such payments would, however, reduce the amount of interest payments due from MetLife, Inc. under the agreement. Any payment received from the unaffiliated financial institution would reduce the receivable by an amount equal to such payment and would also increase the amount of interest payments due from MetLife, Inc. under the agreement. In addition, the unaffiliated financial institution may be required to pledge collateral to MetLife, Inc. related to any increase in the estimated fair value of the surplus notes. MetLife, Inc. may also be required to make a payment to the unaffiliated financial institution in connection with any early termination of this agreement.
In December 2011, following regulatory approval, MRC repurchased and canceled $650 million in aggregate principal amount of the surplus notes (the “Partial Repurchase”). Payments made by the Company in December 2011 associated with the Partial Repurchase, which also included payments made to the unaffiliated financial institution, totaled $650 million, exclusive of accrued interest on the surplus notes. At December 31, 2011 and 2010, the amount of the surplus notes outstanding was $1.9 billion and $2.5 billion, respectively.
At December 31, 2011 and 2010, the amount of the receivable from the unaffiliated financial institution was $241 million and $425 million, respectively. In June 2011, MetLife, Inc. received $100 million from the unaffiliated financial institution related to an increase in the estimated fair value of the surplus notes. No payments were made or received by MetLife, Inc. during 2010. During 2009, on a net basis, MetLife, Inc. received $375 million from the unaffiliated financial institution related to changes in the estimated fair value of the surplus notes.
214
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
In addition, at December 31, 2011 and 2010, MetLife, Inc. had pledged collateral with an estimated fair value of $125 million and $49 million, respectively, to the unaffiliated financial institution.
A majority of the proceeds from the offering of the surplus notes was placed in a trust, which is consolidated by the Company, to support MRC’s statutory obligations associated with the assumed closed block liabilities. At both December 31, 2011 and 2010, the estimated fair value of assets held in trust by the Company was $2.0 billion. The assets are principally invested in fixed maturity securities and are presented as such within the Company’s consolidated balance sheets, with the related income included within net investment income in the Company’s consolidated statements of operations. Interest on the collateral financing arrangement is included as a component of other expenses.
Total interest expense related to the collateral financing arrangement was $35 million, $36 million and $51 million for the years ended December 31, 2011, 2010 and 2009, respectively.
Associated with Secondary Guarantees
In May 2007, MetLife, Inc. and MRSC, a wholly-owned subsidiary of MetLife, Inc., entered into a 30-year collateral financing arrangement with an unaffiliated financial institution that provides up to $3.5 billion of statutory reserve support for MRSC associated with reinsurance obligations under intercompany reinsurance agreements. Such statutory reserves are associated with universal life secondary guarantees and are required under U.S. Valuation of Life Policies Model Regulation (commonly referred to as Regulation A-XXX). At both December 31, 2011 and 2010, $2.8 billion had been drawn upon under the collateral financing arrangement. Proceeds from the collateral financing arrangement were placed in trusts to support MRSC’s statutory obligations associated with the reinsurance of secondary guarantees. The trusts are VIEs which are consolidated by the Company. The unaffiliated financial institution is entitled to the return on the investment portfolio held by the trusts. At both December 31, 2011 and 2010, the Company held assets in trust with an estimated fair value of $3.3 billion associated with the collateral financing arrangement. The assets are principally invested in fixed maturity securities and are presented as such within the Company’s consolidated balance sheets, with the related income included within net investment income in the Company’s consolidated statements of operations. Interest on the collateral financing arrangement is included as a component of other expenses. The collateral financing arrangement may be extended by agreement of MetLife, Inc. and the unaffiliated financial institution on each anniversary of the closing.
In connection with the collateral financing arrangement, MetLife, Inc. entered into an agreement with the same unaffiliated financial institution under which MetLife, Inc. is entitled to the return on the investment portfolio held by the trusts established in connection with this collateral financing arrangement in exchange for the payment of a stated rate of return to the unaffiliated financial institution of three-month LIBOR plus 0.70%, payable quarterly. MetLife, Inc. may also be required to make payments to the unaffiliated financial institution, for deposit into the trusts, related to any decline in the estimated fair value of the assets held by the trusts, as well as amounts outstanding upon maturity or early termination of the collateral financing arrangement. During 2011 and 2010, no payments were made or received by MetLife, Inc. During 2009, MetLife, Inc. contributed $360 million as a result of declines in the estimated fair value of the assets in the trusts. Cumulatively, since May 2007, MetLife, Inc. has contributed a total of $680 million as a result of declines in the estimated fair value of the assets in the trusts, all of which was deposited into the trusts.
In addition, MetLife, Inc. may be required to pledge collateral to the unaffiliated financial institution under this agreement. At December 31, 2011 and 2010, MetLife, Inc. had pledged $92 million and $63 million under the agreement, respectively.
Total interest expense related to the collateral financing arrangement was $29 million, $30 million and $44 million for the years ended December 31, 2011, 2010 and 2009, respectively.
215
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
13. Junior Subordinated Debt Securities
Outstanding Junior Subordinated Debt Securities
Outstanding junior subordinated debt securities and trust securities which MetLife, Inc. will exchange for junior subordinated debt securities prior to redemption or repayment were as follows:
Issuer | Issue Date | Face Value | Interest Rate (2) | Scheduled Redemption Date | Interest Rate Subsequent to Scheduled Redemption Date (3) | Final Maturity | Carrying Value at December 31, | |||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||||
MetLife, Inc. | July 2009 | $ | 500 | 10.750 | % | August 2039 | LIBOR +7.548% | August 2069 | $ | 500 | $ | 500 | ||||||||||||||
MetLife Capital Trust X (1) | April 2008 | $ | 750 | 9.250 | % | April 2038 | LIBOR +5.540% | April 2068 | 750 | 750 | ||||||||||||||||
MetLife Capital Trust IV (1) | December 2007 | $ | 700 | 7.875 | % | December 2037 | LIBOR +3.960% | December 2067 | 694 | 694 | ||||||||||||||||
MetLife, Inc. | December 2006 | $ | 1,250 | 6.400 | % | December 2036 | LIBOR +2.205% | December 2066 | 1,248 | 1,247 | ||||||||||||||||
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|
|
| |||||||||||||||||||||||
$ | 3,192 | $ | 3,191 | |||||||||||||||||||||||
|
|
|
|
(1) | MetLife Capital Trust X and MetLife Capital Trust IV are VIEs which are consolidated in the financial statements of the Company. The securities issued by these entities are exchangeable surplus trust securities, which will be exchanged for a like amount of MetLife, Inc.’s junior subordinated debt securities on the scheduled redemption date; mandatorily under certain circumstances, and at any time upon MetLife, Inc. exercising its option to redeem the securities. The exchangeable surplus trust securities are classified as junior subordinated debt securities for purposes of financial statement presentation. |
(2) | Prior to the scheduled redemption date, interest is payable semiannually in arrears. |
(3) | In the event the securities are not redeemed on or before the scheduled redemption date, interest will accrue after such date at an annual rate of three-month LIBOR plus a margin, payable quarterly in arrears. |
In connection with each of the securities described above, MetLife, Inc. may redeem or may cause the redemption of the securities (i) in whole or in part, at any time on or after the date five years prior to the scheduled redemption date at their principal amount plus accrued and unpaid interest to, but excluding, the date of redemption, or (ii) in certain circumstances, in whole or in part, prior to the date five years prior to the scheduled redemption date at their principal amount plus accrued and unpaid interest to, but excluding, the date of redemption or, if greater, a make-whole price. MetLife, Inc. also has the right to, and in certain circumstances the requirement to, defer interest payments on the securities for a period up to 10 years. Interest compounds during such periods of deferral. If interest is deferred for more than five consecutive years, MetLife, Inc. is required to use proceeds from the sale of its common stock or warrants on common stock to satisfy interest payment obligation. In connection with each of the securities described above, MetLife, Inc. entered into a separate replacement capital covenant (“RCC”). As part of each RCC, MetLife, Inc. agreed that it will not repay, redeem, or purchase the securities on or before a date 10 years prior to the final maturity date of each issuance, unless, subject to certain limitations, it has received cash proceeds during a specified period from the sale of specified replacement securities. Each RCC will terminate upon the occurrence of certain events, including an acceleration of the applicable securities due to the occurrence of an event of default. The RCCs are not intended for the benefit of holders of the securities and may not be enforced by them. Rather, each RCC is for the benefit of the holders of a designated series of MetLife, Inc.’s other indebtedness (the “Covered Debt”). Initially, the Covered Debt for each of the securities described above was MetLife, Inc.’s 5.70% senior notes due 2035 (the “Senior Notes”). As a result of the issuance of MetLife, Inc.’s 10.750% Fixed-to-Floating Rate Junior Subordinated Debentures due 2069 (the “10.750% JSDs”), the 10.750% JSDs became the Covered Debt with
216
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
respect to, and in accordance with, the terms of the RCC relating to MetLife, Inc.’s 6.40% Fixed-to-Floating Rate Junior Subordinated Debentures due 2066. The Senior Notes continue to be the Covered Debt with respect to, and in accordance with, the terms of the RCCs relating to each of MetLife Capital Trust IV’s 7.875% Fixed-to-Floating Rate Exchangeable Surplus Trust Securities, MetLife Capital Trust X’s 9.250% Fixed-to-Floating Rate Exchangeable Surplus Trust Securities and the 10.750% JSDs. MetLife, Inc. also entered into a replacement capital obligation which will commence during the six month period prior to the scheduled redemption date of each of the securities described above and under which MetLife, Inc. must use reasonable commercial efforts to raise replacement capital to permit repayment of the securities through the issuance of certain qualifying capital securities.
Issuance costs associated with the issuance of the securities of $5 million were incurred during the year ended December 31, 2009. These issuance costs have been capitalized, are included in other assets, and are amortized over the period from the issuance date until the scheduled redemption date of the issuance. Interest expense on outstanding junior subordinated debt securities was $258 million, $258 million and $231 million for the years ended December 31, 2011, 2010, and 2009, respectively.
Other Junior Subordinated Debt Securities
In June 2005, MetLife, Inc. issued $1.1 billion 4.91% Series B junior subordinated debt securities due no later than February 2040, in exchange for $32 million in trust common securities of MetLife Capital Trust III (“Series B Trust”), a subsidiary trust of MetLife, Inc., and $1.0 billion in aggregate cash proceeds from the sale by the subsidiary trust of trust preferred securities.
In February 2009, the Series B Trust was dissolved and $32 million of the Series B junior subordinated debt securities were returned to MetLife, Inc. concurrently with the cancellation of the $32 million of trust common securities of the Series B Trust held by MetLife, Inc. Upon dissolution of the Series B Trust, the remaining $1.0 billion of Series B junior subordinated debt securities were distributed to the holders of the trust preferred securities and such trust preferred securities were canceled. In connection with the remarketing transaction in February 2009, the remaining $1.0 billion of MetLife, Inc. Series B junior subordinated debt securities were modified, as permitted by their terms, to be 7.717% senior debt securities, Series B, due February 2019. The Company did not receive any proceeds from the remarketing. See Note 11.
Interest expense on these junior subordinated debt securities was $6 million for the year ended December 31, 2009.
14. Common Equity Units
Acquisition of ALICO
In connection with the financing of the Acquisition (see Note 2) in November 2010, MetLife, Inc. issued to AM Holdings 40.0 million Equity Units with an aggregate stated amount at issuance of $3.0 billion and an estimated fair value of $3.2 billion. Each Equity Unit has an initial stated amount of $75 per unit and initially consists of: (i) three Purchase Contracts, each of which obligates the holder to purchase, on a subsequent settlement date, a variable number of shares of MetLife, Inc. common stock, par value $0.01 per share, for a purchase price of $25 ($75 in the aggregate); and (ii) a 1/40 undivided beneficial ownership interest in each of three series of Debt Securities issued by MetLife, Inc., each series of Debt Securities having an aggregate principal amount of $1.0 billion. Distributions on the Equity Units will be made quarterly, and will consist of contract payments on the Purchase Contracts and interest payments on the Debt Securities, at an aggregate annual rate of 5.00% of the stated amount at any time. The excess of the estimated fair value of the Equity Units over the estimated fair value of the Debt Securities (see Note 11), after accounting for the present value of future contract payments recorded in other liabilities, resulted in a net decrease to additional paid-in capital of $69 million,
217
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
representing the fair value of the Purchase Contracts discussed below. On March 8, 2011, AM Holdings sold, in a public offering, all the Equity Units it received as consideration from MetLife in connection with the Acquisition. The Equity Units are listed on the New York Stock Exchange.
Purchase Contracts
Settlement of the Purchase Contracts of each series will occur upon the successful remarketing of the related series of Debt Securities, or upon a final failed remarketing of the related series, as described below under “— Debt Securities.” On each settlement date subsequent to a successful remarketing, the holder will pay $25 per Equity Unit and MetLife, Inc. will issue to such holder a variable number of shares of its common stock in settlement of the applicable Purchase Contract. The number of shares to be issued will depend on the average of the daily volume-weighted average prices of MetLife, Inc.’s common stock during the 20 trading day periods ending on, and including, the third day prior to the initial scheduled settlement date for each series of Purchase Contracts. The initially-scheduled settlement dates are October 10, 2012 for the Series C Purchase Contracts, September 11, 2013 for the Series D Purchase Contracts and October 8, 2014 for the Series E Purchase Contracts. If the average value of MetLife, Inc.’s common stock as calculated pursuant to the Stock Purchase Agreement during the applicable 20 trading day period is less than or equal to $35.42, as such amount may be adjusted (the “Reference Price”), the number of shares to be issued in settlement of the Purchase Contract will equal $25 divided by the Reference Price, as calculated pursuant to the Stock Purchase Agreement (the “Maximum Settlement Rate”). If the market value of MetLife, Inc.’s common stock is greater than or equal to $44.275, as such amount may be adjusted (the “Threshold Appreciation Price”), the number of shares to be issued in settlement of the Purchase Contract will equal $25 divided by the Threshold Appreciation Price, as so calculated (the “Minimum Settlement Rate”). If the market value of MetLife, Inc.’s common stock is greater than the Reference Price and less than the Threshold Appreciation Price, the number of shares to be issued will equal $25 divided by the applicable market value, as so calculated. In the event of an unsuccessful remarketing of any series of Debt Securities and the postponement of settlement to a later date, the average market value used to calculate the settlement rate for a particular series will not be recalculated, although certain corporate events may require adjustments to the settlement rate. After settlement of all the Purchase Contracts, MetLife, Inc. will receive proceeds of $3.0 billion and issue between 67.8 million and 84.7 million shares of its common stock, subject to certain adjustments. The holder of an Equity Unit may, at its option, settle the related Purchase Contracts before the applicable settlement date. However, upon early settlement, the holder will receive the Minimum Settlement Rate.
Distributions on the Purchase Contracts will be made quarterly at an average annual rate of 3.02%. The value of the Purchase Contracts at issuance of $247 million was calculated as the present value of the future contract payments and was recorded in other liabilities with an offsetting decrease in additional paid-in capital. The other liabilities balance will be reduced as contract payments are made. For the year ended December 31, 2011, $102 million of contract payments were made. For the year ended December 31, 2010, no contract payments were made.
Debt Securities
The Debt Securities are senior, unsecured notes of MetLife, Inc. which, in the aggregate, pay quarterly distributions at an initial average annual rate of 1.98% and are included in long-term debt (see Note 11 for further discussion of terms). The Debt Securities will be initially pledged as collateral to secure the obligations of each Equity Unit holder under the related Purchase Contracts. Each series of the Debt Securities will be subject to a remarketing and sold on behalf of participating holders to investors. The proceeds of a remarketing, net of any related fees, will be applied on behalf of participating holders who so elect to settle any obligation of the holder to pay cash under the related Purchase Contract on the applicable settlement dates. The initially-scheduled remarketing dates are October 10, 2012 for the Series C Debt Securities, September 11, 2013 for the Series D
218
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Debt Securities and October 8, 2014 for the Series E Debt Securities, subject to delay if there are one or more unsuccessful remarketings. If the initial attempted remarketing of a series is unsuccessful, up to two additional remarketing attempts will occur. At the remarketing date, the remarketing agent may reset the interest rate on the Debt Securities, subject to a reset cap for each of the first two attempted remarketings of each series. If a remarketing is successful, the reset rate will apply to all outstanding Debt Securities of the applicable tranche of the remarketed series, whether or not the holder participated in the remarketing and will become effective on the settlement date of such remarketing. If the first remarketing attempt with respect to a series is unsuccessful, the applicable Purchase Contract settlement date will be delayed for three calendar months, at which time a second remarketing attempt will occur in connection with settlement. If the second remarketing attempt is unsuccessful, one additional delay may occur on the same basis. If both additional remarketing attempts are unsuccessful, a “final failed remarketing” will have occurred, and the interest rate on such series of Debt Securities will not be reset and the holder may put such series of Debt Securities to MetLife, Inc. at a price equal to its principal amount plus accrued and unpaid interest, if any, and apply the principal amount against the holder’s obligations under the related Purchase Contract.
15. Income Tax
The provision for income tax from continuing operations was as follows:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Current: | ||||||||||||
Federal | $ | (200 | ) | $ | 121 | $ | (239 | ) | ||||
State and local | (1 | ) | 21 | 12 | ||||||||
Foreign | 614 | 203 | 227 | |||||||||
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|
|
|
|
| |||||||
Subtotal | 413 | 345 | — | |||||||||
|
|
|
|
|
| |||||||
Deferred: | ||||||||||||
Federal | 2,241 | 643 | (2,205 | ) | ||||||||
State and local | (3 | ) | (7 | ) | 26 | |||||||
Foreign | 142 | 129 | 73 | |||||||||
|
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|
|
|
| |||||||
Subtotal | 2,380 | 765 | (2,106 | ) | ||||||||
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|
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| |||||||
Provision for income tax expense (benefit) | $ | 2,793 | $ | 1,110 | $ | (2,106 | ) | |||||
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|
|
The reconciliation of the income tax provision at the U.S. statutory rate to the provision for income tax as reported for continuing operations was as follows:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Tax provision at U.S. statutory rate | $ | 3,215 | $ | 1,306 | $ | (1,615 | ) | |||||
Tax effect of: | ||||||||||||
Tax-exempt investment income | (246 | ) | (242 | ) | (288 | ) | ||||||
State and local income tax | (4 | ) | 9 | 17 | ||||||||
Prior year tax | (4 | ) | 59 | (26 | ) | |||||||
Tax credits | (138 | ) | (82 | ) | (87 | ) | ||||||
Foreign tax rate differential | (41 | ) | 37 | (130 | ) | |||||||
Change in valuation allowance | 16 | 7 | 20 | |||||||||
Other, net | (5 | ) | 16 | 3 | ||||||||
|
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|
|
| |||||||
Provision for income tax expense (benefit) | $ | 2,793 | $ | 1,110 | $ | (2,106 | ) | |||||
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|
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|
219
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Deferred income tax represents the tax effect of the differences between the book and tax basis of assets and liabilities. Net deferred income tax assets and liabilities consisted of the following at:
December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Deferred income tax assets: | ||||||||
Policyholder liabilities and receivables | $ | 5,939 | $ | 8,450 | ||||
Net operating loss carryforwards | 1,595 | 1,971 | ||||||
Employee benefits | 916 | 664 | ||||||
Capital loss carryforwards | 449 | 408 | ||||||
Tax credit carryforwards | 1,692 | 1,007 | ||||||
Litigation-related and government mandated | 207 | 227 | ||||||
Other | 483 | 336 | ||||||
|
|
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| |||||
11,281 | 13,063 | |||||||
Less: Valuation allowance | 1,083 | 932 | ||||||
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|
|
| |||||
10,198 | 12,131 | |||||||
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|
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| |||||
Deferred income tax liabilities: | ||||||||
Investments, including derivatives | 3,371 | 2,261 | ||||||
Intangibles | 5,309 | 5,814 | ||||||
Net unrealized investment gains | 4,453 | 1,560 | ||||||
DAC | 3,268 | 3,338 | ||||||
Other | 192 | 125 | ||||||
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| |||||
16,593 | 13,098 | |||||||
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| |||||
Net deferred income tax asset (liability) | $ | (6,395 | ) | $ | (967 | ) | ||
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The following table sets forth the domestic, state, and foreign net operating and capital loss carryforwards for tax purposes at December 31, 2011:
Net Operating Loss Carryforwards | Capital Loss Carryforwards | |||||||||||
Amount | Expiration | Amount | Expiration | |||||||||
(In millions) | (In millions) | |||||||||||
Domestic | $ | 1,958 | Beginning in 2018 | $ | 1,248 | Beginning in 2013 | ||||||
State | $ | 251 | Beginning in 2012 | $ | — | N/A | ||||||
Foreign | $ | 3,056 | Beginning in 2015 | $ | 37 | Beginning in 2014 |
Tax credit carryforwards of $1.7 billion at December 31, 2011 will expire beginning in 2016.
As of the Acquisition Date, the Company had established a valuation allowance of $671 million against the amount of U.S. deferred tax assets that was expected to reverse post-branch restructuring of American Life. As of November 1, 2011 the Company finalized American Life’s current and deferred income tax liabilities based upon the determination of the amount of taxes resulting from the Section 338 Election and the corresponding filing of the income tax return. Accordingly, American Life’s current income tax receivable was increased by $12 million and deferred tax assets were reduced by $2 million with a corresponding net decrease to goodwill. The Company also increased the valuation allowance recorded against U.S. deferred tax assets to $720 million. The increase in the valuation allowance of $49 million, with a corresponding increase to goodwill, was a result of changes in estimates and assumptions relating to the reversal of U.S. temporary differences prior to the completion of the anticipated restructuring of American Life’s foreign branches and filing of the income tax return.
220
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The Company also has recorded a valuation allowance increase related to tax benefits of $20 million related to certain state and foreign net operating loss carryforwards, $1 million related to certain foreign unrealized losses, $86 million related to certain foreign other assets, and a decrease of $5 million related to certain foreign capital loss carryforwards. The valuation allowance reflects management’s assessment, based on available information, that it is more likely than not that the deferred income tax asset for certain foreign net operating and capital loss carryforwards, certain state net operating loss carryforwards, certain foreign unrealized losses and certain foreign other assets will not be realized. The tax benefit will be recognized when management believes that it is more likely than not that these deferred income tax assets are realizable.
The Company has not provided U.S. deferred taxes on cumulative earnings of certain non-U.S. affiliates and associated companies that have been reinvested indefinitely. These earnings relate to ongoing operations and have been reinvested in active non- U.S. business operations. The Company does not intend to repatriate these earnings to fund U.S. operations. Deferred taxes are provided for earnings of non-U.S. affiliates and associated companies when the Company plans to remit those earnings. At December 31, 2011 the Company had not made a provision for U.S. taxes on approximately $1.7 billion of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. It is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries.
The Company files income tax returns with the U.S. federal government and various state and local jurisdictions, as well as foreign jurisdictions. The Company is under continuous examination by the IRS and other tax authorities in jurisdictions in which the Company has significant business operations. The income tax years under examination vary by jurisdiction. With a few exceptions, the Company is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2000. In early 2009, the Company and the IRS completed and substantially settled the audit years of 2000 to 2002. A few issues not settled have been escalated to the next level, IRS Appeals. The IRS exam of the current audit cycle, years 2003 to 2006, began in April 2010.
The Company’s liability for unrecognized tax benefits may decrease in the next 12 months pending the outcome of remaining issues, tax-exempt income and tax credits associated with the 2000 to 2002 IRS audit. A reasonable estimate of the decrease cannot be made at this time. However, the Company continues to believe that the ultimate resolution of the issues will not result in a material change to its consolidated financial statements, although the resolution of income tax matters could impact the Company’s effective tax rate for a particular future period.
A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Balance at January 1, | $ | 810 | $ | 773 | $ | 766 | ||||||
Additions for tax positions of prior years | 30 | 186 | (1) | 43 | ||||||||
Reductions for tax positions of prior years | (161 | ) | (84 | ) | (33 | ) | ||||||
Additions for tax positions of current year | 13 | 13 | 52 | |||||||||
Reductions for tax positions of current year | (8 | ) | (8 | ) | (9 | ) | ||||||
Settlements with tax authorities | (5 | ) | (59 | ) | (46 | ) | ||||||
Lapses of statutes of limitations | — | (11 | ) | — | ||||||||
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Balance at December 31, | $ | 679 | $ | 810 | $ | 773 | ||||||
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Unrecognized tax benefits that, if recognized would impact the effective rate | $ | 527 | $ | 536 | $ | 583 | ||||||
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(1) | An increase of $169 million resulted from the acquisition of American Life. |
The Company classifies interest accrued related to unrecognized tax benefits in interest expense, included within other expenses, while penalties are included in income tax expense.
Interest and penalties were as follows:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Interest and penalties recognized in the consolidated statements | $ | 31 | $ | 6 | $ | 21 | ||||||
December 31, | ||||||||||||
2011 | 2010 | |||||||||||
(In millions) | ||||||||||||
Interest and penalties included in other liabilities in the consolidated |
| $ | 235 | $ | 221(1) |
(1) | An increase of $20 million resulted from the acquisition of American Life. |
The U.S. Treasury Department and the IRS have indicated that they intend to address through regulations the methodology to be followed in determining the dividends received deduction (“DRD”), related to variable life insurance and annuity contracts. The DRD reduces the amount of dividend income subject to tax and is a significant component of the difference between the actual tax expense and expected amount determined using the federal statutory tax rate of 35%. Any regulations that the IRS ultimately proposes for issuance in this area will be subject to public notice and comment, at which time insurance companies and other interested parties will have the opportunity to raise legal and practical questions about the content, scope and application of such regulations. As a result, the ultimate timing and substance of any such regulations are unknown at this time. For the years ended December 31, 2011 and 2010, the Company recognized an income tax benefit of $159 million and $87 million, respectively, related to the separate account DRD. The 2011 benefit included a benefit of $8 million related to a true-up of the 2010 tax return. The 2010 benefit included an expense of $57 million related to a true-up of the 2009 tax return.
16. Contingencies, Commitments and Guarantees
Contingencies
Litigation
The Company is a defendant in a large number of litigation matters. In some of the matters, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Modern pleading practice in the U.S. permits considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible verdicts in the jurisdiction for similar matters. This variability in pleadings, together with the actual experience of the Company in litigating or resolving through settlement numerous claims over an extended period of time, demonstrates to management that the monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value.
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Due to the vagaries of litigation, the outcome of a litigation matter and the amount or range of potential loss at particular points in time may normally be difficult to ascertain. Uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how trial and appellate courts will apply the law in the context of the pleadings or evidence presented, whether by motion practice, or at trial or on appeal. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable law.
The Company establishes liabilities for litigation and regulatory loss contingencies when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Liabilities have been established for a number of the matters noted below. It is possible that some of the matters could require the Company to pay damages or make other expenditures or establish accruals in amounts that could not be estimated at December 31, 2011. While the potential future charges could be material in the particular quarterly or annual periods in which they are recorded, based on information currently known to management, management does not believe any such charges are likely to have a material effect on the Company’s financial position.
Matters as to Which an Estimate Can Be Made
For some of the matters disclosed below, the Company is able to estimate a reasonably possible range of loss. For such matters where a loss is believed to be reasonably possible, but not probable, no accrual has been made. As of December 31, 2011, the Company estimates the aggregate range of reasonably possible losses in excess of amounts accrued for these matters to be approximately $0 to $200 million.
Matters as to Which an Estimate Cannot Be Made
For other matters disclosed below, the Company is not currently able to estimate the reasonably possible loss or range of loss. The Company is often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, analysis by experts, and the progress of settlement negotiations. On a quarterly and annual basis, the Company reviews relevant information with respect to litigation contingencies and updates its accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews.
Asbestos-Related Claims
MLIC is and has been a defendant in a large number of asbestos-related suits filed primarily in state courts. These suits principally allege that the plaintiff or plaintiffs suffered personal injury resulting from exposure to asbestos and seek both actual and punitive damages. MLIC has never engaged in the business of manufacturing, producing, distributing or selling asbestos or asbestos-containing products nor has MLIC issued liability or workers’ compensation insurance to companies in the business of manufacturing, producing, distributing or selling asbestos or asbestos-containing products. The lawsuits principally have focused on allegations with respect to certain research, publication and other activities of one or more of MLIC’s employees during the period from the 1920’s through approximately the 1950’s and allege that MLIC learned or should have learned of certain health risks posed by asbestos and, among other things, improperly publicized or failed to disclose those health risks. MLIC believes that it should not have legal liability in these cases. The outcome of most asbestos litigation matters, however, is uncertain and can be impacted by numerous variables, including differences in legal rulings in various jurisdictions, the nature of the alleged injury and factors unrelated to the ultimate legal merit of the claims asserted against MLIC. MLIC employs a number of resolution strategies to manage its asbestos loss exposure, including seeking resolution of pending litigation by judicial rulings and settling individual or groups of claims or lawsuits under appropriate circumstances.
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Claims asserted against MLIC have included negligence, intentional tort and conspiracy concerning the health risks associated with asbestos. MLIC’s defenses (beyond denial of certain factual allegations) include that: (i) MLIC owed no duty to the plaintiffs — it had no special relationship with the plaintiffs and did not manufacture, produce, distribute or sell the asbestos products that allegedly injured plaintiffs; (ii) plaintiffs did not rely on any actions of MLIC; (iii) MLIC’s conduct was not the cause of the plaintiffs’ injuries; (iv) plaintiffs’ exposure occurred after the dangers of asbestos were known; and (v) the applicable time with respect to filing suit has expired. During the course of the litigation, certain trial courts have granted motions dismissing claims against MLIC, while other trial courts have denied MLIC’s motions to dismiss. There can be no assurance that MLIC will receive favorable decisions on motions in the future. While most cases brought to date have settled, MLIC intends to continue to defend aggressively against claims based on asbestos exposure, including defending claims at trials.
The approximate total number of asbestos personal injury claims pending against MLIC as of the dates indicated, the approximate number of new claims during the years ended on those dates and the approximate total settlement payments made to resolve asbestos personal injury claims at or during those years are set forth in the following table:
December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions, except number of claims) | ||||||||||||
Asbestos personal injury claims at year end | 66,747 | 68,513 | 68,804 | |||||||||
Number of new claims during the year | 4,972 | 5,670 | 3,910 | |||||||||
Settlement payments during the year (1) | $ | 34.2 | $ | 34.9 | $ | 37.6 |
(1) | Settlement payments represent payments made by MLIC during the year in connection with settlements made in that year and in prior years. Amounts do not include MLIC’s attorneys’ fees and expenses and do not reflect amounts received from insurance carriers. |
In 2008, MLIC received approximately 5,063 new claims, ending the year with a total of approximately 74,027 claims, and paid approximately $99 million for settlements reached in 2008 and prior years. In 2007, MLIC received approximately 7,161 new claims, ending the year with a total of approximately 79,717 claims, and paid approximately $28.2 million for settlements reached in 2007 and prior years. In 2006, MLIC received approximately 7,870 new claims, ending the year with a total of approximately 87,070 claims, and paid approximately $35.5 million for settlements reached in 2006 and prior years. In 2005, MLIC received approximately 18,500 new claims, ending the year with a total of approximately 100,250 claims, and paid approximately $74.3 million for settlements reached in 2005 and prior years. In 2004, MLIC received approximately 23,900 new claims, ending the year with a total of approximately 108,000 claims, and paid approximately $85.5 million for settlements reached in 2004 and prior years. In 2003, MLIC received approximately 58,750 new claims, ending the year with a total of approximately 111,700 claims, and paid approximately $84.2 million for settlements reached in 2003 and prior years. The number of asbestos cases that may be brought, the aggregate amount of any liability that MLIC may incur, and the total amount paid in settlements in any given year are uncertain and may vary significantly from year to year.
The ability of MLIC to estimate its ultimate asbestos exposure is subject to considerable uncertainty, and the conditions impacting its liability can be dynamic and subject to change. The availability of reliable data is limited and it is difficult to predict the numerous variables that can affect liability estimates, including the number of future claims, the cost to resolve claims, the disease mix and severity of disease in pending and future claims, the impact of the number of new claims filed in a particular jurisdiction and variations in the law in the jurisdictions in which claims are filed, the possible impact of tort reform efforts, the willingness of courts to allow plaintiffs to pursue claims against MLIC when exposure to asbestos took place after the dangers of asbestos exposure were well known, and the impact of any possible future adverse verdicts and their amounts.
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The ability to make estimates regarding ultimate asbestos exposure declines significantly as the estimates relate to years further in the future. In the Company’s judgment, there is a future point after which losses cease to be probable and reasonably estimable. It is reasonably possible that the Company’s total exposure to asbestos claims may be materially greater than the asbestos liability currently accrued and that future charges to income may be necessary. To the extent the Company can estimate reasonably possible losses in excess of amounts accrued, it has been included in the aggregate estimate of reasonably possible loss provided above. While the potential future charges could be material in the particular quarterly or annual periods in which they are recorded, based on information currently known by management, management does not believe any such charges are likely to have a material effect on the Company’s financial position.
The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for asbestos-related claims. MLIC’s recorded asbestos liability is based on its estimation of the following elements, as informed by the facts presently known to it, its understanding of current law and its past experiences: (i) the probable and reasonably estimable liability for asbestos claims already asserted against MLIC, including claims settled but not yet paid; (ii) the probable and reasonably estimable liability for asbestos claims not yet asserted against MLIC, but which MLIC believes are reasonably probable of assertion; and (iii) the legal defense costs associated with the foregoing claims. Significant assumptions underlying MLIC’s analysis of the adequacy of its recorded liability with respect to asbestos litigation include: (i) the number of future claims; (ii) the cost to resolve claims; and (iii) the cost to defend claims.
