UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
Form 10-K
(Mark One)
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| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2013
or
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 33-03094
MetLife Insurance Company of Connecticut
(Exact name of registrant as specified in its charter)
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| Connecticut | | 06-0566090 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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| 1300 Hall Boulevard, Bloomfield, Connecticut | | 06002 |
(Address of principal executive offices) | | (Zip Code) |
(860) 656-3000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o | | Accelerated filer o |
Non-accelerated filer þ (Do not check if a smaller reporting company) | | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
At March 28, 2014, 34,595,317 shares of the registrant’s common stock, $2.50 par value per share, were outstanding, of which 30,000,000 shares were owned directly by MetLife, Inc. and the remaining 4,595,317 shares were owned by MetLife Investors Group, Inc., a wholly-owned subsidiary of MetLife, Inc.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Table of Contents
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| Part I |
| Item 1. | | | | |
| Item 1A. | | | | |
| Item 1B. | | | | |
| Item 2. | | | | |
| Item 3. | | | | |
| Item 4. | | | | |
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| Part II |
| Item 5. | | | | |
| Item 6. | | | | |
| Item 7. | | | | |
| Item 7A. | | | | |
| Item 8. | | | | |
| Item 9. | | | | |
| Item 9A. | | | | |
| Item 9B. | | | | |
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| Part III |
| Item 10. | | | | |
| Item 11. | | | | |
| Item 12. | | | | |
| Item 13. | | | | |
| Item 14. | | | | |
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| Part IV |
| Item 15. | | | | |
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As used in this Form 10-K, “MICC,” the “Company,” “we,” “our” and “us” refer to MetLife Insurance Company of Connecticut, a Connecticut corporation incorporated in 1863, and its subsidiaries, including MetLife Investors USA Insurance Company (“MLI-USA”). MetLife Insurance Company of Connecticut is a wholly-owned subsidiary of MetLife, Inc. (“MetLife”).
Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K, including 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, or are tied to future periods, 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. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining the actual future results of MetLife Insurance Company of Connecticut and its subsidiaries. These statements are based on current expectations and the current economic environment. They involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance. Actual results could differ materially from those expressed or implied in the forward-looking statements. Risks, uncertainties, and other factors that might cause such differences include the risks, uncertainties and other factors identified in MetLife Insurance Company of Connecticut’s filings with the U.S. Securities and Exchange Commission (the “SEC”). These factors include: (1) difficult conditions in the global capital markets; (2) increased volatility and disruption of the capital and credit markets, which may affect our ability to meet liquidity needs and access capital, generate fee income and market-related revenue and finance statutory reserve requirements and may require us to pledge collateral or make payments related to declines in value of specified assets, including assets supporting risks ceded to certain affiliated captive reinsurers or hedging arrangements associated with those risks; (3) exposure to financial and capital market risks, including as a result of the disruption in Europe; (4) impact on us of comprehensive financial services regulation reform, including regulation of MetLife as a potential non-bank systemically important financial institution, or otherwise; (5) numerous rulemaking initiatives required or permitted by the Dodd-Frank Wall Street Reform and Consumer Protection Act which may impact how we conduct our business, including those compelling the liquidation of certain financial institutions; (6) regulatory, legislative or tax changes relating to our insurance, international, or other operations that may affect the cost of, or demand for, our products or services, or increase the cost or administrative burdens of providing benefits to employees; (7) adverse results or other consequences from litigation, arbitration or regulatory investigations; (8) potential liquidity and other risks resulting from our participation in a securities lending program and other transactions; (9) investment losses and defaults, and changes to investment valuations; (10) changes in assumptions related to investment valuations, deferred policy acquisition costs, deferred sales inducements, value of business acquired or goodwill; (11) impairments of goodwill and realized losses or market value impairments to illiquid assets; (12) defaults on our mortgage loans; (13) the defaults or deteriorating credit of other financial institutions that could adversely affect us; (14) economic, political, legal, currency and other risks relating to our international operations, including with respect to fluctuations of exchange rates; (15) downgrades in our claims paying ability, financial strength ratings or those of MetLife’s other insurance subsidiaries, or MetLife’s credit ratings; (16) an inability of MetLife to access its credit facilities; (17) availability and effectiveness of reinsurance or indemnification arrangements, as well as any default or failure of counterparties to perform; (18) differences between actual claims experience and underwriting and reserving assumptions; (19) ineffectiveness of MetLife’s risk management policies and procedures; (20) catastrophe losses; (21) increasing cost and limited market capacity for statutory life insurance reserve financings; (22) heightened competition, including with respect to pricing, entry of new competitors, consolidation of distributors, the development of new products by new and existing competitors, and for personnel; (23) exposure to losses related to variable annuity guarantee benefits, including from significant and sustained downturns or extreme volatility in equity markets, reduced interest rates, unanticipated policyholder behavior, mortality or longevity, and the adjustment for nonperformance risk; (24) our ability to address difficulties, unforeseen liabilities, asset impairments, or rating agency actions arising from business acquisitions, and integrating and managing the growth of such acquired businesses, or arising from dispositions of businesses or legal entity reorganizations; (25) changes in accounting standards, practices and/or policies; (26) increased expenses relating to pension and postretirement benefit plans for employees and retirees of MetLife and its subsidiaries, as well as health care and other employee benefits; (27) inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; (28) inability to attract and retain sales representatives; (29) the effects of business disruption or economic contraction due to disasters such as terrorist attacks, cyberattacks, other hostilities, or natural catastrophes, including any related impact on the value of our investment portfolio, MetLife’s disaster recovery systems, cyber- or other information security systems and management continuity planning; (30) the effectiveness of MetLife’s programs and practices in avoiding giving associates incentives to take excessive risks; and (31) other risks and uncertainties described from time to time in MetLife Insurance Company of Connecticut’s filings with the SEC.
MetLife Insurance Company of Connecticut does not undertake any obligation to publicly correct or update any forward-looking statement if MetLife Insurance Company of Connecticut later becomes aware that such statement is not likely to be achieved. Please consult any further disclosures MetLife Insurance Company of Connecticut makes on related subjects in reports to the SEC.
Note Regarding Reliance on Statements in Our Contracts
See “Exhibit Index — Note Regarding Reliance on Statements in Our Contracts” for information regarding agreements included as exhibits to this Annual Report on Form 10-K.
Part I
Item 1. Business
Index to Business
Overview
As used in this Form 10-K, “MICC,” the “Company,” “we,” “our” and “us” refer to MetLife Insurance Company of Connecticut, a Connecticut corporation incorporated in 1863, and its subsidiaries, including MetLife Investors USA Insurance Company (“MLI-USA”). MetLife Insurance Company of Connecticut is a wholly-owned subsidiary of MetLife, Inc. (“MetLife”).
MICC is organized into two segments: Retail and Corporate Benefit Funding. In addition, the Company reports certain of its results of operations in Corporate & Other. Management continues to evaluate the Company’s segment performance and allocated resources and may adjust related measurements in the future to better reflect segment profitability. See Note 2 of the Notes to the Consolidated Financial Statements for further information on the Company’s segments and Corporate & Other.
Retail. Our Retail segment offers a broad range of protection products and a variety of annuities primarily to individuals, and is organized into two businesses: Annuities and Life & Other. Annuities includes a variety of variable, fixed and indexed annuities which provide for both asset accumulation and asset distribution needs. Our Life & Other insurance products and services include variable life, universal life, term life and whole life products, as well as individual disability income products. Additionally, through our broker-dealer affiliates, we offer a full range of mutual funds and other securities products.
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 structured settlements and certain products to fund company-, bank- or trust-owned life insurance used to finance non-qualified benefit programs for executives.
Corporate & Other. Corporate & Other contains the excess capital not allocated to the segments, various start-up businesses, including direct and digital marketing products, run-off businesses, the Company’s ancillary international operations, interest expense related to the majority of the Company’s outstanding debt, as well as expenses associated with certain legal proceedings and income tax audit issues. Corporate & Other also includes the elimination of intersegment amounts.
During the third quarter of 2013, MetLife Insurance Company of Connecticut sold its broker-dealer subsidiary, Tower Square Securities, Inc., to a third party.
In the second quarter of 2013, MetLife announced its plans to merge three U.S.-based life insurance companies and an offshore reinsurance subsidiary to create one larger U.S.-based and U.S.-regulated life insurance company (the “Mergers”). The companies to be merged are MetLife Insurance Company of Connecticut, MLI-USA and MetLife Investors Insurance Company, each a U.S. insurance company that issues variable annuity products in addition to other products, and Exeter Reassurance Company, Ltd. (“Exeter”), a reinsurance company that mainly reinsures guarantees associated with variable annuity products. MetLife Insurance Company of Connecticut, which is expected to be renamed and domiciled in Delaware, will be the surviving entity. Exeter, formerly a Cayman Islands company, was re-domesticated to Delaware in October 2013. Effective January 1, 2014, following receipt of New York State Department of Financial Services (“Department of Financial Services”) approval, MetLife Insurance Company of Connecticut withdrew its license to issue insurance policies and annuity contracts in New York. Also effective January 1, 2014, MetLife Insurance Company of Connecticut reinsured with Metropolitan Life Insurance Company (“MLIC”), an affiliate, all existing New York insurance policies and annuity contracts that include a separate account feature. As a result of the reinsurance agreements, MetLife Insurance Company of Connecticut recorded a reinsurance recoverable, included in premiums, reinsurance and other receivables, of $545 million and a funds withheld liability, included in other liabilities, of $97 million, and transferred cash and investments of $448 million to MLIC. On December 31, 2013, MetLife Insurance Company of Connecticut deposited investments with an estimated fair market value of $6.3 billion into a custodial account, which became restricted to secure MetLife Insurance Company of Connecticut’s remaining New York policyholder liabilities not covered by such reinsurance on January 1, 2014. In anticipation of establishing the custodial account with qualifying investments, MetLife Insurance Company of Connecticut transferred investments with an estimated fair value of $739 million and cash of $12 million to MLIC and received from MLIC qualifying investments with an estimated fair value of $751 million in the fourth quarter of 2013. See Note 7 of the Notes to the Consolidated Financial Statements. Also, following the Mergers and subject to certain regulatory approvals, MetLife Insurance Company of Connecticut will likely enter into transactions to transfer to one or more affiliates certain business that is currently reinsured by Exeter. The Mergers are expected to occur in the fourth quarter of 2014, subject to regulatory approvals.
The Mergers (i) may mitigate to some degree the impact of any restrictions on the use of captive reinsurers that could be adopted by insurance regulators in Connecticut or Delaware by reducing our exposure to and use of captive reinsurers; (ii) will alleviate the need to use holding company cash to fund derivative collateral requirements; (iii) will increase transparency relative to our capital allocation and variable annuity risk management; and (iv) may impact the aggregate amount of dividends permitted to be paid without insurance regulatory approval. See “— Regulation — Holding Company Regulation — Insurance Regulatory Examinations,” and Note 1 of the Notes to the Consolidated Financial Statements for further information on the impact of the Mergers and see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Affiliated Captive Reinsurance Transactions” for information on our use of captive reinsurers. See also “Risk Factors — Acquisition-Related Risks — We Could Face Difficulties, Unforeseen Liabilities, Asset Impairments or Rating Actions Arising from Business Acquisitions or Integrating and Managing Growth of Such Businesses, Dispositions of Businesses, or Legal Entity Reorganizations” for information regarding the potential impact on our operations if the Mergers or related regulatory approvals are prevented or delayed.
Revenues derived from any customer did not exceed 10% of consolidated premiums, universal life and investment-type product policy fees and other revenues for the years ended December 31, 2013, 2012 and 2011. Financial information, including revenues, expenses, operating earnings, and total assets by segment, as well as premiums, universal life and investment-type product policy fees and other revenues by major product groups and geographic region, is provided in Note 2 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 — Non-GAAP and Other Financial Disclosures” for definitions of such measures.
Sales Distribution
Overview
We market our products and services through various distribution channels. Our retail life, disability and annuities products targeted to individuals are sold via sales forces, comprised of MetLife employees, as well as third-party organizations. Our corporate benefit funding products are sold via sales forces primarily comprised of MetLife employees. MetLife sales employees work with all distribution channels to better reach and service customers, brokers, consultants and other intermediaries.
Retail Distribution
Retail products are sold through a diverse set of distribution networks in order to maximize penetration in the market place. These include our MetLife Premier Client Group, formerly known as the individual distribution sales force, and third-party organizations.
Our MetLife Premier Client 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.
The MetLife Premier Client 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.
Retail products are also sold through various third-party organizations. We distribute products in a regional model through wholesalers working directly with 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. Additionally, wholesalers sell through financial intermediaries, including regional broker-dealers, brokerage firms, financial planners and banks.
Corporate Benefit Funding Distribution
Corporate Benefit Funding products and services are distributed through dedicated sales teams and relationship managers located in five offices in the U.S. and one in the United Kingdom. Products may be sold directly to benefit plan sponsors and advisors or through brokers, consultants or other intermediaries. In addition, these sales professionals work with individual and group distribution areas to better reach and service customers, brokers, consultants and other intermediaries.
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. Our liabilities for future policy benefits and claims are established based on estimates by actuaries of how much we will need to pay for future benefits and claims. For life insurance and annuity products, we calculate these liabilities based on assumptions and estimates, including estimated premiums to be received over the assumed life of the policy, the timing of the event covered by the insurance policy, the amount of benefits or claims to be paid and the investment returns on the investments we make with the premiums we receive. We establish liabilities for claims and benefits based on assumptions and estimates of losses and liabilities incurred. 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.”
In establishing actuarial liabilities for life and non-medical health insurance policies and annuity contracts, we distinguish between short and long duration contracts. Long duration contracts primarily consist of traditional whole life, guaranteed renewable term life, universal life, annuities and individual disability income and long-term care (“LTC”).
Actuarial liabilities for term life, whole life, LTC and limited pay contracts such as single premium immediate individual annuities, structured settlement annuities and certain group pension annuities are equal to the present value of future benefit payments and related expenses less the present value of future net premiums plus premium deficiency reserves, if any. For limited pay contracts, we also defer the excess of the gross premium over the net premium and recognize such excess into income in a constant relationship with insurance in-force for life insurance contracts and in relation to anticipated future benefit payments for annuity contracts.
We determine actuarial liabilities for long duration contracts using assumptions based on experience, plus a margin for adverse deviation. For these long duration 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 the establishment of premium deficiency reserves. Such reserves are determined based on the then current assumptions and do not include a provision for adverse deviation.
The actuarial liabilities established for the above products include future policy benefits (associated with base policies and riders, unearned mortality charges and future disability benefits) and other policyholder liabilities (associated with claims payable and with unearned revenues representing the unamortized portion of front-end loads charged). We also establish liabilities for minimum benefit guarantees relating to certain annuity contracts and secondary guarantees relating to certain life policies.
Liabilities for investment-type and universal life-type products primarily consist of policyholder account balances. Investment-type products include individual annuity contracts in the accumulation phase and certain group pension contracts that have limited or no mortality risk. Universal life-type products consist of universal and variable life contracts and contain group pension contracts. For universal life-type contracts with front-end loads, we defer the charge and amortize the unearned revenue using the product’s estimated gross profits. Pursuant to state and country insurance laws and regulations, we establish statutory reserves, reported as liabilities, to meet our obligations on our 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.
State insurance laws and regulations require us to submit to commissioners of insurance 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 our statutory liabilities with respect to these obligations. See “— Regulation — Holding Company Regulation — Policy and Contract Reserve Adequacy Analysis.”
Due to the nature of the underlying risks and the high degree of uncertainty associated with the determination of actuarial liabilities, we cannot precisely determine the amounts that will ultimately be paid with respect to these actuarial liabilities, and the ultimate amounts may vary from the estimated amounts, particularly when payments may not occur until well into the future.
We periodically review our estimates of actuarial liabilities for future benefits and compare them with our actual experience. We revise estimates, to the extent permitted or required under GAAP, if we determine that future expected experience differs from assumptions used in the development of actuarial liabilities. We charge or credit changes in our liabilities to expenses in the period the liabilities are established or re-estimated. If the liabilities originally established for future benefit payments prove inadequate, we must increase them. Such an increase could adversely affect our earnings and have a material adverse effect on our business, results of operations and financial condition.
Underwriting and Pricing
Underwriting
MetLife’s Global Risk Management Department (“GRM”) contains a dedicated unit, the primary responsibility of which is the development of product pricing standards and independent pricing and underwriting oversight for MetLife’s insurance businesses. Further important controls around management of underwriting and pricing processes include regular experience studies to monitor assumptions against expectations and the use of reinsurance to manage our exposures, as appropriate. See “─ Reinsurance Activity.”
Underwriting generally involves an evaluation of applications by a professional staff of underwriters and actuaries, who determine the type and the amount of insurance 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 such 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. 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 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 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.
Subject to very few exceptions, agents in each of the distribution channels have binding authority for risks which fall within our 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
Product pricing reflects our corporate underwriting standards. GRM and regional product teams are responsible for product pricing oversight for all of our insurance 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 products sold in the U.S. and certain products 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.
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, as policyholders have few 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 occupation being underwritten. 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.
We continually review our underwriting and pricing guidelines so that our policies remain competitive and supportive of our marketing strategies and profitability goals.
Reinsurance Activity
We enter into reinsurance agreements primarily as a purchaser of reinsurance for our various insurance products and also as a provider of reinsurance for some insurance products issued by third parties and related parties. 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 recoverable balances 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. Additionally, we enter into reinsurance agreements for risk and capital management purposes with several affiliated captive reinsurers. Captive reinsurers are affiliated insurance companies licensed under specific provisions of insurance law of their respective jurisdictions, such as the Special Purpose Financial Captive law adopted by several states including Vermont and Delaware, and have a very narrow business plan that specifically restricts the majority or all of their activity to reinsuring business from their affiliates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Affiliated Captive Reinsurance Transactions.”
Retail
For our Retail Annuities business, we reinsure 100% of the living and death benefit guarantees issued in connection with most of our variable annuities issued since 2006 to an affiliated reinsurer and certain portions of the living and death benefit guarantees issued in connection with our variable annuities issued prior to 2006 to affiliated and unaffiliated reinsurers. 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. We also reinsure 90% of our fixed annuities to an affiliated reinsurer.
For our Retail Life & Other insurance products, we have historically reinsured the mortality risk primarily on an excess of retention basis or on a quota share basis. We currently reinsure 100% of the mortality risk in excess of $100,000 per life for most new policies and reinsure up to 100% of the mortality risk for certain other policies. 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. We also reinsure the risk associated with secondary death benefit guarantees on certain universal life insurance policies to affiliates. We evaluate our reinsurance programs routinely and may increase or decrease our retention at any time.
Corporate Benefit Funding
For our Corporate Benefit Funding segment, we have periodically engaged in reinsurance activities on an opportunistic basis. There were no such transactions during the periods presented.
Corporate & Other
We reinsure through 100% quota share reinsurance agreements certain run-off LTC and workers’ compensation business written by the Company.
Catastrophe Coverage
We have exposure to catastrophes which could contribute to significant fluctuations in our results of operations. We use excess reinsurance agreements, under which the direct writing company reinsures risk in excess of a specific dollar value for each policy within a class of policies, to provide greater diversification of risk and minimize exposure to larger risks. Such excess reinsurance agreements include retention reinsurance agreements and quota share reinsurance agreements. Retention reinsurance agreements provide for a portion of a risk to remain with the direct writing company, and quota share reinsurance agreements provide for the direct writing company to transfer a fixed percentage of all risks of a class of policies. Our life insurance products subject us to catastrophe risk which we do not reinsure other than through our ongoing mortality reinsurance program which transfers risk at the individual policy level. We also use excess of retention and quota share reinsurance agreements to provide greater diversification of risk and minimize exposure to larger risks.
Reinsurance Recoverables
For information regarding ceded reinsurance recoverable balances, included in premiums, reinsurance and other receivables in the consolidated balance sheets, see Note 6 of the Notes to the Consolidated Financial Statements.
Regulation
Insurance Regulation
The U.S. life insurance industry is regulated primarily at the state level, with some products and services also subject to federal regulation. Insurance regulation generally aims at supervising and regulating insurers individually rather than on a group-wide basis, with the goal of protecting policyholders and ensuring that each insurance company remains solvent.
MetLife Insurance Company of Connecticut, a Connecticut domiciled insurer, has all material licenses to transact business in, and is subject to regulation and supervision by, 49 states, the District of Columbia, Guam, Puerto Rico, the Bahamas, the U.S. Virgin Islands, and the British Virgin Islands. Each of MetLife Insurance Company of Connecticut’s insurance subsidiaries is regulated and has all material licenses in each jurisdiction where it conducts insurance business. The extent of such regulation varies, but most jurisdictions have laws and regulations governing the financial aspects and business conduct of insurers. State laws in the U.S. grant insurance regulatory authorities broad administrative powers with respect to, among other things:
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| • | licensing companies and agents to transact business; |
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| • | calculating the value of assets to determine compliance with statutory requirements; |
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| • | mandating certain insurance benefits; |
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| • | regulating certain premium rates; |
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| • | reviewing and approving policy forms; |
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| • | regulating unfair trade and claims practices, including through the imposition of restrictions on marketing and sales practices, distribution arrangements and payment of inducements, and identifying and paying to the states benefits and other property that is not claimed by the owners; |
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| • | establishing statutory capital and reserve requirements and solvency standards; |
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| • | specifying the conditions under which a ceding company can take credit for reinsurance in its statutory financial statements (i.e., reduce its reserves by the amount of reserves ceded to a reinsurer); |
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| • | fixing maximum interest rates on insurance policy loans and minimum rates for guaranteed crediting rates on life insurance policies and annuity contracts; |
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| • | adopting and enforcing suitability standards with respect to the sale of annuities and other insurance products; |
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| • | approving changes in control of insurance companies; |
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| • | restricting the payment of dividends and other transactions between affiliates; and |
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| • | regulating the types, amounts and valuation of investments. |
We are required to file reports, generally including detailed annual financial statements, with insurance regulatory authorities in each of the jurisdictions in which we do business, and our operations and accounts are subject to periodic examination by such authorities. We must also file, and in many jurisdictions and in some lines of insurance obtain regulatory approval for, rules, rates and forms relating to the insurance written in the jurisdictions in which we operate.
State and federal insurance and securities regulatory authorities and other state law enforcement agencies and attorneys general from time to time make inquiries regarding our compliance with insurance, securities and other laws and regulations regarding the conduct of our insurance and securities businesses. We cooperate with such inquiries and take corrective action when warranted. See Note 15 of the Notes to the Consolidated Financial Statements.
Holding Company Regulation
We are subject to regulation under the insurance holding company laws of various U.S. jurisdictions. The insurance holding company laws and regulations vary from jurisdiction to jurisdiction, but generally require a controlled insurance company (insurers that are subsidiaries of insurance holding companies) to register with state regulatory authorities and to file with those authorities certain reports, including information concerning its capital structure, ownership, financial condition, certain intercompany transactions and general business operations.
State insurance statutes also typically place restrictions and limitations on the amount of dividends or other distributions payable by insurance company subsidiaries to their parent companies, as well as on transactions between an insurer and its affiliates. See “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”
Guaranty Associations and Similar Arrangements
Most of the jurisdictions in which we are admitted to transact business require life insurers doing business within the jurisdiction to participate in guaranty associations, which are organized to pay certain contractual insurance 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 is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets.
In the past five years, the aggregate assessments levied against us have not been material. We have established liabilities for guaranty fund assessments that we consider adequate. See Note 15 of the Notes to the Consolidated Financial Statements for additional information on the insolvency assessments.
Insurance Regulatory Examinations
As part of their regulatory oversight process, state insurance departments conduct periodic detailed examinations of the books, records, accounts, and business practices of insurers domiciled in their states. State insurance departments also have the authority to conduct examinations of non-domiciliary insurers that are licensed in their states. Except as otherwise disclosed in Note 15 of the Notes to the Consolidated Financial Statements, during the three-year period ended December 31, 2013, we have not received any material adverse findings resulting from state insurance department examinations of our insurance companies.
Regulatory authorities in a small number of states, Financial Industry Regulatory Authority and, occasionally, the U.S. Securities and Exchange Commission (“SEC”), have had investigations or inquiries relating to our sales of individual life insurance policies or annuities or other products. 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. We may continue to resolve investigations in a similar manner.
In addition, claims payment practices by insurance companies have received increased scrutiny from regulators. See Note 15 of the Notes to the Consolidated Financial Statements for further information regarding retained asset accounts and unclaimed property inquiries and related litigation.
State insurance regulators and the National Association of Insurance Commissioners (“NAIC”) are also investigating the use of affiliated captive reinsurers or off-shore entities to reinsure insurance risks. In June 2013, the Department of Financial Services issued a highly critical report setting forth its findings to date relating to its inquiry into the life insurance industry’s use of captive insurance companies. In its report, the Department of Financial Services recommended that (i) the NAIC develop enhanced disclosure requirements for reserve financing transactions involving captive insurers, (ii) the Federal Insurance Office (the “FIO”), Office of Financial Research (the “OFR”), the NAIC and state insurance commissioners conduct inquiries similar to the Department of Financial Services inquiry, and (iii) state insurance commissioners consider an immediate national moratorium on new reserve financing transactions involving captive insurers until these inquiries are complete. The NAIC and certain state insurance regulators have stated that they are opposed to an immediate moratorium on new reserve financing transactions. The Financial Condition Committee of the NAIC has charged its Financial Analysis Working Group with the task of performing a peer review of captive insurer reserve financings in order to gather more information regarding their nature and how extensively they are used.
Like many life insurance companies, we utilize captive reinsurers to satisfy statutory reserve requirements related to universal life and term life insurance policies. We also cede variable annuity risks to a captive reinsurer, which allows us to consolidate hedging and other risk management programs. If the insurance regulators in Connecticut or Delaware restrict the use of such captive reinsurers or if we otherwise are unable to continue to use captive reinsurers in the future, our ability to write certain products or to hedge the associated risks efficiently, and/or our risk-based capital (“RBC”) ratios and ability to deploy excess capital, could be adversely affected or we may need to increase prices on those products, which could adversely impact our competitive position and our results of operations. We will continue to evaluate product modifications, pricing structure and alternative means of managing risks, capital and statutory reserves and we expect the discontinued use of captive reinsurance on new reserve financing transactions would not have a material impact on our future consolidated financial results. In the second quarter of 2013, MetLife announced its plans for the Mergers. See “— Overview” for further information on the Mergers. The Mergers may mitigate to some degree the impact of any restrictions on the use of captive reinsurers that could be adopted by insurance regulators in Connecticut or Delaware. For more information on our use of captive reinsurers see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Affiliated Captive Reinsurance Transactions.”
The NAIC also is reviewing life insurers’ use of non-variable separate accounts that are insulated (where assets of the separate account equal to the reserves and other contract liabilities with respect to the account may not be charged with liabilities arising out of the general account in the event of an insurance company insolvency). The NAIC’s review might lead to a recommendation against the allowance of insulation for certain of our separate account products. We cannot predict what, if any, changes may result from this review and possible recommendations. If the insurance regulators in Connecticut or Delaware change applicable laws or regulations in accordance with such recommendation, our use of insulation for certain products could be impaired and our ability to compete effectively or do business in certain markets may be adversely affected. In addition, our financial results may also be adversely affected.
The International Association of Insurance Supervisors (“IAIS”) has encouraged U.S. insurance supervisors to establish Supervisory Colleges for U.S.-based insurance groups with international operations, including MetLife, to facilitate cooperation and coordination among the insurance groups’ supervisors and to enhance the member regulators’ understanding of an insurance group’s risk profile. In January 2013, MetLife was the subject of a Supervisory College meeting which was chaired by the Department of Financial Services and was attended by MetLife's key U.S. and international insurance regulators, including our key regulators. MetLife has not received any report or recommendations from the Supervisory College meeting, and we do not expect any outcome of the meeting to have a material adverse effect on our business. A second Supervisory College, chaired again by the Department of Financial Services, took place in March 2014.
Policy and Contract Reserve Adequacy Analysis
Annually, our U.S. insurance companies are required to conduct an analysis of the adequacy of all statutory reserves. In each case, a qualified actuary must submit an opinion which states that the statutory reserves make adequate provision, according to accepted actuarial standards of practice, for the anticipated cash flows required by the contractual obligations and related expenses of the U.S. insurance company. The adequacy of the statutory reserves is considered in light of the assets held by the insurer with respect to such reserves and related actuarial items including, but not limited to, the investment earnings on such assets, and the consideration anticipated to be received and retained under the related policies and contracts. We may increase reserves in order to submit an opinion without qualification. Since inception of this requirement, our U.S. insurance companies which are required by their states of domicile to provide these opinions have provided such opinions without qualifications.
NAIC
The NAIC is an organization, the mission of which is to assist state insurance regulatory authorities in serving the public interest and achieving the insurance regulatory goals of its members, the state insurance regulatory officials. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer reviews, and coordinate their regulatory oversight. The NAIC provides standardized insurance industry accounting and reporting guidance through its Accounting Practices and Procedures Manual (the “Manual”). However, statutory accounting principles continue to be established by individual state laws, regulations and permitted practices. Changes to the Manual or modifications by the various state insurance departments may impact the statutory capital and surplus of our U.S. insurance companies.
The NAIC currently has in place its “Solvency Modernization Initiative,” which is designed to review the U.S. financial regulatory system and all aspects of financial regulation affecting insurance companies. Though broad in scope, the NAIC has stated that the Solvency Modernization Initiative will focus on: (1) capital requirements; (2) corporate governance and risk management; (3) group supervision; (4) statutory accounting and financial reporting; and (5) reinsurance. This initiative has resulted in the adoption by the NAIC in September 2012 of the Risk Management and Own Risk and Solvency Assessment Model Act (“ORSA”), which has been or is expected to be enacted by our insurance companies’ domiciliary states in the near future. ORSA requires that insurers maintain a risk management framework and conduct an internal own risk and solvency assessment of the insurer’s material risks in normal and stressed environments. The assessment must be documented in a confidential annual summary report, a copy of which must be made available to regulators as required or upon request. MetLife’s first ORSA summary report, which will be submitted on behalf of the enterprise, must be prepared beginning in 2015.
In addition, in December 2012, the NAIC approved a new valuation manual containing a principles-based approach to life insurance company reserves. Principles-based reserving is designed to better address reserving for products, including the current generation of products for which the current formulaic basis for reserve determination does not work effectively. The principles-based approach will not become effective unless it is enacted into law by a minimum number of state legislatures. Insurance commissioners of certain states oppose (e.g., New York) or do not actively support the principles-based reserve approach.
We cannot predict the additional capital requirements or compliance costs, if any, that may result from the above initiatives.
The NAIC adopted revisions to the NAIC Insurance Holding Company System Model Act and Insurance Holding Company System Model Regulation in December 2010. The revised models include a new requirement that the ultimate controlling person of a U.S. insurer file an annual enterprise risk report with the lead state of the insurer identifying risks likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole. To date, several states where MetLife has domestic insurers have enacted a version of the revised NAIC model act, including the enterprise risk reporting requirement.
Surplus and Capital; Risk-Based Capital
Insurers are required to maintain their capital and surplus at or above minimum levels. Regulators have discretionary authority, in connection with the continued licensing of our U.S. insurance companies, to limit or prohibit an insurer’s sales to policyholders if, in their judgment, the regulators determine that such insurer has not maintained the minimum surplus or capital or that the further transaction of business will be hazardous to policyholders. Each of our U.S. insurance companies reports its RBC ratio based on a formula calculated by applying factors to various asset, premium and statutory reserve items, as well as taking into account the risk characteristics of the insurer. The major categories of risk involved are asset risk, insurance risk, interest rate risk, market risk and business risk. The formula is used as an early warning regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. State insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose RBC ratio does not meet or exceed certain RBC levels. As of the date of the most recent annual statutory financial statements filed with insurance regulators, the RBC of each of our subsidiaries subject to these requirements was in excess of each of those RBC levels.
On July 26, 2013, the NAIC adopted a change to the methodology for calculating the RBC risk charges associated with commercial and agricultural mortgage loans. Prior to the adoption of this methodology change, the risk charges were calculated based on an insurance company's portfolio level experience as compared to an industry average. The newly adopted change considers each loan's risk in the calculation of these risk charges. This methodology applies to each of MetLife, Inc.'s U.S. insurance subsidiaries subject to RBC. This adoption had a positive effect on the Company’s RBC ratio, which is provided in its statutory annual statements. We are not aware of any other potential NAIC actions that would have a material impact on our RBC.
Regulation of Investments
Each of our U.S. insurance companies is subject to state laws and regulations that require diversification of our investment portfolios and limit the amount of investments in certain asset categories, such as below investment grade fixed income securities, equity real estate, other equity investments, and derivatives. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as non-admitted assets for purposes of measuring surplus and, in some instances, would require divestiture of such nonqualifying investments. We believe that the investments made by each of our U.S. insurance companies complied, in all material respects, with such regulations at December 31, 2013. See “— Federal Initiatives” for information regarding the impact on our investments of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).
Regulation of Over-the-Counter Derivatives
Dodd-Frank includes a new framework of regulation of the over-the-counter (“OTC”) derivatives markets which requires clearing of certain types of transactions currently traded OTC and imposes additional costs, including new reporting and margin requirements, and will likely impose additional regulation on the Company, including new capital requirements. Our costs of risk mitigation are increasing under Dodd-Frank. For example, Dodd-Frank imposes requirements, including the requirement to pledge initial margin (i) for “OTC-cleared” transactions (OTC derivatives that are cleared and settled through central clearing counterparties) entered into after June 10, 2013, and (ii) for “OTC-bilateral” transactions (OTC derivatives that are bilateral contracts between two counterparties) entered into after the phase-in period; these requirements would be applicable to us in 2019 if the U.S. Commodity Futures Trading Commission and the SEC adopt the final margin requirements for non-centrally cleared derivatives published by the Bank of International Settlements and International Organization of Securities Commissions in September 2013. These increased margin requirements, combined with restrictions on securities that will qualify as eligible collateral, will require increased holdings of cash and highly liquid securities with lower yields causing a reduction in income. Centralized clearing of certain OTC derivatives exposes us to the risk of a default by a clearing member or clearinghouse with respect to our cleared derivative transactions. We use derivatives to mitigate a wide range of risks in connection with our businesses, including the impact of increased benefit exposures from our annuity products that offer guaranteed benefits. We have always been subject to the risk that hedging and other management procedures might prove ineffective in reducing the risks to which insurance policies expose us or that unanticipated policyholder behavior or mortality, combined with adverse market events, could produce economic losses beyond the scope of the risk management techniques employed. Any such losses could be increased by higher costs of writing derivatives (including customized derivatives) and the reduced availability of customized derivatives that might result from the implementation of Dodd-Frank and comparable international derivatives regulations.
Federal Initiatives
Although the insurance business in the United States is primarily regulated by the states, federal initiatives often have an impact on our business in a variety of ways. From time to time, federal measures are proposed which may significantly affect the insurance business. These areas include financial services regulation, securities regulation, derivatives regulation, pension regulation, health care regulation, privacy, tort reform legislation and taxation. In addition, various forms of direct and indirect federal regulation of insurance have been proposed from time to time, including proposals for the establishment of an optional federal charter for insurance companies. See “Risk Factors — Regulatory and Legal Risks — Our Insurance Businesses Are Highly Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability and Limit Our Growth.”
Dodd-Frank effected the most far-reaching overhaul of financial regulation in the U.S. in decades. The full impact of Dodd-Frank on us will depend on the numerous rulemaking initiatives required or permitted by Dodd-Frank and the various studies mandated by Dodd-Frank, many of which remain to be completed.
Dodd-Frank established the FIO within the Department of the Treasury, which has the authority to participate in the negotiations of international insurance agreements with foreign regulators for the U.S., as well as to collect information about the insurance industry and recommend prudential standards. While not having a general supervisory or regulatory authority over the business of insurance, the director of this office performs various functions with respect to insurance, including serving as a non-voting member of the Financial Stability Oversight Council (“FSOC”) and making recommendations to the FSOC regarding insurers to be designated for more stringent regulation. On December 12, 2013, the FIO issued a report, mandated by Dodd-Frank, setting forth recommendations with respect to modernization of insurance regulation in the United States. Many of these recommendations urged the states to take action to achieve greater uniformity in insurance regulation. However, the report also discussed potential federal solutions if states failed to modernize and improve regulation and some of the report’s recommendations favored a greater federal role in certain aspects of insurance regulation to promote uniformity, such as FIO participation in supervisory colleges to monitor financial stability and identify issues or gaps in the regulation of large national and internationally active insurers.
Dodd-Frank also includes provisions that impact our investments and investment activities, including the federal regulation of such activities. Until the various final regulations are promulgated pursuant to Dodd-Frank, and perhaps for some time thereafter, the full impact of Dodd-Frank on such activities will remain unclear. Such provisions and regulations include, but are not limited to, the prohibition or regulation of proprietary trading and sponsoring or investing in hedge funds or private equity funds by certain kinds of financial institutions (commonly known as the Volcker Rule), and the potential application of enhanced prudential standards and other restrictions, including the Volcker Rule, to non-bank systemically important financial institutions (“non-bank SIFIs”), all of which may affect MetLife were it to be designated by the FSOC as a non-bank SIFI. See “— Potential Regulation of MetLife as a Non-Bank SIFI.”
Potential Regulation of MetLife as a Non-Bank SIFI
On January 11, 2013, MetLife Bank, National Association (“MetLife Bank”), a subsidiary of MetLife, and MetLife completed the sale of the depository business of MetLife Bank to GE Capital Retail Bank. Subsequently, MetLife Bank terminated its deposit insurance and MetLife deregistered as a bank holding company. Additionally, in August 2013, MetLife Bank merged with and into MetLife Home Loans LLC, a non-bank affiliate. As a result, MetLife is no longer regulated as a bank holding company or subject to enhanced supervision and prudential standards as a bank holding company with assets of $50 billion or more. However, if, in the future, MetLife is designated by the FSOC as a non-bank SIFI, it could once again be subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and to enhanced supervision and prudential standards. See “— Enhanced Prudential Standards for Non-Bank SIFIs.” Regulation of MetLife as a non-bank SIFI could affect our business. For example, enhanced capital requirements that would be applicable to MetLife, if MetLife were designated as a non-bank SIFI, may adversely affect our ability to compete with other insurers that are not subject to those requirements, and counterparty exposure limits may affect our ability to engage in hedging activities. The Federal Reserve Board would also have the right to require any of our insurance companies, or insurance company affiliates, to take prompt action to correct any financial weaknesses.
The FSOC issued final rules in April 2012, outlining a three-stage process it will follow and the criteria it will use to assess whether a non-bank financial company should be subject to enhanced supervision by the Federal Reserve Board as a non-bank SIFI. On July 16, 2013, MetLife was notified by the FSOC that it had reached Stage 3 in the process to determine whether MetLife would be named a non-bank SIFI. MetLife has been providing information to the FSOC to assist it in its evaluation.
If MetLife is designated as a non-bank SIFI, it will be subject to a number of Dodd-Frank requirements that are also applicable to bank holding companies with assets of $50 billion or more. In August 2013, the Federal Reserve Board issued a final rule to implement Section 318 of Dodd-Frank, which directs the Federal Reserve Board to collect assessments and other charges equal to the total expenses the Federal Reserve Board thinks is necessary for its supervision of bank holding companies and savings and loan holding companies with assets of $50 billion or more and non-bank SIFIs. In accordance with this final rule, MetLife paid an assessment for 2012.
Enhanced Prudential Standards for Non-Bank SIFIs
Regulation of MetLife, Inc. as a non-bank SIFI could materially and adversely affect our business. In December 2011, in accordance with the requirements of Section 165 of Dodd-Frank, the Federal Reserve Board proposed a set of prudential standards (“Regulation YY”) that would apply to non-bank SIFIs, including enhanced RBC requirements, leverage limits, liquidity requirements, single counterparty exposure limits, governance requirements for risk management, stress test requirements, special debt-to-equity limits for certain companies, early remediation procedures, and recovery and resolution planning. The Federal Reserve Board’s proposal contemplates that these standards would be subject to the authority of the Federal Reserve Board to determine, on its own or in response to a recommendation by the FSOC, to tailor the application of the enhanced standards to different companies on an individual basis or by category, taking into consideration their capital structure, riskiness, complexity, financial activities, size, and any other risk-related factors that the Federal Reserve Board deems appropriate. Since this proposal, the Federal Reserve Board has not taken further action to implement most of these requirements for non-bank SIFIs.
In October 2013, the Federal Reserve Board proposed specific regulations relating to liquidity requirements for banking organizations and some non-bank SIFIs, although the rules would not apply to non-bank SIFIs with substantial insurance operations. On February 18, 2014, the Federal Reserve Board adopted amendments to Regulation YY to implement certain of the enhanced prudential standards for bank holding companies and foreign banking organizations with total consolidated assets of $50 billion or more. The enhanced prudential standards include risk-based and leverage capital requirements, liquidity standards, requirements for overall risk management (including establishing a risk committee), stress-test requirements, and a 15-to-1 debt-to-equity limit for these companies. The amendments also establish risk committee requirements and capital stress testing requirements for certain bank holding companies and foreign banking organizations with total consolidated assets of $10 billion or more. While Regulation YY, as originally proposed, would have applied to non-bank SIFIs, the final rule does not. The Federal Reserve Board indicated that it plans to apply enhanced prudential standards to non-bank SIFIs by rule or order, enabling it to more appropriately tailor the standards to non-bank SIFIs and will provide affected non-bank SIFIs with notice and the opportunity to comment prior to determination of their enhanced prudential standards. Accordingly, the manner in which MetLife would be regulated, if it were designated as a non-bank SIFI, remains unclear. The Federal Reserve Board has stated that it believes other provisions of Dodd-Frank, known as the Collins Amendment, constrain its ability to tailor capital standards for non-bank SIFIs. See “Risk Factors — Regulatory and Legal Risks — Our Insurance Businesses Are Highly Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability and Limit Our Growth — Federal Regulatory Agencies.”
The stress testing requirements have been implemented and require non-bank SIFIs (as well as bank holding companies with $50 billion or more of assets) to undergo three stress tests each year: an annual supervisory stress test conducted by the Federal Reserve Board and two company-run stress tests (an annual test which coincides with the timing of the supervisory stress test, and a mid-cycle test). Companies will be required to take the results of the stress tests into consideration in their annual capital planning and resolution and recovery planning. If MetLife is designated by the FSOC as a non-bank SIFI, its competitive position and its ability to pay dividends, repurchase common stock or other securities or engage in other transactions that could affect its capital or need for capital could be adversely affected by any additional capital requirements that might be imposed as a result of the stress testing requirements, as well as enhanced prudential standards, other measures imposed as a result of the enactment of Dodd-Frank and other regulatory initiatives.
Non-bank SIFIs would also be required to submit a resolution plan setting forth how the company could be resolved under the Bankruptcy Code in the event of material financial distress. Resolution plans would have to be resubmitted annually and promptly following any event, occurrence, change in conditions or circumstances, or other change that results in, or could reasonably be foreseen to have, a material effect on the resolution plan. A failure to submit a “credible” resolution plan could result in the imposition of a variety of measures, including additional capital, leverage, or liquidity requirements, and forced divestiture of assets or operations.
In addition, if it were determined that MetLife posed a substantial threat to U.S. financial stability, the applicable federal regulators would have the right to require it to take one or more other mitigating actions to reduce that risk, including limiting its ability to merge with or acquire another company, terminating activities, restricting its ability to offer financial products or requiring it to sell assets or off-balance sheet items to unaffiliated entities. Enhanced standards would also permit, but not require, regulators to establish requirements with respect to contingent capital, enhanced public disclosures and short-term debt limits. These standards are described as being more stringent than those otherwise imposed on bank holding companies; however, the Federal Reserve Board is permitted to apply them on an institution-by-institution basis, depending on its determination of the institution’s level of risk.
Orderly Liquidation Authority
Under the provisions of Dodd-Frank relating to the resolution or liquidation of certain types of financial institutions, if MetLife were to become insolvent or were in danger of defaulting on its obligations, it could be compelled to undergo liquidation with the Federal Deposit Insurance Corporation (“FDIC”) as receiver. For this new regime to be applicable, a number of determinations would have to be made, including that a default by the affected company would have serious adverse effects on financial stability in the U.S. If the FDIC were to be appointed as the receiver for such a company, the liquidation of that company would occur under the provisions of the new liquidation authority, and not under the Bankruptcy Code. Even if the Orderly Liquidation Authority provisions were invoked, our U.S. insurance companies would be resolved under state insurance law. The FDIC’s purpose under the liquidation regime is to mitigate the systemic risks the institution’s failure poses, which is different from that of a bankruptcy trustee under the Bankruptcy Code. In such a liquidation, the holders of such company’s debt could in certain respects be treated differently than under the Bankruptcy Code. As required by Dodd-Frank, the FDIC has established rules relating to the priority of creditors’ claims and the potentially dissimilar treatment of similarly situated creditors. These provisions could apply to some financial institutions whose outstanding debt securities we hold in our investment portfolios. Dodd-Frank also provides for the assessment of bank holding companies with assets of $50 billion or more, non-bank SIFIs, and other financial companies with assets of $50 billion or more to cover the costs of liquidating any financial company subject to the new liquidation authority.
Volcker Rule
Under the Volcker Rule, Dodd-Frank restricts the ability of insured depository institutions and of companies that control an insured depository institution, and their affiliates, to engage in proprietary trading and to sponsor or invest in funds (hedge funds and private equity funds) that rely on certain exemptions from the Investment Company Act of 1940, as amended (the “Investment Company Act”). Because MetLife Bank's FDIC insurance has been terminated, MetLife and its affiliates, including us, are not subject to the bans on proprietary trading and fund activities under the Volcker Rule. However, because the Volcker Rule nevertheless imposes additional capital requirements and quantitative limits on such trading and activities by a non-bank SIFI, we could be subject to such requirements and limits were MetLife to be designated a non-bank SIFI. Regulations defining and governing such requirements and limits on non-bank SIFIs have not been proposed and were not addressed in the final regulations issued on December 10, 2013 implementing the Volcker Rule for insured depository institutions and their affiliates (“Volcker Rule Regulations”). Commencing from the date of designation, a non-bank SIFI will have a two-year period, subject to further extension by the Federal Reserve Board, to conform to any such requirements and limits. Subject to safety and soundness determinations as part of rulemaking that could require additional capital requirements and quantitative limits, Dodd-Frank provides that the exemptions under the Volcker Rule also are available to exempt any additional capital requirements and quantitative limits on non-bank SIFIs. The Volcker Rule Regulations provide an exemption, subject to certain requirements, for trading activities and fund sponsorship and investments by a regulated insurance company and its affiliates solely for the general account or separate account of such insurance company. Until final regulations applicable to non-bank SIFIs have been promulgated, it is unclear whether MetLife, were it to be designated as a non-bank SIFI, may have to alter any of its future activities to comply.
Consumer Protection Laws
Numerous federal and state laws affect MetLife’s earnings and activities, including federal and state consumer protection laws. As part of Dodd-Frank, Congress established the Consumer Financial Protection Bureau (“CFPB”) to supervise and regulate institutions that provide certain financial products and services to consumers. Although the consumer financial services subject to the CFPB’s jurisdiction generally exclude insurance business of the kind in which we engage, the CFPB does have authority to regulate non-insurance consumer services provided throughout the MetLife enterprise.
Securities Regulation
Some of our activities in offering and selling variable insurance products are subject to extensive regulation under the federal securities laws administered by the SEC. We issue variable annuity contracts and variable life insurance policies through separate accounts that are registered with the SEC as investment companies under the Investment Company Act. Each registered separate account is generally divided into sub-accounts, each of which invests in an underlying mutual fund which is itself a registered investment company under the Investment Company Act. In addition, the variable annuity contracts and variable life insurance policies issued by these registered separate accounts are registered with the SEC under the Securities Act of 1933, as amended. Certain variable contract separate accounts sponsored by us are exempt from registration, but may be subject to other provisions of the federal securities laws.
Federal and state securities regulatory authorities from time to time make inquiries and conduct examinations regarding our compliance with securities laws and regulations. We cooperate with such inquiries and examinations and take corrective action when warranted.
Federal and state securities laws and regulations are primarily intended to protect investors in the securities markets and generally grant regulatory agencies broad rulemaking and enforcement powers, including the power to limit or restrict the conduct of business for failure to comply with such laws and regulations. See “Risk Factors — Regulatory and Legal Risks — Changes in U.S. Federal and State Securities Laws and Regulations, and State Insurance Regulations Regarding Suitability of Annuity Product Sales, May Affect Our Operations and Our Profitability."
Designation Process and Policy Measures that May Apply to Global Systemically Important Insurers
The IAIS, an association of insurance supervisors and regulators and a member of the Financial Stability Board (“FSB”), an international entity established to coordinate, develop and promote regulatory, supervisory and other financial sector policies in the interest of financial stability, is participating in the FSB’s initiative to identify global systemically important financial institutions and has devised and published a methodology to assess the systemic relevance of global insurers and has published a framework of policy measures to be applied to global systemically important insurers (“G-SIIs”). In July 2013, the FSB published its initial list of nine G-SIIs, based on the IAIS’ assessment methodology, which includes MetLife. The FSB will update the list annually beginning in November 2014.
For G-SIIs which engage in activities deemed to be systemically risky, the framework of policy measures calls for imposition of additional capital requirements on those activities. The FSB has directed the IAIS to develop G-SII basic (formerly referred to as “backstop”) capital requirements (“BCR”) as the basis for the calculation of additional capital by the end of 2014; the IAIS has indicated that it expects the BCR to apply to G-SIIs in 2015 or shortly thereafter. Any additional capital requirements triggered by systemically risky activities, however, will not be applied before 2019. In addition, the IAIS has confirmed that it will develop a risk-based global insurance capital standard by 2016 which will apply to all internationally active insurance groups, including G-SIIs, with implementation to begin in 2019 after two years of testing and refinement. The FSB and IAIS propose that national authorities ensure that any insurers identified as G-SIIs be subject to additional requirements consistent with the framework of policy measures, which include preparation of a systemic risk management plan, preparation of a recovery and resolution plan, enhanced liquidity planning and management, more intensive supervision, closer coordination among regulators through supervisory colleges led by a regulator with group-wide supervisory authority, and a policy bias in favor of separation of non-traditional insurance and non-insurance activities from traditional insurance activities. The IAIS policy measures would need to be implemented by legislation or regulation in each applicable jurisdiction, and the impact on MetLife, and other designated G-SIIs in the U.S., is uncertain.
Environmental Considerations
As an owner and operator of real property, we are subject to extensive federal, state and local environmental laws and regulations. Inherent in such ownership and operation is also the risk that there may be potential environmental liabilities and costs in connection with any required remediation of such properties. In addition, we hold equity interests in companies that could potentially be subject to environmental liabilities. We routinely have environmental assessments performed with respect to real estate being acquired for investment and real property to be acquired through foreclosure. We cannot provide assurance that unexpected environmental liabilities will not arise. However, based on information currently available to us, we believe that any costs associated with compliance with environmental laws and regulations or any remediation of such properties will not have a material adverse effect on our business, results of operations or financial condition.
Unclaimed Property
We are subject to the laws and regulations of states and other jurisdictions concerning identification, reporting and escheatment of unclaimed or abandoned funds, and are subject to audit and examination for compliance with these requirements. See Note 15 of the Notes of the Consolidated Financial Statements.
Employee Retirement Income Security Act of 1974 (“ERISA”) Considerations
We provide products and services to certain employee benefit plans that are subject to ERISA, or the Internal Revenue Code of 1986, as amended (the “Code”). As such, our activities are subject to the restrictions imposed by ERISA and the Code, including the requirement under ERISA that fiduciaries must perform their duties solely in the interests of ERISA plan participants and beneficiaries, and the requirement under ERISA and the Code that fiduciaries may not cause a covered plan to engage in prohibited transactions with persons who have certain relationships with respect to such plans. The applicable provisions of ERISA and the Code are subject to enforcement by the Department of Labor (“DOL”), the Internal Revenue Service and the Pension Benefit Guaranty Corporation.
The prohibited transaction rules of ERISA and the Code generally restrict the provision of investment advice to ERISA plans and participants and Individual Retirement Accounts (“IRAs”) if the investment recommendation results in fees paid to the individual advisor, his or her firm or their affiliates that vary according to the investment recommendation chosen. In October 2011, the DOL issued final regulations that provide limited relief from these investment advice restrictions. If additional relief is not provided, the ability of our affiliated broker-dealers and their registered representatives to provide investment advice to ERISA plans and participants and IRAs would likely be significantly restricted. Also, the fee and revenue arrangements of certain advisory programs may be required to be revenue neutral, resulting in potential lost revenues for these broker-dealers and their affiliates.
Other proposed investment advice regulatory initiatives under ERISA also may negatively impact the current business model of our affiliated broker-dealers. In particular, the DOL issued a proposed regulation in October 2010 that would, if adopted as proposed, significantly broaden the circumstances under which a person or entity providing investment advice with respect to ERISA plans or IRAs would be deemed a fiduciary under ERISA or the Code. If adopted, the proposed regulations may make it easier for the DOL in enforcement actions, and for plaintiffs’ attorneys in ERISA litigation, to attempt to extend fiduciary status to advisors who would not be deemed fiduciaries under current regulations. In September 2011, the DOL announced it will re-propose these fiduciary definition regulations, and a new proposal is expected in 2014.
In addition, the DOL has issued a number of regulations recently that increase the level of disclosure that must be provided to plan sponsors and participants. The participant disclosure regulations and the regulations which require service providers to disclose fee and other information to plan sponsors took effect in 2012. These ERISA disclosure requirements will likely increase the regulatory and compliance burden upon us, resulting in increased costs.
In John Hancock Mutual Life Insurance Company v. Harris Trust and Savings Bank (1993), the U.S. Supreme Court held that certain assets in excess of amounts necessary to satisfy guaranteed obligations under a participating group annuity general account contract are “plan assets.” Therefore, these assets are subject to certain fiduciary obligations under ERISA, which requires fiduciaries to perform their duties solely in the interest of ERISA plan participants and beneficiaries. On January 5, 2000, the Secretary of Labor issued final regulations indicating, in cases where an insurer has issued a policy backed by the insurer’s general account to or for an employee benefit plan, the extent to which assets of the insurer constitute plan assets for purposes of ERISA and the Code. The regulations apply only with respect to a policy issued by an insurer on or before December 31, 1998 (“Transition Policy”). No person will generally be liable under ERISA or the Code for conduct occurring prior to July 5, 2001, where the basis of a claim is that insurance company general account assets constitute plan assets. An insurer issuing a new policy that is backed by its general account and is issued to or for an employee benefit plan after December 31, 1998 will generally be subject to fiduciary obligations under ERISA, unless the policy is a guaranteed benefit policy.
The regulations indicate the requirements that must be met so that assets supporting a Transition Policy will not be considered plan assets for purposes of ERISA and the Code. These requirements include detailed disclosures to be made to the employee benefits plan and the requirement that the insurer must permit the policyholder to terminate the policy on 90 day notice and receive without penalty, at the policyholder’s option, either (i) the unallocated accumulated fund balance (which may be subject to market value adjustment) or (ii) a book value payment of such amount in annual installments with interest. We have taken and continue to take steps designed to ensure compliance with these regulations.
We cannot predict what other proposals may be made, what legislation may be introduced or enacted or the impact of any such legislation on our business, results of operations and financial condition.
Company Ratings
Insurer financial strength ratings represent the opinions of rating agencies, including A.M. Best Company (“A.M. Best”), Fitch Ratings (“Fitch”), Moody’s Investors Service (“Moody’s”) and Standard & Poor’s Ratings Services (“S&P”), regarding the ability of an insurance company to meet its financial obligations to policyholders and contractholders.
Rating Stability Indicators
Rating agencies use an “outlook statement” of “positive,” “stable,” ‘‘negative’’ or “developing” to indicate a medium- or long-term trend in credit fundamentals which, if continued, may lead to a rating change. A rating may have a “stable” outlook to indicate that the rating is not expected to change; however, a “stable” rating does not preclude a rating agency from changing a rating at any time, without notice. Certain rating agencies assign rating modifiers such as “CreditWatch” or “Under Review” to indicate their opinion regarding the potential direction of a rating. These ratings modifiers are generally assigned in connection with certain events such as potential mergers and acquisitions, or material changes in a company’s results, in order for the rating agency to perform its analysis to fully determine the rating implications of the event.