MLIC reevaluates on a quarterly and annual basis its exposure from asbestos litigation, including studying its claims experience, reviewing external literature regarding asbestos claims experience in the United States, assessing relevant trends impacting asbestos liability and considering numerous variables that can affect its asbestos liability exposure on an overall or per claim basis. These variables include bankruptcies of other companies involved in asbestos litigation, legislative and judicial developments, the number of pending claims involving serious disease, the number of new claims filed against it and other defendants and the jurisdictions in which claims are pending. As previously disclosed, in 2002 MLIC increased its recorded liability for asbestos-related claims by $402 million from approximately $820 million to $1.2 billion. Based upon its regular reevaluation of its exposure from asbestos litigation, MLIC has updated its liability analysis for asbestos-related claims through December 31, 2011.
Regulatory Matters
The Company receives and responds to subpoenas or other inquiries from state regulators, including state insurance commissioners; state attorneys general or other state governmental authorities; federal regulators, including the U.S. Securities and Exchange Commission (“SEC”); federal governmental authorities, including congressional committees; and the Financial Industry Regulatory Authority (“FINRA”) seeking a broad range of information. The issues involved in information requests and regulatory matters vary widely. The Company cooperates in these inquiries.
MetLife Bank Mortgage Servicing Regulatory and Law Enforcement Authorities’ Inquiries. Since 2008, MetLife, through its affiliate, MetLife Bank, has significantly increased its mortgage servicing activities by acquiring servicing portfolios. Currently, MetLife Bank services approximately 1% of the aggregate principal amount of the mortgage loans serviced in the U.S. State and federal regulatory and law enforcement authorities have initiated various inquiries, investigations or examinations of alleged irregularities in the foreclosure practices of the residential mortgage servicing industry. Mortgage servicing practices have also been the subject of Congressional attention. Authorities have publicly stated that the scope of the investigations extends beyond foreclosure documentation practices to include mortgage loan modification and loss mitigation practices.
225
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
MetLife Bank’s mortgage servicing has been the subject of recent inquiries and requests by state and federal regulatory and law enforcement authorities. MetLife Bank is cooperating with the authorities’ review of this business. On April 13, 2011, the Office of the Comptroller of the Currency (“OCC”) entered into consent decrees with several banks, including MetLife Bank. The consent decrees require an independent review of foreclosure practices and set forth new residential mortgage servicing standards, including a requirement for a designated point of contact for a borrower during the loss mitigation process. In addition, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) entered into consent decrees with the affiliated bank holding companies of these banks, including MetLife, Inc., to enhance the supervision of the mortgage servicing activities of their banking subsidiaries. In a February 9, 2012 press release, the Federal Reserve Board announced that it had issued monetary sanctions against five banking organizations for deficiencies in the organizations’ servicing of residential mortgage loans and processing of foreclosures. The Federal Reserve Board also stated that it plans to announce monetary penalties against six other institutions under its supervision against whom it had issued enforcement actions in 2011 for deficiencies in servicing of residential mortgage loans and processing foreclosures. The Federal Reserve Board did not identify these six institutions, but MetLife, Inc. is among the institutions that entered into consent decrees with the Federal Reserve Board in 2011. MetLife Bank has also had a meeting with the Department of Justice regarding mortgage servicing and foreclosure practices. It is possible that various state or federal regulatory and law enforcement authorities may seek monetary penalties from MetLife Bank relating to foreclosure practices. MetLife Bank is responding to a subpoena issued by the New York State Department of Financial Services regarding hazard insurance and flood insurance that MetLife Bank obtains to protect the lienholder’s interest when the borrower’s insurance has lapsed.
These consent decrees, as well as the inquiries or investigations referred to above, could adversely affect MetLife’s reputation or result in material fines, penalties, equitable remedies or other enforcement actions, and result in significant legal costs in responding to governmental investigations or other litigation. In addition, the changes to the mortgage servicing business required by the consent decrees and the resolution of any other inquiries or investigations may affect the profitability of such business. The Company is unable to estimate the reasonably possible loss or range of loss arising from the MetLife Bank regulatory matters. Management believes that the Company’s consolidated financial statements as a whole will not be materially affected by the MetLife Bank regulatory matters.
United States of America v. EME Homer City Generation, L.P., et al. (W.D. Pa., filed January 4, 2011). On January 4, 2011, the U.S. commenced a civil action in United States District Court for the Western District of Pennsylvania against EME Homer City Generation L.P. (“EME Homer City”), Homer City OL6 LLC, and other defendants regarding the operations of the Homer City Generating Station, an electricity generating facility. Homer City OL6 LLC, an entity owned by MLIC, is a passive investor with a noncontrolling interest in the electricity generating facility, which is solely operated by the lessee, EME Homer City. The complaint sought injunctive relief and assessment of civil penalties for alleged violations of the federal Clean Air Act and Pennsylvania’s State Implementation Plan. The alleged violations were the subject of Notices of Violations (“NOVs”) that the Environmental Protection Agency (“EPA”) issued to EME Homer City, Homer City OL6 LLC, and others in June 2008 and May 2010. On January 7, 2011, the United States District Court for the Western District of Pennsylvania granted the motion by the Pennsylvania Department of Environmental Protection and the State of New York to intervene in the lawsuit as additional plaintiffs. On February 16, 2011, the State of New Jersey filed an Intervenor’s Complaint in the lawsuit. On January 7, 2011, two plaintiffs filed a putative class action titledScott Jackson and Maria Jackson v. EME Homer City Generation L.P., et al. in the United States District Court for the Western District of Pennsylvania on behalf of a putative class of persons who have allegedly incurred damage to their persons and/or property because of the violations alleged in the action brought by the U.S. Homer City OL6 LLC is a defendant in this action. On October 12, 2011, the court issued an order dismissing the U.S.’s lawsuit with prejudice. The Government entities have appealed from the order
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
granting defendants’ motion to dismiss. On October 13, 2011, the court also issued an order dismissing the federal claims in the putative class actions with prejudice and dismissing the state law claims in the putative class actions without prejudice to re-file in state court. EME Homer City has acknowledged its obligation to indemnify Homer City OL6 LLC for any claims relating to the NOVs. Due to the acknowledged indemnification obligation, this matter is not included in the aggregate estimate of range of reasonably possible loss. In a February 13, 2012 letter to EME Homer City, Homer City OL6 LLC and others, the Sierra Club indicated its intent to sue for alleged violations of the Clean Air Act and to seek to enjoin the alleged violations, seek unspecified penalties and attorneys’ fees, and other relief. Homer City OL6 LLC has served a claim for indemnification on EME Homer City.
In the Matter of Chemform, Inc. Site, Pompano Beach, Broward County, Florida. In July 2010, the EPA advised MLIC that it believed payments were due under two settlement agreements, known as “Administrative Orders on Consent,” that New England Mutual Life Insurance Company (“New England Mutual”) signed in 1989 and 1992 with respect to the cleanup of a Superfund site in Florida (the “Chemform Site”). The EPA originally contacted MLIC (as successor to New England Mutual) and a third party in 2001, and advised that they owed additional clean-up costs for the Chemform Site. The matter was not resolved at that time. The EPA is requesting payment of an amount under $1 million from MLIC and such third party for past costs and an additional amount for future environmental testing costs at the Chemform Site. The Company estimates that the aggregate cost to resolve this matter will not exceed $1 million.
Sales Practices Regulatory Matters. Regulatory authorities in a small number of states and FINRA, and occasionally the SEC, have had investigations or inquiries relating to sales of individual life insurance policies or annuities or other products by MLIC, MICC, New England Life Insurance Company and General American Life Insurance Company, and four Company broker-dealers, which are MetLife Securities, Inc., New England Securities Corporation, Walnut Street Securities, Inc. and Tower Square Securities, Inc. These investigations often focus on the conduct of particular financial services representatives and the sale of unregistered or unsuitable products or the misuse of client assets. Over the past several years, these and a number of investigations by other regulatory authorities were resolved for monetary payments and certain other relief, including restitution payments. The Company may continue to resolve investigations in a similar manner. The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for these sales practices-related investigations or inquiries.
Unclaimed Property Inquiries and Related Litigation
More than 30 U.S. jurisdictions are auditing MetLife, Inc. and certain of its affiliates for compliance with unclaimed property laws. Additionally, MLIC and certain of its affiliates have received subpoenas and other regulatory inquiries from certain regulators and other officials relating to claims-payment practices and compliance with unclaimed property laws. An examination of these practices by the Illinois Department of Insurance has been converted into a multistate targeted market conduct exam. On July 5, 2011, the New York Insurance Department issued a letter requiring life insurers doing business in New York to use data available on the U.S. Social Security Administration’s Death Master File or a similar database to identify instances where death benefits under life insurance policies, annuities, and retained asset accounts are payable, to locate and pay beneficiaries under such contracts, and to report the results of the use of the data. It is possible that other jurisdictions may pursue similar investigations or inquiries, may join the multistate market conduct exam, or issue directives similar to the New York Insurance Department’s letter. In the third quarter of 2011, the Company incurred a $117 million after tax charge to increase reserves in connection with the Company’s use of the U.S. Social Security Administration’s Death Master File and similar databases to identify potential life insurance claims that have not yet been presented to the Company. It is possible that the audits, market
227
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
conduct exam, and related activity may result in additional payments to beneficiaries, additional escheatment of funds deemed abandoned under state laws, administrative penalties, interest, and changes to the Company’s procedures for the identification and escheatment of abandoned property. The Company believes that payments for life insurance claims not yet presented and interest thereon will not be materially different from the reserve charge noted above. To the extent the Company can estimate the reasonably possible amount of potential additional payments, it has been included in the aggregate estimate of reasonably possible loss provided above. It is possible that there will be additional payments or other expenses incurred with respect to changes in procedures, and the Company is not currently able to estimate these additional possible amounts but such costs may be substantial.
Total Asset Recovery Services, LLC on behalf of the State of Illinois v. MetLife, Inc., et. al. (Cir. Ct. Cook County, IL, filed January 24, 2011). Alleging that MetLife, Inc. and another company have violated the Illinois Uniform Disposition of Unclaimed Property Act by failing to escheat to Illinois benefits of 4,766 life insurance contracts, Total Asset Recovery Services, LLC (“the Relator”) has brought an action under the Illinois False Claims Whistleblower Reward and Protection Act seeking to recover damages on behalf of Illinois. The action was sealed by court order until January 18, 2012. The Relator alleges that the aggregate damages, including statutory damages and treble damages, is $1,572,780,000. The Relator does not allocate this claimed damage amount between MetLife, Inc. and the other defendant. The Relator also bases its damage calculation in part on its assumption that the average face amount of the subject policies is $110,000. MetLife, Inc. strongly disputes this assumption, the Relator’s alleged damages amounts, and other allegations in the complaint, and intends to defend this action vigorously.
City of Westland Police and Fire Retirement System v. MetLife, Inc., et. al. (S.D.N.Y., filed January 12, 2012). Seeking to represent a class of persons who purchased MetLife, Inc. common shares between February 2, 2010, and October 6, 2011, the plaintiff filed an action alleging that MetLife, Inc. and several current and former executive officers of MetLife, Inc. violated the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by issuing, or causing MetLife, Inc. to issue, materially false and misleading statements concerning MetLife, Inc.’s potential liability for millions of dollars in insurance benefits that should have been paid to beneficiaries or escheated to the states. Plaintiff seeks unspecified compensatory damages and other relief. The defendants intend to vigorously defend this action.
Fishbaum v. Kandarian, et al. (Sup. Ct., New York County, filed January 27, 2012). Seeking to sue derivatively on behalf of MetLife, Inc., a shareholder commenced an action against members of the MetLife, Inc. Board of Directors alleging that they breached their fiduciary and other duties to the Company. Plaintiff alleges that the defendants failed to ensure that the Company complied with state unclaimed property laws and to ensure that the Company accurately reported its earnings. Plaintiff alleges that because of the defendants’ breaches of duty, MetLife, Inc. has incurred damage to its reputation and has suffered other unspecified damages. The defendants intend to vigorously defend this action.
Total Control Accounts Litigation
MLIC is a defendant in lawsuits related to its use of retained asset accounts, known as Total Control Accounts (“TCA”), as a settlement option for death benefits. The lawsuits include claims of breach of contract, breach of a common law fiduciary duty or a quasi-fiduciary duty such as a confidential or special relationship, or breach of a fiduciary duty under the Employee Retirement Income Security Act of 1974 (“ERISA”).
Clark, et al. v. Metropolitan Life Insurance Company (D. Nev., filed March 28, 2008). This putative class action lawsuit alleges breach of contract and breach of a common law fiduciary and/or quasi-fiduciary duty arising from use of the TCA to pay life insurance policy death benefits. As damages, plaintiffs seek disgorgement
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
of the difference between the interest paid to the account holders and the investment earnings on the assets backing the accounts. In March 2009, the court granted in part and denied in part MLIC’s motion to dismiss, dismissing the fiduciary duty and unjust enrichment claims but allowing a breach of contract claim and a special or confidential relationship claim to go forward. On September 9, 2010, the court granted MLIC’s motion for summary judgment. Plaintiffs appealed this order and on December 7, 2011, the United States Court of Appeals for the Ninth Circuit affirmed the district court’s grant of summary judgment to MLIC, finding no breach of contract because plaintiffs suffered no damages and finding that no special or confidential relationship existed between the parties under Nevada law.
Faber, et al. v. Metropolitan Life Insurance Company (S.D.N.Y., filed December 4, 2008). This putative class action lawsuit alleges that MLIC’s use of the TCA as the settlement option under group life insurance policies violates MLIC’s fiduciary duties under ERISA. As damages, plaintiffs seek disgorgement of the difference between the interest paid to the account holders and the investment earnings on the assets backing the accounts. On October 23, 2009, the court granted MLIC’s motion to dismiss with prejudice. On August 5, 2011, the United States Court of Appeals for the Second Circuit affirmed the dismissal of the complaint. Plaintiffs’ petition for a rehearing or rehearingen bancwith the Second Circuit was denied by the Second Circuit on November 1, 2011.
Keife, et al. v. Metropolitan Life Insurance Company (D. Nev., filed in state court on July 30, 2010 and removed to federal court on September 7, 2010). This putative class action lawsuit raises a breach of contract claim arising from MLIC’s use of the TCA to pay life insurance benefits under the Federal Employees’ Group Life Insurance program (“FEGLI”). As damages, plaintiffs seek disgorgement of the difference between the interest paid to the account holders and the investment earnings on the assets backing the accounts. In September 2010, plaintiffs filed a motion for class certification of the breach of contract claim, which the court has denied. On April 28, 2011, the court denied MLIC’s motion to dismiss.
Simon v. Metropolitan Life Insurance Company (D. Nev., filed November 3, 2011). Similar toKeife v. Metropolitan Life Insurance Company (pending in the same court), in this putative class action the plaintiff alleges that MLIC improperly paid interest to FEGLI beneficiaries. Specifically, plaintiff alleges that under the terms of the FEGLI policy, MLIC is required to make “immediate” payment of death benefits in “one sum.” MLIC, plaintiff alleges, breached this duty by instead retaining the death benefits in its general investment account and sending beneficiaries a “book of drafts” known as the “TCA Money Market Option” as the only means by which funds can be accessed. Plaintiff further alleges that MLIC manipulates interest rates paid to policy beneficiaries. This matter has been consolidated withKeife.
The Company is unable to estimate the reasonably possible loss or range of loss arising from the TCA matters.
Other U.S. Litigation
Roberts, et al. v. Tishman Speyer Properties, et al. (Sup. Ct., N.Y. County, filed January 22, 2007). This lawsuit was filed by a putative class of market rate tenants at Stuyvesant Town and Peter Cooper Village against parties including Metropolitan Tower Life Insurance Company (“MTL”) and Metropolitan Insurance and Annuity Company. Metropolitan Insurance and Annuity Company has merged into MTL and no longer exists as a separate entity. These tenants claim that MTL, as former owner, and the current owner improperly deregulated apartments while receiving J-51 tax abatements. The lawsuit seeks declaratory relief and damages for rent overcharges. In October 2009, the New York State Court of Appeals issued an opinion denying MTL’s motion to dismiss the complaint. MTL has reached a settlement in principle with the plaintiff tenants, subject to finalizing the settlement terms and court approval. The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for this lawsuit.
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Merrill Haviland, et al. v. Metropolitan Life Insurance Company (E.D. Mich., removed to federal court on July 22, 2011). This lawsuit was filed by 45 retired General Motors (“GM”) employees against MLIC and includes claims for conversion, unjust enrichment, breach of contract, fraud, intentional infliction of emotional distress, fraudulent insurance acts, and unfair trade practices, based upon GM’s 2009 reduction of the employees’ life insurance coverage under GM’s ERISA-governed plan. The complaint includes a count seeking class action status. MLIC is the insurer of GM’s group life insurance plan and administers claims under the plan. According to the complaint, MLIC had previously provided plaintiffs with a “written guarantee” that their life insurance benefits under the GM plan would not be reduced for the rest of their lives. MLIC has removed the case to federal court based upon complete ERISA preemption of the state law claims. Plaintiffs filed an amended complaint recasting the state law claims and asserting ERISA claims. MLIC has filed a motion to dismiss.
Sales Practices Claims. Over the past several years, the Company has faced numerous claims, including class action lawsuits, alleging improper marketing or sales of individual life insurance policies, annuities, mutual funds or other products. Some of the current cases seek substantial damages, including punitive and treble damages and attorneys’ fees. The Company continues to vigorously defend against the claims in these matters. The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for sales practices matters.
International Litigation
Sun Life Assurance Company of Canada v. Metropolitan Life Ins. Co. (Super. Ct., Ontario, October 2006). In 2006, Sun Life Assurance Company of Canada (“Sun Life”), as successor to the purchaser of MLIC’s Canadian operations, filed this lawsuit in Toronto, seeking a declaration that MLIC remains liable for “market conduct claims” related to certain individual life insurance policies sold by MLIC and that have been transferred to Sun Life. Sun Life had asked that the court require MLIC to indemnify Sun Life for these claims pursuant to indemnity provisions in the sale agreement for the sale of MLIC’s Canadian operations entered into in June of 1998. In January 2010, the court found that Sun Life had given timely notice of its claim for indemnification but, because it found that Sun Life had not yet incurred an indemnifiable loss, granted MLIC’s motion for summary judgment. Both parties appealed. In September 2010, Sun Life notified MLIC that a purported class action lawsuit was filed against Sun Life in Toronto,Kang v. Sun Life Assurance Co. (Super. Ct., Ontario, September 2010), alleging sales practices claims regarding the same individual policies sold by MLIC and transferred to Sun Life. An amended class action complaint in that case was served on Sun Life, again without naming MLIC as a party. On August 30, 2011, Sun Life notified MLIC that a purported class action lawsuit was filed against Sun Life in Vancouver,Alamwala v. Sun Life Assurance Co. (Sup. Ct., British Columbia, August 2011), alleging sales practices claims regarding certain of the same policies sold by MLIC and transferred to Sun Life. Sun Life contends that MLIC is obligated to indemnify Sun Life for some or all of the claims in these lawsuits. The Company is unable to estimate the reasonably possible loss or range of loss arising from this litigation.
Italy Fund Redemption Suspension Complaints and Litigation. As a result of suspension of withdrawals and diminution in value in certain funds offered within certain unit-linked policies sold by the Italian branch of Alico Life International, Ltd. (“ALIL”), a number of policyholders invested in those funds have either commenced or threatened litigation against ALIL, alleging misrepresentation, inadequate disclosures and other related claims. These policyholders contacted ALIL beginning in July 2009 alleging that the funds operated at variance to the published prospectus and that prospectus risk disclosures were allegedly wrong, unclear, and misleading. The limited number of lawsuits that have been filed to date have either been resolved or are proceeding through litigation. In March 2011, ALIL began implementing a plan to resolve policyholder claims. Under the plan, ALIL will provide liquidity to the suspended funds so that policyholders may withdraw investments in these funds, and ALIL will offer policyholders amounts in addition to the liquidation value of the suspended funds based on the performance of other relevant financial products. The settlement program achieved a 96% acceptance rate. Those
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Notes to the Consolidated Financial Statements — (Continued)
policyholders who did not accept the settlement may still pursue other remedies or commence individual litigation. The formal investigation opened by the Milan public prosecutor into the actions of ALIL employees, as well as of employees of ALIL’s major distributor, has been dismissed by the court. Under the terms of the stock purchase agreement dated as of March 7, 2010, as amended, by and among MetLife, Inc., AIG and AM Holdings, AIG has agreed to indemnify MetLife, Inc. and its affiliates for third party claims and regulatory fines associated with ALIL’s suspended funds. Due to the acknowledged indemnification obligation, this matter is not included in the aggregate estimate of range of reasonably possible loss.
Summary
Putative or certified class action litigation and other litigation and claims and assessments against the Company, in addition to those discussed previously and those otherwise provided for in the Company’s consolidated 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, mortgage lending bank, employer, investor, investment advisor 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, very 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 consolidated net income or cash flows in particular quarterly or annual periods.
Insolvency Assessments
Most of the jurisdictions in which the Company is admitted to transact business require insurers doing business within the jurisdiction to participate in guaranty associations, which are organized to pay contractual benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. In addition, Japan has established the Life Insurance Policyholders Protection Corporation of Japan as a contingency to protect policyholders against the insolvency of life insurance companies in Japan through assessments to companies licensed to provide life insurance.
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Assets and liabilities held for insolvency assessments were as follows:
December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Other Assets: | ||||||||
Premium tax offset for future undiscounted assessments | $ | 97 | $ | 55 | ||||
Premium tax offsets currently available for paid assessments | 14 | 8 | ||||||
Receivable for reimbursement of paid assessments (1) | 6 | 6 | ||||||
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$ | 117 | $ | 69 | |||||
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Insolvency assessments | $ | 193 | $ | 94 | ||||
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(1) | The Company holds a receivable from the seller of a prior acquisition in accordance with the purchase agreement. |
On September 1, 2011, the New York State Department of Financial Services filed a liquidation plan for Executive Life Insurance Company of New York (“ELNY”), which had been under rehabilitation by the Liquidation Bureau since 1991. The plan will involve the satisfaction of insurers’ financial obligations under a number of state life and health insurance guaranty associations and also contemplates that additional industry support for certain ELNY policyholders will be provided. The Company recorded a net charge of $40 million, after tax, related to ELNY.
Argentina
The Argentine economic, regulatory and legal environment, including interpretations of laws and regulations by regulators and courts, is uncertain. Potential legal or governmental actions related to pension reform, fiduciary responsibilities, performance guarantees, insurance regulations and tax rulings could adversely affect the results of the Company.
In 2007, pension reform legislation in Argentina was enacted which instituted substantial pension reforms, as well as reforms to death and disability insurance coverage. The reform reinstituted the Argentine government’s pension plan system and allowed for pension participants to transfer their future contributions to the Argentine government pension plan system. The death and disability insurance reforms relieved the Company of its obligation to provide death and disability policy coverages and resulted in the elimination of related insurance liabilities.
In December 2008, the Argentine government, through adoption of the nationalization law, which nationalized the Social Security System by moving all pension fund assets and new contributions to the government-run “pay as you go” system, effectively eliminated private pension companies in Argentina.
In March 2009, in light of market developments resulting from the Argentine Supreme Court ruling against the 2002 pesification law and the implementation by the Company of a program to allow the contractholders that had not filed a lawsuit to convert to U.S. dollars the social security annuity contracts denominated in pesos by the pesification law, the Company reduced its related outstanding contingent liabilities by $108 million, net of income tax, which was partially offset by the establishment of contingent liabilities from the implementation of the program to convert these contracts to U.S. dollars of $13 million, net of income tax, resulting in a decrease to net loss of $95 million, net of income tax, for the year ended December 31, 2009.
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In February 2011, the Argentine Superintendent of Insurance (“SSN”) enacted Resolution No. 35,615, which affects the reinsurance regulatory framework. From September 1, 2011, cross-border reinsurance operations were effectively prohibited, with some minor exceptions: Foreign reinsurers that have not set up an Argentine reinsurance subsidiary or branch are only able to underwrite risks from Argentine cedants when, due to the importance and type of risk to be ceded, there is no local capacity and subject to the approval of the SSN (which will be granted on a case by case basis) and to the registration of such foreign reinsurer with the SSN.
In October 2011, the SSN enacted Resolution No. 36,162 which affects the Company’s ability to invest and diversify abroad. From November 4, 2011, insurers will have a term of: (i) 10 business days to file with the SSN an affidavit, reporting all investments located abroad; and (ii) 50 calendar days to evidence with the SSN the transfer to Argentina of all the investments and funds located abroad. All investments and funds must be located in Argentina no later than December 31, 2011. The Company was in compliance with this resolution at December 31, 2011.
Further governmental or legal actions are possible in Argentina. Such actions may impact the level of existing assets and liabilities or may create additional obligations or benefits to the Company’s operations in Argentina. Management has made its best estimate of its obligations based upon information currently available; however, further governmental or legal actions could result in changes in rights and obligations which could materially impact the amounts presented in the consolidated financial statements.
Commitments
Leases
In accordance with industry practice, certain of the Company’s income from lease agreements with retail tenants are contingent upon the level of the tenants’ revenues. Additionally, the Company, as lessee, has entered into various lease and sublease agreements for office space, information technology and other equipment. Future minimum rental and sublease income, and minimum gross rental payments relating to these lease agreements are as follows:
Rental Income | Sublease Income | Gross Rental Payments | ||||||||||
(In millions) | ||||||||||||
2012 | $ | 425 | $ | 17 | $ | 337 | ||||||
2013 | $ | 386 | $ | 20 | $ | 279 | ||||||
2014 | $ | 332 | $ | 12 | $ | 202 | ||||||
2015 | $ | 283 | $ | 12 | $ | 172 | ||||||
2016 | $ | 223 | $ | 12 | $ | 145 | ||||||
Thereafter | $ | 921 | $ | 74 | $ | 917 |
The Company previously moved certain of its operations in New York from Long Island City, Queens to Manhattan. Market conditions, which precluded the Company’s immediate and complete sublet of all unused space following this movement of operations, resulted in a lease impairment charge of $52 million during 2009, which is included in other expenses within Corporate & Other. The impairment charge was determined based upon the present value of the gross rental payments less sublease income discounted at a risk-adjusted rate over the remaining lease terms which range from 15-20 years. The Company has made assumptions with respect to the timing and amount of future sublease income in the determination of this impairment charge. See Note 19 for discussion of $28 million of such charges related to restructuring. Additional impairment charges could be incurred should market conditions change.
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Notes to the Consolidated Financial Statements — (Continued)
Commitments to Fund Partnership Investments
The Company makes commitments to fund partnership investments in the normal course of business. The amounts of these unfunded commitments were $4.0 billion and $3.8 billion at December 31, 2011 and 2010, respectively. The Company anticipates that these amounts will be invested in partnerships over the next five years.
Mortgage Loan Commitments
The Company has issued interest rate lock commitments on certain residential mortgage loan applications totaling $5.6 billion and $2.5 billion at December 31, 2011 and 2010, respectively. The Company intends to sell the majority of these originated residential mortgage loans. Interest rate lock commitments to fund mortgage loans that will be held-for-sale are considered derivatives and their estimated fair value and notional amounts are included within interest rate forwards. See Note 4.
The Company also commits to lend funds under certain other mortgage loan commitments that will be held-for-investment. The amounts of these mortgage loan commitments were $4.1 billion and $3.8 billion at December 31, 2011 and 2010, respectively.
Commitments to Fund Bank Credit Facilities, Bridge Loans and Private Corporate Bond Investments
The Company commits to lend funds under bank credit facilities, bridge loans and private corporate bond investments. The amounts of these unfunded commitments were $1.4 billion and $2.4 billion at December 31, 2011 and 2010, respectively.
Guarantees
In the normal course of its business, the Company has provided certain indemnities, guarantees and commitments to third parties pursuant to which 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 ranging from less than $1 million to $800 million, with a cumulative maximum of $1.5 billion, 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.
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Notes to the Consolidated Financial Statements — (Continued)
The Company has also guaranteed minimum investment returns on certain international retirement funds in accordance with local laws. Since these guarantees are 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 guarantees in the future.
During the year ended December 31, 2011, the Company did not record any additional liabilities for indemnities, guarantees and commitments. The Company’s recorded liabilities were $5 million at both December 31, 2011 and 2010, for indemnities, guarantees and commitments.
17. Employee Benefit Plans
Pension and Other Postretirement Benefit Plans
The Subsidiaries sponsor and/or administer various U.S. qualified and non-qualified defined benefit pension plans and other postretirement employee benefit plans covering employees and sales representatives who meet specified eligibility requirements. U.S. pension benefits are provided utilizing either a traditional formula or cash balance formula. The traditional formula provides benefits that are primarily based upon years of credited service and either final average or career average earnings. The cash balance formula utilizes hypothetical or notional accounts which credit participants with benefits equal to a percentage of eligible pay, as well as earnings credits, determined annually based upon the average annual rate of interest on 30-year U.S. Treasury securities, for each account balance. At December 31, 2011, the majority of active participants were accruing benefits under the cash balance formula; however, approximately 90% of the Subsidiaries’ obligations result from benefits calculated with the traditional formula. The U.S. non-qualified pension plans provide supplemental benefits in excess of limits applicable to a qualified plan. The non-U.S. pension plans generally provide benefits based upon either years of credited service and earnings preceding-retirement or points earned on job grades and other factors in years of service.
The Subsidiaries also provide certain postemployment benefits and certain postretirement medical and life insurance benefits for retired employees. Employees of the Subsidiaries who were hired prior to 2003 (or, in certain cases, rehired during or after 2003) and meet age and service criteria while working for one of the Subsidiaries may become eligible for these other postretirement benefits, at various levels, in accordance with the applicable plans. Virtually all retirees, or their beneficiaries, contribute a portion of the total costs of postretirement medical benefits. Employees hired after 2003 are not eligible for any employer subsidy for postretirement medical benefits.
In connection with the Acquisition, domestic American Life employees who became employees of certain Subsidiaries (including those who remained employees of companies acquired in the Acquisition) were credited with service recognized by AIG for purposes of determining eligibility under the pension plans with respect to benefits earned under the pension plans subsequent to the closing date of the Acquisition.
Additionally, in connection with the Acquisition, the Company acquired certain defined benefit pension plans sponsored by American Life. As of December 31, 2010, these plans had liabilities of approximately $595 million and assets of approximately $97 million.
Measurement dates used for all of the Subsidiaries’ defined benefit pension and other postretirement benefit plans correspond with the fiscal year ends of sponsoring Subsidiaries, which are December 31 for most Subsidiaries and November 30 for American Life.
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Notes to the Consolidated Financial Statements — (Continued)
Obligations, Funded Status and Net Periodic Benefit Costs
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||
U.S. Plans (1) | Non-U.S. Plans | U.S. Plans | Non-U.S. Plans | |||||||||||||||||||||||||||||
December 31, | ||||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Change in benefit obligations: | ||||||||||||||||||||||||||||||||
Benefit obligations at January 1, | $ | 7,043 | $ | 6,562 | $ | 676 | $ | 87 | $ | 1,808 | $ | 1,801 | $ | 37 | $ | 46 | ||||||||||||||||
Service costs | 187 | 172 | 64 | 8 | 16 | 16 | 1 | 1 | ||||||||||||||||||||||||
Interest costs | 404 | 393 | 16 | 6 | 106 | 111 | 2 | 2 | ||||||||||||||||||||||||
Plan participants’ contributions | — | — | — | — | 28 | 34 | — | — | ||||||||||||||||||||||||
Net actuarial (gains) losses | 1,072 | 301 | 24 | (11 | ) | 267 | 66 | 2 | 7 | |||||||||||||||||||||||
Acquisition, divestitures and curtailments | — | — | (5 | ) | 639 | — | — | 1 | — | |||||||||||||||||||||||
Change in benefits | 17 | — | — | 1 | — | (81 | ) | — | 1 | |||||||||||||||||||||||
Prescription drug subsidy | — | — | — | — | — | 12 | — | — | ||||||||||||||||||||||||
Benefits paid | (396 | ) | (385 | ) | (30 | ) | (35 | ) | (132 | ) | (151 | ) | (4 | ) | (3 | ) | ||||||||||||||||
Transfers | — | — | (13 | ) | — | — | — | — | (17 | ) | ||||||||||||||||||||||
Effect of foreign currency translation | — | — | 41 | (19 | ) | — | — | — | — | |||||||||||||||||||||||
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Benefit obligations at December 31, | 8,327 | 7,043 | 773 | 676 | 2,093 | 1,808 | 39 | 37 | ||||||||||||||||||||||||
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Change in plan assets: | ||||||||||||||||||||||||||||||||
Fair value of plan assets at January 1, | 6,310 | 5,684 | 178 | 86 | 1,185 | 1,106 | 15 | 15 | ||||||||||||||||||||||||
Actual return on plan assets | 944 | 708 | (4 | ) | 8 | 80 | 97 | (1 | ) | 5 | ||||||||||||||||||||||
Acquisition and divestitures | — | — | (4 | ) | 97 | — | — | — | — | |||||||||||||||||||||||
Plan participants’ contributions | — | — | — | — | 28 | 34 | — | — | ||||||||||||||||||||||||
Employer contributions | 250 | 303 | 55 | 22 | 79 | 87 | 1 | 8 | ||||||||||||||||||||||||
Benefits paid | (396 | ) | (385 | ) | (30 | ) | (35 | ) | (132 | ) | (139 | ) | (2 | ) | (1 | ) | ||||||||||||||||
Transfers | — | — | (13 | ) | — | — | — | — | (12 | ) | ||||||||||||||||||||||
Effect of foreign currency translation | — | — | 3 | — | — | — | — | — | ||||||||||||||||||||||||
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Fair value of plan assets at December 31, | 7,108 | 6,310 | 185 | 178 | 1,240 | 1,185 | 13 | 15 | ||||||||||||||||||||||||
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Over (under) funded status at December 31, | $ | (1,219 | ) | $ | (733 | ) | $ | (588 | ) | $ | (498 | ) | $ | (853 | ) | $ | (623 | ) | $ | (26 | ) | $ | (22 | ) | ||||||||
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Amounts recognized in the consolidated balance sheets consist of: | ||||||||||||||||||||||||||||||||
Other assets | $ | — | $ | 106 | $ | 3 | $ | 6 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Other liabilities | (1,219 | ) | (839 | ) | (591 | ) | (504 | ) | (853 | ) | (623 | ) | (26 | ) | (22 | ) | ||||||||||||||||
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Net amount recognized | $ | (1,219 | ) | $ | (733 | ) | $ | (588 | ) | $ | (498 | ) | $ | (853 | ) | $ | (623 | ) | $ | (26 | ) | $ | (22 | ) | ||||||||
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Accumulated other comprehensive (income) loss: | ||||||||||||||||||||||||||||||||
Net actuarial (gains) losses | $ | 2,498 | $ | 2,117 | $ | 10 | $ | (25 | ) | $ | 623 | $ | 403 | $ | 2 | $ | (3 | ) | ||||||||||||||
Prior service costs (credit) | 30 | 17 | 2 | 3 | (179 | ) | (286 | ) | 1 | 1 | ||||||||||||||||||||||
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Accumulated other comprehensive (income) loss, before income tax | $ | 2,528 | $ | 2,134 | $ | 12 | $ | (22 | ) | $ | 444 | $ | 117 | $ | 3 | $ | (2 | ) | ||||||||||||||
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(1) | Includes non-qualified unfunded plans, for which the aggregate projected benefit obligation was $997 million and $821 million at December 31, 2011 and 2010, respectively. |
The accumulated benefit obligations for all U.S. defined benefit pension plans were $7.8 billion and $6.7 billion at December 31, 2011 and 2010, respectively. The accumulated benefit obligations for all non-U.S. defined benefit pension plans were $658 million and $610 million at December 31, 2011 and 2010, respectively.
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The aggregate pension accumulated benefit obligation and aggregate fair value of plan assets for pension benefit plans with accumulated benefit obligations in excess of plan assets was as follows:
Pension Benefits | ||||||||||||||||
U.S. Plans | Non-U.S. Plans | |||||||||||||||
December 31, | ||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Projected benefit obligations | $ | 1,164 | $ | 844 | $ | 708 | $ | 592 | ||||||||
Accumulated benefit obligations | $ | 1,045 | $ | 770 | $ | 644 | $ | 537 | ||||||||
Fair value of plan assets | $ | 131 | $ | 13 | $ | 121 | $ | 93 |
Information for pension and other postretirement benefit plans with a projected benefit obligation in excess of plan assets were as follows:
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | U.S. Plans | Non-U.S. Plans | |||||||||||||||||||||||||||||
December 31, | ||||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||
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Projected benefit obligations | $ | 8,327 | $ | 1,187 | $ | 732 | $ | 616 | $ | 2,093 | $ | 1,808 | $ | 39 | $ | 37 | ||||||||||||||||
Fair value of plan assets | $ | 7,108 | $ | 347 | $ | 140 | $ | 114 | $ | 1,240 | $ | 1,185 | $ | 13 | $ | 15 |
Net periodic pension costs and net periodic other postretirement benefit plan costs are comprised of the following:
i) | Service Costs — Service costs are the increase in the projected (expected) pension benefit obligation resulting from benefits payable to employees of the Subsidiaries on service rendered during the current year. |
ii) | Interest Costs — Interest costs are the time value adjustment on the projected (expected) pension benefit obligation at the end of each year. |
iii) | Settlement and Curtailment Costs — The aggregate amount of net gains (losses) recognized in net periodic benefit costs due to settlements and curtailments. Settlements result from actions that relieve/eliminate the plan’s responsibility for benefit obligations or risks associated with the obligations or assets used for the settlement. Curtailments result from an event that significantly reduces/eliminates plan participants’ expected years of future services or benefit accruals. |
iv) | Expected Return on Plan Assets — Expected return on plan assets is the assumed return earned by the accumulated pension and other postretirement fund assets in a particular year. |
v) | Amortization of Net Actuarial Gains (Losses) — Actuarial gains and losses result from differences between the actual experience and the expected experience on pension and other postretirement plan assets or projected (expected) pension benefit obligation during a particular period. These gains and losses are accumulated and, to the extent they exceed 10% of the greater of the PBO or the fair value of plan assets, the excess is amortized into pension and other postretirement benefit costs over the expected service years of the employees. |
vi) | Amortization of Prior Service Costs (Credit) — These costs relate to the recognition of increases or decreases in pension and other postretirement benefit obligation due to amendments in plans or initiation of new plans. These increases or decreases in obligation are recognized in |
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Notes to the Consolidated Financial Statements — (Continued)
accumulated other comprehensive income (loss) at the time of the amendment. These costs are then amortized to pension and other postretirement benefit costs over the expected service years of the employees affected by the change. |
The components of net periodic benefit costs and other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) were as follows:
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | U.S. Plans | Non-U.S. Plans | |||||||||||||||||||||||||||||||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
Net Periodic Benefit Costs: | ||||||||||||||||||||||||||||||||||||||||||||||||
Service costs | $ | 187 | $ | 172 | $ | 170 | $ | 64 | $ | 8 | $ | — | $ | 16 | $ | 16 | $ | 22 | $ | 1 | $ | 1 | $ | — | ||||||||||||||||||||||||
Interest costs | 404 | 393 | 395 | 16 | 6 | — | 106 | 111 | 125 | 2 | 2 | — | ||||||||||||||||||||||||||||||||||||
Settlement and curtailment costs | — | — | 17 | — | 8 | — | — | — | — | 1 | 1 | — | ||||||||||||||||||||||||||||||||||||
Expected return on plan assets | (448 | ) | (444 | ) | (439 | ) | (6 | ) | (6 | ) | — | (76 | ) | (79 | ) | (72 | ) | (1 | ) | — | — | |||||||||||||||||||||||||||
Amortization of net actuarial (gains) losses | 194 | 196 | 227 | — | — | — | 43 | 38 | 42 | — | — | — | ||||||||||||||||||||||||||||||||||||
Amortization of prior service costs (credit) | 4 | 7 | 10 | — | — | — | (108 | ) | (83 | ) | (36 | ) | — | — | — | |||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||
Total net periodic benefit costs (credit) | 341 | 324 | 380 | 74 | 16 | — | (19 | ) | 3 | 81 | 3 | 4 | — | |||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||
Other Changes in Plan Assets and Benefit Obligations | ||||||||||||||||||||||||||||||||||||||||||||||||
Recognized in Other Comprehensive Income (Loss): | ||||||||||||||||||||||||||||||||||||||||||||||||
Net actuarial (gains) losses | 575 | 37 | 310 | 34 | (15 | ) | — | 262 | 49 | 283 | 5 | 1 | — | |||||||||||||||||||||||||||||||||||
Prior service costs (credit) | 17 | — | (10 | ) | — | 1 | — | — | (81 | ) | (167 | ) | — | 1 | — | |||||||||||||||||||||||||||||||||
Amortization of net actuarial gains (losses) | (194 | ) | (196 | ) | (227 | ) | — | — | — | (43 | ) | (38 | ) | (42 | ) | — | — | — | ||||||||||||||||||||||||||||||
Amortization of prior service (costs) credit | (4 | ) | (7 | ) | (10 | ) | — | — | — | 108 | 83 | 36 | — | — | — | |||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||
Total recognized in other comprehensive income (loss) | 394 | (166 | ) | 63 | 34 | (14 | ) | — | 327 | 13 | 110 | 5 | 2 | — | ||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||
Total recognized in net periodic benefit costs and other comprehensive income (loss) | $ | 735 | $ | 158 | $ | 443 | $ | 108 | $ | 2 | $ | — | $ | 308 | $ | 16 | $ | 191 | $ | 8 | $ | 6 | $ | — | ||||||||||||||||||||||||
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For the year ended December 31, 2011, included within other comprehensive income (loss) were other changes in plan assets and benefit obligations associated with pension benefits of $394 million for the U.S. plans and $34 million for the non-U.S. plans and other postretirement benefits of $327 million for the U.S. plans and $5 million for the non-U.S. plans for an aggregate reduction in other comprehensive income (loss) of $760 million before income tax and $494 million, net of income tax.
The estimated net actuarial (gains) losses and prior service costs (credit) for the U.S. pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit costs over the next year are $178 million and $6 million, respectively.
The estimated net actuarial (gains) losses and prior service costs (credit) for the U.S. defined benefit other postretirement benefit plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit costs over the next year are $54 million and ($104) million, respectively.
The Medicare Modernization Act of 2003 created various subsidies for all U.S. sponsors of retiree drug programs. Two common ways of providing subsidies were the Retiree Drug Subsidy (“RDS”) and Medicare Part D Prescription Drug Plans (“PDP”). From 2006 through 2010, the Company applied for and received the RDS each year. The RDS program provides the subsidy through cash payments made by Medicare to the
238
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Company, resulting in smaller net claims paid by the Company. A summary of the reduction to the APBO and the related reduction to the components of net periodic other postretirement benefits plan costs resulting from receipt of the RDS is presented below. As of January 1, 2011, as a result of changes made under the Patient Protection and Affordable Care Act of 2010, the Company, no longer applies for the RDS. Instead it has joined PDP and will indirectly receive Medicare subsidies in the form of smaller gross benefit payments for prescription drug coverage.
December 31, | ||||||||
2010 | 2009 | |||||||
(In millions) | ||||||||
Cumulative reduction in other postretirement benefits obligations: | ||||||||
Balance at January 1, | $ | 247 | $ | 317 | ||||
Service costs | 3 | 2 | ||||||
Interest costs | 16 | 16 | ||||||
Net actuarial (gains) losses | (255 | ) | (76 | ) | ||||
Expected prescription drug subsidy | (11 | ) | (12 | ) | ||||
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Balance at December 31, | $ | — | $ | 247 | ||||
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Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
(In millions) | ||||||||
Reduction in net periodic other postretirement benefit costs: | ||||||||
Service costs | $ | 3 | $ | 2 | ||||
Interest costs | 16 | 16 | ||||||
Amortization of net actuarial (gains) losses | 10 | 11 | ||||||
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Total reduction in net periodic benefit costs | $ | 29 | $ | 29 | ||||
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The Company received subsidies of $3 million, $8 million and $12 million for the years ended December 31, 2011, 2010 and 2009, respectively.
Assumptions
Assumptions used in determining benefit obligations were as follows:
Pension Benefits | Other Postretirement Benefits | |||||||
U.S. Plans | Non-U.S. Plans (1) | U.S. Plans | Non-U.S. Plans (1) | |||||
December 31, 2011: | ||||||||
Weighted average discount rate | 4.95% | 2.33% | 4.95% | 5.60% | ||||
Rate of compensation increase | 3.5% - 7.5% | 2.4% - 5.5% | N/A | N/A | ||||
December 31, 2010: | ||||||||
Weighted average discount rate | 5.80% | 2.01% | 5.80% | N/A | ||||
Rate of compensation increase | 3.5% - 7.5% | 2.0% - 4.0% | N/A | N/A |
(1) | Reflects those assumptions that were most appropriate for the local economic environments of each of the Subsidiaries providing such benefits. |
239
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Assumptions used in determining net periodic benefit costs were as follows:
Pension Benefits | Other Postretirement Benefits | |||||||
U.S. Plans | Non-U.S. Plans (1) | U.S. Plans | Non-U.S. Plans (1) | |||||
Year Ended December 31, 2011: | ||||||||
Weighted average discount rate | 5.80% | 2.40% | 5.80% | 6.34% | ||||
Weighted average expected rate of return on plan assets | 7.25% | 3.19% | 7.25% | 7.01% | ||||
Rate of compensation increase | 3.5% - 7.5% | 3.0% - 5.5% | N/A | N/A | ||||
Year Ended December 31, 2010: | ||||||||
Weighted average discount rate | 6.25% | 1.76% | 6.25% | N/A | ||||
Weighted average expected rate of return on plan assets | 8.00% | 1.32% | 7.20% | N/A | ||||
Rate of compensation increase | 3.5% - 7.5% | 2.0% - 4.0% | N/A | N/A | ||||
Year Ended December 31, 2009: | ||||||||
Weighted average discount rate | 6.60% | N/A | 6.60% | N/A | ||||
Weighted average expected rate of return on plan assets | 8.25% | N/A | 7.36% | N/A | ||||
Rate of compensation increase | 3.5% - 7.5% | N/A | N/A | N/A |
(1) | Reflects those assumptions that were most appropriate for the local economic environments of each of the Subsidiaries providing such benefits. |
The weighted average discount rate for the U.S. plans is determined annually based on the yield, measured on a yield to worst basis, of a hypothetical portfolio constructed of high quality debt instruments available on the valuation date, which would provide the necessary future cash flows to pay the aggregate projected benefit obligation when due.
The weighted average discount rate for non-U.S. pension plans is based on the duration of liabilities on a country by country basis. The rate was selected by reference to high quality corporate bonds in developed markets or local government bonds where markets were less robust or nonexistent.
The weighted average expected rate of return on plan assets for the U.S. plans is based on anticipated performance of the various asset sectors in which the plans invest, weighted by target allocation percentages. Anticipated future performance is based on long-term historical returns of the plan assets by sector, adjusted for the Subsidiaries’ long-term expectations on the performance of the markets. While the precise expected rate of return derived using this approach will fluctuate from year to year, the policy of most of the Subsidiaries’ is to hold this long-term assumption constant as long as it remains within reasonable tolerance from the derived rate.
The weighted average expected long-term rate of return for the non-U.S. pension plans is an aggregation of each country’s expected rate of return within each asset class. For each country, the rate of return with respect to each asset class was developed based on a building block approach that considers historical returns, current market conditions, asset volatility and the expectations for future market returns. While the assessment of the expected rate of return is long-term and not expected to change annually, significant changes in investment strategy or economic conditions may warrant such a change. The expected rate of return within each asset class, together with any contributions made, are expected to maintain the plans’ ability to meet all required benefit obligations.
240
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The weighted average expected rate of return on plan assets for use in that plan’s valuation in 2012 is currently anticipated to be 7.00% for U.S. pension benefits and 6.22% for U.S. other postretirement benefits. The weighted average expected rate of return on plan assets for use in that plan’s valuation in 2012 is currently anticipated to be 2.05% for non-U.S. pension benefits and 6.54% for non-U.S. other postretirement benefits.
The assumed healthcare costs trend rates used in measuring the APBO and net periodic benefit costs were as follows:
December 31, | ||||
2011 | 2010 | |||
Pre-and Post-Medicare eligible claims | 7.3% in 2012, gradually decreasing each year until 2083 reaching the ultimate rate of 4.3%. | 7.8% in 2011, gradually decreasing each year until 2083 reaching the ultimate rate of 4.4%. |
Assumed healthcare costs trend rates may have a significant effect on the amounts reported for healthcare plans. A 1% change in assumed healthcare costs trend rates would have the following effects:
U.S. Plans | Non-U.S. Plans | |||||||||||||||
One Percent Increase | One Percent Decrease | One Percent Increase | One Percent Decrease | |||||||||||||
(In millions) | ||||||||||||||||
Effect on total of service and interest costs components | $ | 7 | $ | (9 | ) | $ | — | $ | — | |||||||
Effect of accumulated postretirement benefit obligations | $ | 195 | $ | (160 | ) | $ | 1 | $ | (1 | ) |
Plan Assets
The pension and other postretirement benefit plan assets are categorized into the three-level fair value hierarchy, as defined in Note 1, based upon the priority of the inputs to the respective valuation technique. The following summarizes the types of assets included within the three-level fair value hierarchy presented below.
Level 1 | This category includes investments in fixed maturity securities, equity securities, derivative securities, and short-term investments which have unadjusted quoted market prices in active markets for identical assets and liabilities. |
Level 2 | This category includes certain separate accounts that are primarily invested in liquid and readily marketable securities. The estimated fair value of such separate account is based upon reported NAV provided by fund managers and this value represents the amount at which transfers into and out of the respective separate account are effected. These separate accounts provide reasonable levels of price transparency and can be corroborated through observable market data. |
Certain separate accounts are invested in investment partnerships designated as hedge funds. The values for these separate accounts is determined monthly based on the NAV of the underlying hedge fund investment. Additionally, such hedge funds generally contain lock out or other waiting period provisions for redemption requests to be filled. While the reporting and redemption restrictions may limit the frequency of trading activity in separate accounts invested in hedge funds, the reported NAV, and thus the referenced value of the separate account, provides a reasonable level of price transparency that can be corroborated through observable market data. |
Directly held investments are primarily invested in U.S. and foreign government and corporate securities. |
241
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Level 3 | This category includes separate accounts that are invested in fixed maturity securities, equity securities, pass-through securities, derivative securities, and other invested assets that provide little or no price transparency due to the infrequency with which the underlying assets trade and generally require additional time to liquidate in an orderly manner. Accordingly, the values for separate accounts invested in these alternative asset classes are based on inputs that cannot be readily derived from or corroborated by observable market data. |
U.S. Plans
Most U.S. Subsidiaries have issued group annuity and life insurance contracts supporting the pension and other postretirement benefit plans assets, which are invested primarily in separate accounts.
The underlying assets of the separate accounts are principally comprised of cash and cash equivalents, short-term investments, fixed maturity and equity securities, mutual funds, real estate, private equity investments and hedge funds investments.
The pension and postretirement plan assets and liabilities measured at estimated fair value on a recurring basis were determined as described below. These estimated fair values and their corresponding placement in the fair value hierarchy are summarized as follows:
December 31, 2011 | ||||||||||||||||||||||||||||||||
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||
Fair Value Measurements at Reporting Date Using | Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||||||||||
Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Estimated Fair Value | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||
Corporate | $ | — | $ | 1,932 | $ | 32 | $ | 1,964 | $ | — | $ | 139 | $ | 4 | $ | 143 | ||||||||||||||||
Federal agencies | 1 | 286 | — | 287 | — | 29 | — | 29 | ||||||||||||||||||||||||
Foreign bonds | — | 213 | 5 | 218 | — | 13 | — | 13 | ||||||||||||||||||||||||
Municipals | — | 184 | — | 184 | — | 59 | 1 | 60 | ||||||||||||||||||||||||
Preferred stocks | — | 2 | — | 2 | — | — | — | — | ||||||||||||||||||||||||
U.S. government bonds | 1,007 | 187 | — | 1,194 | 160 | 1 | — | 161 | ||||||||||||||||||||||||
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Total fixed maturity securities | 1,008 | 2,804 | 37 | 3,849 | 160 | 241 | 5 | 406 | ||||||||||||||||||||||||
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Equity securities: | ||||||||||||||||||||||||||||||||
Common stock - domestic | 1,149 | 38 | 206 | 1,393 | 240 | 2 | — | 242 | ||||||||||||||||||||||||
Common stock - foreign | 287 | — | — | 287 | 55 | — | — | 55 | ||||||||||||||||||||||||
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Total equity securities | 1,436 | 38 | 206 | 1,680 | 295 | 2 | — | 297 | ||||||||||||||||||||||||
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Money market securities | 2 | — | — | 2 | — | 1 | — | 1 | ||||||||||||||||||||||||
Pass-through securities | — | 471 | 2 | 473 | — | 84 | 5 | 89 | ||||||||||||||||||||||||
Derivative securities | 30 | 10 | 4 | 44 | — | — | 1 | 1 | ||||||||||||||||||||||||
Short-term investments | 4 | 401 | — | 405 | 6 | 435 | — | 441 | ||||||||||||||||||||||||
Other invested assets | — | 69 | 531 | 600 | — | — | — | — | ||||||||||||||||||||||||
Other receivables | — | 47 | — | 47 | — | 4 | — | 4 | ||||||||||||||||||||||||
Securities receivable | — | 8 | — | 8 | — | 1 | — | 1 | ||||||||||||||||||||||||
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| |||||||||||||||||
Total assets | $ | 2,480 | $ | 3,848 | $ | 780 | $ | 7,108 | $ | 461 | $ | 768 | $ | 11 | $ | 1,240 | ||||||||||||||||
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242
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
December 31, 2010 | ||||||||||||||||||||||||||||||||
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||
Fair Value Measurements at Reporting Date Using | Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||||||||||
Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Estimated Fair Value | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||
Corporate | $ | — | $ | 1,528 | $ | 49 | $ | 1,577 | $ | — | $ | 67 | $ | 4 | $ | 71 | ||||||||||||||||
Federal agencies | — | 175 | — | 175 | — | 15 | — | 15 | ||||||||||||||||||||||||
Foreign bonds | — | 143 | 4 | 147 | — | 4 | — | 4 | ||||||||||||||||||||||||
Municipals | — | 137 | — | 137 | — | 37 | 1 | 38 | ||||||||||||||||||||||||
Preferred stocks | — | 4 | — | 4 | — | — | — | — | ||||||||||||||||||||||||
U.S. government bonds | 650 | 136 | — | 786 | 82 | — | — | 82 | ||||||||||||||||||||||||
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Total fixed maturity securities | 650 | 2,123 | 53 | 2,826 | 82 | 123 | 5 | 210 | ||||||||||||||||||||||||
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Equity securities: | ||||||||||||||||||||||||||||||||
Common stock - domestic | 1,406 | 93 | 240 | 1,739 | 359 | 3 | — | 362 | ||||||||||||||||||||||||
Common stock - foreign | 461 | — | — | 461 | 77 | — | — | 77 | ||||||||||||||||||||||||
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Total equity securities | 1,867 | 93 | 240 | 2,200 | 436 | 3 | — | 439 | ||||||||||||||||||||||||
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Money market securities | 200 | 90 | — | 290 | 1 | 1 | — | 2 | ||||||||||||||||||||||||
Pass-through securities | — | 321 | 2 | 323 | — | 73 | 6 | 79 | ||||||||||||||||||||||||
Derivative securities | 3 | (5 | ) | — | (2 | ) | — | — | — | — | ||||||||||||||||||||||
Short-term investments | (11 | ) | 101 | — | 90 | 8 | 443 | — | 451 | |||||||||||||||||||||||
Other invested assets | — | 63 | 471 | 534 | — | — | — | — | ||||||||||||||||||||||||
Other receivables | — | 39 | — | 39 | — | 3 | — | 3 | ||||||||||||||||||||||||
Securities receivable | — | 70 | — | 70 | — | 2 | — | 2 | ||||||||||||||||||||||||
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Total assets | $ | 2,709 | $ | 2,895 | $ | 766 | $ | 6,370 | $ | 527 | $ | 648 | $ | 11 | $ | 1,186 | ||||||||||||||||
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Liabilities: | ||||||||||||||||||||||||||||||||
Securities payable | $ | — | $ | 60 | $ | — | $ | 60 | $ | — | $ | 1 | $ | — | $ | 1 | ||||||||||||||||
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Total liabilities | $ | — | $ | 60 | $ | — | $ | 60 | $ | — | $ | 1 | $ | — | $ | 1 | ||||||||||||||||
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Total assets and liabilities | $ | 2,709 | $ | 2,835 | $ | 766 | $ | 6,310 | $ | 527 | $ | 647 | $ | 11 | $ | 1,185 | ||||||||||||||||
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243
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
A rollforward of all pension and other postretirement benefit plan assets measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs was as follows:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||||||||||||||
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||||||||||
Fixed Maturity Securities: | Equity Securities: | Fixed Maturity Securities: | ||||||||||||||||||||||||||||||||||||||
Corporate | Foreign Bonds | Common Stock- Domestic | Pass- Through Securities | Derivative Securities | Other Invested Assets | Corporate | Municipals | Pass- Through Securities | Derivative Securities | |||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2011: | ||||||||||||||||||||||||||||||||||||||||
Balance, January 1, | $ | 49 | $ | 4 | $ | 240 | $ | 2 | $ | — | $ | 471 | $ | 4 | $ | 1 | $ | 6 | $ | — | ||||||||||||||||||||
Total realized/unrealized gains (losses) included in: | ||||||||||||||||||||||||||||||||||||||||
Earnings: | ||||||||||||||||||||||||||||||||||||||||
Net investment income | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Net investment gains (losses) | — | — | (59 | ) | (1 | ) | 2 | 85 | — | — | (1 | ) | — | |||||||||||||||||||||||||||
Net derivative gains (losses) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Other revenues | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Policyholder benefits and claims | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Other expenses | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Other comprehensive income (loss) | (4 | ) | (1 | ) | 118 | 1 | 4 | 45 | — | — | 1 | 1 | ||||||||||||||||||||||||||||
Purchases | — | 2 | 7 | 1 | — | 97 | — | — | — | — | ||||||||||||||||||||||||||||||
Sales | (13 | ) | — | (100 | ) | (2 | ) | (2 | ) | (167 | ) | — | — | (1 | ) | — | ||||||||||||||||||||||||
Issuances | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Settlements | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Transfers into Level 3 | — | — | — | 1 | — | — | — | — | 1 | — | ||||||||||||||||||||||||||||||
Transfers out of Level 3 | — | — | — | — | — | — | — | — | (1 | ) | — | |||||||||||||||||||||||||||||
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| |||||||||||||||||||||
Balance, December 31, | $ | 32 | $ | 5 | $ | 206 | $ | 2 | $ | 4 | $ | 531 | $ | 4 | $ | 1 | $ | 5 | $ | 1 | ||||||||||||||||||||
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|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||||||
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||
Fixed Maturity Securities: | Equity Securities: | Fixed Maturity Securities: | ||||||||||||||||||||||||||||||
Corporate | Foreign Bonds | Common Stock Domestic | Pass- Through Securities | Other Invested Assets | Corporate | Municipals | Pass- Through Securities | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Year Ended December 31, 2010: | ||||||||||||||||||||||||||||||||
Balance, January 1, | $ | 68 | $ | 5 | $ | 241 | $ | 69 | $ | 373 | $ | — | $ | — | $ | 9 | ||||||||||||||||
Total realized/unrealized gains (losses) included in: | ||||||||||||||||||||||||||||||||
Earnings: | ||||||||||||||||||||||||||||||||
Net investment income | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Net investment gains (losses) | — | — | — | (11 | ) | 78 | — | — | (4 | ) | ||||||||||||||||||||||
Net derivative gains (losses) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Other revenues | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Policyholder benefits and claims | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Other expenses | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Other comprehensive income (loss) | 7 | 1 | (2 | ) | 14 | (4 | ) | 1 | — | 1 | ||||||||||||||||||||||
Purchases, sales, issuances and settlements | (17 | ) | (2 | ) | 1 | (71 | ) | 24 | — | — | (1 | ) | ||||||||||||||||||||
Transfers into Level 3 | 4 | — | — | 2 | — | 3 | 1 | 1 | ||||||||||||||||||||||||
Transfers out of Level 3 | (13 | ) | — | — | (1 | ) | — | — | — | — | ||||||||||||||||||||||
|
|
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|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Balance, December 31, | $ | 49 | $ | 4 | $ | 240 | $ | 2 | $ | 471 | $ | 4 | $ | 1 | $ | 6 | ||||||||||||||||
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244
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||
Fixed Maturity Securities: | Equity Securities: | Pass- Through Securities | Derivative Securities | Other Invested Assets | Pass- Through Securities | |||||||||||||||||||||||
Corporate | Foreign Bonds | Common Stock Domestic | ||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Year Ended December 31, 2009: | ||||||||||||||||||||||||||||
Balance, January 1, | $ | 57 | $ | 4 | $ | 460 | $ | 80 | $ | 40 | $ | 392 | $ | 13 | ||||||||||||||
Total realized/unrealized gains (losses) | ||||||||||||||||||||||||||||
Earnings: | ||||||||||||||||||||||||||||
Net investment income | — | — | — | — | — | — | — | |||||||||||||||||||||
Net investment gains (losses) | (5 | ) | (1 | ) | — | (2 | ) | 36 | 4 | (17 | ) | |||||||||||||||||
Net derivative gains (losses) | — | — | — | — | — | — | — | |||||||||||||||||||||
Other revenues | — | — | — | — | — | — | — | |||||||||||||||||||||
Policyholder benefits and claims | — | — | — | — | — | — | — | |||||||||||||||||||||
Other expenses | — | — | — | — | — | — | — | |||||||||||||||||||||
Other comprehensive income (loss) | 21 | 5 | (232 | ) | 8 | (39 | ) | (59 | ) | 17 | ||||||||||||||||||
Purchases, sales, issuances and settlements | (3 | ) | (3 | ) | 13 | (24 | ) | (37 | ) | 36 | (4 | ) | ||||||||||||||||
Transfers into and/or out of Level 3 | (2 | ) | — | — | 7 | — | — | — | ||||||||||||||||||||
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| |||||||||||||||
Balance, December 31, | $ | 68 | $ | 5 | $ | 241 | $ | 69 | $ | — | $ | 373 | $ | 9 | ||||||||||||||
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See Note 5 for further information about the valuation techniques and inputs by level of major assets of invested assets that affect the amounts reported above.
The U.S. Subsidiaries provide employees with benefits under various ERISA benefit plans. These include qualified pension plans, postretirement medical plans and certain retiree life insurance coverage. The assets of the U.S. Subsidiaries’ qualified pension plans are held in insurance group annuity contracts, and the vast majority of the assets of the postretirement medical plan and backing the retiree life coverage are held in insurance contracts. All of these contracts are issued by Company insurance affiliates, and the assets under the contracts are held in insurance separate accounts that have been established by the Company. The insurance contract provider engages investment management firms (“Managers”) to serve as sub-advisors for the separate accounts based on the specific investment needs and requests identified by the plan fiduciary. These Managers have portfolio management discretion over the purchasing and selling of securities and other investment assets pursuant to the respective investment management agreements and guidelines established for each insurance separate account. The assets of the qualified pension plans and postretirement medical plans (the “Invested Plans”) are well diversified across multiple asset categories and across a number of different Managers, with the intent of minimizing risk concentrations within any given asset category or with any given Manager.
The Invested Plans, other than those held in participant directed investment accounts, are managed in accordance with investment policies consistent with the longer-term nature of related benefit obligations and within prudent risk parameters. Specifically, investment policies are oriented toward (i) maximizing the Invested Plan’s funded status; (ii) minimizing the volatility of the Invested Plan’s funded status; (iii) generating asset returns that exceed liability increases; and (iv) targeting rates of return in excess of a custom benchmark and industry standards over appropriate reference time periods. These goals are expected to be met through identifying appropriate and diversified asset classes and allocations, ensuring adequate liquidity to pay benefits and expenses when due and controlling the costs of administering and managing the Invested Plan’s investments. Independent investment consultants are periodically used to evaluate the investment risk of Invested Plan’s assets relative to liabilities, analyze the economic and portfolio impact of various asset allocations and management strategies and to recommend asset allocations.
245
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Derivative contracts may be used to reduce investment risk, to manage duration and to replicate the risk/return profile of an asset or asset class. Derivatives may not be used to leverage a portfolio in any manner, such as to magnify exposure to an asset, asset class, interest rates or any other financial variable. Derivatives are also prohibited for use in creating exposures to securities, currencies, indices or any other financial variable that are otherwise restricted.