Insurer Financial Strength Ratings
Our insurer financial strength ratings at the date of this filing are as follows:
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| | A.M. Best (1) | | Fitch (2) | | Moody’s* (3) | | S&P (4) |
| MetLife Insurance Company of Connecticut | A+ | | AA- | | Aa3 | | AA- |
| MetLife Investors USA Insurance Company | A+ | | AA- | | Aa3 | | AA- |
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| * | Negative outlook by Moody’s effective February 5, 2013. Moody’s stated that the change in its long-term ratings outlook for MetLife, Inc. and most of its U.S. subsidiaries to negative from stable was due to the weak economic and low interest rate environment and its impact on the profitability and financial flexibility of MetLife, Inc. and most of its U.S. subsidiaries. |
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| (1) | A.M. Best financial strength ratings range from “A++ (superior)” to “S (Suspended).” A rating of “A+” is the second highest of sixteen rating categories. |
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| (2) | Fitch insurer financial strength ratings range from “AAA (exceptionally strong)” to “C (ceased or interrupted payments imminent).” A “+” or “-” may be appended to ratings from “AA” to “CCC” to indicate relative position within a category. A rating of “AA-” is the fourth highest of nineteen rating categories. |
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| (3) | Moody’s insurance financial strength ratings range from “Aaa (exceptional)” to “C (extremely poor).” A numeric modifier may be appended to ratings from “Aa” to “Caa” to indicate relative position within a category, with 1 being the highest and 3 being the lowest. A rating of “Aa3” is the fourth highest of twenty-one rating categories. |
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| (4) | S&P long-term insurer financial strength ratings range from “AAA (extremely strong)” to “R (under regulatory supervision).” A “+” or “-” may be appended to ratings from “AA” to “CCC” to indicate relative position within a category. A rating of “AA-” is the fourth highest of twenty-two rating categories. |
The foregoing insurer financial strength ratings reflect each rating agency’s opinion of the financial characteristics of MetLife Insurance Company of Connecticut and MLI-USA with respect to their ability to pay obligations under insurance policies and contracts in accordance with their terms. Insurer financial strength ratings are not statements of fact nor are they recommendations to purchase, hold or sell any security, contract or policy. Each rating should be evaluated independently of any other rating. Additional information about financial strength ratings can be found on the respective websites of the rating agencies.
A ratings downgrade (or the potential for such a downgrade) of MetLife Insurance Company of Connecticut or MLI-USA could potentially, among other things, increase the number of policies surrendered and withdrawals by policyholders of cash values from their policies, adversely affect relationships with broker-dealers, banks, agents, wholesalers and other distributors of our products and services, negatively impact new sales, and adversely affect our ability to compete and thereby have a material adverse effect on our business, results of operations and financial condition. See “Risk Factors — Risks Related to Our Business — A Downgrade or a Potential Downgrade in Our Financial Strength Ratings or Those of MetLife’s Other Insurance Subsidiaries, or MetLife’s Credit Ratings, Could Result in a Loss of Business and Materially Adversely Affect Our Financial Condition and Results of Operations.”
Item 1A. Risk Factors
Economic Environment and Capital Markets-Related Risks
If Difficult Conditions in the Global Capital Markets and the Economy Generally Persist, They May Materially Adversely Affect Our Business and Results of Operations
Our business and results of operations are materially affected by conditions in the global capital markets and the economy generally. Stressed conditions, volatility and disruptions in financial asset classes or various markets, including global capital markets, can have an adverse effect on us, in part because we have a large investment portfolio and our insurance liabilities are sensitive to changing market factors. Global market factors, including interest rates, credit spreads, equity prices, real estate markets, foreign currency exchange rates, consumer spending, business investment, government spending, the volatility and strength of the capital markets, deflation and inflation can all affect our financial condition, as well as the volume, profitability and results of our business operations, either directly or by virtue of their impact on the business and economic environment generally and on general levels of economic activity, employment and customer behavior specifically. Disruptions in one market or asset class can also spread to other markets or asset classes. Upheavals in the financial markets can also affect our financial condition (including our liquidity and capital levels) as a result of mismatched impacts on the value of our assets and our liabilities. While our diversified business mix and geographically diverse business operations partially mitigate these risks, correlation across regions, countries and global market factors may reduce the benefits of diversification.
At times throughout the past few years, volatile conditions have characterized financial markets. Significant market volatility, and government actions taken in response, may exacerbate some of the risks we face. Concerns about economic conditions, capital markets and the solvency of certain EU member states, their banking systems and the financial institutions that have significant direct or indirect exposure to debt issued by these countries or significant exposure to their banking systems, have caused elevated levels of market volatility. This market volatility has affected the performance of various asset classes at various times, and it could continue until there is an ultimate resolution of these sovereign debt and banking system-related concerns. Concerns about sovereign debt sustainability have also expanded to other EU member states, which resulted in credit ratings downgrades or adverse credit ratings outlook changes for certain EU member states and the EU itself. The financial markets have also been affected by concerns over U.S. fiscal and monetary policy. Any of these concerns could have significant adverse effects on the economic and financial markets generally.
To the extent these uncertain financial market conditions persist, our revenues and net investment income are likely to remain under pressure. Similarly, sustained periods of low interest rates could cause our profit margins to erode. See “— We Are Exposed to Significant Financial and Capital Markets Risks Which May Adversely Affect Our Results of Operations, Financial Condition and Liquidity, and May Cause Our Net Investment Income to Vary from Period to Period.” Also, in the event of extreme prolonged market events, such as the recent global credit crisis, we could incur significant capital and/or operating losses due to, among other reasons, losses incurred in our general account and as a result of the impact on us of guarantees and/or collateral requirements associated with affiliated captive reinsurers and other similar arrangements. Even in the absence of a market downturn, we are exposed to substantial risk of loss due to market volatility.
We are a significant writer of variable insurance products and certain other products issued through separate accounts. The account values of these products decrease as a result of declining equity markets. Lower interest rates generally increase account values in the near term, but may result in lower returns in fixed income options in the future. Decreases in account values reduce fees generated by these products, cause the amortization of deferred policy acquisition costs (“DAC”) to accelerate, could increase the level of insurance liabilities we must carry to support such products issued with any associated guarantees and could require us to provide additional funding to affiliated captive reinsurers.
In an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, the demand for our financial and insurance products could be adversely affected. Group insurance, in particular, is affected by higher unemployment rates. In addition, we may experience an elevated incidence of claims and lapses or surrenders of policies. Furthermore, our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. Such adverse changes in the economy could negatively affect our earnings and have a material adverse effect on our business, results of operations and financial condition.
The recent financial crisis has precipitated, and may continue to raise the possibility of, legislative, judicial, regulatory and other governmental actions. See “— Regulatory and Legal Risks — Our Insurance Businesses Are Highly Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability and Limit Our Growth,” and “— Risks Related to Our Business — Competitive Factors May Adversely Affect Our Market Share and Profitability” below.
Adverse Capital and Credit Market Conditions May Significantly Affect Our Ability to Meet Liquidity Needs, Our Access to Capital and Our Cost of Capital
The capital and credit markets may be subject to periods of extreme volatility and disruption, which could cause our liquidity and credit capacity to be limited.
We need liquidity to pay claims and other operating expenses, interest on our debt and dividends on our capital stock, provide our subsidiaries with cash or collateral, maintain our securities lending activities and replace certain maturing liabilities. Without sufficient liquidity, we could be forced to curtail our operations, and our business and financial results may suffer. The principal sources of our liquidity are insurance premiums, annuity considerations, deposit funds, and cash flow from our investment portfolio and assets, consisting mainly of cash or assets that are readily convertible into cash. Sources of capital in normal markets include external borrowings, borrowings from MetLife or other affiliates and capital contributions from MetLife.
In the event market or other conditions have an adverse impact on our capital and liquidity, or our stress-testing indicates that such conditions could have such an impact beyond expectations and our current resources do not satisfy our needs or regulatory requirements, we may have to seek additional financing. The availability of additional financing will depend on a variety of factors such as the then current market conditions, regulatory considerations, availability of credit to us and the financial services industry generally, our credit ratings and credit capacity, and the perception of our customers and lenders regarding our long- or short-term financial prospects if we incur large operating or investment losses or if the level of our business activity decreases due to a market downturn. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. Our internal sources of liquidity may prove to be insufficient and, in such case, we may not be able to successfully obtain additional financing on favorable terms, or at all.
Our liquidity requirements may change if, among other things, we are required to return significant amounts of cash collateral on short notice under securities lending agreements. See “— Investments-Related Risks — Should the Need Arise, We May Have Difficulty Selling Certain Holdings in Our Investment Portfolio or in Our Securities Lending Program in a Timely Manner and Realizing Full Value Given Their Illiquid Nature,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Off-Balance Sheet Arrangements — Collateral for Securities Lending and Derivatives” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Securities Lending.”
Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital needed to operate our business, most significantly in our insurance operations. Such market conditions may limit our ability to replace, in a timely manner, maturing liabilities; satisfy regulatory capital requirements; and access the capital necessary to grow our business. See “— Regulatory and Legal Risks — Our Insurance Businesses Are Highly Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability and Limit Our Growth.” As a result, we may be forced to delay raising capital, issue different types of securities than we would have otherwise, less effectively deploy such capital, issue shorter tenor securities than we prefer, or bear an unattractive cost of capital, which could decrease our profitability and significantly reduce our financial flexibility. Our results of operations, financial condition, cash flows and statutory capital position could be materially adversely affected by disruptions in the financial markets.
We Are Exposed to Significant Financial and Capital Markets Risks Which May Adversely Affect Our Results of Operations, Financial Condition and Liquidity, and May Cause Our Net Investment Income to Vary from Period to Period
We are exposed to significant financial and capital markets risks, including changes in interest rates, credit spreads, equity prices, real estate markets, foreign currency exchange rates, market volatility, global economic performance in general, the performance of specific obligors, including governments, included in our investment portfolio and other factors outside our control.
Interest Rate Risk
Some of our products, principally traditional whole life insurance, fixed annuities and guaranteed interest contracts, expose us to the risk that changes in interest rates will reduce our investment margin or “spread,” or the difference between the amounts that we are required to pay under the contracts in our general account and the rate of return we earn on general account investments intended to support obligations under such contracts. Our spread is a key component of our net income.
In a low interest rate environment, we may be forced to reinvest proceeds from investments that have matured or have been prepaid or sold at lower yields, which will reduce our investment margin. Moreover, borrowers may prepay or redeem the fixed income securities and commercial or agricultural mortgage loans in our investment portfolio with greater frequency in order to borrow at lower market rates, thereby exacerbating this risk. Although lowering interest crediting rates can help offset decreases in spreads on some products, our ability to lower these rates could be limited by competition or contractually guaranteed minimum rates and may not match the timing or magnitude of changes in asset yields. As a result, our spread could decrease or potentially become negative. See “— Risks Related to Our Business — Guarantees Within Certain of Our Products May Decrease Our Earnings, Increase the Volatility of Our Results, Result in Higher Risk Management Costs and Expose Us to Increased Counterparty Risk.”
Our expectation for future spreads is an important component in the amortization of DAC and value of business acquired (“VOBA”). Significantly lower spreads may cause us to accelerate amortization, thereby reducing net income in the affected reporting period. In addition, during periods of declining interest rates, life insurance and annuity products may be relatively more attractive investments to consumers. This could result in increased premium payments on products with flexible premium features, repayment of policy loans and increased persistency, or a higher percentage of insurance policies remaining in-force from year to year, during a period when our new investments carry lower returns. A decline in market interest rates could also reduce our return on investments that do not support particular policy obligations. During periods of sustained lower interest rates, policy liabilities may not be sufficient to meet future policy obligations and may need to be strengthened. Accordingly, declining and sustained lower interest rates may materially affect our results of operations, financial position and cash flows and significantly reduce our profitability.
We are also affected by the monetary policies of the Federal Reserve Board and of central banks around the world. The Federal Reserve Board has taken a number of actions in recent years to spur economic activity by keeping interest rates low, and, more recently, through its asset purchase programs; and may take further action to influence rates in the future. Such actions may have an impact on the pricing levels of risk-bearing investments, and may adversely impact the level of product sales. Central banks in other parts of the world have also taken action to lower interest rates.
Increases in market interest rates could also negatively affect our profitability. In periods of rapidly increasing interest rates, we may not be able to replace, in a timely manner, the investments in our general account with higher yielding investments needed to fund the higher crediting rates necessary to keep interest sensitive products competitive. We therefore may have to accept a lower spread and, thus, lower profitability or face a decline in sales and greater loss of existing contracts and related assets. In addition, policy loans, surrenders and withdrawals may tend to increase as policyholders seek investments with higher perceived returns as interest rates rise. This process may result in cash outflows requiring that we sell investments at a time when the prices of those investments are adversely affected by the increase in market interest rates, which may result in realized investment losses. Unanticipated withdrawals and terminations may cause us to accelerate the amortization of DAC and VOBA, which reduces net income. An increase in market interest rates could also have a material adverse effect on the value of our investment portfolio, for example, by decreasing the estimated fair values of the fixed income securities that comprise a substantial portion of our investment portfolio. Finally, an increase in interest rates could result in decreased fee income associated with a decline in the value of variable annuity account balances invested in fixed income funds. However, this increase in interest rates would typically cause any guaranteed living benefits to decline in value. We cannot predict how market interest rates will respond to the reduction, or “tapering,” of the pace of the Federal Reserve Board’s Federal Open Market Committee asset purchases.
We manage interest rate risk as part of our asset and liability management strategies, which include maintaining an investment portfolio with diversified maturities that has a weighted average duration that is approximately equal to the duration of our estimated liability cash flow profile. We also use derivatives to mitigate interest rate risk. Although we take measures to manage the economic risks of investing in a changing interest rate environment, we may not be able to mitigate the interest rate risk of our fixed income investments relative to our liabilities. See “Quantitative and Qualitative Disclosures About Market Risk.”
Credit Spreads
Our exposure to credit spreads primarily relates to market price volatility and cash flow variability associated with changes in such spreads. A widening of credit spreads will adversely impact the net unrealized gain (loss) position of the fixed income investment portfolio, will increase losses associated with credit-based non-qualifying derivatives where we assume credit exposure, and, if credit spreads widen significantly or for an extended period of time, will likely result in higher other-than-temporary impairments. Credit spread tightening will reduce net investment income associated with purchases of fixed maturity securities and will favorably impact the net unrealized gain (loss) position of the fixed income investment portfolio. In addition, market volatility can make it difficult to value certain of our securities if trading becomes less frequent. In such case, valuations may include assumptions or estimates that may have significant period-to-period changes, which could have a material adverse effect on our results of operations or financial condition. If there is a resumption of significant volatility in the markets, it could cause changes in credit spreads and defaults and a lack of pricing transparency which, individually or in tandem, could have a material adverse effect on our results of operations, financial condition, liquidity or cash flows.
Equity Risk
Our primary exposure to equity risk relates to the potential for lower earnings associated with certain of our businesses where fee income is earned based upon the estimated fair value of the assets under management. Downturns and volatility in equity markets can have a material adverse effect on the revenues and investment returns from our savings and investment products and services. Because these products and services generate fees related primarily to the value of assets under management, a decline in the equity markets could reduce our revenues from the reduction in the value of the investments we manage. The retail variable annuity business in particular is highly sensitive to equity markets, and a sustained weakness in the equity markets could decrease revenues and earnings with respect to those products. Furthermore, certain of our variable annuity products offer guaranteed benefits which increase our potential benefit exposure should equity markets decline. We use derivatives and reinsurance to mitigate the impact of such increased potential benefit exposures. We are also exposed to interest rate and equity risk based upon the discount rate and expected long-term rate of return assumptions associated with our allocated pension and other postretirement benefit obligations. Sustained declines in long-term interest rates or equity returns likely would have a negative effect on the funded status of these plans.
In addition, we invest a portion of our investments in leveraged buy-out funds, hedge funds and other private equity funds. The amount and timing of net investment income from such funds tends to be uneven as a result of the performance of the underlying investments. The timing of distributions from such funds, which depends on particular events relating to the underlying investments, as well as the funds’ schedules for making distributions and their needs for cash, can be difficult to predict. As a result, the amount of net investment income from these investments can vary substantially from quarter to quarter. Significant volatility could adversely impact returns and net investment income on these alternative investment classes. In addition, the estimated fair value of such investments may be impacted by downturns or volatility in equity markets. See “Quantitative and Qualitative Disclosures About Market Risk.”
Real Estate Risk
Our primary exposure to real estate risk relates to commercial and agricultural real estate. Our exposure to these risks stems from various factors, including the supply and demand of leasable commercial space, creditworthiness of tenants and partners, capital markets volatility and interest rate fluctuations. Although we manage credit risk and market valuation risk for our commercial and agricultural real estate assets through geographic, property type and product type diversification, and asset allocation, general economic conditions and the recovery rate in the commercial and agricultural real estate sectors will continue to influence the performance of these investments. These factors, which are beyond our control, could have a material adverse effect on our results of operations, financial condition, liquidity or cash flows.
Obligor-Related Risks
Our investment portfolio contains investments in government bonds issued by certain EU member states, and of financial institutions that have significant direct or indirect exposure to debt issued by these countries. Recently, the EU member states have experienced above average public debt and unemployment and lower than targeted inflation. A number of member states are significantly impacted by the economies of their more influential neighbors, such as Germany, and financial troubles of one nation can lead to troubles in others. In particular, a number of large European banks hold significant amounts of sovereign and/or financial institution debt of other European nations and could experience difficulties as a result of defaults or declines in the value of such debt. Concerns regarding these difficulties could disrupt the functioning of the financial markets.
Our investment portfolio also contains investments, primarily in revenue bonds issued under the auspices of U.S. states and municipalities, and a limited amount of general obligation bonds of U.S. states and municipalities (collectively, “State and political subdivision securities”). Recently, certain U.S. states and municipalities have faced budget deficits and financial difficulties. The financial difficulties of such U.S. states and municipalities could have an adverse impact on our State and political subdivision securities.
Foreign Currency Exchange Rate Risks
Our primary foreign currency exchange rate risks are described under “— Risks Related to Our Business — Fluctuations in Foreign Currency Exchange Rates Could Negatively Affect Our Profitability.” Changes in foreign currency exchange rates can significantly affect our net investment income in any period, and such changes can be substantial. This risk will increase if a country withdraws from the Euro zone. In such case, the national currency to which such a country may revert will likely be devalued and contracts using the Euro will need to be renegotiated. Any such devaluation and its related consequences for our contracts and investments in any such country could be significant and materially adversely affect our operations and earnings in that country. Any operations we may have in any such withdrawing country could also be materially adversely affected by legal or governmental actions related to conversion from the Euro to a national currency. See “Quantitative and Qualitative Disclosures About Market Risk.”
Summary
Significant volatility in the markets could cause changes in interest rates, declines in equity prices, and the strengthening or weakening of foreign currencies against the U.S. dollar which, individually or in tandem, could have a material adverse effect on our results of operations, financial condition, liquidity or cash flows through realized investment losses, impairments, increased valuation allowances and changes in unrealized gain or loss positions.
Regulatory and Legal Risks
Our Insurance Businesses Are Highly Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability and Limit Our Growth
Our insurance businesses are subject to a wide variety of insurance and other laws and regulations. See “Business — Regulation — Insurance Regulation,” as supplemented by discussions of regulatory developments in our subsequently filed Quarterly Reports on Form 10-Q under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business — Regulatory Developments,” and as further supplemented below.
Insurance Regulation — U.S.
State insurance regulators and the NAIC regularly re-examine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations, or in interpretations thereof, that are made for the benefit of the consumer sometimes lead to additional expense for the insurer and, thus, could have a material adverse effect on our financial condition and results of operations. Recently, the NAIC and state insurance regulators have been scrutinizing insurance companies’ use of affiliated captive reinsurers or off-shore entities, and the Department of Financial Services in June 2013 issued a highly critical report setting forth its findings to date relating to its inquiry into the life insurance industry’s use of captive insurance companies. In its report, the Department of Financial Services recommended that (i) the NAIC develop enhanced disclosure requirements for reserve financing transactions involving captive insurers, (ii) the FIO, the OFR, the NAIC and state insurance commissioners conduct inquiries similar to the Department of Financial Services inquiry, and (iii) state insurance commissioners consider an immediate national moratorium on new reserve financing transactions involving captive insurers until these inquiries are complete. Like many life insurance companies, we utilize captive reinsurers to satisfy statutory reserve requirements related to universal life and term life insurance policies. We also cede variable annuity risks to a captive reinsurer, which allows us to consolidate hedging and other risk management programs. If state insurance regulators restrict the use of such captive reinsurers or if we otherwise are unable to continue to use captive reinsurers in the future, our ability to write certain products or to hedge the associated risks efficiently and/or our risk-based capital ratios and ability to deploy excess capital, could be adversely affected or we may need to increase prices on those products, which could adversely impact our competitive position and our results of operations. See “Business — Regulation — Holding Company Regulation — Insurance Regulatory Examinations.”
The NAIC is also reviewing life insurers’ use of non-variable separate accounts that are insulated from general account claims, which might lead to a recommendation against the allowance of insulation for certain of our separate account products. If state insurance regulators change applicable laws or regulations in accordance with such recommendation, our use of insulation for certain products could be impaired and our ability to compete effectively or do business in certain markets may be adversely affected. In addition, our financial results may also be adversely affected. See “Business — Regulation — Holding Company Regulation — Insurance Regulatory Examinations.”
U.S. Federal Regulation Affecting Insurance
Currently, the U.S. federal government does not directly regulate the business of insurance. However, Dodd-Frank established the FIO within the Department of the Treasury, which has the authority to participate in the negotiations of international insurance agreements with foreign regulators for the U.S., as well as to collect information about the insurance industry and recommend prudential standards. On December 12, 2013, the FIO issued a report, mandated by Dodd-Frank, setting forth recommendations with respect to modernization of insurance regulation in the United States. The report raised the possibility of a greater role for the federal government if states do not achieve greater uniformity in their laws and regulations. We cannot predict whether any such legislation or regulatory changes will be adopted, or what impact they will have on our business, financial condition or results of operations. See “Business — Regulation — Holding Company Regulation — Federal Initiatives.”
Federal legislation and administrative policies can significantly and adversely affect insurance companies, including policies regarding financial services regulation, securities regulation, derivatives regulation, pension regulation, health care regulation, privacy, tort reform legislation and taxation. In addition, various forms of direct and indirect federal regulation of insurance have been proposed from time to time, including proposals for the establishment of an optional federal charter for insurance companies. Other aspects of our insurance operations could also be affected by Dodd-Frank. For example, under the so-called Volcker Rule, Dodd-Frank authorizes the Federal Reserve Board to impose additional capital requirements and quantitative limits on certain trading and activities by a non-bank SIFI. MetLife could be subject to such requirements and limits were it to be designated as a non-bank SIFI, which could adversely affect our competitive position. See “Business — Regulation — Potential Regulation of MetLife as a Non-Bank SIFI.”
Non-bank SIFIs and certain other large financial companies can be assessed under Dodd-Frank for any uncovered costs arising in connection with the resolution of a systemically important financial company and to cover the expenses of the OFR, an agency established by Dodd-Frank to improve the quality of financial data available to policymakers and facilitate more robust and sophisticated analysis of the financial system.
Federal Regulatory Agencies
Dodd-Frank established the CFPB, which supervises and regulates institutions providing certain financial products and services to consumers. Although the consumer financial services to which this legislation applies exclude insurance business of the kind in which we engage, the CFPB has authority to regulate non-insurance consumer services provided by MetLife. See “Business — Regulation — Consumer Protection Laws.”
While MetLife has de-registered as a bank holding company, it may, in the future, be designated by the FSOC as a non-bank SIFI, as more fully discussed below, and could once again be subject to regulation by the Federal Reserve Board and subject to enhanced supervision and prudential standards. Moreover, other national and international authorities have also proposed measures intended to increase the intensity of regulation of large financial institutions, requiring greater coordination among regulators and efforts to harmonize regulatory regimes. If such measures were adopted, including as a result of the designation of MetLife as a non-bank SIFI, they could materially adversely affect our ability to conduct business and our results of operations and financial condition. See “Business — Regulation — Potential Regulation of MetLife as a Non-Bank SIFI” and “— Potential Regulation of MetLife as a Non-Bank SIFI or as Systemically Important Under Other Regulations Proposed by National or International Authorities Could Adversely Affect Our Ability to Compete and Our Business and Results of Operations.”
ERISA Considerations
We provide products and services to certain employee benefit plans that are subject to ERISA or the Code. Consequently, our activities are likewise subject to the restrictions imposed by ERISA and the Code, including the requirement that fiduciaries must perform their duties solely in the interests of ERISA plan participants and beneficiaries, and the requirement under ERISA and the Code that fiduciaries may not cause a covered plan to engage in prohibited transactions with persons who have certain relationships with respect to those plans.
The prohibited transaction rules generally restrict the provision of investment advice to ERISA plans and participants and IRAs if the investment recommendation results in fees paid to the individual advisor, his or her firm or their affiliates that vary according to the investment recommendation chosen. Regulations adopted in October 2011 in this area provide some relief from these investment advice restrictions. If additional relief is not provided, the ability of our affiliated broker-dealers and their registered representatives to provide investment advice to ERISA plans and participants and IRAs would likely be significantly restricted. Other proposed regulations in this area may negatively impact the current business model of our affiliated broker-dealers, including proposed changes to broaden the definition of “fiduciary,” thereby increasing the regulation of persons providing investment advice to ERISA plans and IRAs. These proposed regulations are expected in 2014. See “Business — Regulation — Employee Retirement Income Security Act of 1974 (“ERISA”) Considerations.”
International Regulation
Our international insurance operations are principally regulated by insurance regulatory authorities in the jurisdictions in which they are located or operate. The authority of our international operations to conduct business is subject to licensing requirements, permits and approvals, and these authorizations are subject to modification and revocation. See “— Risks Related to Our Business — 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.” Our international operations may be materially adversely affected by the actions and decisions of foreign authorities and regulators, such as through nationalization or expropriation of assets, the imposition of limits on foreign ownership of local companies, changes in laws (including tax laws and regulations), their application or interpretation, political instability, dividend limitations, price controls, changes in applicable currency, currency exchange controls or other restrictions that prevent us from transferring funds from these operations out of the countries in which they operate or converting local currencies we hold to U.S. dollars or other currencies. This may also impact many of our customers and independent sales intermediaries. Changes in the laws and regulations that affect these customers and independent sales intermediaries also may affect our business relationships with them and their ability to purchase or distribute our products. Accordingly, these changes and actions may negatively affect our business in these jurisdictions. We expect the scope and extent of regulation outside of the U.S., as well as general regulatory oversight, to continue to increase. The regulatory environment in the countries in which we operate and changes in laws could have a material adverse effect on our results of operations. See “— Risks Related to Our Business — 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.”
We are also subject to the evolving Solvency II insurance regulatory directive established by the European Parliament in 2009 for our insurance business throughout the European Economic Area, and may be subject to similar solvency regulations in other regions. As requirements are finalized by the regulators, capital requirements might be impacted in a number of jurisdictions. In addition, our legal entity structure throughout Europe may impact our capital requirements, risk management infrastructure and reporting by country.
General
From time to time, regulators raise issues during examinations or audits of us and regulated subsidiaries that could, if determined adversely, have a material impact on us. In addition, the interpretations of regulations by regulators may change and statutes may be enacted with retroactive impact, particularly in areas such as accounting or statutory reserve requirements. We are also subject to other regulations and may in the future become subject to additional regulations. See “Business — Regulation.” Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations may materially increase our direct and indirect compliance and other expenses of doing business, thus having a material adverse effect on our financial condition and results of operations.
Potential Regulation of MetLife as a Non-Bank SIFI or as Systemically Important Under Other Regulations Proposed by National or International Authorities Could Adversely Affect Our Ability to Compete and Our Business and Results of Operations
While MetLife has de-registered as a bank holding company, it may, in the future be designated by the FSOC as a non-bank SIFI. This would subject MetLife to enhanced supervision and prudential standards which could adversely affect our ability to compete with other insurers that are not subject to those requirements and adversely affect our business and results of operations. See “Business — Regulation — Potential Regulation of MetLife as a Non-Bank SIFI,” as supplemented by discussions of regulatory developments in our subsequently filed Quarterly Reports on Form 10-Q under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business — Regulatory Developments.”
The FSOC follows a three-stage process to assess whether a non-bank financial company should be subject to enhanced supervision by the Federal Reserve Board as a non-bank SIFI. On July 16, 2013, MetLife was notified by the FSOC that it had reached Stage 3 in the process to determine whether MetLife would be designated a non-bank SIFI. MetLife has been providing information to the FSOC to assist in its evaluation. Regulation of MetLife as a non-bank SIFI could materially and adversely affect our business. In December 2011, the Federal Reserve Board proposed Regulation YY that would apply a set of prudential standards to non-bank SIFIs, including enhanced risk-based capital requirements, leverage limits, liquidity requirements, single counterparty exposure limits, governance requirements for risk management, stress test requirements, special debt-to-equity limits for certain companies, early remediation procedures and recovery and resolution planning. The Federal Reserve Board’s proposal contemplates that these standards would be subject to the authority of the Federal Reserve Board to determine, on its own or in response to a recommendation by the FSOC, to tailor the application of the enhanced standards to different companies on an individual basis or by category, taking into consideration their capital structure, riskiness, complexity, financial activities, size, and any other risk-related factors that the Federal Reserve Board deems appropriate. On February 18, 2014, the Federal Reserve Board adopted amendments to Regulation YY to implement certain of the enhanced prudential standards for bank holding companies and foreign banking organizations with total consolidated assets of $50 billion or more. While Regulation YY, as originally proposed, would have applied to non-bank SIFIs, the final rule does not, but the Federal Reserve Board has indicated that it plans to apply enhanced prudential standards to non-bank SIFIs by rule or order. See “Business — Regulation — Potential Regulation of MetLife as a Non-Bank SIFI — Enhanced Prudential Standards for Non-Bank SIFIs.” Accordingly, the manner in which these proposed standards might apply to MetLife remains unclear. The Federal Reserve Board has stated that it believes other provisions of Dodd-Frank, known as the Collins Amendment, constrain its ability to tailor capital standards for non-bank SIFIs.
In the wake of the recent financial crisis, other national and international authorities have also proposed measures intended to increase the intensity of regulation of large financial institutions, requiring greater coordination among regulators and efforts to harmonize regulatory regimes. For example, IAIS is participating in the initiative of the Financial Stability Board (“FSB”) to identify global systemically important financial institutions by devising a process for designating G-SIIs. In July 2013, the FSB published its initial list of nine G-SIIs, based on the IAIS’ assessment methodology, which includes MetLife. The FSB has directed the IAIS to develop G-SII BCR as the basis for the calculation of additional capital by the end of 2014; the IAIS has indicated that it expects the BCR to apply to G-SIIs in 2015 or shortly thereafter. In addition, the IAIS has confirmed that it will develop a risk-based global insurance capital standard by 2016 which will apply to all internationally active insurance groups, including G-SIIs, with implementation to begin in 2019 after two years of testing and refinement. The IAIS policy measures would have to be implemented by legislation or regulation in each applicable jurisdiction, and the impact on MetLife and other designated G-SIIs in the U.S. is uncertain. See “Business — Regulation — Designation Process and Policy Measures that May Apply to Global Systemically Important Insurers.”
If such measures were adopted, including as a result of the potential designation of MetLife as a non-bank SIFI, they could materially adversely affect our ability to conduct business and our results of operations and financial condition. Enhanced capital requirements could adversely affect our ability to compete with other insurers that are not subject to those requirements, and our ability to issue guarantees could be constrained. We could have to raise the price of the products we offer, reduce the amount of risk we take on, or stop offering certain products altogether. Further, counterparty exposure limits could affect our ability to engage in hedging activities. The Federal Reserve Board could also have the right to require that we or our insurance company affiliates take prompt action to correct any financial weaknesses. See “Business — Regulation.”
In the event that MetLife is designated as a non-bank SIFI, it may elect to contest such designation using all available remedies under Dodd-Frank or otherwise. If ultimately designated as a non-bank SIFI, MetLife may consider such structural and other business alternatives that may be available to it in response to such a designation, and we cannot predict the impact that any such alternatives, if implemented, may have on us.
The Dodd-Frank Provisions Compelling the Liquidation of Certain Types of Financial Institutions Could Materially and Adversely Affect MetLife, as a Potential Non-Bank SIFI and an Investor in Other Financial Institutions, and Our Investors
Under provisions of Dodd-Frank, if MetLife were to become insolvent or were in danger of defaulting on its obligations, it could be compelled to undergo liquidation with the FDIC as receiver. For this new regime to be applicable, a number of determinations would have to be made, including that a default by the affected company would have serious adverse effects on financial stability in the United States. If the FDIC were appointed as the receiver for such company, liquidation of that company would occur under the provisions of the new liquidation authority, and not under the Bankruptcy Code, which ordinarily governs liquidations. Even if the Orderly Liquidation Authority provisions were invoked, our U.S. insurance companies would be resolved under state insurance law. In an FDIC-managed liquidation, holders of a company’s debt could be treated differently than under the Bankruptcy Code and similarly-situated creditors could be treated differently. In particular, unsecured creditors and shareholders are intended to bear the losses of the company being liquidated. These provisions could also apply to financial institutions whose debt securities we hold in our investment portfolio and could adversely affect our position as a creditor and the value of our holdings.
Dodd-Frank also provides for the assessment of charges against certain financial institutions, including non-bank SIFIs and bank holding companies of a certain size, to cover the costs of liquidating any financial company subject to the new liquidation authority. If MetLife is designated as a non-bank SIFI, it could be assessed for a portion of the costs of the liquidation of a financial company that is liquidated under this authority. The liquidation authority could increase the funding costs of large bank holding companies or financial companies that might be viewed as systemically significant, such as MetLife. See “Business — Regulation — Potential Regulation of MetLife as a Non-Bank SIFI — Orderly Liquidation Authority.”
Legislative and Regulatory Activity in Health Care and Other Employee Benefits Could Affect our Profitability as a Provider of Life Insurance, Annuities, and Non-Medical Health Insurance Benefit Products
The Patient Protection and Affordable Care Act, signed into law on March 23, 2010, and The Health Care and Education Reconciliation Act of 2010, signed into law on March 30, 2010 (together, the “Health Care Act”), may lead to fundamental changes in the way that employers, including us, provide health care benefits, other benefits, and other forms of compensation to their employees and former employees. The Health Care Act also imposes requirements on us as a provider of non-medical health insurance benefit and other products and on the purchasers of certain of these products. The Health Care Act or any other related regulations or regulatory actions could adversely affect our ability to offer certain of these products in the same manner as we do today. They could also result in increased or unpredictable costs to provide certain products, and could harm our competitive position if the Health Care Act has a disparate impact on our products compared to products offered by our competitors.
In addition, we depend on employees of MetLife affiliates to conduct our business. These employees are offered employment-related benefits and benefits are also provided to certain retirees. These benefits are provided under complex plans that are subject to a variety of regulatory requirements. The Health Care Act or related regulations or regulatory actions could adversely affect MetLife affiliates’ ability to attract, retain and motivate our associates. They could also result in increased or unpredictable costs to provide employee benefits, and could harm our competitive position if we are subject to fees, penalties, tax provisions or other limitations in the Health Care Act and our competitors are not.
The Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 also includes certain provisions for defined benefit pension plan funding relief. These provisions may impact the likelihood and/or timing of corporate plan sponsors terminating their plans and/or engaging in transactions to partially or fully transfer pension obligations to an insurance company. As part of our Corporate Benefit Funding segment, we offer general account and separate account group annuity products that enable a plan sponsor to transfer these risks, often in connection with the termination of defined benefit pension plans. Consequently, this legislation could indirectly affect the mix of our business, with fewer closeouts and more non-guaranteed funding products, and adversely impact our results of operations.
Changes in U.S. Federal and State Securities Laws and Regulations, and State Insurance Regulations Regarding Suitability of Annuity Product Sales, May Affect Our Operations and Our Profitability
Federal and state securities laws and regulations apply to insurance products that are also “securities,” including variable annuity contracts and variable life insurance policies. As a result, our activities in offering and selling variable insurance contracts and policies are subject to extensive regulation under these securities laws.
Federal and state securities laws and regulations are primarily intended to ensure the integrity of the financial markets and to protect investors in the securities markets, and to protect investment advisory or brokerage clients. These laws and regulations generally grant regulatory agencies broad rulemaking and enforcement powers, including the power to limit or restrict the conduct of business for failure to comply with the securities laws and regulations. A number of changes have recently been suggested to the laws and regulations that govern the conduct of our variable insurance products business and our distributors that could change the way we conduct our business and the products we sell. This may adversely affect our operations and profitability, including increasing the regulatory and compliance burden upon us, resulting in increased costs. See “Business — Regulation — Securities Regulation.” We also may be subject to similar laws and regulations in the foreign countries in which we offer products or conduct other activities similar to those described above.
Changes in Tax Laws or Interpretations of Such Laws Could Reduce Our Earnings and Materially Impact Our Operations by Increasing Our Corporate Taxes and Making Some of Our Products Less Attractive to Consumers
Changes in domestic or foreign tax laws or interpretations of such laws could increase our corporate taxes and reduce our earnings. Additionally, global budget deficits make it likely that governments’ need for additional revenue will result in future tax proposals that will increase our effective tax rate. However, it remains difficult to predict the timing and effect that future tax law changes could have on our earnings both in the U.S. and in foreign jurisdictions.
Additionally, U.S. tax laws currently afford certain benefits to life insurance and annuity products. The Obama Administration and some members of Congress have proposed certain changes to rules applicable to certain of these products and to individual income tax rates in general. Changes in tax laws could make some of our products less attractive to consumers. A shift away from life insurance and annuity contracts and other tax-deferred products by our customers would reduce our income from sales of these products, as well as the asset base upon which we earn investment income and fees, thereby reducing our earnings and potentially affecting the value of our deferred tax assets.
Litigation and Regulatory Investigations Are Increasingly Common in Our Businesses and May Result in Significant Financial Losses and/or Harm to Our Reputation
We face a significant risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including the risk of class action lawsuits. Our pending legal and regulatory actions include proceedings specific to us and others generally applicable to business practices in the industries in which we operate. In connection with our insurance operations, plaintiffs’ lawyers may bring or are bringing class actions and individual suits alleging, among other things, issues relating to sales or underwriting practices, claims payments and procedures, product design, disclosure, administration, denial or delay of benefits and breaches of fiduciary or other duties to customers. Plaintiffs in class action and other lawsuits against us may seek very large and/or indeterminate amounts, including punitive and treble damages. 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. Material pending litigation and regulatory matters affecting us and risks to our business presented by these proceedings are discussed in Note 15 of the Notes to the Consolidated Financial Statements. Updates are provided in the notes to our interim condensed consolidated financial statements included in our subsequently filed quarterly reports on Form 10-Q, as well as in Part II, Item 1 (“Legal Proceedings”) of those quarterly reports.
We are also subject to various regulatory inquiries, such as information requests, subpoenas and books and record examinations, from state and federal regulators and other authorities.
A substantial legal liability or a significant regulatory action against us, as well as regulatory inquiries or investigations could harm our reputation, result in material fines or penalties, result in significant legal costs and otherwise have a material adverse effect on our business, financial condition and results of operations. Even if we ultimately prevail in the litigation, regulatory action or investigation, our ability to attract new customers, retain our current customers and recruit and retain employees could be materially and adversely impacted. Regulatory inquiries and litigation may also cause volatility in the price of stocks of companies in our industry.
Current claims, litigation, unasserted claims probable of assertion, investigations and other proceedings against us could have a material adverse effect on our business, financial condition or results of operations. It is also possible that related or unrelated claims, litigation, unasserted claims probable of assertion, investigations and proceedings may be commenced in the future, and we could become subject to further investigations and have lawsuits filed or enforcement actions initiated against us. Increased regulatory scrutiny and any resulting investigations or proceedings in any of the countries where we operate could result in new legal actions and precedents and industry-wide regulations that could adversely affect our business, financial condition and results of operations.
Investments-Related Risks
Should the Need Arise, We May Have Difficulty Selling Certain Holdings in Our Investment Portfolio or in Our Securities Lending Program in a Timely Manner and Realizing Full Value Given Their Illiquid Nature
There may be a limited market for certain investments we hold in our investment portfolio, making them relatively illiquid. These include privately-placed fixed maturity securities, mortgage loans, policy loans, leveraged leases, equity real estate, such as real estate joint ventures and funds, and other limited partnership interests. In recent years, even some of our very high quality investments experienced reduced liquidity during periods of market volatility or disruption. If we were forced to sell certain of our investments during periods of market volatility or disruption, market prices may be lower than our carrying value in such investments. This could result in realized losses which could have a material adverse effect on our net income and financial position.
Similarly, we loan blocks of our securities to third parties (primarily brokerage firms and commercial banks) through our securities lending program, including fixed maturity and equity securities, short-term investments and cash equivalents. Under this program, we obtain collateral, usually cash, at the inception of a loan and typically purchase securities with the cash collateral. Upon the return to us of these loaned securities, we must return to the third party the cash collateral we received. If the cash collateral has been invested in securities, we need to sell the securities. However, in some cases, the maturity of those securities may exceed the term of the related securities on loan and the estimated fair value of the securities we need to sell may fall below the amount of cash received.
If we are required to return significant amounts of cash collateral under our securities lending program or otherwise need significant amounts of cash on short notice and we are forced to sell securities, we may have difficulty selling such collateral that is invested in securities in a timely manner, be forced to sell securities in a volatile or illiquid market for less than we otherwise would have been able to realize under normal market conditions, or both. In the event of a forced sale, accounting guidance requires the recognition of a loss for securities in an unrealized loss position and may require the impairment of other securities based on our ability to hold those securities, which would negatively impact our financial condition. In addition, under stressful capital market and economic conditions, liquidity broadly deteriorates, which may further restrict our ability to sell securities. Furthermore, if we decrease the amount of our securities lending activities over time, the amount of net investment income generated by these activities will also likely decline. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Securities Lending” and Note 7 of the Notes to the Consolidated Financial Statements.
Our Requirements to Pledge Collateral or Make Payments Related to Declines in Estimated Fair Value of Derivatives Transactions or Specified Assets in Connection with OTC-Cleared and OTC-Bilateral Transactions May Adversely Affect Our Liquidity, Expose Us to Central Clearinghouse and Counterparty Credit Risk, and Increase our Costs of Hedging
Substantially all of our derivatives transactions require us to pledge collateral related to any decline in the net estimated fair value of such derivatives transactions executed through a specific broker at a clearinghouse or entered into with a specific counterparty on a bilateral basis. Certain derivatives financing transactions require us to pledge collateral or make payments related to declines in the estimated fair value of the specified assets under certain circumstances to central clearinghouses or our counterparties. The amount of collateral we may be required to pledge and the payments we may be required to make under our derivatives transactions may increase under certain circumstances and will likely increase under Dodd-Frank as a result of the requirement to pledge initial margin for OTC-cleared transactions entered into after June 10, 2013 and for OTC-bilateral transactions entered into after the phase-in period, which would be applicable to us in 2019 if the U.S. Commodity Futures Trading Commission and the SEC adopt the final margin requirements for non-centrally cleared derivatives published by the Bank of International Settlements and International Organization of Securities Commissions in September 2013. Each of these items could also adversely affect our liquidity. Central clearinghouses and counterparties may also restrict or eliminate certain types of previously eligible collateral, which could also adversely affect our liquidity or charge us to pledge such collateral which would increase our costs. See “Business — Regulation — Holding Company Regulation — Regulation of Over-the-Counter Derivatives,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Derivatives and Collateral” and Note 8 of the Notes to the Consolidated Financial Statements.
Gross Unrealized Losses on Fixed Maturity and Equity Securities and Defaults, Downgrades or Other Events May Result in Future Impairments to the Carrying Value of Such Securities, Resulting in a Reduction in Our Net Income
Fixed maturity securities represented 72% of our total cash and invested assets at December 31, 2013. Fixed maturity and equity securities classified as available-for-sale (“AFS”) securities are reported at their estimated fair value. Unrealized gains or losses on AFS securities are recognized as a component of other comprehensive income (loss) and are, therefore, excluded from net income. In recent periods, as a result of low interest rates, the unrealized gains on our fixed maturity securities have far exceeded the unrealized losses. However, if interest rates rise, our unrealized gains would decrease and our unrealized losses would increase, perhaps substantially. The accumulated change in estimated fair value of these AFS securities is recognized in net income when the gain or loss is realized upon the sale of the security or in the event that the decline in estimated fair value is determined to be other-than-temporary and an impairment charge to earnings is taken. See Notes 1 and 7 of the Notes to the Consolidated Financial Statements.
The occurrence of a major economic downturn, acts of corporate malfeasance, widening risk spreads, or other events that adversely affect the issuers or guarantors of securities or the underlying collateral of structured securities could cause the estimated fair value of our fixed maturity securities portfolio and corresponding earnings to decline and cause the default rate of the fixed maturity securities in our investment portfolio to increase. A ratings downgrade affecting issuers or guarantors of particular securities, or similar trends that could worsen the credit quality of issuers, such as the corporate issuers of securities in our investment portfolio, could also have a similar effect. With economic uncertainty, credit quality of issuers or guarantors could be adversely affected. Similarly, a ratings downgrade affecting a security we hold could indicate the credit quality of that security has deteriorated and could increase the capital we must hold to support that security to maintain our RBC levels. Levels of writedowns or impairments are impacted by intent to sell, or our assessment of the likelihood that we will be required to sell, fixed maturity securities, as well as our intent and ability to hold equity securities which have declined in value until recovery. Realized losses or impairments on these securities may have a material adverse effect on our net income in a particular quarterly or annual period.
Our Valuation of Securities and Investments and the Determination of the Amount of Allowances and Impairments Taken on Our Investments Are Subjective and Include Methodologies, Estimations and Assumptions Which Are Subject to Differing Interpretations and Market Conditions and, if Changed, Could Materially Adversely Affect Our Results of Operations or Financial Condition
Fixed maturity and equity securities, as well as short-term investments that are reported at estimated fair value represent the majority of our total cash and investments. We define fair value generally as the price that would be received to sell an asset or paid to transfer a liability. 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 of the estimated fair value amounts. During periods of market disruption including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain of our securities if trading becomes less frequent and/or market data becomes less observable. In addition, in times of financial market disruption, certain asset classes that were in active markets with significant observable data may become illiquid. In those cases, the valuation process includes inputs that are less observable and require more subjectivity and management judgment. Valuations may result in estimated fair values which vary significantly from the amount at which the investments may ultimately be sold. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported within our consolidated financial statements and the period-to-period changes in estimated fair value could vary significantly. Decreases in the fair value of securities we hold may have a material adverse effect on our results of operations or financial condition. See Notes 1 and 9 of the Notes to the Consolidated Financial Statements.
The determination of the amount of allowances and impairments varies by investment type and is based upon our 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. We reflect any changes in allowances and impairments in earnings as such evaluations are revised. However, historical trends may not be indicative of future impairments or allowances. In addition, any such future impairments or allowances could have a materially adverse effect on our earnings and financial position. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates — Investment Impairments” and Note 7 of the Notes to the Consolidated Financial Statements.
Defaults on Our Mortgage Loans and Volatility in Performance May Adversely Affect Our Profitability
Our mortgage loans face default risk and are principally collateralized by commercial and agricultural properties. We establish valuation allowances for estimated impairments, which are based on loan risk characteristics, historical default rates and loss severities, real estate market fundamentals and outlooks, as well as other relevant factors. In addition, substantially all of our mortgage loans held-for-investment have balloon payment maturities. An increase in the default rate of our mortgage loan investments or fluctuations in their performance could have a material adverse effect on our business, results of operations and financial condition.
Further, any geographic or sector concentration of our mortgage loans may have adverse effects on our investment portfolios and consequently on our results of operations or financial condition. While we seek to mitigate this risk by having a broadly diversified portfolio, events or developments that have a negative effect on any particular geographic region or sector may have a greater adverse effect on the investment portfolios to the extent that the portfolios are concentrated. Moreover, our ability to sell assets relating to such particular groups of related assets may be limited if other market participants are seeking to sell at the same time. In addition, legislative proposals that would allow or require modifications to the terms of mortgage loans could be enacted. We cannot predict whether these proposals will be adopted, or what impact, if any, such proposals or, if enacted, such laws, could have on our business or investments. See Note 1 of the Notes to the Consolidated Financial Statements.
The Defaults or Deteriorating Credit of Other Financial Institutions Could Adversely Affect Us
We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, central clearinghouses, commercial banks, investment banks, hedge funds and investment funds and other financial institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty. In addition, with respect to secured transactions, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to us. We also have exposure to these financial institutions in the form of unsecured debt instruments, non-redeemable and redeemable preferred securities, derivatives, joint venture, hedge fund and equity investments. Further, potential action by governments and regulatory bodies in response to the financial crisis affecting the global banking system and financial markets, such as investment, nationalization, conservatorship, receivership and other intervention, whether under existing legal authority or any new authority that may be created, or lack of action by governments and central banks, as well as deterioration in the banks’ credit standing, could negatively impact these instruments, securities, transactions and investments or limit our ability to trade with them. Any such losses or impairments to the carrying value of these investments or other changes may materially and adversely affect our business and results of operations.
Risks Related to Our Business
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
Our international operations face political, legal, financial, operational and other risks. These operations may be materially adversely affected by the actions and decisions of foreign authorities and regulators, such as through nationalization or expropriation of assets, the imposition of limits on foreign ownership of local companies, changes in laws (including tax laws and regulations), their application or interpretation, political instability, dividend limitations, price controls, changes in applicable currency, currency exchange controls or other restrictions that prevent us from transferring funds from these operations out of the countries in which they operate or converting local currencies we hold into U.S. dollars or other currencies, as well as other adverse actions by foreign governmental authorities and regulators, such as the retroactive application of new requirements on our current and prior activities or operations and the imposition of regulations limiting our ability to distribute our products. Such actions may negatively affect our business in these jurisdictions and could indirectly affect our business in other jurisdictions as well. See “Quantitative and Qualitative Disclosures About Market Risk,” as well as “— Regulatory and Legal Risks — Our Insurance Businesses Are Highly Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability and Limit Our Growth.”
Our international operations expose us to risks posed by local and regional economic conditions. Europe has recently experienced a recession and overall sluggish economic performance, with concerns over low inflation becoming more pronounced. Unfavorable economic conditions in Europe could adversely impact the demand for our products, negatively impact earnings, adversely affect the performance of our investments or result in impairments, all of which could have a material adverse effect on our business, results of operations and financial condition. See “— Economic Environment and Capital Markets-Related Risks — If Difficult Conditions in the Global Capital Markets and the Economy Generally Persist, They May Materially Adversely Affect Our Business and Results of Operations.”
Furthermore, we rely on local sales forces in these countries and may encounter labor problems resulting from workers’ associations and trade unions in some countries. If our business model is not successful in a particular country, we may lose all or most of our investment in building and training the sales force in that country.
Lastly, our international operations may require considerable management time, as well as start-up expenses for market development before any significant revenues and earnings are generated. Operations in new foreign markets may achieve low margins or may be unprofitable, and expansion in existing markets may be affected by local political, economic and market conditions. Therefore, if we expand internationally, we may not achieve expected operating margins and our results of operations may be negatively impacted.
Fluctuations in Foreign Currency Exchange Rates Could Negatively Affect Our Profitability
We are exposed to risks associated with fluctuations in foreign currency exchange rates against the U.S. dollar resulting from our holdings of non-U.S. dollar denominated investments, investments in foreign subsidiaries and net income from foreign operations and issuance of non-U.S. dollar denominated instruments, including guaranteed interest contracts and funding agreements. In general, the weakening of foreign currencies versus the U.S. dollar will adversely affect the estimated fair value of our non-U.S. dollar denominated investments, our investments in foreign subsidiaries, and our net income from foreign operations. See “Quantitative and Qualitative Disclosures About Market Risk.”
In addition, certain of our life and annuity products are exposed to foreign exchange rate risk. Payments under these contracts, depending on the circumstances, may be required to be made in different currencies and may not be the legal tender in the country whose law governs the particular product. Changes in exchange rate movements and the imposition of capital controls may also directly impact the liability valuation that may not be entirely hedged. If the currency upon which expected future payments are made strengthens, the liability valuation may increase, which may result in a reduction of net income.
Historically, we have matched substantially all of our foreign currency liabilities in our foreign subsidiaries with investments denominated in their respective foreign currency, which limits the effect of currency exchange rate fluctuation on local operating results; however, fluctuations in such rates affect the translation of these results into our U.S. dollar basis consolidated financial statements. Although we take certain actions to address this risk, including entering into foreign currency derivatives, foreign currency exchange rate fluctuation could materially adversely affect our reported results due to unhedged positions or the failure of hedges to effectively offset the impact of the foreign currency exchange rate fluctuation. See “Quantitative and Qualitative Disclosures About Market Risk.”
Due to our international operations, during periods when any foreign currency in which we derive our revenues weakens (strengthens), translating amounts expressed in that currency into U.S. dollars causes fewer (more) U.S. dollars to be reported. Any unrealized foreign currency translation adjustments are reported in accumulated other comprehensive income (loss). The weakening of a foreign currency relative to the U.S. dollar will generally adversely affect the value of investments in U.S. dollar terms and reduce the level of reserves denominated in that currency.
An Inability to Access MetLife’s Credit Facilities Could Result in a Reduction in Our Liquidity and Lead to Downgrades in MetLife’s Credit and Financial Strength Ratings and Our Financial Strength Ratings
MetLife relies on its credit facilities as a potential source of liquidity. The availability of these facilities to MetLife could be critical to MetLife’s credit and financial strength ratings, as well as our financial strength ratings and our ability to meet our obligations as they come due in a market when alternative sources of credit are tight. These credit facilities contain certain administrative, reporting, legal and financial covenants, including a requirement to maintain a specified minimum consolidated net worth.
MetLife’s right to borrow funds under these facilities is subject to the fulfillment of certain important conditions, including its compliance with all covenants, and its ability to borrow under these facilities is also subject to the continued willingness and ability of the lenders that are parties to the facilities to provide funds. MetLife’s failure to comply with the covenants in the credit facilities or fulfill the conditions to borrowings, or the failure of lenders to fund their lending commitments (whether due to insolvency, illiquidity or other reasons) in the amounts provided for under the terms of the facilities, would restrict MetLife’s ability to access these credit facilities when needed and, consequently, could have a material adverse effect on our financial condition and results of operations.
A Downgrade or a Potential Downgrade in Our Financial Strength Ratings or Those of MetLife’s Other Insurance Subsidiaries, or MetLife’s Credit Ratings, Could Result in a Loss of Business and Materially Adversely Affect Our Financial Condition and Results of Operations
Financial strength ratings are published by various Nationally Recognized Statistical Rating Organizations (“NRSRO”) and similar entities not formally recognized as NRSROs. They indicate the NRSROs’ opinion regarding an insurance company’s ability to meet contractholder and policyholder obligations, and are important to maintaining public confidence in our products and our competitive position. See “Business — Company Ratings” for additional information regarding our financial strength ratings.
Downgrades in our financial strength ratings could have a material adverse effect on our financial condition and results of operations in many ways, including:
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| • | reducing new sales of insurance products, annuities and other investment products; |
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| • | impacting our ability to generate cash flows from issuances of funding agreements and other capital markets products; |
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| • | adversely affecting our relationships with our sales force and independent sales intermediaries; |
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| • | materially increasing the number or amount of policy surrenders and withdrawals by contractholders and policyholders; |
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| • | requiring us to post additional collateral under certain of our financing and OTC-bilateral derivative transactions; |
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| • | requiring us to reduce prices for many of our products and services to remain competitive; and |
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| • | adversely affecting our ability to obtain reinsurance at reasonable prices or at all. |
In addition to the financial strength ratings of MetLife’s insurance subsidiaries, various NRSROs also publish credit ratings for MetLife and several of its subsidiaries. Credit ratings indicate the NRSROs’ opinion regarding a debt issuer’s ability to meet the terms of debt obligations in a timely manner and are important factors in MetLife’s overall funding profile and ability to access certain types of liquidity. Downgrades in our financial strength ratings could have a material adverse effect on our financial condition and results of operations in many ways, including limiting our access to capital markets, potentially increasing the cost of debt, and requiring us to post collateral. See Note 8 of the Notes to the Consolidated Financial Statements for information regarding the impact of a one-notch downgrade with respect to derivative transactions with insurance financial strength downgrade triggers.
In view of the difficulties experienced by many financial institutions as a result of the financial crisis and ensuing global recession, including our competitors in the insurance industry, we believe it is possible that the NRSROs will continue to heighten the level of scrutiny that they apply to insurance companies, will continue to increase the frequency and scope of their credit reviews, will continue to request additional information from the companies that they rate, and may adjust upward the capital and other requirements employed in the models for maintenance of certain ratings levels. Our ratings could be downgraded at any time and without notice by any NRSRO.
Reinsurance May Not Be Available, Affordable or Adequate to Protect Us Against Losses
As part of our overall risk management strategy, we purchase reinsurance for certain risks underwritten by our various business segments. While reinsurance agreements generally bind the reinsurer for the life of the business reinsured at generally fixed pricing, market conditions beyond our control determine the availability and cost of the reinsurance protection for new business. In certain circumstances, the price of reinsurance for business already reinsured may also increase. Also, for most of our traditional life reinsurance agreements, it is common for the reinsurer to have a right to increase reinsurance rates on in-force business if there is a systematic deterioration of mortality in the market as a whole. Any decrease in the amount of reinsurance will increase our risk of loss and any increase in the cost of reinsurance will, absent a decrease in the amount of reinsurance, reduce our earnings. Accordingly, we may be forced to incur additional expenses for reinsurance or may not be able to obtain sufficient reinsurance on acceptable terms, which could adversely affect our ability to write future business or result in the assumption of more risk with respect to those policies we issue. See “Business — Reinsurance Activity” and “— Risks Related to Our Business — If the Counterparties to Our Reinsurance or Indemnification Arrangements or to the Derivatives We Use to Hedge Our Business Risks Default or Fail to Perform, We May Be Exposed to Risks We Had Sought to Mitigate, Which Could Materially Adversely Affect Our Financial Condition and Results of Operations.”
If the Counterparties to Our Reinsurance or Indemnification Arrangements or to the Derivatives We Use to Hedge Our Business Risks Default or Fail to Perform, We May Be Exposed to Risks We Had Sought to Mitigate, Which Could Materially Adversely Affect Our Financial Condition and Results of Operations
We use reinsurance, indemnification and derivatives to mitigate our risks in various circumstances. In general, reinsurance, indemnification and derivatives do not relieve us of our direct liability to our policyholders, even when the reinsurer is liable to us. Accordingly, we bear credit risk with respect to our reinsurers, indemnitors, counterparties and central clearinghouses. A reinsurer’s, indemnitor’s, counterparty’s or central clearinghouse’s insolvency, inability or unwillingness to make payments under the terms of reinsurance agreements, indemnity agreements or derivatives agreements with us could have a material adverse effect on our financial condition and results of operations, including our liquidity. See “Business — Reinsurance Activity.”
In addition, we use derivatives to hedge various business risks. We enter into a variety of derivatives, including options, forwards, interest rate, credit default and currency swaps with a number of counterparties on a bilateral basis for uncleared OTC derivatives and with clearing broker and central clearinghouses for OTC-cleared derivatives. If our counterparties, clearing brokers or central clearinghouses fail or refuse to honor their obligations under these derivatives, our hedges of the related risk will be ineffective. This risk is more pronounced in light of the stresses suffered by financial institutions over the past few years. Such failure could have a material adverse effect on our financial condition and results of operations.
Differences Between Actual Claims Experience and Underwriting and Reserving Assumptions May Adversely Affect Our Financial Results
Our earnings significantly depend upon the extent to which our actual claims experience is consistent with the assumptions we use in setting prices for our products and establishing liabilities for future policy benefits and claims. Such amounts are established based on estimates by actuaries of how much we will need to pay for future benefits and claims. To the extent that actual claims experience is less favorable than the underlying assumptions we used in establishing such liabilities, we could be required to increase our liabilities.
Due to the nature of the underlying risks and the high degree of uncertainty associated with the determination of liabilities for future policy benefits and claims, we cannot determine precisely the amounts which we will ultimately pay to settle our liabilities. Such amounts may vary from the estimated amounts, particularly when those payments may not occur until well into the future. We evaluate our liabilities periodically based on accounting requirements, which change from time to time, the assumptions used to establish the liabilities, as well as our actual experience. If the liabilities originally established for future benefit payments prove inadequate, we must increase them. Such increases could affect earnings negatively and have a material adverse effect on our business, results of operations and financial condition. See “Business — Policyholder Liabilities.”
Catastrophes May Adversely Impact Liabilities for Policyholder Claims and Reinsurance Availability
Our insurance operations are exposed to the risk of catastrophic events. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophes are restricted to small geographic areas; however, hurricanes, earthquakes, tsunamis and man-made catastrophes may produce significant loss of life in larger areas, especially those that are heavily populated. Claims resulting from catastrophic events could cause substantial volatility in our financial results for any fiscal quarter or year and could materially reduce our profitability or harm our financial condition. In addition, catastrophic events could harm the financial condition of issuers of obligations we hold in our investment portfolio, resulting in impairments to these obligations, and the financial condition of our reinsurers, thereby increasing the probability of default on reinsurance recoveries. Large-scale catastrophes may also reduce the overall level of economic activity in affected countries which could hurt our business and the value of our investments or our ability to write new business. It is possible that increases in the value, caused by the effects of inflation or other factors, and geographic concentration of insured lives, could increase the severity of claims we receive from future catastrophic events.
Our life insurance operations are exposed to the risk of catastrophic mortality, such as a pandemic or other event that causes a large number of deaths. Significant influenza pandemics have occurred three times in the last century; however, the likelihood, timing, and severity of a future pandemic cannot be predicted. A significant pandemic could have a major impact on the global economy or the economies of particular countries or regions, including travel, trade, tourism, the health system, food supply, consumption, overall economic output and, eventually, on the financial markets. In addition, a pandemic that affected our employees or the employees of our distributors or of other companies with which we do business could disrupt our business operations. The effectiveness of external parties, including governmental and non-governmental organizations, in combating the spread and severity of such a pandemic could have a material impact on the losses experienced by us. In our group insurance operations, a localized event that affects the workplace of one or more of our group insurance customers could cause a significant loss due to mortality or morbidity claims. These events could cause a material adverse effect on our results of operations in any period and, depending on their severity, could also materially and adversely affect our financial condition.
Consistent with industry practice and accounting standards, we establish liabilities for claims arising from a catastrophe only after assessing the probable losses arising from the event. We cannot be certain that the liabilities we have established will be adequate to cover actual claim liabilities. From time to time, states have passed legislation that has the effect of limiting the ability of insurers to manage risk, such as legislation restricting an insurer’s ability to withdraw from catastrophe-prone areas. While we attempt to limit our exposure to acceptable levels, subject to restrictions imposed by insurance regulatory authorities, a catastrophic event or multiple catastrophic events could have a material adverse effect on our business, results of operations and financial condition.
Most of the jurisdictions in which our insurance companies are admitted to transact business require life insurers doing business within the jurisdiction to participate in guaranty associations. These associations are organized to pay contractual benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers, who may become impaired, insolvent or fail, for example, following the occurrence of one or more catastrophic events. 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 is engaged. In addition, certain states have government owned or controlled organizations providing life insurance to their citizens. The activities of such organizations could also place additional stress on the adequacy of guaranty fund assessments. Many of these organizations also have the power to levy assessments similar to those of the guaranty associations described above. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. See “Business — Regulation — Holding Company Regulation — Guaranty Associations and Similar Arrangements.”
While in the past five years, the aggregate assessments levied against us have not been material, it is possible that a large catastrophic event could render such guaranty funds inadequate and we may be called upon to contribute additional amounts, which may have a material impact on our financial condition or results of operations in a particular period. We have established liabilities for guaranty fund assessments that we consider adequate, but additional liabilities may be necessary. See Note 15 of the Notes to the Consolidated Financial Statements.
Our ability to manage this risk and the profitability of our life insurance businesses depends in part on our ability to obtain catastrophe reinsurance, which may not be available at commercially acceptable rates in the future. See “— Risks Related to Our Business — Reinsurance May Not Be Available, Affordable or Adequate to Protect Us Against Losses.”
Our Statutory Life Insurance Reserve Financings May Be Subject to Cost Increases and New Financings May Be Subject to Limited Market Capacity
To support statutory reserves for several products, including, but not limited to, our level premium term life and universal life with secondary guarantees and MLIC’s closed block, we currently utilize capital markets solutions for financing a portion of our statutory reserve requirements. While we have financing facilities in place for certain previously written business, certain of these facilities are subject to cost increases upon the occurrence of specified ratings downgrades of MetLife or are subject to periodic repricing. Any resulting cost increases could negatively impact our financial results.
Future capacity for these statutory reserve funding structures in the marketplace is not guaranteed. Currently, the use of captive reinsurers is being studied by state insurance regulators and the NAIC. See “— Regulatory and Legal Risks — Our Insurance Businesses are Highly Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability and Limit Our Growth.” If state insurance regulators restrict the use of captive reinsurers for purposes of funding reserve requirements or capacity in the capital markets otherwise becomes unavailable for a prolonged period of time, thereby hindering our ability to obtain funding for these new structures, our ability to write additional business in a cost effective manner may be impacted.
Competitive Factors May Adversely Affect Our Market Share and Profitability
We believe competition amongst insurance companies is based on a number of factors, including service, product features, scale, price, financial strength, claims-paying ratings, credit ratings, e-business capabilities and name recognition. We compete with a large number of other insurance companies, as well as non-insurance financial services companies, such as banks, broker-dealers and asset managers, for individual consumers, employers and other group customers and agents and other distributors of insurance and investment products. Some of these companies offer a broader array of products, have more competitive pricing or, with respect to other insurance companies, have higher claims paying ability ratings. Some may also have greater financial resources with which to compete. In some circumstances, national banks that sell annuity products of life insurers may also have pre-existing customer bases for financial services products. Additionally, many of our group insurance products are underwritten annually. There is a risk that group purchasers may be able to obtain more favorable terms from competitors than they could renewing coverage with us. These competitive pressures may adversely affect the persistency of these and other products, as well as our ability to sell our products in the future.
The insurance industry distributes many of its individual products through other financial institutions such as banks and broker-dealers. An increase in bank and broker-dealer consolidation activity may negatively impact the industry’s sales, and such consolidation could increase competition for access to distributors, result in greater distribution expenses and impair our ability to market insurance products to our current customer base or to expand our customer base. Consolidation of distributors and/or other industry changes may also increase the likelihood that distributors will try to renegotiate the terms of any existing selling agreements to terms less favorable to us.
In addition, since numerous aspects of our business are subject to regulation, legislative and other changes affecting the regulatory environment for our business may have, over time, the effect of supporting or burdening some aspects of the financial services industry more than others. This can affect our competitive position within the life insurance industry and within the broader financial services industry. See “Business — Regulation,” “— Regulatory and Legal Risks — Our Insurance Businesses Are Highly Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability and Limit Our Growth,” and “— Regulatory and Legal Risks — Changes in U.S. Federal and State Securities Laws and Regulations, and State Insurance Regulations Regarding Suitability of Annuity Product Sales, May Affect Our Operations and Our Profitability.”
If Our Business Does Not Perform Well, We May Be Required to Recognize an Impairment of Our Goodwill or Other Long-Lived Assets or to Establish a Valuation Allowance Against the Deferred Income Tax Asset, Which Could Adversely Affect Our Results of Operations or Financial Condition
We were allocated a portion of goodwill representing the excess of MetLife’s cost over the estimated fair value of net assets acquired. 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 the fair value of the reporting unit may be less than the carrying value of that reporting unit. We perform our 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 the operating segment under certain circumstances.
The estimated fair value of the reporting unit is impacted by the performance of the business, which may be adversely impacted by prolonged market declines. If it is determined that the goodwill has been impaired, we must write down the goodwill by the amount of the impairment, with a corresponding charge to net income. Such writedowns could have an adverse effect on our results of operations or financial position. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates — Goodwill” and Note 10 of the Notes to the Consolidated Financial Statements.
Long-lived assets, including assets such as real estate, also require impairment testing. This testing is done to determine whether changes in circumstances indicate that we will be unable to recover the carrying amount of the asset group. Such writedowns could have a material adverse effect on our results of operations or financial position.
Deferred income tax represents the tax effect of the differences between the book and tax basis of assets and liabilities. Deferred tax assets are assessed periodically by management to determine if they are realizable. Factors in management’s determination include the performance of the business including the ability to generate future taxable income. If, based on available information, it is more likely than not that the deferred income tax asset will not be realized then a valuation allowance must be established with a corresponding charge to net income. Such charges could have a material adverse effect on our results of operations or financial position. In addition, changes in the corporate tax rates could affect the value of our deferred tax assets and may require a write-off of some of those assets. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates — Income Taxes.”
If Our Business Does Not Perform Well or if Actual Experience Versus Estimates Used in Valuing and Amortizing DAC, Deferred Sales Inducements (“DSI”) and VOBA Vary Significantly, We May Be Required to Accelerate the Amortization and/or Impair the DAC, DSI and VOBA Which Could Adversely Affect Our Results of Operations or Financial Condition
We incur significant costs in connection with acquiring new and renewal insurance business. Costs that are related directly to the successful acquisition of new and renewal insurance business are deferred and referred to as DAC. Bonus amounts credited to certain policyholders, either immediately upon receiving a deposit or as excess interest credits for a period of time, are deferred and referred to as DSI. The recovery of DAC and DSI is dependent upon the future profitability of the related business. The amount of future profit or margin is dependent principally on investment returns in excess of the amounts credited to policyholders, mortality, morbidity, persistency, interest crediting rates, dividends paid to policyholders, expenses to administer the business, creditworthiness of reinsurance counterparties and certain economic variables, such as inflation. Of these factors, we anticipate that investment returns are most likely to impact the rate of amortization of such costs. The aforementioned factors enter into management’s estimates of gross profits or margins, which generally are used to amortize such costs.
If actual gross profits or margins are less than originally expected, then the amortization of such costs would be accelerated in the period the actual experience is known and would result in a charge to income. Significant or sustained equity market declines could result in an acceleration of amortization of DAC and DSI related to variable annuity and variable universal life contracts, resulting in a charge to income. Such adjustments could have a material adverse effect on our results of operations or financial condition. See “— Economic Environment and Capital Markets-Related Risks — We Are Exposed to Significant Financial and Capital Markets Risks Which May Adversely Affect Our Results of Operations, Financial Condition and Liquidity, and May Cause Our Net Investment Income to Vary From Period to Period.”
VOBA 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. In the event actual experience on the purchased business varies from these projections, we will be required to revise our estimates, which results in changes to the amounts expensed in the reporting period in which the revisions are made and also could result in a charge to income. In addition, VOBA is amortized similarly to DAC and DSI. Accordingly, an acceleration of the amortization of VOBA would occur if actual gross profits or margins are less than originally expected. In such a case, the amortization of such costs would be accelerated in the period in which the actual experience is known and would result in a charge to net income. Furthermore, significant or sustained equity market declines could result in an acceleration of amortization of the VOBA related to variable annuity and variable universal life contracts, resulting in a charge to income. Such adjustments could have a material adverse effect on our results of operations or financial condition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates — Deferred Policy Acquisition Costs and Value of Business Acquired” and Note 1 of the Notes to the Consolidated Financial Statements for further consideration of DAC and VOBA.
Guarantees Within Certain of Our Products May Decrease Our Earnings, Increase the Volatility of Our Results, Result in Higher Risk Management Costs and Expose Us to Increased Counterparty Risk
Certain of our variable annuity products include guaranteed benefits, including guaranteed minimum death benefits, guaranteed minimum withdrawal benefits, guaranteed minimum accumulation benefits, and guaranteed minimum income benefits. These guarantees are designed to protect policyholders against significant downturns in equity markets and interest rates. Any such periods of significant and sustained downturns in equity markets, increased equity volatility, or reduced interest rates could result in an increase in the valuation of our liabilities associated with those products. An increase in these liabilities would result in a decrease in our net income.
We use hedging and risk management strategies to mitigate the liability exposure and the volatility of net income associated with these liabilities. These strategies involve the use of reinsurance and derivatives, which may not be completely effective. For example, in the event that reinsurers, derivative counterparties or central clearinghouses are unable or unwilling to pay, we remain liable for the guaranteed benefits. See “— Risks Related to Our Business — If the Counterparties to Our Reinsurance or Indemnification Arrangements or to the Derivatives We Use to Hedge Our Business Risks Default or Fail to Perform, We May Be Exposed to Risks We Had Sought to Mitigate, Which Could Materially Adversely Affect Our Financial Condition and Results of Operations.”
In addition, hedging instruments may not effectively offset the costs of guarantees or may otherwise be insufficient in relation to our obligations. Furthermore, we are subject to the risk that changes in policyholder behavior or mortality, combined with adverse market events, produce economic losses not addressed by the risk management techniques employed. These, individually or collectively, may have a material adverse effect on our results of operations, including net income, financial condition or liquidity. The valuation of certain of the foregoing liabilities carried at fair value includes an adjustment for nonperformance risk that reflects the credit standing of the issuing entity. This adjustment, which is not hedged, is based in part on publicly available information regarding credit spreads related to MetLife's debt, including credit default swaps. In periods of extreme market volatility, movements in the credit spread can have a significant impact on net income. See Note 1 of the Notes to the Consolidated Financial Statements for further consideration of the risks associated with guaranteed benefits.
Acquisition-Related Risks
We Could Face Difficulties, Unforeseen Liabilities, Asset Impairments or Rating Actions Arising from Business Acquisitions or Integrating and Managing Growth of Such Businesses, Dispositions of Businesses, or Legal Entity Reorganizations
We have engaged in dispositions and acquisitions of businesses in the past, and expect to continue to do so in the future. Such activity exposes us to a number of risks. For example, there could be unforeseen liabilities or asset impairments, including goodwill impairments, that arise in connection with the businesses that we may sell or the businesses that we may acquire in the future.
In addition, there may be liabilities or asset impairments that we fail, or are unable, to discover in the course of performing acquisition-related due diligence investigations. Furthermore, even for obligations and liabilities that we do discover during the due diligence process, neither the valuation adjustment nor the contractual protections we negotiate may be sufficient to fully protect us from losses. Although we generally have rights to indemnification for certain losses, our rights are limited by survival periods for bringing claims and limitations on the nature and amount of losses we may recover, and we cannot be certain that indemnification will be, among other things, collectible or sufficient in amount, scope or duration to fully offset any loss we may suffer.
Likewise, when we dispose of subsidiaries or operations, we may remain liable to the acquiror or to third parties for certain losses or costs arising from the divested business. We may also incur a loss on the disposition.
The use of our own funds as consideration in any acquisition would consume capital resources, which could affect our capital plan and render those funds unavailable for other corporate purposes. We also may not be able to raise sufficient funds to consummate an acquisition if, for example, we are unable to sell our securities or close related bridge credit facilities. Moreover, as a result of uncertainty and risks associated with potential acquisitions and dispositions of businesses, rating agencies may take certain actions with respect to the ratings assigned to MetLife and/or its subsidiaries, including us.
Our ability to achieve certain benefits we anticipate from any acquisitions of businesses will depend in large part upon our ability to successfully integrate such businesses in an efficient and effective manner. We may not be able to integrate such businesses smoothly or successfully, and the process may take longer than expected. The integration of operations and differences in operational culture may require the dedication of significant management resources, which may distract management’s attention from day-to-day business. If we are unable to successfully integrate the operations of such acquired businesses, we may be unable to realize the benefits we expect to achieve as a result of such acquisitions and our business and results of operations may be less than expected.
The success with which we are able to integrate acquired operations will depend on our ability to manage a variety of issues, including the following:
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| • | Loss of key personnel or higher than expected employee attrition rates could adversely affect the performance of the acquired business and our ability to integrate it successfully. |
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| • | Customers of the acquired business may reduce, delay or defer decisions concerning their use of its products and services as a result of the acquisition or uncertainty related to the consummation of the acquisition, including, for example, potential unfamiliarity with the MetLife brand in regions where we did not have a market presence prior to the acquisition. |
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| • | If the acquired business relies upon independent distributors to distribute its products, these distributors may not continue to generate the same volume of business for us after the acquisition. Independent distributors may reexamine the scope of their relationship with the acquired business or us as a result of the acquisition and decide to curtail or eliminate distribution of our products. |
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| • | Integrating acquired operations with our existing operations may require us to coordinate geographically separated organizations, address possible differences in corporate culture and management philosophies, merge financial processes and risk and compliance procedures, combine separate information technology platforms and integrate operations that were previously closely tied to the former parent of the acquired business or other service providers. |
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| • | In cases where we or an acquired business operates in certain markets through joint ventures, the acquisition may affect the continued success and prospects of the joint venture. Our ability to exercise management control or influence over these joint venture operations and our investment in them will depend on the continued cooperation between the joint venture participants and on the terms of the joint venture agreements, which allocate control among the joint venture participants. We may face financial or other exposure in the event that any of these joint venture partners fail to meet their obligations under the joint venture, encounter financial difficulty or elect to alter, modify or terminate the relationship. |
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| • | We may incur significant costs in connection with any acquisition and the related integration. The costs and liabilities actually incurred in connection with an acquisition and subsequent integration process may exceed those anticipated. |
The prospects of our business also may be materially and adversely affected if we are not able to manage the growth of any acquired business successfully. In particular, there may be difficulties in hiring and training sufficient numbers of customer service personnel and agents to keep pace with any future growth in the number of customers in our developing or developed markets. In addition, we may experience difficulties in upgrading, developing and expanding information technology systems quickly enough to accommodate any future growth. If we are unable to manage future growth, our prospects may be materially and adversely affected.
In addition, we may reorganize or consolidate the legal entities through which we conduct business. For example, in the second quarter of 2013, MetLife announced the Mergers. The Mergers are expected to occur in the fourth quarter of 2014, subject to regulatory approvals. See “Business — Overview.” The implementation of legal entity reorganizations is a complex undertaking and involves a number of risks similar to those that are present in the case of an acquisition. Many aspects of these transactions are subject to regulatory approvals from a number of different jurisdictions. We may not obtain needed regulatory approvals in the timeframe anticipated or at all, which could reduce or prevent us from realizing the anticipated benefits of these transactions. These transactions or the related regulatory approvals may entail modifications of certain aspects of our operations, the composition of certain of our investment portfolios, and/or the cost of our derivatives hedging activities, which could result in additional costs or reduce net investment income. We may also incur additional expenses in connection with planning and effectuating these mergers and related transactions. We may encounter delays or unforeseen problems in making changes to our information technology systems that are needed to reflect the mergers. Loss of key personnel could adversely affect our ability to carry out these transactions. In addition, these transactions may absorb significant attention from our management, which could reduce management’s focus on other aspects of our business. Any of these risks, if realized, could result in a material adverse effect on our business, results of operations or financial condition.
Operational Risks
MetLife’s Risk Management Policies and Procedures May Leave Us Exposed to Unidentified or Unanticipated Risk, Which Could Negatively Affect Our Business
MetLife has devoted significant resources to develop and periodically update risk management policies and procedures for itself and its subsidiaries, including us, to reflect ongoing review of risks, and expects to continue to do so in the future. Nonetheless, these policies and procedures may not be comprehensive and may not identify every risk to which we are exposed. Many of MetLife’s methods for managing risk and exposures are based upon the use of observed historical market behavior or statistics based on historical models. As a result, these methods may not fully predict future exposures, which can be significantly greater than historical measures indicate. Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that is publicly available or otherwise accessible to MetLife. This information may not always be accurate, complete, up-to-date or properly evaluated. In addition, more extensive and perhaps different risk management policies and procedures might have to be implemented under pending regulations. See “Business — Regulation — Potential Regulation of MetLife as a Non-Bank SIFI” and “Quantitative and Qualitative Disclosures About Market Risk.”
The Continued Threat of Terrorism and Ongoing Military Actions May Adversely Affect the Value of Our Investment Portfolio and the Level of Claim Losses We Incur
The continued threat of terrorism, both within the U.S. and abroad, ongoing military and other actions and heightened security measures in response to these types of threats may cause significant volatility in global financial markets and result in loss of life, property damage, additional disruptions to commerce and reduced economic activity. The value of assets in our investment portfolio may be adversely affected by declines in the credit and equity markets and reduced economic activity caused by the continued threat of terrorism. Companies in which we maintain investments may suffer losses as a result of financial, commercial or economic disruptions and such disruptions might affect the ability of those companies to pay interest or principal on their securities or mortgage loans. Terrorist actions also could disrupt our operations centers in the U.S. or abroad and result in higher than anticipated claims under our insurance policies. See “— Economic Environment and Capital Markets-Related Risks — If Difficult Conditions in the Global Capital Markets and the Economy Generally Persist, They May Materially Adversely Affect Our Business and Results of Operations.”
The Failure in Cyber- or Other Information Security Systems, as well as the Occurrence of Events Unanticipated in MetLife’s Disaster Recovery Systems and Management Continuity Planning Could Result in a Loss or Disclosure of Confidential Information, Damage to Our Reputation and Impairment of Our Ability to Conduct Business Effectively
Our business is highly dependent upon the effective operation of MetLife’s computer systems. We rely on these systems throughout our business for a variety of functions, including processing claims and applications, providing information to customers and distributors, performing actuarial analyses and maintaining financial records. We also retain confidential and proprietary information on our computer systems and we rely on sophisticated technologies to maintain the security of that information. MetLife’s computer systems have been, and will likely continue to be, subject to computer viruses or other malicious codes, unauthorized access, cyberattacks or other computer-related penetrations. While, to date, MetLife has not experienced a material breach of cybersecurity, administrative and technical controls and other preventive actions we take to reduce the risk of cyber-incidents and protect our information technology may be insufficient to prevent physical and electronic break-ins, cyber-attacks or other security breaches to our computer systems.
In the event of a disaster such as a natural catastrophe, epidemic, industrial accident, blackout, computer virus, terrorist attack, cyberattack or war, unanticipated problems with our disaster recovery systems could have a material adverse impact on our ability to conduct business and on our results of operations and financial position, particularly if those problems affect our computer-based data processing, transmission, storage and retrieval systems and destroy valuable data. In addition, in the event that a significant number of our managers were unavailable following a disaster, our ability to effectively conduct business could be severely compromised. These interruptions also may interfere with our suppliers’ ability to provide goods and services and our employees’ ability to perform their job responsibilities.
The failure of our computer systems and/or our disaster recovery plans for any reason could cause significant interruptions in our operations and result in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to our customers. Such a failure could harm our reputation, subject us to regulatory sanctions and legal claims, lead to a loss of customers and revenues and otherwise adversely affect our business and financial results. While MetLife maintains cyber liability insurance that provides both third-party liability and first party liability coverages, this insurance may not be sufficient to protect us against all losses. MetLife and its subsidiaries maintain a primary cybersecurity and privacy liability insurance policy with a limit of $15 million, and have additional coverage for cybersecurity and privacy liability available under blended professional liability excess coverage policies with a total limit of $185 million.
Our Associates May Take Excessive Risks Which Could Negatively Affect Our Financial Condition and Business
As an insurance enterprise, we are in the business of accepting certain risks. The associates who conduct our business, including executive officers and other members of management, sales managers, investment professionals, product managers, sales agents, and other associates, do so in part by making decisions and choices that involve exposing us to risk. These include decisions such as setting underwriting guidelines and standards, product design and pricing, determining what assets to purchase for investment and when to sell them, which business opportunities to pursue, and other decisions. MetLife endeavors, in the design and implementation of compensation programs and practices, to avoid giving associates incentives to take excessive risks; however, associates may take such risks regardless of the structure of these compensation programs and practices. Similarly, although we employ controls and procedures designed to monitor associates’ business decisions and prevent us from taking excessive risks, and to prevent employee misconduct, these controls and procedures may not be effective. If our associates take excessive risks, the impact of those risks could harm our reputation and have a material adverse effect on our financial condition and business operations.
General Risks
Changes in Accounting Standards Issued by the Financial Accounting Standards Board or Other Standard-Setting Bodies May Adversely Affect Our Financial Statements
Our financial statements are subject to the application of GAAP, which is periodically revised and/or expanded. Accordingly, from time to time we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the Financial Accounting Standards Board (the “FASB”). The impact of accounting pronouncements that have been issued but not yet implemented is disclosed in our reports filed with the SEC. See Note 1 of the Notes to the Consolidated Financial Statements. An assessment of proposed standards, including standards on insurance contracts and accounting for financial instruments, is not provided as such proposals are subject to change through the exposure process and official positions of the FASB are determined only after extensive due process and deliberations. Therefore, the effects on our financial statements cannot be meaningfully assessed. The required adoption of future accounting standards could have a material adverse effect on our financial condition and results of operations, including on our net income.
Changes in Our Assumptions Regarding the Discount Rate, Expected Rate of Return and Expected Increase in Compensation Used for Pension and Other Postretirement Benefit Plans For Employees and Retirees of MetLife and Its Subsidiaries May Result in Increased Expenses and Reduce Our Profitability
Our allocated pension and other postretirement benefit plan costs are determined based on best estimates of future plan experience. These assumptions are reviewed regularly and include discount rates, expected rates of return on plan assets, expected increases in compensation levels and expected medical inflation. Changes in these assumptions may result in increased expenses and reduce our profitability.
We May Not be Able to Protect Our Intellectual Property and May be Subject to Infringement Claims
We rely on a combination of contractual rights with third parties and copyright, trademark, patent and trade secret laws to establish and protect our intellectual property. Although we endeavor to protect our rights, third parties may infringe or misappropriate our intellectual property. We may have to litigate to enforce and protect our copyrights, trademarks, patents, trade secrets and know-how or to determine their scope, validity or enforceability. This would represent a diversion of resources that may be significant and our efforts may not prove successful. The inability to secure or protect our intellectual property assets could harm our reputation and have a material adverse effect on our business and our ability to compete with other insurers and financial institutions.
In addition, we may be subject to claims by third parties for (i) patent, trademark or copyright infringement, (ii) breach of patent, trademark or copyright license usage rights, or (iii) misappropriation of trade secrets. Any such claims or resulting litigation could result in significant expense and liability for damages. If we were found to have infringed or misappropriated a third-party patent or other intellectual property right, we could in some circumstances be enjoined from providing certain products or services to our customers or from utilizing and benefiting from certain patents, copyrights, trademarks, trade secrets or licenses. Alternatively, we could be required to enter into costly licensing arrangements with third parties or implement a costly alternative. Any of these scenarios could harm our reputation and have a material adverse effect on our business and results of operations.
We May Be Unable to Attract and Retain Sales Representatives for Our Products
We must attract and retain productive sales representatives to sell our insurance, annuities and investment products. Insurers compete for sales representatives with demonstrated ability. In addition, there is competition for representatives with other types of financial services firms, such as independent broker-dealers.
We compete with other financial services companies for sales representatives primarily on the basis of product features, support services, compensation and financial position. We continue to undertake several initiatives to enhance the efficiency and production of our existing sales force. These initiatives may not succeed in attracting and retaining new agents. Sales of individual insurance, annuities and investment products and our results of operations and financial condition could be materially adversely affected if we are unsuccessful in attracting and retaining highly qualified and productive agents. See “— Risks Related to Our Business — Competitive Factors May Adversely Affect Our Market Share and Profitability.”
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our executive office is located in Bloomfield, Connecticut and is owned by an affiliate. It is occupied by both of the Company’s segments, as well as Corporate & Other.
Management believes that the Company’s properties are suitable and adequate for our current and anticipated business operations. MetLife arranges for property & casualty coverage on our properties, taking into consideration our risk exposures and the cost and availability of commercial coverages, including deductible loss levels. In connection with the renewal of those coverages, MetLife has arranged $700 million of property insurance, including coverage for terrorism, on our real estate portfolio through May 1, 2014, its renewal date.
Item 3. Legal Proceedings
See Note 15 of the Notes to the Consolidated Financial Statements.
Item 4. Mine Safety Disclosures
Not applicable.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
MetLife Insurance Company of Connecticut has 40,000,000 authorized shares of common stock, 34,595,317 shares of which were outstanding at December 31, 2013. Of such outstanding shares, at March 28, 2014, 30,000,000 shares are owned directly by MetLife and the remaining 4,595,317 shares are owned by MetLife Investors Group, Inc., a wholly-owned subsidiary of MetLife. There exists no established public trading market for the Company’s common equity.
During the years ended December 31, 2013 and 2012, MetLife Insurance Company of Connecticut paid dividends of $1.0 billion and $706 million, respectively, to its stockholders. See Note 12 of the Notes to the Consolidated Financial Statements for a discussion of the components of the 2012 dividends, as well as a discussion of restrictions on MetLife Insurance Company of Connecticut’s ability to pay dividends. The maximum amount of dividends which MetLife Insurance Company of Connecticut may pay in 2014, without prior regulatory approval, is $1.0 billion.
Item 6. Selected Financial Data
Omitted pursuant to General Instruction I(2)(a) of Form 10-K.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements and Other Financial Information
For purposes of this discussion, “MICC,” the “Company,” “we,” “our” and “us” refer to MetLife Insurance Company of Connecticut, a Connecticut corporation incorporated in 1863, and its subsidiaries, including MetLife Investors USA Insurance Company. MetLife Insurance Company of Connecticut is a wholly-owned subsidiary of MetLife, Inc. (“MetLife”). Management’s narrative analysis of the results of operations is presented pursuant to General Instruction I(2)(a) of Form 10-K. This narrative analysis should be read in conjunction with “Note Regarding Forward-Looking Statements,” “Risk Factors,” “Quantitative and Qualitative Disclosures About Market Risk” and the Company’s consolidated financial statements included elsewhere herein.
This narrative analysis 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, or are tied to future periods, 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.”
This narrative analysis includes references to our performance measure, operating earnings, that is 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 guidance for segment reporting, operating earnings is our measure of segment performance. See “— Non-GAAP and Other Financial Disclosures” for definitions of such measures.
MICC is organized into two segments: Retail and Corporate Benefit Funding. In addition, the Company reports certain of its results of operations in Corporate & Other. Management continues to evaluate the Company’s segment performance and allocated resources and may adjust related measurements in the future to better reflect segment profitability. See “Business” and Note 2 of the Notes to the Consolidated Financial Statements for further information on the Company’s segments and Corporate & Other.
Summary of Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the Consolidated Financial Statements. For a discussion of our significant accounting policies, see Note 1 of the Notes to the Consolidated Financial Statements. The most critical estimates include those used in determining:
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| (i) | liabilities for future policyholder benefits and the accounting for reinsurance; |
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| (ii) | capitalization and amortization of deferred policy acquisition costs (“DAC”) and the establishment and amortization of value of business acquired (“VOBA”); |
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| (iii) | estimated fair values of investments in the absence of quoted market values; |
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| (iv) | investment impairments; |
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| (v) | estimated fair values of freestanding derivatives and the recognition and estimated fair value of embedded derivatives requiring bifurcation; |
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| (vi) | measurement of goodwill and related impairment; |
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| (vii) | measurement of income taxes and the valuation of deferred tax assets; and |
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| (viii) | liabilities for litigation and regulatory matters. |
In applying our accounting policies, we make subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our business and operations. Actual results could differ from these estimates.
Liability for Future Policy Benefits
Generally, future policy benefits 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 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. 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. If experience is less favorable than assumed, additional liabilities may be established, resulting in a charge to policyholder benefits and claims.
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.
Liabilities for unpaid claims are estimated based upon our historical experience and other actuarial assumptions that consider the effects of current developments, anticipated trends and risk management programs. With respect to workers’ compensation insurance, such unpaid claims are reduced for anticipated subrogation.
Future policy benefit liabilities for minimum death and income benefit guarantees relating to certain annuity contracts are based on estimates of the expected value of benefits in excess of the projected account balance, recognizing the excess ratably over the accumulation period based on total expected assessments. Liabilities for universal and variable life secondary 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 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 experience of the appropriate underlying equity index, such as the Standard & Poor’s Ratings Services (“S&P”) 500 Index.
We regularly review our estimates of liabilities for future policy benefits and compare them with our actual experience. Differences between actual experience and the assumptions used in pricing these policies and guarantees, as well as in the establishment of the related liabilities, result in variances in profit and could result in losses.
See Note 4 of the Notes to the Consolidated Financial Statements for additional information on our liability for future policy benefits.
Reinsurance
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. We periodically review actual and anticipated experience compared to the aforementioned assumptions used to establish assets and liabilities relating to ceded and assumed reinsurance and evaluate the financial strength of counterparties to our reinsurance agreements using criteria similar to that evaluated in the security impairment process discussed subsequently. Additionally, for each of our reinsurance agreements, we determine whether the agreement provides indemnification against loss or liability relating to insurance risk, in accordance with applicable accounting standards. We review all contractual features, including those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims. If we determine that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, we record the agreement using the deposit method of accounting.
See Note 6 of the Notes to the Consolidated Financial Statements for additional information on our reinsurance programs.
Deferred Policy Acquisition Costs and Value of Business Acquired
We incur significant costs in connection with acquiring new and renewal insurance business. Costs that relate directly to the successful acquisition or renewal of insurance contracts are deferred as DAC. In addition to commissions, certain direct-response advertising expenses and other direct costs, deferrable costs include 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. We utilize various techniques to estimate the portion of an employee’s time spent on qualifying acquisition activities that result in actual sales, including surveys, interviews, representative time studies and other methods. These estimates include assumptions that are reviewed and updated on a periodic basis or more frequently to reflect significant changes in processes or distribution methods.
VOBA 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 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.
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. Our 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. We monitor these events and only change the assumption when our long-term expectation changes. The effect of an increase (decrease) by 100 basis points in the assumed future rate of return is reasonably likely to result in a decrease (increase) in the DAC and VOBA amortization of approximately $85 million, with an offset to our unearned revenue liability of approximately $3 million for this factor. We use a mean reversion approach to separate account returns where the mean reversion period is five years with a long-term separate account return after the five-year reversion period is over. The current long-term rate of return assumption for the variable universal life contracts and variable deferred annuity contracts is 7.25% in the U.S.
We also periodically review other long-term assumptions underlying the projections of estimated gross margins and profits. These assumptions primarily relate to investment returns, policyholder dividend scales, interest crediting rates, mortality, persistency, and expenses to administer business. Assumptions used in the calculation of estimated gross margins and profits which may have significantly changed are updated annually. 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.
In 2013, our most significant assumption updates resulting in a change to expected future gross margins and profits and the amortization of DAC and VOBA are due to mortality, expenses and persistency assumptions on variable and universal life contracts and annuity contracts. We expect these assumptions to be the ones most reasonably likely to cause significant changes in the future. Changes in these assumptions can be offsetting and we are unable to predict their movement or offsetting impact over time.
See Note 5 of the Notes to the Consolidated Financial Statements for information regarding the DAC and VOBA offset to unrealized investment losses.
Estimated Fair Value of Investments
In determining the estimated fair value of our investments, we maximize the use of quoted prices in active markets. When quoted prices in active markets are not available, various methodologies, assumptions and inputs are utilized, giving priority to observable inputs. When observable inputs are not available, unobservable inputs or inputs that cannot be derived principally from or corroborated by observable market data are used which can be based in large part on management judgment or estimation, and cannot be supported by reference to market activity. Accordingly, the estimated fair values are based on available market information and management’s judgments about financial instruments. The methodologies, assumptions and inputs utilized are described in Note 9 of the Notes to the Consolidated Financial Statements.
Financial markets are susceptible to severe events evidenced by rapid depreciation in asset values accompanied by a reduction in asset liquidity. Our 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.
Investment Impairments
One of the significant estimates related to available-for-sale securities is our impairment evaluation. The assessment of whether an other-than-temporary impairment (“OTTI”) occurred is based on our case-by-case evaluation of the underlying reasons for the decline in estimated fair value on a security-by-security basis. Our review of each fixed maturity and equity security for OTTI includes an analysis of gross unrealized losses by three categories of severity and/or age of gross unrealized loss. 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. Accordingly, such an unrealized loss position may not impact our 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 certain equity securities, greater weight and consideration are given to a decline in estimated fair value and the likelihood such estimated fair value decline will recover.
Additionally, we consider a wide range of factors about the security issuer and use our 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 our evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Factors we consider in the OTTI evaluation process are described in Note 7 of the Notes to the Consolidated Financial Statements.
The determination of the amount of allowances and impairments on the remaining invested asset classes is highly subjective and is based upon our 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.
See Notes 1 and 7 of the Notes to the Consolidated Financial Statements for additional information relating to our determination of the amount of allowances and impairments.
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. See Note 9 of the Notes to the Consolidated Financial Statements for additional details on significant inputs into the over-the-counter (“OTC”) derivative pricing models and credit risk adjustment.
We issue variable annuity products with guaranteed minimum benefits, some of which are embedded derivatives measured at estimated fair value separately from the host variable annuity product, with changes in estimated fair value reported in net derivative gains (losses). The estimated fair values of these embedded derivatives are 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 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 our nonperformance risk and risk margins for non-capital market inputs. The nonperformance risk 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’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. 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.
The accounting for derivatives is complex and interpretations of accounting standards continue to evolve in practice. If it is determined that hedge accounting designations were not appropriately applied, reported net income could be materially affected. Assessments of hedge effectiveness and measurements of ineffectiveness of hedging relationships are also subject to interpretations and estimations and different interpretations or estimates may have a material effect on the amount reported in net income.
Variable annuities with guaranteed minimum benefits 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 our 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. If interpretations change, there is a risk that features previously not bifurcated may require bifurcation and reporting at estimated fair value in the consolidated financial statements and respective changes in estimated fair value could materially affect net income.
Additionally, we ceded the risk associated with certain of the variable annuities with guaranteed minimum benefits described in the preceding paragraphs to an affiliated reinsurance company. 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 us with the exception of the input for nonperformance risk that reflects the credit of the reinsurer. Because certain of the direct guarantees do not meet the definition of an embedded derivative and, thus, are not accounted for at fair value, significant fluctuations in net income may occur since the change in fair value of the embedded derivative on the ceded risk is being recorded in net income without a corresponding and offsetting change in fair value of the direct guarantee.
See Note 8 of the Notes to the Consolidated Financial Statements for additional information on our derivatives and hedging programs.
Goodwill
Goodwill 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.
For purposes of goodwill impairment testing, if the carrying value of a reporting unit exceeds its estimated fair value, the implied fair value of the reporting unit goodwill is compared to the carrying value of that goodwill to measure the amount of impairment loss, if any. 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 key inputs, judgments and assumptions necessary in determining estimated fair value of the reporting units include projected operating earnings, current book value, 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 we believe is appropriate for the respective reporting unit. In performing the Company’s goodwill impairment tests, the estimated fair values of the reporting units are first determined using a market multiple valuation approach. When further corroboration is required, the Company uses a discounted cash flow valuation approach. For reporting units which are particularly sensitive to market assumptions, the Company may use additional valuation methodologies to estimate the reporting units’ fair values.
In 2013, the Company performed its annual goodwill impairment test on its Retail Life & Other reporting unit using both the market multiple and discounted cash flow valuation approaches. Results for both approaches indicated that the fair value of the Retail Life & Other reporting unit was below its carrying value. As a result, an actuarial appraisal, which estimates the net worth of the reporting unit, the value of existing business and the value of new business, was performed. This appraisal resulted in a fair value of the Retail Life & Other reporting unit that was less than the carrying value, indicating a potential for goodwill impairment. An increase in required reserves on universal life products with secondary guarantees, together with modifications to financial reinsurance treaty terms, was reflected in the fair value estimate. In addition, decreased future sales assumptions reflected in the valuation were driven by the Company’s discontinuance of certain sales of universal life products with secondary guarantees. Accordingly, the Company performed Step 2 of the goodwill impairment process, which compares the implied fair value of the reporting unit’s goodwill with its carrying value. This analysis indicated that the recorded goodwill associated with this reporting unit was not recoverable. Therefore, we recorded a non-cash charge of $66 million ($57 million, net of income tax) for the impairment of the entire goodwill balance that is reported in goodwill impairment in the consolidated statements of operations for the year ended December 31, 2013.
In addition, the Company performed its annual goodwill impairment test of its Corporate Benefit Funding reporting unit using a market multiple valuation approach, and concluded that the fair value of the reporting unit was in excess of its carrying value and, therefore, goodwill was not impaired.
In 2012, we performed the annual goodwill impairment test on our Retail Annuities reporting unit using an actuarial appraisal approach, which estimates the net worth of the reporting unit, the value of existing business and the value of new business. This appraisal 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 actuarial appraisal reflected the expected market impact to a buyer of changes in the regulatory environment, continued low interest rates for an extended period of time, and other market and economic factors. Specifically, in July 2012, the New York State Department of Financial Services (“Department of Financial Services”) had initiated an inquiry into the use of captive or off-shore reinsurers, strategies many market participants have used for capital efficiency on variable annuity products; the National Association of Insurance Commissioners (“NAIC”) had also been studying the use of captives. Additionally, in the third quarter of 2012, the Federal Reserve announced that it anticipated that low interest rates were likely to be warranted at least through mid-2015, extending the time horizon from previous announcements and Moody’s Investors Service changed its outlook for the U.S. life insurance industry to negative from stable, and stated that it expects interest rates to remain in the low single digits for the next few years. As a result, we performed Step 2 of the goodwill impairment process, which compares the implied fair value of the reporting unit’s goodwill with its carrying value. This analysis indicated that the recorded goodwill associated with this reporting unit was not recoverable. Therefore, we recorded a non-cash charge of $394 million ($147 million, net of income tax) for the impairment of the entire goodwill balance that is reported in goodwill impairment in the consolidated statements of operations for the year ended December 31, 2012. For a discussion of the status of the inquiries made by the Department of Financial Services and the NAIC, see “Business — Regulation — Holding Company Regulation — Insurance Regulatory Examinations.”
We apply significant judgment when determining the estimated fair value of our 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 our reporting units could result in goodwill impairments in future periods which could materially adversely affect our results of operations or financial position.
See Note 10 of the Notes to the Consolidated Financial Statements for additional information on our goodwill.
Income Taxes
We provide for federal, state and foreign income taxes currently payable, as well as those deferred due to temporary differences between the financial reporting and tax bases of assets and liabilities. Our accounting for income taxes represents our best estimate of various events and transactions. These tax laws are complex and are subject to differing interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions, both domestic and foreign.
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:
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| (i) | future taxable income exclusive of reversing temporary differences and carryforwards; |
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| (ii) | future reversals of existing taxable temporary differences; |
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| (iii) | taxable income in prior carryback years; and |
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| (iv) | tax planning strategies. |
Disputes over interpretations of the tax laws may be subject to review and adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon audit. We determine 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 is recorded in the financial statements. We may be required to change our provision for income taxes 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 financial statements in the year these changes occur.
See Note 14 of the Notes to the Consolidated Financial Statements for additional information on our income taxes.
Litigation Contingencies
We are a party to a number of legal actions and are involved in a number of regulatory investigations. Given the inherent unpredictability of these matters, it is difficult to estimate the impact on our 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. On a quarterly and annual basis, we review relevant information with respect to liabilities for litigation, regulatory investigations and litigation-related contingencies to be reflected in our consolidated financial statements.
See Note 15 of the Notes to the Consolidated Financial Statements for additional information regarding our assessment of litigation contingencies.
Economic Capital
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 MetLife’s and the Company’s business.
MetLife’s economic capital model aligns segment allocated equity with emerging standards and consistent risk principles. The model applies statistics-based risk evaluation principles to the material risks to which the Company is exposed. These consistent risk principles include calibrating required economic capital shock factors to a specific confidence level and time horizon and applying an industry standard method for the inclusion of diversification benefits among risk types. Economic capital-based risk estimation is an evolving science and industry best practices have emerged and continue to evolve. Areas of evolving industry best practices include stochastic liability valuation techniques, alternative methodologies for the calculation of diversification benefits, and the quantification of appropriate shock levels. MetLife management is responsible for the on-going production and enhancement of the economic capital model and reviews its approach periodically to ensure that it remains consistent with emerging industry practice standards.
Segment net investment income is 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.
Dispositions
See Notes 3 and 17 of the Notes to the Consolidated Financial Statements.
Results of Operations
See Note 1 of the Notes to the Consolidated Financial Statements for information regarding prior period adjustments to the consolidated results.
Consolidated Results
We made additional changes to variable annuity guarantee features as we continued to manage sales volume, focusing on pricing discipline and risk management in this challenging economic environment. These actions, in combination with product changes made in 2012, resulted in a net decrease in sales of annuities of $5.2 billion, before income tax, or 45% compared to 2012. Variable and universal life sales were also lower by 19%, mainly driven by the discontinuance of all but one of our secondary guarantees on universal life products. A decrease in premiums of $465 million, before income tax, was the result of the sustained low interest rate environment and pricing competition in the bulk annuity market in the United Kingdom (“U.K.”), which caused us to be very selective in the pension closeout deals for which we elected to compete. The premiums for this business are almost entirely offset by the related change in policyholder benefits.
|
| | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 |
| | (In millions) |
| Revenues | | | |
| Premiums | $ | 606 |
| | $ | 1,261 |
|
| Universal life and investment-type product policy fees | 2,336 |
| | 2,261 |
|
| Net investment income | 2,852 |
| | 2,952 |
|
| Other revenues | 592 |
| | 511 |
|
| Net investment gains (losses) | 82 |
| | 152 |
|
| Net derivative gains (losses) | (1,052 | ) | | 1,003 |
|
| Total revenues | 5,416 |
| | 8,140 |
|
| Expenses | | | |
| Policyholder benefits and claims | 1,707 |
| | 2,389 |
|
| Interest credited to policyholder account balances | 1,037 |
| | 1,147 |
|
| Goodwill impairment | 66 |
| | 394 |
|
| Capitalization of DAC | (504 | ) | | (886 | ) |
| Amortization of DAC and VOBA | 50 |
| | 1,035 |
|
| Interest expense on debt | 190 |
| | 231 |
|
| Other expenses | 1,923 |
| | 2,340 |
|
| Total expenses | 4,469 |
| | 6,650 |
|
| Income (loss) from continuing operations before provision for income tax | 947 |
| | 1,490 |
|
| Provision for income tax expense (benefit) | 227 |
| | 372 |
|
| Income (loss) from continuing operations, net of income tax | 720 |
| | 1,118 |
|
| Income (loss) from discontinued operations, net of income tax | — |
| | 8 |
|
| Net income (loss) | $ | 720 |
| | $ | 1,126 |
|
Year Ended December 31, 2013 Compared with the Year Ended December 31, 2012
During the year ended December 31, 2013, income (loss) from continuing operations, before provision for income tax, decreased $543 million ($398 million, net of income tax) from 2012 primarily driven by an unfavorable change in net derivative gains (losses), partially offset by a lower goodwill impairment charge compared to 2012 and an increase in operating earnings.
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 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 currency exchange rates, 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 had historically included contractholder-directed unit-linked investments supporting unit-linked variable annuity type liabilities, which do not qualify as separate account assets. The returns on these contractholder-directed unit-linked investments, which can vary significantly from 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 (“PABs”) through interest credited to policyholder account balances. During June 2012, the Company disposed of MetLife Europe Limited (“MetLife Europe”), which held these contractholder-directed unit-linked investments.
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.
We purchase investments 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 currency exchange rates, 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 hedge certain invested assets and insurance liabilities. Certain of these hedges are designated and qualify as accounting hedges, which reduce volatility in earnings. For those hedges not designated as accounting hedges, changes in market factors lead to the recognition of fair value changes in net derivative gains (losses) generally without an offsetting gain or loss recognized in earnings for the item being hedged.
Certain direct or assumed variable annuity products with guaranteed minimum benefits 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). We hedge the market and other risks inherent in these variable annuity guarantees through a combination of reinsurance and freestanding derivatives. Ceded reinsurance of direct or assumed variable annuity products with minimum benefit guarantees generally 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 valuation of these embedded derivatives includes a nonperformance risk adjustment, which is unhedged and can be a significant driver of net derivative gains (losses) but does not have an economic impact on us.
Direct, assumed, and ceded variable annuity embedded derivatives and the associated freestanding derivative hedges are collectively referred to as “VA program derivatives” in the following table. All other derivatives that are economic hedges of certain invested assets and insurance liabilities are referred to as “non-VA program derivatives” in the following table. The table below presents the impact on net derivative gains (losses) from non-VA program derivatives and VA program derivatives:
|
| | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 |
| | (In millions) |
| Non-VA program derivatives | | | |
| Interest rate | $ | (171 | ) | | $ | (15 | ) |
| Foreign currency exchange rate | (24 | ) | | (27 | ) |
| Credit | 50 |
| | 52 |
|
| Non-VA embedded derivatives | 527 |
| | (117 | ) |
| Total non-VA program derivatives | 382 |
| | (107 | ) |
| VA program derivatives | | | |
| Embedded derivatives-direct/assumed guarantees: |
|
|
|
|
|
| Market risks | 2,578 |
|
| 1,757 |
|
| Nonperformance risk | (156 | ) | | (235 | ) |
| Other risks | (44 | ) |
| (637 | ) |
| Total | 2,378 |
|
| 885 |
|
| Embedded derivatives-ceded reinsurance: | | | |
| Market and other risks | (3,075 | ) | | 400 |
|
| Nonperformance risk | 76 |
| | 124 |
|
| Total | (2,999 | ) | | 524 |
|
| Freestanding derivatives hedging direct/assumed embedded derivatives | (813 | ) | | (299 | ) |
| Total VA program derivatives | (1,434 | ) | | 1,110 |
|
| Net derivative gains (losses) | $ | (1,052 | ) | | $ | 1,003 |
|
Within VA program derivatives, we reclassified the 2012 amounts to conform to the 2013 presentation and separately present each component of market risks and other risks within direct/assumed embedded derivatives.
The favorable change in net derivative gains (losses) on non-VA program derivatives was $489 million ($318 million, net of income tax). This was primarily due to non-VA program embedded derivatives in affiliated ceded reinsurance written on a coinsurance with funds withheld basis, which were favorably impacted by changes in value of the underlying assets, as well as by a 2013 refinement to the method in which the changes in fair value of the underlying assets in the reference portfolio are allocated to the embedded derivative. The favorable change was also due to increasing forward U.K. inflation rates favorably impacting receive-float inflation swaps. These favorable impacts were partially offset by long-term interest rates increasing more in 2013 than in 2012, unfavorably impacting receive-fixed interest rate swaps and net long interest rate floors. These freestanding derivatives are primarily hedging long duration liability portfolios. Because certain of these hedging strategies are not designated or do not qualify as accounting hedges, the changes in the estimated fair value of these freestanding derivatives are recognized in net derivative gains (losses) without an offsetting gain or loss recognized in earnings for the item being hedged.
The unfavorable change in net derivative gains (losses) on VA program derivatives was $2.5 billion ($1.7 billion, net of income tax). This was due to an unfavorable change of $2.6 billion ($1.7 billion, net of income tax) related to market and other risks on direct and assumed variable annuity embedded derivatives, net of the impact of market and other risks on the ceded reinsurance embedded derivatives and net of freestanding derivatives hedging those risks, and a favorable change of $31 million ($20 million, net of income tax) related to the nonperformance risk adjustment on the direct and assumed variable annuity embedded derivatives, net of the impact of nonperformance risk adjustment on the ceded variable annuity embedded derivatives.
The favorable nonperformance risk adjustment on ceded variable annuity embedded derivatives of $76 million ($49 million, net of income tax) in 2013 was comprised of a gain of $173 million due to the impact of changes in capital market inputs, such as long-term risk free interest rates and key equity index levels, partially offset by a loss of $97 million due to changes in the reinsurer’s credit spread. The unfavorable nonperformance risk adjustment on direct and assumed variable annuity embedded derivatives of $156 million ($101 million, net of income tax) in 2013 was comprised of a loss of $145 million due to the impact of changes in capital market inputs, such as long-term risk free interest rates and key equity index levels, as well as a loss of $11 million due to changes in our own credit spread. We calculate the nonperformance risk adjustment on the direct, assumed, and ceded variable annuity embedded derivatives as the change in the embedded derivative discounted at the risk adjusted rate (which includes our own credit spread to the extent that the embedded derivative is in-the-money) less the change in the embedded derivative discounted at the risk free rate.