The table below summarizes the actual weighted average allocation of the fair value of total plan assets by asset class at December 31 for the years indicated and the approved target range allocation by major asset class as of December 31, 2011 for the Invested Plans:
Defined Benefit Plan | Postretirement Medical | Postretirement Life | ||||||||||||||||||||||||||||||||||
Target Range | Actual Allocation | Target Range | Actual Allocation | Target Range | Actual Allocation | |||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||||
Asset Class: | ||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||
Corporate | 27 | % | 24 | % | 17 | % | 9 | % | — | % | — | % | ||||||||||||||||||||||||
Federal agency | 4 | 3 | 4 | 2 | — | — | ||||||||||||||||||||||||||||||
Foreign bonds | 3 | 3 | 2 | 3 | — | — | ||||||||||||||||||||||||||||||
Municipals | 3 | 2 | 8 | 5 | — | — | ||||||||||||||||||||||||||||||
U.S. government bonds | 16 | 12 | 20 | 11 | — | — | ||||||||||||||||||||||||||||||
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|
| |||||||||||||||||||||||||
Total fixed maturity securities | 50% - 80% | 53 | % | 44 | % | 50% - 100% | 51 | % | 30 | % | 0 | % | — | % | — | % | ||||||||||||||||||||
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| |||||||||||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||||||||||||
Common stock - domestic | 20 | % | 27 | % | 30 | % | 48 | % | — | % | — | % | ||||||||||||||||||||||||
Common stock - foreign | 4 | 8 | 7 | 10 | — | — | ||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||
Total equity securities | 0% - 40% | 24 | % | 35 | % | 0% - 50% | 37 | % | 58 | % | 0 | % | — | % | — | % | ||||||||||||||||||||
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| |||||||||||||||||||||||||
Alternative securities: | ||||||||||||||||||||||||||||||||||||
Money market securities | — | % | 5 | % | 1 | % | — | % | — | % | — | % | ||||||||||||||||||||||||
Pass-through securities | 6 | 5 | 11 | 10 | — | — | ||||||||||||||||||||||||||||||
Derivatives | 1 | — | — | — | — | — | ||||||||||||||||||||||||||||||
Short-term investments | 6 | 1 | — | 1 | 100 | 100 | ||||||||||||||||||||||||||||||
Other invested assets | 9 | 8 | — | — | — | — | ||||||||||||||||||||||||||||||
Other receivables | 1 | 1 | — | 1 | — | — | ||||||||||||||||||||||||||||||
Securities receivable | — | 1 | — | — | — | — | ||||||||||||||||||||||||||||||
|
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| |||||||||||||||||||||||||
Total alternative securities | 10% - 20% | 23 | % | 21 | % | 10% - 20% | 12 | % | 12 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||||
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|
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|
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| |||||||||||||||||||||||||
Total assets | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||||||||
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246
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Non-U.S. Plans
The pension and postretirement plan assets and liabilities measured at estimated fair value on a recurring basis were determined as described below. These estimated fair values and their corresponding placement in the fair value hierarchy are summarized as follows:
December 31, 2011 | ||||||||||||||||||||||||||||||||
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||
Fair Value Measurements at Reporting Date Using | Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||||||||||
Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Estimated Fair Value | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||
Foreign bonds | $ | — | $ | 96 | $ | — | $ | 96 | $ | — | $ | 13 | $ | — | $ | 13 | ||||||||||||||||
|
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|
|
|
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|
|
|
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|
|
| |||||||||||||||||
Total fixed maturity securities | — | 96 | — | 96 | — | 13 | — | 13 | ||||||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
| |||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||||||||
Common stock - foreign | — | 43 | — | 43 | — | — | — | — | ||||||||||||||||||||||||
|
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|
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|
|
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|
|
|
|
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|
|
| |||||||||||||||||
Total equity securities | — | 43 | — | 43 | — | — | — | — | ||||||||||||||||||||||||
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| |||||||||||||||||
Derivative securities | — | — | 13 | 13 | — | — | — | — | ||||||||||||||||||||||||
Short-term investments | — | 6 | — | 6 | — | — | — | — | ||||||||||||||||||||||||
Other invested assets | 19 | — | — | 19 | — | — | — | — | ||||||||||||||||||||||||
Real estate | — | — | 8 | 8 | — | — | — | — | ||||||||||||||||||||||||
|
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| |||||||||||||||||
Total assets | $ | 19 | $ | 145 | $ | 21 | $ | 185 | $ | — | $ | 13 | $ | — | $ | 13 | ||||||||||||||||
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247
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
December 31, 2010 | ||||||||||||||||||||||||||||||||
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||
Fair Value Measurements at Reporting Date Using | Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||||||||||
Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Estimated Fair Value | Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Estimated Fair Value | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||
Foreign bonds | $ | 1 | $ | 79 | $ | — | $ | 80 | $ | — | $ | 15 | $ | — | $ | 15 | ||||||||||||||||
|
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| |||||||||||||||||
Total fixed maturity securities | 1 | 79 | — | 80 | — | 15 | — | 15 | ||||||||||||||||||||||||
|
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|
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|
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| |||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||||||||
Common stock - domestic | 4 | — | — | 4 | — | — | — | — | ||||||||||||||||||||||||
Common stock - foreign | 8 | 35 | — | 43 | — | — | — | — | ||||||||||||||||||||||||
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|
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|
|
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|
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|
| |||||||||||||||||
Total equity securities | 12 | 35 | — | 47 | — | — | — | — | ||||||||||||||||||||||||
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| |||||||||||||||||
Money market securities | — | 10 | — | 10 | — | — | — | — | ||||||||||||||||||||||||
Derivative securities | — | — | 11 | 11 | — | — | — | — | ||||||||||||||||||||||||
Short-term investments | 2 | 4 | — | 6 | — | — | — | — | ||||||||||||||||||||||||
Other invested assets | 16 | — | — | 16 | — | — | — | — | ||||||||||||||||||||||||
Real estate | — | — | 8 | 8 | — | — | — | — | ||||||||||||||||||||||||
|
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|
|
|
|
|
|
| |||||||||||||||||
Total assets | $ | 31 | $ | 128 | $ | 19 | $ | 178 | $ | — | $ | 15 | $ | — | $ | 15 | ||||||||||||||||
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248
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
A rollforward of all pension and other postretirement benefit plan assets measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs was as follows:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||
Pension Benefits | ||||||||
Derivative Securities | Real Estate | |||||||
(In millions) | ||||||||
Year Ended December 31, 2011: | ||||||||
Balance, January 1, | $ | 11 | $ | 8 | ||||
Total realized/unrealized gains | ||||||||
(losses) included in: | ||||||||
Earnings: | ||||||||
Net investment income | — | — | ||||||
Net investment gains (losses) | — | — | ||||||
Net derivative gains (losses) | — | — | ||||||
Other revenues | — | — | ||||||
Policyholder benefits and claims | — | — | ||||||
Other expenses | — | — | ||||||
Other comprehensive income (loss) | 2 | — | ||||||
Purchases | — | — | ||||||
Sales | — | — | ||||||
Issuances | — | — | ||||||
Settlements | — | — | ||||||
Transfers into Level 3 | — | — | ||||||
Transfers out of Level 3 | — | — | ||||||
|
|
|
| |||||
Balance, December 31, | $ | 13 | $ | 8 | ||||
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||
Pension Benefits | ||||||||
Derivative Securities (1) | Real Estate (1) | |||||||
(In millions) | ||||||||
Year Ended December 31, 2010: | ||||||||
Balance, January 1, | $ | — | $ | — | ||||
Total realized/unrealized gains | ||||||||
(losses) included in: | ||||||||
Earnings: | ||||||||
Net investment income | — | — | ||||||
Net investment gains (losses) | — | — | ||||||
Net derivative gains (losses) | 3 | — | ||||||
Other revenues | — | — | ||||||
Policyholder benefits and claims | — | — | ||||||
Other expenses | — | — | ||||||
Other comprehensive income (loss) | (3 | ) | — | |||||
Purchases, sales, issuances, and settlements | (1 | ) | — | |||||
Transfers into Level 3 | 12 | 8 | ||||||
Transfers out of Level 3 | — | — | ||||||
|
|
|
| |||||
Balance, December 31, | $ | 11 | $ | 8 | ||||
|
|
|
|
249
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
(1) | Derivative securities and real estate transfers into Level 3 are due to the Acquisition and are not related to the changes in Level 3 classification at the security level. |
Certain non-U.S. Subsidiaries sponsor defined benefit plans that cover employees and sales representatives who meet specified eligibility requirements. Pension benefits are provided utilizing either a traditional formula or cash balance formula, similar to the U.S. plans discussed above. The investment objectives are also similar, subject to local regulations. Generally, these international pension plans invest directly in high quality equity and fixed maturity securities. The assets of the non-U.S. pension plans are comprised of cash and cash equivalents, equity and fixed maturity securities, real estate and hedge fund investments.
The assets of the non-U.S. pension plans, other than those held in participant directed investment accounts, are managed in accordance with investment policies consistent with the longer-term nature of related benefit obligations and within prudent risk parameters. Specifically, investment policies are oriented toward (i) maximizing the assets of the non-U.S. pension plans funded status; (ii) minimizing the volatility of the assets of the non-U.S. pension plans funded status; (iii) generating asset returns that exceed liability increases; and (iv) targeting rates of return in excess of a custom benchmark and industry standards over appropriate reference time periods. These goals are expected to be met through identifying appropriate and diversified asset classes and allocations, ensuring adequate liquidity to pay benefits and expenses when due and controlling the costs of administering and managing the non-U.S. pension plans’ investments. Independent investment consultants are periodically used to evaluate the investment risk of the non-U.S. pension plans’ assets relative to liabilities, analyze the economic and portfolio impact of various asset allocations and management strategies and recommend asset allocations.
Derivative contracts may be used to reduce investment risk, to manage duration and to replicate the risk/return profile of an asset or asset class. Derivatives may not be used to leverage a portfolio in any manner, such as to magnify exposure to an asset, asset class, interest rates or any other financial variable. Derivatives are also prohibited for use in creating exposures to securities, currencies, indices or any other financial variable that are otherwise restricted.
250
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The table below summarizes the actual weighted average allocation of the fair value of total plan assets by asset class at December 31 for the years indicated and the approved target allocation by major asset class as of December 31, 2011 for the plans:
Defined Benefit Plan | Other Postretirement Plans | |||||||||||||||||||||||
Actual Allocation | Actual Allocation | |||||||||||||||||||||||
Target | 2011 | 2010 | Target | 2011 | 2010 | |||||||||||||||||||
Asset Class: | ||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||
Foreign bonds | 52 | % | 45 | % | 100 | % | 100 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total fixed maturity securities | 61 | % | 52 | % | 45 | % | 100 | % | 100 | % | 100 | % | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Equity securities: | ||||||||||||||||||||||||
Common stock - domestic | — | % | 2 | % | — | % | — | % | ||||||||||||||||
Common stock - foreign | 23 | 24 | — | — | ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total equity securities | 27 | % | 23 | % | 26 | % | — | % | — | % | — | % | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Alternative securities: | ||||||||||||||||||||||||
Money market securities | — | % | 6 | % | — | % | — | % | ||||||||||||||||
Short-term investments | 3 | 3 | — | — | ||||||||||||||||||||
Other invested assets | 22 | 20 | — | — | ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total alternative securities | 12 | % | 25 | % | 29 | % | — | % | — | % | — | % | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total assets | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
Expected Future Contributions and Benefit Payments
It is the Subsidiaries’ practice to make contributions to the U.S. qualified pension plan to comply with minimum funding requirements of ERISA. In accordance with such practice, no contributions were required for 2012. The Subsidiaries expect to make discretionary contributions to the qualified pension plan of $205 million in 2012. For information on employer contributions, see “— Obligations, Funded Status and Net Periodic Benefit Costs.”
Benefit payments due under the U.S. non-qualified pension plans are primarily funded from the Subsidiaries’ general assets as they become due under the provision of the plans, therefore benefit payments equal employer contributions. The U.S. Subsidiaries expect to make contributions of $88 million to fund the benefit payments in 2012.
U.S. and non-U.S. postretirement benefits are either: (i) not vested under law; (ii) a non-funded obligation of the Subsidiaries; or (iii) both. Current regulations do not require funding for these benefits. The Subsidiaries use their general assets, net of participant’s contributions, to pay postretirement medical claims as they come due in lieu of utilizing any plan assets. The U.S. Subsidiaries expect to make contributions of $75 million towards benefit obligations in 2012 to pay postretirement medical claims.
As noted previously, the Subsidiaries no longer expect to receive the RDS under the Medicare Modernization Act of 2003 to partially offset payment of such benefits. Instead, the gross benefit payments that will be made under the PDP will already reflect subsidies.
251
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Gross benefit payments for the next 10 years, which reflect expected future service where appropriate, are expected to be as follows:
Pension Benefits | Other Postretirement Benefits | |||||||||||||||
U.S. Plans | Non-U.S. Plans | U.S. Plans | Non-U.S. Plans | |||||||||||||
(In millions) | ||||||||||||||||
2012 | $ | 448 | $ | 38 | $ | 109 | $ | 3 | ||||||||
2013 | $ | 424 | $ | 41 | $ | 111 | $ | 3 | ||||||||
2014 | $ | 456 | $ | 45 | $ | 114 | $ | 3 | ||||||||
2015 | $ | 457 | $ | 50 | $ | 117 | $ | 3 | ||||||||
2016 | $ | 474 | $ | 58 | $ | 118 | $ | 3 | ||||||||
2017-2021 | $ | 2,687 | $ | 322 | $ | 605 | $ | 14 |
Additional Information
As previously discussed, most of the assets of the U.S. pension and other postretirement benefit plans are held in group annuity and life insurance contracts issued by the Subsidiaries. Total revenues from these contracts recognized in the consolidated statements of operations were $47 million, $46 million and $45 million for the years ended December 31, 2011, 2010 and 2009, respectively, and included policy charges and net investment income from investments backing the contracts and administrative fees. Total investment income (loss), including realized and unrealized gains (losses), credited to the account balances was $885 million, $767 million and $725 million for the years ended December 31, 2011, 2010 and 2009, respectively. The terms of these contracts are consistent in all material respects with those the Subsidiaries offer to unaffiliated parties that are similarly situated.
Savings and Investment Plans
The Subsidiaries sponsor the U.S. savings and investment plans for substantially all Company employees under which a portion of employee contributions are matched. The Subsidiaries contributed $95 million, $86 million and $93 million for the years ended December 31, 2011, 2010 and 2009, respectively.
18. Equity
Preferred Stock
There are 200,000,000 authorized shares of preferred stock, of which 6,857,000 shares were designated for issuance of convertible preferred stock in connection with the financing of the Acquisition in 2010. See “— Convertible Preferred Stock” below.
MetLife, Inc. has outstanding 24 million shares of Floating Rate Non-Cumulative Preferred Stock, Series A (the “Series A preferred shares”) with a $0.01 par value per share, and a liquidation preference of $25 per share.
MetLife, Inc. has outstanding 60 million shares of 6.50% Non-Cumulative Preferred Stock, Series B (the “Series B preferred shares”), with a $0.01 par value per share, and a liquidation preference of $25 per share.
The Preferred Stock ranks senior to the common stock with respect to dividends and liquidation rights. Dividends on the Preferred Stock are not cumulative. Holders of the Preferred Stock will be entitled to receive dividend payments only when, as and if declared by MetLife, Inc.’s Board of Directors or a duly authorized committee of the Board. If dividends are declared on the Series A preferred shares, they will be payable quarterly, in arrears, at an annual rate of the greater of: (i) 1.00% above three-month LIBOR on the related
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LIBOR determination date; or (ii) 4.00%. Any dividends declared on the Series B preferred shares will be payable quarterly, in arrears, at an annual fixed rate of 6.50%. Accordingly, in the event that dividends are not declared on the Preferred Stock for payment on any dividend payment date, then those dividends will cease to accrue and be payable. If a dividend is not declared before the dividend payment date, MetLife, Inc. has no obligation to pay dividends accrued for that dividend period whether or not dividends are declared and paid in future periods. No dividends may, however, be paid or declared on MetLife, Inc.’s common stock — or any other securities ranking junior to the Preferred Stock — unless the full dividends for the latest completed dividend period on all Preferred Stock, and any parity stock, have been declared and paid or provided for.
MetLife, Inc. is prohibited from declaring dividends on the Preferred Stock if it fails to meet specified capital adequacy, net income and equity levels. In addition, under Federal Reserve Board policy, MetLife, Inc. may not be able to pay dividends if it does not earn sufficient operating income.
The Preferred Stock does not have voting rights except in certain circumstances where the dividends have not been paid for an equivalent of six or more dividend payment periods whether or not those periods are consecutive. Under such circumstances, the holders of the Preferred Stock have certain voting rights with respect to members of the Board of Directors of MetLife, Inc.
The Preferred Stock is not subject to any mandatory redemption, sinking fund, retirement fund, purchase fund or similar provisions. The Preferred Stock is redeemable at MetLife, Inc.’s option in whole or in part, at a redemption price of $25 per share of Preferred Stock, plus declared and unpaid dividends.
In December 2008, MetLife, Inc. entered into an RCC related to the Preferred Stock. As part of such RCC, MetLife, Inc. agreed that it will not repay, redeem or purchase the Preferred Shares on or before December 31, 2018, unless, subject to certain limitations, it has received proceeds during a specified period from the sale of specified replacement securities. The RCC is for the benefit of the holders of the related Covered Debt, which was initially the Senior Notes. As a result of the issuance of the 10.750% JSDs, the 10.750% JSDs became the Covered Debt with respect to, and in accordance with, the terms of the RCC relating to the Preferred Shares. The RCC will terminate upon the occurrence of certain events, including the date on which MetLife, Inc. has no series of outstanding eligible debt securities.
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Notes to the Consolidated Financial Statements — (Continued)
Information on the declaration, record and payment dates, as well as per share and aggregate dividend amounts, for the Preferred Shares was as follows:
Dividend | ||||||||||||||||||||
Declaration Date | Record Date | Payment Date | Series A Per Share | Series A Aggregate | Series B Per Share | Series B Aggregate | ||||||||||||||
(In millions, except per share data) | ||||||||||||||||||||
November 15, 2011 | November 30, 2011 | December 15, 2011 | $ | 0.2527777 | $ | 7 | $ | 0.4062500 | $ | 24 | ||||||||||
August 15, 2011 | August 31, 2011 | September 15, 2011 | $ | 0.2555555 | 6 | $ | 0.4062500 | 24 | ||||||||||||
May 16, 2011 | May 31, 2011 | June 15, 2011 | $ | 0.2555555 | 7 | $ | 0.4062500 | 24 | ||||||||||||
March 7, 2011 | February 28, 2011 | March 15, 2011 | $ | 0.2500000 | 6 | $ | 0.4062500 | 24 | ||||||||||||
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$ | 26 | $ | 96 | |||||||||||||||||
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November 15, 2010 | November 30, 2010 | December 15, 2010 | $ | 0.2527777 | $ | 7 | $ | 0.4062500 | $ | 24 | ||||||||||
August 16, 2010 | August 31, 2010 | September 15, 2010 | $ | 0.2555555 | 6 | $ | 0.4062500 | 24 | ||||||||||||
May 17, 2010 | May 31, 2010 | June 15, 2010 | $ | 0.2555555 | 7 | $ | 0.4062500 | 24 | ||||||||||||
March 5, 2010 | February 28, 2010 | March 15, 2010 | $ | 0.2500000 | 6 | $ | 0.4062500 | 24 | ||||||||||||
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$ | 26 | $ | 96 | |||||||||||||||||
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November 16, 2009 | November 30, 2009 | December 15, 2009 | $ | 0.2527777 | $ | 7 | $ | 0.4062500 | $ | 24 | ||||||||||
August 17, 2009 | August 31, 2009 | September 15, 2009 | $ | 0.2555555 | 6 | $ | 0.4062500 | 24 | ||||||||||||
May 15, 2009 | May 31, 2009 | June 15, 2009 | $ | 0.2555555 | 7 | $ | 0.4062500 | 24 | ||||||||||||
March 5, 2009 | February 28, 2009 | March 16, 2009 | $ | 0.2500000 | 6 | $ | 0.4062500 | 24 | ||||||||||||
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$ | 26 | $ | 96 | |||||||||||||||||
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See Note 24 for information on subsequent dividends declared.
Convertible Preferred Stock
In connection with the financing of the Acquisition in November 2010, MetLife, Inc. issued to AM Holdings 6,857,000 shares of convertible preferred stock with a $0.01 par value per share, a liquidation preference of $0.01 per share and a fair value of $2.8 billion. On March 8, 2011, MetLife, Inc. repurchased and canceled all of the convertible preferred stock for $3.0 billion in cash, which resulted in a preferred stock redemption premium of $146 million. See Note 2.
For purposes of the earnings per common share calculation, for the year ended December 31, 2010, the convertible preferred stock was assumed converted into shares of common stock for both basic and diluted weighted average common shares. See Note 20.
Common Stock
Issuances
In March 2011, MetLife, Inc. issued 68,570,000 new shares of its common stock in a public offering at a price of $43.25 per share for gross proceeds of $3.0 billion. In connection with the offering of common stock, MetLife, Inc. incurred $16 million of issuance costs which have been recorded as a reduction of additional paid-in capital. The proceeds were used to repurchase the convertible preferred stock issued to AM Holdings in November 2010. See Note 2.
In November 2010, MetLife, Inc. issued to AM Holdings in connection with the financing of the Acquisition 78,239,712 new shares of its common stock at $40.90 per share with a fair value of $3.2 billion.
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Notes to the Consolidated Financial Statements — (Continued)
In August 2010, MetLife, Inc. issued 86,250,000 new shares of its common stock at a price of $42.00 per share for gross proceeds of $3.6 billion. In connection with the offering of common stock, MetLife, Inc. incurred $94 million of issuance costs which have been recorded as a reduction of additional paid-in capital.
In February 2009, MetLife, Inc. delivered 24,343,154 shares of newly issued common stock for $1.0 billion. The issuance was made in connection with the initial settlement of stock purchase contracts issued as part of common equity units sold in 2005.
During the years ended December 31, 2011 and 2010, 3,549,211 and 2,182,174 new shares of common stock were issued for $115 million and $74 million, respectively, to satisfy various stock option exercises and other stock-based awards. There were no new shares of common stock issued to satisfy the various stock option exercises and other stock-based awards during the year ended December 31, 2009. There were no shares of common stock issued from treasury stock during the year ended December 31, 2011. During the years ended December 31, 2010 and 2009, 332,121 shares and 861,586 shares of common stock were issued from treasury stock for $18 million and $46 million, respectively, to satisfy various stock option exercises and other stock-based awards.
Repurchase Programs
At December 31, 2011, MetLife, Inc. had $1.3 billion remaining under its common stock repurchase program authorizations. During the years ended December 31, 2011, 2010 and 2009, MetLife, Inc. did not repurchase any shares.
Under these authorizations, MetLife, Inc. may purchase its common stock from the MetLife Policyholder Trust, in the open market (including pursuant to the terms of a pre-set trading plan meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934) and in privately negotiated transactions. Any future common stock repurchases will be dependent upon several factors, including the Company’s capital position, its liquidity, its financial strength and credit ratings, general market conditions and the market price of MetLife, Inc.’s common stock compared to management’s assessment of the stock’s underlying value and applicable regulatory approvals, as well as other legal and accounting factors.
Dividends
The table below presents declaration, record and payment dates, as well as per share and aggregate dividend amounts, for the common stock:
Dividend | ||||||||||||
Per Share | Aggregate | |||||||||||
Declaration Date | Record Date | Payment Date | (In millions, except per share data) | |||||||||
October 25, 2011 | November 9, 2011 | December 14, 2011 | $ | 0.74 | $ | 787 | ||||||
October 26, 2010 | November 9, 2010 | December 14, 2010 | $ | 0.74 | $ | 784 | (1) | |||||
October 29, 2009 | November 9, 2009 | December 14, 2009 | $ | 0.74 | $ | 610 |
(1) | Includes dividends on convertible preferred stock (see “— Convertible Preferred Stock” above). |
The funding of the cash dividends and operating expenses of MetLife, Inc. is primarily provided by cash dividends from MetLife, Inc.’s insurance subsidiaries. The statutory capital and surplus, or net assets, of MetLife, Inc.’s insurance subsidiaries are subject to regulatory restrictions except to the extent that dividends are allowed to be paid in a given year without prior regulatory approval. Dividends exceeding these limitations can generally
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Notes to the Consolidated Financial Statements — (Continued)
be made subject to regulatory approval. The nature and amount of these dividend restrictions, as well as the statutory capital and surplus of MetLife, Inc.’s U.S. insurance subsidiaries, are disclosed in “— Statutory Equity and Income”. MetLife, Inc.’s principal non-U.S. insurance operations are branches or subsidiaries of American Life, a U.S. insurance subsidiary of the Company.
Stock-Based Compensation Plans
Description of Plans for Employees and Agents — General Terms
The MetLife, Inc. 2000 Stock Incentive Plan, as amended (the “2000 Stock Plan”) authorized the granting of awards to employees and agents in the form of options to buy shares of MetLife, Inc. common stock (“Stock Options”) that either qualify as incentive Stock Options under Section 422A of the Code or are non-qualified. By December 31, 2009 all awards under the 2000 Stock Plan had either vested or been forfeited. No awards have been made under the 2000 Stock Plan since 2005.
Under the MetLife, Inc. 2005 Stock and Incentive Compensation Plan (the “2005 Stock Plan”), awards granted to employees and agents may be in the form of Stock Options, Stock Appreciation Rights, Restricted Stock or Restricted Stock Units, Performance Shares or Performance Share Units, Cash-Based Awards and Stock-Based Awards (each as defined in the 2005 Stock Plan with reference to MetLife, Inc. common stock).
The aggregate number of shares authorized for issuance under the 2005 Stock Plan is 68,000,000, plus those shares available but not utilized under the 2000 Stock Plan and those shares utilized under the 2000 Stock Plan that are recovered due to forfeiture of Stock Options. Each share issued under the 2005 Stock Plan in connection with a Stock Option or Stock Appreciation Right reduces the number of shares remaining for issuance under that plan by one, and each share issued under the 2005 Stock Plan in connection with awards other than Stock Options or Stock Appreciation Rights reduces the number of shares remaining for issuance under that plan by 1.179 shares. At December 31, 2011, the aggregate number of shares remaining available for issuance pursuant to the 2005 Stock Plan was 31,803,801. Stock Option exercises and other awards settled in shares are satisfied through the issuance of shares held in treasury by the Company or by the issuance of new shares.
Compensation expense related to awards under the 2005 Stock Plan is recognized based on the number of awards expected to vest, which represents the awards granted less expected forfeitures over the life of the award, as estimated at the date of grant. Unless a material deviation from the assumed forfeiture rate is observed during the term in which the awards are expensed, any adjustment necessary to reflect differences in actual experience is recognized in the period the award becomes payable or exercisable.
Compensation expense related to awards under the 2005 Stock Plan is principally related to the issuance of Stock Options, Performance Shares and Restricted Stock Units. The majority of the awards granted each year under the 2005 Stock Plan are made in the first quarter of each year.
Certain stock-based awards provide solely for cash settlement based on changes in the price of MetLife, Inc. common stock and other factors (“Phantom Stock-Based Awards”). Such awards are made under the MetLife, Inc. International Unit Option Incentive Plan, the MetLife International Performance Unit Incentive Plan, and the MetLife International Restricted Unit Incentive Plan.
Description of Plans for Directors — General Terms
The MetLife, Inc. 2000 Directors Stock Plan, as amended (the “2000 Directors Stock Plan”) authorized the granting of awards in the form of MetLife, Inc. common stock, non-qualified Stock Options, or a combination of the foregoing to non-management Directors of MetLife, Inc. As of December 31, 2009, all awards under the 2000 Directors Stock Plan had either vested or been forfeited. No awards have been made under the 2000 Directors Stock Plan since 2004.
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Notes to the Consolidated Financial Statements — (Continued)
Under the MetLife, Inc. 2005 Non-Management Director Stock Compensation Plan (the “2005 Directors Stock Plan”), awards granted may be in the form of non-qualified Stock Options, Stock Appreciation Rights, Restricted Stock or Restricted Stock Units, or Stock-Based Awards (each as defined in the 2005 Directors Stock Plan with reference to MetLife, Inc. common stock) to non-management Directors of MetLife, Inc. The number of shares authorized for issuance under the 2005 Directors Stock Plan is 2,000,000. There were no shares carried forward from the 2000 Directors Stock Plan to the 2005 Directors Stock Plan. At December 31, 2011, the aggregate number of shares remaining available for issuance pursuant to the 2005 Directors Stock Plan was 1,777,288. Stock Option exercises and other awards settled in shares are satisfied through the issuance of shares held in treasury by the Company or by the issuance of new shares.
Compensation expense related to awards under the 2005 Directors Plan is recognized based on the number of shares awarded. The Stock-Based Awards granted under the 2005 Directors Plan have vested immediately. The majority of the awards granted each year under the 2005 Directors Stock Plan are made in the second quarter of each year.
Compensation Expense Related to Stock-Based Compensation
The components of compensation expense related to stock-based compensation which includes compensation expense related to Phantom Stock-Based Awards, and excludes the insignificant compensation expense related to the 2005 Directors Stock Plan, were as follows:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Stock Options | $ | 58 | $ | 45 | $ | 55 | ||||||
Performance Shares (1) | 68 | 29 | 11 | |||||||||
Restricted Stock Units | 18 | 10 | 3 | |||||||||
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Total compensation expenses | $ | 144 | $ | 84 | $ | 69 | ||||||
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Income tax benefits | $ | 50 | $ | 29 | $ | 24 | ||||||
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(1) | Performance Shares expected to vest and the related compensation expenses may be further adjusted by the performance factor most likely to be achieved, as estimated by management, at the end of the performance period. |
The following table presents the total unrecognized compensation expense related to stock-based compensation and the expected weighted average period over which these expenses will be recognized at:
December 31, 2011 | ||||||||
Expense | Weighted Average Period | |||||||
(In millions) | (Years) | |||||||
Stock Options | $ | 52 | 1.82 | |||||
Performance Shares | $ | 44 | 1.76 | |||||
Restricted Stock Units | $ | 23 | 1.82 |
Stock Options
Stock Options are the contingent right of award holders to purchase shares of MetLife, Inc. common stock at a stated price for a limited time. All Stock Options have an exercise price equal to the closing price of MetLife, Inc. common stock reported on the NYSE on the date of grant, and have a maximum term of 10 years. The vast
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Notes to the Consolidated Financial Statements — (Continued)
majority of Stock Options granted have become or will become exercisable at a rate of one-third of each award on each of the first three anniversaries of the grant date. Other Stock Options have become or will become exercisable on the third anniversary of the grant date. Vesting is subject to continued service, except for employees who are retirement eligible and in certain other limited circumstances.
A summary of the activity related to Stock Options for the year ended December 31, 2011 was as follows:
Shares Under Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value (1) | |||||||||||||
(Years) | (In millions) | |||||||||||||||
Outstanding at January 1, 2011 | 32,702,331 | $ | 38.47 | 5.30 | $ | 195 | ||||||||||
Granted (2) | 5,471,447 | $ | 45.16 | |||||||||||||
Exercised | (2,944,529 | ) | $ | 29.83 | ||||||||||||
Expired | (317,342 | ) | $ | 42.32 | ||||||||||||
Forfeited | (198,381 | ) | $ | 38.34 | ||||||||||||
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Outstanding at December 31, 2011 | 34,713,526 | $ | 40.22 | 5.35 | $ | — | ||||||||||
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Aggregate number of stock options expected to vest at a future date as of | 33,596,536 | $ | 40.31 | 5.25 | $ | — | ||||||||||
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Exercisable at December 31, 2011 | 24,345,356 | $ | 41.06 | 4.02 | $ | — | ||||||||||
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(1) | The aggregate intrinsic value was computed using the closing share price on December 30, 2011 of $31.18 and December 31, 2010 of $44.44, as applicable. |
(2) | The total fair value on the date of the grant was $78 million. |
The fair value of Stock Options is estimated on the date of grant using a binomial lattice model. Significant assumptions used in the Company’s binomial lattice model, which are further described below, include: expected volatility of the price of MetLife, Inc. common stock; risk-free rate of return; expected dividend yield on MetLife, Inc. common stock; exercise multiple; and the post-vesting termination rate.
Expected volatility is based upon an analysis of historical prices of MetLife, Inc. common stock and call options on that common stock traded on the open market. The Company uses a weighted-average of the implied volatility for publicly-traded call options with the longest remaining maturity nearest to the money as of each valuation date and the historical volatility, calculated using monthly closing prices of MetLife, Inc.’s common stock. The Company chose a monthly measurement interval for historical volatility as it believes this better depicts the nature of employee option exercise decisions being based on longer-term trends in the price of the underlying shares rather than on daily price movements.
The binomial lattice model used by the Company incorporates different risk-free rates based on the imputed forward rates for U.S. Treasury Strips for each year over the contractual term of the option. The table below presents the full range of rates that were used for options granted during the respective periods.
Dividend yield is determined based on historical dividend distributions compared to the price of the underlying common stock as of the valuation date and held constant over the life of the Stock Option.
The binomial lattice model used by the Company incorporates the contractual term of the Stock Options and then factors in expected exercise behavior and a post-vesting termination rate, or the rate at which vested options
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Notes to the Consolidated Financial Statements — (Continued)
are exercised or expire prematurely due to termination of employment, to derive an expected life. Exercise behavior in the binomial lattice model used by the Company is expressed using an exercise multiple, which reflects the ratio of exercise price to the strike price of Stock Options granted at which holders of the Stock Options are expected to exercise. The exercise multiple is derived from actual historical exercise activity. The post-vesting termination rate is determined from actual historical exercise experience and expiration activity under the Incentive Plans.
The following table presents the weighted average assumptions, with the exception of risk-free rate, which is expressed as a range, used to determine the fair value of Stock Options issued:
Years Ended December 31, | ||||||
2011 | 2010 | 2009 | ||||
Dividend yield | 1.65% | 2.11% | 3.15% | |||
Risk-free rate of return | 0.29%-5.51% | 0.35%-5.88% | 0.73%-6.67% | |||
Expected volatility | 32.64% | 34.41% | 44.39% | |||
Exercise multiple | 1.69 | 1.75 | 1.76 | |||
Post-vesting termination rate | 3.36% | 3.64% | 3.70% | |||
Contractual term (years) | 10 | 10 | 10 | |||
Expected life (years) | 7 | 7 | 6 | |||
Weighted average exercise price of stock options granted | $ 45.16 | $ 35.06 | $ 23.61 | |||
Weighted average fair value of stock options granted | $ 14.27 | $ 11.29 | $ 8.37 |
The following table presents a summary of Stock Option exercise activity:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Total intrinsic value of stock options exercised | $ | 41 | $ | 22 | $ | 1 | ||||||
Cash received from exercise of stock options | $ | 88 | $ | 52 | $ | 8 | ||||||
Tax benefit realized from stock options exercised | $ | 14 | $ | 8 | $ | — |
Performance Shares
Performance Shares are units that, if they vest, are multiplied by a performance factor to produce a number of final Performance Shares which are payable in shares of MetLife, Inc. common stock. Performance Shares are accounted for as equity awards, but are not credited with dividend-equivalents for actual dividends paid on MetLife, Inc. common stock during the performance period. Accordingly, the estimated fair value of Performance Shares is based upon the closing price of MetLife, Inc. common stock on the date of grant, reduced by the present value of estimated dividends to be paid on that stock during the performance period.
Performance Share awards normally vest in their entirety at the end of the three-year performance period. Vesting is subject to continued service, except for employees who are retirement eligible and in certain other limited circumstances. Vested Performance Shares are multiplied by a performance factor of 0.0 to 2.0 based largely on MetLife, Inc.’s performance in change in annual net operating earnings and total shareholder return over the applicable three-year performance period compared to the performance of its competitors. The performance factor was 0.90 for the January 1, 2008 — December 31, 2010 performance period.