When equity index levels decrease in isolation, the direct and assumed variable annuity guarantees become more valuable to policyholders, which results in an increase in the undiscounted embedded derivative liability. Discounting this unfavorable change by the risk adjusted rate yields a smaller loss than by discounting at the risk free rate, thus, creating a gain from including an adjustment for nonperformance risk on the direct and assumed variable annuity embedded derivatives. The opposite impact occurs with respect to the nonperformance risk adjustment on the ceded variable annuity guarantees.
When the risk free interest rate decreases in isolation, discounting the embedded derivative liability produces a higher valuation of the liability than if the risk free interest rate had remained constant. Discounting this unfavorable change by the risk adjusted rate yields a smaller loss than by discounting at the risk free rate, thus creating a gain from including an adjustment for nonperformance risk on the direct and assumed variable annuity embedded derivatives. The opposite impact occurs with respect to the nonperformance risk adjustment on the ceded variable annuity guarantees.
When our own credit spread increases in isolation, discounting the embedded derivative liability produces a lower valuation of the liability than if the own credit spread had remained constant. As a result, a gain is created from including an adjustment for nonperformance risk on the direct and assumed variable annuity embedded derivatives. The opposite impact occurs with respect to the nonperformance risk adjustment on ceded variable annuity guarantees when the reinsurer's credit spread increases in isolation. For each of these primary market drivers, the opposite effect occurs when they move in the opposite direction.
Generally, a higher portion of the ceded reinsurance for guaranteed minimum income benefits (“GMIBs”) is accounted for as an embedded derivative as compared to the direct guarantees since the settlement provisions of the reinsurance contracts generally meet the accounting criteria of “net settlement.” This mismatch in accounting can lead to significant volatility in earnings, even though the risks inherent in these direct guarantees are fully covered by the ceded reinsurance.
The foregoing unfavorable change of $2.6 billion ($1.7 billion, net of income tax) is comprised of a $4.0 billion ($2.6 billion, net of income tax) unfavorable change in market and other risks on ceded variable annuity embedded derivatives and freestanding derivatives which, together, hedge the market and other risks on direct and assumed variable annuity embedded derivatives, and a $1.4 billion ($919 million, net of income tax) favorable change in market and other risks on direct and assumed variable annuity embedded derivatives. As discussed in the preceding paragraph, changes in market and other risks lead to volatility in earnings due to the mismatch in accounting on GMIBs.
The primary changes in market factors are summarized as follows:
| |
| • | Long-term interest rates increased more in 2013 than in 2012, contributing to an unfavorable change in our ceded reinsurance assets and our freestanding derivatives and a favorable change in our direct and assumed embedded derivatives. |
| |
| • | Key equity index levels increased more in 2013 than in 2012, contributing to an unfavorable change in our ceded reinsurance assets and our freestanding derivatives and a favorable change in our direct and assumed embedded derivatives. |
| |
| • | Key equity volatility measures decreased less in 2013 than in 2012, contributing to a favorable change in our ceded reinsurance assets and our freestanding derivatives and an unfavorable change in our direct and assumed embedded derivatives. |
The unfavorable change in net investment gains (losses) of $70 million ($46 million, net of income tax) primarily reflects a decrease in net gains on sales of fixed maturity securities partially offset by a decrease in fixed maturity securities impairments from improving economic fundamentals.
Our 2013 results include a $66 million ($57 million, net of income tax) non-cash charge for goodwill impairment associated with our Retail Life & Other business. Results for 2012 included a $394 million ($147 million, net of income tax) non-cash charge for goodwill impairment associated with our Retail Annuities business.
Our 2013 results include a $31 million ($20 million, net of income tax) charge associated with the global review of assumptions related to reserves and DAC, of which $65 million ($43 million, net of income tax) was recognized in net derivative gains (losses). Of the $31 million charge, $96 million ($62 million, net of income tax) was related to reserves, offset by $64 million ($42 million, net of income tax) associated with DAC. With respect to the $65 million charge recorded in net derivative gains (losses), a $73 million loss on direct variable annuity embedded derivatives was included within the other risks caption and a $8 million gain on ceded reinsurance embedded derivatives was included within the market and other risks caption in the table above.
As a result of the global review of assumptions, changes were made to policyholder behavior and mortality assumptions, as well as to economic assumptions. The most significant impacts were in Retail Annuities and Retail Life & Other.
| |
| • | Changes to policyholder behavior and mortality assumptions resulted in reserve increases offset by favorable DAC for a net loss of $51 million ($33 million, net of income tax). |
| |
| • | Changes in economic assumptions resulted in a decrease in reserves and favorable DAC for a net benefit of $20 million ($13 million, net of income tax). |
Income tax expense for the year ended December 31, 2013 was $227 million, or 24% of income (loss) from continuing operations, before provision for income tax, compared with $372 million, or 25% of income (loss) from continuing operations, before provision for income tax for 2012. The Company’s 2013 and 2012 effective tax rates differ from the U.S. statutory rate of 35% primarily due to non-taxable investment income and income tax accounting for goodwill.
As more fully described in “— Non-GAAP and Other Financial Disclosures,” 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, 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 income (loss) from continuing operations, net of income tax. Operating earnings increased $235 million, net of income tax, to $1.2 billion, net of income tax, in 2013 from $1.0 billion, net of income tax, in 2012.
Reconciliation of income (loss) from continuing operations, net of income tax, to operating earnings
|
| | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 |
| | (In millions) |
| Income (loss) from continuing operations, net of income tax | $ | 720 |
| | $ | 1,118 |
|
| Less: Net investment gains (losses) | 82 |
| | 152 |
|
| Less: Net derivative gains (losses) | (1,052 | ) | | 1,003 |
|
| Less: Goodwill impairment | (66 | ) | | (394 | ) |
| Less: Other adjustments to net income (1) | 294 |
| | (718 | ) |
| Less: Provision for income tax (expense) benefit | 244 |
| | 92 |
|
| Operating earnings | $ | 1,218 |
| | $ | 983 |
|
(1) See definitions of operating revenues and operating expenses under “— Non-GAAP and Other Financial Disclosures” for the components of such adjustments.
Reconciliation of GAAP revenues to operating revenues and GAAP expenses to operating expenses
|
| | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 |
| | (In millions) |
| Total revenues | $ | 5,416 |
| | $ | 8,140 |
|
| Less: Net investment gains (losses) | 82 |
| | 152 |
|
| Less: Net derivative gains (losses) | (1,052 | ) | | 1,003 |
|
| Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | (7 | ) | | (1 | ) |
| Less: Other adjustments to revenues (1) | 117 |
| | 213 |
|
| Total operating revenues | $ | 6,276 |
| | $ | 6,773 |
|
| Total expenses | $ | 4,469 |
| | $ | 6,650 |
|
| Less: Adjustments related to net investment gains (losses) and net derivative gains (losses) | (490 | ) | | 332 |
|
| Less: Goodwill impairment | 66 |
| | 394 |
|
| Less: Other adjustments to expenses (1) | 306 |
| | 598 |
|
| Total operating expenses | $ | 4,587 |
| | $ | 5,326 |
|
______________
(1) See definitions of operating revenues and operating expenses under “— Non-GAAP and Other Financial Disclosures” for the components of such adjustments.
Consolidated Results – Operating
|
| | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 |
| | (In millions) |
| OPERATING REVENUES | | | |
| Premiums | $ | 606 |
| | $ | 1,261 |
|
| Universal life and investment-type product policy fees | 2,190 |
| | 2,124 |
|
| Net investment income | 2,888 |
| | 2,877 |
|
| Other revenues | 592 |
| | 511 |
|
| Total operating revenues | 6,276 |
| | 6,773 |
|
| OPERATING EXPENSES | | | |
| Policyholder benefits and claims | 1,500 |
| | 2,027 |
|
| Interest credited to policyholder account balances | 1,042 |
| | 1,105 |
|
| Capitalization of DAC | (504 | ) | | (886 | ) |
| Amortization of DAC and VOBA | 558 |
| | 678 |
|
| Interest expense on debt | 68 |
| | 68 |
|
| Other expenses | 1,923 |
| | 2,334 |
|
| Total operating expenses | 4,587 |
| | 5,326 |
|
| Provision for income tax expense (benefit) | 471 |
| | 464 |
|
| Operating earnings | $ | 1,218 |
| | $ | 983 |
|
Year Ended December 31, 2013 Compared with the Year Ended December 31, 2012
Unless otherwise stated, all amounts discussed below are net of income tax.
The $235 million increase in operating earnings was primarily driven by higher asset-based fee revenues and decreases in other expenses and DAC amortization, partially offset by unfavorable mortality and claims experience.
Positive net flows from universal life and variable annuities products since 2012 resulted in an increase in average account balances and generated higher asset-based fee revenue of $56 million. These positive net flows in our universal life business combined with positive net flows in our traditional life businesses increased invested assets which generated higher net investment income of $17 million. Deferred annuity surrenders and withdrawals exceeded sales for the period, resulting in negative cash flows to the general account and a reduction in interest credited expense. This was partially offset by higher interest credited in Retail Life & Other and the Corporate Benefit Funding segment due to higher average account balances. Operating earnings also decreased by $9 million due to the sale of our former broker-dealer subsidiary, Tower Square Securities, Inc., in 2013.
The improving equity market resulted in higher fee income from increased separate account balances, which increased operating earnings by $176 million. This increase was partially offset by higher asset-based commissions that are also, in part, determined by separate account balances, which decreased operating earnings by $45 million. As a result of the sustained low interest rate environment, average interest credited rates in our Corporate Benefit Funding segment declined, increasing operating earnings by $20 million. Operating earnings decreased by $10 million as a result of lower investment yields from lower returns on real estate joint ventures and the impact of the low interest rate environment on our fixed maturity securities, partially offset by improved returns on other limited partnership interests.
Less favorable claims experience, mainly in our variable and universal life businesses, reduced operating earnings by $136 million. The decrease was primarily driven by changes in affiliated reinsurance coverage and experience refunds, resulting in higher costs of reinsurance in 2013, partially offset by favorable mortality in our whole life business. DAC amortization decreased due to the continued favorable equity markets in the current period, partially offset by an increase due to growth in the business, resulting in a $100 million increase in operating earnings.
On an annual basis, we review and update our long-term assumptions used in our calculations of certain insurance-related liabilities and DAC. The combined impact of the 2013 and 2012 annual updates resulted in a net operating earnings decrease of $72 million, primarily related to 2012 favorable DAC unlockings in our variable annuity business. In addition to our annual updates, certain insurance-related liabilities and DAC refinements were recorded in both 2013 and 2012 and resulted in a $27 million increase in operating earnings.
Expenses declined $38 million, primarily driven by disciplined spending and reduced interest expense associated with affiliated ceded funds withheld reinsurance treaties, partially offset by an increase in post-retirement benefit costs.
The Company’s effective tax rate differs from the U.S. statutory rate of 35% primarily due to non-taxable investment income and tax credits for low income housing. In 2013, the Company realized additional tax benefits of $78 million compared to 2012, primarily from the higher utilization of tax preferenced investments.
In June 2012, the Company distributed all of the issued and outstanding shares of common stock of its wholly-owned subsidiary, MetLife Europe, to its stockholders as an in-kind dividend. This transaction resulted in a $16 million increase in operating earnings in 2013 compared to 2012.
Effects of Inflation
Management believes that inflation has not had a material effect on the Company’s consolidated results of operations, except insofar as inflation may affect interest rates.
An increase in inflation could affect our business in several ways. During inflationary periods, the value of fixed income investments falls which could increase realized and unrealized losses. Inflation also increases expenses for labor and other materials, potentially putting pressure on profitability if such costs cannot be passed through in our product prices. Prolonged and elevated inflation could adversely affect the financial markets and the economy generally, and dispelling it may require governments to pursue a restrictive fiscal and monetary policy, which could constrain overall economic activity, inhibit revenue growth and reduce the number of attractive investment opportunities.
Off-Balance Sheet Arrangements
Collateral for Securities Lending and Derivatives
We participate in a securities lending program in the normal course of business for the purpose of enhancing the total return on our investment portfolio. Periodically we receive non-cash collateral for securities lending from counterparties on deposit from customers, which cannot be sold or repledged, and which has not been recorded on our consolidated balance sheets. We had no such collateral at December 31, 2013. The amount of this collateral was $51 million at estimated fair value at December 31, 2012. See “Securities Lending Program” in Note 1 of the Notes to the Consolidated Financial Statements for discussion of our securities lending program and the classification of revenues and expenses and the nature of the secured financing arrangement and associated liability.
We enter into derivatives to manage various risks relating to our ongoing business operations. We have non-cash collateral from counterparties for derivatives, which can be sold or repledged subject to certain constraints, and which has not been recorded on our consolidated balance sheets. The amount of this collateral was $588 million and $689 million at December 31, 2013 and 2012, respectively. See “— Liquidity and Capital Resources — Liquidity — Derivatives and Collateral” and “Derivatives” in Note 8 of the Notes to the Consolidated Financial Statements for information on the earned income on and the gross notional amount, estimated fair value of assets and liabilities and primary underlying risk exposure of our derivatives.
Guarantees
See “Guarantees” in Note 15 of the Notes to the Consolidated Financial Statements.
Other
Additionally, we have the following commitments in the normal course of business for the purpose of enhancing the total return on our investment portfolio: commitments to fund partnership investments; mortgage loan commitments; commitments to fund bank credit facilities and private corporate bond investments.
See “Net Investment Income” and “Net Investment Gains (Losses)” in Note 7 of the Notes to the Consolidated Financial Statements for information on the investment income, investment expense, gains and losses from such investments. See also “Fixed Maturity and Equity Securities AFS” and “Mortgage Loans” in Note 7 of the Notes to the Consolidated Financial Statements and “Real Estate Joint Ventures and Other Limited Partnership Interests” in Note 9 of the Notes to the Consolidated Financial Statements for information on our investments in fixed maturity securities, mortgage loans and partnership investments.
Other than the commitments disclosed in Note 15 of the Notes to the Consolidated Financial Statements, there are no other material obligations or liabilities arising from the commitments to fund partnership investments, mortgage loans, bank credit facilities and private corporate bond investments.
In addition, see “Primary Risks Managed by Derivatives” in Note 8 of the Notes to the Consolidated Financial Statements for further information on interest rate lock commitments.
Liquidity and Capital Resources
Overview
Our business and results of operations are materially affected by conditions in the global capital markets and the economy generally. Stressed conditions, volatility and disruptions in global capital markets, particular markets, or financial asset classes can have an adverse effect on us, in part because we have a large investment portfolio and our insurance liabilities are sensitive to changing market factors. The global markets and economy continue to experience volatility that may affect our financing costs and market interest for our debt. For further information regarding market factors that could affect our ability to meet liquidity and capital needs, see “Risk Factors — Economic Environment and Capital Markets-Related Risks — Adverse Capital and Credit Market Conditions May Significantly Affect Our Ability to Meet Liquidity Needs, Our Access to Capital and Our Cost of Capital” and “Risk Factors — Economic Environment and Capital Markets-Related Risks — We Are Exposed to Significant Financial and Capital Markets Risks Which May Adversely Affect Our Results of Operations, Financial Condition and Liquidity, and May Cause Our Net Investment Income to Vary From Period to Period.”
We continuously monitor and adjust our liquidity and capital plans for the Company in light of changing needs and opportunities.
Liquidity
Based upon the strength of our franchise, diversification of our businesses, strong financial fundamentals including: strong cash flows from operations, substantial short-term liquidity and additional liquid assets in the investment portfolio and the substantial funding sources available to us, we continue to believe we have access to ample liquidity to meet business requirements under current market conditions and reasonably possible stress scenarios.
The principal cash inflows from operations come from insurance premiums, annuity considerations, deposit funds, and net investment income while the principal cash outflows relate to liabilities associated with various life insurance, annuity products, operating expenses and income tax. We typically have a cash outflow from investment activities because cash inflows from insurance operations are reinvested in accordance with our ALM discipline to fund insurance liabilities. The principal financing cash flows come from deposits and withdrawals on PABs, repayments on debt, dividends on common stock and changes in collateral related to securities lending and derivative activities.
Short-term Liquidity
At December 31, 2013 and 2012, the Company’s short-term liquidity position was $1.7 billion and $1.6 billion, respectively. Short-term liquidity includes cash and cash equivalents and short-term investments, excluding amounts related to: (i) cash collateral received under our securities lending program, and (ii) cash collateral received from counterparties in connection with derivatives. We continuously monitor and adjust our liquidity and capital plans for MetLife Insurance Company of Connecticut and its subsidiaries in light of changing needs and opportunities.
Funding Agreements Reported in Policyholder Account Balances
We issue fixed and floating rate funding agreements to a variety of sources including special purpose entities, the Federal Home Loan Bank and the Federal Agricultural Mortgage Corporation. We had total obligations under funding agreements of $6.1 billion and $6.7 billion at December 31, 2013 and 2012, respectively. During the years ended December 31, 2013, 2012 and 2011, we issued $11.3 billion, $10.4 billion and $12.9 billion, respectively, and repaid $12.0 billion, $9.6 billion and $13.5 billion, respectively, of funding agreements. See Note 4 of the Notes to the Consolidated Financial Statements.
Insurance Liabilities
Liabilities arising from our insurance activities primarily relate to benefit payments under various life insurance, annuity and group pension products, as well as payments for policy surrenders, withdrawals and loans. For annuity or deposit type products, surrender or lapse product behavior differs somewhat by segment. In the Retail segment, which includes individual annuities, lapses and surrenders tend to occur in the normal course of business. During the years ended December 31, 2013 and 2012, general account surrenders and withdrawals from annuity products were $2.2 billion and $2.3 billion, respectively. In the Corporate Benefit Funding segment, which includes pension closeouts, bank-owned life insurance and other fixed annuity contracts, as well as funding agreements and other capital market products, most of the products offered have fixed maturities or fairly predictable surrenders or withdrawals.
Derivatives and Collateral
We pledge collateral to, and have collateral pledged to us, by counterparties in connection with our derivatives. At December 31, 2013 and 2012, we were obligated to return cash collateral under our control of $277 million and $897 million, respectively. See Note 8 of the Notes to the Consolidated Financial Statements. With respect to OTC-bilateral derivatives in a net liability position that have financial strength contingent provisions, a one-notch downgrade in the Company’s financial strength rating would not have increased our derivative collateral requirements at December 31, 2013.
Securities Lending
We participate in a securities lending program whereby securities are loaned to third parties, primarily brokerage firms and commercial banks. We obtain collateral, usually cash, from the borrower, which must be returned to the borrower when the loaned securities are returned to us. Under our securities lending program, we were liable for cash collateral under our control of $6.1 billion and $7.5 billion at December 31, 2013 and 2012, respectively. Of these amounts, $1.2 billion and $992 million at December 31, 2013 and 2012, respectively, were on open, meaning that the related loaned security could be returned to us on the next business day requiring the immediate return of cash collateral we hold. The estimated fair value of the securities on loan related to the cash collateral on open at December 31, 2013 was $1.2 billion, of which $1.1 billion were U.S. Treasury and agency securities which, if put to us, could be immediately sold to satisfy the cash requirements to immediately return the cash collateral. For further details on our securities lending program, see Note 7 of the Notes to the Consolidated Financial Statements.
Capital
We manage our capital position to maintain our financial strength ratings. See “Business — Company Ratings.” Our capital position is supported by our ability to generate strong cash flows within our businesses.
Affiliated Captive Reinsurance Transactions
MetLife Insurance Company of Connecticut cedes specific policy classes, including ordinary and universal life insurance and variable annuity benefit guarantees to affiliated captive reinsurers. The statutory reserves of such affiliated captive reinsurers are supported by a combination of investment assets and letters of credit issued by unaffiliated financial institutions. MetLife, Inc. has committed to maintain the surplus of these affiliated captive reinsurers, as well as provided guarantees of the captive reinsurers’ repayment obligations on the letters of credit. MetLife, Inc. has also provided guarantees of reinsurers’ repayment obligations on derivative and certain reinsurance agreements entered into by the captives. We enter into reinsurance agreements with affiliated captive reinsurers for risk and capital management purposes, as well as to satisfy statutory reserve requirements related to universal life and term life insurance policies. Ceding variable annuity guaranteed minimum benefit risks to an affiliated captive reinsurer, which allows us to consolidate hedging and other risk management programs.
Recently, the NAIC and the Department of Financial Services have been scrutinizing insurance companies’ use of affiliated captive reinsurers or off-shore entities. One of the recommendations of the Department of Financial Services is that state insurance commissioners consider an immediate national moratorium on new reserve financing transactions involving captive insurers, until their inquiries are complete. We are not aware of any states other than New York implementing such a moratorium. While such a moratorium would not impact our existing reinsurance agreements with captive reinsurers, a moratorium placed on the use of captives for new reserve financing transactions could impact our ability to write certain products or to hedge the associated risks effectively in the future. This may result in our need to increase prices, modify product features or limit the availability of those products to our customers. While this affects insurers across the industry, it could adversely impact our competitive position and our results of operations in the future. We will evaluate product modifications, pricing structure and alternative means of managing risks, capital and statutory reserves and we expect the discontinued use of captive reinsurance on new reserve financing transactions would not have a material impact on our future consolidated financial results.
Our variable annuity guaranteed minimum benefit risk is currently ceded to a Delaware affiliated captive reinsurer. MetLife, Inc. is planning to merge this captive reinsurer with three U.S.-based life insurance companies, in the fourth quarter of 2014, subject to regulatory approvals, to create one larger U.S.-based and U.S. regulated life insurance company (the “Mergers”). This will further reduce the Company’s exposure to and use of captive reinsurers. See “Business — Overview” for further information on the Mergers. See also “Risk Factors — Regulatory and Legal Risks — Our Insurance Businesses Are Highly Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability and Limit Our Growth — Insurance Regulation” and Note 6 of the Notes to the Consolidated Financial Statements for further information on our reinsurance activities.
Support Agreement
MetLife Insurance Company of Connecticut is a party to a net worth maintenance agreement with its indirect subsidiary, MetLife Assurance Limited (“MAL”), a U.K. company. Under this agreement, MetLife Insurance Company of Connecticut has agreed to cause MAL to meet specific capital and surplus levels. We anticipate that in the event that this arrangement places demands upon the Company, there will be sufficient liquidity and capital to enable the Company to meet anticipated demands. As described in Note 17 of the Notes to the Consolidated Financial Statements, a subsidiary of MetLife Insurance Company of Connecticut reached an agreement to sell MAL to a third party. Upon the close of such sale, MetLife Insurance Company of Connecticut’s obligations under this net worth maintenance agreement will terminate.
Adoption of New Accounting Pronouncements
See Note 1 of the Notes to the Consolidated Financial Statements.
Future Adoption of New Accounting Pronouncements
See Note 1 of the Notes to the Consolidated Financial Statements.
Non-GAAP and Other Financial Disclosures
Operating earnings is defined as operating revenues less operating expenses, both net of income tax.
Operating revenues excludes net investment gains (losses) and net derivative gains (losses). Operating expenses excludes goodwill impairments.
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”); and |
| |
| • | Net investment income: (i) includes amounts for scheduled periodic settlement payments and amortization of premium on derivatives that are hedges of investments or that are used to replicate certain investments, but do not qualify for hedge accounting treatment, (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. |
The following additional adjustments are made to GAAP expenses, in the line items indicated, in calculating operating expenses:
| |
| • | Policyholder benefits and claims excludes: (i) amounts associated with periodic crediting rate adjustments based on the total return of a contractually referenced pool of assets, (ii) benefits and hedging costs related to GMIBs (“GMIB Costs”), and (iii) 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; |
| |
| • | 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) implementation of new insurance regulatory requirements, and (ii) acquisition and integration costs. |
We believe 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 our business. Operating revenues, operating expenses and operating earnings should not be viewed as substitutes for the following financial measures calculated in accordance with GAAP: GAAP revenues, GAAP expenses, income (loss) from continuing operations, net of income tax, and net income (loss), respectively. Reconciliations of these measures to the most directly comparable GAAP measures are included in “— Results of Operations.”
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.
Subsequent Event
See Note 17 of the Notes to the Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Risk Management
We have developed an integrated process for managing risk, which we conduct through multiple Board and senior management committees (financial and non-financial) within GRM, MetLife’s ALM Unit, Treasury Department and Investments Department. The risk committee structure is designed to provide a consolidated enterprise-wide assessment and management of risk. MetLife’s Enterprise Risk Committee (“ERC”) is responsible for reviewing all material risks to the enterprise and deciding on actions, if necessary, in the event risks exceed desired targets, taking into consideration industry best practices and the current environment to resolve or mitigate those risks. Additional committees at the MetLife and subsidiary insurance company level that manage capital and risk positions, approve ALM strategies and establish corporate business standards, report to the ERC.
Global Risk Management
Independent from the lines of business, the centralized GRM, led by MetLife’s Chief Risk Officer (“CRO”) collaborates and coordinates across all committees to ensure that all material risks are properly identified, measured, aggregated and reported across the Company. The CRO reports to MetLife’s Chief Executive Officer and is primarily responsible for maintaining and communicating the Company’s enterprise risk policies and for monitoring and analyzing all material risks.
GRM considers and monitors a full range of risks against the Company’s solvency, liquidity, earnings, business operations and reputation. GRM’s primary responsibilities consist of:
| |
| • | implementing a corporate risk framework, which outlines MetLife’s approach for managing risk; |
| |
| • | developing policies and procedures for managing, measuring, monitoring and controlling those risks identified in the corporate risk framework; |
| |
| • | establishing appropriate corporate risk tolerance levels; |
| |
| • | deploying capital on an economic basis; |
| |
| • | reporting to (i) the Finance and Risk Committee of MetLife’s Board of Directors; (ii) the Investment Committee of Metropolitan Life Insurance Company’s Board of Directors, which assists MetLife’s Board of Directors in overseeing certain investment activities of the enterprise; and (iii) the financial and non-financial senior management committees on various aspects of risks. |
Asset/Liability Management
We actively manage our assets using an approach that balances quality, diversification, asset/liability matching, liquidity, concentration and investment return. The goals of the investment process are to optimize, net of income tax, risk-adjusted investment income and risk-adjusted total return while ensuring that the assets and liabilities are reasonably managed on a cash flow and duration basis. The ALM process is the shared responsibility of the ALM Unit, GRM, the Portfolio Management Unit, and the senior members of MetLife’s business segments and is governed by the ALM Committees. The ALM Committees’ duties include reviewing and approving target portfolios, establishing investment guidelines and limits and providing oversight of the ALM process on a periodic basis. The directives of the ALM Committees are carried out and monitored through ALM Working Groups which are set up to manage by product type. In addition, an ALM Steering Committee oversees the activities of the underlying ALM Committees.
MetLife establishes target asset portfolios for each major insurance product, which represent the investment strategies used to profitably fund our liabilities within acceptable levels of risk. These strategies are monitored through regular review of portfolio metrics, such as effective duration, yield curve sensitivity, convexity, liquidity, asset sector concentration and credit quality by the ALM Working Groups.
Market Risk Exposures
We regularly analyze our exposure to interest rate, equity market price and foreign currency exchange rate risks. As a result of that analysis, we have determined that the estimated fair values of certain assets and liabilities are materially exposed to changes in interest rates, foreign currency exchange rates and changes in the equity markets. We have exposure to market risk through our insurance operations and investment activities. For purposes of this disclosure, “market risk” is defined as the risk of loss resulting from changes in interest rates, foreign currency exchange rates and equity markets.
Interest Rates
Our exposure to interest rate changes results most significantly from our holdings of fixed maturity securities, as well as our interest rate sensitive liabilities. The fixed maturity securities include U.S. and foreign government bonds, securities issued by government agencies, corporate bonds, mortgage-backed securities and asset-backed securities, all of which are mainly exposed to changes in medium- and long-term interest rates. The interest rate sensitive liabilities for purposes of this disclosure include debt, PABs related to certain investment type contracts, and net embedded derivatives on variable annuities with guaranteed minimum benefits which have the same type of interest rate exposure (medium- and long-term interest rates) as fixed maturity securities. We employ product design, pricing and ALM strategies to reduce the potential effects of interest rate movements. Product design and pricing strategies include the use of surrender charges or restrictions on withdrawals in some products and the ability to reset crediting rates for certain products. ALM strategies include the use of derivatives and duration mismatch limits. See “Risk Factors — Economic Environment and Capital Markets-Related Risks — We Are Exposed to Significant Financial and Capital Markets Risks Which May Adversely Affect Our Results of Operations, Financial Condition and Liquidity, and May Cause Our Net Investment Income to Vary from Period to Period.”
Foreign Currency Exchange Rates
Our exposure to fluctuations in foreign currency exchange rates against the U.S. dollar results from our holdings in non-U.S. dollar denominated fixed maturity and equity securities, mortgage loans and certain liabilities, as well as through our investments in foreign subsidiaries. The principal currencies that create foreign currency exchange rate risk in our investment portfolios and liabilities are the Euro and the British pound. Through our investments in a foreign subsidiary and a joint venture, we are primarily exposed to the British pound. Selectively, we use U.S. dollar assets to support certain long duration foreign currency liabilities. We have matched much of our foreign currency liabilities in our foreign subsidiary with its respective foreign currency assets, thereby reducing our risk to foreign currency exchange rate fluctuation. See “Risk Factors — Risks Related to Our Business — Fluctuations in Foreign Currency Exchange Rates Could Negatively Affect Our Profitability.”
Equity Market
Along with investments in equity securities, we have exposure to equity market risk through certain liabilities that involve long-term guarantees on equity performance such as net embedded derivatives on variable annuities with guaranteed minimum benefits and certain PABs. We manage this risk on an integrated basis with other risks through our ALM strategies including the dynamic hedging of certain variable annuity guarantee benefits, as well as reinsurance, in order to limit losses, minimize exposure to large risks, and provide additional capacity for future growth. We also manage equity market risk exposure in our investment portfolio through the use of derivatives. Equity exposures associated with other limited partnership interests are excluded from this discussion as they are not considered financial instruments under GAAP.
Management of Market Risk Exposures
We use a variety of strategies to manage interest rate, foreign currency exchange rate and equity market risk, including the use of derivatives.
Interest Rate Risk Management
To manage interest rate risk, we analyze interest rate risk using various models, including multi-scenario cash flow projection models that forecast cash flows of the liabilities and their supporting investments, including derivatives. These projections involve evaluating the potential gain or loss on most of our in-force business under various increasing and decreasing interest rate environments. The Connecticut State Insurance Department regulations require that we perform some of these analyses annually as part of our review of the sufficiency of our regulatory reserves. For several of our legal entities, we maintain segmented operating and surplus asset portfolios for the purpose of ALM and the allocation of investment income to product lines. For each segment, invested assets greater than or equal to the GAAP liabilities and any non-invested assets allocated to the segment are maintained, with any excess allocated to Corporate & Other. The business segments may reflect differences in legal entity, statutory line of business and any product market characteristic which may drive a distinct investment strategy with respect to duration, liquidity or credit quality of the invested assets. Certain smaller entities make use of unsegmented general accounts for which the investment strategy reflects the aggregate characteristics of liabilities in those entities. We measure relative sensitivities of the value of our assets and liabilities to changes in key assumptions utilizing internal models. These models reflect specific product characteristics and include assumptions based on current and anticipated experience regarding lapse, mortality and interest crediting rates. In addition, these models include asset cash flow projections reflecting interest payments, sinking fund payments, principal payments, bond calls, mortgage loan prepayments and defaults.
Common industry metrics, such as duration and convexity, are also used to measure the relative sensitivity of assets and liability values to changes in interest rates. In computing the duration of liabilities, consideration is given to all policyholder guarantees and to how we intend to set indeterminate policy elements such as interest credits or dividends. Each asset portfolio has a duration target based on the liability duration and the investment objectives of that portfolio. Where a liability cash flow may exceed the maturity of available assets, as is the case with certain retirement and group products, we may support such liabilities with equity investments, derivatives or interest rate curve mismatch strategies.
Foreign Currency Exchange Rate Risk Management
We assume foreign currency exchange rate risk primarily in three ways: investments in foreign subsidiaries, purchases of foreign currency denominated investments and the sale of certain insurance products.
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| • | The Foreign Exchange Committee, in coordination with the Treasury Department, is responsible for managing our exposure to investments in foreign subsidiaries. Limits to exposures are established by the Treasury Department and monitored by GRM. The Investments Department manages exposure. |
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| • | The Investments Department is responsible for managing the exposure to foreign currency denominated investments. Exposure limits to unhedged foreign currency investments are incorporated into the standing authorizations granted to management by MetLife’s Board of Directors and are reported to MetLife’s Board of Directors on a periodic basis. |
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| • | Management of each of the Company’s segments, with oversight from the Foreign Exchange Committee, is responsible for establishing limits and managing any foreign currency exchange rate exposure caused by the sale or issuance of insurance products. |
We use foreign currency swaps and forwards to mitigate the liability exposure, risk of loss and financial statement volatility associated with our investments in foreign subsidiaries, foreign currency denominated fixed income investments and the sale of certain insurance products.
Equity Market Risk Management
Equity market risk exposure through the issuance of variable annuities is managed by the ALM Unit in partnership with the Investments Department. Equity market risk is realized through our investment in equity securities and is managed by the Investments Department. We use derivatives to mitigate our equity exposure both in certain liability guarantees such as variable annuities with guaranteed minimum benefits and equity securities. These derivatives include exchange-traded equity futures, equity index options contracts and equity variance swaps. We also employ reinsurance to manage these exposures.
Hedging Activities
We use derivative contracts primarily to hedge a wide range of risks including interest rate risk, foreign currency exchange rate risk, and equity market risk. Derivative hedges are designed to reduce risk on an economic basis while considering their impact on accounting results and GAAP and statutory capital. Our derivative hedge programs vary depending on the type of risk being hedged. Some hedge programs are asset or liability specific while others are portfolio hedges that reduce risk related to a group of liabilities or assets. Our use of derivatives by major hedge programs is as follows:
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| • | Risks Related to Living Guarantee Benefits — We use a wide range of derivative contracts to mitigate the risk associated with variable annuity living guarantee benefits. These derivatives include equity and interest rate futures, interest rate swaps, currency futures/forwards, equity indexed options and interest rate option contracts and equity variance swaps. |
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| • | Minimum Interest Rate Guarantees — For certain liability contracts, we provide the contractholder a guaranteed minimum interest rate. These contracts include certain fixed annuities and other insurance liabilities. We purchase interest rate floors to reduce risk associated with these liability guarantees. |
| |
| • | Reinvestment Risk in Long Duration Liability Contracts — Derivatives are used to hedge interest rate risk related to certain long duration liability contracts. Hedges include interest rate swaps and swaptions. |
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| • | Foreign Currency Exchange Rate Risk — We use currency swaps and forwards to hedge foreign currency exchange rate risk. These hedges primarily swap foreign currency denominated bonds, investments in foreign subsidiaries or equity market exposures to U.S. dollars. |
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| • | General ALM Hedging Strategies — In the ordinary course of managing our asset/liability risks, we use interest rate futures, interest rate swaps, interest rate caps, interest rate floors and inflation swaps. These hedges are designed to reduce interest rate risk or inflation risk related to the existing assets or liabilities or related to expected future cash flows. |
Risk Measurement: Sensitivity Analysis
We measure market risk related to our market sensitive assets and liabilities based on changes in interest rates, equity market prices and foreign currency exchange rates utilizing a sensitivity analysis. This analysis estimates the potential changes in estimated fair value based on a hypothetical 10% change (increase or decrease) in interest rates, equity market prices and foreign currency exchange rates. We believe that a 10% change (increase or decrease) in these market rates and prices is reasonably possible in the near term. In performing the analysis summarized below, we used market rates at December 31, 2013. We modeled the impact of changes in market rates and prices on the estimated fair values of our market sensitive assets and liabilities as follows:
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| • | the net present values of our interest rate sensitive exposures resulting from a 10% change (increase or decrease) in interest rates; |
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| • | the U.S. dollar equivalent estimated fair values of our foreign currency exposures due to a 10% change (increase or decrease) in foreign currency exchange rates; and |
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| • | the estimated fair value of our equity positions due to a 10% change (increase or decrease) in equity market prices. |
The sensitivity analysis is an estimate and should not be viewed as predictive of our future financial performance. We cannot ensure that our actual losses in any particular period will not exceed the amounts indicated in the table below. Limitations related to this sensitivity analysis include:
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| • | the market risk information is limited by the assumptions and parameters established in creating the related sensitivity analysis, including the impact of prepayment rates on mortgage loans; |
| |
| • | for the derivatives that qualify as hedges, the impact on reported earnings may be materially different from the change in market values; |
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| • | the analysis excludes liabilities pursuant to insurance contracts and real estate holdings; and |
| |
| • | the model assumes that the composition of assets and liabilities remains unchanged throughout the period. |
Accordingly, we use such models as tools and not as substitutes for the experience and judgment of our management. Based on our analysis of the impact of a 10% change (increase or decrease) in market rates and prices, we have determined that such a change could have a material adverse effect on the estimated fair value of certain assets and liabilities from interest rate, foreign currency exchange rate and equity market exposures.
The table below illustrates the potential loss in estimated fair value for each market risk exposure of our market sensitive assets and liabilities at December 31, 2013:
|
| | | |
| | December 31, 2013 |
| | (In millions) |
| Interest rate risk | $ | 1,702 |
|
| Foreign currency exchange rate risk | $ | 464 |
|
| Equity market risk | $ | 216 |
|
The table below provides additional detail regarding the potential loss in estimated fair value of our interest sensitive financial instruments at December 31, 2013 by type of asset or liability:
|
| | | | | | | | | | | |
| | December 31, 2013 |
| | Notional Amount | | Estimated Fair Value (1) | | Assuming a 10% Increase in the Yield Curve |
| | (In millions) |
| Assets: | | | | | |
| Fixed maturity securities | | | $ | 45,252 |
| | $ | (1,058 | ) |
| Equity securities | | | $ | 418 |
| | — |
|
| Mortgage loans, net | | | $ | 6,427 |
| | (57 | ) |
| Policy loans | | | $ | 1,279 |
| | (5 | ) |
| Short-term investments | | | $ | 2,107 |
| | — |
|
| Other invested assets | | | $ | 1,004 |
| | (8 | ) |
| Cash and cash equivalents | | | $ | 746 |
| | — |
|
| Accrued investment income | | | $ | 542 |
| | — |
|
| Premiums, reinsurance and other receivables | | | $ | 6,306 |
| | (307 | ) |
| Net embedded derivatives within asset host contracts (2) | | | $ | 912 |
| | (452 | ) |
| Total assets | | | | | $ | (1,887 | ) |
| Liabilities: (3) | | | | | |
| Policyholder account balances | | | $ | 21,987 |
| | $ | 137 |
|
| Payables for collateral under securities loaned and other transactions | | | $ | 6,451 |
| | — |
|
| Long-term debt | | | $ | 1,009 |
| | 30 |
|
| Other liabilities | | | $ | 258 |
| | 16 |
|
| Net embedded derivatives within liability host contracts (2) | | | $ | (1,211 | ) | | 293 |
|
| Total liabilities | | | | | $ | 476 |
|
| Derivative Instruments: | | | | | |
| Interest rate swaps | $ | 23,235 |
| | $ | 409 |
| | $ | (240 | ) |
| Interest rate floors | $ | 17,604 |
| | $ | 4 |
| | (1 | ) |
| Interest rate caps | $ | 9,651 |
| | $ | 36 |
| | 12 |
|
| Interest rate futures | $ | 1,443 |
| | $ | (3 | ) | | (27 | ) |
| Interest rate forwards | $ | 245 |
| | $ | (1 | ) | | (16 | ) |
| Foreign currency swaps | $ | 1,548 |
| | $ | (12 | ) | | (7 | ) |
| Foreign currency forwards | $ | 56 |
| | $ | (1 | ) | | — |
|
| Credit default swaps | $ | 2,400 |
| | $ | 37 |
| | — |
|
| Equity futures | $ | 778 |
| | $ | (3 | ) | | — |
|
| Equity options | $ | 3,597 |
| | $ | 263 |
| | (12 | ) |
| Variance swaps | $ | 2,270 |
| | $ | (88 | ) | | — |
|
| Total rate of return swaps | $ | 462 |
| | $ | (22 | ) | | — |
|
| Total derivative instruments | | | | | $ | (291 | ) |
| Net Change | | | | | $ | (1,702 | ) |
| |
| (1) | Separate account assets and liabilities, which are interest rate sensitive, are not included herein as any interest rate risk is borne by the holder of the separate account. Mortgage loans and long-term debt exclude $1.6 billion and $1.5 billion, respectively, related to consolidated securitization entities (“CSEs”). See Note 7 of the Notes to the Consolidated Financial Statements for information regarding CSEs. |
| |
| (2) | Embedded derivatives are recognized in the consolidated balance sheet in the same caption as the host contract. |
| |
| (3) | Excludes $31.2 billion of liabilities, at carrying value, pursuant to insurance contracts reported within future policy benefits and other policy-related balances. These liabilities would economically offset a significant portion of the net change in fair value of our financial instruments resulting from a 10% increase in the yield curve. |
Interest rate risk increased by $299 million, or 21%, to $1.7 billion at December 31, 2013 from $1.4 billion at December 31, 2012. This change was primarily due to an increase in interest rates across the swap and U.S. Treasury curves of $305 million and a net impact of $82 million related to PABs, net embedded derivatives within asset and liability host contracts and premiums, reinsurance and other receivables. The increase was partially offset by the use of derivatives by the Company of $80 million.
The table below provides additional detail regarding the potential loss in estimated fair value of our portfolio due to a 10% change in foreign currency exchange rates at December 31, 2013 by type of asset or liability:
|
| | | | | | | | | | | |
| | December 31, 2013 |
| | Notional Amount | | Estimated Fair Value (1) | | Assuming a 10% Increase in the Foreign Exchange Rate |
| | (In millions) |
| Assets: | | | | | |
| Fixed maturity securities | | | $ | 45,252 |
| | $ | (573 | ) |
| Equity securities | | | $ | 418 |
| | (1 | ) |
| Mortgage loans, net | | | $ | 6,427 |
| | (26 | ) |
| Total assets | | | | | $ | (600 | ) |
| Liabilities: (2) | | | | | |
| Policyholder account balances | | | $ | 21,987 |
| | $ | 35 |
|
| Total liabilities | | | | | $ | 35 |
|
| Derivative Instruments: | | | | | |
| Interest rate swaps | $ | 23,235 |
| | $ | 409 |
| | $ | (14 | ) |
| Interest rate floors | $ | 17,604 |
| | $ | 4 |
| | — |
|
| Interest rate caps | $ | 9,651 |
| | $ | 36 |
| | — |
|
| Interest rate futures | $ | 1,443 |
| | $ | (3 | ) | | — |
|
| Interest rate forwards | $ | 245 |
| | $ | (1 | ) | | — |
|
| Foreign currency swaps | $ | 1,548 |
| | $ | (12 | ) | | 111 |
|
| Foreign currency forwards | $ | 56 |
| | $ | (1 | ) | | 5 |
|
| Credit default swaps | $ | 2,400 |
| | $ | 37 |
| | — |
|
| Equity futures | $ | 778 |
| | $ | (3 | ) | | — |
|
| Equity options | $ | 3,597 |
| | $ | 263 |
| | (1 | ) |
| Variance swaps | $ | 2,270 |
| | $ | (88 | ) | | — |
|
| Total rate of return swaps | $ | 462 |
| | $ | (22 | ) | | — |
|
| Total derivative instruments | | | | | $ | 101 |
|
| Net Change | | | | | $ | (464 | ) |
______________
| |
| (1) | Does not necessarily represent those financial instruments solely subject to foreign currency exchange rate risk. Separate account assets and liabilities, which are foreign currency exchange rate sensitive, are not included herein as any foreign currency exchange rate risk is borne by the holder of the separate account. Mortgage loans exclude $1.6 billion related to CSEs. See Note 7 of the Notes to the Consolidated Financial Statements for information regarding CSEs. |
| |
| (2) | Excludes $31.2 billion of liabilities, at carrying value, pursuant to insurance contracts reported within future policy benefits and other policy-related balances. These liabilities would economically offset a significant portion of the net change in fair value of our financial instruments resulting from a 10% increase in foreign currency exchange rates. |
Foreign currency exchange rate risk increased by $17 million to $464 million at December 31, 2013 from $447 million at December 31, 2012. This change was due to an increase in exposure to the British Pound.
The table below provides additional detail regarding the potential loss in estimated fair value of our portfolio due to a 10% change in equity at December 31, 2013 by type of asset or liability:
|
| | | | | | | | | | | |
| | December 31, 2013 |
| | Notional Amount | | Estimated Fair Value (1) | | Assuming a 10% Increase in Equity Prices |
| | (In millions) |
| Assets: | | | | | |
| Equity securities | | | $ | 418 |
| | $ | 42 |
|
| Net embedded derivatives within asset host contracts (2) | | | $ | 912 |
| | (405 | ) |
| Total assets | | | | | $ | (363 | ) |
| Liabilities: | | | | | |
| Policyholder account balances | | | $ | 21,987 |
| | $ | — |
|
| Net embedded derivatives within liability host contracts (2) | | | $ | (1,211 | ) | | 291 |
|
| Total liabilities | | | | | $ | 291 |
|
| Derivative Instruments: | | | | | |
| Interest rate swaps | $ | 23,235 |
| | $ | 409 |
| | $ | — |
|
| Interest rate floors | $ | 17,604 |
| | $ | 4 |
| | — |
|
| Interest rate caps | $ | 9,651 |
| | $ | 36 |
| | — |
|
| Interest rate futures | $ | 1,443 |
| | $ | (3 | ) | | — |
|
| Interest rate forwards | $ | 245 |
| | $ | (1 | ) | | — |
|
| Foreign currency swaps | $ | 1,548 |
| | $ | (12 | ) | | — |
|
| Foreign currency forwards | $ | 56 |
| | $ | (1 | ) | | — |
|
| Credit default swaps | $ | 2,400 |
| | $ | 37 |
| | — |
|
| Equity futures | $ | 778 |
| | $ | (3 | ) | | (81 | ) |
| Equity options | $ | 3,597 |
| | $ | 263 |
| | (17 | ) |
| Variance swaps | $ | 2,270 |
| | $ | (88 | ) | | 2 |
|
| Total rate of return swaps | $ | 462 |
| | $ | (22 | ) | | (48 | ) |
| Total derivative instruments | | | | | $ | (144 | ) |
| Net Change | | | | | $ | (216 | ) |
______________
| |
| (1) | Does not necessarily represent those financial instruments solely subject to equity price risk. Additionally, separate account assets and liabilities, which are equity market sensitive, are not included herein as any equity market risk is borne by the holder of the separate account. |
| |
| (2) | Embedded derivatives are recognized in the consolidated balance sheet in the same caption as the host contract. |
Equity price risk decreased by $19 million to $216 million at December 31, 2013 from $235 million at December 31, 2012. This decrease was due to the use of derivatives by the Company of $32 million and changes in equity securities of $25 million, and was partially offset by an increase in equity risk from net embedded derivatives of $38 million.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements, Notes and Schedules
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| Financial Statements at December 31, 2013 and 2012 and for the Years Ended December 31, 2013, 2012 and 2011: | |
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| Financial Statement Schedules at December 31, 2013 and 2012 and for the Years Ended December 31, 2013, 2012 and 2011: | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
MetLife Insurance Company of Connecticut:
We have audited the accompanying consolidated balance sheets of MetLife Insurance Company of Connecticut and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedules listed in the Index to Consolidated Financial Statements, Notes 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, 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 Insurance Company of Connecticut and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, 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.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 28, 2014
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Balance Sheets
December 31, 2013 and 2012
(In millions, except share and per share data)
|
| | | | | | | | |
| | | 2013 | | 2012 |
| Assets | | | | |
| Investments: | | | | |
| Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $43,477 and $46,005, respectively) | | $ | 45,252 |
| | $ | 50,968 |
|
| Equity securities available-for-sale, at estimated fair value (cost: $397 and $311, respectively) | | 418 |
| | 317 |
|
| Mortgage loans (net of valuation allowances of $34 and $35, respectively; includes $1,598 and $2,666, respectively, at estimated fair value, relating to variable interest entities) | | 7,718 |
| | 9,157 |
|
| Policy loans | | 1,219 |
| | 1,216 |
|
| Real estate and real estate joint ventures | | 754 |
| | 708 |
|
| Other limited partnership interests | | 2,130 |
| | 1,848 |
|
| Short-term investments, principally at estimated fair value | | 2,107 |
| | 2,576 |
|
| Other invested assets, principally at estimated fair value | | 2,555 |
| | 2,970 |
|
| Total investments | | 62,153 |
| | 69,760 |
|
| Cash and cash equivalents, principally at estimated fair value | | 746 |
| | 895 |
|
| Accrued investment income (includes $9 and $13, respectively, relating to variable interest entities) | | 542 |
| | 575 |
|
| Premiums, reinsurance and other receivables | | 20,609 |
| | 21,927 |
|
| Deferred policy acquisition costs and value of business acquired | | 4,730 |
| | 3,746 |
|
| Current income tax recoverable | | 192 |
| | 135 |
|
| Goodwill | | 493 |
| | 559 |
|
| Other assets | | 794 |
| | 826 |
|
| Separate account assets | | 97,780 |
| | 86,114 |
|
| Total assets | | $ | 188,039 |
| | $ | 184,537 |
|
| Liabilities and Stockholders’ Equity | | | | |
| Liabilities | | | | |
| Future policy benefits | | $ | 27,991 |
| | $ | 27,583 |
|
| Policyholder account balances | | 33,453 |
| | 36,976 |
|
| Other policy-related balances | | 3,164 |
| | 3,138 |
|
| Payables for collateral under securities loaned and other transactions | | 6,451 |
| | 8,399 |
|
| Long-term debt (includes $1,461 and $2,559, respectively, at estimated fair value, relating to variable interest entities) | | 2,251 |
| | 3,350 |
|
| Deferred income tax liability | | 1,385 |
| | 1,870 |
|
| Other liabilities (includes $7 and $13, respectively, relating to variable interest entities) | | 6,776 |
| | 6,547 |
|
| Separate account liabilities | | 97,780 |
| | 86,114 |
|
| Total liabilities | | 179,251 |
| | 173,977 |
|
| Contingencies, Commitments and Guarantees (Note 15) | |
| |
|
| Stockholders’ Equity | | | | |
| Common stock, par value $2.50 per share; 40,000,000 shares authorized; 34,595,317 shares issued and outstanding at December 31, 2013 and 2012 | | 86 |
| | 86 |
|
| Additional paid-in capital | | 6,737 |
| | 6,718 |
|
| Retained earnings | | 1,076 |
| | 1,356 |
|
| Accumulated other comprehensive income (loss) | | 889 |
| | 2,400 |
|
| Total stockholders’ equity | | 8,788 |
| | 10,560 |
|
| Total liabilities and stockholders’ equity | | $ | 188,039 |
| | $ | 184,537 |
|
See accompanying notes to the consolidated financial statements.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Statements of Operations
For the Years Ended December 31, 2013, 2012 and 2011
(In millions)
|
| | | | | | | | | | | | |
| | | 2013 | | 2012 | | 2011 |
| Revenues | | | | | | |
| Premiums | | $ | 606 |
| | $ | 1,261 |
| | $ | 1,828 |
|
| Universal life and investment-type product policy fees | | 2,336 |
| | 2,261 |
| | 1,956 |
|
| Net investment income | | 2,852 |
| | 2,952 |
| | 3,074 |
|
| Other revenues | | 592 |
| | 511 |
| | 508 |
|
| Net investment gains (losses): | | | | | | |
| Other-than-temporary impairments on fixed maturity securities | | (9 | ) | | (52 | ) | | (42 | ) |
| Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income (loss) | | (11 | ) | | 3 |
| | (5 | ) |
| Other net investment gains (losses) | | 102 |
| | 201 |
| | 82 |
|
| Total net investment gains (losses) | | 82 |
| | 152 |
| | 35 |
|
| Net derivative gains (losses) | | (1,052 | ) | | 1,003 |
| | 1,096 |
|
| Total revenues | | 5,416 |
| | 8,140 |
| | 8,497 |
|
| Expenses | | | | | | |
| Policyholder benefits and claims | | 1,707 |
| | 2,389 |
| | 2,660 |
|
| Interest credited to policyholder account balances | | 1,037 |
| | 1,147 |
| | 1,189 |
|
| Goodwill impairment | | 66 |
| | 394 |
| | — |
|
| Other expenses | | 1,659 |
| | 2,720 |
| | 2,981 |
|
| Total expenses | | 4,469 |
| | 6,650 |
| | 6,830 |
|
| Income (loss) from continuing operations before provision for income tax | | 947 |
| | 1,490 |
| | 1,667 |
|
| Provision for income tax expense (benefit) | | 227 |
| | 372 |
| | 493 |
|
| Income (loss) from continuing operations, net of income tax | | 720 |
| | 1,118 |
| | 1,174 |
|
| Income (loss) from discontinued operations, net of income tax | | — |
| | 8 |
| | — |
|
| Net income (loss) | | $ | 720 |
| | $ | 1,126 |
| | $ | 1,174 |
|
See accompanying notes to the consolidated financial statements.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2013, 2012 and 2011
(In millions)
|
| | | | | | | | | | | | |
| | | 2013 | | 2012 | | 2011 |
| Net income (loss) | | $ | 720 |
| | $ | 1,126 |
| | $ | 1,174 |
|
| Other comprehensive income (loss): | | | | | | |
| Unrealized investment gains (losses), net of related offsets | | (2,094 | ) | | 850 |
| | 2,074 |
|
| Unrealized gains (losses) on derivatives | | (204 | ) | | 4 |
| | 347 |
|
| Foreign currency translation adjustments | | 28 |
| | 88 |
| | (16 | ) |
| Other comprehensive income (loss), before income tax | | (2,270 | ) | | 942 |
| | 2,405 |
|
| Income tax (expense) benefit related to items of other comprehensive income (loss) | | 759 |
| | (313 | ) | | (851 | ) |
| Other comprehensive income (loss), net of income tax | | (1,511 | ) | | 629 |
| | 1,554 |
|
| Comprehensive income (loss) | | $ | (791 | ) | | $ | 1,755 |
| | $ | 2,728 |
|
See accompanying notes to the consolidated financial statements.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31, 2013, 2012 and 2011
(In millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
|
|
|
| Accumulated Other Comprehensive Income (Loss) | |
|
| | Common Stock | | Additional Paid-in Capital |
| Retained Earnings |
| Net Unrealized Investment Gains (Losses) |
| Other-Than- Temporary Impairments |
| Foreign Currency Translation Adjustments |
| Total Stockholders’ Equity |
| Balance at December 31, 2010 (1) | | $ | 86 |
| | $ | 6,719 |
| | $ | 424 |
| | $ | 393 |
| | $ | (51 | ) | | $ | (125 | ) | | $ | 7,446 |
|
| Dividend paid to MetLife | |
|
| |
|
| | (517 | ) | |
|
| |
|
| |
|
| | (517 | ) |
| Capital contribution | |
|
| | 1 |
| |
|
| |
|
| |
|
| |
|
| | 1 |
|
| Return of capital (Note 12) | |
|
| | (47 | ) | |
|
| |
|
| |
|
| |
|
| | (47 | ) |
| Net income (loss) | |
|
| |
|
| | 1,174 |
| |
|
| |
|
| |
|
| | 1,174 |
|
| Other comprehensive income (loss), net of income tax | |
|
| |
|
| |
|
| | 1,591 |
| | (23 | ) | | (14 | ) | | 1,554 |
|
| Balance at December 31, 2011 | | 86 |
| | 6,673 |
| | 1,081 |
| | 1,984 |
| | (74 | ) | | (139 | ) | | 9,611 |
|
| Dividend of subsidiary (Note 3) | |
|
| |
|
| | (347 | ) | |
|
| |
|
| |
|
| | (347 | ) |
| Dividend paid to MetLife | |
|
| |
|
| | (504 | ) | |
|
| |
|
| |
|
| | (504 | ) |
| Capital contribution | |
|
| | 45 |
| |
|
| |
|
| |
|
| |
|
| | 45 |
|
| Net income (loss) | |
|
| |
|
| | 1,126 |
| |
|
| |
|
| |
|
| | 1,126 |
|
| Other comprehensive income (loss), net of income tax (2) | |
|
| |
|
| |
|
| | 503 |
| | 36 |
| | 90 |
| | 629 |
|
| Balance at December 31, 2012 | | 86 |
| | 6,718 |
| | 1,356 |
| | 2,487 |
| | (38 | ) | | (49 | ) | | 10,560 |
|
| Dividend paid to MetLife | |
| |
| | (1,000 | ) | |
| |
| |
| | (1,000 | ) |
| Capital contribution | |
| | 19 |
| |
| |
| |
| |
| | 19 |
|
| Net income (loss) | |
| |
| | 720 |
| |
| |
| |
| | 720 |
|
| Other comprehensive income (loss), net of income tax | |
| |
| |
| | (1,549 | ) | | 12 |
| | 26 |
| | (1,511 | ) |
| Balance at December 31, 2013 | | $ | 86 |
| | $ | 6,737 |
| | $ | 1,076 |
| | $ | 938 |
| | $ | (26 | ) | | $ | (23 | ) | | $ | 8,788 |
|
| |
| (1) | Includes amounts related to prior period adjustments to Retained Earnings of ($33) million. See Note 1. |
| |
| (2) | Includes amounts related to dividend of subsidiary. See Notes 3 and 12. |
See accompanying notes to the consolidated financial statements.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2013, 2012 and 2011
(In millions)
|
| | | | | | | | | | | | |
|
| 2013 |
| 2012 |
| 2011 |
| Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
| Net income (loss) |
| $ | 720 |
|
| $ | 1,126 |
|
| $ | 1,174 |
|
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
| Depreciation and amortization expenses |
| 33 |
|
| 31 |
|
| 37 |
|
| Amortization of premiums and accretion of discounts associated with investments, net |
| (167 | ) |
| (168 | ) |
| (152 | ) |
| (Gains) losses on investments and derivatives and from sales of businesses, net |
| 1,108 |
|
| (1,043 | ) |
| (1,160 | ) |
| (Income) loss from equity method investments, net of dividends or distributions |
| (78 | ) |
| (42 | ) |
| (23 | ) |
| Interest credited to policyholder account balances |
| 1,037 |
|
| 1,147 |
|
| 1,189 |
|
| Universal life and investment-type product policy fees |
| (2,336 | ) |
| (2,261 | ) |
| (1,956 | ) |
| Goodwill impairment |
| 66 |
|
| 394 |
|
| — |
|
| Change in fair value option securities |
| — |
|
| (602 | ) |
| (1,483 | ) |
| Change in accrued investment income |
| 77 |
|
| 66 |
|
| 51 |
|
| Change in premiums, reinsurance and other receivables |
| (1,355 | ) |
| (1,197 | ) |
| (1,202 | ) |
| Change in deferred policy acquisition costs and value of business acquired, net |
| (553 | ) |
| 182 |
|
| (207 | ) |
| Change in income tax |
| 213 |
|
| 630 |
|
| 537 |
|
| Change in other assets |
| 1,836 |
|
| 1,499 |
|
| 1,386 |
|
| Change in insurance-related liabilities and policy-related balances |
| 1,144 |
|
| 1,863 |
|
| 1,958 |
|
| Change in other liabilities |
| 847 |
|
| 804 |
|
| 406 |
|
| Other, net |
| 141 |
|
| 53 |
|
| 67 |
|
| Net cash provided by (used in) operating activities |
| 2,733 |
|
| 2,482 |
|
| 622 |
|
| Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
| Sales, maturities and repayments of: |
|
|
|
|
|
|
|
|
|
| Fixed maturity securities |
| 18,718 |
|
| 14,394 |
|
| 17,348 |
|
| Equity securities |
| 67 |
|
| 50 |
|
| 168 |
|
| Mortgage loans |
| 2,292 |
|
| 1,447 |
|
| 993 |
|
| Real estate and real estate joint ventures |
| 104 |
|
| 72 |
|
| 26 |
|
| Other limited partnership interests |
| 153 |
|
| 223 |
|
| 256 |
|
| Purchases of: |
|
|
|
|
|
|
|
|
|
| Fixed maturity securities |
| (15,841 | ) |
| (15,706 | ) |
| (17,127 | ) |
| Equity securities |
| (133 | ) |
| (58 | ) |
| (27 | ) |
| Mortgage loans |
| (882 | ) |
| (807 | ) |
| (1,357 | ) |
| Real estate and real estate joint ventures |
| (201 | ) |
| (225 | ) |
| (72 | ) |
| Other limited partnership interests |
| (363 | ) |
| (341 | ) |
| (378 | ) |
| Cash received in connection with freestanding derivatives |
| 111 |
|
| 414 |
|
| 397 |
|
| Cash paid in connection with freestanding derivatives |
| (720 | ) |
| (335 | ) |
| (478 | ) |
| Dividend of subsidiary |
| — |
|
| (53 | ) |
| — |
|
| Issuances of loans to affiliates |
| (500 | ) |
| — |
|
| (430 | ) |
| Net change in policy loans |
| (3 | ) |
| (13 | ) |
| (13 | ) |
| Net change in short-term investments |
| 471 |
|
| (155 | ) |
| (1,347 | ) |
| Net change in other invested assets |
| (47 | ) |
| (54 | ) |
| (12 | ) |
| Other, net |
| 3 |
|
| — |
|
| 1 |
|
| Net cash provided by (used in) investing activities |
| 3,229 |
|
| (1,147 | ) |
| (2,052 | ) |
| Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
| Policyholder account balances: |
|
|
|
|
|
|
|
|
|
| Deposits |
| 13,770 |
|
| 14,785 |
|
| 20,496 |
|
| Withdrawals |
| (15,899 | ) |
| (15,493 | ) |
| (19,404 | ) |
| Net change in payables for collateral under securities loaned and other transactions |
| (1,948 | ) |
| 320 |
|
| (24 | ) |
| Long-term debt repaid |
| (1,009 | ) |
| (482 | ) |
| (385 | ) |
| Financing element on certain derivative instruments |
| (29 | ) |
| 180 |
|
| 129 |
|
| Return of capital |
| — |
|
| — |
|
| (47 | ) |
| Dividends on common stock |
| (1,000 | ) |
| (504 | ) |
| (517 | ) |
| Net cash provided by (used in) financing activities |
| (6,115 | ) |
| (1,194 | ) |
| 248 |
|
| Effect of change in foreign currency exchange rates on cash and cash equivalents balances |
| 4 |
|
| 9 |
|
| (1 | ) |
| Change in cash and cash equivalents |
| (149 | ) |
| 150 |
|
| (1,183 | ) |
| Cash and cash equivalents, beginning of year |
| 895 |
|
| 745 |
|
| 1,928 |
|
| Cash and cash equivalents, end of year |
| $ | 746 |
|
| $ | 895 |
|
| $ | 745 |
|
See accompanying notes to the consolidated financial statements.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Statements of Cash Flows — (Continued)
For the Years Ended December 31, 2013, 2012 and 2011
(In millions)
|
| | | | | | | | | | | | |
|
| 2013 |
| 2012 |
| 2011 |
| Supplemental disclosures of cash flow information |
|
|
|
|
|
|
| Net cash paid (received) for: |
|
|
|
|
|
|
|
|
|
| Interest |
| $ | 194 |
|
| $ | 232 |
|
| $ | 406 |
|
| Income tax |
| $ | (1 | ) |
| $ | (226 | ) |
| $ | (47 | ) |
| Non-cash transactions: |
|
|
|
|
|
|
|
|
|
| Disposal of subsidiary: (1) |
| | | | | |
| Assets disposed |
| $ | — |
|
| $ | 4,857 |
|
| $ | — |
|
| Liabilities disposed |
| — |
|
| (4,567 | ) |
| — |
|
| Net assets disposed |
| — |
|
| 290 |
|
| — |
|
| Cash disposed |
| — |
|
| (53 | ) |
| — |
|
| Dividend of interests in subsidiary |
| — |
|
| (237 | ) |
| — |
|
| (Gain) loss on dividend of interests in subsidiary |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| Capital contribution from MetLife, Inc. |
| $ | 19 |
|
| $ | 45 |
|
| $ | — |
|
| Real estate and real estate joint ventures acquired in satisfaction of debt |
| $ | — |
|
| $ | 50 |
|
| $ | 5 |
|
_____________
See accompanying notes to the consolidated financial statements.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements
1. Business, Basis of Presentation and Summary of Significant Accounting Policies
Business
“MICC” or the “Company” refers to MetLife Insurance Company of Connecticut, a Connecticut corporation incorporated in 1863, and its subsidiaries, including MetLife Investors USA Insurance Company (“MLI-USA”). MetLife Insurance Company of Connecticut is a wholly-owned subsidiary of MetLife, Inc. (“MetLife”). The Company offers individual annuities, individual life insurance, and institutional protection and asset accumulation products.
The Company is organized into two segments: Retail and Corporate Benefit Funding.
In the second quarter of 2013, MetLife announced its plans to merge three U.S.-based life insurance companies and an offshore reinsurance subsidiary to create one larger U.S.-based and U.S.-regulated life insurance company (the “Mergers”). The companies to be merged are MetLife Insurance Company of Connecticut, MLI-USA and MetLife Investors Insurance Company (“MLIIC”), each a U.S. insurance company that issues variable annuity products in addition to other products, and Exeter Reassurance Company, Ltd. (“Exeter”), a reinsurance company that mainly reinsures guarantees associated with variable annuity products. MetLife Insurance Company of Connecticut, which is expected to be renamed and domiciled in Delaware, will be the surviving entity. Exeter, formerly a Cayman Islands company, was re-domesticated to Delaware in October 2013. Effective January 1, 2014, following receipt of New York State Department of Financial Services (“Department of Financial Services”) approval, MetLife Insurance Company of Connecticut withdrew its license to issue insurance policies and annuity contracts in New York. Also effective January 1, 2014, MetLife Insurance Company of Connecticut reinsured with Metropolitan Life Insurance Company (“MLIC”), an affiliate, all existing New York insurance policies and annuity contracts that include a separate account feature. As a result of the reinsurance agreements, MetLife Insurance Company of Connecticut recorded a reinsurance recoverable, included in premiums, reinsurance and other receivables, of $545 million and a funds withheld liability, included in other liabilities, of $97 million, and transferred cash and investments of $448 million to MLIC. On December 31, 2013, MetLife Insurance Company of Connecticut deposited investments with an estimated fair market value of $6.3 billion into a custodial account, which became restricted to secure MetLife Insurance Company of Connecticut’s remaining New York policyholder liabilities not covered by such reinsurance on January 1, 2014. In anticipation of establishing the custodial account with qualifying investments, MetLife Insurance Company of Connecticut transferred investments with an estimated fair value of $739 million and cash of $12 million to MLIC and received from MLIC qualifying investments with an estimated fair value of $751 million in the fourth quarter of 2013. See Note 7. The Mergers are expected to occur in the fourth quarter of 2014, subject to regulatory approvals.
Basis of Presentation
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements. In applying these policies and estimates, management makes subjective and complex judgments that frequently require assumptions about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Company’s business and operations. Actual results could differ from estimates.
Consolidation
The accompanying consolidated financial statements include the accounts of MetLife Insurance Company of Connecticut and its subsidiaries, as well as partnerships and joint ventures in which the Company has control, and variable interest entities (“VIEs”) for which the Company is the primary beneficiary. Intercompany accounts and transactions have been eliminated.
Since the Company is a member of a controlled group of affiliated companies, its results may not be indicative of those of a stand-alone entity.
Discontinued Operations
The results of operations of a component of the Company that has either been disposed of or is classified as held-for-sale are reported in discontinued operations if certain criteria are met. In order to qualify for a discontinued operation, the operations and cash flows of the component have been or will be eliminated from the ongoing operations of the Company, and the Company will not have any significant continuing involvement in the operations of the component after the disposal transaction.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
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. The Company reports separately, as assets and liabilities, investments held in separate accounts and liabilities of the separate accounts if:
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| • | such separate accounts are legally recognized; |
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| • | assets supporting the contract liabilities are legally insulated from the Company’s general account liabilities; |
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| • | investments are directed by the contractholder; and |
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| • | all investment performance, net of contract fees and assessments, is passed through to the contractholder. |
The Company reports separate account assets at their fair value, which is based on the estimated fair values of the underlying assets comprising the individual separate account portfolios. 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 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 that are directed by contractholders but do not meet one or more of the other above criteria are included in fair value option (“FVO”) securities. See Note 3.
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 statements of operations.
Reclassifications
Certain amounts in the prior years’ consolidated financial statements and related footnotes thereto have been reclassified to conform with the current year presentation as discussed throughout the Notes to the Consolidated Financial Statements.
Adjustments to Prior Periods
During the fourth quarter of 2013, the Company determined to adjust certain prior period results to correct the following:
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| • | Certain prior years’ acquisition costs related to variable annuity sales were incorrectly allocated to an affiliate. Such costs, net of deferred policy acquisition costs (“DAC”), were $57 million, $66 million, and $52 million for 2012, 2011 and 2010, respectively. |
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| • | A DAC recoverability write-off of $111 million associated with term life and universal life secondary guarantees business sold in 2012 was not recorded as of December 31, 2012. |
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| • | The fair value of a bifurcated embedded derivative associated with a reinsurance agreement was overstated by $23 million for 2011. |
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| • | Policyholder benefits and claims and other expenses were overstated in 2012 by $6 million and $23 million, respectively, due to an adjustment in the modeling of dynamic lapses in certain variable annuity products. |
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| • | Tax valuation allowances were understated by $22 million for 2012. |
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| • | A non-cash transaction relating to a pension closeout sale was incorrectly recorded as an increase of $312 million in net cash provided by operating activities with an offsetting impact on net cash used in investing activities for 2011. |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Management evaluated the materiality of these adjustments quantitatively and qualitatively and concluded that they were not material to any prior periods’ annual or quarterly financial statements; however, unadjusted amounts as of December 31, 2012 would have had a significant effect on the results of operations for 2013 if they were recorded in 2013. Accordingly, the Company has revised its previously reported financial statements for prior annual periods for the items listed above, including the related tax impacts, as detailed below. The effects of the adjustments were immaterial to quarterly financial information reported in each of the interim condensed consolidated financial statements in 2012 and 2013, since the most significant adjustments occurred in the fourth quarter of 2012. As a result, such previously reported quarterly financial information has not been adjusted, and we do not plan to amend prior quarterly filings.
The impact of the adjustments is shown in the tables below:
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| | | | | | | | |
| | | December 31, 2012 |
| Consolidated Balance Sheets | | As Previously Reported | | As Adjusted |
| | | (In millions) |
| Assets | | | | |
| Premiums, reinsurance and other receivables | | $ | 22,143 |
| | $ | 21,927 |
|
| Deferred policy acquisition costs and value of business acquired | | $ | 3,793 |
| | $ | 3,746 |
|
| Other assets | | $ | 822 |
| | $ | 826 |
|
| Total assets | | $ | 184,796 |
| | $ | 184,537 |
|
| Liabilities | | | | |
| Future policy benefits | | $ | 27,585 |
| | $ | 27,583 |
|
| Deferred income tax liability | | $ | 1,938 |
| | $ | 1,870 |
|
| Total liabilities | | $ | 174,047 |
| | $ | 173,977 |
|
| Stockholders’ Equity | | | | |
| Retained earnings | | $ | 1,545 |
| | $ | 1,356 |
|
| Total stockholders’ equity | | $ | 10,749 |
| | $ | 10,560 |
|
| Total liabilities and stockholders’ equity | | $ | 184,796 |
| | $ | 184,537 |
|
|
| | | | | | | | | | | | | | | | |
|
| December 31, |
|
| 2012 |
| 2011 |
| Consolidated Statements of Operations |
| As Previously Reported |
| As
Adjusted |
| As Previously Reported |
| As
Adjusted |
|
| (In millions) |
| Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
| Net derivative gains (losses) |
| $ | 980 |
|
| $ | 1,003 |
|
| $ | 1,119 |
|
| $ | 1,096 |
|
| Total revenues |
| $ | 8,117 |
|
| $ | 8,140 |
|
| $ | 8,520 |
|
| $ | 8,497 |
|
| Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
| Policyholder benefits and claims |
| $ | 2,395 |
|
| $ | 2,389 |
|
| $ | 2,660 |
|
| N/A |
|
| Other expenses |
| $ | 2,575 |
|
| $ | 2,720 |
|
| $ | 2,915 |
|
| $ | 2,981 |
|
| Total expenses |
| $ | 6,511 |
|
| $ | 6,650 |
|
| $ | 6,764 |
|
| $ | 6,830 |
|
| Income (loss) from continuing operations before provision for income tax |
| $ | 1,606 |
|
| $ | 1,490 |
|
| $ | 1,756 |
|
| $ | 1,667 |
|
| Provision for income tax expense (benefit) |
| $ | 391 |
|
| $ | 372 |
|
| $ | 523 |
|
| $ | 493 |
|
| Income (loss) from continuing operations, net of income tax |
| $ | 1,215 |
|
| $ | 1,118 |
|
| $ | 1,233 |
|
| $ | 1,174 |
|
| Net income (loss) |
| $ | 1,223 |
|
| $ | 1,126 |
|
| $ | 1,233 |
|
| $ | 1,174 |
|
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| | | | | | | | | | | | | | | | |
| | | December 31, |
|
| 2012 |
| 2011 |
| Consolidated Statements of Comprehensive Income (Loss) | | As Previously Reported | | As
Adjusted | | As Previously Reported | | As
Adjusted |
| | | (In millions) |
| Net income (loss) | | $ | 1,223 |
| | $ | 1,126 |
| | $ | 1,233 |
| | $ | 1,174 |
|
| Comprehensive income (loss) | | $ | 1,852 |
| | $ | 1,755 |
| | $ | 2,787 |
| | $ | 2,728 |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
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| | | | | | | | |
| Consolidated Statements of Stockholders’ Equity | | As Previously Reported | | As
Adjusted |
| | | (In millions) |
| Retained Earnings | | | | |
| Balance at December 31, 2010 | | $ | 457 |
| | $ | 424 |
|
| Net income (loss) | | $ | 1,233 |
| | $ | 1,174 |
|
| Balance at December 31, 2011 | | $ | 1,173 |
| | $ | 1,081 |
|
| Net income (loss) | | $ | 1,223 |
| | $ | 1,126 |
|
| Balance at December 31, 2012 | | $ | 1,545 |
| | $ | 1,356 |
|
| Total Stockholders’ Equity | | | | |
| Balance at December 31, 2010 | | $ | 7,479 |
| | $ | 7,446 |
|
| Balance at December 31, 2011 | | $ | 9,703 |
| | $ | 9,611 |
|
| Balance at December 31, 2012 | | $ | 10,749 |
| | $ | 10,560 |
|
|
| | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2012 | | 2011 |
| Consolidated Statements of Cash Flows | | As Previously Reported | | As
Adjusted | | As Previously Reported | | As
Adjusted |
| | | (In millions) |
| Cash flows from operating activities | | | | | | | | |
| Net income (loss) | | $ | 1,223 |
| | $ | 1,126 |
| | $ | 1,233 |
| | $ | 1,174 |
|
| (Gains) losses on investments and derivatives and from sales of businesses, net | | $ | (1,020 | ) | | $ | (1,043 | ) | | $ | (1,183 | ) | | $ | (1,160 | ) |
| Change in premiums, reinsurance and other receivables | | $ | (1,229 | ) | | $ | (1,197 | ) | | $ | (1,288 | ) | | $ | (1,202 | ) |
| Change in deferred policy acquisition costs and value of business acquired, net | | $ | 69 |
| | $ | 182 |
| | $ | (187 | ) | | $ | (207 | ) |
| Change in income tax | | $ | 649 |
| | $ | 630 |
| | $ | 567 |
| | $ | 537 |
|
| Change in other assets | | $ | 1,503 |
| | $ | 1,499 |
| | N/A |
| | N/A |
|
| Change in insurance-related liabilities and policy-related balances | | $ | 1,865 |
| | $ | 1,863 |
| | $ | 2,307 |
| | $ | 1,958 |
|
| Other, net | | N/A |
| | N/A |
| | $ | 30 |
| | $ | 67 |
|
| Net cash provided by (used in) operating activities | | N/A |
| | N/A |
| | $ | 934 |
| | $ | 622 |
|
| Cash flows from investing activities | | | | | | | | |
| Purchases of fixed maturity securities | | N/A |
| | N/A |
| | $ | (17,439 | ) | | $ | (17,127 | ) |
| Net cash provided by (used in) investing activities | | N/A |
| | N/A |
| | $ | (2,364 | ) | | $ | (2,052 | ) |
Summary of Significant Accounting Policies
The following are the Company’s significant accounting policies with references to notes providing additional information on such policies and critical accounting estimates relating to such policies.
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| |
| Accounting Policy | Note |
| Insurance | 4 |
| Deferred Policy Acquisition Costs, Value of Business Acquired and Other Policy-Related Intangibles | 5 |
| Reinsurance | 6 |
| Investments | 7 |
| Derivatives | 8 |
| Fair Value | 9 |
| Goodwill | 10 |
| Income Tax | 14 |
| Litigation Contingencies | 15 |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Insurance
Future Policy Benefit Liabilities and Policyholder Account Balances
The Company establishes liabilities for amounts payable under insurance policies. 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 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. 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 the establishment of premium deficiency reserves. Such reserves are determined based on the then current assumptions and do not include a provision for adverse deviation.
Liabilities for universal and variable life secondary 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 guarantee liabilities are consistent with those used for amortizing DAC, and are thus subject to the same variability and risk as further discussed herein. The assumptions of investment performance and volatility for variable products are consistent with historical experience of appropriate underlying equity indices, such as the Standard & Poor’s Ratings Services (“S&P”) 500 Index. The benefits used in calculating the liabilities are based on the average benefits payable over a range of scenarios.
The Company regularly reviews its estimates of liabilities for future policy benefits and compares them with its actual experience. Differences result in changes to the liability balances with related charges or credits to benefit expenses in the period in which the changes occur.
Policyholder account balances (“PABs”) relate to contract or contract features where the Company has no significant insurance risk.
The Company issues directly and assumes through 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. 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 split and accounted for under both models.
Guarantees accounted for as insurance liabilities in future policy benefits include guaranteed minimum death benefits (“GMDBs”), the portion of guaranteed minimum income benefits (“GMIBs”) that require annuitization, and the life-contingent portion of guaranteed minimum withdrawal benefits (“GMWBs”).
Guarantees accounted for as embedded derivatives in PABs include the non life-contingent portion of GMWBs, guaranteed minimum accumulation benefits (“GMABs”) and the portion of GMIBs that do not require annuitization. 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.
Other Policy-Related Balances
Other policy-related balances include policy and contract claims, unearned revenue liabilities, premiums received in advance and policyholder dividends due and unpaid.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
The liability for policy and contract claims generally relates to incurred but not reported death, disability, and long-term care (“LTC”) 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 analyses of historical patterns of claims by business line. 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, similar to DAC as discussed further herein. Such amortization is recorded in universal life and investment-type product policy fees.
The Company accounts for the prepayment of premiums on its individual life, group life and health contracts as premiums received in advance and applies the cash received to premiums when due.
Recognition of Insurance Revenues and Deposits
Premiums related to traditional life and annuity policies with life contingencies are recognized as revenues when due from policyholders. Policyholder benefits and expenses are provided to recognize profits over the estimated lives of the insurance 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 earnings in a constant relationship to insurance in-force or, for annuities, the amount of expected future policy benefit payments.
Premiums related to non-medical health and disability 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 fees 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 earnings include interest credited and benefit claims incurred in excess of related PABs.
Premiums, policy fees, policyholder benefits and expenses are presented net of reinsurance.
Deferred Policy Acquisition Costs, Value of Business Acquired and Other Policy-Related Intangibles
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 capitalized as DAC. Such costs include:
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| • | incremental direct costs of contract acquisition, such as commissions; |
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| • | 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; |
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| • | other essential direct costs that would not have been incurred had a policy not been acquired or renewed; and |
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| • | in limited circumstances, the costs of direct-response advertising, the primary purpose of which 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 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.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
DAC and VOBA are amortized as follows:
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| | | |
| Products: | In proportion to the following over estimated lives of the contracts: |
| • | Nonparticipating and non-dividend-paying traditional contracts (primarily term insurance) | | Historic actual and expected future gross premiums. |
| • | Participating, dividend-paying traditional contracts | | Actual and expected future gross margins. |
| • | Fixed and variable universal life contracts | | Actual and expected future gross profits. |
| • | Fixed and variable deferred annuity contracts | | |
See Note 5 for additional information on DAC and VOBA amortization.
The recovery of DAC and VOBA is dependent upon the future profitability of the related business. DAC and VOBA are aggregated in the financial statements for reporting purposes.
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 potential recoverability issue exists, the Company reviews deferred sales inducements to determine the recoverability of the asset.
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 business combinations are amortized over useful lives ranging from 10 to 30 years and such amortization is included in other expenses. Each year, or more frequently if circumstances indicate a possible impairment exists, the Company reviews VODA and VOCRA to determine whether the asset is impaired.
Reinsurance
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. Cessions under reinsurance agreements do not discharge the Company’s obligations as the primary insurer. The Company reviews all contractual features, including 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 when there is a gain at inception on the ceding entity and to other liabilities when there is a loss at inception. The net cost of reinsurance is recognized as a component of other expenses when there is a gain at inception and as policyholder benefits and claims when there is a loss and is subsequently amortized on a basis consistent with the methodology used for amortizing DAC related to the underlying reinsured contracts. 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) premiums, reinsurance and other receivables (future policy benefits) are established.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Amounts currently recoverable under reinsurance agreements are included in premiums, reinsurance and other receivables and amounts currently payable are included in other liabilities. 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 recoverable balances could become uncollectible. In such instances, reinsurance recoverable balances are stated net of allowances for uncollectible reinsurance.
The funds withheld liability represents amounts withheld by the Company in accordance with the terms of the reinsurance agreements. The Company withholds the funds rather than transferring the underlying investments and, as a result, records funds withheld liability within other liabilities. The Company recognizes interest on funds withheld, included in other expenses, at rates defined by the terms of the agreement which may be contractually specified or directly related to the investment portfolio.
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. With respect to GMIBs, a portion of the directly written GMIBs are accounted for as insurance liabilities, but the associated reinsurance agreements contain embedded derivatives. These embedded derivatives are included in premiums, reinsurance and other receivables with changes in estimated fair value reported in net derivative gains (losses).
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.
Investments
Net Investment Income and Net Investment Gains (Losses)
Income on investments is reported within net investment income, unless otherwise stated herein. Gains and losses on sales of investments, impairment losses and changes in valuation allowances are reported within net investment gains (losses), unless otherwise stated herein.
Fixed Maturity and Equity Securities
The majority of the Company’s fixed maturity and equity securities are classified as available-for-sale (“AFS”) 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) (“OCI”), 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 are determined on a specific identification basis.
Interest income on fixed maturity securities is recognized when earned using an effective yield method giving effect to amortization of premiums and accretion of discounts. Prepayment fees are recognized when earned. Dividends on equity securities are recognized when declared.
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, as well as an analysis of the gross unrealized losses by severity and/or age as described in Note 7 “— Evaluation of AFS Securities for OTTI and Evaluating Temporarily Impaired AFS Securities.”
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (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. When either: (i) the Company has the intent to sell the security; or (ii) it is more likely than not that the Company will be required to sell the security before recovery, the OTTI recognized in earnings is the entire difference between the security’s amortized cost and estimated fair value. If neither of these conditions exist, the difference between the amortized cost of the 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 OCI.
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 recovery to an amount at least equal to cost prior to the sale is not expected, the security will be deemed to be other-than-temporarily impaired in the period that the sale decision was made and an OTTI loss will be recorded in earnings. The OTTI loss recognized is the entire difference between the security’s cost and its estimated fair value.
Mortgage Loans
The Company disaggregates its mortgage loan investments into two portfolio segments: commercial and agricultural. The accounting policies that are applicable to all portfolio segments are presented below and the accounting policies related to each of the portfolio segments are included in Note 7.
Mortgage loans are stated at unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or expenses, and are net of valuation allowances. Interest income and prepayment fees are recognized when earned. Interest income is recognized using an effective yield method giving effect to amortization of premiums and accretion of discounts.
Also included in mortgage loans are commercial mortgage loans held by consolidated securitization entities (“CSEs”) for which the FVO was elected. These mortgage loans are stated at estimated fair value. Changes in estimated fair value are recognized in net investment gains (losses) for commercial mortgage loans held by CSEs.
Policy Loans
Policy loans are stated at unpaid principal balances. Interest income on such loans is recorded as earned using the contractual interest rate. Generally, accrued interest is capitalized on the policy’s anniversary date. Valuation allowances are not established for policy loans, as they 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 insurance policy.
Real Estate
Real estate held-for-investment 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 associated with such real estate is recognized on a straight-line basis over the term of the respective leases. The Company periodically reviews its real estate held-for-investment for impairment and tests for recoverability whenever events or changes in circumstances indicate the carrying value may not be recoverable and exceeds its estimated fair value. Properties whose carrying values are greater than their undiscounted cash flows are written down to their estimated fair value, which is generally computed using the present value of expected future cash flows discounted at a rate commensurate with the underlying risks.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Real estate for which the Company commits to a plan to sell within one year and actively markets in its current condition for a reasonable price in comparison to its estimated fair value is classified as held for sale. Real estate held-for-sale is stated at the lower of depreciated cost or estimated fair value less expected disposition costs and is not depreciated.
Real Estate Joint Ventures and Other Limited Partnership Interests
The Company uses the equity method of accounting for investments in equity securities when it has significant influence or at least 20% interest and for investments in real estate joint ventures and other limited partnership interests (“investees”) when it has more than a minor ownership interest or more than a minor influence over the investee’s operations, but does not have a controlling financial interest. The Company generally recognizes its share of the investee’s earnings on a three-month lag in instances where the investee’s financial information is not sufficiently timely or when the investee’s reporting period differs from the Company’s reporting period.
The Company uses the cost method of accounting for investments in which it has virtually no influence over the investee’s operations. The Company recognizes distributions on cost method investments as earned or received. Because of the nature and structure of these cost method investments, they do not meet the characteristics of an equity security in accordance with applicable accounting standards.
The Company routinely evaluates its equity method and cost method investments for impairment. For equity method investees, the Company considers financial and other information provided by the investee, other known information and inherent risks in the underlying investments, as well as future capital commitments, in determining whether an impairment has occurred. The Company considers its cost method investments for impairment when the carrying value of such investments exceeds the net asset value (“NAV”). The Company takes into consideration the severity and duration of this excess when determining whether the cost method investment is impaired.
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. Short-term investments also include investments in affiliated money market pools.
Other Invested Assets
Other invested assets consist principally of the following:
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| • | Freestanding derivatives with positive estimated fair values are described in “— Derivatives” below. |
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| • | Loans to affiliates are stated at unpaid principal balance, adjusted for any unamortized premium or discount. |
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| • | Tax credit and renewable energy partnerships derive a significant source of investment return in the form of income tax credits or other tax incentives. Where tax credits are guaranteed by a creditworthy third party, the investment is accounted for under the effective yield method. Otherwise, the investment is accounted for under the equity method. |
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| • | Leveraged leases are recorded net of non-recourse debt. Income on leveraged leases is recognized by applying the leveraged lease’s estimated rate of return to the net investment in the lease. The Company regularly reviews residual values for impairment. |
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| • | Investments in joint ventures that engage in insurance underwriting activities are accounted for under the equity method. |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Securities Lending Program
Securities lending transactions, whereby blocks of securities are loaned to third parties, primarily brokerage firms and commercial banks, are treated as financing arrangements and the associated liability is recorded at the amount of cash received. The Company obtains collateral at the inception of the loan, 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 is liable to return to the counterparties the cash collateral received. 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 financial statements. The Company monitors the estimated fair value of the securities loaned on a daily basis and additional collateral is obtained as necessary. Income and expenses associated with securities lending transactions are reported as investment income and investment expense, respectively, within net investment income.
Derivatives
Freestanding Derivatives
Freestanding derivatives are carried in the Company’s balance sheets either as assets within other invested assets or as liabilities within other liabilities at estimated fair value. The Company does not offset the fair value amounts recognized for derivatives executed with the same counterparty under the same master netting agreement.
Accruals on derivatives are generally recorded in accrued investment income or within other liabilities. However, accruals that are not scheduled to settle within one year are included with the derivatives carrying value in other invested assets or other liabilities.
If a derivative is not designated as an accounting hedge or its use in managing risk does not qualify for hedge accounting, changes in the estimated fair value of the derivative are reported in net derivative gains (losses) except as follows:
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| Statement of Operations Presentation: | Derivative: |
| Policyholder benefits and claims | • | Economic hedges of variable annuity guarantees included in future policy benefits |
| Net investment income | • | Economic hedges of equity method investments in joint ventures |
Hedge Accounting
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. Hedge designation and financial statement presentation of changes in estimated fair value of the hedging derivatives are as follows:
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| • | Fair value hedge (a hedge of the estimated fair value of a recognized asset or liability) - in net derivative gains (losses), consistent with the change in fair value of the hedged item attributable to the designated risk being hedged. |
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| • | Cash flow hedge (a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability) - effectiveness in OCI (deferred gains or losses on the derivative are reclassified into the statement of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item); ineffectiveness in net derivative gains (losses). |
The changes in estimated fair values of the hedging derivatives are exclusive of any accruals that are separately reported in the statement of operations within interest income or interest expense to match the location of the hedged item.
In its hedge documentation, the Company sets forth how the hedging instrument is expected to hedge the designated risks related to the hedged item and sets forth the method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness and the method that will be used to measure ineffectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and at least quarterly throughout the life of the designated hedging relationship. 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.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
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 balance sheets at its estimated fair value, with changes in estimated fair value recognized 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 OCI related to discontinued cash flow hedges are released into the statements of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item.
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 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 OCI 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 balance sheets, with changes in its estimated fair value recognized in the current period as net derivative gains (losses).
Embedded Derivatives
The Company sells variable annuities and issues certain insurance products and investment contracts and is a party to certain reinsurance agreements that have embedded derivatives. The Company assesses each identified embedded derivative to determine whether it is required to be bifurcated. The embedded derivative is bifurcated from the host contract and accounted for as a freestanding derivative if:
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| • | the combined instrument is not accounted for in its entirety at fair value with changes in fair value recorded in earnings; |
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| • | the terms of the embedded derivative are not clearly and closely related to the economic characteristics of the host contract; and |
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| • | a separate instrument with the same terms as the embedded derivative would qualify as a derivative instrument. |
Such embedded derivatives are carried in the 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). If the Company is unable to properly identify and measure an embedded derivative for separation from its host contract, the entire contract is carried on the balance sheet at estimated fair value, with changes in estimated fair value recognized in the current period in net investment gains (losses) or net investment income. Additionally, the Company may elect to carry an entire contract on the balance sheet at estimated fair value, with changes in estimated fair value recognized in the current period in net investment gains (losses) or net investment income if that contract contains an embedded derivative that requires bifurcation. At inception, the Company attributes to the embedded derivative a portion of the projected future guarantee fees to be collected from the policyholder equal to the present value of projected future guaranteed benefits. Any additional fees represent “excess” fees and are reported in universal life and investment-type product policy fees.
Fair Value
Fair value is defined 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 determinable, unobservable inputs and/or adjustments to observable inputs requiring management judgment are used to determine the estimated fair value of assets and liabilities.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Goodwill
Goodwill represents the future economic benefits arising from net assets acquired in a business combination that are not individually identified and recognized. Goodwill is calculated as the excess of cost over the estimated fair value of such net assets acquired, is not amortized, and is tested for impairment based on a fair value approach at least annually or more frequently if events or circumstances 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.
The impairment test is performed at the reporting unit level, which 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. For purposes of goodwill impairment testing, if the carrying value of a reporting unit exceeds its estimated fair value, there may 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 combination. 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.
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.
Employee Benefit Plans
Pension, postretirement and postemployment benefits are provided to associates under plans sponsored and administered by MLIC, an affiliate of the Company. The Company’s obligation and expense related to these benefits is limited to the amount of associated expense allocated from MLIC.
Income Tax
MetLife Insurance Company of Connecticut and all of its includable subsidiaries join with MetLife and its includable subsidiaries in filing a consolidated U.S. life and non-life federal income tax return in accordance with the provisions of the Internal Revenue Code of 1986, as amended (the “Code”). Current taxes (and the benefits of tax attributes such as losses) are allocated to MetLife Insurance Company of Connecticut and its subsidiaries under the consolidated tax return regulations and a tax sharing agreement. Under the consolidated tax return regulations, MetLife has elected the “percentage method” (and 100 percent under such method) of reimbursing companies for tax attributes such as losses. As a result, 100 percent of tax attributes such as losses are reimbursed by MetLife to the extent that consolidated federal income tax of the consolidated federal tax return group is reduced in a year by tax attributes such as losses. Profitable subsidiaries pay MetLife each year the federal income tax which such profitable subsidiary would have paid that year based upon that year’s taxable income. If MetLife Insurance Company of Connecticut or its includable subsidiaries has current or prior deductions and credits (including but not limited to losses) which reduce the consolidated tax liability of the consolidated federal tax return group, the deductions and credits are characterized as realized (or realizable) by MetLife Insurance Company of Connecticut and its includable subsidiaries when those tax attributes are realized (or realizable) by the consolidated federal tax return group, even if MetLife Insurance Company of Connecticut or its includable subsidiaries would not have realized the attributes on a stand-alone basis under a “wait and see” method.
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.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
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:
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| • | future taxable income exclusive of reversing temporary differences and carryforwards; |
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| • | future reversals of existing taxable temporary differences; |
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| • | taxable income in prior carryback years; and |
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| • | 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 financial statements in the year these changes occur.
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.
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. Legal costs are recognized 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 financial statements.
Other Accounting Policies
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. Estimated lives generally range from five to 10 years for leasehold improvements, and from three to seven years for all other property and equipment. The net book value of the property, equipment and leasehold improvements was insignificant at both December 31, 2013 and 2012.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
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 $200 million and $185 million at December 31, 2013 and 2012, respectively. Accumulated amortization of capitalized software was $97 million and $92 million at December 31, 2013 and 2012, respectively. Related amortization expense was $5 million, $10 million and $17 million for the years ended December 31, 2013, 2012 and 2011, respectively.
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.
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. 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 exchange rates during the year. The resulting translation adjustments are charged or credited directly to OCI, 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.
Adoption of New Accounting Pronouncements
Effective July 17, 2013, the Company adopted new guidance regarding derivatives that permits the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to the United States Treasury and London Interbank Offered Rate (“LIBOR”). Also, this new guidance removes the restriction on using different benchmark rates for similar hedges. The new guidance did not have a material impact on the financial statements upon adoption, but may impact the selection of benchmark interest rates for hedging relationships in the future.
Effective January 1, 2013, the Company adopted new guidance regarding comprehensive income that requires an entity to provide information about the amounts reclassified out of accumulated OCI (“AOCI”) by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The adoption was prospectively applied and resulted in additional disclosures in Note 12.
Effective January 1, 2013, the Company adopted new guidance regarding balance sheet offsetting disclosures which requires an entity to disclose information about offsetting and related arrangements for derivatives, including bifurcated embedded derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions, 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 adoption was retrospectively applied and resulted in additional disclosures related to derivatives in Note 8.
On January 1, 2012, the Company adopted new guidance regarding accounting for DAC, which was retrospectively applied. 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. As a result, certain sales manager compensation and administrative costs previously capitalized by the Company will no longer be deferred.
On January 1, 2012, the Company adopted new guidance regarding comprehensive income, which was retrospectively applied, that provides companies with the option to present the total of comprehensive income, components of net income, and the components of OCI either in a single continuous statement of comprehensive income or in two separate but consecutive statements in annual financial statements. The standard eliminates the option to present components of OCI as part of the statement of changes in stockholders’ equity. The Company adopted the two-statement approach for annual financial statements.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (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 qualitative assessment is optional and the Company is permitted to bypass it for any reporting unit in any period and begin its impairment analysis with the quantitative calculation. The Company is permitted to perform the qualitative assessment in any subsequent period.
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. 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 financial statements other than the expanded disclosures in Note 9.
Future Adoption of New Accounting Pronouncements
In March 2013, the FASB issued new guidance regarding foreign currency (Accounting Standards Update (“ASU”) 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity), effective prospectively for fiscal years and interim reporting periods within those years beginning after December 15, 2013. The amendments require an entity that ceases to have a controlling financial interest in a subsidiary or group of assets within a foreign entity to apply the guidance in Subtopic 830-30, Foreign Currency Matters — Translation of Financial Statements, to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. For an equity method investment that is a foreign entity, the partial sale guidance in section 830-30-40, Derecognition, still applies. As such, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment. The Company does not expect the adoption of this new guidance to have a material impact on its financial statements.
In February 2013, the FASB issued new guidance regarding liabilities (ASU 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date), effective retrospectively for fiscal years beginning after December 15, 2013 and interim periods within those years. The amendments require an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. In addition, the amendments require an entity to disclose the nature and amount of the obligation, as well as other information about the obligation. The Company does not expect the adoption of this new guidance to have a material impact on its financial statements.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
2. Segment Information
The Company is organized into two segments: Retail and Corporate Benefit Funding. In addition, the Company reports certain of its results of operations in Corporate & Other.
Retail
The Retail segment offers a broad range of protection products and a variety of annuities primarily to individuals, and is organized into two businesses: Annuities and Life & Other. Annuities includes a variety of variable, fixed and indexed annuities which provide for both asset accumulation and asset distribution needs. Life & Other insurance products and services include variable life, universal life, term life and whole life products, as well as individual disability income products. Additionally, through broker-dealer affiliates, the Company offers a full range of mutual funds and other securities products.
Corporate Benefit Funding
The 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 structured settlements and certain products to fund company-, bank- or trust-owned life insurance used to finance non-qualified benefit programs for executives.
Corporate & Other
Corporate & Other contains the excess capital not allocated to the segments, various start-up businesses, including direct and digital marketing products, run-off businesses, the Company’s ancillary international operations, interest expense related to the majority of the Company’s outstanding debt, as well as expenses associated with certain legal proceedings and income tax audit issues. Corporate & Other also includes the elimination of intersegment amounts.
Financial Measures and Segment Accounting Policies
Operating earnings is the measure of segment profit or loss the Company uses to evaluate segment performance and allocate resources. Consistent with GAAP 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 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 excludes net investment gains (losses) and net derivative gains (losses). Operating expenses excludes goodwill impairments.
The following additional adjustments are made to GAAP revenues, in the line items indicated, in calculating operating revenues:
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| • | 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”); and |
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| • | Net investment income: (i) includes amounts for scheduled periodic settlement payments and amortization of premium on derivatives that are hedges of investments or that are used to replicate certain investments, but do not qualify for hedge accounting treatment, (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. |
The following additional adjustments are made to GAAP expenses, in the line items indicated, in calculating operating expenses:
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| • | Policyholder benefits and claims excludes: (i) amounts associated with periodic crediting rate adjustments based on the total return of a contractually referenced pool of assets, (ii) benefits and hedging costs related to GMIBs (“GMIB Costs”), and (iii) market value adjustments associated with surrenders or terminations of contracts (“Market Value Adjustments”); |
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| • | 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; |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
2. Segment Information (continued)
| |
| • | 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; |
| |
| • | 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) implementation of new insurance regulatory requirements, and (ii) acquisition and integration costs. |
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, 2013, 2012 and 2011 and at December 31, 2013 and 2012. The segment accounting policies are the same as those used to prepare the Company’s consolidated financial statements, except for operating earnings adjustments as defined above. In addition, segment accounting policies include the method of capital allocation described below.
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 MetLife’s and the Company’s business.
MetLife’s economic capital model aligns segment allocated equity with emerging standards and consistent risk principles. The model applies statistics-based risk evaluation principles to the material risks to which the Company is exposed. These consistent risk principles include calibrating required economic capital shock factors to a specific confidence level and time horizon and applying an industry standard method for the inclusion of diversification benefits among risk types.
Segment net investment income is 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.
Net investment income is based upon the actual results of each segment’s specifically identifiable investment portfolios 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.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
2. Segment Information (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Operating Earnings | | | | |
| Year Ended December 31, 2013 | | Retail | | Corporate Benefit Funding | | Corporate & Other | | Total | | Adjustments | | Total Consolidated |
| | | (In millions) |
| Revenues | | | | | | | | | | | | |
| Premiums | | $ | 387 |
| | $ | 184 |
| | $ | 35 |
| | $ | 606 |
| | $ | — |
| | $ | 606 |
|
| Universal life and investment-type product policy fees | | 2,155 |
| | 35 |
| | — |
| | 2,190 |
| | 146 |
| | 2,336 |
|
| Net investment income | | 1,614 |
| | 1,162 |
| | 112 |
| | 2,888 |
| | (36 | ) | | 2,852 |
|
| Other revenues | | 587 |
| | 5 |
| | — |
| | 592 |
| | — |
| | 592 |
|
| Net investment gains (losses) | | — |
| | — |
| | — |
| | — |
| | 82 |
| | 82 |
|
| Net derivative gains (losses) | | — |
| | — |
| | — |
| | — |
| | (1,052 | ) | | (1,052 | ) |
| Total revenues | | 4,743 |
| | 1,386 |
| | 147 |
| | 6,276 |
| | (860 | ) | | 5,416 |
|
| Expenses | | | | | | | | | | | | |
| Policyholder benefits and claims | | 737 |
| | 749 |
| | 14 |
| | 1,500 |
| | 207 |
| | 1,707 |
|
| Interest credited to policyholder account balances | | 906 |
| | 136 |
| | — |
| | 1,042 |
| | (5 | ) | | 1,037 |
|
| Goodwill impairment | | — |
| | — |
| | — |
| | — |
| | 66 |
| | 66 |
|
| Capitalization of DAC | | (475 | ) | | (2 | ) | | (27 | ) | | (504 | ) | | — |
| | (504 | ) |
| Amortization of DAC and VOBA | | 552 |
| | 5 |
| | 1 |
| | 558 |
| | (508 | ) | | 50 |
|
| Interest expense on debt | | — |
| | — |
| | 68 |
| | 68 |
| | 122 |
| | 190 |
|
| Other expenses | | 1,816 |
| | 36 |
| | 71 |
| | 1,923 |
| | — |
| | 1,923 |
|
| Total expenses | | 3,536 |
| | 924 |
| | 127 |
| | 4,587 |
| | (118 | ) | | 4,469 |
|
| Provision for income tax expense (benefit) | | 395 |
| | 162 |
| | (86 | ) | | 471 |
| | (244 | ) | | 227 |
|
| Operating earnings | | $ | 812 |
| | $ | 300 |
| | $ | 106 |
| | 1,218 |
| | | | |
| Adjustments to: | | | | | | | | | | | | |
| Total revenues | | (860 | ) | | | | |
| Total expenses | | 118 |
| | | | |
| Provision for income tax (expense) benefit | | 244 |
| | | | |
| Income (loss) from continuing operations, net of income tax | | $ | 720 |
| | | | $ | 720 |
|
|
| | | | | | | | | | | | | | | | |
| At December 31, 2013 |
| Retail |
| Corporate Benefit Funding |
| Corporate & Other |
| Total |
|
| (In millions) |
| Total assets |
| $ | 146,515 |
|
| $ | 30,822 |
|
| $ | 10,702 |
|
| $ | 188,039 |
|
| Separate account assets |
| $ | 95,692 |
|
| $ | 2,088 |
|
| $ | — |
|
| $ | 97,780 |
|
| Separate account liabilities |
| $ | 95,692 |
|
| $ | 2,088 |
|
| $ | — |
|
| $ | 97,780 |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
2. Segment Information (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Operating Earnings | | | | |
| Year Ended December 31, 2012 | | Retail | | Corporate Benefit Funding | | Corporate & Other | | Total | | Adjustments | | Total Consolidated |
| | | (In millions) |
| Revenues | | | | | | | | | | | | |
| Premiums | | $ | 498 |
| | $ | 629 |
| | $ | 134 |
| | $ | 1,261 |
| | $ | — |
| | $ | 1,261 |
|
| Universal life and investment-type product policy fees | | 2,081 |
| | 29 |
| | 14 |
| | 2,124 |
| | 137 |
| | 2,261 |
|
| Net investment income | | 1,525 |
| | 1,167 |
| | 185 |
| | 2,877 |
| | 75 |
| | 2,952 |
|
| Other revenues | | 505 |
| | 6 |
| | — |
| | 511 |
| | — |
| | 511 |
|
| Net investment gains (losses) | | — |
| | — |
| | — |
| | — |
| | 152 |
| | 152 |
|
| Net derivative gains (losses) | | — |
| | — |
| | — |
| | — |
| | 1,003 |
| | 1,003 |
|
| Total revenues | | 4,609 |
| | 1,831 |
| | 333 |
| | 6,773 |
| | 1,367 |
| | 8,140 |
|
| Expenses | | | | | | | | | | | | |
| Policyholder benefits and claims | | 738 |
| | 1,161 |
| | 128 |
| | 2,027 |
| | 362 |
| | 2,389 |
|
| Interest credited to policyholder account balances | | 943 |
| | 162 |
| | — |
| | 1,105 |
| | 42 |
| | 1,147 |
|
| Goodwill impairment | | — |
| | — |
| | — |
| | — |
| | 394 |
| | 394 |
|
| Capitalization of DAC | | (848 | ) | | (5 | ) | | (33 | ) | | (886 | ) | | — |
| | (886 | ) |
| Amortization of DAC and VOBA | | 666 |
| | 10 |
| | 2 |
| | 678 |
| | 357 |
| | 1,035 |
|
| Interest expense on debt | | — |
| | — |
| | 68 |
| | 68 |
| | 163 |
| | 231 |
|
| Other expenses | | 2,229 |
| | 39 |
| | 66 |
| | 2,334 |
| | 6 |
| | 2,340 |
|
| Total expenses | | 3,728 |
| | 1,367 |
| | 231 |
| | 5,326 |
| | 1,324 |
| | 6,650 |
|
| Provision for income tax expense (benefit) | | 332 |
| | 162 |
| | (30 | ) | | 464 |
| | (92 | ) | | 372 |
|
| Operating earnings | | $ | 549 |
| | $ | 302 |
| | $ | 132 |
| | 983 |
| | | | |
| Adjustments to: | | | | | | | | | | | | |
| Total revenues | | 1,367 |
| | | | |
| Total expenses | | (1,324 | ) | | | | |
| Provision for income tax (expense) benefit | | 92 |
| | | | |
| Income (loss) from continuing operations, net of income tax | | $ | 1,118 |
| | | | $ | 1,118 |
|
|
| | | | | | | | | | | | | | | | |
| At December 31, 2012 |
| Retail |
| Corporate Benefit Funding |
| Corporate & Other |
| Total |
| | | (In millions) |
| Total assets | | $ | 136,074 |
| | $ | 33,140 |
| | $ | 15,323 |
| | $ | 184,537 |
|
| Separate account assets | | $ | 84,106 |
| | $ | 2,008 |
| | $ | — |
| | $ | 86,114 |
|
| Separate account liabilities | | $ | 84,106 |
| | $ | 2,008 |
| | $ | — |
| | $ | 86,114 |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
2. Segment Information (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Operating Earnings | | | | |
| Year Ended December 31, 2011 | | Retail | | Corporate Benefit Funding | | Corporate & Other | | Total | | Adjustments | | Total Consolidated |
| | | (In millions) |
| Revenues | | | | | | | | | | | | |
| Premiums | | $ | 710 |
| | $ | 1,071 |
| | $ | 47 |
| | $ | 1,828 |
| | $ | — |
| | $ | 1,828 |
|
| Universal life and investment-type product policy fees | | 1,764 |
| | 34 |
| | 36 |
| | 1,834 |
| | 122 |
| | 1,956 |
|
| Net investment income | | 1,423 |
| | 1,175 |
| | 181 |
| | 2,779 |
| | 295 |
| | 3,074 |
|
| Other revenues | | 502 |
| | 5 |
| | 1 |
| | 508 |
| | — |
| | 508 |
|
| Net investment gains (losses) | | — |
| | — |
| | — |
| | — |
| | 35 |
| | 35 |
|
| Net derivative gains (losses) | | — |
| | — |
| | — |
| | — |
| | 1,096 |
| | 1,096 |
|
| Total revenues | | 4,399 |
| | 2,285 |
| | 265 |
| | 6,949 |
| | 1,548 |
| | 8,497 |
|
| Expenses | | | | | | | | | | | | |
| Policyholder benefits and claims | | 896 |
| | 1,598 |
| | 46 |
| | 2,540 |
| | 120 |
| | 2,660 |
|
| Interest credited to policyholder account balances | | 988 |
| | 180 |
| | — |
| | 1,168 |
| | 21 |
| | 1,189 |
|
| Goodwill impairment | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Capitalization of DAC | | (1,301 | ) | | (7 | ) | | (57 | ) | | (1,365 | ) | | — |
| | (1,365 | ) |
| Amortization of DAC and VOBA | | 791 |
| | 4 |
| | 6 |
| | 801 |
| | 358 |
| | 1,159 |
|
| Interest expense on debt | | — |
| | — |
| | 67 |
| | 67 |
| | 322 |
| | 389 |
|
| Other expenses | | 2,568 |
| | 42 |
| | 163 |
| | 2,773 |
| | 25 |
| | 2,798 |
|
| Total expenses | | 3,942 |
| | 1,817 |
| | 225 |
| | 5,984 |
| | 846 |
| | 6,830 |
|
| Provision for income tax expense (benefit) | | 161 |
| | 164 |
| | (70 | ) | | 255 |
| | 238 |
| | 493 |
|
| Operating earnings | | $ | 296 |
| | $ | 304 |
| | $ | 110 |
| | 710 |
| | | | |
| Adjustments to: | | | | | | | | | | | | |
| Total revenues | | 1,548 |
| | | | |
| Total expenses | | (846 | ) | | | | |
| Provision for income tax (expense) benefit | | (238 | ) | | | | |
| Income (loss) from continuing operations, net of income tax | | $ | 1,174 |
| | | | $ | 1,174 |
|
The following table presents total premiums, universal life and investment-type product policy fees and other revenues by major product groups of the Company’s segments, as well as Corporate & Other:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Life insurance (1) | $ | 3,528 |
| | $ | 4,026 |
| | $ | 4,285 |
|
| Accident and health insurance | 6 |
| | 7 |
| | 7 |
|
| Total | $ | 3,534 |
| | $ | 4,033 |
| | $ | 4,292 |
|
______________
| |
| (1) | Includes annuities and corporate benefit funding products. |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
2. Segment Information (continued)
Revenues derived from any customer did not exceed 10% of consolidated premiums, universal life and investment-type product policy fees and other revenues for the years ended December 31, 2013, 2012 and 2011.
The following table presents total premiums, universal life and investment-type product policy fees and other revenues associated with the Company’s U.S. and foreign operations:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| U.S. | $ | 3,442 |
| | $ | 3,329 |
| | $ | 3,222 |
|
| Foreign: | | | | | |
| United Kingdom | 92 |
| | 556 |
| | 986 |
|
| Other (1) | — |
| | 148 |
| | 84 |
|
| Total | $ | 3,534 |
| | $ | 4,033 |
| | $ | 4,292 |
|
______________
| |
| (1) | See Note 3 for information on the disposition of a subsidiary. |
3. Dispositions
Disposition
In June 2012, the Company distributed all of the issued and outstanding shares of common stock of its wholly-owned subsidiary, MetLife Europe Limited (“MetLife Europe”) to its stockholders as an in-kind dividend. The net book value of MetLife Europe at the time of the dividend was $290 million which was recorded as a dividend of retained earnings of $347 million and an increase to OCI of $57 million, net of income tax. As of the date of dividend, the Company no longer consolidates the assets, liabilities and operations of MetLife Europe. The net income of MetLife Europe was not material to the Company for the periods prior to the dividend. The results of MetLife Europe were reported in Corporate & Other. See Note 2 for a discussion of Corporate & Other.