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Notes to the Consolidated Financial Statements — (Continued)
The following table presents a summary of Performance Share activity for the year ended December 31, 2011:
Performance Shares | Weighted Average Grant Date Fair Value | |||||||
Outstanding at January 1, 2011 | 4,155,574 | $ | 31.91 | |||||
Granted (1) | 1,783,070 | $ | 42.84 | |||||
Forfeited | (89,725 | ) | $ | 32.79 | ||||
Payable (2) | (824,825 | ) | $ | 57.95 | ||||
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Outstanding at December 31, 2011 | 5,024,094 | $ | 31.50 | |||||
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Performance Shares expected to vest at a future date as of December 31, 2011 | 4,729,890 | $ | 32.35 | |||||
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(1) | The total fair value on the date of the grant was $76 million. |
(2) | Includes both shares paid and shares deferred for later payment. |
Performance Share amounts above represent aggregate initial target awards and do not reflect potential increases or decreases resulting from the performance factor determined after the end of the respective performance periods. At December 31, 2011, the three year performance period for the 2009 Performance Share grants was completed, but the performance factor had not yet been calculated. Included in the immediately preceding table are 1,791,609 outstanding Performance Shares to which the 2009-2011 performance factor will be applied.
Restricted Stock Units
Restricted Stock Units are units that, if they vest, are payable in shares of MetLife, Inc. common stock. Restricted Stock Units are accounted for as equity awards, but are not credited with dividend-equivalents for actual dividends paid on MetLife, Inc. common stock during the performance period. Accordingly, the estimated fair value of Restricted Stock Units is based upon the closing price of MetLife, Inc. common stock on the date of grant, reduced by the present value of estimated dividends to be paid on that stock during the performance period.
The vast majority of Restricted Stock Units normally vest in their entirety on the third anniversary of their grant date. Other Restricted Stock Units normally vest in their entirety on the fifth anniversary of their grant date. Vesting is subject to continued service, except for employees who are retirement eligible and in certain other limited circumstances.
The following table presents a summary of Restricted Stock Unit activity for the year ended December 31, 2011:
Restricted Stock Units | Weighted Average Grant Date Fair Value | |||||||
Outstanding at January 1, 2011 | 937,172 | $ | 29.63 | |||||
Granted (1) | 734,159 | $ | 41.94 | |||||
Forfeited | (61,160 | ) | $ | 35.36 | ||||
Payable (2) | (47,322 | ) | $ | 44.35 | ||||
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Outstanding at December 31, 2011 | 1,562,849 | $ | 34.74 | |||||
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Restricted Stock Units expected to vest at a future date as of December 31, 2011 | 1,562,849 | $ | 34.74 | |||||
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Notes to the Consolidated Financial Statements — (Continued)
(1) | The total fair value on the date of the grant was $31 million. |
(2) | Includes both shares paid and shares deferred for later payment. |
Liability Awards (Phantom Stock-Based Awards)
Certain MetLife international subsidiaries have granted Phantom Stock-Based Awards in the form of Unit Options, Restricted Units, and Performance Units. These share-based cash settled awards are recorded as liabilities until payout is made. Unlike share-settled awards, which have a fixed grant-date fair value, the fair value of unsettled or unvested liability awards is remeasured at the end of each reporting period based on the change in fair value of one share of MetLife, Inc. common stock. The liability and corresponding expense are adjusted accordingly until the award is settled.
Unit Options.
Each Unit Option is the contingent right of the holders to receive a cash payment equal to the closing price of one share of MetLife, Inc. common stock on the surrender date, less the closing price on the grant date, if the difference is greater than zero. The vast majority of Unit Options have become or will become eligible for surrender at a rate of one-third of each award on each of the first three anniversaries of the grant date. Other Unit Options have become or will become eligible for surrender on the third anniversary of the grant date. Vesting is subject to continued service, except for employees who are retirement eligible and in certain other limited circumstances.
Restricted Units.
Restricted Units are units that, if they vest, are payable in cash equal to the closing price of MetLife, Inc. common stock on the last day of the restriction period. The vast majority of Restricted Units normally vest in their entirety on the third anniversary of their grant date. Vesting is subject to continued service, except for employees who are retirement eligible and in certain other limited circumstances.
Performance Units.
Performance Units are units that, if they vest, are multiplied by a performance factor to produce a number of final Performance Units which are payable in cash equal to the closing price of MetLife, Inc. common stock on a date following the last day of the three-year performance period. Performance Units are accounted for as liability awards, but are not credited with dividend-equivalents for actual dividends paid on MetLife, Inc. common stock during the performance period. Accordingly, the estimated fair value of Performance Units is based upon the closing price of MetLife, Inc. common stock on the date of grant, reduced by the present value of estimated dividends to be paid on that stock during the performance period.
Performance Units normally vest in their entirety at the end of the three-year performance period. Vesting is subject to continued service, except for employees who are retirement eligible and in certain other limited circumstances. Vested Performance Units are multiplied by a performance factor of 0.0 to 2.0 based largely on MetLife, Inc.’s performance in change in annual net operating earnings and total shareholder return over the applicable three-year performance period compared to the performance of its competitors.
261
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The following table presents a summary of Liability Award activity for the year ended December 31, 2011:
Unit Options | Performance Units | Restricted Units | ||||||||||
Outstanding at January 1, 2011 | 811,221 | 139,893 | 216,251 | |||||||||
Granted | 369,665 | 125,710 | 340,750 | |||||||||
Exercised | (29,068 | ) | — | — | ||||||||
Forfeited | (68,448 | ) | (6,825 | ) | (44,680 | ) | ||||||
Paid | — | (25,521 | ) | (1,640 | ) | |||||||
|
|
|
|
|
| |||||||
Outstanding at December 31, 2011 | 1,083,370 | 233,257 | 510,681 | |||||||||
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| |||||||
Units expected to vest at a future date as of December 31, 2011 | 1,083,370 | 209,931 | 459,613 | |||||||||
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Statutory Equity and Income
Each of MetLife, Inc.’s U.S. insurance company’s state of domicile imposes risk-based capital (“RBC”) requirements that were developed by the National Association of Insurance Commissioners (“NAIC”). American Life does not write business in Delaware or any other domestic state and, as such, is exempt from RBC requirements by Delaware law. Regulatory compliance is determined by a ratio of a company’s total adjusted capital, calculated in the manner prescribed by the NAIC (“TAC”) to its authorized control level RBC, calculated in the manner prescribed by the NAIC (“ACL RBC”). Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The minimum level of TAC before corrective action commences is twice ACL RBC (“Company Action RBC”). While not required by or filed with insurance regulators, the Company also calculates an internally defined combined RBC ratio (“Combined RBC Ratio”), which is determined by dividing the sum of TAC for MetLife, Inc.’s principal U.S. insurance subsidiaries, excluding American Life, by the sum of Company Action RBC for such subsidiaries. The Company’s Combined RBC Ratio was in excess of 400% for all periods presented. In addition, all non-exempted U.S. insurance subsidiaries individually exceeded Company Action RBC for all periods presented.
MetLife, Inc.’s foreign subsidiaries are regulated by applicable authorities of the countries in which each entity operates and are subject to minimum capital and solvency requirements in those countries before corrective action commences. At December 31, 2011 and 2010, the adjusted capital of American Life’s insurance subsidiary in Japan, the Company’s largest foreign operation, was in excess of four times of the amount of capital that would require corrective action. Each of MetLife Inc.’s other foreign insurance operations exceeded minimum capital and solvency requirements of their respective countries for all periods presented.
The NAIC has adopted the Codification of Statutory Accounting Principles (“Statutory Codification”). Statutory Codification is intended to standardize regulatory accounting and reporting to state insurance departments. However, statutory accounting principles continue to be established by individual state laws and permitted practices. Modifications by the various state insurance departments may impact the effect of Statutory Codification on the statutory capital and surplus of MetLife, Inc.’s U.S. insurance subsidiaries.
Statutory accounting principles differ from GAAP primarily by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions, reporting surplus notes as surplus instead of debt and valuing securities on a different basis.
In addition, certain assets are not admitted under statutory accounting principles and are charged directly to surplus. The most significant assets not admitted by the Company are net deferred income tax assets resulting
262
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
from temporary differences between statutory accounting principles basis and tax basis not expected to reverse and become recoverable within three years. Further, statutory accounting principles do not give recognition to purchase accounting adjustments.
Amounts presented in the tables below are derived from the statutory–basis financial statements as filed with the insurance regulators.
Statutory net income (loss) was as follows:
Years Ended December 31, | ||||||||||||||
State of Domicile | 2011 | 2010 | 2009 | |||||||||||
(In millions) | ||||||||||||||
Metropolitan Life Insurance Company | New York | $ | 1,970 | $ | 2,066 | $ | 1,221 | |||||||
American Life Insurance Company | Delaware | $ | 334 | $ | 803 | N/A | ||||||||
MetLife Insurance Company of Connecticut | Connecticut | $ | 46 | $ | 668 | $ | 81 | |||||||
Metropolitan Property and Casualty Company | Rhode Island | $ | 41 | $ | 273 | $ | 266 | |||||||
Metropolitan Tower Life Insurance Company | Delaware | $ | 63 | $ | 151 | $ | 57 | |||||||
MetLife Investors Insurance Company | Missouri | $ | 94 | $ | 153 | $ | 49 | |||||||
Delaware American Life Insurance Company | Delaware | $ | 13 | $ | 6 | N/A |
Statutory capital and surplus was as follows at:
December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Metropolitan Life Insurance Company | $ | 13,507 | $ | 13,217 | ||||
American Life Insurance Company | $ | 3,310 | $ | 4,321 | ||||
MetLife Insurance Company of Connecticut | $ | 5,133 | $ | 5,105 | ||||
Metropolitan Property and Casualty Company | $ | 1,857 | $ | 1,845 | ||||
Metropolitan Tower Life Insurance Company | $ | 828 | $ | 805 | ||||
MetLife Investors Insurance Company | $ | 600 | $ | 499 | ||||
Delaware American Life Insurance Company | $ | 51 | $ | 29 |
Dividend Restrictions
The table below sets forth the dividends permitted to be paid by the respective insurance subsidiary without insurance regulatory approval and the respective dividends paid:
2012 | 2011 | 2010 | ||||||||||||||||||
Company | Permitted w/o Approval (1) | Paid (2) | Permitted w/o Approval (3) | Paid (2) | Permitted w/o Approval (3) | |||||||||||||||
(In millions) | ||||||||||||||||||||
Metropolitan Life Insurance Company | $ | 1,350 | $ | 1,321 | (4) | $ | 1,321 | $ | 631 | (4) | $ | 1,262 | ||||||||
American Life Insurance Company | $ | 168 | $ | 661 | $ | 661 | $ | — | (5) | $ | 511 | |||||||||
MetLife Insurance Company of Connecticut | $ | 504 | $ | 517 | $ | 517 | $ | 330 | $ | 659 | ||||||||||
Metropolitan Property and Casualty Insurance Company | $ | — | $ | 30 | $ | — | $ | 260 | $ | — | ||||||||||
Metropolitan Tower Life Insurance Company | $ | 82 | $ | 80 | $ | 80 | $ | 569 | (6) | $ | 93 | |||||||||
MetLife Investors Insurance Company | $ | 18 | $ | — | $ | — | $ | — | $ | — | ||||||||||
Delaware American Life Insurance Company | $ | 12 | $ | — | $ | — | $ | — | $ | — |
(1) | Reflects dividend amounts that may be paid during 2012 without prior regulatory approval. However, because dividend tests may be based on dividends previously paid over rolling 12-month periods, if paid before a specified date during 2012, some or all of such dividends may require regulatory approval. |
263
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
(2) | All amounts paid, including those requiring regulatory approval. |
(3) | Reflects dividend amounts that could have been paid during the relevant year without prior regulatory approval. |
(4) | Includes securities transferred to MetLife, Inc. of $170 million and $399 million during the years ended December 31, 2011 and 2010, respectively. |
(5) | Reflects the respective dividends paid since the Acquisition Date. See Note 2. |
(6) | Includes shares of an affiliate distributed to MetLife, Inc. as an in-kind dividend of $475 million. |
Under New York State Insurance Law, MLIC is permitted, without prior insurance regulatory clearance, to pay stockholder dividends to MetLife, Inc. as long as the aggregate amount of all such dividends in any calendar year does not exceed the lesser of: (i) 10% of its surplus to policyholders as of the end of the immediately preceding calendar year; or (ii) its statutory net gain from operations for the immediately preceding calendar year (excluding realized capital gains). MLIC will be permitted to pay a dividend to MetLife, Inc. in excess of the lesser of such two amounts only if it files notice of its intention to declare such a dividend and the amount thereof with the Superintendent and the Superintendent does not disapprove the dividend within 30 days of its filing. Under New York State Insurance Law, the Superintendent has broad discretion in determining whether the financial condition of a stock life insurance company would support the payment of such dividends to its shareholders.
Under Delaware State Insurance Law, each of American Life, DelAm and MTL is permitted, without prior insurance regulatory clearance, to pay a stockholder dividend to MetLife, Inc. as long as the amount of the dividend when aggregated with all other dividends in the preceding 12 months does not exceed the greater of: (i) 10% of its surplus to policyholders as of the end of the immediately preceding calendar year; or (ii) its statutory net gain from operations for the immediately preceding calendar year (excluding realized capital gains). Each of American Life, DelAm and MTL will be permitted to pay a dividend to MetLife, Inc. in excess of the greater of such two amounts only if it files notice of the declaration of such a dividend and the amount thereof with the Delaware Commissioner of Insurance (the “Delaware Commissioner”) and the Delaware Commissioner either approves the distribution of the dividend or does not disapprove the distribution within 30 days of its filing. In addition, any dividend that exceeds earned surplus (defined as unassigned funds) as of the last filed annual statutory statement requires insurance regulatory approval. Under Delaware State Insurance Law, the Delaware Commissioner has broad discretion in determining whether the financial condition of a stock life insurance company would support the payment of such dividends to its shareholders.
Under Connecticut State Insurance Law, MICC is permitted, without prior insurance regulatory clearance, to pay stockholder dividends to its stockholders as long as the amount of such dividends, when aggregated with all other dividends in the preceding 12 months, does not exceed the greater of: (i) 10% of its surplus to policyholders as of the end of the immediately preceding calendar year; or (ii) its statutory net gain from operations for the immediately preceding calendar year. MICC will be permitted to pay a dividend in excess of the greater of such two amounts only if it files notice of its declaration of such a dividend and the amount thereof with the Connecticut Commissioner of Insurance (the “Connecticut Commissioner”) and the Connecticut Commissioner does not disapprove the payment within 30 days after notice. In addition, any dividend that exceeds earned surplus (unassigned funds, reduced by 25% of unrealized appreciation in value or revaluation of assets or unrealized profits on investments) as of the last filed annual statutory statement requires insurance regulatory approval. Under Connecticut State Insurance Law, the Connecticut Commissioner has broad discretion in determining whether the financial condition of a stock life insurance company would support the payment of such dividends to its shareholders.
264
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Under Rhode Island State Insurance Law, MPC is permitted, without prior insurance regulatory clearance, to pay a stockholder dividend to MetLife, Inc. as long as the aggregate amount of all such dividends in any twelve-month period does not exceed the lesser of: (i) 10% of its surplus to policyholders as of the end of the immediately preceding calendar year; or (ii) net income, not including realized capital gains, for the immediately preceding calendar year, which may include carry forward net income from the second and third preceding calendar years excluding realized capital gains and less dividends paid in the second and immediately preceding calendar years. MPC will be permitted to pay a dividend to MetLife, Inc. in excess of the lesser of such two amounts only if it files notice of its intention to declare such a dividend and the amount thereof with the Rhode Island Commissioner of Insurance (the “Rhode Island Commissioner”) and the Rhode Island Commissioner does not disapprove the distribution within 30 days of its filing. Under Rhode Island State Insurance Code, the Rhode Island Commissioner has broad discretion in determining whether the financial condition of a stock property and casualty insurance company would support the payment of such dividends to its shareholders.
Under Missouri State Insurance Law, MetLife Investors Insurance Company (“MLIIC”) is permitted, without prior insurance regulatory clearance, to pay a stockholder dividend to its parent as long as the amount of the dividend when aggregated with all other dividends in the preceding 12 months does not exceed the greater of: (i) 10% of its surplus to policyholders as of the end of the immediately preceding calendar year; or (ii) its statutory net gain from operations for the immediately preceding calendar year (excluding net realized capital gains). MLIIC will be permitted to pay a cash dividend to its parent in excess of the greater of such two amounts only if it files notice of the declaration of such a dividend and the amount thereof with the Missouri Commissioner of Insurance (the “Missouri Commissioner”) and the Missouri Commissioner does not disapprove the distribution within 30 days of its filing. In addition, any dividend that exceeds earned surplus (defined as unassigned funds) as of the last filed annual statutory statement requires insurance regulatory approval. Under Missouri State Insurance Law, the Missouri Commissioner has broad discretion in determining whether the financial condition of a stock life insurance company would support the payment of such dividends to its shareholders.
In January 2012, the Company submitted to the Federal Reserve Board and the Federal Reserve Bank of New York (collectively, the “Federal Reserve”) a comprehensive capital plan, as mandated by the capital plans rule, and additional information required by the 2012 Comprehensive Capital Analysis and Review. The capital plan included an anticipated repurchase of common stock and an anticipated increase to MetLife, Inc.’s annual dividend to its stockholders. The Federal Reserve objected to the capital plan in March of 2012; therefore, MetLife, Inc. is unable to repurchase its common stock or increase its aggregate annual dividend amount above $0.74 per share, or $0.8 billion based on the outstanding shares at September 30, 2012, until such time as the Company is no longer subject to the capital plans rule and supervision by the Federal Reserve, or submits a capital plan that is approved by the Federal Reserve. The Federal Reserve, pursuant to the Company’s request, has extended the time for the Company to resubmit its capital plan until January 5, 2013. Unless the Company receives an extension, it may also need to submit a capital plan for 2013 if MetLife, Inc. is still a bank holding company on January 5, 2013. See “— Common Stock — Dividends”.
265
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Other Comprehensive Income (Loss)
The following table sets forth the balance and changes in accumulated other comprehensive income (loss) including reclassification adjustments required for the years ended December 31, 2011, 2010 and 2009 in other comprehensive income (loss) that are included as part of net income for the current year that have been reported as a part of other comprehensive income (loss) in the current or prior year:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Holding gains (losses) on investments arising during the year | $ | 13,945 | $ | 10,092 | $ | 18,548 | ||||||
Income tax effect of holding gains (losses) | (4,783 | ) | (3,516 | ) | (6,243 | ) | ||||||
Reclassification adjustments for recognized holding (gains) losses included in current year income | 755 | (733 | ) | 1,464 | ||||||||
Income tax effect of reclassification adjustments | (260 | ) | 255 | (493 | ) | |||||||
Unrealized investment loss of subsidiary at the date of disposal | (105 | ) | — | — | ||||||||
Income tax on unrealized investment loss of subsidiary at the date of disposal | 37 | — | — | |||||||||
Allocation of holding (gains) losses on investments relating to other policyholder amounts | (6,248 | ) | (2,598 | ) | (2,515 | ) | ||||||
Income tax effect of allocation of holding (gains) losses to other policyholder amounts | 2,146 | 905 | 840 | |||||||||
Allocation of holding (gains) losses on investments relating to other policyholder amounts of subsidiary at the date of disposal | 93 | — | — | |||||||||
Income tax effect of allocation of holding (gains) losses on investments relating to other policyholder amounts of subsidiary at the date of disposal | (33 | ) | — | — | ||||||||
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|
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| |||||||
Net unrealized investment gains (losses), net of income tax | 5,547 | 4,405 | 11,601 | |||||||||
Foreign currency translation adjustments, net of income tax expense (benefit) of $162 million, ($226) million and $12 million | (146 | ) | (354 | ) | 29 | |||||||
Foreign currency translation adjustments of subsidiary at the date of disposal | (7 | ) | — | — | ||||||||
Defined benefit plans adjustment, net of income tax expense (benefit) of ($266) million, $69 million and ($71) million | (494 | ) | 96 | (102 | ) | |||||||
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| |||||||
Other comprehensive income (loss), net of income tax | 4,900 | 4,147 | 11,528 | |||||||||
Other comprehensive (income) loss attributable to noncontrolling interests | 38 | (5 | ) | 11 | ||||||||
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| |||||||
Other comprehensive income (loss) attributable to MetLife, Inc., excluding cumulative effect of change in accounting principle | 4,938 | 4,142 | 11,539 | |||||||||
Cumulative effect of change in accounting principle, net of income tax expense (benefit) of $0, $27 million and ($207) million (see Note 1) | — | 52 | (335 | ) | ||||||||
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| |||||||
Other comprehensive income (loss) attributable to MetLife, Inc. | $ | 4,938 | $ | 4,194 | $ | 11,204 | ||||||
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266
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
19. Other Expenses
Information on other expenses was as follows:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Compensation | $ | 5,287 | $ | 3,575 | $ | 3,394 | ||||||
Pension, postretirement & post employment benefit costs | 463 | 380 | 452 | |||||||||
Commissions | 6,378 | 3,607 | 3,393 | |||||||||
Volume-related costs | 335 | 379 | 407 | |||||||||
Interest credited to bank deposits | 95 | 137 | 163 | |||||||||
Capitalization of DAC | (5,558 | ) | (2,770 | ) | (2,502 | ) | ||||||
Amortization of DAC and VOBA | 4,898 | 2,477 | 1,055 | |||||||||
Amortization of negative VOBA | (697 | ) | (64 | ) | — | |||||||
Interest expense on debt and debt issuance costs | 1,629 | 1,550 | 1,044 | |||||||||
Premium taxes, licenses & fees | 633 | 513 | 526 | |||||||||
Professional services | 1,597 | 1,103 | 901 | |||||||||
Rent, net of sublease income | 426 | 305 | 383 | |||||||||
Other | 3,051 | 1,735 | 1,545 | |||||||||
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Total other expenses | $ | 18,537 | $ | 12,927 | $ | 10,761 | ||||||
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Capitalization of DAC and Amortization of DAC and VOBA
See Note 6 for DAC and VOBA by segment and a rollforward of each including impacts of capitalization and amortization. See also Note 10 for a description of the DAC amortization impact associated with the closed block. See Note 1 for information on the retrospective application of the adoption of new accounting guidance related to DAC.
Interest Expense on Debt and Debt Issuance Costs
See Notes 11, 12, 13 and 14 for attribution of interest expense by debt issuance. Interest expense on debt and debt issuance costs includes interest expense related to CSEs. See Note 3.
Lease Impairments
See Note 16 for description of lease impairments included within other expenses.
Costs Related to the Acquisition
Transaction and Integration-Related Expenses
The Company incurred transaction costs of $3 million and $100 million for the years ended December 31, 2011 and 2010, respectively. Transaction costs represent costs directly related to effecting the Acquisition and primarily include banking and legal expenses. Such costs have been expensed as incurred within Corporate & Other.
Integration-related costs were $362 million and $176 million for the years ended December 31, 2011 and 2010, respectively. Integration-related costs represent costs directly related to integrating ALICO, including expenses for consulting, rebranding and the integration of information systems. Such costs have been expensed as incurred and as the integration of ALICO is an enterprise-wide initiative, these expenses are reported within Corporate & Other.
267
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Restructuring Charges
As part of the integration of ALICO’s operations, management initiated restructuring plans focused on increasing productivity and improving the efficiency of the Company’s operations. See Note 2. Estimated restructuring charges may change as management continues to execute its restructuring plans. Management anticipates further restructuring charges, including severance, contract termination costs and other associated costs through the year ended December 31, 2013. However, such restructuring plans are not sufficiently developed to enable management to make an estimate of such restructuring charges at December 31, 2011.
Restructuring charges associated with restructuring plans related to the Acquisition are included in other expenses within Corporate & Other. Such restructuring charges included:
Years Ended December 31, | ||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Balance at January 1, | $ | 10 | $ | — | ||||
Restructuring charges | 46 | 10 | ||||||
Cash payments | (43 | ) | — | |||||
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Balance at December 31, | $ | 13 | $ | 10 | ||||
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Restructuring charges incurred in current period | $ | 46 | $ | 10 | ||||
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Total restructuring charges incurred since inception of restructuring plans | $ | 56 | $ | 10 | ||||
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Other Restructuring Charges
In September 2008, the Company began an enterprise-wide cost reduction and revenue enhancement initiative which was fully implemented by December 31, 2011. This initiative was focused on reducing complexity, leveraging scale, increasing productivity and improving the effectiveness of the Company’s operations, as well as providing a foundation for future growth.
These restructuring charges are included in other expenses. As the expenses relate to an enterprise-wide initiative, they are reported within Corporate & Other. Restructuring charges associated with this enterprise-wide initiative were as follows:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Balance at January 1, | $ | 7 | $ | 36 | $ | 86 | ||||||
Severance charges | 2 | 17 | 84 | |||||||||
Change in severance charge estimates | (1 | ) | (1 | ) | (8 | ) | ||||||
Cash payments | (8 | ) | (45 | ) | (126 | ) | ||||||
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Balance at December 31, | $ | — | $ | 7 | $ | 36 | ||||||
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Restructuring charges incurred in current period | $ | 1 | $ | 16 | $ | 76 | ||||||
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Total restructuring charges incurred since inception of initiative | $ | 194 | $ | 193 | $ | 177 | ||||||
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Changes in severance charge estimates were due to changes in estimates for variable incentive compensation, COBRA benefits, employee outplacement services and for employees whose severance status changed.
In addition to the above charges, the Company has recognized lease charges of $28 million associated with the consolidation of office space since the inception of the initiative.
268
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
20. Earnings Per Common Share
The following table presents the weighted average shares used in calculating basic earnings per common share and those used in calculating diluted earnings per common share for each income category presented below:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions, except share and per share data) | ||||||||||||
Weighted Average Shares: | ||||||||||||
Weighted average common stock outstanding for basic | 1,059,580,442 | 882,436,532 | 818,462,150 | |||||||||
Incremental common shares from assumed: | ||||||||||||
Stock purchase contracts underlying common equity units (2) | 1,641,444 | — | — | |||||||||
Exercise or issuance of stock-based awards (3) | 6,872,474 | 7,131,346 | — | |||||||||
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Weighted average common stock outstanding for diluted earnings | 1,068,094,360 | 889,567,878 | 818,462,150 | |||||||||
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Income (Loss) from Continuing Operations: | ||||||||||||
Income (loss) from continuing operations, net of income tax | $ | 6,392 | $ | 2,620 | $ | (2,509 | ) | |||||
Less: Income (loss) from continuing operations, net of | (8 | ) | (4 | ) | (36 | ) | ||||||
Less: Preferred stock dividends | 122 | 122 | 122 | |||||||||
Preferred stock redemption premium | 146 | — | — | |||||||||
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Income (loss) from continuing operations, net of income | $ | 6,132 | $ | 2,502 | $ | (2,595 | ) | |||||
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Basic | $ | 5.79 | $ | 2.83 | $ | (3.17 | ) | |||||
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Diluted | $ | 5.74 | $ | 2.81 | $ | (3.17 | ) | |||||
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Income (Loss) from Discontinued Operations: | ||||||||||||
Income (loss) from discontinued operations, net of income tax | $ | 23 | $ | 43 | $ | 62 | ||||||
Less: Income (loss) from discontinued operations, net of income | — | — | — | |||||||||
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| |||||||
Income (loss) from discontinued operations, net of income tax, | $ | 23 | $ | 43 | $ | 62 | ||||||
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Basic | $ | 0.02 | $ | 0.05 | $ | 0.08 | ||||||
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Diluted | $ | 0.02 | $ | 0.05 | $ | 0.08 | ||||||
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| |||||||
Net Income (Loss): | ||||||||||||
Net income (loss) | $ | 6,415 | $ | 2,663 | $ | (2,447 | ) | |||||
Less: Net income (loss) attributable to noncontrolling interests | (8 | ) | (4 | ) | (36 | ) | ||||||
Less: Preferred stock dividends | 122 | 122 | 122 | |||||||||
Preferred stock redemption premium | 146 | — | — | |||||||||
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Net income (loss) available to MetLife, Inc.’s common shareholders | $ | 6,155 | $ | 2,545 | $ | (2,533 | ) | |||||
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Basic | $ | 5.81 | $ | 2.88 | $ | (3.09 | ) | |||||
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Diluted | $ | 5.76 | $ | 2.86 | $ | (3.09 | ) | |||||
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269
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
(1) | For purposes of the earnings per common share calculation, for the year ended December 31, 2010, the convertible preferred stock was assumed converted into shares of common stock for both basic and diluted weighted average shares. See Note 18. |
(2) | See Note 14 for a description of the Company’s common equity units. |
(3) | For the year ended December 31, 2009, 4,213,700 shares related to the assumed exercise or issuance of stock-based awards have been excluded from the calculation of diluted earnings per common share as these assumed shares are anti-dilutive. |
21. Quarterly Results of Operations (Unaudited)
The unaudited quarterly results of operations for 2011 and 2010 are summarized in the table below:
Three Months Ended | ||||||||||||||||
March 31, | June 30, | September 30, | December 31, | |||||||||||||
(In millions, except per share data) | ||||||||||||||||
2011 | ||||||||||||||||
Total revenues | $ | 15,908 | $ | 17,145 | $ | 20,454 | $ | 16,735 | ||||||||
Total expenses | $ | 14,623 | $ | 15,636 | $ | 15,338 | $ | 15,460 | ||||||||
Income (loss) from continuing operations, net of income tax | $ | 924 | $ | 1,061 | $ | 3,444 | $ | 963 | ||||||||
Income (loss) from discontinued operations, net of income tax | $ | (40 | ) | $ | 32 | $ | 6 | $ | 25 | |||||||
Net income (loss) | $ | 884 | $ | 1,093 | $ | 3,450 | $ | 988 | ||||||||
Less: Net income (loss) attributable to noncontrolling interests | $ | 7 | $ | (7 | ) | $ | (6 | ) | $ | (2 | ) | |||||
Net income (loss) attributable to MetLife, Inc. | $ | 877 | $ | 1,100 | $ | 3,456 | $ | 990 | ||||||||
Less: Preferred stock dividends | $ | 30 | $ | 31 | $ | 30 | $ | 31 | ||||||||
Preferred stock redemption premium | $ | 146 | $ | — | $ | — | $ | — | ||||||||
Net income (loss) available to MetLife, Inc.’s common shareholders | $ | 701 | $ | 1,069 | $ | 3,426 | $ | 959 | ||||||||
Basic earnings per common share: | ||||||||||||||||
Income (loss) from continuing operations, net of income tax, available to | $ | 0.70 | $ | 0.98 | $ | 3.22 | $ | 0.88 | ||||||||
Income (loss) from discontinued operations, net of income tax, | $ | (0.04 | ) | $ | 0.03 | $ | 0.01 | $ | 0.02 | |||||||
Net income (loss) attributable to MetLife, Inc. | $ | 0.83 | $ | 1.04 | $ | 3.26 | $ | 0.93 | ||||||||
Net income (loss) available to MetLife, Inc.’s common shareholders | $ | 0.66 | $ | 1.01 | $ | 3.23 | $ | 0.90 | ||||||||
Diluted earnings per common share: | ||||||||||||||||
Income (loss) from continuing operations, net of income tax, available to | $ | 0.70 | $ | 0.97 | $ | 3.20 | $ | 0.88 | ||||||||
Income (loss) from discontinued operations, net of income tax, | $ | (0.04 | ) | $ | 0.03 | $ | 0.01 | $ | 0.02 | |||||||
Net income (loss) attributable to MetLife, Inc. | $ | 0.82 | $ | 1.03 | $ | 3.24 | $ | 0.93 | ||||||||
Net income (loss) available to MetLife, Inc.’s common shareholders | $ | 0.66 | $ | 1.00 | $ | 3.21 | $ | 0.90 |
270
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Three Months Ended | ||||||||||||||||
March 31, | June 30, | September 30, | December 31, | |||||||||||||
(In millions, except per share data) | ||||||||||||||||
2010 | ||||||||||||||||
Total revenues | $ | 13,096 | $ | 14,137 | $ | 12,335 | $ | 12,680 | ||||||||
Total expenses | $ | 11,928 | $ | 11,786 | $ | 11,987 | $ | 12,817 | ||||||||
Income (loss) from continuing operations, net of income tax | $ | 816 | $ | 1,526 | $ | 291 | $ | (13 | ) | |||||||
Income (loss) from discontinued operations, net of income tax | $ | 6 | $ | 11 | $ | 3 | $ | 23 | ||||||||
Net income (loss) | $ | 822 | $ | 1,537 | $ | 294 | $ | 10 | ||||||||
Less: Net income (loss) attributable to noncontrolling interests | $ | (1 | ) | $ | (10 | ) | $ | 4 | $ | 3 | ||||||
Net income (loss) attributable to MetLife, Inc. | $ | 823 | $ | 1,547 | $ | 290 | $ | 7 | ||||||||
Less: Preferred stock dividends | $ | 30 | $ | 31 | $ | 30 | $ | 31 | ||||||||
Net income (loss) available to MetLife, Inc.’s common shareholders | $ | 793 | $ | 1,516 | $ | 260 | $ | (24 | ) | |||||||
Basic earnings per common share: | ||||||||||||||||
Income (loss) from continuing operations, net of income tax, available to | $ | 0.95 | $ | 1.83 | $ | 0.30 | $ | (0.04 | ) | |||||||
Income (loss) from discontinued operations, net of income tax, | $ | 0.01 | $ | 0.01 | $ | — | $ | 0.02 | ||||||||
Net income (loss) attributable to MetLife, Inc. | $ | 1.00 | $ | 1.88 | $ | 0.33 | $ | 0.01 | ||||||||
Net income (loss) available to MetLife, Inc.’s common shareholders | $ | 0.96 | $ | 1.84 | $ | 0.30 | $ | (0.02 | ) | |||||||
Diluted earnings per common share: | ||||||||||||||||
Income (loss) from continuing operations, net of income tax, available to | $ | 0.95 | $ | 1.82 | $ | 0.29 | $ | (0.04 | ) | |||||||
Income (loss) from discontinued operations, net of income tax, | $ | 0.01 | $ | 0.01 | $ | — | $ | 0.02 | ||||||||
Net income (loss) attributable to MetLife, Inc. | $ | 0.99 | $ | 1.86 | $ | 0.33 | $ | 0.01 | ||||||||
Net income (loss) available to MetLife, Inc.’s common shareholders | $ | 0.96 | $ | 1.83 | $ | 0.29 | $ | (0.02 | ) |
22. Business Segment Information
As announced in November 2011, the Company reorganized its business from its former U.S. Business and International structure into three broad geographic regions to better reflect its global reach. As a result, in the first quarter of 2012, the Company reorganized into six segments, reflecting these broad geographic regions: Retail; Group, Voluntary & Worksite Benefits; Corporate Benefit Funding; and Latin America (collectively, “The Americas”); Asia; and EMEA. As anticipated, in the third quarter of 2012, the Company continued to realign certain products and businesses among its existing segments as noted below. Prior period results have been revised in connection with these changes.