Discontinued Operations
The following table summarizes the amounts that have been reflected as discontinued operations in the consolidated statements of operations. Income (loss) from discontinued operations includes real estate classified as held-for-sale or sold.
|
| | | | |
| | | Year Ended December 31, 2012 |
| |
| (In millions) |
| Total revenues | | $ | 12 |
|
| Total expenses | | — |
|
| Income (loss) before provision for income tax | | 12 |
|
| Provision for income tax expense (benefit) | | 4 |
|
| Income (loss) from discontinued operations, net of income tax | | $ | 8 |
|
There was no income (loss) from discontinued operations, net of income tax, for both of the years ended December 31, 2013 and 2011.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements
4. Insurance
Insurance Liabilities
Insurance liabilities, including affiliated insurance liabilities on reinsurance assumed and ceded, are comprised of future policy benefits, PABs and other policy-related balances. Information regarding insurance liabilities by segment, as well as Corporate & Other, was as follows at:
|
| | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | (In millions) |
| Retail | $ | 35,844 |
| | $ | 37,642 |
|
| Corporate Benefit Funding | 22,222 |
| | 23,766 |
|
| Corporate & Other | 6,542 |
| | 6,289 |
|
| Total | $ | 64,608 |
| | $ | 67,697 |
|
See Note 6 for discussion of affiliated reinsurance liabilities included in the table above.
Future policy benefits are measured as follows:
|
| | |
| Product Type: | | Measurement Assumptions: |
| Participating life | | Aggregate of net level premium reserves for death and endowment policy benefits (calculated based upon the non-forfeiture interest rate of 4%, and mortality rates guaranteed in calculating the cash surrender values described in such contracts). |
| Nonparticipating life | | 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 7%. |
Individual and group traditional fixed annuities after annuitization | | Present value of expected future payments. Interest rate assumptions used in establishing such liabilities range from 4% to 8%. |
Non-medical health insurance | | 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%. |
| Disabled lives | | 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 3% to 7%. |
Participating business represented 3% and 2% of the Company’s life insurance in-force at December 31, 2013 and 2012, respectively. Participating policies represented 32%, 24% and 10% of gross life insurance premiums for the years ended December 31, 2013, 2012 and 2011, respectively.
PABs are equal to: (i) policy account values, which consist of an accumulation of gross premium payments; (ii) credited interest, ranging from 1% to 8%, less expenses, mortality charges and withdrawals; and (iii) fair value adjustments relating to business combinations.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
4. Insurance (continued)
Guarantees
The Company issues variable annuity products with guaranteed minimum benefits. The non-life contingent portion of GMWBs and the portion of certain GMIBs that does not require annuitization are accounted for as embedded derivatives in PABs and are further discussed in Note 8. Guarantees accounted for as insurance liabilities include:
|
| | | | |
| Guarantee: | Measurement Assumptions: |
| GMDBs | • | A return of purchase payment upon death even if the account value is reduced to zero. | • | Present value of expected death benefits in excess of the projected account balance recognizing the excess ratably over the accumulation period based on the present value of total expected assessments. |
| | • | An enhanced death benefit may be available for an additional fee. | • | Assumptions are consistent with those used for amortizing DAC, and are thus subject to the same variability and risk. |
| | | | • | Investment performance and volatility assumptions are consistent with the historical experience of the appropriate underlying equity index, such as the S&P 500 Index. |
| | | | • | Benefit assumptions are based on the average benefits payable over a range of scenarios. |
| GMIBs | • | After a specified period of time determined at the time of issuance of the variable annuity contract, a minimum accumulation of 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. | • | Present value of expected 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 present value of total expected assessments. |
| | • | Certain contracts also provide for a guaranteed lump sum return of purchase premium in lieu of the annuitization benefit. | • | Assumptions are consistent with those used for estimating GMDB liabilities. |
| | | | • | Calculation incorporates an assumption for the percentage of the potential annuitizations that may be elected by the contractholder. |
| GMWBs | • | A return of purchase payment via partial withdrawals, even if the account value is reduced to zero, provided that cumulative withdrawals in a contract year do not exceed a certain limit. | • | Expected value of the life contingent payments and expected assessments using assumptions consistent with those used for estimating the GMDB liabilities. |
| | • | Certain contracts include guaranteed withdrawals that are life contingent. | | |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
4. Insurance (continued)
Information regarding the liabilities for guarantees (excluding base policy liabilities and embedded derivatives) relating to annuity and universal and variable life contracts was as follows:
|
| | | | | | | | | | | | | | | |
| | Annuity Contracts | | Universal and Variable Life Contracts | | |
| | GMDBs | | GMIBs | | Secondary Guarantees | | Total |
| | (In millions) |
| Direct | | | | | | | |
| Balance at January 1, 2011 | $ | 79 |
| | $ | 281 |
| | $ | 896 |
| | $ | 1,256 |
|
| Incurred guaranteed benefits | 84 |
| | 128 |
| | 140 |
| | 352 |
|
| Paid guaranteed benefits | (25 | ) | | — |
| | — |
| | (25 | ) |
| Balance at December 31, 2011 | 138 |
| | 409 |
| | 1,036 |
| | 1,583 |
|
| Incurred guaranteed benefits | 108 |
| | 402 |
| | 332 |
| | 842 |
|
| Paid guaranteed benefits | (29 | ) | | — |
| | — |
| | (29 | ) |
| Balance at December 31, 2012 | 217 |
| | 811 |
| | 1,368 |
| | 2,396 |
|
| Incurred guaranteed benefits | 155 |
| | 127 |
| | 415 |
| | 697 |
|
| Paid guaranteed benefits | (17 | ) | | — |
| | — |
| | (17 | ) |
| Balance at December 31, 2013 | $ | 355 |
| | $ | 938 |
| | $ | 1,783 |
| | $ | 3,076 |
|
| Ceded | | | | | | | |
| Balance at January 1, 2011 | $ | 76 |
| | $ | 97 |
| | $ | 657 |
| | $ | 830 |
|
| Incurred guaranteed benefits | 59 |
| | 42 |
| | 110 |
| | 211 |
|
| Paid guaranteed benefits | (21 | ) | | — |
| | — |
| | (21 | ) |
| Balance at December 31, 2011 | 114 |
| | 139 |
| | 767 |
| | 1,020 |
|
| Incurred guaranteed benefits | 56 |
| | 129 |
| | 267 |
| | 452 |
|
| Paid guaranteed benefits | (25 | ) | | — |
| | — |
| | (25 | ) |
| Balance at December 31, 2012 | 145 |
| | 268 |
| | 1,034 |
| | 1,447 |
|
| Incurred guaranteed benefits | 85 |
| | 31 |
| | 334 |
| | 450 |
|
| Paid guaranteed benefits | (15 | ) | | — |
| | — |
| | (15 | ) |
| Balance at December 31, 2013 | $ | 215 |
| | $ | 299 |
| | $ | 1,368 |
| | $ | 1,882 |
|
| Net | | | | | | | |
| Balance at January 1, 2011 | $ | 3 |
| | $ | 184 |
| | $ | 239 |
| | $ | 426 |
|
| Incurred guaranteed benefits | 25 |
| | 86 |
| | 30 |
| | 141 |
|
| Paid guaranteed benefits | (4 | ) | | — |
| | — |
| | (4 | ) |
| Balance at December 31, 2011 | 24 |
| | 270 |
| | 269 |
| | 563 |
|
| Incurred guaranteed benefits | 52 |
| | 273 |
| | 65 |
| | 390 |
|
| Paid guaranteed benefits | (4 | ) | | — |
| | — |
| | (4 | ) |
| Balance at December 31, 2012 | 72 |
| | 543 |
| | 334 |
| | 949 |
|
| Incurred guaranteed benefits | 70 |
| | 96 |
| | 81 |
| | 247 |
|
| Paid guaranteed benefits | (2 | ) | | — |
| | — |
| | (2 | ) |
| Balance at December 31, 2013 | $ | 140 |
| | $ | 639 |
| | $ | 415 |
| | $ | 1,194 |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
4. Insurance (continued)
Account balances of contracts with insurance guarantees were invested in separate account asset classes as follows at:
|
| | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | (In millions) |
| Fund Groupings: | | | |
| Equity | $ | 46,559 |
| | $ | 39,113 |
|
| Balanced | 41,894 |
| | 37,528 |
|
| Bond | 4,270 |
| | 4,678 |
|
| Money Market | 789 |
| | 879 |
|
| Total | $ | 93,512 |
| | $ | 82,198 |
|
Based on the type of guarantee, the Company defines net amount at risk (“NAR”) as listed below.
Variable Annuity Guarantees
In the Event of Death
Defined as the death benefit less the total contract account value, as of the balance sheet date. It represents the amount of the claim that the Company would incur if death claims were filed on all contracts on the balance sheet date and includes any additional contractual claims associated with riders purchased to assist with covering income taxes payable upon death.
At Annuitization
Defined as the amount (if any) that would be required to be added to the total contract account value to purchase a lifetime income stream, based on current annuity rates, equal to the minimum amount provided under the guaranteed benefit. This amount represents the Company’s potential economic exposure to such guarantees in the event all contractholders were to annuitize on the balance sheet date, even though the contracts contain terms that allow annuitization of the guaranteed amount only after the 10th anniversary of the contract, which not all contractholders have achieved.
Universal and Variable Life Contracts
Defined as the guarantee amount less the account value, as of the balance sheet date. It represents the amount of the claim that the Company would incur if death claims were filed on all contracts on the balance sheet date.
The amounts in the table below include direct business, but exclude offsets from hedging or reinsurance, if any. See Note 6 for a discussion of certain living and death benefit guarantees which have been reinsured. Therefore, the NARs presented below reflect the economic exposures of living and death benefit guarantees associated with variable annuities, but not necessarily their impact on the Company.
Information regarding the types of guarantees relating to annuity contracts and universal and variable life contracts was as follows at:
|
| | | | | | | | | | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | In the
Event of Death | | At
Annuitization | | In the Event of Death | | At Annuitization |
| | (In millions) |
| Annuity Contracts (1) | | | | | | | |
| Variable Annuity Guarantees | | | | | | | |
| Total contract account value | $ | 100,420 |
| | $ | 57,041 |
| | $ | 89,671 |
| | $ | 51,411 |
|
| Separate account value | $ | 95,637 |
| | $ | 55,805 |
| | $ | 84,106 |
| | $ | 49,778 |
|
| Net amount at risk | $ | 2,230 |
| | $ | 562 |
| | $ | 3,117 |
| | $ | 2,316 |
|
| Average attained age of contractholders | 64 years |
| | 64 years |
| | 63 years |
| | 63 years |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
4. Insurance (continued)
|
| | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | Secondary Guarantees |
| | (In millions) |
| Universal and Variable Life Contracts (1) | | | |
| Account value (general and separate account) | $ | 6,360 |
| | $ | 5,812 |
|
| Net amount at risk | $ | 91,264 |
| | $ | 86,468 |
|
| Average attained age of policyholders | 58 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. |
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, 2013, 2012 and 2011, the Company issued $10.9 billion, $10.3 billion and $12.5 billion, respectively, and repaid $11.7 billion, $9.6 billion and $13.4 billion, respectively, of such funding agreements. At December 31, 2013 and 2012, liabilities for funding agreements outstanding, which are included in PABs, were $5.3 billion and $6.1 billion, respectively.
MetLife Insurance Company of Connecticut and MLI-USA, are members of regional banks in the Federal Home Loan Bank (“FHLB”) system (“FHLBanks”). Holdings of common stock of FHLBanks, included in equity securities, were as follows at:
|
| | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | (In millions) |
| FHLB of Boston | $ | 64 |
| | $ | 67 |
|
| FHLB of Pittsburgh | $ | 20 |
| | $ | 11 |
|
The Company has also entered into funding agreements with FHLBanks and the Federal Agricultural Mortgage Corporation, a federally chartered instrumentality of the U.S. (“Farmer Mac”). The liability for such funding agreements is included in PABs. Information related to such funding agreements was as follows at:
|
| | | | | | | | | | | | | | | | | |
| | Liability | | Collateral | |
| | December 31, | |
| | 2013 | | 2012 | | 2013 | | 2012 |
| | (In millions) |
| FHLB of Boston (1) | $ | 450 |
| | $ | 450 |
| | $ | 808 |
| (2) | | $ | 537 |
| (2) |
| Farmer Mac (3) | $ | 200 |
| | $ | 200 |
| | $ | 230 |
| | | $ | 230 |
| |
| FHLB of Pittsburgh (1) | $ | 200 |
| | $ | — |
| | $ | 602 |
| (2) | | $ | 595 |
| (2) |
______________
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
4. Insurance (continued)
| |
| (1) | Represents funding agreements issued to the applicable FHLBank in exchange for cash and for which such FHLBank has been granted a lien on certain assets, some of which are in the custody of such FHLBank, including residential mortgage-backed securities (“RMBS”), to collateralize obligations under advances evidenced by funding agreements. The Company is permitted to withdraw any portion of the collateral in the custody of such FHLBank 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, such FHLBank’s recovery on the collateral is limited to the amount of the Company’s liability to such FHLBank. |
| |
| (2) | Advances are collateralized by mortgage-backed securities. The amount of collateral presented is at estimated fair value. |
| |
| (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 Farmer Mac. The obligations under these funding agreements are secured by a pledge of certain eligible agricultural real estate mortgage loans and may, under certain circumstances, be secured by other qualified collateral. The amount of collateral presented is at carrying value. |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
4. Insurance (continued)
Liabilities for Unpaid Claims and Claim Expenses
Information regarding the liabilities for unpaid claims and claim expenses relating to 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, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Balance at January 1, | $ | 1,216 |
| | $ | 1,079 |
| | $ | 978 |
|
| Less: Reinsurance recoverables | 1,124 |
| | 980 |
| | 878 |
|
| Net balance at January 1, | 92 |
| | 99 |
| | 100 |
|
| Incurred related to: | | | | | |
| Current year | 5 |
| | 5 |
| | 5 |
|
| Prior years (1) | 4 |
| | (2 | ) | | 4 |
|
| Total incurred | 9 |
| | 3 |
| | 9 |
|
| Paid related to: | | | | | |
| Current year | — |
| | — |
| | — |
|
| Prior years | (11 | ) | | (10 | ) | | (10 | ) |
| Total paid | (11 | ) | | (10 | ) | | (10 | ) |
| Net balance at December 31, | 90 |
| | 92 |
| | 99 |
|
| Add: Reinsurance recoverables | 1,235 |
| | 1,124 |
| | 980 |
|
| Balance at December 31, | $ | 1,325 |
| | $ | 1,216 |
| | $ | 1,079 |
|
______________
| |
| (1) | During 2013, 2012 and 2011, claims and claim adjustment expenses associated with prior years changed due to differences between the actual benefits paid and expected benefits owed during those periods. |
Separate Accounts
Separate account assets and liabilities primarily include pass-through separate accounts totaling $97.6 billion and $85.9 billion at December 31, 2013 and 2012, respectively, for which the policyholder assumes all investment risk.
For the years ended December 31, 2013, 2012 and 2011, there were no investment gains (losses) on transfers of assets from the general account to the separate accounts.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
5. Deferred Policy Acquisition Costs, Value of Business Acquired and Other Policy-Related Intangibles
See Note 1 for a description of capitalized acquisition costs.
Nonparticipating and Non-Dividend-Paying Traditional Contracts
The Company amortizes DAC and VOBA related to these contracts (primarily term insurance) over the appropriate premium paying period in proportion to the historic actual and expected future gross premiums that were set at contract issue. The expected premiums are based upon the premium requirement of each policy and assumptions for mortality, persistency and investment returns at policy issuance, or policy acquisition (as it relates to VOBA), include provisions for adverse deviation, and 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.
Participating, Dividend-Paying Traditional Contracts
The Company amortizes DAC related to these 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. 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 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 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 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 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 balances.
Fixed and Variable Universal Life Contracts and Fixed and Variable Deferred Annuity Contracts
The Company amortizes DAC and VOBA related to these 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.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
5. Deferred Policy Acquisition Costs, Value of Business Acquired and Other Policy-Related Intangibles (continued)
Factors Impacting Amortization
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 assumptions primarily relate to investment returns, policyholder dividend scales, interest crediting rates, mortality, persistency and expenses to administer business. Management annually updates assumptions used in 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.
Amortization of DAC and VOBA is attributed to net investment gains (losses) and net derivative gains (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.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
5. Deferred Policy Acquisition Costs, Value of Business Acquired and Other Policy-Related Intangibles (continued)
Information regarding DAC and VOBA was as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| DAC | | | | | |
| Balance at January 1, | $ | 3,079 |
| | $ | 3,215 |
| | $ | 2,718 |
|
| Capitalizations | 504 |
| | 886 |
| | 1,365 |
|
| Amortization related to: | | | | | |
| Net investment gains (losses) and net derivative gains (losses) | 484 |
| | (331 | ) | | (339 | ) |
| Other expenses | (404 | ) | | (513 | ) | | (477 | ) |
| Total amortization | 80 |
| | (844 | ) | | (816 | ) |
| Unrealized investment gains (losses) | 80 |
| | (19 | ) | | (49 | ) |
| Disposition and other (1), (2) | 138 |
|
| (159 | ) |
| (3 | ) |
| Balance at December 31, | 3,881 |
| | 3,079 |
| | 3,215 |
|
| VOBA | | | | | |
| Balance at January 1, | 667 |
| | 1,006 |
| | 1,686 |
|
| Amortization related to: | | | | | |
| Net investment gains (losses) and net derivative gains (losses) | 5 |
| | — |
| | (29 | ) |
| Other expenses | (135 | ) | | (191 | ) | | (314 | ) |
| Total amortization | (130 | ) | | (191 | ) | | (343 | ) |
| Unrealized investment gains (losses) | 312 |
| | (148 | ) | | (337 | ) |
| Balance at December 31, | 849 |
| | 667 |
| | 1,006 |
|
| Total DAC and VOBA | | | | | |
| Balance at December 31, | $ | 4,730 |
| | $ | 3,746 |
| | $ | 4,221 |
|
______________
| |
| (1) | The year ended December 31, 2013 includes $138 million that was reclassified to DAC from premiums, reinsurance and other receivables. The amounts reclassified relate to an affiliated reinsurance agreement accounted for using the deposit method of accounting and represent the DAC amortization on the expense allowances ceded on the agreement from inception. These amounts were previously included in the calculated value of the deposit receivable on this agreement and recorded within premiums, reinsurance and other receivables. |
| |
| (2) | See Note 3 for information on the disposition of a subsidiary. |
Information regarding total DAC and VOBA by segment, as well as Corporate & Other, was as follows at:
|
| | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | (In millions) |
| Retail | $ | 4,698 |
| | $ | 3,738 |
|
| Corporate Benefit Funding | 6 |
| | 8 |
|
| Corporate & Other | 26 |
| | — |
|
| Total | $ | 4,730 |
| | $ | 3,746 |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
5. Deferred Policy Acquisition Costs, Value of Business Acquired and Other Policy-Related Intangibles (continued)
Information regarding other policy-related intangibles was as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Deferred Sales Inducements | | | | | |
| Balance at January 1, | $ | 509 |
| | $ | 535 |
| | $ | 537 |
|
| Capitalization | 6 |
| | 21 |
| | 79 |
|
| Amortization | (32 | ) | | (47 | ) | | (81 | ) |
| Balance at December 31, | $ | 483 |
| | $ | 509 |
| | $ | 535 |
|
|
| | | | | | | | | | | |
| VODA and VOCRA | | | | | |
| Balance at January 1, | $ | 175 |
| | $ | 190 |
| | $ | 203 |
|
| Amortization | (16 | ) | | (15 | ) | | (13 | ) |
| Balance at December 31, | $ | 159 |
| | $ | 175 |
| | $ | 190 |
|
| Accumulated amortization | $ | 81 |
| | $ | 65 |
| | $ | 50 |
|
The estimated future amortization expense to be reported in other expenses for the next five years is as follows:
|
| | | | | | | |
| | VOBA | | VODA and VOCRA |
| | (In millions) |
| 2014 | $ | 176 |
| | $ | 17 |
|
| 2015 | $ | 141 |
| | $ | 17 |
|
| 2016 | $ | 114 |
| | $ | 15 |
|
| 2017 | $ | 94 |
| | $ | 14 |
|
| 2018 | $ | 78 |
| | $ | 13 |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
6. 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 affiliated and unaffiliated companies. The Company participates in reinsurance activities in order to limit losses, minimize exposure to significant risks and provide additional capacity for future growth.
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 in Note 7.
Retail
The Company’s Retail Annuities business reinsures 100% of the living and death benefit guarantees issued in connection with most of its variable annuities issued since 2006 to an affiliated reinsurer and certain portions of the living and death benefit guarantees issued in connection with its variable annuities issued prior to 2006 to affiliated and unaffiliated reinsurers. 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 also reinsures 90% of its fixed annuities to an affiliated reinsurer. The value of the embedded derivatives on the ceded risk is determined using a methodology consistent with the guarantees directly written by the Company with the exception of the input for nonperformance risk that reflects the credit of the reinsurer.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
6. Reinsurance (continued)
For its Retail Life & Other insurance products, the Company has historically reinsured the mortality risk primarily on an excess of retention basis or on a quota share basis. The Company currently reinsures 100% of the mortality risk in excess of $100,000 per life for most new policies and reinsures up to 100% of the mortality risk for certain other policies. 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. The Company also reinsures the risk associated with secondary death benefit guarantees on certain universal life insurance policies to affiliates. The Company evaluates its reinsurance programs routinely and may increase or decrease its retention at any time.
Corporate Benefit Funding
The Company’s Corporate Benefit Funding segment has periodically engaged in reinsurance activities, on an opportunistic basis. The impact of these activities on the financial results of this segment has not been significant and there were no additional transactions during the periods presented.
Corporate & Other
The Company also reinsures, through 100% quota share reinsurance agreements, certain run-off LTC and workers’ compensation business written by the Company.
Catastrophe Coverage
The Company has exposure to catastrophes, 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.
Reinsurance Recoverables
The Company reinsures its business through a diversified group of well-capitalized 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, 2013 and 2012, were not significant.
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 $2.0 billion and $2.2 billion of unsecured unaffiliated reinsurance recoverable balances at December 31, 2013 and 2012, respectively.
At December 31, 2013, the Company had $7.5 billion of net unaffiliated ceded reinsurance recoverables. Of this total, $6.7 billion, or 89%, were with the Company’s five largest unaffiliated ceded reinsurers, including $1.2 billion of net unaffiliated ceded reinsurance recoverables which were unsecured. At December 31, 2012, the Company had $7.2 billion of net unaffiliated ceded reinsurance recoverables. Of this total, $6.5 billion, or 90%, were with the Company’s five largest unaffiliated ceded reinsurers, including $1.4 billion of net unaffiliated ceded reinsurance recoverables which were unsecured.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
6. Reinsurance (continued)
The amounts in the consolidated statements of operations include the impact of reinsurance. Information regarding the significant effects of reinsurance was as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 |
| 2012 |
| 2011 |
| | (In millions) |
| Premiums |
|
|
|
|
|
| Direct premiums | $ | 1,561 |
|
| $ | 2,063 |
|
| $ | 2,429 |
|
| Reinsurance assumed | 10 |
|
| 11 |
|
| 7 |
|
| Reinsurance ceded | (965 | ) |
| (813 | ) |
| (608 | ) |
| Net premiums | $ | 606 |
|
| $ | 1,261 |
|
| $ | 1,828 |
|
| Universal life and investment-type product policy fees |
|
|
|
|
|
| Direct universal life and investment-type product policy fees | $ | 3,248 |
|
| $ | 2,972 |
|
| $ | 2,572 |
|
| Reinsurance assumed | 84 |
|
| 87 |
|
| 92 |
|
| Reinsurance ceded | (996 | ) |
| (798 | ) |
| (708 | ) |
| Net universal life and investment-type product policy fees | $ | 2,336 |
|
| $ | 2,261 |
|
| $ | 1,956 |
|
| Other revenues |
|
|
|
|
|
| Direct other revenues | $ | 259 |
|
| $ | 231 |
|
| $ | 209 |
|
| Reinsurance assumed | — |
|
| — |
|
| — |
|
| Reinsurance ceded | 333 |
|
| 280 |
|
| 299 |
|
| Net other revenues | $ | 592 |
|
| $ | 511 |
|
| $ | 508 |
|
| Policyholder benefits and claims |
|
|
|
|
|
| Direct policyholder benefits and claims | $ | 3,732 |
|
| $ | 4,139 |
|
| $ | 4,277 |
|
| Reinsurance assumed | 15 |
|
| 23 |
|
| 20 |
|
| Reinsurance ceded | (2,040 | ) |
| (1,773 | ) |
| (1,637 | ) |
| Net policyholder benefits and claims | $ | 1,707 |
|
| $ | 2,389 |
|
| $ | 2,660 |
|
| Interest credited to policyholder account balances |
|
|
|
|
|
| Direct interest credited to policyholder account balances | $ | 1,089 |
|
| $ | 1,185 |
|
| $ | 1,206 |
|
| Reinsurance assumed | 73 |
|
| 71 |
|
| 68 |
|
| Reinsurance ceded | (125 | ) |
| (109 | ) |
| (85 | ) |
| Net interest credited to policyholder account balances | $ | 1,037 |
|
| $ | 1,147 |
|
| $ | 1,189 |
|
| Other expenses |
|
|
|
|
|
| Direct other expenses | $ | 1,568 |
|
| $ | 2,562 |
|
| $ | 2,781 |
|
| Reinsurance assumed | 28 |
|
| 33 |
|
| 48 |
|
| Reinsurance ceded | 63 |
|
| 125 |
|
| 152 |
|
| Net other expenses | $ | 1,659 |
|
| $ | 2,720 |
|
| $ | 2,981 |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
6. Reinsurance (continued)
The amounts in the consolidated balance sheets include the impact of reinsurance. Information regarding the significant effects of reinsurance was as follows at:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2013 |
| 2012 |
| | Direct |
| Assumed |
| Ceded |
| Total Balance Sheet |
| Direct |
| Assumed |
| Ceded |
| Total Balance Sheet |
| | (In millions) |
| Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Premiums, reinsurance and other receivables | $ | 221 |
|
| $ | 28 |
|
| $ | 20,360 |
|
| $ | 20,609 |
|
| $ | 396 |
|
| $ | 35 |
|
| $ | 21,496 |
|
| $ | 21,927 |
|
| Deferred policy acquisition costs and value of business acquired | 5,191 |
|
| 123 |
|
| (584 | ) |
| 4,730 |
|
| 4,264 |
|
| 121 |
|
| (639 | ) |
| 3,746 |
|
| Total assets | $ | 5,412 |
|
| $ | 151 |
|
| $ | 19,776 |
|
| $ | 25,339 |
|
| $ | 4,660 |
|
| $ | 156 |
|
| $ | 20,857 |
|
| $ | 25,673 |
|
| Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other policy-related balances | $ | 712 |
|
| $ | 1,641 |
|
| $ | 811 |
|
| $ | 3,164 |
|
| $ | 691 |
|
| $ | 1,592 |
|
| $ | 855 |
|
| $ | 3,138 |
|
| Other liabilities | 1,257 |
|
| 10 |
|
| 5,509 |
|
| 6,776 |
|
| 1,396 |
|
| 11 |
|
| 5,140 |
|
| 6,547 |
|
| Total liabilities | $ | 1,969 |
|
| $ | 1,651 |
|
| $ | 6,320 |
|
| $ | 9,940 |
|
| $ | 2,087 |
|
| $ | 1,603 |
|
| $ | 5,995 |
|
| $ | 9,685 |
|
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 $4.6 billion and $4.7 billion at December 31, 2013 and 2012, respectively. There were no deposit liabilities on reinsurance at both December 31, 2013 and 2012.
Related Party Reinsurance Transactions
The Company has reinsurance agreements with certain MetLife subsidiaries, including MLIC, MetLife Reinsurance Company of South Carolina, Exeter, General American Life Insurance Company, MLIIC, MetLife Reinsurance Company of Vermont and MetLife Reinsurance Company of Delaware (“MRD”), all of which are related parties.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
6. Reinsurance (continued)
Information regarding the significant effects of affiliated reinsurance included in the consolidated statements of operations was as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| | 2013 |
| 2012 |
| 2011 |
| | (In millions) |
| Premiums |
|
|
|
|
|
| Reinsurance assumed | $ | 10 |
| | $ | 11 |
| | $ | 7 |
|
| Reinsurance ceded | (638 | ) | | (478 | ) | | (286 | ) |
| Net premiums | $ | (628 | ) | | $ | (467 | ) | | $ | (279 | ) |
| Universal life and investment-type product policy fees | | | | | |
| Reinsurance assumed | $ | 84 |
| | $ | 87 |
| | $ | 92 |
|
| Reinsurance ceded | (585 | ) | | (444 | ) | | (400 | ) |
| Net universal life and investment-type product policy fees | $ | (501 | ) | | $ | (357 | ) | | $ | (308 | ) |
| Other revenues |
| |
| |
|
| Reinsurance assumed | $ | — |
| | $ | — |
| | $ | — |
|
| Reinsurance ceded | 332 |
| | 280 |
| | 299 |
|
| Net other revenues | $ | 332 |
| | $ | 280 |
| | $ | 299 |
|
| Policyholder benefits and claims |
| |
| |
|
| Reinsurance assumed | $ | 13 |
| | $ | 21 |
| | $ | 18 |
|
| Reinsurance ceded | (800 | ) | | (780 | ) | | (484 | ) |
| Net policyholder benefits and claims | $ | (787 | ) | | $ | (759 | ) | | $ | (466 | ) |
| Interest credited to policyholder account balances | | | | | |
| Reinsurance assumed | $ | 73 |
| | $ | 71 |
| | $ | 68 |
|
| Reinsurance ceded | (125 | ) | | (109 | ) | | (84 | ) |
| Net interest credited to policyholder account balances | $ | (52 | ) | | $ | (38 | ) | | $ | (16 | ) |
| Other expenses | | | | | |
| Reinsurance assumed | $ | 28 |
| | $ | 33 |
| | $ | 48 |
|
| Reinsurance ceded | 92 |
| | 157 |
| | 204 |
|
| Net other expenses | $ | 120 |
| | $ | 190 |
| | $ | 252 |
|
Information regarding the significant effects of affiliated reinsurance included in the consolidated balance sheets was as follows at:
|
| | | | | | | | | | | | | | | |
| | December 31, |
| | 2013 |
| 2012 |
| | Assumed |
| Ceded |
| Assumed |
| Ceded |
| | (In millions) |
| Assets |
|
|
|
|
|
|
|
| Premiums, reinsurance and other receivables | $ | 28 |
|
| $ | 12,710 |
| | $ | 35 |
| | $ | 14,171 |
|
| Deferred policy acquisition costs and value of business acquired | 122 |
|
| (579 | ) | | 121 |
| | (642 | ) |
| Total assets | $ | 150 |
| | $ | 12,131 |
| | $ | 156 |
| | $ | 13,529 |
|
| Liabilities | | | | | | | |
| Other policy-related balances | $ | 1,640 |
|
| $ | 811 |
| | $ | 1,592 |
| | $ | 855 |
|
| Other liabilities | 9 |
|
| 5,260 |
| | 10 |
| | 4,894 |
|
| Total liabilities | $ | 1,649 |
|
| $ | 6,071 |
|
| $ | 1,602 |
|
| $ | 5,749 |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
6. Reinsurance (continued)
Effective October 1, 2012, MLI-USA entered into a reinsurance agreement to cede two blocks of business to MRD, on a 90% coinsurance with funds withheld basis. The agreement covers certain term and certain universal life policies issued in 2012 by MLI-USA and was amended in 2013 to include certain term and universal life policies issued by MLI-USA through December 31, 2013. The agreement transfers risk to MRD and, therefore, is accounted for as reinsurance. As a result of the agreement, affiliated reinsurance recoverables, included in premiums, reinsurance and other receivables, were $917 million and $407 million at December 31, 2013 and 2012, respectively. MLI-USA also recorded a funds withheld liability and other reinsurance payables, included in other liabilities, which were $798 million and $438 million at December 31, 2013 and 2012, respectively. Certain contractual features of this agreement qualify as embedded derivatives, which are separately accounted for at fair value on the Company’s consolidated balance sheets. The embedded derivative related to the funds withheld associated with this reinsurance agreement is included within other liabilities and was ($14) million and $6 million at December 31, 2013 and 2012, respectively. The Company’s consolidated statements of operations reflected a loss for this agreement of $50 million and $37 million for the years ended December 31, 2013 and 2012, respectively, which included net derivative gains (losses) of $20 million and ($6) million for the years ended December 31, 2013 and 2012, respectively, related to the embedded derivative.
The Company ceded risks to affiliates related to guaranteed minimum benefit guarantees written directly by the Company. These ceded reinsurance agreements contain embedded derivatives and changes in their fair value are also included within net derivative gains (losses). The embedded derivatives associated with the cessions are included within premiums, reinsurance and other receivables and were assets of $912 million and $3.6 billion at December 31, 2013 and 2012, respectively. Net derivative gains (losses) associated with the embedded derivatives were ($3.0) billion, $524 million, and $1.6 billion for the years ended December 31, 2013, 2012 and 2011, respectively.
MLI-USA ceded two blocks of business to an affiliate on a 90% coinsurance with funds withheld basis. Certain contractual features of this agreement qualify as embedded derivatives, which are separately accounted for at estimated fair value on the Company’s consolidated balance sheets. The embedded derivative related to the funds withheld associated with this reinsurance agreement is included within other liabilities and increased the funds withheld balance by $48 million and $546 million at December 31, 2013 and 2012, respectively. Net derivative gains (losses) associated with the embedded derivatives were $498 million, ($107) million and ($434) million for the years ended December 31, 2013, 2012 and 2011, respectively.
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 $5.9 billion and $6.1 billion of unsecured affiliated reinsurance recoverable balances at December 31, 2013 and 2012, respectively.
Affiliated 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 affiliated reinsurance were $4.4 billion and $4.6 billion at December 31, 2013 and 2012, respectively. There were no deposit liabilities on affiliated reinsurance at both December 31, 2013 and 2012.
7. Investments
See Note 9 for information about the fair value hierarchy for investments and the related valuation methodologies.
Investment Risks and Uncertainties
Investments are exposed to the following primary sources of risk: credit, interest rate, liquidity, market valuation, currency and real estate risk. 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.
The determination of valuation allowances and impairments is highly subjective and is based upon periodic evaluations and assessments 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 securities, asset-backed securities (“ABS”) and certain structured investment transactions) is dependent upon certain factors such as prepayments and defaults, and changes in such factors could result in changes in amounts to be earned.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
7. Investments (continued)
Fixed Maturity and Equity Securities AFS
Fixed Maturity and Equity Securities AFS by Sector
The following table presents the fixed maturity and equity securities AFS by sector. Redeemable preferred stock is reported within U.S. corporate and foreign corporate fixed maturity securities and non-redeemable preferred stock is reported within equity securities. Included within fixed maturity securities are structured securities including RMBS, ABS and commercial mortgage-backed securities (“CMBS”).
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2013 | | December 31, 2012 |
| | Cost or Amortized Cost | | Gross Unrealized | | Estimated Fair Value | | Cost or Amortized Cost | | Gross Unrealized | | Estimated Fair Value |
| | | Gains | | Temporary Losses | | OTTI Losses | | Gains | | Temporary Losses | | OTTI Losses | |
| | | | | | | | | | (In millions) | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | | | | | |
| U.S. corporate | $ | 15,779 |
| | $ | 1,130 |
| | $ | 207 |
| | $ | — |
| | $ | 16,702 |
| | $ | 16,914 |
| | $ | 2,063 |
| | $ | 82 |
| | $ | — |
| | $ | 18,895 |
|
| Foreign corporate | 8,111 |
| | 485 |
| | 79 |
| | — |
| | 8,517 |
| | 8,618 |
| | 853 |
| | 26 |
| | — |
| | 9,445 |
|
| U.S. Treasury and agency | 8,188 |
| | 334 |
| | 228 |
| | — |
| | 8,294 |
| | 7,678 |
| | 1,186 |
| | — |
| | — |
| | 8,864 |
|
| RMBS | 4,587 |
| | 201 |
| | 59 |
| | 41 |
| | 4,688 |
| | 5,492 |
| | 360 |
| | 50 |
| | 64 |
| | 5,738 |
|
| State and political subdivision | 2,147 |
| | 139 |
| | 62 |
| | — |
| | 2,224 |
| | 2,002 |
| | 354 |
| | 27 |
| | — |
| | 2,329 |
|
| ABS | 2,081 |
| | 32 |
| | 12 |
| | — |
| | 2,101 |
| | 2,204 |
| | 67 |
| | 18 |
| | — |
| | 2,253 |
|
| CMBS | 1,546 |
| | 62 |
| | 4 |
| | — |
| | 1,604 |
| | 2,221 |
| | 141 |
| | 6 |
| | — |
| | 2,356 |
|
| Foreign government | 1,038 |
| | 103 |
| | 19 |
| | — |
| | 1,122 |
| | 876 |
| | 214 |
| | 2 |
| | — |
| | 1,088 |
|
| Total fixed maturity securities | $ | 43,477 |
| | $ | 2,486 |
| | $ | 670 |
| | $ | 41 |
| | $ | 45,252 |
| | $ | 46,005 |
| | $ | 5,238 |
| | $ | 211 |
| | $ | 64 |
| | $ | 50,968 |
|
| Equity securities | | | | | | | | | | | | | | | | | | | |
| Non-redeemable preferred stock | $ | 236 |
| | $ | 9 |
| | $ | 28 |
| | $ | — |
| | $ | 217 |
| | $ | 151 |
| | $ | 11 |
| | $ | 22 |
| | $ | — |
| | $ | 140 |
|
| Common stock | 161 |
| | 40 |
| | — |
| | — |
| | 201 |
| | 160 |
| | 18 |
| | 1 |
| | — |
| | 177 |
|
| Total equity securities | $ | 397 |
| | $ | 49 |
| | $ | 28 |
| | $ | — |
| | $ | 418 |
| | $ | 311 |
| | $ | 29 |
| | $ | 23 |
| | $ | — |
| | $ | 317 |
|
The Company held non-income producing fixed maturity securities with an estimated fair value of $30 million and $22 million with unrealized gains (losses) of $6 million and $3 million at December 31, 2013 and 2012, respectively.
Methodology for Amortization of Premium and Accretion of Discount on Structured Securities
Amortization of premium and accretion of discount on structured securities 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 using inputs obtained from third-party specialists 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.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
7. Investments (continued)
Maturities of Fixed Maturity Securities
The amortized cost and estimated fair value of fixed maturity securities, by contractual maturity date, were as follows at:
|
| | | | | | | | | | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
| | (In millions) |
| Due in one year or less | $ | 2,934 |
| | $ | 2,966 |
| | $ | 4,831 |
| | $ | 4,875 |
|
| Due after one year through five years | 8,895 |
| | 9,301 |
| | 8,646 |
| | 9,192 |
|
| Due after five years through ten years | 7,433 |
| | 7,970 |
| | 7,967 |
| | 8,960 |
|
| Due after ten years | 16,001 |
| | 16,622 |
| | 14,644 |
| | 17,594 |
|
| Subtotal | 35,263 |
| | 36,859 |
| | 36,088 |
| | 40,621 |
|
| Structured securities (RMBS, ABS and CMBS) | 8,214 |
| | 8,393 |
| | 9,917 |
| | 10,347 |
|
| Total fixed maturity securities | $ | 43,477 |
| | $ | 45,252 |
| | $ | 46,005 |
| | $ | 50,968 |
|
Actual maturities may differ from contractual maturities due to the exercise of call or prepayment options. Fixed maturity securities not due at a single maturity date have been presented in the year of final contractual maturity. RMBS, ABS and CMBS are shown separately, as they are not due at a single maturity.
Continuous Gross Unrealized Losses for Fixed Maturity and Equity Securities AFS by Sector
The following table presents the estimated fair value and gross unrealized losses of fixed maturity and equity securities AFS in an unrealized loss position, aggregated by sector and by length of time that the securities have been in a continuous unrealized loss position.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2013 | | December 31, 2012 |
| | Less than 12 Months | | Equal to or Greater than 12 Months | | Less than 12 Months | | Equal to or Greater than 12 Months |
| | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses |
| | (In millions, except number of securities) |
| Fixed maturity securities | | | | | | | | | | | | | | | |
| U.S. corporate | $ | 2,526 |
| | $ | 141 |
| | $ | 470 |
| | $ | 66 |
| | $ | 784 |
| | $ | 16 |
| | $ | 621 |
| | $ | 66 |
|
| Foreign corporate | 1,520 |
| | 70 |
| | 135 |
| | 9 |
| | 494 |
| | 8 |
| | 203 |
| | 18 |
|
| U.S. Treasury and agency | 3,825 |
| | 228 |
| | — |
| | — |
| | 200 |
| | — |
| | — |
| | — |
|
| RMBS | 996 |
| | 35 |
| | 457 |
| | 65 |
| | 62 |
| | 6 |
| | 781 |
| | 108 |
|
| State and political subdivision | 630 |
| | 44 |
| | 64 |
| | 18 |
| | 44 |
| | 2 |
| | 55 |
| | 25 |
|
| ABS | 680 |
| | 5 |
| | 104 |
| | 7 |
| | 208 |
| | 1 |
| | 266 |
| | 17 |
|
| CMBS | 143 |
| | 4 |
| | 7 |
| | — |
| | 59 |
| | 1 |
| | 101 |
| | 5 |
|
| Foreign government | 264 |
| | 19 |
| | 1 |
| | — |
| | 116 |
| | 2 |
| | — |
| | — |
|
| Total fixed maturity securities | $ | 10,584 |
| | $ | 546 |
| | $ | 1,238 |
| | $ | 165 |
| | $ | 1,967 |
| | $ | 36 |
| | $ | 2,027 |
| | $ | 239 |
|
| Equity securities | | | | | | | | | | | | | | | |
| Non-redeemable preferred stock | $ | 105 |
| | $ | 21 |
| | $ | 33 |
| | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | 50 |
| | $ | 22 |
|
| Common stock | 3 |
| | — |
| | 7 |
| | — |
| | 10 |
| | 1 |
| | 7 |
| | — |
|
| Total equity securities | $ | 108 |
| | $ | 21 |
| | $ | 40 |
| | $ | 7 |
| | $ | 10 |
| | $ | 1 |
| | $ | 57 |
| | $ | 22 |
|
| Total number of securities in an unrealized loss position | 1,081 |
| | | | 297 |
| | | | 327 |
| | | | 420 |
| | |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
7. Investments (continued)
Evaluation of AFS Securities for OTTI and Evaluating Temporarily Impaired AFS Securities
Evaluation and Measurement Methodologies
Management considers a wide range of factors about the security issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations used in the impairment evaluation process include, but are not limited to: (i) the length of time and the extent to which the estimated fair value has been below cost or amortized cost; (ii) the potential for impairments when the issuer is experiencing significant financial difficulties; (iii) the potential for impairments in an entire industry sector or sub-sector; (iv) the potential for impairments in certain economically depressed geographic locations; (v) the potential for impairments where the issuer, series of issuers or industry has suffered a catastrophic loss or has exhausted natural resources; (vi) 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.
The methodology and significant inputs used to determine the amount of credit loss on fixed maturity securities are as follows:
| |
| • | The Company calculates the recovery value by performing a discounted cash flow analysis based on the present value of future cash flows. The discount rate is generally the effective interest rate of the security prior to impairment. |
| |
| • | When determining collectability and the period over which value is expected to recover, the Company applies 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: payment terms of the security; the likelihood that the issuer can service the 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. |
| |
| • | Additional considerations are made when assessing the unique features that apply to certain structured securities including, but not limited to: the quality of underlying collateral, expected prepayment speeds, current and forecasted loss severity, consideration of the payment terms of the underlying loans or assets backing a particular security, and the payment priority within the tranche structure of the security. |
| |
| • | When determining the amount of the credit loss for U.S. and foreign corporate securities, foreign government securities and state and political subdivision securities, the estimated fair value is considered 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 above, as well as any private and public sector programs to restructure such securities. |
With respect to securities that have attributes of debt and equity (perpetual hybrid securities), consideration is given in the OTTI analysis as to whether there has been any deterioration in the credit of the issuer and the likelihood of recovery in value of the securities that are in a severe and extended unrealized loss position. Consideration is also given as to 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 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 over the remaining term of the fixed maturity security in a prospective manner based on the amount and timing of estimated future cash flows.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
7. Investments (continued)
Current Period Evaluation
Based on the Company’s current evaluation of its AFS securities in an unrealized loss position in accordance with its impairment policy, and the Company’s current intentions and assessments (as applicable to the type of security) about holding, selling and any requirements to sell these securities, the Company has concluded that these securities are not other-than-temporarily impaired at December 31, 2013. Future OTTI will depend primarily on economic fundamentals, issuer performance (including changes in the present value of future cash flows expected to be collected), and changes in credit ratings, collateral valuation, interest rates and credit spreads. If economic fundamentals deteriorate or if there are adverse changes in the above factors, OTTI may be incurred in upcoming periods.
Gross unrealized losses on fixed maturity securities increased $436 million during the year ended December 31, 2013 from $275 million to $711 million. The increase in gross unrealized losses for the year ended December 31, 2013, was primarily attributable to an increase in interest rates, partially offset by narrowing credit spreads.
At December 31, 2013, $61 million of the total $711 million of gross unrealized losses were from 18 fixed maturity securities with an unrealized loss position of 20% or more of amortized cost for six months or greater.
Investment Grade Fixed Maturity Securities
Of the $61 million of gross unrealized losses on fixed maturity securities with an unrealized loss of 20% or more of amortized cost for six months or greater, $41 million, or 67%, are related to gross unrealized losses on 13 investment grade fixed maturity securities. Unrealized losses on investment grade fixed maturity securities are principally related to widening credit spreads, and with respect to fixed-rate fixed maturity securities, rising interest rates since purchase.
Below Investment Grade Fixed Maturity Securities
Of the $61 million of gross unrealized losses on fixed maturity securities with an unrealized loss of 20% or more of amortized cost for six months or greater, $20 million, or 33%, are related to gross unrealized losses on five below investment grade fixed maturity securities. Unrealized losses on below investment grade fixed maturity securities are principally related to non-agency RMBS (primarily alternative residential mortgage loans) and are the result of significantly wider credit spreads resulting from higher risk premiums since purchase, largely due to economic and market uncertainties including concerns over unemployment levels and valuations of residential real estate supporting non-agency RMBS. Management evaluates non-agency RMBS 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.
Equity Securities
Gross unrealized losses on equity securities increased $5 million during the year ended December 31, 2013 from $23 million to $28 million. Of the $28 million, $5 million were from two equity securities with gross unrealized losses of 20% or more of cost for 12 months or greater, all of which were financial services industry investment grade non-redeemable preferred stock, of which 40% were rated A or better.
Mortgage Loans
Mortgage Loans by Portfolio Segment
Mortgage loans are summarized as follows at:
|
| | | | | | | | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | Carrying Value | | % of Total | | Carrying Value | | % of Total |
| | (In millions) | | | | (In millions) | | |
| Mortgage loans: | | | | | | | |
| Commercial | $ | 4,869 |
| | 63.1 | % | | $ | 5,266 |
| | 57.5 | % |
| Agricultural | 1,285 |
| | 16.6 |
| | 1,260 |
| | 13.8 |
|
| Subtotal (1) | 6,154 |
| | 79.7 |
| | 6,526 |
| | 71.3 |
|
| Valuation allowances | (34 | ) | | (0.4 | ) | | (35 | ) | | (0.4 | ) |
| Subtotal mortgage loans, net | 6,120 |
| | 79.3 |
| | 6,491 |
| | 70.9 |
|
| Commercial mortgage loans held by CSEs — FVO | 1,598 |
| | 20.7 |
| | 2,666 |
| | 29.1 |
|
| Total mortgage loans, net | $ | 7,718 |
| | 100.0 | % | | $ | 9,157 |
| | 100.0 | % |
______________
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
7. Investments (continued)
| |
| (1) | Purchases of mortgage loans were $10 million and $27 million for the years ended December 31, 2013 and 2012, respectively. |
See “— Variable Interest Entities” for discussion of CSEs.
See “— Related Party Investment Transactions” for discussion of related party mortgage loans.
Mortgage Loans and Valuation Allowance by Portfolio Segment
The carrying value prior to valuation allowance (“recorded investment”) in mortgage loans, by portfolio segment, by method of evaluation of credit loss, and the related valuation allowances, by type of credit loss, were as follows at:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | Commercial | | Agricultural | | Total | | Commercial | | Agricultural | | Total |
| | (In millions) |
| Mortgage loans: | | | | | | | | | | | |
| Evaluated individually for credit losses | $ | 72 |
| | $ | 4 |
| | $ | 76 |
| | $ | 76 |
| | $ | — |
| | $ | 76 |
|
| Evaluated collectively for credit losses | 4,797 |
| | 1,281 |
| | 6,078 |
| | 5,190 |
| | 1,260 |
| | 6,450 |
|
| Total mortgage loans | 4,869 |
| | 1,285 |
| | 6,154 |
| | 5,266 |
| | 1,260 |
| | 6,526 |
|
| Valuation allowances: | | | | | | | | | | | |
| Specific credit losses | 7 |
| | — |
| | 7 |
| | 11 |
| | — |
| | 11 |
|
| Non-specifically identified credit losses | 23 |
| | 4 |
| | 27 |
| | 21 |
| | 3 |
| | 24 |
|
| Total valuation allowances | 30 |
| | 4 |
| | 34 |
| | 32 |
| | 3 |
| | 35 |
|
| Mortgage loans, net of valuation allowance | $ | 4,839 |
| | $ | 1,281 |
| | $ | 6,120 |
| | $ | 5,234 |
| | $ | 1,257 |
| | $ | 6,491 |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
7. Investments (continued)
Valuation Allowance Rollforward by Portfolio Segment
The changes in the valuation allowance, by portfolio segment, were as follows:
|
| | | | | | | | | | | |
| | Commercial | | Agricultural | | Total |
| | (In millions) |
| Balance at January 1, 2011 | $ | 84 |
| | $ | 3 |
| | $ | 87 |
|
| Provision (release) | (26 | ) | | — |
| | (26 | ) |
| Charge-offs, net of recoveries | — |
| | — |
| | — |
|
| Balance at December 31, 2011 | 58 |
| | 3 |
| | 61 |
|
| Provision (release) | (26 | ) | | — |
| | (26 | ) |
| Charge-offs, net of recoveries | — |
| | — |
| | — |
|
| Balance at December 31, 2012 | 32 |
| | 3 |
| | 35 |
|
| Provision (release) | (2 | ) | | 1 |
| | (1 | ) |
| Charge-offs, net of recoveries | — |
| | — |
| | — |
|
| Balance at December 31, 2013 | $ | 30 |
| | $ | 4 |
| | $ | 34 |
|
Valuation Allowance Methodology
Mortgage loans are considered to be impaired when it is probable that, based upon current information and events, the Company will be unable to collect all amounts due under the loan agreement. Specific valuation allowances are established using the same methodology for both portfolio segments as the excess carrying value of a loan over either (i) the present value of expected future cash flows discounted at the loan’s original effective interest rate, (ii) the estimated fair value of the loan’s underlying collateral if the loan is in the process of foreclosure or otherwise collateral dependent, or (iii) the loan’s observable market price. A common evaluation framework is used for establishing non-specific valuation allowances for both loan portfolio segments; however, a separate non-specific valuation allowance is calculated and maintained for each loan portfolio segment that is based on inputs unique to each loan portfolio segment. Non-specific valuation allowances are established for pools of loans with similar risk characteristics where a property-specific or market-specific risk has not been identified, but for which the Company expects to incur a credit loss. These evaluations are based upon several loan portfolio segment-specific factors, including the Company’s experience for loan losses, defaults and loss severity, and loss expectations for loans with similar risk characteristics. These evaluations are revised as conditions change and new information becomes available.
Commercial and Agricultural Mortgage Loan Portfolio Segments
The Company typically uses several years of historical experience in establishing non-specific valuation allowances 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 evaluations of agricultural mortgage 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. 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 commercial and agricultural mortgage loans.
All commercial mortgage 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 mortgage loans are monitored on an ongoing basis. The monitoring process focuses on higher risk loans, which include those that are classified as restructured, 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 mortgage loans is generally similar to the commercial mortgage loan monitoring process, with a focus on higher risk loans, including reviews on a geographic and property-type basis. Higher risk loans are reviewed individually on an ongoing basis for potential credit loss and specific valuation allowances are established using the methodology described above. 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.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
7. Investments (continued)
For commercial mortgage loans, the 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 mortgage loan portfolio. Loan-to-value ratios compare the unpaid principal balance of the loan to the estimated fair value of the underlying collateral. 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 mortgage 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 mortgage loan portfolio and are routinely updated.
Credit Quality of Commercial Mortgage Loans
The credit quality of commercial mortgage loans, were as follows at:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Recorded Investment | | Estimated Fair Value | | % of Total |
| | Debt Service Coverage Ratios | | Total | | % of Total | |
| | > 1.20x | | 1.00x - 1.20x | | < 1.00x | |
| | (In millions) | | | | (In millions) | | |
| December 31, 2013: | | | | | | | | | | | | | |
| Loan-to-value ratios: | | | | | | | | | | | | | |
| Less than 65% | $ | 3,754 |
| | $ | 125 |
| | $ | 107 |
| | $ | 3,986 |
| | 81.9 | % | | $ | 4,224 |
| | 82.8 | % |
| 65% to 75% | 700 |
| | — |
| | 27 |
| | 727 |
| | 14.9 |
| | 736 |
| | 14.4 |
|
| 76% to 80% | 80 |
| | 13 |
| | — |
| | 93 |
| | 1.9 |
| | 93 |
| | 1.8 |
|
| Greater than 80% | 37 |
| | 26 |
| | — |
| | 63 |
| | 1.3 |
| | 53 |
| | 1.0 |
|
| Total | $ | 4,571 |
| | $ | 164 |
| | $ | 134 |
| | $ | 4,869 |
| | 100.0 | % | | $ | 5,106 |
| | 100.0 | % |
| December 31, 2012: | | | | | | | | | | | | | |
| Loan-to-value ratios: | | | | | | | | | | | | | |
| Less than 65% | $ | 3,888 |
| | $ | 106 |
| | $ | 89 |
| | $ | 4,083 |
| | 77.5 | % | | $ | 4,459 |
| | 78.5 | % |
| 65% to 75% | 626 |
| | 32 |
| | 27 |
| | 685 |
| | 13.0 |
| | 711 |
| | 12.5 |
|
| 76% to 80% | 343 |
| | 8 |
| | 57 |
| | 408 |
| | 7.8 |
| | 428 |
| | 7.6 |
|
| Greater than 80% | 39 |
| | 28 |
| | 23 |
| | 90 |
| | 1.7 |
| | 81 |
| | 1.4 |
|
| Total | $ | 4,896 |
| | $ | 174 |
| | $ | 196 |
| | $ | 5,266 |
| | 100.0 | % | | $ | 5,679 |
| | 100.0 | % |
Credit Quality of Agricultural Mortgage Loans
The credit quality of agricultural mortgage loans, were as follows at:
|
| | | | | | | | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | Recorded Investment | | % of Total | | Recorded Investment | | % of Total |
| | (In millions) | | | | (In millions) | | |
| Loan-to-value ratios: | | | | | | | |
| Less than 65% | $ | 1,215 |
| | 94.6 | % | | $ | 1,184 |
| | 94.0 | % |
| 65% to 75% | 70 |
| | 5.4 |
| | 76 |
| | 6.0 |
|
| Total | $ | 1,285 |
| | 100.0 | % | | $ | 1,260 |
| | 100.0 | % |
The estimated fair value of agricultural mortgage loans was $1.3 billion at both December 31, 2013 and 2012.