The Americas. The Americas consists of the following segments:
• | Retail. The Retail segment offers a broad range of protection products and services and a variety of annuities to individuals and employees of corporations and other institutions, and is organized into two businesses: Life & Other and Annuities. Life & Other insurance products and services include variable life, universal life, term life and whole life products. Additionally, through broker-dealer affiliates, the Company offers a full range of mutual funds and other securities products. Life & Other products and services also include individual disability income products and personal lines property & casualty insurance, including private passenger automobile, homeowners and personal excess liability insurance. Annuities include a variety of variable and fixed annuities which provide for both asset accumulation and asset distribution needs. |
• | Group, Voluntary & Worksite Benefits. The Group, Voluntary & Worksite Benefits segment offers a broad range of protection products and services to individuals and corporations, as well as other institutions and their respective employees, and is organized into two businesses: Group and Voluntary & Worksite. Group insurance products and services include variable life, universal life and term life products. Group insurance products and services also include dental, group short- and long-term disability and accidental death & dismemberment coverages. The Voluntary & |
271
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Worksite business includes personal lines property & casualty insurance, including private passenger automobile, homeowners and personal excess liability insurance offered to employees at their employer’s worksite. The Voluntary & Worksite business also includes long-term care, prepaid legal plans and critical illness products. |
• | Corporate Benefit Funding. The Corporate Benefit Funding segment includes an array of annuity and investment products, including guaranteed interest products and other stable value products, income annuities, and separate account contracts for the investment management of defined benefit and defined contribution plan assets. |
• | Latin America. The Latin America segment offers a broad range of products to both individuals and corporations, as well as other institutions and their respective employees, which include life insurance, accident & health insurance, group medical, dental, credit life insurance, annuities, endowment and retirement & savings products. |
Asia. The Asia segment offers a broad range of products to both individuals and corporations, as well as other institutions and their respective employees, which include whole life, term life, variable life, universal life, accident & health insurance, fixed and variable annuities and endowment products.
EMEA. The EMEA segment offers a broad range of products to both individuals and corporations, as well as other institutions and their respective employees, which include life insurance, accident & health insurance, credit life insurance, annuities, endowment and retirement & savings products.
In addition, the Company reports certain of its results of operations in Corporate & Other, which includes MetLife Bank (see Notes 2 and 24) and other business activities. Corporate & Other contains the excess capital not allocated to the segments, external integration costs, internal resource costs for associates committed to acquisitions and various start-up and certain run-off entities. Corporate & Other also includes assumed reinsurance for a Japan domiciled life insurance company, a former joint venture of the Company. These in-force reinsurance agreements reinsure a portion of the living and death benefit guarantees issued in connection with variable annuity products. Additionally, Corporate & Other includes interest expense related to the majority of the Company’s outstanding debt, expenses associated with certain legal proceedings, and income tax audit issues. Corporate & Other also includes the elimination of intersegment amounts, which generally relate to intersegment loans, which bear interest rates commensurate with related borrowings.
As discussed above, in the third quarter of 2012, as anticipated as a part of the November 2011 reorganization, management realigned certain individual disability income and property & casualty products and began reporting such product results in the Retail segment. As a result of the first quarter segment reorganization, these results had been reported in the Group, Voluntary & Worksite Benefits segment. In accordance with the third quarter 2012 realignment, operating earnings for the Retail segment increased by $75 million, net of $8 million of income tax benefit, $205 million, net of $63 million of income tax, and $221 million, net of $71 million of income tax, with a corresponding decrease in the Group, Voluntary & Worksite Benefits segment, for the years ended December 31, 2011, 2010 and 2009, respectively.
Also, as anticipated as part of the November 2011 reorganization, in the third quarter of 2012, management realigned the businesses in South Asia and India and began reporting such results in the Asia segment. As a result of the first quarter segment reorganization, these results had been reported in the EMEA segment. In accordance with the third quarter 2012 realignment, operating earnings for the Asia segment increased (decreased) by $13 million, net of $10 million of income tax, ($2) million, net of $2 million of income tax, and ($12) million, net of $1 million of income tax benefit, with a corresponding change in the EMEA segment, for the years ended December 31, 2011, 2010 and 2009, respectively.
272
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Operating earnings is the measure of segment profit or loss the Company uses to evaluate segment performance and allocate resources. Consistent with GAAP accounting guidance for segment reporting, operating earnings is the Company’s measure of segment performance and is reported below. Operating earnings should not be viewed as a substitute for GAAP income (loss) from continuing operations, net of income tax. The Company believes the presentation of operating 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.
Operating earnings is defined as operating revenues less operating expenses, both net of income tax.
Operating revenues and operating expenses exclude results of discontinued operations and other businesses that have been or will be sold or exited by MetLife, Inc. (“Divested Businesses”). Operating revenues also excludes net investment gains (losses) and net derivative gains (losses).
The following additional adjustments are made to GAAP revenues, in the line items indicated, in calculating operating revenues:
• | Universal life and investment-type product policy fees excludes the amortization of unearned revenue related to net investment gains (losses) and net derivative gains (losses) and certain variable annuity GMIB fees (“GMIB Fees”); |
• | Net investment income: (i) includes amounts for scheduled periodic settlement payments and amortization of premium on derivatives that are hedges of investments but do not qualify for hedge accounting treatment, (ii) includes income from discontinued real estate operations, (iii) excludes post-tax operating earnings adjustments relating to insurance joint ventures accounted for under the equity method, (iv) excludes certain amounts related to contractholder-directed unit-linked investments, and (v) excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP; and |
• | Other revenues are adjusted for settlements of foreign currency earnings hedges. |
The following additional adjustments are made to GAAP expenses, in the line items indicated, in calculating operating expenses:
• | Policyholder benefits and claims and policyholder dividends excludes: (i) changes in the policyholder dividend obligation related to net investment gains (losses) and net derivative gains (losses), (ii) inflation-indexed benefit adjustments associated with contracts backed by inflation-indexed investments and amounts associated with periodic crediting rate adjustments based on the total return of a contractually referenced pool of assets, (iii) benefits and hedging costs related to GMIBs (“GMIB Costs”), and (iv) market value adjustments associated with surrenders or terminations of contracts (“Market Value Adjustments”); |
• | Interest credited to policyholder account balances includes adjustments for scheduled periodic settlement payments and amortization of premium on derivatives that are hedges of PABs but do not qualify for hedge accounting treatment and excludes amounts related to net investment income earned on contractholder-directed unit-linked investments; |
• | Amortization of DAC and VOBA excludes amounts related to: (i) net investment gains (losses) and net derivative gains (losses), (ii) GMIB Fees and GMIB Costs, and (iii) Market Value Adjustments; |
273
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
• | Amortization of negative VOBA excludes amounts related to Market Value Adjustments; |
• | Interest expense on debt excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP; and |
• | Other expenses excludes costs related to: (i) noncontrolling interests, (ii) implementation of new insurance regulatory requirements, and (iii) business combinations. |
In 2011, management modified its definition of operating earnings to exclude the impacts of the Divested Businesses, which includes certain operations of MetLife Bank and the Caribbean Business, as these results are not relevant to understanding the Company’s ongoing operating results. Consequently, prior years’ results for Corporate & Other and total consolidated operating earnings have been decreased by $111 million, net of $66 million of income tax, and $211 million, net of $139 million of income tax, for the years ended December 31, 2010 and 2009, respectively. In the third quarter of 2012, MetLife, Inc. began reporting additional MetLife Bank operations as Divested Businesses. See Note 24. Consequently, results for Corporate & Other and total consolidated operating earnings have been further decreased by $91 million, net of $55 million of income tax, $131 million, net of $75 million of income tax and $76 million, net of $46 million of income tax, for the years ended December 31, 2011, 2010 and 2009, respectively.
In addition, in 2011, management modified its definition of operating earnings to exclude impacts related to certain variable annuity guarantees and Market Value Adjustments to better conform to the way it manages and assesses its business. Accordingly, such results are no longer reported in operating earnings. Consequently, prior years’ results for Retail and total consolidated operating earnings have been increased by $64 million, net of $34 million of income tax, and $90 million, net of $49 million of income tax, for the years ended December 31, 2010 and 2009, respectively.
Set forth in the tables below is certain financial information with respect to the Company’s segments, as well as Corporate & Other for the years ended December 31, 2011, 2010 and 2009 and at December 31, 2011 and 2010. The accounting policies of the segments are the same as those of the Company, except for operating earnings adjustments as defined above, the method of capital allocation and the accounting for gains (losses) from intercompany sales, which are eliminated in consolidation.
Economic capital is an internally developed risk capital model, the purpose of which is to measure the risk in the business and to provide a basis upon which capital is deployed. The economic capital model accounts for the unique and specific nature of the risks inherent in the Company’s business.
Effective January 1, 2011, the Company updated its economic capital model to align segment allocated equity with emerging standards and consistent risk principles. Such changes to the Company’s economic capital model are applied prospectively. Segment net investment income is also credited or charged based on the level of allocated equity; however, changes in allocated equity do not impact the Company’s consolidated net investment income, operating earnings or income (loss) from continuing operations, net of income tax.
274
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Operating Earnings | ||||||||||||||||||||||||||||||||||||||||||||
The Americas | ||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2011 | Retail | Group, Voluntary & Worksite Benefits | Corporate Benefit Funding | Latin America | Total | Asia | EMEA | Corporate & Other | Total | Adjustments | Total Consolidated | |||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||||||||||||||
Premiums | $ | 6,711 | $ | 13,949 | $ | 2,848 | $ | 2,514 | $ | 26,022 | $ | 7,716 | $ | 2,477 | $ | 54 | $ | 36,269 | $ | 92 | $ | 36,361 | ||||||||||||||||||||||
Universal life and investment-type product policy fees | 4,096 | 630 | 232 | 757 | 5,715 | 1,343 | 315 | 155 | 7,528 | 278 | 7,806 | |||||||||||||||||||||||||||||||||
Net investment income | 7,414 | 1,768 | 5,506 | 1,025 | 15,713 | 2,475 | 562 | 888 | 19,638 | (52 | ) | 19,586 | ||||||||||||||||||||||||||||||||
Other revenues | 779 | 390 | 249 | 15 | 1,433 | 36 | 123 | 60 | 1,652 | 880 | 2,532 | |||||||||||||||||||||||||||||||||
Net investment gains (losses) | — | — | — | — | — | — | — | — | — | (867 | ) | (867 | ) | |||||||||||||||||||||||||||||||
Net derivative gains (losses) | — | — | — | — | — | — | — | — | — | 4,824 | 4,824 | |||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||
Total revenues | 19,000 | 16,737 | 8,835 | 4,311 | 48,883 | 11,570 | 3,477 | 1,157 | 65,087 | 5,155 | 70,242 | |||||||||||||||||||||||||||||||||
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Expenses | ||||||||||||||||||||||||||||||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 9,220 | 13,015 | 5,287 | 2,064 | 29,586 | 5,239 | 1,290 | 126 | 36,241 | 676 | 36,917 | |||||||||||||||||||||||||||||||||
Interest credited to policyholder account balances | 2,412 | 178 | 1,323 | 371 | 4,284 | 1,607 | 166 | — | 6,057 | (454 | ) | 5,603 | ||||||||||||||||||||||||||||||||
Capitalization of DAC | (2,339 | ) | (176 | ) | (25 | ) | (295 | ) | (2,835 | ) | (2,045 | ) | (669 | ) | — | (5,549 | ) | (9 | ) | (5,558 | ) | |||||||||||||||||||||||
Amortization of DAC and VOBA | 1,845 | 186 | 17 | 207 | 2,255 | 1,486 | 613 | 1 | 4,355 | 543 | 4,898 | |||||||||||||||||||||||||||||||||
Amortization of negative VOBA | — | — | — | (6 | ) | (6 | ) | (560 | ) | (53 | ) | — | (619 | ) | (78 | ) | (697 | ) | ||||||||||||||||||||||||||
Interest expense on debt | 1 | — | 9 | 1 | 11 | — | — | 1,293 | 1,304 | 325 | 1,629 | |||||||||||||||||||||||||||||||||
Other expenses | 5,854 | 2,198 | 513 | 1,305 | 9,870 | 4,522 | 1,723 | 505 | 16,620 | 1,645 | 18,265 | |||||||||||||||||||||||||||||||||
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Total expenses | 16,993 | 15,401 | 7,124 | 3,647 | 43,165 | 10,249 | 3,070 | 1,925 | 58,409 | 2,648 | 61,057 | |||||||||||||||||||||||||||||||||
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Provision for income tax expense (benefit) | 672 | 445 | 599 | 150 | 1,866 | 441 | 156 | (584 | ) | 1,879 | 914 | 2,793 | ||||||||||||||||||||||||||||||||
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Operating earnings | $ | 1,335 | $ | 891 | $ | 1,112 | $ | 514 | $ | 3,852 | $ | 880 | $ | 251 | $ | (184 | ) | $ | 4,799 | |||||||||||||||||||||||||
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Adjustments to: | ||||||||||||||||||||||||||||||||||||||||||||
Total revenues |
| 5,155 | ||||||||||||||||||||||||||||||||||||||||||
Total expenses |
| (2,648 | ) | |||||||||||||||||||||||||||||||||||||||||
Provision for income tax (expense) benefit |
| (914 | ) | |||||||||||||||||||||||||||||||||||||||||
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Income (loss) from continuing operations, net of income tax |
| $ | 6,392 | $ | 6,392 | |||||||||||||||||||||||||||||||||||||||
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At December 31, 2011 | Retail | Group, Voluntary & Worksite Benefits | Corporate Benefit Funding | Latin America | Asia (1) | EMEA | Corporate & Other | Total | ||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 301,591 | $ | 45,197 | $ | 195,217 | $ | 20,315 | $ | 115,806 | $ | 30,040 | $ | 88,060 | $ | 796,226 | ||||||||||||||||||||||||||||
Separate account assets | $ | 128,208 | $ | 479 | $ | 64,851 | $ | 2,880 | $ | 6,599 | $ | 6 | $ | — | $ | 203,023 | ||||||||||||||||||||||||||||
Separate account liabilities | $ | 128,208 | $ | 479 | $ | 64,851 | $ | 2,880 | $ | 6,599 | $ | 6 | $ | — | $ | 203,023 |
(1) | Total assets includes $103.9 billion of assets from the Japan operations which represents 13% of total consolidated assets. |
275
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Operating Earnings | ||||||||||||||||||||||||||||||||||||||||||||
The Americas | ||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2010 | Retail | Group, Voluntary & Worksite Benefits | Corporate Benefit Funding | Latin America | Total | Asia | EMEA | Corporate & Other | Total | Adjustments | Total Consolidated | |||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||||||||||||||
Premiums | $ | 6,491 | $ | 14,100 | $ | 2,345 | $ | 1,969 | $ | 24,905 | $ | 1,716 | $ | 439 | $ | 11 | $ | 27,071 | $ | — | $ | 27,071 | ||||||||||||||||||||||
Universal life and investment-type product policy fees | 3,655 | 616 | 226 | 630 | 5,127 | 502 | 50 | 138 | 5,817 | 211 | 6,028 | |||||||||||||||||||||||||||||||||
Net investment income | 7,644 | 1,702 | 5,280 | 927 | 15,553 | 497 | 155 | 650 | 16,855 | 639 | 17,494 | |||||||||||||||||||||||||||||||||
Other revenues | 633 | 369 | 247 | 12 | 1,261 | 14 | 9 | 109 | 1,393 | 935 | 2,328 | |||||||||||||||||||||||||||||||||
Net investment gains (losses) | — | — | — | — | — | — | — | — | — | (408 | ) | (408 | ) | |||||||||||||||||||||||||||||||
Net derivative gains (losses) | — | — | — | — | — | — | — | — | — | (265 | ) | (265 | ) | |||||||||||||||||||||||||||||||
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Total revenues | 18,423 | 16,787 | 8,098 | 3,538 | 46,846 | 2,729 | 653 | 908 | 51,136 | 1,112 | 52,248 | |||||||||||||||||||||||||||||||||
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Expenses | ||||||||||||||||||||||||||||||||||||||||||||
Policyholder benefits and claims and policyholder dividends | 8,835 | 13,112 | 4,677 | 1,829 | 28,453 | 1,351 | 137 | 33 | 29,974 | 698 | 30,672 | |||||||||||||||||||||||||||||||||
Interest credited to policyholder account balances | 2,381 | 192 | 1,447 | 370 | 4,390 | 183 | 124 | — | 4,697 | 222 | 4,919 | |||||||||||||||||||||||||||||||||
Capitalization of DAC | (1,769 | ) | (187 | ) | (18 | ) | (221 | ) | (2,195 | ) | (459 | ) | (116 | ) | — | (2,770 | ) | — | (2,770 | ) | ||||||||||||||||||||||||
Amortization of DAC and VOBA | 1,724 | 181 | 16 | 144 | 2,065 | 290 | 87 | 1 | 2,443 | 34 | 2,477 | |||||||||||||||||||||||||||||||||
Amortization of negative VOBA | — | — | — | (1 | ) | (1 | ) | (49 | ) | (7 | ) | — | (57 | ) | (7 | ) | (64 | ) | ||||||||||||||||||||||||||
Interest expense on debt | 2 | — | 8 | 1 | 11 | 1 | 1 | 1,124 | 1,137 | 413 | 1,550 | |||||||||||||||||||||||||||||||||
Other expenses | 5,059 | 2,193 | 494 | 901 | 8,647 | 1,142 | 434 | 379 | 10,602 | 1,132 | 11,734 | |||||||||||||||||||||||||||||||||
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Total expenses | 16,232 | 15,491 | 6,624 | 3,023 | 41,370 | 2,459 | 660 | 1,537 | 46,026 | 2,492 | 48,518 | |||||||||||||||||||||||||||||||||
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Provision for income tax expense (benefit) | 735 | 427 | 516 | 92 | 1,770 | 46 | — | (402 | ) | 1,414 | (304 | ) | 1,110 | |||||||||||||||||||||||||||||||
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Operating earnings | $ | 1,456 | $ | 869 | $ | 958 | $ | 423 | $ | 3,706 | $ | 224 | $ | (7 | ) | $ | (227 | ) | $ | 3,696 | ||||||||||||||||||||||||
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Adjustments to: |
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Total revenues |
| 1,112 | ||||||||||||||||||||||||||||||||||||||||||
Total expenses |
| (2,492 | ) | |||||||||||||||||||||||||||||||||||||||||
Provision for income tax (expense) benefit |
| 304 | ||||||||||||||||||||||||||||||||||||||||||
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Income (loss) from continuing operations, net of income tax |
| $ | 2,620 | $ | 2,620 | |||||||||||||||||||||||||||||||||||||||
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At December 31, 2010 | Retail | Group, Voluntary & Worksite Benefits | Corporate Benefit Funding | Latin America | Asia (1) | EMEA | Corporate & Other | Total | ||||||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 277,948 | $ | 40,036 | $ | 179,672 | $ | 22,079 | $ | 111,832 | $ | 29,090 | $ | 67,592 | $ | 728,249 | ||||||||||||||||||||||||||||
Separate account assets | $ | 116,357 | $ | 492 | $ | 56,624 | $ | 2,691 | $ | 6,737 | $ | 237 | $ | — | $ | 183,138 | ||||||||||||||||||||||||||||
Separate account liabilities | $ | 116,357 | $ | 492 | $ | 56,624 | $ | 2,691 | $ | 6,737 | $ | 237 | $ | — | $ | 183,138 |
(1) | Total assets includes $87.5 billion of assets from the Japan operations which represents 12% of total consolidated assets. |
276
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Operating Earnings | ||||||||||||||||||||||||||||||||||||||||||||
The Americas | ||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2009 | Retail | Group, Voluntary & Worksite Benefits | Corporate Benefit Funding | Latin America | Total | Asia | EMEA | Corporate & Other | Total | Adjustments | Total Consolidated | |||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||||||||||||||
Premiums | $ | 6,748 | $ | 13,945 | $ | 2,561 | $ | 1,562 | $ | 24,816 | $ | 1,023 | $ | 299 | $ | 19 | $ | 26,157 | $ | — | $ | 26,157 | ||||||||||||||||||||||
Universal life and investment-type product policy fees | 3,191 | 633 | 176 | 546 | 4,546 | 390 | 13 | 106 | 5,055 | 142 | 5,197 | |||||||||||||||||||||||||||||||||
Net investment income | 7,137 | 1,516 | 4,766 | 624 | 14,043 | 356 | 104 | 77 | 14,580 | 149 | 14,729 | |||||||||||||||||||||||||||||||||
Other revenues | 564 | 420 | 239 | 7 | 1,230 | 2 | 5 | 44 | 1,281 | 1,048 | 2,329 | |||||||||||||||||||||||||||||||||
Net investment gains (losses) | — | — | — | — | — | — | — | — | — | (2,901 | ) | (2,901 | ) | |||||||||||||||||||||||||||||||
Net derivative gains (losses) | — | — | — | — | — | — | — | — | — | (4,866 | ) | (4,866 | ) | |||||||||||||||||||||||||||||||
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Total revenues | 17,640 | 16,514 | 7,742 | 2,739 | 44,635 | 1,771 | 421 | 246 | 47,073 | (6,428 | ) | 40,645 | ||||||||||||||||||||||||||||||||
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Policyholder benefits and claims and policyholder dividends | 8,946 | 13,031 | 4,797 | 1,412 | 28,186 | 844 | 60 | 16 | 29,106 | 548 | 29,654 | |||||||||||||||||||||||||||||||||
Interest credited to policyholder account balances | 2,429 | 210 | 1,633 | 331 | 4,603 | 148 | 98 | — | 4,849 | (4 | ) | 4,845 | ||||||||||||||||||||||||||||||||
Capitalization of DAC | (1,782 | ) | (197 | ) | (13 | ) | (155 | ) | (2,147 | ) | (311 | ) | (44 | ) | — | (2,502 | ) | — | (2,502 | ) | ||||||||||||||||||||||||
Amortization of DAC and VOBA | 1,328 | 194 | 14 | 111 | 1,647 | 194 | 41 | 3 | 1,885 | (830 | ) | 1,055 | ||||||||||||||||||||||||||||||||
Amortization of negative VOBA | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Interest expense on debt | 6 | — | 3 | 1 | 10 | 2 | 5 | 1,014 | 1,031 | 13 | 1,044 | |||||||||||||||||||||||||||||||||
Other expenses | 5,139 | 2,206 | 484 | 654 | 8,483 | 756 | 324 | 515 | 10,078 | 1,086 | 11,164 | |||||||||||||||||||||||||||||||||
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Total expenses | 16,066 | 15,444 | 6,918 | 2,354 | 40,782 | 1,633 | 484 | 1,548 | 44,447 | 813 | 45,260 | |||||||||||||||||||||||||||||||||
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Provision for income tax expense (benefit) | 504 | 344 | 273 | 120 | 1,241 | 1 | (13 | ) | (762 | ) | 467 | (2,573 | ) | (2,106 | ) | |||||||||||||||||||||||||||||
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Operating earnings | $ | 1,070 | $ | 726 | $ | 551 | $ | 265 | $ | 2,612 | $ | 137 | $ | (50 | ) | $ | (540 | ) | $ | 2,159 | ||||||||||||||||||||||||
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Adjustments to: | ||||||||||||||||||||||||||||||||||||||||||||
Total revenues |
| (6,428 | ) | |||||||||||||||||||||||||||||||||||||||||
Total expenses |
| (813 | ) | |||||||||||||||||||||||||||||||||||||||||
Provision for income tax (expense) benefit |
| 2,573 | ||||||||||||||||||||||||||||||||||||||||||
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Income (loss) from continuing operations, net of income tax |
| $ | (2,509 | ) | $ | (2,509 | ) | |||||||||||||||||||||||||||||||||||||
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277
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The following table presents total premiums, universal life & investment-type product policy fees and other revenue by major product groups of the Company’s segments as well as Corporate & Other:
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Life insurance (1) | $ | 30,486 | $ | 23,978 | $ | 22,774 | ||||||
Accident and health | 12,269 | 7,480 | 6,897 | |||||||||
Property and casualty insurance | 3,043 | 2,956 | 2,946 | |||||||||
Non-insurance | 901 | 1,013 | 1,066 | |||||||||
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Total | $ | 46,699 | $ | 35,427 | $ | 33,683 | ||||||
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(1) | Includes Annuities and Corporate Benefit Funding products. |
Net investment income is based upon the actual results of each segment’s specifically identifiable asset portfolio adjusted for allocated equity. Other costs are allocated to each of the segments based upon: (i) a review of the nature of such costs; (ii) time studies analyzing the amount of employee compensation costs incurred by each segment; and (iii) cost estimates included in the Company’s product pricing.
Operating revenues derived from any customer did not exceed 10% of consolidated operating revenues for the years ended December 31, 2011, 2010 and 2009. Operating revenues from U.S. operations were $44.4 billion, $43.4 billion and $41.2 billion for the years ended December 31, 2011, 2010 and 2009, respectively, which represented 68%, 85% and 88%, respectively, of consolidated operating revenues.
The only significant concentration of operating revenues from any individual foreign country for the year ended December 31, 2011 was from the Japan operations, which were $9.3 billion or 14% of consolidated operating revenues. There was no significant concentration of operating revenues from any individual foreign country for the years ended December 31, 2010 and 2009.
23. Discontinued Operations
Real Estate
The Company actively manages its real estate portfolio with the objective of maximizing earnings through selective acquisitions and dispositions. Income related to real estate classified as held-for-sale or sold is presented in discontinued operations. These assets are carried at the lower of depreciated cost or estimated fair value less expected disposition costs. Income from discontinued real estate operations, net of income tax, was $67 million, $15 million and $23 million for the years ended December 31, 2011, 2010 and 2009, respectively.
The carrying value of real estate related to discontinued operations was $114 million and $300 million at December 31, 2011 and 2010, respectively.
278
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Operations
MetLife Taiwan
During the first quarter of 2011, the Company entered into a definitive agreement to sell its wholly-owned subsidiary, MetLife Taiwan, to a third party, and the sale occurred in November 2011. See Note 2. The following tables present the amounts related to the operations and financial position of MetLife Taiwan that have been reflected as discontinued operations in the consolidated statements of operations and as assets and liabilities held-for-sale in the consolidated balance sheet:
Years ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Total revenues | $ | 379 | $ | 440 | $ | 386 | ||||||
Total expenses | 363 | 406 | 373 | |||||||||
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Income (loss) before provision for income tax | 16 | 34 | 13 | |||||||||
Provision for income tax expense (benefit) | (4 | ) | 12 | 4 | ||||||||
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Income (loss) from operations of discontinued operations, net of income tax | 20 | 22 | 9 | |||||||||
Gain (loss) on disposal, net of income tax | (64 | ) | — | — | ||||||||
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Income (loss) from discontinued operations, net of income tax | $ | (44 | ) | $ | 22 | $ | 9 | |||||
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December 31, 2010 | ||||
(In millions) | ||||
Total assets held-for-sale | $ | 3,331 | ||
Total liabilities held-for-sale | $ | 3,043 | ||
Major classes of assets and liabilities included above: | ||||
Total investments | $ | 2,726 | ||
Total future policy benefits | $ | 2,461 |
Texas Life Insurance Company
During the fourth quarter of 2008, MetLife, Inc. entered into an agreement to sell its wholly-owned subsidiary, Cova, the parent company of Texas Life, to a third-party and the sale occurred in March 2009. See Note 2. The following table presents the amounts related to the operations of Cova that have been reflected as discontinued operations in the consolidated statements of operations:
Year Ended December 31, 2009 | ||||
(In millions) | ||||
Total revenues | $ | 25 | ||
Total expenses | 19 | |||
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Income before provision for income tax | 6 | |||
Provision for income tax expense | 2 | |||
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Income from operations of discontinued operations, net of income tax | 4 | |||
Gain on disposal, net of income tax | 28 | |||
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Income (loss) from discontinued operations, net of income tax | $ | 32 | ||
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279
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
24. Subsequent Events
Acquisitions and Dispositions
2012 Pending Dispositions
MetLife Bank
As discussed in Note 2, MetLife Bank and MetLife, Inc. entered into a definitive agreement to sell most of the depository business of MetLife Bank to GE Capital Bank (formerly known as GE Capital Financial Inc.). In September 2012, this agreement was amended. Under the new structure, MetLife Bank’s depository business would be assumed by GE Capital Retail Bank, rather than by GE Capital Bank. The key terms of the agreement, whereby a GE Capital affiliate will acquire approximately $7 billion in MetLife Bank deposits, including certificates of deposit and money market accounts, remain unchanged. The transaction, as amended, will now be subject to approval by the OCC, the primary regulator of GE Capital Retail Bank, and other customary closing conditions. The approval of the Federal Deposit Insurance Corporation (“FDIC”) will no longer be required for the transaction. Upon completion of the sale, MetLife Bank would take the remaining administrative steps with the FDIC to terminate its deposit insurance and MetLife, Inc. would deregister as a bank holding company.
Additionally, in January 2012, MetLife, Inc. announced it was exiting the business of originating forward residential mortgage loans and, in April 2012, announced it was exiting the businesses of originating and servicing reverse residential mortgage loans and that it and MetLife Bank entered into a definitive agreement to sell MetLife Bank’s reverse mortgage servicing portfolio. In June 2012, the Company sold the majority of MetLife Bank’s reverse mortgage servicing rights and related assets and liabilities, with the remainder sold in September 2012 pursuant to the same sales agreement. Also, in the third quarter of 2012, MetLife began exploring the sale of MetLife Bank’s forward mortgage servicing assets and operations. On November 2, 2012, MetLife, Inc. and MetLife Bank entered into a definitive agreement to sell MetLife Bank’s forward mortgage servicing portfolio to JPMorganChase Bank, N.A. The transaction is subject to certain regulatory approvals and other customary closing conditions. Upon entering into this agreement, MetLife Bank has committed to sell or has otherwise exited most of its operations.
In conjunction with exiting the depository, reverse mortgage servicing rights and mortgage loan origination businesses, for the nine months ended September 30, 2012, the Company recorded a net loss of $155 million, net of income tax, related to the loss on disposal of the reverse mortgage servicing rights, lease impairments, other employee-related charges, impairments on mortgage loans, and gains (losses) on securities and mortgage loans sold. The Company expects to incur additional charges of $10 million to $40 million, net of income tax, through 2013, related to exiting these businesses. For reverse mortgage servicing rights, collective net assets of $140 million were sold for $38 million in net consideration. In conjunction with the sale of reverse servicing rights, the Company also de-recognized $9.1 billion of the associated securitized reverse residential mortgage loans that previously did not qualify as sales, as well as the corresponding liability of $9.1 billion related to these mortgage loans, from the consolidated balance sheet. In addition, the total assets and liabilities recorded in the consolidated balance sheets related to the depository and origination businesses were approximately $6.8 billion and $6.0 billion at September 30, 2012, respectively, and $11.3 billion and $10.5 billion at December 31, 2011, respectively. These businesses did not qualify for classification as discontinued operations under GAAP.
MetLife Bank has historically taken advantage of collateralized borrowing opportunities with the FHLB of NY. In January 2012, MetLife Bank discontinued taking advances from the FHLB of NY. In April 2012, MetLife Bank transferred cash to MLIC related to $3.8 billion of outstanding advances which had been included in long-term debt, and MLIC assumed the associated obligations under terms similar to those of the transferred advances by issuing funding agreements which are included in PABs.
280
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Caribbean Business
As discussed in Note 2, the Company entered into an agreement to sell its Caribbean Business. During the third quarter of 2012, regulatory approvals have been received and closings have taken place in the majority of the jurisdictions. The net assets sold were $127 million. The Company recorded an additional loss of $8 million, net of income tax, related to these closings. Sales in the remaining jurisdictions are expected to close in the fourth quarter of 2012, subject to regulatory approval and other customary closing conditions in each of the jurisdictions. The results of the Caribbean Business are included in continuing operations.
American Life U.K. Assumption Reinsurance
During July 2012, the Company completed the disposal, through a ceded assumption reinsurance agreement, of certain closed blocks of business in the U.K., to a third party. Simultaneously, the Company recaptured from the third party the indemnity reinsurance agreement related to this business, previously reinsured as of July 1, 2011. These transactions resulted in a decrease in both insurance and reinsurance assets and liabilities of $4.1 billion. The Company recognized a gain of $34 million, net of income tax, on the transactions.
2010 Acquisition of ALICO
Contingent Consideration
As discussed in Note 2, the Company guaranteed that the fair value of a fund of assets backing certain U.K. unit-linked contracts would have a value of at least £1 per unit on July 1, 2012. At July 1, 2012, the shortfall between the aggregate guaranteed amount and the fair value of the fund was less than £106 million, resulting in a payment of $108 million by the Company to AIG during the third quarter of 2012.
Branch Restructuring
During the second quarter of 2012, and in accordance with the Closing Agreement with the Commissioner of the IRS as discussed in Note 2, the Company transferred the business of the Japan branch to a newly incorporated wholly-owned subsidiary in Japan, MetLife Alico Life Insurance K. K. (“MLKK”). Also during the second quarter of 2012, the Company revised the estimate of the valuation allowance required for U.S. deferred tax assets relating to the ongoing restructuring of American Life’s other non-U.S. branches. At December 31, 2011 the Company had recorded a valuation allowance related to the branch restructuring of $720 million to reduce the net amount of U.S. deferred tax assets to an amount that is more likely than not realizable. See Note 15. This valuation allowance was reduced to $118 million at September 30, 2012. The net reduction in the valuation allowance was primarily due to the following factors:
• | Additional U.S. deferred tax assets that were determined to be realizable; |
• | Additional tax basis in assets as a result of the gain recognized related to the branch restructuring that more likely than not will not be realizable; and |
• | A reduction in both the gross deferred tax asset and the valuation allowance related to the completion of the Company’s transfer of the Japan branch business to MLKK. |
281
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The following table provides a rollforward of the deferred tax asset valuation allowance associated with the branch restructuring:
Nine Months Ended September 30, 2012 | ||||||||||||
Japan | Other Non-U.S. Branches | Total | ||||||||||
(In millions) | ||||||||||||
Balance, beginning of period | $ | 566 | $ | 154 | $ | 720 | ||||||
Income tax expense (benefit) | 10 | (11 | ) | (1 | ) | |||||||
Deferred income tax expense (benefit) related to unrealized investment gains (losses) | 320 | (25 | ) | 295 | ||||||||
Offsetting reduction in gross deferred tax asset related to the branch transfer to subsidiary | (896 | ) | — | (896 | ) | |||||||
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Balance, end of period | $ | — | $ | 118 | $ | 118 | ||||||
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The liability recognized in purchase accounting as of the Acquisition Date for the anticipated and estimated costs associated with restructuring American Life’s foreign branches into subsidiaries in connection with the Closing Agreement (see Note 2) has been reduced based on payments through September 30, 2012. In addition, based on revised estimates of anticipated costs, this liability was reduced by $35 million, resulting in a liability of $92 million at September 30, 2012.
Goodwill
The Company tests goodwill for impairment during the third quarter of each year at the reporting unit level based upon data at June 30 of that year. A reporting unit is the operating segment or a business one level below the operating segment, if discrete financial information is prepared and regularly reviewed by management at that level. Step 1 of the goodwill impairment process requires a comparison of the fair value of a reporting unit to its carrying value. To determine the fair values for our reporting units, the Company generally applies a market multiple and/or discounted cash flow (“DCF”) valuation approach. The market multiple valuation approach utilizes market multiples of companies with similar businesses and the projected operating earnings of the reporting unit. The DCF valuation approach requires judgments about revenues, operating earnings projections, capital market assumptions and discount rates.
Since the market multiple and DCF valuation techniques indicated that the fair value of the Retail Annuities reporting unit was below its carrying value, an actuarial appraisal, which estimates the net worth of the reporting unit, the value of existing business and the value of new business, was also performed. This appraisal also resulted in a fair value of the Retail Annuities reporting unit that was less than the carrying value, indicating a potential for goodwill impairment. The growing concern regarding an extended period of low interest rates was reflected in the fair value estimate, particularly on the returns a market buyer would assume on the fixed income portion of separate account annuity products. In addition, industry-wide inquiries by regulators on the use of affiliated captive reinsurers for off-shore entities to reinsure insurance risks may limit access to this type of capital structure. As a result, a market buyer may discount the ability to fully utilize these structures, which also affected the fair value estimate of the reporting unit. Accordingly, the Company performed Step 2 of the goodwill impairment process, which compares the implied fair value of goodwill with the carrying value of that goodwill in the reporting unit to calculate the amount of goodwill impairment. The Company determined that all of the recorded goodwill associated with the Retail Annuities reporting unit was not recoverable and recorded a non-cash charge of $1.9 billion ($1.6 billion, net of income tax) for the impairment of the entire goodwill balance at September 30, 2012.
282
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
In addition, the Company performed its annual goodwill impairment tests of its other reporting units during the third quarter of 2012 using a market multiple and/or DCF valuation approach based upon data at June 30, 2012 and concluded that the fair values of all such reporting units were in excess of their carrying values and, therefore, goodwill was not impaired.
As anticipated, in the third quarter of 2012, the Company continued to realign certain products and businesses among its existing segments. As a result, the Company reallocated goodwill from the former segments to and among the new segments based on the relative fair value method. As a result of the realignment during the third quarter, the Company performed an analysis to identify all reporting units under the revised structure. Based on a qualitative assessment performed, the Company concluded that at September 30, 2012 there were no indicators of a scenario in which it was more likely than not that any reporting units had a carrying value that exceeded fair value, and thus, no further impairment analysis was performed.
Management continues to evaluate current market conditions that may affect the estimated fair value of the reporting units to assess whether any goodwill impairment exists. Deteriorating or adverse market conditions for certain reporting units may have a significant impact on the estimated fair value of these reporting units and could result in future impairments of goodwill.
At September 30, 2012, the Company’s accumulated goodwill impairment loss was $1.9 billion, of which $1.7 billion was recorded in Retail and $241 million was recorded in Corporate & Other.
Long-term Debt
Senior Notes
In August 2012, MetLife, Inc. issued $750 million of senior notes due in August 2042. The senior notes bear interest at a fixed rate of 4.125% payable semi-annually. In connection with the issuance, MetLife, Inc. incurred $7 million of related costs which have been capitalized and included in other assets. These costs are being amortized over the term of the senior notes.
Credit Facility
In September 2012, MetLife, Inc. and MetLife Funding, Inc. entered into a $1.0 billion five-year credit agreement which amended and restated the three-year agreement dated October 2010. All borrowings under the 2012 five-year credit agreement must be repaid by September 2017, except that letters of credit outstanding on that date may remain outstanding until no later than September 2018. MetLife, Inc. incurred costs of $4 million related to the amended and restated credit facility, which have been capitalized and included in other assets. These costs will be amortized over the remaining term of the amended and restated facility.
Collateral Financing Arrangements Associated with the Closed Block
In June 2012, following regulatory approval, MRC, a wholly-owned subsidiary of MetLife, Inc., repurchased and canceled $451 million in aggregate principal amount of surplus notes (the “June 2012 Partial Repurchase”) that MRC issued in December 2007 in connection with MLIC reinsuring a portion of its closed block liabilities to MRC. Payments made by MetLife, Inc. in June 2012 associated with the June 2012 Partial Repurchase, which also included payments made to the unaffiliated financial institution with which MetLife, Inc. entered into an agreement in 2007 in connection with the issuance of the surplus notes, totaled $451 million, exclusive of accrued interest on the surplus notes. At September 30, 2012, the amount of the surplus notes issued by MRC that remained outstanding was $1.4 billion. See Note 12.
283
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Remarketing of Senior Debt Securities and Settlement of Stock Purchase Contracts
In October 2012, MetLife, Inc. closed the successful remarketing of the Series C portion of the senior debt securities underlying the common equity units. The Series C senior debt securities were remarketed as 1.756% Series C senior debt securities Tranche 1 and 3.048% Series C senior debt securities Tranche 2, due December 2017 and 2022, respectively. MetLife, Inc. did not receive any proceeds from the remarketing. Common equity unit holders used the remarketing proceeds to settle their payment obligations under the applicable stock purchase contract. The subsequent settlement of the stock purchase contracts occurred in October 2012, providing proceeds to MetLife, Inc. of $1.0 billion in exchange for shares of MetLife, Inc.’s common stock. MetLife, Inc. delivered 28,231,956 shares of its newly issued common stock to settle the stock purchase contracts. See Note 14.
Litigation
Matters as to Which an Estimate Can Be Made
For some of the matters disclosed below and in Note 16, the Company is able to estimate a reasonably possible range of loss. For such matters where a loss is believed to be reasonably possible, but not probable, no accrual has been made. The Company currently estimates the aggregate range of reasonably possible losses in excess of amounts accrued for these matters to be approximately $0 to $145 million.
Asbestos-Related Claims
In addition to the asbestos-related claims discussed in Note 16, MLIC received approximately 3,909 new asbestos-related claims during the nine months ended September 30, 2012.
Regulatory Matters
MetLife Bank Mortgage Regulatory and Law Enforcement Authorities’ Inquiries. Since 2008, MetLife, through its affiliate, MetLife Bank, has been engaged in the forward and reverse residential mortgage origination and servicing business. State and federal regulatory and law enforcement authorities have initiated various inquiries, investigations or examinations of alleged irregularities in the foreclosure practices of the residential mortgage servicing industry. Mortgage servicing practices have also been the subject of Congressional attention. Authorities have publicly stated that the scope of the investigations extends beyond foreclosure documentation practices to include mortgage loan modification and loss mitigation practices.
On April 13, 2011, the OCC entered into consent decrees with several banks, including MetLife Bank. The consent decrees require an independent review of foreclosure practices and set forth new residential mortgage servicing standards, including a requirement for a designated point of contact for a borrower during the loss mitigation process. In addition, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) entered into consent decrees with the affiliated bank holding companies of these banks, including MetLife, Inc., to enhance the supervision of the mortgage servicing activities of their banking subsidiaries. On August 6, 2012, the Federal Reserve Board issued an Order of Assessment of a Civil Monetary Penalty Issued Upon Consent against MetLife, Inc. that will impose a penalty of up to $3.2 million for the alleged deficiencies in oversight of MetLife Bank’s servicing of residential mortgage loans and processing foreclosures that were the subject of the 2011 consent decree.
MetLife Bank also had a meeting with the Department of Justice regarding mortgage servicing and foreclosure practices. It is possible that various state or federal regulatory and law enforcement authorities may seek monetary penalties from MetLife Bank relating to foreclosure practices.
284
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
MetLife Bank has also responded to a subpoena issued by the New York State Department of Financial Services (“Department of Financial Services”) regarding hazard insurance and flood insurance that MetLife Bank obtains to protect the lienholder’s interest when the borrower’s insurance has lapsed. In April and May 2012, MetLife Bank received two subpoenas issued by the Office of Inspector General for the U.S. Department of Housing and Urban Development regarding Federal Housing Administration (“FHA”) insured loans. In June and September 2012, MetLife Bank received two Civil Investigative Demands that the U.S. Department of Justice issued as part of a False Claims Act investigation of allegations that MetLife Bank had improperly originated and/or underwritten loans insured by the FHA.
The consent decrees, as well as the inquiries or investigations referred to above, could adversely affect MetLife’s reputation or result in material fines, penalties, equitable remedies or other enforcement actions, and result in significant legal costs in responding to governmental investigations or other litigation. In addition, the changes to the mortgage servicing business required by the consent decrees and the resolution of any other inquiries or investigations may affect the profitability of such business. The Company is unable to estimate the reasonably possible loss or range of loss arising from the MetLife Bank regulatory matters. Management believes that the Company’s consolidated financial statements as a whole will not be materially affected by the MetLife Bank regulatory matters.
United States of America v. EME Homer City Generation, L.P., et al. (W.D. Pa., filed January 4, 2011). On January 4, 2011, the U.S. commenced a civil action in United States District Court for the Western District of Pennsylvania against EME Homer City Generation L.P. (“EME Homer City”), Homer City OL6 LLC, and other defendants regarding the operations of the Homer City Generating Station, an electricity generating facility. Homer City OL6 LLC, an entity owned by MLIC, is a passive investor with a noncontrolling interest in the electricity generating facility, which is solely operated by the lessee, EME Homer City. The complaint sought injunctive relief and assessment of civil penalties for alleged violations of the federal Clean Air Act and Pennsylvania’s State Implementation Plan. The alleged violations were the subject of Notices of Violations (“NOVs”) that the Environmental Protection Agency (“EPA”) issued to EME Homer City, Homer City OL6 LLC, and others in June 2008 and May 2010. On January 7, 2011, the United States District Court for the Western District of Pennsylvania granted the motion by the Pennsylvania Department of Environmental Protection and the State of New York to intervene in the lawsuit as additional plaintiffs. On February 16, 2011, the State of New Jersey filed an Intervenor’s Complaint in the lawsuit. On October 12, 2011, the court issued an order dismissing the U.S.’s lawsuit with prejudice. The Government entities have appealed from the order granting defendants’ motion to dismiss. EME Homer City has acknowledged its obligation to indemnify Homer City OL6 LLC for any claims relating to the NOVs. In a February 13, 2012 letter to EME Homer City, Homer City OL6 LLC and others, the Sierra Club indicated its intent to sue for alleged violations of the Clean Air Act and to seek to enjoin the alleged violations, seek unspecified penalties and attorneys’ fees, and other relief. Homer City OL6 LLC has served a claim for indemnification on EME Homer City with respect to the February 13, 2012 letter.
In the Matter of Chemform, Inc. Site, Pompano Beach, Broward County, Florida. In July 2010, the EPA advised MLIC that it believed payments were due under two settlement agreements, known as “Administrative Orders on Consent,” that New England Mutual Life Insurance Company (“New England Mutual”) signed in 1989 and 1992 with respect to the cleanup of a Superfund site in Florida (the “Chemform Site”). The EPA originally contacted MLIC (as successor to New England Mutual) and a third party in 2001, and advised that they owed additional clean-up costs for the Chemform Site. The matter was not resolved at that time. The EPA is requesting payment of an amount under $1 million from MLIC and such third party for past costs and an additional amount for future environmental testing costs at the Chemform Site. In June 2012, the EPA, MLIC, and the third party executed an Administrative Order on Consent under which MLIC and the third party have agreed to be
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
responsible for certain environmental testing at the Chemform site. The Company estimates that its costs for the environmental testing will not exceed $100,000. The June 2012 Administrative Order on Consent does not resolve the EPA’s claim for past clean-up costs. The EPA may seek additional costs if the environmental testing identifies issues. The Company estimates that the aggregate cost to resolve this matter will not exceed $1 million.
Metco Site, Hicksville, Nassau County, New York. On February 22, 2012, the New York State Department of Environmental Conservation issued a notice to MLIC, as purported successor in interest to New England Mutual, that it is a potentially responsible party with respect to hazardous substances and hazardous waste located on a property that New England Mutual owned for a time in 1978. MLIC has responded to the Department of Environmental Conservation and asserted that it is not a potentially responsible party under the law.
Unclaimed Property Inquiries and Related Litigation
In April 2012, the Company reached agreements with representatives of the U.S. jurisdictions that were conducting audits of MetLife, Inc. and certain of its affiliates for compliance with unclaimed property laws, and with state insurance regulators directly involved in a multistate targeted market conduct examination relating to claim-payment practices and compliance with unclaimed property laws. The effectiveness of each agreement was conditioned upon the approval of a specified number of jurisdictions. In each case, the threshold for effectiveness has been reached. Pursuant to the agreements, the Company will, among other things, take specified action to identify liabilities under life insurance, annuity, and retained asset contracts, to adopt specified procedures for seeking to contact and pay owners of the identified liabilities, and, to the extent that it is unable to locate such owners, to escheat these amounts with interest at a specified rate to the appropriate states. Additionally, the Company has agreed to accelerate the final date of certain industrial life policies and to escheat unclaimed benefits of such policies. Pursuant to the agreement to resolve the market conduct examination, the Company made a $40 million multi-state examination payment to be allocated among the settling states. In the third quarter of 2011, the Company incurred a $117 million after tax charge to increase reserves in connection with the Company’s use of the U.S. Social Security Administration’s Death Master File and similar databases to identify potential life insurance claims that had not been presented to the Company. In the first quarter of 2012, the Company recorded a $52 million after tax charge for the multi-state examination payment and the expected acceleration of benefit payments to policyholders under the settlements. On September 20, 2012, the West Virginia Treasurer filed an action against MLIC in West Virginia state court(West Virginia ex rel. John D. Perdue v. Metropolitan Life Insurance Company, Circuit Court of Putnam County, Civil Action No. 12-C-295)alleging that the Company violated the West Virginia Uniform Unclaimed Property Act, seeking to compel compliance with the Act, and seeking payment of unclaimed property, interest, and penalties. At least one other jurisdiction is pursuing a similar market conduct examination concerning compliance with unclaimed property statutes. It is possible that other jurisdictions may pursue similar examinations, audits or lawsuits and that such actions may result in additional payments to beneficiaries, additional escheatment of funds deemed abandoned under state laws, administrative penalties, interest, and/or further changes to the Company’s procedures. The Company is not currently able to estimate these additional possible costs.
Total Asset Recovery Services, LLC on behalf of the State of Illinois v. MetLife, Inc., et. al. (Cir. Ct. Cook County, IL, filed January 24, 2011). Alleging that MetLife, Inc. and another company have violated the Illinois Uniform Disposition of Unclaimed Property Act by failing to escheat to Illinois benefits of 4,766 life insurance contracts, Total Asset Recovery Services, LLC (“the Relator”) has brought an action under the Illinois False Claims Whistleblower Reward and Protection Act seeking to recover damages on behalf of Illinois. MetLife, Inc. and MLIC have moved to dismiss the action. On September 6, 2012, the court granted the Relator’s unopposed motion to dismiss all of its claims.
286
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Total Asset Recovery Services, LLC on behalf of the State of Minnesota v. MetLife, Inc., et. al. (District Court, County of Hennepin, MN, filed January 31, 2011). Alleging that MetLife, Inc. and another company have violated the Minnesota Uniform Disposition of Unclaimed Property Act by failing to escheat to Minnesota benefits of 584 life insurance contracts, the Relator has brought an action under the Minnesota False Claims Act seeking to recover damages on behalf of Minnesota. Based on the allegations in the complaint, it appears that the Relator may have improperly named MetLife, Inc. as a defendant instead of MLIC. The action was sealed by court order until March 22, 2012. The Relator alleges that the aggregate damages, including statutory damages and treble damages, are $228 million. The Relator does not allocate this claimed damage amount between MetLife, Inc. and the other defendant. The Relator also bases its damage calculation in part on its assumption that the average face amount of the subject policies is $130,000. MetLife, Inc. strongly disputes this assumption, the Relator’s alleged damages amounts, and other allegations in the complaint. MetLife, Inc. and MLIC have moved to dismiss the action.
City of Westland Police and Fire Retirement System v. MetLife, Inc., et. al. (S.D.N.Y., filed January 12, 2012). Seeking to represent a class of persons who purchased MetLife, Inc. common shares between February 2, 2010, and October 6, 2011, the plaintiff filed an action alleging that MetLife, Inc. and several current and former executive officers of MetLife, Inc. violated the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by issuing, or causing MetLife, Inc. to issue, materially false and misleading statements concerning MetLife, Inc.’s potential liability for millions of dollars in insurance benefits that should have been paid to beneficiaries or escheated to the states. In May 2012, plaintiff amended the complaint to add defendants including members of the MetLife, Inc. Board of Directors and several other parties and to add claims for violations of the Securities Act of 1933. Plaintiff seeks unspecified compensatory damages and other relief. Defendants have moved to dismiss the action.
City of Birmingham Retirement and Relief System v. MetLife, Inc., et. al. (N.D. Alabama, filed in state court on July 5, 2012 and removed to federal court on August 3, 2012). Seeking to represent a class of persons who purchased MetLife, Inc. common equity units in or traceable to a public offering in March 2011, the plaintiff filed an action alleging that MetLife, Inc., certain current and former directors and executive officers of MetLife, Inc., and various underwriters violated several provisions of the Securities Act of 1933 related to the filing of the registration statement by issuing, or causing MetLife, Inc. to issue, materially false and misleading statements and/or omissions concerning MetLife, Inc.’s potential liability for millions of dollars in insurance benefits that should have been paid to beneficiaries or escheated to the states. Plaintiff seeks unspecified compensatory damages and other relief. Defendants removed this action to federal court, and plaintiff has moved to remand the action to state court. The defendants intend to defend this action vigorously.
Derivative Actions and Demands. Seeking to sue derivatively on behalf of MetLife, Inc., four shareholders have commenced separate actions against members of the MetLife, Inc. Board of Directors, alleging that they breached their fiduciary and other duties to the Company. The actions areFishbaum v. Kandarian, et al. (Sup. Ct., New York County, filed January 27, 2012),Batchelder v. Burwell, et al. (Sup. Ct., New York County, filed March 6, 2012),Mallon v. Kandarian, et al. (S.D.N.Y., filed March 28, 2012), andMartino v. Kandarian, et al. (S.D.N.Y., filed April 19, 2012). The two federal court actions have been consolidated and have been stayed pending further order of the court. The two state court actions have been consolidated under the captionIn re: MetLife Shareholder Derivative Action and anamended complaint has been filed. Plaintiffs in all four actions allege that the defendants failed to ensure that the Company complied with state unclaimed property laws and to ensure that the Company accurately reported its earnings. Plaintiffs allege that because of the defendants’ breaches of duty, MetLife, Inc. has incurred damage to its reputation and has suffered other unspecified damages. The defendants intend to defend these actions vigorously. A fifth shareholder, Western Pennsylvania Electrical Workers Pension Fund, has written to the MetLife, Inc. Board of Directors demanding that MetLife, Inc. take action against current and former Board members, executive officers, and MetLife, Inc.’s independent auditor,
287
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
for similar alleged breaches of duty with respect to the Company’s compliance with unclaimed property laws and financial disclosures. The MetLife, Inc. Board of Directors has appointed a Special Committee to investigate these allegations. On September 24, 2012, counsel for the Special Committee apprised this shareholder’s counsel that the Board of Directors had reviewed the issues and rejected the demand.
Total Control Accounts Litigation and Regulatory Actions
MLIC is a defendant in a consolidated lawsuit related to its use of retained asset accounts, known as Total Control Accounts (“TCA”), as a settlement option for death benefits.
Keife, et al. v. Metropolitan Life Insurance Company (D. Nev., filed in state court on July 30, 2010 and removed to federal court on September 7, 2010); andSimon v. Metropolitan Life Insurance Company (D. Nev., filed November 3, 2011). These putative class action lawsuits, which have been consolidated, raise breach of contract claims arising from MLIC’s use of the TCA to pay life insurance benefits under the Federal Employees’ Group Life Insurance (“FEGLI”) program. Specifically, plaintiffs allege that under the terms of the FEGLI policy, MLIC is required to make “immediate” payment of death benefits in “one sum.” MLIC, plaintiff alleges, breached this duty by instead retaining the death benefits in its general investment account and sending beneficiaries a “book of drafts” known as the “TCA Money Market Option” as the only means by which funds can be accessed. As damages, plaintiffs seek disgorgement of the difference between the interest paid to the account holders and the investment earnings on the assets backing the accounts. In September 2010, plaintiffs filed a motion for class certification of the breach of contract claim, which the court has stayed. On April 28, 2011, the court denied MLIC’s motion to dismiss. On May 4, 2012, MLIC moved for summary judgment.
Various state regulators have also taken actions with respect to retained asset accounts. The Department of Financial Services issued a circular letter on March 29, 2012 stating that an insurer should only use a retained asset account when a policyholder or beneficiary affirmatively chooses to receive life insurance proceeds through such an account and providing for certain disclosures to a beneficiary, including that payment by a single check is an option. In connection with an ongoing market conduct exam, MLIC has entered into a consent order with the Minnesota Department of Commerce regarding MLIC’s use of TCAs as a default option.
The Company is unable to estimate the reasonably possible loss or range of loss arising from the TCA matters.
Other U.S. Litigation
Merrill Haviland, et al. v. Metropolitan Life Insurance Company (E.D. Mich., removed to federal court on July 22, 2011). This lawsuit was filed by 45 retired General Motors (“GM”) employees against MLIC and the amended complaint includes claims for conversion, unjust enrichment, breach of contract, fraud, intentional infliction of emotional distress, fraudulent insurance acts, unfair trade practices, and Employee Retirement Income Security Act of 1974 (“ERISA”) claims based upon GM’s 2009 reduction of the employees’ life insurance coverage under GM’s ERISA-governed plan. The complaint includes a count seeking class action status. MLIC is the insurer of GM’s group life insurance plan and administers claims under the plan. According to the complaint, MLIC had previously provided plaintiffs with a “written guarantee” that their life insurance benefits under the GM plan would not be reduced for the rest of their lives. On June 26, 2012, the district court granted MLIC’s motion to dismiss the complaint. Plaintiffs have appealed that decision to the United States Court of Appeals for the Sixth Circuit.
McGuire v. Metropolitan Life Insurance Company (E.D. Mich., filed February 22, 2012). This lawsuit was filed by the fiduciary for the Union Carbide Employees’ Pension Plan and alleges that MLIC, which issued annuity contracts to fund some of the benefits the Plan provides, engaged in transactions that ERISA prohibits
288
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
and violated duties under ERISA and federal common law by determining that no dividends were payable with respect to the contracts from and after 1999. On September 26, 2012, the court denied MLIC’s motion to dismiss the complaint. The Company is defending the action vigorously.
Dolan v. Lawsky, et al. (S.D.N.Y., filed November 8, 2012). Several plaintiffs filed this action against the New York Superintendent of Financial Services, MLIC, and other parties alleging that the defendants breached fiduciary duties and contractual obligations and were unjustly enriched through actions they took with respect to the rehabilitation and subsequent liquidation of ELNY. Among other things, plaintiffs assert that contracts entered into in 1992 between MLIC and the ELNY rehabilitator were improper. Plaintiffs seek to represent a class of beneficiaries of ELNY structured settlement annuities who will receive reduced payments under ELNY’s court-approved liquidation plan. The Company intends to defend the action vigorously.
International Litigation
Italy Fund Redemption Suspension Complaints and Litigation. As a result of suspension of withdrawals and diminution in value in certain funds offered within certain unit-linked policies sold by the Italian branch of Alico Life International, Ltd. (“ALIL”), a number of policyholders invested in those funds have either commenced or threatened litigation against ALIL, alleging misrepresentation, inadequate disclosures and other related claims. These policyholders contacted ALIL beginning in July 2009 alleging that the funds operated at variance to the published prospectus and that prospectus risk disclosures were allegedly wrong, unclear, and misleading. The limited number of lawsuits or complaints that have been filed to date have either been resolved or are proceeding. In March 2011, ALIL implemented a plan to resolve policyholder claims. Under the plan, ALIL provided liquidity to the suspended funds so that policyholders may withdraw investments in these funds, and ALIL offered policyholders amounts in addition to the liquidation value of the suspended funds based on the performance of other relevant financial products. The settlement program achieved a 97% acceptance rate. Those policyholders who did not accept the settlement may still pursue other remedies or commence individual litigation. Under the terms of the stock purchase agreement dated as of March 7, 2010, as amended, by and among MetLife, Inc., AIG and AM Holdings LLC, AIG agreed to indemnify MetLife, Inc. and its affiliates for third party claims and regulatory fines associated with ALIL’s suspended funds.
Employee Benefit Plans
As disclosed in Note 17, no contributions are required to be made to the Subsidiaries’ U.S. qualified pension plans during 2012; however, during the third quarter of 2012, $405 million of discretionary contributions were made by the Subsidiaries to those plans.
Stock-Based Compensation Plans
Payout of 2009 — 2011 Performance Shares
As discussed in Note 18, vested Performance Shares are multiplied by a performance factor of 0.0 to 2.0 based largely on MetLife, Inc.’s performance. For this purpose, MetLife, Inc.’s performance is determined in terms of (a) the change in annual net operating earnings and (b) total shareholder return, in each case, over the applicable three-year performance period compared to the performance of its competitors. Final Performance Shares are paid in shares of MetLife, Inc. common stock. The performance factor for the January 1, 2009 — December 31, 2011 performance period was 1.13. This factor has been applied to the 1,791,609 Performance Shares associated with that performance period that vested on December 31, 2011 and, as a result, 2,024,518 shares of MetLife, Inc.’s common stock (less withholding for taxes and other items, as applicable) were issued, aside from shares that payees chose to defer, during the second quarter of 2012.
289
MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Payout of 2009 — 2011 Performance Units
Vested Performance Units are multiplied by a performance factor of 0.0 to 2.0 based largely on MetLife, Inc.’s performance. For this purpose, MetLife, Inc.’s performance is determined in terms of (a) the change in annual net operating earnings and (b) total shareholder return, in each case, over the applicable three-year performance period compared to the performance of its competitors. Final Performance Units which are payable in cash equal to the closing price of MetLife, Inc. common stock on a date following the last day of the three-year performance period. The performance factor for the January 1, 2009 — December 31, 2011 performance period was 1.13. This factor has been applied to the 51,144 Performance Units associated with that performance period that vested on December 31, 2011 and, as a result, the cash value of 57,793 units was paid during the second quarter of 2012.
Dividends
Preferred Stock
In November 2012, MetLife, Inc. announced dividends of $0.2527777 per share, for a total of $7 million on its Series A preferred shares, and $0.4062500 per share, for a total of $24 million on its Series B preferred shares. Both dividends will be paid on December 17, 2012 to shareholders of record as of November 30, 2012.
In August 2012, MetLife, Inc. announced dividends of $0.2555555 per share, for a total of $6 million on its Series A preferred shares, and $0.4062500 per share, for a total of $24 million on its Series B preferred shares. Both dividends were paid on September 17, 2012 to shareholders of record as of August 31, 2012.
In May 2012, MetLife, Inc. announced dividends of $0.2555555 per share, for a total of $7 million on its Series A preferred shares, and $0.4062500 per share, for a total of $24 million on its Series B preferred shares. Both dividends were paid on June 15, 2012 to shareholders of record as of May 31, 2012.
In February 2012, MetLife, Inc. announced dividends of $0.2527777 per share, for a total of $6 million on its Series A preferred shares, and $0.4062500 per share, for a total of $24 million on its Series B preferred shares. Both dividends were paid on March 15, 2012 to shareholders of record as of February 29, 2012.
Common Stock
In October 2012, the Company’s Board of Directors approved an annual dividend for 2012 of $0.74 per common share payable on December 14, 2012 to stockholders of record as of November 9, 2012. The Company estimates the aggregate dividend payment to be $812 million.
Dividend Restrictions
During June 2012, MICC distributed shares of an affiliate to MetLife, Inc. as an in-kind extraordinary dividend of $202 million as calculated on a statutory basis. Regulatory approval for this extraordinary dividend was obtained due to the timing of payment. Remaining dividends permitted to be paid in 2012 without regulatory approval total $302 million.
During May 2012, American Life received regulatory approval to pay an extraordinary dividend for an amount up to the funds remitted in connection with the Company’s restructuring of American Life’s business in Japan. The dividend may be paid in installments by November 30, 2012. Subsequently, $1.5 billion was remitted to American Life. See “— Branch Restructuring” above. Of this approved amount, $1.0 billion was paid to MetLife, Inc. as an extraordinary dividend, during May 2012, which included the $168 million otherwise permitted to be paid without approval later in 2012, due to the timing of such dividend.
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MetLife, Inc.
Notes to the Consolidated Financial Statements — (Continued)
See Note 18 for information on dividend restrictions.
Restructuring Charges
The Company has commenced an enterprise-wide strategic initiative. This global strategy focuses on leveraging the Company’s scale to improve the value it provides to customers and shareholders in order to reduce costs, enhance revenues, achieve efficiencies and reinvest in its technology, platforms and functionality to improve its current operations and develop new capabilities.
The Company has incurred restructuring charges of $101 million and made cash payments of $66 million through September 30, 2012. These restructuring charges are included in other expenses. As the expenses relate to an enterprise-wide initiative, they are reported within Corporate & Other. Estimated restructuring costs may change as management continues to execute this enterprise-wide strategic initiative.
Management anticipates further restructuring charges including severance, lease and asset impairments, through the year ending December 31, 2014. However, currently such restructuring plans are not sufficiently developed to enable management to make an estimate of such restructuring charges.
Hurricane Sandy
On October 29, 2012, Hurricane Sandy made landfall in the United States causing loss of lives and extensive property damage. Because of the limited information available, the Company is currently unable to reasonably estimate the impact of the hurricane on its property & casualty insurance operations or other businesses.