Past Due and Interest Accrual Status of Mortgage Loans
The Company has a high quality, well performing, mortgage loan portfolio, with 99% of all mortgage loans classified as performing at both December 31, 2013 and 2012. The Company defines delinquency consistent with industry practice, when mortgage loans are past due as follows: commercial mortgage loans — 60 days and agricultural mortgage loans — 90 days. The Company had no agricultural mortgage loans past due and one commercial mortgage loan in non-accrual status with a recorded investment of $22 million at December 31, 2013. The Company had no mortgage loans past due and no loans in nonaccrual status at December 31, 2012.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
7. Investments (continued)
Impaired Mortgage Loans
Impaired mortgage loans, including those modified in a troubled debt restructuring, by portfolio segment, were as follows at and for the years ended:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | Average Recorded Investment | | Interest Income |
| | (In millions) |
| December 31, 2013: | | | | | | | | | | | | | | | | | | | |
| Commercial | $ | 22 |
| | $ | 22 |
| | $ | 7 |
| | $ | 15 |
| | $ | 52 |
| | $ | 50 |
| | $ | 74 |
| | $ | 65 |
| | $ | 73 |
| | $ | 3 |
|
| Agricultural (1) | 4 |
| | 4 |
| | — |
| | 4 |
| | — |
| | — |
| | 4 |
| | 4 |
| | 2 |
| | — |
|
| Total | $ | 26 |
| | $ | 26 |
| | $ | 7 |
| | $ | 19 |
| | $ | 52 |
| | $ | 50 |
| | $ | 78 |
| | $ | 69 |
| | $ | 75 |
| | $ | 3 |
|
| December 31, 2012: | | | | | | | | | | | | | | | | | | | |
| Commercial | $ | 76 |
| | $ | 76 |
| | $ | 11 |
| | $ | 65 |
| | $ | — |
| | $ | — |
| | $ | 76 |
| | $ | 65 |
| | $ | 67 |
| | $ | 2 |
|
| Agricultural | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 76 |
| | $ | 76 |
| | $ | 11 |
| | $ | 65 |
| | $ | — |
| | $ | — |
| | $ | 76 |
| | $ | 65 |
| | $ | 67 |
| | $ | 2 |
|
______________
| |
| (1) | Valuation allowance on agricultural mortgage loans was less than $1 million for the year ended December 31, 2013. |
Unpaid principal balance is generally prior to any charge-offs. Interest income recognized is primarily cash basis income. The average recorded investment for commercial and agricultural mortgage loans was $29 million and $4 million, respectively, for the year ended December 31, 2011; and interest income recognized for commercial and agricultural mortgage loans was $2 million and $0, respectively, for the year ended December 31, 2011.
Mortgage Loans Modified in a Troubled Debt Restructuring
For a small portion of the mortgage loan portfolio, classified as troubled debt restructurings, concessions are granted related to borrowers experiencing 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 with the restructuring. Through the continuous 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.
The Company had one agricultural mortgage loan modified in a troubled debt restructuring with a pre-modification and post-modification carrying value of $4 million during the year ended December 31, 2013. There were no agricultural mortgage loans modified in a troubled debt restructuring during the year ended December 31, 2012. There were no commercial mortgage loans modified in a troubled debt restructuring during the year ended December 31, 2013. The Company had one commercial mortgage loan modified during the year ended December 31, 2012 in a troubled debt restructuring which had a carrying value after specific valuation allowance of $53 million pre-modification and $48 million post-modification.
There were no mortgage loans during the previous 12 months modified in a troubled debt restructuring with a subsequent payment default at December 31, 2013 and 2012. Payment default is determined in the same manner as delinquency status as described above.
Other Invested Assets
Other invested assets is comprised primarily of freestanding derivatives with positive estimated fair values (see Note 8), loans to affiliates (see “— Related Party Investment Transactions), tax credit and renewable energy partnerships and leveraged leases.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
7. Investments (continued)
Leveraged Leases
Investment in leveraged leases consisted of the following at:
|
| | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | (In millions) |
| Rental receivables, net | $ | 92 |
| | $ | 92 |
|
| Estimated residual values | 14 |
| | 14 |
|
| Subtotal | 106 |
| | 106 |
|
| Unearned income | (35 | ) | | (37 | ) |
| Investment in leveraged leases, net of non-recourse debt | $ | 71 |
| | $ | 69 |
|
Rental receivables are generally due in periodic installments. The payment periods range from two to 19 years. For rental receivables, the primary credit quality indicator is whether the rental receivable is performing or nonperforming, which is assessed monthly. The Company generally defines nonperforming rental receivables as those that are 90 days or more past due. At December 31, 2013 and 2012, all rental receivables were performing.
The deferred income tax liability related to leveraged leases was $63 million and $53 million at December 31, 2013 and 2012, respectively.
The components of income from investment in leveraged leases, excluding net investment gains (losses), were as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Income from investment in leveraged leases | $ | 2 |
| | $ | 5 |
| | $ | 8 |
|
| Less: Income tax expense on leveraged leases | 1 |
| | 2 |
| | 3 |
|
| Investment income after income tax from investment in leveraged leases | $ | 1 |
| | $ | 3 |
| | $ | 5 |
|
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 $469 million and $654 million at December 31, 2013 and 2012, respectively.
Net Unrealized Investment Gains (Losses)
The components of net unrealized investment gains (losses), included in AOCI, were as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Fixed maturity securities | $ | 1,819 |
| | $ | 5,019 |
| | $ | 3,690 |
|
| Fixed maturity securities with noncredit OTTI losses in AOCI | (41 | ) | | (64 | ) | | (125 | ) |
| Total fixed maturity securities | 1,778 |
| | 4,955 |
| | 3,565 |
|
| Equity securities | 15 |
| | 12 |
| | (41 | ) |
| Derivatives | 39 |
| | 243 |
| | 239 |
|
| Short-term investments | 1 |
| | (2 | ) | | (2 | ) |
| Other | (71 | ) | | (17 | ) | | (5 | ) |
| Subtotal | 1,762 |
| | 5,191 |
| | 3,756 |
|
| Amounts allocated from: | | | | | |
| Insurance liability loss recognition | — |
| | (739 | ) | | (325 | ) |
| DAC and VOBA related to noncredit OTTI losses recognized in AOCI | (1 | ) | | 4 |
| | 9 |
|
| DAC and VOBA | (274 | ) | | (671 | ) | | (509 | ) |
| Subtotal | (275 | ) | | (1,406 | ) | | (825 | ) |
| Deferred income tax benefit (expense) related to noncredit OTTI losses recognized in AOCI | 16 |
| | 22 |
| | 42 |
|
| Deferred income tax benefit (expense) | (591 | ) | | (1,358 | ) | | (1,063 | ) |
| Net unrealized investment gains (losses) | $ | 912 |
| | $ | 2,449 |
| | $ | 1,910 |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
7. Investments (continued)
The changes in fixed maturity securities with noncredit OTTI losses included in AOCI were as follows:
|
| | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 |
| | (In millions) |
| Balance at January 1, | $ | (64 | ) | | $ | (125 | ) |
| Noncredit OTTI losses and subsequent changes recognized (1) | 11 |
| | (3 | ) |
| Securities sold with previous noncredit OTTI loss | 21 |
| | 35 |
|
| Subsequent changes in estimated fair value | (9 | ) | | 29 |
|
| Balance at December 31, | $ | (41 | ) | | $ | (64 | ) |
______________
| |
| (1) | Noncredit OTTI losses and subsequent changes recognized, net of DAC, were $7 million and $5 million for the years ended December 31, 2013 and 2012, respectively. |
The changes in net unrealized investment gains (losses) were as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Balance at January 1, | $ | 2,449 |
| | $ | 1,910 |
| | $ | 342 |
|
| Fixed maturity securities on which noncredit OTTI losses have been recognized | 23 |
| | 61 |
| | (39 | ) |
| Unrealized investment gains (losses) during the year | (3,452 | ) | | 1,374 |
| | 3,138 |
|
| Unrealized investment gains (losses) relating to: | | | | | |
| Insurance liability gain (loss) recognition | 739 |
| | (414 | ) | | (292 | ) |
| DAC and VOBA related to noncredit OTTI losses recognized in AOCI | (5 | ) | | (5 | ) | | 4 |
|
| DAC and VOBA | 397 |
| | (162 | ) | | (390 | ) |
| Deferred income tax benefit (expense) related to noncredit OTTI losses recognized in AOCI | (6 | ) | | (20 | ) | | 12 |
|
| Deferred income tax benefit (expense) | 767 |
| | (295 | ) | | (865 | ) |
| Balance at December 31, | $ | 912 |
| | $ | 2,449 |
| | $ | 1,910 |
|
| Change in net unrealized investment gains (losses) | $ | (1,537 | ) | | $ | 539 |
| | $ | 1,568 |
|
Concentrations of Credit Risk
There were no investments in any counterparty that were greater than 10% of the Company’s stockholders’ equity, other than the U.S. government and its agencies, at both December 31, 2013 and 2012.
Securities Lending
Elements of the securities lending program are presented below at:
|
| | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | (In millions) |
| Securities on loan: (1) | | | |
| Amortized cost | $ | 5,931 |
| | $ | 6,154 |
|
| Estimated fair value | $ | 5,984 |
| | $ | 7,339 |
|
| Cash collateral on deposit from counterparties (2) | $ | 6,140 |
| | $ | 7,502 |
|
| Security collateral on deposit from counterparties (3) | $ | — |
| | $ | 51 |
|
| Reinvestment portfolio — estimated fair value | $ | 6,145 |
| | $ | 7,533 |
|
______________
| |
| (1) | Included within fixed maturity securities, short-term investments, cash and cash equivalents and equity securities. |
| |
| (2) | Included within payables for collateral under securities loaned and other transactions. |
| |
| (3) | Security collateral on deposit from counterparties may not be sold or repledged, unless the counterparty is in default, and is not reflected in the consolidated financial statements. |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
7. Investments (continued)
Invested Assets on Deposit and Pledged as Collateral
Invested assets on deposit and pledged as collateral are presented below at estimated fair value for cash and cash equivalents, short-term investments and fixed maturity securities and at carrying value for mortgage loans at:
|
| | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | (In millions) |
| Invested assets on deposit (regulatory deposits) (1) | $ | 56 |
| | $ | 58 |
|
| Invested assets pledged as collateral (2) | 1,901 |
| | 1,569 |
|
| Total invested assets on deposit and pledged as collateral | $ | 1,957 |
| | $ | 1,627 |
|
______________
| |
| (1) | See Note 1 for information about invested assets that became restricted under the MetLife Insurance Company of Connecticut plan to withdraw its New York license on January 1, 2014. |
| |
| (2) | The Company has pledged invested assets in connection with various agreements and transactions, including funding agreements (see Note 4) and derivative transactions (see Note 8). |
See “— Securities Lending” for securities on loan.
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 (“PCI”) 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 (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.
The Company’s PCI fixed maturity securities were as follows at:
|
| | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | (In millions) |
| Outstanding principal and interest balance (1) | $ | 648 |
| | $ | 560 |
|
| Carrying value (2) | $ | 498 |
| | $ | 459 |
|
______________
| |
| (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. |
The following table presents information about PCI fixed maturity securities acquired during the periods indicated:
|
| | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | (In millions) |
| Contractually required payments (including interest) | $ | 238 |
| | $ | 172 |
|
| Cash flows expected to be collected (1) | $ | 183 |
| | $ | 88 |
|
| Fair value of investments acquired | $ | 128 |
| | $ | 55 |
|
______________
| |
| (1) | Represents undiscounted principal and interest cash flow expectations, at the date of acquisition. |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
7. Investments (continued)
The following table presents activity for the accretable yield on PCI fixed maturity securities for:
|
| | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | (In millions) |
| Accretable yield, January 1, | $ | 309 |
| | $ | 320 |
|
| Investments purchased | 55 |
| | 33 |
|
| Accretion recognized in earnings | (24 | ) | | (18 | ) |
| Disposals | (8 | ) | | (4 | ) |
| Reclassification (to) from nonaccretable difference | (24 | ) | | (22 | ) |
| Accretable yield, December 31, | $ | 308 |
| | $ | 309 |
|
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 $2.6 billion at December 31, 2013. 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 $862 million at December 31, 2013. 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.
As 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 investments exceeded 10% of the Company’s consolidated pre-tax income (loss) from continuing operations. This aggregated summarized financial data does not represent the Company’s proportionate share of the assets, liabilities, or earnings of such entities.
The aggregated summarized financial data presented below reflects the latest available financial information and is as of, and for, the years ended December 31, 2013, 2012 and 2011. Aggregate total assets of these entities totaled $217.3 billion and $178.3 billion at December 31, 2013 and 2012, respectively. Aggregate total liabilities of these entities totaled $16.3 billion and $12.4 billion at December 31, 2013 and 2012, respectively. Aggregate net income (loss) of these entities totaled $20.9 billion, $13.1 billion and $7.1 billion for the years ended December 31, 2013, 2012 and 2011, respectively. Aggregate net income (loss) from the underlying entities in which the Company invests is primarily comprised of investment income, including recurring investment income and realized and unrealized investment gains (losses).
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
7. Investments (continued)
Variable Interest Entities
The Company has invested in certain structured transactions that are VIEs. In certain instances, the Company holds both the power to direct the most significant activities of the entity, as well as an economic interest in the entity and, as such, is deemed to be the primary beneficiary or consolidator of the entity.
The determination of the VIE’s primary beneficiary requires an evaluation of the contractual and implied rights and obligations associated with each party’s relationship with or involvement in the entity, an estimate of the entity’s expected losses and expected residual returns and the allocation of such estimates to each party involved in the entity. The Company generally uses a qualitative approach to determine whether it is the primary beneficiary. However, for VIEs that are investment companies or apply measurement principles consistent with 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.
Consolidated VIEs
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, 2013 and 2012. 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, |
| | 2013 | | 2012 |
| | (In millions) |
| CSEs: (1) | | | |
| Assets: | | | |
| Mortgage loans (commercial mortgage loans) | $ | 1,598 |
| | $ | 2,666 |
|
| Accrued investment income | 9 |
| | 13 |
|
| Total assets | $ | 1,607 |
| | $ | 2,679 |
|
| Liabilities: | | | |
| Long-term debt | $ | 1,461 |
| | $ | 2,559 |
|
| Other liabilities | 7 |
| | 13 |
|
| Total liabilities | $ | 1,468 |
| | $ | 2,572 |
|
______________
| |
| (1) | The Company consolidates entities that are structured as CMBS. 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 these entities of $120 million and $92 million at estimated fair value at December 31, 2013 and 2012, respectively. The long-term debt bears interest primarily at fixed rates ranging from 2.25% to 5.57%, payable primarily on a monthly basis. Interest expense related to these obligations, included in other expenses, was $122 million, $163 million and $322 million for the years ended December 31, 2013, 2012 and 2011, respectively. |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
7. Investments (continued)
Unconsolidated VIEs
The carrying amount and maximum exposure to loss relating to VIEs in which the Company holds a significant variable interest but is not the primary beneficiary and which have not been consolidated were as follows at:
|
| | | | | | | | | | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | Carrying Amount | | Maximum Exposure to Loss (1) | | Carrying Amount | | Maximum Exposure to Loss (1) |
| | (In millions) |
| Fixed maturity securities AFS: | | | | | | | |
| Structured securities (RMBS, ABS and CMBS) (2) | $ | 8,393 |
| | $ | 8,393 |
| | $ | 10,347 |
| | $ | 10,347 |
|
| U.S. and foreign corporate | 468 |
| | 468 |
| | 651 |
| | 651 |
|
| Other limited partnership interests | 1,651 |
| | 2,077 |
| | 1,408 |
| | 1,930 |
|
| Real estate joint ventures | 41 |
| | 45 |
| | 71 |
| | 74 |
|
| Other invested assets | 9 |
| | 44 |
| | — |
| | — |
|
| Total | $ | 10,562 |
| | $ | 11,027 |
| | $ | 12,477 |
| | $ | 13,002 |
|
______________
| |
| (1) | The maximum exposure to loss relating to fixed maturity securities AFS is equal to their carrying amounts or the carrying amounts of retained interests. The maximum exposure to loss relating to other limited partnership interests and real estate joint ventures is equal to the carrying amounts plus any unfunded commitments of the Company. For its investments in other invested assets, the Company’s return is in the form of income tax credits. For such investments, the maximum exposure to loss is equal to the carrying amounts plus any unfunded commitment. Such a maximum loss would be expected to occur only upon bankruptcy of the issuer or investee. |
| |
| (2) | For these variable interests, the Company’s involvement is limited to that of a passive investor. |
As described in Note 15, 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, 2013, 2012 and 2011.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
7. Investments (continued)
Net Investment Income
The components of net investment income were as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Investment income: | | | | | |
| Fixed maturity securities | $ | 2,102 |
| | $ | 2,143 |
| | $ | 2,147 |
|
| Equity securities | 12 |
| | 9 |
| | 10 |
|
| Mortgage loans | 344 |
| | 357 |
| | 347 |
|
| Policy loans | 55 |
| | 59 |
| | 63 |
|
| Real estate and real estate joint ventures | 56 |
| | 83 |
| | 24 |
|
| Other limited partnership interests | 266 |
| | 167 |
| | 176 |
|
| Cash, cash equivalents and short-term investments | 4 |
| | 5 |
| | 5 |
|
| International joint ventures | (5 | ) | | (2 | ) | | (5 | ) |
| Other | — |
| | (2 | ) | | 4 |
|
| Subtotal | 2,834 |
| | 2,819 |
| | 2,771 |
|
| Less: Investment expenses | 114 |
| | 101 |
| | 100 |
|
| Subtotal, net | 2,720 |
| | 2,718 |
| | 2,671 |
|
| FVO securities — FVO contractholder-directed unit-linked investments (1) | — |
| | 62 |
| | 71 |
|
| FVO CSEs — interest income — commercial mortgage loans | 132 |
| | 172 |
| | 332 |
|
| Subtotal | 132 |
| | 234 |
| | 403 |
|
| Net investment income | $ | 2,852 |
| | $ | 2,952 |
| | $ | 3,074 |
|
______________
| |
| (1) | There were no 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 for both the years ended December 31, 2013 and 2012. Changes in estimated fair value subsequent to purchase for securities included in net investment income were ($11) million for the year ended December 31, 2011. |
See “— Variable Interest Entities” for discussion of CSEs.
See “— Related Party Investment Transactions” for discussion of affiliated net investment income and investment expenses.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
7. Investments (continued)
Net Investment Gains (Losses)
Components of Net Investment Gains (Losses)
The components of net investment gains (losses) were as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Total gains (losses) on fixed maturity securities: | | | | | |
| Total OTTI losses recognized — by sector and industry: | | | | | |
| U.S. and foreign corporate securities — by industry: | | | | | |
| Transportation | $ | (3 | ) | | $ | (16 | ) | | $ | — |
|
| Finance | (3 | ) | | (7 | ) | | (9 | ) |
| Utility | — |
| | (3 | ) | | — |
|
| Communications | — |
| | (2 | ) | | (11 | ) |
| Industrial | — |
| | (1 | ) | | (2 | ) |
| Total U.S. and foreign corporate securities | (6 | ) | | (29 | ) | | (22 | ) |
| RMBS | (14 | ) | | (20 | ) | | (17 | ) |
| ABS | — |
| | — |
| | (5 | ) |
| CMBS | — |
| | — |
| | (3 | ) |
| OTTI losses on fixed maturity securities recognized in earnings | (20 | ) | | (49 | ) | | (47 | ) |
| Fixed maturity securities — net gains (losses) on sales and disposals | 58 |
| | 145 |
| | 81 |
|
| Total gains (losses) on fixed maturity securities | 38 |
| | 96 |
| | 34 |
|
| Total gains (losses) on equity securities: | | | | | |
| Total OTTI losses recognized — by sector: | | | | | |
| Non-redeemable preferred stock | (3 | ) | | — |
| | (6 | ) |
| Common stock | (2 | ) | | (9 | ) | | (2 | ) |
| OTTI losses on equity securities recognized in earnings | (5 | ) | | (9 | ) | | (8 | ) |
| Equity securities — net gains (losses) on sales and disposals | 10 |
| | 5 |
| | (13 | ) |
| Total gains (losses) on equity securities | 5 |
| | (4 | ) | | (21 | ) |
| Mortgage loans | 5 |
| | 27 |
| | 26 |
|
| Real estate and real estate joint ventures | 2 |
| | (3 | ) | | (1 | ) |
| Other limited partnership interests | (6 | ) | | (2 | ) | | (5 | ) |
| Other investment portfolio gains (losses) | 8 |
| | 4 |
| | (9 | ) |
| Subtotal — investment portfolio gains (losses) | 52 |
| | 118 |
| | 24 |
|
| FVO CSEs: | | | | | |
| Commercial mortgage loans | (56 | ) | | 7 |
| | (84 | ) |
| Long-term debt — related to commercial mortgage loans | 88 |
| | 27 |
| | 93 |
|
| Non-investment portfolio gains (losses) | (2 | ) | | — |
| | 2 |
|
| Subtotal FVO CSEs and non-investment portfolio gains (losses) | 30 |
| | 34 |
| | 11 |
|
| Total net investment gains (losses) | $ | 82 |
| | $ | 152 |
| | $ | 35 |
|
See “— Variable Interest Entities” for discussion of CSEs.
See “— Related Party Investment Transactions” for discussion of affiliated net investment gains (losses) related to transfers of invested assets to affiliates.
Gains (losses) from foreign currency transactions included within net investment gains (losses) was less than $1 million, $2 million and ($7) million for the years ended December 31, 2013, 2012 and 2011, respectively.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
7. Investments (continued)
Sales or Disposals and Impairments of Fixed Maturity and Equity Securities
Proceeds from sales or disposals of fixed maturity and equity securities and the components of fixed maturity and equity securities net investment gains (losses) are 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, |
| | 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 |
| | Fixed Maturity Securities | | Equity Securities | | Total |
| | (In millions) |
| Proceeds | $ | 11,051 |
| | $ | 6,690 |
| | $ | 11,634 |
| | $ | 75 |
| | $ | 39 |
| | $ | 190 |
| | $ | 11,126 |
| | $ | 6,729 |
| | $ | 11,824 |
|
| Gross investment gains | $ | 189 |
| | $ | 186 |
| | $ | 182 |
| | $ | 19 |
| | $ | 9 |
| | $ | 9 |
| | $ | 208 |
| | $ | 195 |
| | $ | 191 |
|
| Gross investment losses | (131 | ) | | (41 | ) | | (101 | ) | | (9 | ) | | (4 | ) | | (22 | ) | | (140 | ) | | (45 | ) | | (123 | ) |
| Total OTTI losses: | | | | | | | | | | | | | | | | | |
| Credit-related | (17 | ) | | (42 | ) | | (38 | ) | | — |
| | — |
| | — |
| | (17 | ) | | (42 | ) | | (38 | ) |
| Other (1) | (3 | ) | | (7 | ) | | (9 | ) | | (5 | ) | | (9 | ) | | (8 | ) | | (8 | ) | | (16 | ) | | (17 | ) |
| Total OTTI losses | (20 | ) | | (49 | ) | | (47 | ) | | (5 | ) | | (9 | ) | | (8 | ) | | (25 | ) | | (58 | ) | | (55 | ) |
| Net investment gains (losses) | $ | 38 |
| | $ | 96 |
| | $ | 34 |
| | $ | 5 |
| | $ | (4 | ) | | $ | (21 | ) | | $ | 43 |
| | $ | 92 |
| | $ | 13 |
|
______________
| |
| (1) | Other OTTI losses recognized in earnings include impairments on (i) equity securities, (ii) 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 (iii) 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. |
Credit Loss Rollforward
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 OCI:
|
| | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 |
| | (In millions) |
| Balance at January 1, | $ | 59 |
| | $ | 55 |
|
| Additions: | | | |
| Initial impairments — credit loss OTTI recognized on securities not previously impaired | 1 |
| | 6 |
|
| Additional impairments — credit loss OTTI recognized on securities previously impaired | 12 |
| | 15 |
|
| Reductions: | | | |
| Sales (maturities, pay downs or prepayments) during the period of securities previously impaired as credit loss OTTI | (15 | ) | | (17 | ) |
| Balance at December 31, | $ | 57 |
| | $ | 59 |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
7. Investments (continued)
Related Party Investment Transactions
The Company transfers invested assets, primarily consisting of fixed maturity securities, to and from affiliates. Invested assets transferred to and from affiliates were as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 |
| 2012 |
| 2011 |
| | (In millions) |
| Estimated fair value of invested assets transferred to affiliates | $ | 874 |
|
| $ | — |
|
| $ | — |
|
| Amortized cost of invested assets transferred to affiliates | $ | 827 |
|
| $ | — |
|
| $ | — |
|
| Net investment gains (losses) recognized on transfers | $ | 47 |
|
| $ | — |
|
| $ | — |
|
| Estimated fair value of invested assets transferred from affiliates | $ | 834 |
|
| $ | — |
|
| $ | 33 |
|
Included within the transfers to affiliates in 2013 and transfers from affiliates in 2013 was $739 million and $751 million, respectively, related to the establishment of a custodial account to secure certain policyholder liabilities. See Note 1.
The Company has affiliated loans outstanding to wholly-owned real estate subsidiaries of an affiliate, MLIC, which are included in mortgage loans, with a carrying value of $364 million and $306 million at December 31, 2013 and 2012, respectively. Two loans issued in 2013 totaling $60 million bear interest at one-month LIBOR + 4.50% with quarterly interest only payments of less than $1 million through January 2017, when the principal balance is due. A loan with a carrying value of $110 million, at both December 31, 2013 and 2012, bears interest at one-month LIBOR + 1.95% with quarterly interest only payments of $1 million through January 2015, when the principal balance is due. A loan with a carrying value of $134 million and $136 million at December 31, 2013 and 2012, respectively, bears interest at 7.26% due in quarterly principal and interest payments of $3 million through January 2020, when the principal balance is due. A loan with a carrying value of $60 million, at both December 31, 2013 and 2012, bears interest at 7.01% with quarterly interest only payments of $1 million through January 2020, when the principal balance is due. These affiliated loans are secured by interests in the real estate subsidiaries, which own operating real estate with a fair value in excess of the loans. Net investment income from these affiliated loans was $16 million, $17 million and $14 million for the years ended December 31, 2013, 2012 and 2011, respectively.
The Company has affiliated loans outstanding, which are included in other invested assets, totaling $430 million at both December 31, 2013 and 2012. At December 31, 2011, the loans were outstanding with Exeter, an affiliate. During 2012, MetLife assumed this affiliated debt from Exeter. The loans of $305 million, issued by MetLife Insurance Company of Connecticut and $125 million, issued by MLI-USA, are due on July 15, 2021 and December 16, 2021, respectively, and bear interest, payable semi-annually, at 5.64% and 5.86%, respectively. Net investment income from these affiliated loans was $25 million, $25 million and $8 million for the years ended December 31, 2013, 2012 and 2011, respectively.
In July 2013, the Company committed to lend up to $1.8 billion to Exeter, an affiliate, pursuant to a note purchase agreement. Pursuant to the agreement, MetLife Insurance Company of Connecticut committed to purchase up to $1.3 billion of notes and MLI-USA committed to purchase up to $438 million of notes through December 31, 2014. The notes will be due not later than three years after issuance. The repayment of any notes issued pursuant to this agreement is guaranteed by MetLife. In October 2013, pursuant to this agreement, the Company issued loans to Exeter which are included in other invested assets, totaling $500 million at December 31, 2013. The loans of $375 million, issued by MetLife Insurance Company of Connecticut and $125 million, issued by MLI-USA, are both due October 15, 2015, and bear interest, payable semi-annually, at 2.47%. Net investment income from this loan was $3 million at December 31, 2013. The remaining total commitment to lend is $1.2 billion with $925 million committed by MetLife Insurance Company of Connecticut and $313 million committed by MLI-USA at December 31, 2013.
The Company receives investment administrative services from an affiliate. The related investment administrative service charges were $68 million for both years ended December 31, 2013 and 2012 and $67 million for the year ended December 31, 2011. The Company also had additional affiliated net investment income of $1 million for the year ended December 31, 2013 and less than $1 million for both of the years ended December 31, 2012 and 2011.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
8. Derivatives
Accounting for Derivatives
See Note 1 for a description of the Company’s accounting policies for derivatives and Note 9 for information about the fair value hierarchy for derivatives.
Derivative Strategies
The Company is exposed to various risks relating to its ongoing business operations, including interest rate, foreign currency exchange rate, credit and equity market. The Company uses a variety of strategies to manage these risks, including the use of derivatives.
Derivatives are financial instruments 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. Certain of the Company’s OTC derivatives are cleared and settled through central clearing counterparties (“OTC-cleared”), while others are bilateral contracts between two counterparties (“OTC-bilateral”). The types of derivatives the Company uses include swaps, forwards, futures and option contracts. To a lesser extent, the Company uses credit default swaps to synthetically replicate investment risks and returns which are not readily available in the cash market.
Interest Rate Derivatives
The Company uses a variety of interest rate derivatives to reduce its exposure to changes in interest rates, including interest rate swaps, caps, floors, futures and forwards.
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 amount. The Company utilizes interest rate swaps in fair value, cash flow and non-qualifying hedging relationships.
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, 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.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
8. Derivatives (continued)
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. The Company utilizes inflation swaps 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 utilizes interest rate forwards in cash flow hedging relationships.
Foreign Currency Exchange Rate Derivatives
The Company uses foreign currency swaps to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated in foreign currencies. In a foreign currency swap transaction, the Company agrees with another party to exchange, at specified intervals, the difference between one currency and another at a fixed exchange rate, generally set at inception, calculated by reference to an agreed upon notional amount. The notional amount of each currency is exchanged at the inception and termination of the currency swap by each party. The Company utilizes foreign currency swaps in fair value, cash flow and non-qualifying hedging relationships.
To a lesser extent, the Company uses foreign currency forwards in non-qualifying hedging relationships.
Credit Derivatives
The Company enters into purchased credit default swaps to hedge against credit-related changes in the value of its investments. In a credit default swap transaction, the Company agrees with another party to pay, at specified intervals, a premium to hedge credit risk. If a credit event occurs, as defined by the contract, 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. Credit events vary by type of issuer but typically include bankruptcy, failure to pay debt obligations, repudiation, moratorium, or involuntary restructuring. In each case, payout on a credit default swap is triggered only after the Credit Derivatives Determinations Committee of the International Swaps and Derivatives Association, Inc. (“ISDA”) deems that a credit event has occurred. The Company utilizes credit default swaps in non-qualifying hedging relationships.
The Company enters into written credit default swaps to synthetically create credit 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. These credit default swaps are not designated as hedging instruments.
To a lesser extent, the Company uses credit forwards to lock in the price to be paid for forward purchases of certain securities. The Company utilizes credit forwards in cash flow hedging relationships.
Equity Derivatives
The Company uses a variety of equity derivatives to reduce its exposure to equity market risk, including equity index options, variance swaps and exchange-traded equity futures.
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. 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. The Company utilizes equity index options in non-qualifying hedging relationships.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
8. Derivatives (continued)
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. The Company utilizes equity variance swaps in non-qualifying 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.
To a lesser extent, the Company also uses total rate of return swaps (“TRRs”) to hedge its equity market guarantees in certain of its insurance products. The Company utilizes TRRs in non-qualifying hedging relationships.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
8. Derivatives (continued)
Primary Risks Managed by Derivatives
The following table presents the gross notional amount, estimated fair value and primary underlying risk exposure of the Company’s derivatives, excluding embedded derivatives, held at:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Primary Underlying Risk Exposure | | December 31, |
| | 2013 | | 2012 |
| | | | Estimated Fair Value | | | | Estimated Fair Value |
| | Notional Amount | | Assets | | Liabilities | | Notional Amount | | Assets | | Liabilities |
| | | | (In millions) |
| Derivatives Designated as Hedging Instruments | | | | | | | | | | | | |
| Fair value hedges: | | | | | | | | | | | | | |
| Interest rate swaps | Interest rate | | $ | 436 |
| | $ | 5 |
| | $ | 10 |
| | $ | 538 |
| | $ | 28 |
| | $ | 9 |
|
| Foreign currency swaps | Foreign currency exchange rate | | 122 |
| | — |
| | 13 |
| | 122 |
| | — |
| | 14 |
|
| Subtotal | | 558 |
| | 5 |
| | 23 |
| | 660 |
| | 28 |
| | 23 |
|
| Cash flow hedges: | | | | | | | | | | | | | |
| Interest rate swaps | Interest rate | | 537 |
| | 6 |
| | 32 |
| | 658 |
| | 99 |
| | — |
|
| Interest rate forwards | Interest rate | | 245 |
| | 3 |
| | 4 |
| | 410 |
| | 81 |
| | — |
|
| Foreign currency swaps | Foreign currency exchange rate | | 544 |
| | 25 |
| | 35 |
| | 524 |
| | 16 |
| | 14 |
|
| Subtotal | | 1,326 |
| | 34 |
| | 71 |
| | 1,592 |
| | 196 |
| | 14 |
|
| Total qualifying hedges | | 1,884 |
| | 39 |
| | 94 |
| | 2,252 |
| | 224 |
| | 37 |
|
| Derivatives Not Designated or Not Qualifying as Hedging Instruments | | | | | | | | | | | | |
| Interest rate swaps | Interest rate | | 22,262 |
| | 881 |
| | 441 |
| | 16,869 |
| | 1,254 |
| | 513 |
|
| Interest rate floors | Interest rate | | 17,604 |
| | 103 |
| | 99 |
| | 15,136 |
| | 318 |
| | 274 |
|
| Interest rate caps | Interest rate | | 9,651 |
| | 36 |
| | — |
| | 9,031 |
| | 11 |
| | — |
|
| Interest rate futures | Interest rate | | 1,443 |
| | — |
| | 3 |
| | 2,771 |
| | — |
| | 7 |
|
| Foreign currency swaps | Foreign currency exchange rate | | 882 |
| | 52 |
| | 41 |
| | 811 |
| | 60 |
| | 35 |
|
| Foreign currency forwards | Foreign currency exchange rate | | 56 |
| | — |
| | 1 |
| | 139 |
| | — |
| | 4 |
|
| Credit default swaps - purchased | Credit | | 157 |
| | — |
| | 1 |
| | 162 |
| | — |
| | 2 |
|
| Credit default swaps - written | Credit | | 2,243 |
| | 38 |
| | — |
| | 2,456 |
| | 23 |
| | 1 |
|
| Equity futures | Equity market | | 778 |
| | — |
| | 3 |
| | 1,075 |
| | — |
| | 27 |
|
| Equity options | Equity market | | 3,597 |
| | 305 |
| | 42 |
| | 2,845 |
| | 469 |
| | 1 |
|
| Variance swaps | Equity market | | 2,270 |
| | 6 |
| | 94 |
| | 2,346 |
| | 11 |
| | 62 |
|
| TRRs | Equity market | | 462 |
| | — |
| | 22 |
| | 300 |
| | — |
| | 7 |
|
| Total non-designated or non-qualifying derivatives | | 61,405 |
| | 1,421 |
| | 747 |
| | 53,941 |
| | 2,146 |
| | 933 |
|
| Total | | $ | 63,289 |
| | $ | 1,460 |
| | $ | 841 |
| | $ | 56,193 |
| | $ | 2,370 |
| | $ | 970 |
|
Based on notional amounts, a substantial portion of the Company’s derivatives was not designated or did not qualify as part of a hedging relationship at both December 31, 2013 and 2012. The Company’s use of derivatives includes (i) derivatives that serve as macro hedges of the Company’s exposure to various risks and that generally do not qualify for hedge accounting due to the criteria required under the portfolio hedging rules; (ii) derivatives that economically hedge insurance liabilities that contain mortality or morbidity risk and that generally do not qualify for hedge accounting because the lack of these risks in the derivatives cannot support an expectation of a highly effective hedging relationship; (iii) derivatives that economically hedge embedded derivatives that do not qualify for hedge accounting because the changes in estimated fair value of the embedded derivatives are already recorded in net income; and (iv) written credit default swaps that are used to synthetically create credit investments and that do not qualify for hedge accounting because they do not involve a hedging relationship. For these non-qualified derivatives, changes in market factors can lead to the recognition of fair value changes in the consolidated statement of operations without an offsetting gain or loss recognized in earnings for the item being hedged.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
8. Derivatives (continued)
Net Derivative Gains (Losses)
The components of net derivative gains (losses) were as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Derivatives and hedging gains (losses) (1) | $ | (958 | ) | | $ | (289 | ) | | $ | 846 |
|
| Embedded derivatives | (94 | ) | | 1,292 |
| | 250 |
|
| Total net derivative gains (losses) | $ | (1,052 | ) | | $ | 1,003 |
| | $ | 1,096 |
|
______________
| |
| (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. |
The following table presents earned income on derivatives:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Qualifying hedges: | | | | | |
| Net investment income | $ | 2 |
| | $ | 2 |
| | $ | 2 |
|
| Interest credited to policyholder account balances | 2 |
| | 18 |
| | 41 |
|
| Non-qualifying hedges: | | | | | |
| Net derivative gains (losses) | 79 |
| | 127 |
| | 83 |
|
| Policyholder benefits and claims | (17 | ) | | (6 | ) | | — |
|
| Total | $ | 66 |
| | $ | 141 |
| | $ | 126 |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
8. Derivatives (continued)
Non-Qualifying Derivatives and Derivatives for Purposes Other Than Hedging
The following table presents 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) |
| | (In millions) |
| Year Ended December 31, 2013: | | | | | |
| Interest rate derivatives | $ | (558 | ) | | $ | — |
| | $ | (26 | ) |
| Foreign currency exchange rate derivatives | (24 | ) | | — |
| | — |
|
| Credit derivatives — purchased | — |
| | — |
| | — |
|
| Credit derivatives — written | 27 |
| | — |
| | — |
|
| Equity derivatives | (486 | ) | | (7 | ) | | (90 | ) |
| Total | $ | (1,041 | ) | | $ | (7 | ) | | $ | (116 | ) |
| Year Ended December 31, 2012: | | | | | |
| Interest rate derivatives | $ | (5 | ) | | $ | — |
| | $ | — |
|
| Foreign currency exchange rate derivatives | (4 | ) | | — |
| | — |
|
| Credit derivatives — purchased | (11 | ) | | — |
| | — |
|
| Credit derivatives — written | 41 |
| | — |
| | — |
|
| Equity derivatives | (413 | ) | | (4 | ) | | (51 | ) |
| Total | $ | (392 | ) | | $ | (4 | ) | | $ | (51 | ) |
| Year Ended December 31, 2011: | | | | | |
| Interest rate derivatives | $ | 701 |
| | $ | — |
| | $ | — |
|
| Foreign currency exchange rate derivatives | 27 |
| | — |
| | — |
|
| Credit derivatives — purchased | 13 |
| | — |
| | — |
|
| Credit derivatives — written | (13 | ) | | — |
| | — |
|
| Equity derivatives | 45 |
| | (7 | ) | | (4 | ) |
| Total | $ | 773 |
| | $ | (7 | ) | | $ | (4 | ) |
______________
| |
| (1) | Changes in estimated fair value related to economic hedges of equity method investments in joint ventures. |
| |
| (2) | Changes in estimated fair value related to economic hedges of variable annuity guarantees included in future policy benefits. |
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 assets and liabilities to floating rate assets and liabilities; and (ii) foreign currency swaps to hedge the foreign currency fair value exposure of foreign currency denominated liabilities.
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 presents the amount of such net derivative gains (losses):
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
8. Derivatives (continued)
|
| | | | | | | | | | | | | | |
Derivatives in Fair Value Hedging Relationships | | 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) |
| Year Ended December 31, 2013: | | | | | | | | |
| Interest rate swaps: | | Fixed maturity securities | | $ | 7 |
| | $ | (9 | ) | | $ | (2 | ) |
| | | Policyholder liabilities (1) | | (30 | ) | | 28 |
| | (2 | ) |
| Foreign currency swaps: | | Foreign-denominated PABs (2) | | 2 |
| | (2 | ) | | — |
|
| Total | | $ | (21 | ) | | $ | 17 |
| | $ | (4 | ) |
| Year Ended December 31, 2012: | | | | | | | | |
| Interest rate swaps: | | Fixed maturity securities | | $ | (3 | ) | | $ | 1 |
| | $ | (2 | ) |
| | | Policyholder liabilities (1) | | (10 | ) | | 8 |
| | (2 | ) |
| Foreign currency swaps: | | Foreign-denominated PABs (2) | | (29 | ) | | 20 |
| | (9 | ) |
| Total | | $ | (42 | ) | | $ | 29 |
| | $ | (13 | ) |
| Year Ended December 31, 2011: | | | | | | | | |
| Interest rate swaps: | | Fixed maturity securities | | $ | (7 | ) | | $ | 5 |
| | $ | (2 | ) |
| | | Policyholder liabilities (1) | | 36 |
| | (38 | ) | | (2 | ) |
| Foreign currency swaps: | | Foreign-denominated PABs (2) | | (52 | ) | | 30 |
| | (22 | ) |
| Total | | $ | (23 | ) | | $ | (3 | ) | | $ | (26 | ) |
______________
| |
| (1) | Fixed rate liabilities reported in PABs or future policy benefits. |
| |
| (2) | Fixed rate or floating rate liabilities. |
All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
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 assets and liabilities to fixed rate assets and liabilities; (ii) foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated assets and liabilities; (iii) interest rate forwards and credit forwards to lock in the price to be paid for forward purchases of investments; and (iv) interest rate swaps and interest rate forwards to hedge the forecasted purchases of fixed-rate investments.
In certain instances, the Company discontinued cash flow hedge accounting because the forecasted transactions were no longer probable of occurring. Because certain of the forecasted transactions also were not probable of occurring within two months of the anticipated date, the Company reclassified certain amounts from AOCI into net derivative gains (losses). These amounts were $0 for both years ended December 31, 2013 and 2012 and $1 million for the year ended December 31, 2011.
At December 31, 2013 and 2012, 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 six years and seven years, respectively.
At December 31, 2013 and 2012, the balance in AOCI associated with cash flow hedges was $39 million and $243 million, respectively.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
8. Derivatives (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 stockholders’ equity:
|
| | | | | | | | | | | | | | | | | | |
| | Derivatives in Cash Flow Hedging Relationships | | Amount of Gains
(Losses) Deferred in
AOCI on Derivatives | | Amount and Location of Gains(Losses) Reclassified from AOCI into Income (Loss) | | Amount and Location of Gains (Losses) Recognized in Income (Loss) on Derivatives |
| |
| |
| |
| | | | (Effective Portion) | | (Effective Portion) | | (Ineffective Portion) |
| | | | | | Net Derivative Gains (Losses) | | Net Investment Income | | | Net Derivative Gains (Losses) |
| | | | (In millions) |
| | Year Ended December 31, 2013: | | | | | | | | | |
| | Interest rate swaps | | $ | (120 | ) | | $ | — |
| | $ | — |
| | | $ | — |
|
| | Interest rate forwards | | (57 | ) | | 9 |
| | 1 |
| | | — |
|
| | Foreign currency swaps | | (15 | ) | | — |
| | — |
| | | 1 |
|
| | Credit forwards | | (1 | ) | | — |
| | 1 |
| | | — |
|
| | Total | | $ | (193 | ) | | $ | 9 |
| | $ | 2 |
| | | $ | 1 |
|
| | Year Ended December 31, 2012: | | | | | | | | | |
| | Interest rate swaps | | $ | 21 |
| | $ | — |
| | $ | — |
| | | $ | 1 |
|
| | Interest rate forwards | | 1 |
| | 1 |
| | 1 |
| | | — |
|
| | Foreign currency swaps | | (15 | ) | | 1 |
| | — |
| | | (1 | ) |
| | Credit forwards | | — |
| | — |
| | — |
| | | — |
|
| | Total | | $ | 7 |
| | $ | 2 |
| | $ | 1 |
| | | $ | — |
|
| | Year Ended December 31, 2011: | | | | | | | | | |
| | Interest rate swaps | | $ | 132 |
| | $ | 1 |
| | $ | — |
| | | $ | — |
|
| | Interest rate forwards | | 208 |
| | 9 |
| | — |
| | | 1 |
|
| | Foreign currency swaps | | 17 |
| | (2 | ) | | — |
| | | — |
|
| | Credit forwards | | — |
| | 1 |
| | — |
| | | — |
|
| | Total | | $ | 357 |
| | $ | 9 |
| | $ | — |
| | | $ | 1 |
|
All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
At December 31, 2013, $1 million of deferred net gains (losses) on derivatives in AOCI was expected to be reclassified to earnings within the next 12 months.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
8. Derivatives (continued)
Credit Derivatives
In connection with synthetically created credit investment transactions, 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 $2.2 billion and $2.5 billion at December 31, 2013 and 2012, 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, 2013 and 2012, the Company would have received $38 million and $22 million, respectively, to terminate all of these contracts.
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, |
| | | 2013 | | 2012 |
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) | | $ | 3 |
| | $ | 115 |
| | 2.7 |
| | $ | 3 |
| | $ | 167 |
| | 3.2 |
|
| Credit default swaps referencing indices | | 6 |
| | 650 |
| | 1.1 |
| | 10 |
| | 650 |
| | 2.1 |
|
| Subtotal | | 9 |
| | 765 |
| | 1.3 |
| | 13 |
| | 817 |
| | 2.3 |
|
| Baa | | | | | | | | | | | | |
| Single name credit default swaps (corporate) | | 8 |
| | 446 |
| | 3.0 |
| | 4 |
| | 479 |
| | 3.8 |
|
| Credit default swaps referencing indices | | 18 |
| | 996 |
| | 4.9 |
| | 5 |
| | 1,124 |
| | 4.8 |
|
| Subtotal | | 26 |
| | 1,442 |
| | 4.3 |
| | 9 |
| | 1,603 |
| | 4.5 |
|
| B | | | | | | | | | | | | |
| Single name credit default swaps (corporate) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Credit default swaps referencing indices | | 3 |
| | 36 |
| | 5.0 |
| | — |
| | 36 |
| | 5.0 |
|
| Subtotal | | 3 |
| | 36 |
| | 5.0 |
| | — |
| | 36 |
| | 5.0 |
|
| Total | | $ | 38 |
| | $ | 2,243 |
| | 3.3 |
| | $ | 22 |
| | $ | 2,456 |
| | 3.8 |
|
______________
| |
| (1) | The rating agency designations are based on availability and the midpoint of the applicable ratings among Moody’s Investors Service (“Moody’s”), 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. |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
8. Derivatives (continued)
Credit Risk on Freestanding Derivatives
The Company may be exposed to credit-related losses in the event of nonperformance by counterparties to derivatives. Generally, the current credit exposure of the Company’s derivatives is limited to the net positive estimated fair value of derivatives at the reporting date after taking into consideration the existence of master netting or similar agreements and any collateral received pursuant to such agreements.
The Company manages its credit risk related to derivatives by entering into transactions with creditworthy counterparties and establishing and monitoring exposure limits. The Company’s OTC-bilateral derivative transactions are generally governed by ISDA Master Agreements which provide for legally enforceable set-off and close-out netting of exposures to specific counterparties in the event of early termination of a transaction, which includes, but is not limited to, events of default and bankruptcy. In the event of an early termination, the Company is permitted to set off receivables from the counterparty against payables to the same counterparty arising out of all included transactions. Substantially all of the Company’s ISDA Master Agreements also include Credit Support Annex provisions which require both the pledging and accepting of collateral in connection with its OTC-bilateral derivatives.
The Company’s OTC-cleared derivatives are effected through central clearing counterparties and its exchange-traded derivatives are effected through regulated exchanges. Such positions are marked to market and margined on a daily basis, and the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to such derivatives. See Note 9 for a description of the impact of credit risk on the valuation of derivatives.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
8. Derivatives (continued)
The estimated fair value of the Company’s net derivative assets and net derivative liabilities after the application of master netting agreements and collateral was as follows at:
|
| | | | | | | | | | | | | | | | |
| | | December 31, 2013 | | December 31, 2012 |
| Derivatives Subject to a Master Netting Arrangement or a Similar Arrangement | | Assets | | Liabilities | | Assets | | Liabilities |
| | | (In millions) |
| Gross estimated fair value of derivatives: | | | | | | | | |
| OTC-bilateral (1) | | $ | 1,450 |
| | $ | 851 |
| | $ | 2,436 |
| | $ | 982 |
|
| OTC-cleared (1) | | 50 |
| | 9 |
| | — |
| | — |
|
| Exchange-traded | | — |
| | 6 |
| | — |
| | 34 |
|
| Total gross estimated fair value of derivatives (1) | | 1,500 |
| | 866 |
| | 2,436 |
| | 1,016 |
|
| Amounts offset in the consolidated balance sheets | | — |
| | — |
| | — |
| | — |
|
| Estimated fair value of derivatives presented in the consolidated balance sheets (1) | | 1,500 |
| | 866 |
| | 2,436 |
| | 1,016 |
|
| Gross amounts not offset in the consolidated balance sheets: | | | | | | | | |
| Gross estimated fair value of derivatives: (2) | | | | | | | | |
| OTC-bilateral | | (670 | ) | | (670 | ) | | (838 | ) | | (838 | ) |
| OTC-cleared | | (8 | ) | | (8 | ) | | — |
| | — |
|
| Exchange-traded | | — |
| | — |
| | — |
| | — |
|
| Cash collateral: (3) | | | | | | | | |
| OTC-bilateral | | (216 | ) | | — |
| | (897 | ) | | — |
|
| OTC-cleared | | (40 | ) | | (1 | ) | | — |
| | — |
|
| Exchange-traded | | — |
| | (5 | ) | | — |
| | (34 | ) |
| Securities collateral: (4) | | | | | | | | |
| OTC-bilateral | | (554 | ) | | (160 | ) | | (689 | ) | | (121 | ) |
| OTC-cleared | | — |
| | — |
| | — |
| | — |
|
| Exchange-traded | | — |
| | (1 | ) | | — |
| | — |
|
| Net amount after application of master netting agreements and collateral | | $ | 12 |
| | $ | 21 |
| | $ | 12 |
| | $ | 23 |
|
______________
| |
| (1) | At December 31, 2013 and 2012, derivative assets include income or expense accruals reported in accrued investment income or in other liabilities of $40 million and $66 million, respectively, and derivative liabilities include income or expense accruals reported in accrued investment income or in other liabilities of $25 million and $46 million, respectively. |
| |
| (2) | Estimated fair value of derivatives is limited to the amount that is subject to set-off and includes income or expense accruals. |
| |
| (3) | Cash collateral received is included in cash and cash equivalents, short-term investments, or in fixed maturity securities, and the obligation to return it is included in payables for collateral under securities loaned and other transactions in the consolidated balance sheets. The receivable for the return of cash collateral provided by the Company is inclusive of initial margin on exchange-traded and OTC-cleared derivatives and is included in premiums, reinsurance and other receivables in the consolidated balance sheets. The amount of cash collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements. At December 31, 2013 and 2012, the Company received excess cash collateral of $21 million and $0, respectively, and provided excess cash collateral of $19 million and $53 million, respectively, which is not included in the table above due to the foregoing limitation. |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
8. Derivatives (continued)
| |
| (4) | Securities collateral received by the Company is held in separate custodial accounts and is not recorded on the consolidated balance sheets. Subject to certain constraints, the Company is permitted by contract to sell or repledge this collateral, but at December 31, 2013 none of the collateral had been sold or repledged. Securities collateral pledged by the Company is reported 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. The amount of securities collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements and cash collateral. At December 31, 2013 and 2012, the Company received excess securities collateral with an estimated fair value of $34 million and $0, respectively, for its OTC-bilateral derivatives, which are not included in the table above due to the foregoing limitation. At December 31, 2013 and 2012, the Company provided excess securities collateral with an estimated fair value of $1 million and $0, respectively, for its OTC-bilateral derivatives, $29 million and $0, respectively, for its OTC-cleared derivatives and $46 million and $0, respectively, for its exchange-traded derivatives, which are not included in the table above due to the foregoing limitation. |
The Company’s collateral arrangements for its OTC-bilateral derivatives generally require the counterparty in a net liability position, after considering the effect of netting agreements, to pledge collateral when the fair value of that counterparty’s derivatives reaches a pre-determined threshold. Certain of these arrangements also include financial strength-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 financial strength ratings of the Company and/or the credit ratings of the counterparty. In addition, certain of the Company’s netting agreements for derivatives contain provisions that require both the Company and the counterparty to maintain a specific investment grade financial strength or credit rating from each of Moody’s and S&P. If a party’s financial strength or credit ratings were to fall below that specific investment grade financial strength or credit rating, that party would be in violation of these provisions, and the other party to the derivatives could terminate the transactions and demand immediate settlement and payment based on such party’s reasonable valuation of the derivatives.
The following table presents the estimated fair value of the Company’s OTC-bilateral 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 financial strength rating at the reporting date or if the Company’s financial strength rating sustained a downgrade to a level that triggered full overnight collateralization or termination of the derivative position at the reporting date. OTC-bilateral derivatives that are not subject to collateral agreements are excluded from this table.
|
| | | | | | | | | | | | | | | | |
| | | | Estimated Fair Value of Collateral Provided: | | | Fair Value of Incremental Collateral Provided Upon: |
| | Estimated Fair Value of Derivatives in Net Liability Position (1) | | Fixed Maturity Securities | | | One Notch Downgrade in the Company’s Financial Strength Rating | | Downgrade in the Company’s Financial Strength Rating to a Level that Triggers Full Overnight Collateralization or Termination of the Derivative Position |
| | (In millions) |
| | | | | | | | | |
| December 31, 2013 | $ | 181 |
| | $ | 161 |
| | | $ | — |
| | $ | 2 |
|
| December 31, 2012 | $ | 143 |
| | $ | 121 |
| | | $ | 2 |
| | $ | 28 |
|
______________
| |
| (1) | After taking into consideration the existence of netting agreements. |
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; affiliated ceded reinsurance of guaranteed minimum benefits related to GMWBs, GMABs and certain GMIBs; affiliated assumed reinsurance of guaranteed minimum benefits related to GMWBs and certain GMIBs; funds withheld on ceded reinsurance; and certain debt and equity securities.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
8. Derivatives (continued)
The following table presents the estimated fair value and balance sheet location of the Company’s embedded derivatives that have been separated from their host contracts at:
|
| | | | | | | | | |
| | | | December 31, |
| | Balance Sheet Location | | 2013 | | 2012 |
| | | | (In millions) |
| Net embedded derivatives within asset host contracts: | | | | | |
| Ceded guaranteed minimum benefits | Premiums, reinsurance and other receivables | | $ | 912 |
| | $ | 3,551 |
|
| Options embedded in debt or equity securities | Investments | | (30 | ) | | (14 | ) |
| Net embedded derivatives within asset host contracts | | $ | 882 |
| | $ | 3,537 |
|
| Net embedded derivatives within liability host contracts: | | | | |
| Direct guaranteed minimum benefits | PABs | | $ | (1,232 | ) | | $ | 705 |
|
| Assumed guaranteed minimum benefits | PABs | | (13 | ) | | 4 |
|
| Funds withheld on ceded reinsurance | Other liabilities | | 34 |
| | 552 |
|
| Net embedded derivatives within liability host contracts | | $ | (1,211 | ) | | $ | 1,261 |
|
The following table presents changes in estimated fair value related to embedded derivatives:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| 2013 | | 2012 | | 2011 |
| | (In millions) |
| Net derivative gains (losses) (1) (2) | $ | (94 | ) | | $ | 1,292 |
| | $ | 250 |
|
______________
| |
| (1) | The valuation of direct and assumed guaranteed minimum benefits includes a nonperformance risk adjustment. The amounts included in net derivative gains (losses), in connection with this adjustment, were ($156) million, ($235) million and $354 million for the years ended December 31, 2013, 2012 and 2011, respectively. In addition, the valuation of ceded guaranteed minimum benefits includes a nonperformance risk adjustment. The amounts included in net derivative gains (losses) in connection with this adjustment, were $76 million, $124 million and ($476) million for the years ended December 31, 2013, 2012 and 2011, respectively. |
| |
| (2) | See Note 6 for discussion of affiliated net derivative gains (losses) included in the table above. |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value
When developing estimated fair values, 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 determination of 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. |
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.