291
Schedule
Schedule I
Consolidated Summary of Investments - Other Than Investments in Related Parties
Consolidated Summary of Investments —
Other Than Investments in Related Parties
December 31, 2011
(In millions)
Types of Investments | Cost or Amortized Cost (1) | Estimated Fair Value | Amount at Which Shown on Balance Sheet | |||||||||
Fixed maturity securities: | ||||||||||||
Bonds: | ||||||||||||
Foreign government securities | $ | 49,840 | $ | 52,536 | $ | 52,536 | ||||||
U.S. Treasury and agency securities | 34,132 | 40,012 | 40,012 | |||||||||
Public utilities | 11,959 | 13,590 | 13,590 | |||||||||
State and political subdivision securities | 11,975 | 13,235 | 13,235 | |||||||||
All other corporate bonds | 145,342 | 153,587 | 153,587 | |||||||||
|
|
|
|
|
| |||||||
Total bonds | 253,248 | 272,960 | 272,960 | |||||||||
Mortgage-backed and asset-backed securities | 73,675 | 74,685 | 74,685 | |||||||||
Redeemable preferred stock | 2,888 | 2,626 | 2,626 | |||||||||
Other fixed maturity securities | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total fixed maturity securities | 329,811 | 350,271 | 350,271 | |||||||||
|
|
|
|
|
| |||||||
Trading and other securities | 19,632 | 18,268 | 18,268 | |||||||||
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|
|
|
|
| |||||||
Equity securities: | ||||||||||||
Common stock: | ||||||||||||
Industrial, miscellaneous and all other | 2,120 | 2,105 | 2,105 | |||||||||
Banks, trust and insurance companies | 99 | 100 | 100 | |||||||||
Public utilities | — | — | — | |||||||||
Non-redeemable preferred stock | 989 | 818 | 818 | |||||||||
|
|
|
|
|
| |||||||
Total equity securities | 3,208 | 3,023 | 3,023 | |||||||||
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|
|
|
|
| |||||||
Mortgage loans: | ||||||||||||
Held-for-investment | 56,915 | 56,915 | ||||||||||
Held-for-sale | 15,178 | 15,178 | ||||||||||
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|
|
| |||||||||
Mortgage loans, net | 72,093 | 72,093 | ||||||||||
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|
|
| |||||||||
Policy loans | 11,892 | 11,892 | ||||||||||
Real estate and real estate joint ventures | 8,299 | 8,299 | ||||||||||
Real estate acquired in satisfaction of debt | 264 | 264 | ||||||||||
Other limited partnership interests | 6,378 | 6,378 | ||||||||||
Short-term investments | 17,310 | 17,310 | ||||||||||
Other invested assets | 23,581 | 23,581 | ||||||||||
|
|
|
| |||||||||
Total investments | $ | 492,468 | $ | 511,379 | ||||||||
|
|
|
|
(1) | The Company’s trading and other securities portfolio is mainly comprised of fixed maturity and equity securities, including mutual funds and, to a lesser extent, short-term investments and cash and cash equivalents. Cost or amortized cost for fixed maturity securities and mortgage loans held-for-investment represents original cost reduced by repayments, valuation allowances and impairments from other-than-temporary declines in estimated fair value that are charged to earnings and adjusted for amortization of premiums or discounts; for equity securities, cost represents original cost reduced by impairments from other-than-temporary declines in estimated fair value; for real estate, cost represents original cost reduced by impairments and adjusted for valuation allowances and depreciation; for real estate joint ventures and other limited partnership interests cost represents original cost reduced for other-than-temporary impairments or original cost adjusted for equity in earnings and distributions. |
292
Schedule II
Condensed Financial Information
(Parent Company Only)
December 31, 2011 and 2010
(In millions, except share and per share data)
2011 | 2010 | |||||||
Condensed Balance Sheets | ||||||||
Assets | ||||||||
Investments: | ||||||||
Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $4,350 and $2,691, respectively) | $ | 4,419 | $ | 2,740 | ||||
Equity securities available-for-sale, at estimated fair value (cost: $17 and $18, respectively) | 13 | 15 | ||||||
Short-term investments, principally at estimated fair value | 667 | 33 | ||||||
Other invested assets, at estimated fair value | 275 | 114 | ||||||
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|
| |||||
Total investments | 5,374 | 2,902 | ||||||
Cash and cash equivalents | 309 | 624 | ||||||
Accrued investment income | 44 | 42 | ||||||
Investment in subsidiaries | 74,281 | 64,060 | ||||||
Loans to subsidiaries | — | 1,275 | ||||||
Receivables from subsidiaries | 165 | 73 | ||||||
Other assets | 1,201 | 1,320 | ||||||
|
|
|
| |||||
Total assets | $ | 81,374 | $ | 70,296 | ||||
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|
|
| |||||
Liabilities and Stockholders’ Equity | ||||||||
Liabilities | ||||||||
Payables for collateral under securities loaned and other transactions | $ | 1,180 | $ | 660 | ||||
Long-term debt — unaffiliated | 15,666 | 16,258 | ||||||
Long-term debt — affiliated | 500 | 665 | ||||||
Collateral financing arrangements | 2,797 | 2,797 | ||||||
Junior subordinated debt securities | 1,748 | 1,748 | ||||||
Other liabilities | 1,964 | 1,315 | ||||||
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|
|
| |||||
Total liabilities | 23,855 | 23,443 | ||||||
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|
|
| |||||
Stockholders’ Equity | ||||||||
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized: | ||||||||
Preferred stock, 84,000,000 shares issued and outstanding; $2,100 aggregate liquidation preference | 1 | 1 | ||||||
Convertible preferred stock, 0 and 6,857,000 shares issued and outstanding at December 31, 2011 and 2010, respectively | — | — | ||||||
Common stock, par value $0.01 per share; 3,000,000,000 shares authorized; 1,061,150,915 and 989,031,704 shares issued at December 31, 2011 and 2010, respectively; 1,057,957,028 and 985,837,817 shares outstanding at December 31, 2011 and 2010, respectively | 11 | 10 | ||||||
Additional paid-in capital | 26,782 | 26,423 | ||||||
Retained earnings | 24,814 | 19,446 | ||||||
Treasury stock, at cost; 3,193,887 shares at December 31, 2011 and 2010 | (172 | ) | (172 | ) | ||||
Accumulated other comprehensive income (loss) | 6,083 | 1,145 | ||||||
|
|
|
| |||||
Total stockholders’ equity | 57,519 | 46,853 | ||||||
|
|
|
| |||||
Total liabilities and stockholders’ equity | $ | 81,374 | $ | 70,296 | ||||
|
|
|
|
See accompanying notes to the condensed financial information.
293
MetLife, Inc.
Schedule II
Condensed Financial Information — (Continued)
(Parent Company Only)
For the Years Ended December 31, 2011, 2010 and 2009
(In millions)
2011 | 2010 | 2009 | ||||||||||
Condensed Statements of Operations | ||||||||||||
Equity in earnings of subsidiaries | $ | 6,979 | $ | 3,318 | $ | (1,976 | ) | |||||
Net investment income | 121 | 144 | 153 | |||||||||
Other income | 155 | 144 | 155 | |||||||||
Net investment gains (losses): | ||||||||||||
Other-than-temporary impairments on fixed maturity securities | — | — | (23 | ) | ||||||||
Other net investment gains (losses) | (146 | ) | 31 | (85 | ) | |||||||
|
|
|
|
|
| |||||||
Total net investment gains (losses) | (146 | ) | 31 | (108 | ) | |||||||
Net derivative gains (losses) | 82 | (81) | 199 | |||||||||
Interest expense | (1,007 | ) | (882 | ) | (776 | ) | ||||||
Other expenses | (149 | ) | (319 | ) | (202 | ) | ||||||
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|
|
|
|
| |||||||
Income (loss) before provision for income tax | 6,035 | 2,355 | (2,555 | ) | ||||||||
Provision for income tax expense (benefit) | (388 | ) | (312 | ) | (144 | ) | ||||||
|
|
|
|
|
| |||||||
Net income (loss) | 6,423 | 2,667 | (2,411 | ) | ||||||||
Less: Preferred stock dividends | 122 | 122 | 122 | |||||||||
Preferred stock redemption premium | 146 | — | — | |||||||||
|
|
|
|
|
| |||||||
Net income (loss) available to common shareholders | $ | 6,155 | $ | 2,545 | $ | (2,533 | ) | |||||
|
|
|
|
|
| |||||||
Comprehensive income (loss) | $ | 11,361 | $ | 6,861 | $ | 8,793 | ||||||
|
|
|
|
|
|
See accompanying notes to the condensed financial information.
294
MetLife, Inc.
Schedule II
Condensed Financial Information — (Continued)
(Parent Company Only)
For the Years Ended December 31, 2011, 2010 and 2009
(In millions)
2011 | 2010 | 2009 | ||||||||||
Condensed Statements of Cash Flows | ||||||||||||
Cash flows from operating activities | ||||||||||||
Net income (loss) | $ | 6,423 | $ | 2,667 | $ | (2,411 | ) | |||||
Earnings of subsidiaries | (6,979 | ) | (3,318 | ) | 1,976 | |||||||
Dividends from subsidiaries | 2,578 | 916 | 515 | |||||||||
Other, net | 697 | 376 | (458 | ) | ||||||||
|
|
|
|
|
| |||||||
Net cash provided by (used in) operating activities | 2,719 | 641 | (378 | ) | ||||||||
|
|
|
|
|
| |||||||
Cash flows from investing activities | ||||||||||||
Sales of fixed maturity securities | 3,265 | 7,422 | 1,005 | |||||||||
Purchases of fixed maturity securities | (4,787 | ) | (6,542 | ) | (3,002 | ) | ||||||
Sales of equity securities | 1 | 5 | — | |||||||||
Purchases of equity securities | — | — | (3 | ) | ||||||||
Cash received in connection with freestanding derivatives | 257 | 200 | 239 | |||||||||
Cash paid in connection with freestanding derivatives | (276 | ) | (450 | ) | (496 | ) | ||||||
Sales of businesses | 180 | — | 130 | |||||||||
Disposal of subsidiary | — | — | (19 | ) | ||||||||
Purchases of businesses | — | (7,196 | ) | — | ||||||||
Expense paid on behalf of subsidiaries | (75 | ) | (72 | ) | (69 | ) | ||||||
Repayments of loans to subsidiaries | 1,275 | 300 | — | |||||||||
Investment in preferred stock of subsidiary | (250 | ) | (50 | ) | (75 | ) | ||||||
Returns of capital from subsidiaries | 591 | 54 | — | |||||||||
Capital contributions to subsidiaries | (1,439 | ) | (374 | ) | (876 | ) | ||||||
Net change in short-term investments | (620 | ) | 271 | 772 | ||||||||
Other, net | (10 | ) | (35 | ) | 186 | |||||||
|
|
|
|
|
| |||||||
Net cash used in investing activities | (1,888 | ) | (6,467 | ) | (2,208 | ) | ||||||
|
|
|
|
|
| |||||||
Cash flows from financing activities | ||||||||||||
Net change in payables for collateral under securities loaned and other transactions | 520 | 233 | 84 | |||||||||
Net change in change in short-term debt | — | — | (300 | ) | ||||||||
Long-term debt issued | — | 2,987 | 1,647 | |||||||||
Long-term debt repaid | (750 | ) | — | — | ||||||||
Cash received in connection with collateral financing arrangements | 100 | — | 775 | |||||||||
Cash paid in connection with collateral financing arrangements | (63 | ) | — | (400 | ) | |||||||
Junior subordinated debt securities issued | — | — | 500 | |||||||||
Debt issuance costs | (1 | ) | (14 | ) | (30 | ) | ||||||
Stock options exercised | 88 | 5 | 8 | |||||||||
Common stock issued, net of issuance costs | 2,950 | 3,576 | — | |||||||||
Common stock issued to settle stock forward contracts | — | — | 1,035 | |||||||||
Redemption of convertible preferred stock | (2,805 | ) | — | — | ||||||||
Preferred stock redemption premium | (146 | ) | — | — | ||||||||
Dividends on preferred stock | (122 | ) | (122 | ) | (122 | ) | ||||||
Dividends on common stock | (787 | ) | (784 | ) | (610 | ) | ||||||
Other, net | (130 | ) | (110 | ) | — | |||||||
|
|
|
|
|
| |||||||
Net cash (used in) provided by financing activities | (1,146 | ) | 5,771 | 2,587 | ||||||||
|
|
|
|
|
| |||||||
Change in cash and cash equivalents | (315 | ) | (55 | ) | 1 | |||||||
Cash and cash equivalents, beginning of year | 624 | 679 | 678 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents, end of year | $ | 309 | $ | 624 | $ | 679 | ||||||
|
|
|
|
|
|
295
MetLife, Inc.
Schedule II
Condensed Financial Information — (Continued)
(Parent Company Only)
For the Years Ended December 31, 2011, 2010 and 2009
(In millions)
2011 | 2010 | 2009 | ||||||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Net cash paid (received) during the year for: | ||||||||||||
Interest | $ | 997 | $ | 808 | $ | 704 | ||||||
|
|
|
|
|
| |||||||
Income tax | $ | (659 | ) | $ | (474 | ) | $ | 104 | ||||
|
|
|
|
|
| |||||||
Non-cash transactions during the year: | ||||||||||||
Business acquisitions: | ||||||||||||
Assets acquired (1) | $ | — | $ | 125,728 | $ | — | ||||||
Liabilities assumed (1) | — | (109,306 | ) | — | ||||||||
Redeemable and non-redeemable noncontrolling interests assumed | — | (130 | ) | — | ||||||||
|
|
|
|
|
| |||||||
Net assets acquired | — | 16,292 | — | |||||||||
Cash paid, excluding transaction costs of $0, $88 and $0, respectively | — | (7,196 | ) | — | ||||||||
Other purchase price adjustments | — | 98 | — | |||||||||
|
|
|
|
|
| |||||||
Securities issued | $ | — | $ | 9,194 | $ | — | ||||||
|
|
|
|
|
| |||||||
Remarketing of debt securities: | ||||||||||||
Fixed maturity securities redeemed | $ | — | $ | — | $ | 32 | ||||||
|
|
|
|
|
| |||||||
Long-term debt issued | $ | — | $ | — | $ | 1,035 | ||||||
|
|
|
|
|
| |||||||
Junior subordinated debt securities redeemed | $ | — | $ | — | $ | 1,067 | ||||||
|
|
|
|
|
| |||||||
Issuance of collateral financing arrangements | $ | — | $ | — | $ | 105 | ||||||
|
|
|
|
|
| |||||||
Dividends from subsidiaries | $ | 170 | $ | 874 | $ | — | ||||||
|
|
|
|
|
| |||||||
Returns of capital from subsidiaries | $ | 47 | $ | — | $ | — | ||||||
|
|
|
|
|
| |||||||
Capital contributions to subsidiaries | $ | 316 | $ | — | $ | 105 | ||||||
|
|
|
|
|
| |||||||
Allocation of interest expense to subsidiary | $ | 29 | $ | 30 | $ | 44 | ||||||
|
|
|
|
|
| |||||||
Allocation of interest income to subsidiary | $ | 68 | $ | 46 | $ | 56 | ||||||
|
|
|
|
|
| |||||||
Issuance of loan to subsidiary via transfer of fixed maturity securities | $ | — | $ | — | $ | 300 | ||||||
|
|
|
|
|
|
(1) | The 2010 amounts include measurement period adjustments described in Note 2 of the Notes to the Consolidated Financial Statements. |
296
MetLife, Inc.
Schedule II
Notes to the Condensed Financial Information
(Parent Company Only)
1. Basis of Presentation
The condensed financial information of MetLife, Inc. (the “Parent Company”) should be read in conjunction with the consolidated financial statements of MetLife, Inc. and its subsidiaries and the notes thereto (the “Consolidated Financial Statements”). These condensed unconsolidated financial statements reflect the results of operations, financial position and cash flows for MetLife, Inc. Investments in subsidiaries are accounted for using the equity method of accounting.
The preparation of these condensed unconsolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to adopt accounting policies and make certain estimates and assumptions. The most important of these estimates and assumptions relate to the fair value measurements, the accounting for goodwill and identifiable intangible assets and the provision for potential losses that may arise from litigation and regulatory proceedings and tax audits, which may affect the amounts reported in the condensed unconsolidated financial statements and accompanying notes. Actual results could differ from these estimates.
2. Acquisition
On November 1, 2010, MetLife, Inc. acquired all of the issued and outstanding capital stock of American Life Insurance Company (“American Life”) and Delaware American Life Insurance Company (“DelAm”) (collectively, “ALICO”). For further information on the $16.4 billion purchase price including cash, common stock, convertible preferred stock and common equity units, as well as on the capital raised in anticipation of the acquisition, see Notes 2, 11, 14 and 18 of the Notes to the Consolidated Financial Statements.
3. Loans to Subsidiaries
MetLife, Inc. lends funds, as necessary, to its subsidiaries, some of which are regulated, to meet their capital requirements. Such loans are included in loans to subsidiaries and consisted of the following at:
December 31, | ||||||||||||
Subsidiaries | Interest Rate | Maturity Date | 2011 | 2010 | ||||||||
(In millions) | ||||||||||||
Metropolitan Life Insurance Company | Six-month LIBOR + 1.80% | December 31, 2011 | $ | — | $ | 775 | ||||||
Metropolitan Life Insurance Company | 7.13% | December 15, 2032 | — | 400 | ||||||||
Metropolitan Life Insurance Company | 7.13% | January 15, 2033 | — | 100 | ||||||||
|
|
|
| |||||||||
Total | $ | — | $ | 1,275 | ||||||||
|
|
|
|
On December 15, 2011, Metropolitan Life Insurance Company (“MLIC”) repaid in cash the $400 million and $100 million capital notes issued to MetLife, Inc. in December 2002.
In September and November 2011, American Life issued notes to MetLife, Inc. for $100 million and $270 million, respectively. American Life repaid both notes during the fourth quarter of 2011.
In December 2009, the $700 million surplus note issued to MetLife, Inc. by MLIC was renewed and increased to $775 million, extending the maturity to December 31, 2011 with an interest rate of six-month LIBOR + 1.80%. In April 2011, MLIC repaid in cash the $775 million surplus note. The early redemption was approved by the New York Superintendent of Insurance.
297
MetLife, Inc.
Schedule II
Notes to the Condensed Financial Information — (Continued)
(Parent Company Only)
In December 2009, MLIC issued a surplus note to MetLife, Inc. for $300 million maturing in 2011 with an interest rate of six-month LIBOR + 1.80%. MLIC received securities in exchange for the surplus note. On December 29, 2010, MLIC repaid the $300 million surplus note to MetLife, Inc. in cash.
Interest income earned on loans to subsidiaries of $40 million, $63 million and $50 million for the years ended December 31, 2011, 2010 and 2009, respectively, is included in net investment income.
Payments of interest and principal on surplus notes, which are subordinate to all other obligations of the issuing company, may be made only with the prior approval of the insurance department of the state of domicile.
4. Long-term and Short-term Debt
Long-term Debt
Long-term debt outstanding was as follows:
Interest Rates | December 31, | |||||||||||||
Range | Weighted Average | Maturity | 2011 | 2010 | ||||||||||
(In millions) | ||||||||||||||
Senior notes — unaffiliated | 0.57%-7.72% | 4.84% | 2012-2045 | $ 15,666 | $ 16,258 | |||||||||
Senior notes — affiliated (1) | 5.00%-6.82% | 5.48% | 2011 | — | 165 | |||||||||
Other affiliated debt | 0.95%-1.07% | 1.01% | 2015-2016 | 500 | 500 | |||||||||
|
|
|
| |||||||||||
Total | $ 16,166 | $ 16,923 | ||||||||||||
|
|
|
|
(1) | Represents $165 million of affiliated senior notes associated with bonds held by ALICO at December 31, 2010. Such bonds were sold to a third party in the second quarter of 2011. |
The aggregate maturities of long-term debt at December 31, 2011 for the next five years and thereafter are $797 million in 2012, $749 million in 2013, $1.4 billion in 2014, $1.3 billion in 2015, $1.5 billion in 2016 and $10.5 billion thereafter.
Short-term Debt
There was no short-term debt outstanding at both December 31, 2011 and 2010. During the year ended December 31, 2009, the weighted average interest rate on short-term debt was 1.25%. During the year ended December 31, 2009, the average daily balance on short-term debt was $5 million, and the average days outstanding was six days. There was no short-term debt activity in 2011 and 2010.
298
MetLife, Inc.
Schedule II
Notes to the Condensed Financial Information — (Continued)
(Parent Company Only)
Interest Expense
Interest expense was comprised of the following:
December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(In millions) | ||||||||||||
Long-term debt — unaffiliated | $ | 806 | $ | 689 | $ | 589 | ||||||
Long-term debt — affiliated | 16 | 15 | 16 | |||||||||
Collateral financing arrangements | 43 | 44 | 59 | |||||||||
Junior subordinated debt securities | 134 | 134 | 112 | |||||||||
Stock purchase contracts | 8 | — | — | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 1,007 | $ | 882 | $ | 776 | ||||||
|
|
|
|
|
|
5. Support Agreements
MetLife, Inc. is party to various capital support commitments and guarantees with certain of its subsidiaries. Under these arrangements, MetLife, Inc. has agreed to cause each such entity to meet specified capital and surplus levels or has guaranteed certain contractual obligations.
In June 2011, MetLife, Inc. guaranteed the obligations of its subsidiary, DelAm, under a stop loss reinsurance agreement with RGA Reinsurance (Barbados) Inc. (“RGARe”), pursuant to which RGARe retrocedes to DelAm a portion of the whole life medical insurance business that RGARe assumed from American Life on behalf of its Japan branch.
Prior to the sale in April 2011 of its 50% interest in MSI MetLife to a third party, MetLife, Inc. guaranteed the obligations of its subsidiary, Exeter Reassurance Company, Ltd. (“Exeter”), under a reinsurance agreement with MSI MetLife, under which Exeter reinsures variable annuity business written by MSI MetLife. This guarantee will remain in place until such time as the reinsurance agreement between Exeter and MSI MetLife is terminated, notwithstanding the April 2011 disposition of MetLife, Inc.’s interest in MSI MetLife as described in Note 2 of the Notes to the Consolidated Financial Statements.
In March 2011, MetLife, Inc. guaranteed the obligations of its subsidiary, Missouri Reinsurance (Barbados) Inc. (“MoRe”), under a retrocession agreement with RGARe, pursuant to which MoRe retrocedes a portion of the closed block liabilities associated with industrial life and ordinary life insurance policies that it assumed from MLIC.
In November 2010, MetLife, Inc. guaranteed the obligations of Exeter in an aggregate amount up to $1.0 billion, under a reinsurance agreement with MetLife Europe Limited (“MEL”), under which Exeter reinsures the guaranteed living benefits and guaranteed death benefits associated with certain unit-linked annuity contracts issued by MEL.
In January 2010, MetLife, Inc. guaranteed the obligations of MoRe, under a retrocession agreement with RGARe, pursuant to which MoRe retrocedes certain group term life insurance liabilities that it assumed from MLIC.
299
MetLife, Inc.
Schedule II
Notes to the Condensed Financial Information — (Continued)
(Parent Company Only)
In December 2009, MetLife, Inc., in connection with MetLife Reinsurance Company of Vermont’s (“MRV”) reinsurance of certain universal life and term life insurance risks, committed to the Vermont Department of Banking, Insurance, Securities and Health Care Administration to take necessary action to cause the third protected cell of MRV to maintain total adjusted capital equal to or greater than 200% of such protected cell’s authorized control level risk-based capital (“RBC”), as defined in state insurance statutes. See Note 11 of the Notes to the Consolidated Financial Statements.
MetLife, Inc., in connection with MRV’s reinsurance of certain universal life and term life insurance risks, committed to the Vermont Department of Banking, Insurance, Securities and Health Care Administration to take necessary action to cause each of the two initial protected cells of MRV to maintain total adjusted capital equal to or greater than 200% of such protected cell’s authorized control level RBC, as defined in state insurance statutes. See Note 11 of the Notes to the Consolidated Financial Statements.
MetLife, Inc., in connection with the collateral financing arrangement associated with MetLife Reinsurance Company of Charleston’s (“MRC”) reinsurance of a portion of the liabilities associated with the closed block, committed to the South Carolina Department of Insurance to make capital contributions, if necessary, to MRC so that MRC may at all times maintain its total adjusted capital at a level of not less than 200% of the company action level RBC, as defined in state insurance statutes as in effect on the date of determination or December 31, 2007, whichever calculation produces the greater capital requirement, or as otherwise required by the South Carolina Department of Insurance. See Note 12 of the Notes to the Consolidated Financial Statements.
MetLife, Inc., in connection with the collateral financing arrangement associated with MetLife Reinsurance Company of South Carolina’s (“MRSC”) reinsurance of universal life secondary guarantees, committed to the South Carolina Department of Insurance to take necessary action to cause MRSC to maintain total adjusted capital equal to the greater of $250,000 or 100% of MRSC’s authorized control level RBC, as defined in state insurance statutes. See Note 12 of the Notes to the Consolidated Financial Statements.
MetLife, Inc. has net worth maintenance agreements with two of its insurance subsidiaries, MetLife Investors Insurance Company and First MetLife Investors Insurance Company. Under these agreements, as subsequently amended, MetLife, Inc. agreed, without limitation as to the amount, to cause each of these subsidiaries to have a minimum capital and surplus of $10 million, total adjusted capital at a level not less than 150% of the company action level RBC, as defined by state insurance statutes, and liquidity necessary to enable it to meet its current obligations on a timely basis.
MetLife, Inc. also guarantees the obligations of a number of its subsidiaries under credit facilities with third-party banks. See Note 11 of the Notes to the Consolidated Financial Statements.
6. Subsequent Events
In September 2012, $750 million of senior notes held by MLIC were reassigned from Exeter Reassurance Company (“Exeter”), an affiliate, to MetLife, Inc. MetLife, Inc. received $750 million of preferred stock of Exeter in exchange for the assumed debt. In September 2012, $250 million of the assumed senior notes matured, and in October 2012, $250 million of senior notes were then issued by MetLife, Inc. to MLIC. The $500 million of senior notes maturing in June 2014 bear interest at a fixed rate of 6.44%, payable semi-annually. The $250 million of senior notes maturing in October 2019 bear interest at a fixed rate of 3.57%, payable semi-annually.
300
Schedule III
Consolidated Supplementary Insurance Information
December 31, 2011, 2010 and 2009
(In millions)
Segment | DAC and VOBA | Future Policy Benefits, Other Policy-Related Balances and Policyholder Dividend Obligation | Policyholder Account Balances | Policyholder Dividends Payable | Unearned Revenue (1) | |||||||||||||||
2011 | ||||||||||||||||||||
Retail | $ | 11,681 | $ | 72,238 | $ | 69,553 | $ | 659 | $ | 995 | ||||||||||
Group, Voluntary & Worksite Benefits | 377 | 19,626 | 9,273 | — | — | |||||||||||||||
Corporate Benefit Funding | 89 | 49,858 | 56,367 | — | 49 | |||||||||||||||
Latin America | 1,050 | 7,731 | 6,159 | 4 | 514 | |||||||||||||||
Asia | 9,554 | 38,528 | 59,739 | 53 | 655 | |||||||||||||||
EMEA | 1,866 | 8,113 | 14,235 | 58 | 103 | |||||||||||||||
Corporate & Other | 2 | 6,699 | 2,374 | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 24,619 | $ | 202,793 | $ | 217,700 | $ | 774 | $ | 2,316 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
2010 | ||||||||||||||||||||
Retail | $ | 12,404 | $ | 68,871 | $ | 66,193 | $ | 722 | $ | 1,091 | ||||||||||
Group, Voluntary & Worksite Benefits | 387 | 18,493 | 9,676 | — | — | |||||||||||||||
Corporate Benefit Funding | 62 | 43,832 | 57,828 | — | 53 | |||||||||||||||
Latin America | 1,092 | 7,972 | 6,232 | 3 | 508 | |||||||||||||||
Asia | 8,630 | 34,220 | 54,584 | 44 | 423 | |||||||||||||||
EMEA | 1,887 | 7,882 | 14,017 | 61 | 13 | |||||||||||||||
Corporate & Other | 3 | 6,278 | 2,227 | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 24,465 | $ | 187,548 | $ | 210,757 | $ | 830 | $ | 2,088 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
2009 | ||||||||||||||||||||
Retail | $ | 13,523 | $ | 66,403 | $ | 65,453 | $ | 761 | $ | 1,202 | ||||||||||
Group, Voluntary & Worksite Benefits | 385 | 17,793 | 9,486 | — | — | |||||||||||||||
Corporate Benefit Funding | 60 | 41,830 | 55,556 | — | 62 | |||||||||||||||
Latin America | 883 | 5,715 | 4,643 | — | 416 | |||||||||||||||
Asia | 1,436 | 4,240 | 981 | — | 344 | |||||||||||||||
EMEA | 124 | 376 | 1,128 | — | 16 | |||||||||||||||
Corporate & Other | 4 | 5,862 | 1,268 | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 16,415 | $ | 142,219 | $ | 138,515 | $ | 761 | $ | 2,040 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Amounts are included within the future policy benefits, other policy-related balances and policyholder dividend obligation column. |
301
MetLife, Inc.
Schedule III — (Continued)
Consolidated Supplementary Insurance Information
December 31, 2011, 2010 and 2009
(In millions)
Segment | Premium Revenue and Policy Charges | Net Investment Income | Policyholder Benefits and Claims and Interest Credited to Policyholder Account Balances | Amortization of DAC and VOBA Charged to Other Expenses (1) | Other Operating Expenses (1) (2) | Premiums Written (Excluding Life) | ||||||||||||||||||
2011 | ||||||||||||||||||||||||
Retail | $ | 11,077 | $ | 7,156 | $ | 10,447 | $ | 2,365 | $ | 4,902 | $ | 1,975 | ||||||||||||
Group, Voluntary & | 14,579 | 1,631 | 13,193 | 186 | 2,022 | 6,887 | ||||||||||||||||||
Corporate Benefit Funding | 3,080 | 5,640 | 6,664 | 17 | 497 | — | ||||||||||||||||||
Latin America | 3,371 | 1,105 | 2,899 | 211 | 1,056 | 817 | ||||||||||||||||||
Asia | 9,059 | 1,954 | 6,360 | 1,505 | 1,862 | 4,293 | ||||||||||||||||||
EMEA | 2,792 | 535 | 1,385 | 613 | 1,119 | 823 | ||||||||||||||||||
Corporate & Other | 209 | 1,565 | 126 | 1 | 3,627 | 27 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 44,167 | $ | 19,586 | $ | 41,074 | $ | 4,898 | $ | 15,085 | $ | 14,822 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
2010 | ||||||||||||||||||||||||
Retail | $ | 10,357 | $ | 7,348 | $ | 10,134 | $ | 1,758 | $ | 4,764 | $ | 1,972 | ||||||||||||
Group, Voluntary & | 14,716 | 1,600 | 13,308 | 181 | 2,007 | 6,897 | ||||||||||||||||||
Corporate Benefit Funding | 2,571 | 5,462 | 6,177 | 16 | 481 | — | ||||||||||||||||||
Latin America | 2,599 | 940 | 2,483 | 144 | 683 | 519 | ||||||||||||||||||
Asia | 2,218 | 505 | 1,664 | 290 | 635 | 412 | ||||||||||||||||||
EMEA | 489 | 205 | 307 | 87 | 320 | 198 | ||||||||||||||||||
Corporate & Other | 149 | 1,434 | 33 | 1 | 3,045 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 33,099 | $ | 17,494 | $ | 34,106 | $ | 2,477 | $ | 11,935 | $ | 9,998 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
2009 | ||||||||||||||||||||||||
Retail | $ | 10,081 | $ | 6,908 | $ | 10,208 | $ | 498 | $ | 5,035 | $ | 1,921 | ||||||||||||
Group, Voluntary & | 14,578 | 1,448 | 13,238 | 194 | 2,011 | 6,913 | ||||||||||||||||||
Corporate Benefit Funding | 2,737 | 4,948 | 6,495 | 14 | 473 | — | ||||||||||||||||||
Latin America | 2,108 | 632 | 1,747 | 111 | 502 | 391 | ||||||||||||||||||
Asia | 1,413 | 200 | 988 | 194 | 485 | 134 | ||||||||||||||||||
EMEA | 312 | 104 | 158 | 41 | 285 | 65 | ||||||||||||||||||
Corporate & Other | 125 | 489 | 16 | 3 | 2,564 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 31,354 | $ | 14,729 | $ | 32,850 | $ | 1,055 | $ | 11,355 | $ | 9,424 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | For 2010, certain amounts have been reclassified to conform with the 2011 presentation. |
(2) | Includes other expenses and policyholder dividends, excluding amortization of deferred policy acquisition costs (“DAC”) and value of business acquired (“VOBA”) charged to other expenses. |
302
Schedule IV
Consolidated Reinsurance
December 31, 2011, 2010 and 2009
(In millions)
Gross Amount | Ceded | Assumed | Net Amount | % Amount Assumed to Net | ||||||||||||||||
2011 | ||||||||||||||||||||
Life insurance in-force | $ | 4,263,421 | $ | 754,781 | $ | 604,555 | $ | 4,113,195 | 14.7% | |||||||||||
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Insurance premium | ||||||||||||||||||||
Life insurance | $ | 21,930 | $ | 1,670 | $ | 1,198 | $ | 21,458 | 5.6% | |||||||||||
Accident and health | 12,186 | 568 | 275 | 11,893 | 2.3% | |||||||||||||||
Property and casualty insurance | 3,069 | 70 | 11 | 3,010 | 0.4% | |||||||||||||||
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Total insurance premium | $ | 37,185 | $ | 2,308 | $ | 1,484 | $ | 36,361 | 4.1% | |||||||||||
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2010 | ||||||||||||||||||||
Life insurance in-force | $ | 4,199,755 | $ | 742,194 | $ | 628,879 | $ | 4,086,440 | 15.4% | |||||||||||
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Insurance premium | ||||||||||||||||||||
Life insurance | $ | 17,300 | $ | 1,469 | $ | 1,183 | $ | 17,014 | 7.0% | |||||||||||
Accident and health | 7,298 | 364 | 189 | 7,123 | 2.7% | |||||||||||||||
Property and casualty insurance | 2,998 | 69 | 5 | 2,934 | 0.2% | |||||||||||||||
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| |||||||||||||
Total insurance premium | $ | 27,596 | $ | 1,902 | $ | 1,377 | $ | 27,071 | 5.1% | |||||||||||
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2009 | ||||||||||||||||||||
Life insurance in-force | $ | 3,792,074 | $ | 713,992 | $ | 740,196 | $ | 3,818,278 | 19.4% | |||||||||||
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Insurance premium | ||||||||||||||||||||
Life insurance | $ | 17,342 | $ | 1,813 | $ | 1,223 | $ | 16,752 | 7.3% | |||||||||||
Accident and health | 6,842 | 429 | 79 | 6,492 | 1.2% | |||||||||||||||
Property and casualty insurance | 2,981 | 79 | 11 | 2,913 | 0.4% | |||||||||||||||
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| |||||||||||||
Total insurance premium | $ | 27,165 | $ | 2,321 | $ | 1,313 | $ | 26,157 | 5.0% | |||||||||||
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303
Part IV
Item 15. | Exhibits and Financial Statement Schedules |
(a) The following documents are filed as part of this report:
(1) | Financial Statements |
The financial statements are listed in the Index to Consolidated Financial Statements and Schedules.
(2) | Financial Statement Schedules |
The financial statement schedules are listed in the Index to Consolidated Financial Statements and Schedules.
(3) | Exhibits |
The exhibits are listed in the Exhibit Index which begins on page E-1.