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.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
Recurring Fair Value Measurements
The assets and liabilities measured at estimated fair value on a recurring basis and their corresponding placement in the fair value hierarchy, including those items for which the Company has elected the FVO, are presented below.
|
| | | | | | | | | | | | | | | |
| | December 31, 2013 |
| | Fair Value Hierarchy | | |
| | Level 1 | | Level 2 | | Level 3 | | Total Estimated Fair Value |
| | (In millions) |
| Assets | | | | | | | |
| Fixed maturity securities: | | | | | | | |
| U.S. corporate | $ | — |
| | $ | 15,454 |
| | $ | 1,248 |
| | $ | 16,702 |
|
| Foreign corporate | — |
| | 7,783 |
| | 734 |
| | 8,517 |
|
| U.S. Treasury and agency | 4,365 |
| | 3,929 |
| | — |
| | 8,294 |
|
| RMBS | — |
| | 4,266 |
| | 422 |
| | 4,688 |
|
| State and political subdivision | — |
| | 2,224 |
| | — |
| | 2,224 |
|
| ABS | — |
| | 1,682 |
| | 419 |
| | 2,101 |
|
| CMBS | — |
| | 1,532 |
| | 72 |
| | 1,604 |
|
| Foreign government | — |
| | 1,122 |
| | — |
| | 1,122 |
|
| Total fixed maturity securities | 4,365 |
| | 37,992 |
| | 2,895 |
| | 45,252 |
|
| Equity securities: | | | | | | |
|
| Non-redeemable preferred stock | — |
| | 136 |
| | 81 |
| | 217 |
|
| Common stock | 86 |
| | 84 |
| | 31 |
| | 201 |
|
| Total equity securities | 86 |
| | 220 |
| | 112 |
| | 418 |
|
| Short-term investments (1) | 391 |
| | 1,671 |
| | — |
| | 2,062 |
|
| Mortgage loans held by CSEs - FVO | — |
| | 1,598 |
| | — |
| | 1,598 |
|
| Other invested assets: | | | | | | | |
| FVO securities | — |
| | 9 |
| | — |
| | 9 |
|
| Derivative assets: (2) | | | | | | |
|
| Interest rate | — |
| | 1,011 |
| | 23 |
| | 1,034 |
|
| Foreign currency exchange rate | — |
| | 77 |
| | — |
| | 77 |
|
| Credit | — |
| | 32 |
| | 6 |
| | 38 |
|
| Equity market | — |
| | 305 |
| | 6 |
| | 311 |
|
| Total derivative assets | — |
| | 1,425 |
| | 35 |
| | 1,460 |
|
| Total other invested assets | — |
| | 1,434 |
| | 35 |
| | 1,469 |
|
| Net embedded derivatives within asset host contracts (3) | — |
| | — |
| | 912 |
| | 912 |
|
| Separate account assets (4) | 259 |
| | 97,368 |
| | 153 |
| | 97,780 |
|
| Total assets | $ | 5,101 |
| | $ | 140,283 |
| | $ | 4,107 |
| | $ | 149,491 |
|
| Liabilities | | | | | | | |
| Derivative liabilities: (2) | | | | | | | |
| Interest rate | $ | 3 |
| | $ | 574 |
| | $ | 12 |
| | $ | 589 |
|
| Foreign currency exchange rate | — |
| | 90 |
| | — |
| | 90 |
|
| Credit | — |
| | 1 |
| | — |
| | 1 |
|
| Equity market | 3 |
| | 64 |
| | 94 |
| | 161 |
|
| Total derivative liabilities | 6 |
| | 729 |
| | 106 |
| | 841 |
|
| Net embedded derivatives within liability host contracts (3) | — |
| | — |
| | (1,211 | ) | | (1,211 | ) |
| Long-term debt of CSEs | — |
| | 1,461 |
| | — |
| | 1,461 |
|
| Total liabilities | $ | 6 |
| | $ | 2,190 |
| | $ | (1,105 | ) | | $ | 1,091 |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
|
| | | | | | | | | | | | | | | |
| | December 31, 2012 |
| | Fair Value Hierarchy | | Total Estimated Fair Value |
| | Level 1 | | Level 2 | | Level 3 | |
| | (In millions) |
| Assets | | | | | | | |
| Fixed maturity securities: | | | | | | | |
| U.S. corporate | $ | — |
| | $ | 17,461 |
| | $ | 1,434 |
| | $ | 18,895 |
|
| Foreign corporate | — |
| | 8,577 |
| | 868 |
| | 9,445 |
|
| U.S. Treasury and agency | 5,082 |
| | 3,782 |
| | — |
| | 8,864 |
|
| RMBS | — |
| | 5,460 |
| | 278 |
| | 5,738 |
|
| State and political subdivision | — |
| | 2,304 |
| | 25 |
| | 2,329 |
|
| ABS | — |
| | 1,910 |
| | 343 |
| | 2,253 |
|
| CMBS | — |
| | 2,231 |
| | 125 |
| | 2,356 |
|
| Foreign government | — |
| | 1,085 |
| | 3 |
| | 1,088 |
|
| Total fixed maturity securities | 5,082 |
| | 42,810 |
| | 3,076 |
| | 50,968 |
|
| Equity securities: | | | | | | | |
| Non-redeemable preferred stock | — |
| | 47 |
| | 93 |
| | 140 |
|
| Common stock | 70 |
| | 81 |
| | 26 |
| | 177 |
|
| Total equity securities | 70 |
| | 128 |
| | 119 |
| | 317 |
|
| Short-term investments (1) | 1,233 |
| | 1,285 |
| | 13 |
| | 2,531 |
|
| Mortgage loans held by CSEs - FVO | — |
| | 2,666 |
| | — |
| | 2,666 |
|
| Other invested assets: | | | | | | | |
| FVO securities | — |
| | 9 |
| | — |
| | 9 |
|
| Derivative assets: (2) | | | | | | | |
| Interest rate | — |
| | 1,643 |
| | 148 |
| | 1,791 |
|
| Foreign currency exchange rate | — |
| | 76 |
| | — |
| | 76 |
|
| Credit | — |
| | 13 |
| | 10 |
| | 23 |
|
| Equity market | — |
| | 469 |
| | 11 |
| | 480 |
|
| Total derivative assets | — |
| | 2,201 |
| | 169 |
| | 2,370 |
|
| Total other invested assets | — |
| | 2,210 |
| | 169 |
| | 2,379 |
|
| Net embedded derivatives within asset host contracts (3) | — |
| | — |
| | 3,551 |
| | 3,551 |
|
| Separate account assets (4) | 201 |
| | 85,772 |
| | 141 |
| | 86,114 |
|
| Total assets | $ | 6,586 |
| | $ | 134,871 |
| | $ | 7,069 |
| | $ | 148,526 |
|
| Liabilities | | | | | | | |
| Derivative liabilities: (2) | | | | | | | |
| Interest rate | $ | 7 |
| | $ | 767 |
| | $ | 29 |
| | $ | 803 |
|
| Foreign currency exchange rate | — |
| | 67 |
| | — |
| | 67 |
|
| Credit | — |
| | 3 |
| | — |
| | 3 |
|
| Equity market | 27 |
| | 8 |
| | 62 |
| | 97 |
|
| Total derivative liabilities | 34 |
| | 845 |
| | 91 |
| | 970 |
|
| Net embedded derivatives within liability host contracts (3) | — |
| | — |
| | 1,261 |
| | 1,261 |
|
| Long-term debt of CSEs | — |
| | 2,559 |
| | — |
| | 2,559 |
|
| Total liabilities | $ | 34 |
| | $ | 3,404 |
| | $ | 1,352 |
| | $ | 4,790 |
|
______________
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (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 on a recurring basis. |
| |
| (2) | Derivative assets are presented within other invested assets in the consolidated balance sheets and 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. |
| |
| (3) | 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 and other liabilities in the consolidated balance sheets. At December 31, 2013 and 2012, equity securities also included embedded derivatives of ($30) million and ($14) million, respectively. |
| |
| (4) | 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. |
The following describes the valuation methodologies used to measure assets and liabilities at fair value. The description includes the valuation techniques and key inputs for each category of assets or liabilities that are classified within Level 2 and Level 3 of the fair value hierarchy.
Investments
Valuation Controls and Procedures
On behalf of the Company and MetLife, Inc.’s Chief Investment Officer and Chief Financial Officer, a pricing and valuation committee that is independent of the trading and investing functions and comprised of senior management, provides oversight of control systems and valuation policies for securities, mortgage loans and derivatives. On a quarterly basis, this committee reviews and approves new transaction types and markets, ensures that observable market prices and market-based parameters are used for valuation, wherever possible, and determines that judgmental valuation adjustments, when applied, are based upon established policies and are applied consistently over time. This committee also provides oversight of the selection of independent third party pricing providers and the controls and procedures to evaluate third party pricing. Periodically, the Chief Accounting Officer reports to MetLife Insurance Company of Connecticut’s Audit Committee regarding compliance with fair value accounting standards.
The Company reviews its valuation methodologies on an ongoing basis and revises those methodologies when necessary based on changing market conditions. Assurance is gained on the overall reasonableness and consistent application of input assumptions, valuation methodologies and compliance with fair value accounting standards through controls designed to ensure valuations represent an exit price. Several controls are utilized, including certain monthly controls, which include, but are not limited to, analysis of portfolio returns to corresponding benchmark returns, comparing a sample of executed prices of securities sold to the fair value estimates, comparing fair value estimates to management’s knowledge of the current market, reviewing the bid/ask spreads to assess activity, comparing prices from multiple independent pricing services and ongoing due diligence to confirm that independent pricing services use market-based parameters. The process includes a determination of the observability of inputs used in estimated fair values received from independent pricing services or brokers by assessing whether these inputs can be corroborated by observable market data. The Company ensures that prices received from independent brokers, also referred to herein as “consensus pricing,” represent a reasonable estimate of fair value by considering such pricing relative to the Company’s knowledge of the current market dynamics and current pricing for similar financial instruments. While independent non-binding broker quotations are utilized, they are not used for a significant portion of the portfolio. For example, fixed maturity securities priced using independent non-binding broker quotations represent less than 1% of the total estimated fair value of fixed maturity securities and 11% of the total estimated fair value of Level 3 fixed maturity securities.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
The Company also applies a formal process to challenge any prices received from independent pricing services that are not considered representative of estimated fair value. If prices received from independent pricing services are not considered reflective of market activity or representative of estimated fair value, independent non-binding broker quotations are obtained, or an internally developed valuation is prepared. Internally developed valuations of current estimated fair value, which reflect internal estimates of liquidity and nonperformance risks, compared with pricing received from the independent pricing services, did not produce material differences in the estimated fair values for the majority of the portfolio; accordingly, overrides were not material. This is, in part, because internal estimates of liquidity and nonperformance risks are generally based on available market evidence and estimates used by other market participants. In the absence of such market-based evidence, management’s best estimate is used.
Securities, Short-term Investments and Long-term Debt of CSEs
When available, the estimated fair value of these financial instruments is 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 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. When observable inputs are not available, the market standard valuation methodologies 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 long-term debt of CSEs is determined on a basis consistent with the methodologies described herein for securities.
Level 2 Valuation Techniques and Key Inputs:
This level includes securities priced principally by independent pricing services using observable inputs. Short-term investments within this level are of a similar nature and class to the Level 2 fixed maturity securities and equity securities.
U.S. corporate and foreign corporate securities
These securities are principally valued using the market and income approaches. Valuations are 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. Privately-placed securities are valued using matrix pricing 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, and in certain cases, delta spread adjustments to reflect specific credit-related issues.
U.S. Treasury and agency securities
These securities are principally valued using the market approach. Valuations are 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 a benchmark U.S. Treasury yield curve, the spread off the U.S. Treasury yield curve for the identical security and comparable securities that are actively traded.
Structured securities comprised of RMBS, ABS and CMBS
These securities are principally valued using the market and income approaches. Valuations are based primarily on matrix pricing, discounted cash flow methodologies 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, 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.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
State and political subdivision and foreign government securities
These securities are principally valued using the market approach. Valuations are based primarily on matrix pricing or other similar techniques using standard market observable inputs including a benchmark U.S. Treasury yield 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. Valuations are based principally on observable inputs, including quoted prices in markets that are not considered active.
Level 3 Valuation Techniques and Key Inputs:
In general, securities classified within Level 3 use many of the same valuation techniques and inputs as described previously for Level 2. 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.
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 approach. Valuations are based primarily on matrix pricing or other similar techniques that utilize unobservable inputs or inputs that cannot be derived principally from, or corroborated by, observable market data, including illiquidity premium, delta spread adjustments to reflect specific credit-related issues, credit spreads; and 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. Certain valuations are based on independent non-binding broker quotations.
Structured securities comprised of RMBS, ABS and CMBS
These securities are principally valued using the market and income approaches. Valuations are based primarily on matrix pricing, discounted cash flow methodologies or other similar techniques that utilize inputs that are unobservable or cannot be derived principally from, or corroborated by, observable market data, including credit spreads. Below investment grade securities and sub-prime RMBS 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. Certain of these valuations are based on independent non-binding broker quotations.
State and political subdivision and foreign government securities
These securities are principally valued using the market approach. Valuations are based primarily on independent non-binding broker quotations and 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. Certain valuations are based on matrix pricing that utilize inputs that are unobservable or cannot be derived principally from, or corroborated by, observable market data, including credit spreads.
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, discounted cash flow methodologies or other similar techniques using inputs such as comparable credit rating and issuance structure. Certain of these securities 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 independent non-binding broker quotations.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
Mortgage Loans Held by CSEs - FVO
The Company consolidates certain securitization entities that hold commercial mortgage loans.
Level 2 Valuation Techniques and Key Inputs:
These investments are principally valued using the market approach. The principal market for these investments 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.
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. Separate account assets include: mutual funds, fixed maturity securities, equity securities, derivatives, other limited partnership interests, short-term investments and cash and cash equivalents.
Level 2 Valuation Techniques and Key Inputs:
These assets are comprised of investments that are similar in nature to the instruments described under “— Securities, Short-term Investments and Long-term Debt of CSEs.” Also included are certain mutual funds without readily determinable fair values, as prices are not published publicly. Valuation of the mutual funds is based upon quoted prices or reported NAV provided by the fund managers.
Level 3 Valuation Techniques and Key Inputs:
These assets are comprised of investments that are similar in nature to the instruments described under “— Securities, Short-term Investments and Long-term Debt of CSEs.” Also included are other limited partnership interests, which 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 that may impact the exit value of the particular partnership interest.
Derivatives
The estimated fair value of derivatives is determined through the use of quoted market prices for exchange-traded derivatives, or through the use of pricing models for OTC-bilateral and OTC-cleared 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 such 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 valuation controls and procedures for derivatives are described in “— Investments.”
The significant inputs to the pricing models for most OTC-bilateral and OTC-cleared 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-bilateral and OTC-cleared 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 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.
Most inputs for OTC-bilateral and OTC-cleared derivatives are mid-market inputs but, in certain cases, liquidity adjustments are made when they are deemed more representative of exit value. Market liquidity, as well as the use of different methodologies, assumptions and inputs, may have a material effect on the estimated fair values of the Company’s derivatives and could materially affect net income.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
The credit risk of both the counterparty and the Company are considered in determining the estimated fair value for all OTC-bilateral and OTC-cleared derivatives, and any potential credit adjustment is based on the net exposure by counterparty after taking into account the effects of netting agreements and collateral arrangements. The Company values its OTC-bilateral and OTC-cleared derivatives using standard swap curves which may include a spread to the risk free rate, depending upon specific collateral arrangements. This credit spread is appropriate for those parties that execute trades at pricing levels consistent with similar collateral arrangements. As the Company and its significant derivative counterparties generally execute trades at such pricing levels and hold sufficient collateral, additional credit risk adjustments are not currently required in the valuation process. The Company’s ability to consistently execute at such pricing levels is in part due to the netting agreements and collateral arrangements that are in place with all of its significant derivative counterparties. An evaluation of the requirement to make additional credit risk adjustments is performed by the Company each reporting period.
Freestanding Derivatives
Level 2 Valuation Techniques and Key Inputs:
This level includes all types of derivatives utilized by the Company with the exception of exchange-traded derivatives included within Level 1 and those derivatives with unobservable inputs as described in Level 3. These derivatives are principally valued using the income approach.
Interest rate
Non-option-based. Valuations are based on present value techniques, which utilize significant inputs that may include the swap yield curve and basis curves.
Option-based. Valuations are based on option pricing models, which utilize significant inputs that may include the swap yield curve, basis curves and interest rate volatility.
Foreign currency exchange rate
Non-option-based. Valuations are based on present value techniques, which utilize significant inputs that may include the swap yield curve, basis curves, currency spot rates and cross currency basis curves.
Credit
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
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.
Level 3 Valuation Techniques and Key Inputs:
These derivatives are principally valued using the 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
Non-option-based. Significant unobservable inputs may include the extrapolation beyond observable limits of the swap yield curve and basis curves.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
Credit
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
Non-option-based. Significant unobservable inputs may include the extrapolation beyond observable limits of dividend yield curves and equity volatility.
Embedded Derivatives
Embedded derivatives principally include certain direct, assumed and ceded variable annuity guarantees and embedded derivatives related to funds withheld on ceded reinsurance. Embedded derivatives are recorded at estimated fair value with changes in estimated fair value reported in net income.
The Company issues certain variable annuity products with guaranteed minimum benefits. GMWBs, GMABs and GMIBs contain embedded derivatives, which are measured at estimated fair value separately from the host variable annuity contract, with changes in estimated fair value reported in net derivative gains (losses). These embedded derivatives are classified within PABs in the consolidated balance sheets.
The fair value of these embedded derivatives, estimated as the present value of projected future benefits minus the present value of projected future fees using actuarial and capital market assumptions including expectations concerning policyholder behavior, is calculated by the Company’s actuarial department. The calculation is based on in-force business, and is performed using standard actuarial valuation software which projects future cash flows from the embedded derivative over multiple risk neutral stochastic scenarios using observable risk free rates.
Capital market assumptions, such as risk free rates and implied volatilities, are based on market prices for publicly traded instruments to the extent that prices for such instruments are observable. Implied volatilities beyond the observable period are extrapolated based on observable implied volatilities and historical volatilities. Actuarial assumptions, including mortality, lapse, withdrawal and utilization, are unobservable and are reviewed at least annually based on actuarial studies of historical experience.
The valuation of these guarantee liabilities includes nonperformance risk adjustments and adjustments for a risk margin related to non-capital market inputs. The nonperformance adjustment is determined by taking into consideration publicly available information relating to spreads in the secondary market for MetLife’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.
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 assumed, from an affiliated insurance company, the risk associated with certain GMIBs. These embedded derivatives are included in other policy-related balances in the consolidated balance sheets with changes in estimated fair value reported in net derivative gains (losses). The value of the embedded derivatives on these assumed risks is determined using a methodology consistent with that described previously for the guarantees directly written by the Company.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
The Company ceded, to an affiliated reinsurance company, the risk associated with certain of the GMIBs, GMABs and GMWBs described above that are also accounted for as embedded derivatives. In addition to ceding risks associated with guarantees that are accounted for as embedded derivatives, the Company also cedes, to the same affiliated reinsurance company, certain directly written GMIBs that are accounted for as insurance (i.e., not as embedded derivatives), but where the reinsurance agreement contains an embedded derivative. These embedded derivatives 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). 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 “— Investments — Securities, Short-term Investments and Long-term Debt of CSEs.” 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.
Embedded Derivatives Within Asset and Liability Host Contracts
Level 3 Valuation Techniques and Key Inputs:
Direct and assumed guaranteed minimum benefits
These embedded derivatives are principally valued using the 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 the income approach. The valuation techniques and significant market standard unobservable inputs used in their valuation are similar to those described above in “— Direct and Assumed Guaranteed Minimum Benefits” and also include counterparty credit spreads.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
Transfers between Levels
Overall, transfers between levels occur when there are changes in the observability of inputs and market activity. Transfers into or out of any level are assumed to occur at the beginning of the period.
Transfers between Levels 1 and 2:
For assets and liabilities measured at estimated fair value and still held at December 31, 2013 and 2012, transfers between Levels 1 and 2 were not significant.
Transfers into or out of Level 3:
Assets and liabilities are transferred into Level 3 when a significant input cannot be corroborated with market observable data. This occurs when market activity decreases significantly and underlying inputs cannot be observed, current prices are not available, and/or when there are significant variances in quoted prices, thereby affecting transparency. Assets and liabilities are transferred out of Level 3 when circumstances change such that a significant input can be corroborated with market observable data. This may be due to a significant increase in market activity, a specific event, or one or more significant input(s) becoming observable.
Transfers into Level 3 for fixed maturity securities 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 independent non-binding broker quotations and unobservable inputs, such as illiquidity premiums, delta spread adjustments or credit spreads.
Transfers out of Level 3 for fixed maturity securities 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 (such as observable spreads used in pricing securities) or increases in market activity and upgraded credit ratings.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)
The following table presents certain quantitative information about the significant unobservable inputs used in the fair value measurement, and the sensitivity of the estimated fair value to changes in those inputs, for the more significant asset and liability classes measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at:
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | December 31, 2013 | | December 31, 2012 | | Impact of Increase in Input on Estimated
Fair Value (2) |
| | Valuation
Techniques | | Significant Unobservable Inputs | |
Range | | Weighted
Average (1) | | Range | | Weighted
Average (1) | |
| Fixed maturity securities: (3) | | | | | | | | | | | | | | | | | |
| U.S. corporate and foreign corporate | • | Matrix pricing | | • | Delta spread adjustments (4) | | (10) | - | 240 | | 51 | | 9 | - | 500 | | 105 | | Decrease |
| | | | | • | Illiquidity premium (4) | | 30 | - | 30 | | 30 | | 30 | - | 30 | | 30 | | Decrease |
| | | | | • | Credit spreads (4) | | (112) | - | 538 | | 208 | | (157) | - | 876 | | 282 | | Decrease |
| | | | | • | Offered quotes (5) | | 99 | - | 100 | | 100 | | 100 | - | 100 | | 100 | | Increase |
| | • | Consensus pricing | | • | Offered quotes (5) | | 33 | - | 103 | | 87 | | 35 | - | 555 | | 96 | | Increase |
| RMBS | • | Matrix pricing and discounted cash flow | | • | Credit spreads (4) | | (96) | - | 2,406 | | 295 | | 40 | - | 2,367 | | 436 | | Decrease (6) |
| | • | Market pricing | | • | Quoted prices (5) | | 10 | - | 100 | | 95 | | 100 | - | 100 | | 100 | | Increase (6) |
| | • | Consensus pricing | | • | Offered quotes (5) | | 78 | - | 100 | | 95 | | | | | | | | Increase (6) |
| CMBS | • | Matrix pricing and discounted cash flow | | • | Credit spreads (4) | | 341 | - | 1,879 | | 746 | | 10 | - | 9,164 | | 413 | | Decrease (6) |
| | • | Market pricing | | • | Quoted prices (5) | | 97 | - | 104 | | 101 | | 100 | - | 104 | | 102 | | Increase (6) |
| | • | Consensus pricing | | • | Offered quotes (5) | | 101 | - | 101 | | 101 | | | | | | | | Increase (6) |
| ABS | • | Matrix pricing and discounted cash flow | | • | Credit spreads (4) | | 30 | - | 875 | | 319 | | — | - | 900 | | 152 | | Decrease (6) |
| | • | Market pricing | | • | Quoted prices (5) | | — | - | 104 | | 101 | | 97 | - | 102 | | 100 | | Increase (6) |
| | • | Consensus pricing | | • | Offered quotes (5) | | 58 | - | 106 | | 98 | | 50 | - | 111 | | 100 | | Increase (6) |
| Derivatives: | | | | | | | | | | | | | | |
| Interest rate | • | Present value techniques | | • | Swap yield (7) | | 248 | - | 450 | | | | 221 | - | 353 | | | | Increase (11) |
| Credit | • | Present value techniques | | • | Credit spreads (8) | | 98 | - | 100 | | | | 100 | - | 100 | | | | Decrease (8) |
| | • | Consensus pricing | | • | Offered quotes (9) | | | | | | | | | | | | | | |
| Equity market | • | Present value techniques | | • | Volatility (10) | | 17% | - | 28% | | | | 18% | - | 26% | | | | Increase (11) |
| Embedded derivatives: | | | | | | | | | | | | | | |
| Direct and ceded guaranteed minimum benefits | • | Option pricing techniques | | • | Mortality rates: | | | | | | | | | | | | | | |
| | | | | | Ages 0 - 40 | | 0% | - | 0.10% | | | | 0% | - | 0.10% | | | | Decrease (12) |
| | | | | | Ages 41 - 60 | | 0.04% | - | 0.65% | | | | 0.05% | - | 0.64% | | | | Decrease (12) |
| | | | | | Ages 61 - 115 | | 0.26% | - | 100% | | | | 0.32% | - | 100% | | | | Decrease (12) |
| | | | | • | Lapse rates: | | | | | | | | | | | | | | |
| | | | | | Durations 1 - 10 | | 0.50% | - | 100% | | | | 0.50% | - | 100% | | | | Decrease (13) |
| | | | | | Durations 11 - 20 | | 3% | - | 100% | | | | 3% | - | 100% | | | | Decrease (13) |
| | | | | | Durations 21 - 116 | | 3% | - | 100% | | | | 3% | - | 100% | | | | Decrease (13) |
| | | | | • | Utilization rates | | 20% | - | 50% | | | | 20% | - | 50% | | | | Increase (14) |
| | | | | • | Withdrawal rates | | 0.07% | - | 10% | | | | 0.07% | - | 10% | | | | (15) |
| | | | | • | Long-term equity volatilities | | 17.40% | - | 25% | | | | 17.40% | - | 25% | | | | Increase (16) |
| | | | | • | Nonperformance risk spread | | 0.03% | - | 0.44% | | | | 0.10% | - | 0.67% | | | | Decrease (17) |
______________
| |
| (1) | The weighted average for fixed maturity securities is determined based on the estimated fair value of the securities. |
| |
| (2) | The impact of a decrease in input would have the opposite impact on the estimated fair value. For embedded derivatives, changes to direct guaranteed minimum benefits are based on liability positions and changes to ceded guaranteed minimum benefits are based on asset positions. |
| |
| (3) | Significant increases (decreases) in expected default rates in isolation would result in substantially lower (higher) valuations. |
| |
| (4) | Range and weighted average are presented in basis points. |
| |
| (5) | Range and weighted average are presented in accordance with the market convention for fixed maturity securities of dollars per hundred dollars of par. |
| |
| (6) | Changes in the assumptions used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumptions used for prepayment rates. |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
| |
| (7) | Ranges represent the rates across different yield curves and are presented in basis points. The swap yield curve is utilized among different types of derivatives to project cash flows, as well as to discount future cash flows to present value. Since this valuation methodology uses a range of inputs across a yield curve to value the derivative, presenting a range is more representative of the unobservable input used in the valuation. |
| |
| (8) | Represents the risk quoted in basis points of a credit default event on the underlying instrument. The range being provided is a single quoted spread in the valuation model. Credit derivatives with significant unobservable inputs are primarily comprised of written credit default swaps. |
| |
| (9) | At both December 31, 2013 and 2012, independent non-binding broker quotations were used in the determination of less than 1% of the total net derivative estimated fair value. |
| |
| (10) | Ranges represent the underlying equity volatility quoted in percentage points. Since this valuation methodology uses a range of inputs across multiple volatility surfaces to value the derivative, presenting a range is more representative of the unobservable input used in the valuation. |
| |
| (11) | Changes are based on long U.S. dollar net asset positions and will be inversely impacted for short U.S. dollar net asset positions. |
| |
| (12) | Mortality rates vary by age and by demographic characteristics such as gender. Mortality rate assumptions are based on company experience. A mortality improvement assumption is also applied. For any given contract, mortality rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. |
| |
| (13) | Base lapse rates are adjusted at the contract level based on a comparison of the actuarially calculated guaranteed values and the current policyholder account value, as well as other factors, such as the applicability of any surrender charges. A dynamic lapse function reduces the base lapse rate when the guaranteed amount is greater than the account value as in the money contracts are less likely to lapse. Lapse rates are also generally assumed to be lower in periods when a surrender charge applies. For any given contract, lapse rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. |
| |
| (14) | The utilization rate assumption estimates the percentage of contract holders with a GMIB or lifetime withdrawal benefit who will elect to utilize the benefit upon becoming eligible. The rates may vary by the type of guarantee, the amount by which the guaranteed amount is greater than the account value, the contract’s withdrawal history and by the age of the policyholder. For any given contract, utilization rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. |
| |
| (15) | The withdrawal rate represents the percentage of account balance that any given policyholder will elect to withdraw from the contract each year. The withdrawal rate assumption varies by age and duration of the contract, and also by other factors such as benefit type. For any given contract, withdrawal rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. For GMWBs, any increase (decrease) in withdrawal rates results in an increase (decrease) in the estimated fair value of the guarantees. For GMABs and GMIBs, any increase (decrease) in withdrawal rates results in a decrease (increase) in the estimated fair value. |
| |
| (16) | Long-term equity volatilities represent equity volatility beyond the period for which observable equity volatilities are available. For any given contract, long-term equity volatility rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. |
| |
| (17) | Nonperformance risk spread varies by duration and by currency. For any given contract, multiple nonperformance risk spreads will apply, depending on the duration of the cash flow being discounted for purposes of valuing the embedded derivative. |
The following is a summary of the valuation techniques and significant unobservable inputs used in the fair value measurement of assets and liabilities classified within Level 3 that are not included in the preceding table. Generally, all other classes of securities classified within Level 3, including those within separate account assets and embedded derivatives within funds withheld related to certain ceded reinsurance, use the same valuation techniques and significant unobservable inputs as previously described for Level 3 securities. This includes matrix pricing and discounted cash flow methodologies, inputs such as quoted prices for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2, as well as independent non-binding broker quotations. The sensitivity of the estimated fair value to changes in the significant unobservable inputs for these other assets and liabilities is similar in nature to that described in the preceding table. The valuation techniques and significant unobservable inputs used in the fair value measurement for the more significant assets measured at estimated fair value on a nonrecurring basis and determined using significant unobservable inputs (Level 3) are summarized in “— Nonrecurring Fair Value Measurements.”
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
The following tables summarize the change of all assets and (liabilities) measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Fixed Maturity Securities: |
| | U.S.
Corporate | | Foreign
Corporate | | U.S.
Treasury
and Agency | | RMBS | | State and
Political
Subdivision | | ABS | | CMBS | | Foreign Government |
| | (In millions) |
| Year Ended December 31, 2013: | | | | | | | | | | | | | | | |
| Balance at January 1, | $ | 1,434 |
| | $ | 868 |
| | $ | — |
| | $ | 278 |
| | $ | 25 |
| | $ | 343 |
| | $ | 125 |
| | $ | 3 |
|
Total realized/unrealized gains (losses) included in: | | | | | | | | | | | | | | | |
| Net income (loss): (1), (2) | | | | | | | | | | | | | | | |
| Net investment income | 7 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | 1 |
| | — |
|
| Net investment gains (losses) | — |
| | (7 | ) | | — |
| | (1 | ) | | — |
| | 2 |
| | — |
| | — |
|
| Net derivative gains (losses) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| OCI | (39 | ) | | (5 | ) | | — |
| | 13 |
| | — |
| | (5 | ) | | 3 |
| | — |
|
| Purchases (3) | 150 |
| | 53 |
| | — |
| | 170 |
| | — |
| | 184 |
| | 37 |
| | — |
|
| Sales (3) | (243 | ) | | (129 | ) | | — |
| | (49 | ) | | (2 | ) | | (53 | ) | | (71 | ) | | (3 | ) |
| Issuances (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Settlements (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Transfers into Level 3 (4) | 218 |
| | 30 |
| | — |
| | 14 |
| | — |
| | — |
| | — |
| | — |
|
| Transfers out of Level 3 (4) | (279 | ) | | (76 | ) | | — |
| | (4 | ) | | (23 | ) | | (53 | ) | | (23 | ) | | — |
|
| Balance at December 31, | $ | 1,248 |
| | $ | 734 |
| | $ | — |
| | $ | 422 |
| | $ | — |
| | $ | 419 |
| | $ | 72 |
| | $ | — |
|
Changes in unrealized gains (losses) included in net income (loss): (5) | | | | | | | | | | | | | | | |
| Net investment income | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Net investment gains (losses) | $ | — |
| | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Net derivative gains (losses) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Equity Securities: | | | | Net Derivatives: (6) | | | | |
| | Non-
redeemable
Preferred
Stock | | Common
Stock | | Short-term
Investments | | Interest
Rate | | Credit | | Equity
Market | | Net
Embedded
Derivatives (7) | | Separate Account Assets (8) |
| | (In millions) |
| Year Ended December 31, 2013: | | | | | | | | | | | | | | | |
| Balance at January 1, | $ | 93 |
| | $ | 26 |
| | $ | 13 |
| | $ | 119 |
| | $ | 10 |
| | $ | (51 | ) | | $ | 2,290 |
| | $ | 141 |
|
Total realized/unrealized gains (losses) included in: | | | | | | | | | | | | | | | |
| Net income (loss): (1), (2) | | | | | | | | | | | | | | | |
| Net investment income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net investment gains (losses) | — |
| | 8 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6 |
|
| Net derivative gains (losses) | — |
| | — |
| | — |
| | (16 | ) | | (4 | ) | | (40 | ) | | (108 | ) | | — |
|
| OCI | 12 |
| | 7 |
| | — |
| | (58 | ) | | — |
| | — |
| | — |
| | — |
|
| Purchases (3) | 3 |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 9 |
|
| Sales (3) | (27 | ) | | (12 | ) | | (13 | ) | | — |
| | — |
| | — |
| | — |
| | (6 | ) |
| Issuances (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Settlements (3) | — |
| | — |
| | — |
| | (19 | ) | | — |
| | 3 |
| | (59 | ) | | — |
|
| Transfers into Level 3 (4) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
| Transfers out of Level 3 (4) | — |
| | — |
| | — |
| | (15 | ) | | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, | $ | 81 |
| | $ | 31 |
| | $ | — |
| | $ | 11 |
| | $ | 6 |
| | $ | (88 | ) | | $ | 2,123 |
| | $ | 153 |
|
Changes in unrealized gains (losses) included in net income (loss): (5) | | | | | | | | | | | | | | | |
| Net investment income | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Net investment gains (losses) | $ | (3 | ) | | $ | (2 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Net derivative gains (losses) | $ | — |
| | $ | — |
| | $ | — |
| | $ | (8 | ) | | $ | (4 | ) | | $ | (36 | ) | | $ | (83 | ) | | $ | — |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Fixed Maturity Securities: |
| | U.S.
Corporate | | Foreign
Corporate | | U.S.
Treasury
and Agency | | RMBS | | State and
Political
Subdivision | | ABS | | CMBS | | Foreign Government |
| | (In millions) |
| Year Ended December 31, 2012: | | | | | | | | | | | | | | | |
| Balance at January 1, | $ | 1,432 |
| | $ | 580 |
| | $ | — |
| | $ | 239 |
| | $ | 23 |
| | $ | 220 |
| | $ | 147 |
| | $ | 2 |
|
Total realized/unrealized gains (losses) included in: | | | | | | | | | | | | | | | |
| Net income (loss): (1), (2) | | | | | | | | | | | | | | | |
| Net investment income | 7 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net investment gains (losses) | — |
| | (24 | ) | | — |
| | (4 | ) | | — |
| | — |
| | (1 | ) | | — |
|
| Net derivative gains (losses) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| OCI | 66 |
| | 44 |
| | — |
| | 39 |
| | 2 |
| | 8 |
| | 6 |
| | 1 |
|
| Purchases (3) | 227 |
| | 269 |
| | — |
| | 61 |
| | — |
| | 148 |
| | 22 |
| | — |
|
| Sales (3) | (183 | ) | | (56 | ) | | — |
| | (63 | ) | | — |
| | (15 | ) | | (71 | ) | | — |
|
| Issuances (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Settlements (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Transfers into Level 3 (4) | 76 |
| | 68 |
| | — |
| | 6 |
| | — |
| | — |
| | 39 |
| | — |
|
| Transfers out of Level 3 (4) | (191 | ) | | (13 | ) | | — |
| | — |
| | — |
| | (18 | ) | | (17 | ) | | — |
|
| Balance at December 31, | $ | 1,434 |
| | $ | 868 |
| | $ | — |
| | $ | 278 |
| | $ | 25 |
| | $ | 343 |
| | $ | 125 |
| | $ | 3 |
|
Changes in unrealized gains (losses) included in net income (loss): (5) | | | | | | | | | | | | | | | |
| Net investment income | $ | 7 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Net investment gains (losses) | $ | — |
| | $ | (16 | ) | | $ | — |
| | $ | (2 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Net derivative gains (losses) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Equity Securities: | |
|
| Net Derivatives: (6) |
|
|
| |
| | Non-
redeemable
Preferred
Stock |
| Common
Stock | | Short-term
Investments |
| Interest
Rate |
| Credit |
| Equity
Market |
| Net
Embedded
Derivatives (7) |
| Separate Account Assets (8) |
| | (In millions) |
| Year Ended December 31, 2012: |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Balance at January 1, | $ | 76 |
|
| $ | 21 |
| | $ | 10 |
|
| $ | 174 |
|
| $ | (1 | ) |
| $ | 43 |
|
| $ | 1,009 |
|
| $ | 130 |
|
Total realized/unrealized gains (losses) included in: |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss): (1), (2) |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Net investment income | — |
|
| — |
| | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| Net investment gains (losses) | — |
|
| (2 | ) | | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 16 |
|
| Net derivative gains (losses) | — |
|
| — |
| | — |
|
| 1 |
|
| 10 |
|
| (91 | ) |
| 1,296 |
|
| — |
|
| OCI | 20 |
|
| 9 |
| | — |
|
| 1 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| Purchases (3) | — |
|
| — |
| | 13 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1 |
|
| Sales (3) | (3 | ) |
| (2 | ) | | (10 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| (5 | ) |
| Issuances (3) | — |
|
| — |
| | — |
|
| (10 | ) |
| — |
|
| ��� |
|
| — |
|
| — |
|
| Settlements (3) | — |
|
| — |
| | — |
|
| (47 | ) |
| — |
|
| (3 | ) |
| (15 | ) |
| — |
|
| Transfers into Level 3 (4) | — |
|
| — |
| | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1 |
|
| Transfers out of Level 3 (4) | — |
|
| — |
| | — |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| (2 | ) |
| Balance at December 31, | $ | 93 |
|
| $ | 26 |
| | $ | 13 |
|
| $ | 119 |
|
| $ | 10 |
|
| $ | (51 | ) |
| $ | 2,290 |
|
| $ | 141 |
|
Changes in unrealized gains (losses) included in net income (loss): (5) | | | | | | | | | | | | | | | |
| Net investment income | $ | — |
|
| $ | — |
| | $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| Net investment gains (losses) | $ | — |
|
| $ | (4 | ) | | $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| Net derivative gains (losses) | $ | — |
|
| $ | — |
| | $ | — |
|
| $ | 3 |
|
| $ | 11 |
|
| $ | (88 | ) |
| $ | 1,305 |
|
| $ | — |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Fixed Maturity Securities: |
| | U.S.
Corporate |
| Foreign
Corporate |
| U.S.
Treasury
and Agency |
| RMBS |
| State and
Political
Subdivision | | ABS |
| CMBS |
| Foreign Government |
| | (In millions) |
| Year Ended December 31, 2011: |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
| Balance at January 1, | $ | 1,510 |
|
| $ | 880 |
|
| $ | 34 |
|
| $ | 282 |
|
| $ | 32 |
| | $ | 321 |
|
| $ | 130 |
|
| $ | 14 |
|
Total realized/unrealized gains (losses) included in: |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
| Net income (loss): (1), (2) |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
| Net investment income | 6 |
|
| 1 |
|
| — |
|
| 1 |
|
| — |
| | — |
|
| — |
|
| — |
|
| Net investment gains (losses) | 32 |
|
| (20 | ) |
| — |
|
| (5 | ) |
| — |
| | (6 | ) |
| — |
|
| — |
|
| Net derivative gains (losses) | — |
|
| — |
|
| — |
|
| — |
|
| — |
| | — |
|
| — |
|
| — |
|
| OCI | 80 |
|
| 22 |
|
| — |
|
| (9 | ) |
| (8 | ) | | 8 |
|
| 19 |
|
| — |
|
| Purchases (3) | 76 |
| | 282 |
| | — |
| | 16 |
| | — |
| | 166 |
| | 17 |
| | — |
|
| Sales (3) | (175 | ) | | (515 | ) | | — |
| | (34 | ) | | (1 | ) | | (46 | ) | | (19 | ) | | (12 | ) |
| Issuances (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Settlements (3) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Transfers into Level 3 (4) | 40 |
| | 3 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
| Transfers out of Level 3 (4) | (137 | ) | | (73 | ) | | (34 | ) | | (13 | ) | | — |
| | (223 | ) | | — |
| | — |
|
| Balance at December 31, | $ | 1,432 |
|
| $ | 580 |
|
| $ | — |
|
| $ | 239 |
|
| $ | 23 |
| | $ | 220 |
|
| $ | 147 |
|
| $ | 2 |
|
Changes in unrealized gains (losses) included in net income (loss): (5) |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
| Net investment income | $ | 6 |
|
| $ | 1 |
|
| $ | — |
|
| $ | 1 |
|
| $ | — |
| | $ | — |
|
| $ | — |
|
| $ | — |
|
| Net investment gains (losses) | $ | — |
|
| $ | (9 | ) |
| $ | — |
|
| $ | (5 | ) |
| $ | — |
| | $ | (2 | ) |
| $ | — |
|
| $ | — |
|
| Net derivative gains (losses) | $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| | $ | — |
|
| $ | — |
|
| $ | — |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Equity Securities: |
|
|
| Net Derivatives: (6) |
|
| | |
| | Non-
redeemable
Preferred
Stock |
| Common
Stock |
| Short-term
Investments |
| Interest
Rate |
| Credit |
| Equity
Market |
| Net
Embedded
Derivatives (7) | | Separate Account Assets (8) |
| | (In millions) |
| Year Ended December 31, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| Balance at January 1, | $ | 214 |
|
| $ | 22 |
|
| $ | 173 |
|
| $ | (61 | ) |
| $ | 11 |
|
| $ | 12 |
|
| $ | 677 |
| | $ | 133 |
|
Total realized/unrealized gains (losses) included in: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Net income (loss): (1), (2) |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Net investment income | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| | — |
|
| Net investment gains (losses) | (24 | ) |
| 2 |
|
| (1 | ) |
| — |
|
| — |
|
| — |
|
| — |
| | (7 | ) |
| Net derivative gains (losses) | — |
|
| — |
|
| — |
|
| 50 |
|
| (10 | ) |
| 32 |
|
| 254 |
| | — |
|
| OCI | 1 |
|
| (6 | ) |
| — |
|
| 199 |
|
| — |
|
| — |
|
| — |
| | — |
|
| Purchases (3) | — |
| | 9 |
| | 10 |
| | — |
| | — |
| | 3 |
| | — |
| | 5 |
|
| Sales (3) | (115 | ) | | (6 | ) | | (172 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) |
| Issuances (3) | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (4 | ) | | — |
| | — |
|
| Settlements (3) | — |
| | — |
| | — |
| | (13 | ) | | (1 | ) | | — |
| | 78 |
| | — |
|
| Transfers into Level 3 (4) | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
|
| Transfers out of Level 3 (4) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, | $ | 76 |
|
| $ | 21 |
|
| $ | 10 |
|
| $ | 174 |
|
| $ | (1 | ) |
| $ | 43 |
|
| $ | 1,009 |
| | $ | 130 |
|
Changes in unrealized gains (losses) included in net income (loss): (5) |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Net investment income | $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| | $ | — |
|
| Net investment gains (losses) | $ | (3 | ) |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| | $ | — |
|
| Net derivative gains (losses) | $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 39 |
|
| $ | (10 | ) |
| $ | 33 |
|
| $ | 256 |
| | $ | — |
|
______________
| |
| (1) | Amortization of premium/accretion of discount is included within net investment income. Impairments charged to net income (loss) on securities are included in net investment gains (losses). Lapses associated with net embedded derivatives are included in net derivative gains (losses). |
| |
| (2) | Interest and dividend accruals, as well as cash interest coupons and dividends received, are excluded from the rollforward. |
| |
| (3) | Items purchased/issued and then sold/settled in the same period are excluded from the rollforward. Fees attributed to embedded derivatives are included in settlements. |
| |
| (4) | Gains and losses, in net income (loss) and OCI, are calculated assuming transfers into and/or out of Level 3 occurred at the beginning of the period. Items transferred into and then out of Level 3 in the same period are excluded from the rollforward. |
| |
| (5) | Changes in unrealized gains (losses) included in net income (loss) relate to assets and liabilities still held at the end of the respective periods. |
| |
| (6) | Freestanding derivative assets and liabilities are presented net for purposes of the rollforward. |
| |
| (7) | Embedded derivative assets and liabilities are presented net for purposes of the rollforward. |
| |
| (8) | 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). |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
Fair Value Option
The following table presents information for certain assets and liabilities of CSEs, which are accounted for under the FVO. These assets and liabilities were initially measured at fair value.
|
| | | | | | | | |
| | | December 31, |
| | | 2013 | | 2012 |
| | | (In millions) |
| Assets: (1) | |
| Unpaid principal balance | | $ | 1,528 |
| | $ | 2,539 |
|
| Difference between estimated fair value and unpaid principal balance | | 70 |
| | 127 |
|
| Carrying value at estimated fair value | | $ | 1,598 |
| | $ | 2,666 |
|
| Liabilities: (1) | | | | |
| Contractual principal balance | | $ | 1,436 |
| | $ | 2,444 |
|
| Difference between estimated fair value and contractual principal balance | | 25 |
| | 115 |
|
| Carrying value at estimated fair value | | $ | 1,461 |
| | $ | 2,559 |
|
______________
| |
| (1) | These assets and liabilities are comprised of commercial mortgage loans and long-term debt. Changes in estimated fair value on these assets and liabilities and gains or losses on sales of these assets are recognized in net investment gains (losses). Interest income on commercial mortgage loans held by CSEs — FVO is recognized in net investment income. Interest expense from long-term debt of CSEs — FVO is recognized in other expenses. |
Nonrecurring Fair Value Measurements
The following table presents information for assets measured at estimated fair value on a nonrecurring basis during the periods and still held at the reporting dates; that is, they are not measured at fair value on a recurring basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). The estimated fair values for these assets were determined using significant unobservable inputs (Level 3).
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, | | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 |
| | Carrying Value After Measurement | | Gains (Losses) |
| | (In millions) |
| Mortgage loans, net (1) | $ | 36 |
| | $ | 65 |
| | $ | 8 |
| | $ | (4 | ) | | $ | 4 |
| | $ | 8 |
|
| Other limited partnership interests (2) | $ | 5 |
| | $ | 6 |
| | $ | 5 |
| | $ | (6 | ) | | $ | (3 | ) | | $ | (2 | ) |
| Real estate joint ventures (3) | $ | 1 |
| | $ | 2 |
| | $ | — |
| | $ | (1 | ) | | $ | (3 | ) | | $ | — |
|
| Goodwill (4) | $ | — |
| | $ | — |
| | $ | — |
| | $ | (66 | ) | | $ | (394 | ) | | $ | — |
|
______________
| |
| (1) | Estimated fair values for impaired mortgage loans are based on independent broker quotations or valuation models using unobservable inputs or, if the loans are in foreclosure or are otherwise determined to be collateral dependent, are based on the estimated fair value of the underlying collateral or the present value of the expected future cash flows. |
| |
| (2) | For these cost method investments, estimated fair value is determined from information provided in the financial statements of the underlying entities including NAV data. These investments include private equity and debt funds that typically invest primarily in various 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. Distributions 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 at both December 31, 2013 and 2012 were not significant. |
| |
| (3) | For these cost method investments, estimated fair value is determined from information provided in the financial statements of the underlying entities including NAV data. These investments include several real estate funds that typically invest primarily in commercial real estate. Distributions 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 one to 10 years. Unfunded commitments for these investments at both December 31, 2013 and 2012 were not significant. |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
| |
| (4) | As discussed in Note 10, in 2013, the Company recorded an impairment of goodwill associated with the Retail Life & Other reporting unit. In addition, in 2012, the Company recorded an impairment of goodwill associated with the Retail Annuities reporting unit. These impairments have been categorized as Level 3 due to the significant unobservable inputs used in the determination of the estimated fair value. |
Fair Value of Financial Instruments Carried at Other Than Fair Value
The following tables provide fair value information for financial instruments that are carried on the balance sheet at amounts other than fair value. These tables exclude the following financial instruments: cash and cash equivalents, accrued investment income, payables for collateral under securities loaned and other transactions and those short-term investments that are not securities, such as time deposits, and therefore are not included in the three level hierarchy table disclosed in the “— Recurring Fair Value Measurements” section. The estimated fair value of the excluded financial instruments, which are primarily classified in Level 2 and, to a lesser extent, in Level 1, approximates carrying value as they are short-term in nature such that the Company believes there is minimal risk of material changes in interest rates or credit quality. All remaining balance sheet amounts excluded from the table below are not considered financial instruments subject to this disclosure.
The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows at:
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2013 |
| | | | Fair Value Hierarchy | | |
| | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Total Estimated Fair Value |
| | (In millions) |
| Assets | | | | | | | | | |
| Mortgage loans | $ | 6,120 |
|
| $ | — |
|
| $ | — |
|
| $ | 6,427 |
|
| $ | 6,427 |
|
| Policy loans | $ | 1,219 |
| | $ | — |
| | $ | 872 |
| | $ | 407 |
| | $ | 1,279 |
|
| Real estate joint ventures | $ | 55 |
| | $ | — |
| | $ | — |
| | $ | 98 |
| | $ | 98 |
|
| Other limited partnership interests | $ | 78 |
| | $ | — |
| | $ | — |
| | $ | 89 |
| | $ | 89 |
|
| Other invested assets | $ | 931 |
| | $ | — |
| | $ | 995 |
| | $ | — |
| | $ | 995 |
|
| Premiums, reinsurance and other receivables | $ | 5,928 |
| | $ | — |
| | $ | 24 |
| | $ | 6,282 |
| | $ | 6,306 |
|
| Liabilities | | | | | | | | | |
| PABs | $ | 20,875 |
| | $ | — |
| | $ | — |
| | $ | 21,987 |
| | $ | 21,987 |
|
| Long-term debt | $ | 790 |
| | $ | — |
| | $ | 1,009 |
| | $ | — |
| | $ | 1,009 |
|
| Other liabilities | $ | 258 |
| | $ | — |
| | $ | 96 |
| | $ | 162 |
| | $ | 258 |
|
| Separate account liabilities | $ | 1,448 |
| | $ | — |
| | $ | 1,448 |
| | $ | — |
| | $ | 1,448 |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2012 |
| | | | Fair Value Hierarchy | | |
| | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Total Estimated Fair Value |
| | (In millions) |
| Assets | | | | | | | | | |
| Mortgage loans | $ | 6,491 |
| | $ | — |
| | $ | — |
| | $ | 7,009 |
| | $ | 7,009 |
|
| Policy loans | $ | 1,216 |
| | $ | — |
| | $ | 861 |
| | $ | 450 |
| | $ | 1,311 |
|
| Real estate joint ventures | $ | 59 |
| | $ | — |
| | $ | — |
| | $ | 101 |
| | $ | 101 |
|
| Other limited partnership interests | $ | 94 |
| | $ | — |
| | $ | — |
| | $ | 103 |
| | $ | 103 |
|
| Other invested assets | $ | 432 |
| | $ | — |
| | $ | 548 |
| | $ | — |
| | $ | 548 |
|
| Premiums, reinsurance and other receivables | $ | 6,015 |
| | $ | — |
| | $ | 86 |
| | $ | 6,914 |
| | $ | 7,000 |
|
| Liabilities | | | | | | | | | |
| PABs | $ | 22,613 |
| | $ | — |
| | $ | — |
| | $ | 24,520 |
| | $ | 24,520 |
|
| Long-term debt | $ | 791 |
| | $ | — |
| | $ | 1,076 |
| | $ | — |
| | $ | 1,076 |
|
| Other liabilities | $ | 237 |
| | $ | — |
| | $ | 81 |
| | $ | 156 |
| | $ | 237 |
|
| Separate account liabilities | $ | 1,296 |
| | $ | — |
| | $ | 1,296 |
| | $ | — |
| | $ | 1,296 |
|
The methods, assumptions and significant valuation techniques and inputs used to estimate the fair value of financial instruments are summarized as follows:
Mortgage Loans
For mortgage loans, estimated fair value is primarily determined by estimating expected future cash flows and discounting them using current interest rates for similar mortgage loans with similar credit risk, or is determined from pricing for similar loans.
Policy Loans
Policy loans with fixed interest rates are classified within Level 3. The estimated fair values for these loans 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. Policy loans with variable interest rates are classified within Level 2 and the estimated fair value 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
The estimated fair values of these cost method investments 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.
Other Invested Assets
These other invested assets are principally comprised of loans to affiliates. The estimated fair value of loans to affiliates is determined by discounting the expected future cash flows using market interest rates currently available for instruments with similar terms and remaining maturities.
Premiums, Reinsurance and Other Receivables
Premiums, reinsurance and other receivables are principally comprised of certain amounts recoverable under reinsurance agreements, amounts on deposit with financial institutions to facilitate daily settlements related to certain derivatives and amounts receivable for securities sold but not yet settled.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
9. Fair Value (continued)
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 classified as Level 3. The valuation is based on discounted cash flow methodologies using significant unobservable inputs. The estimated fair value is determined using interest rates determined to reflect the appropriate credit standing of the assuming counterparty.
The amounts on deposit for derivative settlements, classified within Level 2, 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.
PABs
These PABs include investment contracts. Embedded derivatives on investment contracts and certain variable annuity guarantees accounted for as embedded derivatives are excluded from this caption in the preceding tables as they are separately presented in “— Recurring Fair Value Measurements.”
The investment contracts primarily include certain funding agreements, fixed deferred annuities, modified guaranteed annuities, fixed term payout annuities and total control accounts. The valuation of these investment contracts is based on discounted cash flow methodologies using significant unobservable inputs. The estimated fair value is determined using current market risk-free interest rates adding a spread to reflect the nonperformance risk in the liability.
Long-term Debt
The estimated fair value of long-term debt is principally determined using market standard valuation methodologies. Valuations are based primarily on quoted prices in markets that are not active or using matrix pricing that use standard market observable inputs such as quoted prices in markets that are not active and observable yields and spreads in the market. Instruments valued using discounted cash flow methodologies use standard market observable inputs including market yield curve, duration, observable prices and spreads for similar publicly traded or privately traded issues.
Other Liabilities
Other liabilities consist primarily of interest payable, amounts due for securities purchased but not yet settled and funds withheld amounts payable, which are contractually withheld by the Company in accordance with the terms of the reinsurance agreements. 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.
Separate Account Liabilities
Separate account liabilities represent those balances due to policyholders under contracts that are classified as investment contracts.
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 and certain contracts that provide for benefit funding.
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 value of those assets approximates the estimated fair value of the related separate account liabilities. The valuation techniques and inputs for separate account liabilities are similar to those described for separate account assets.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
10. Goodwill
Goodwill is the excess of cost over the estimated fair value of net assets acquired. 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. Step 1 of the goodwill impairment process requires a comparison of the fair value of a reporting unit to its carrying value. In performing the Company’s goodwill impairment tests, the estimated fair values of the reporting units are first determined using a market multiple valuation approach. When further corroboration is required, the Company uses a discounted cash flow valuation approach. For reporting units which are particularly sensitive to market assumptions, the Company may use additional valuation methodologies to estimate the reporting units’ fair values.
The market multiple valuation approach utilizes market multiples of companies with similar businesses and the projected operating earnings of the reporting unit. The discounted cash flow valuation approach requires judgments about revenues, operating earnings projections, capital market assumptions and discount rates. The key inputs, judgments and assumptions necessary in determining estimated fair value of the reporting units include projected operating earnings, current book value, 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 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.
During the 2013 annual goodwill impairment tests, the market multiple and discounted cash flow valuation techniques indicated that the fair value of the Retail Life & Other reporting unit was below its carrying value. Due to these results, 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 Life & Other reporting unit that was less than the carrying value, indicating a potential for goodwill impairment. An increase in required reserves on universal life products with secondary guarantees, together with modifications to financial reinsurance treaty terms, was reflected in the fair value estimate. In addition, decreased future sales assumptions reflected in the valuation were driven by the discontinuance of certain sales of universal life products with secondary guarantees by the Company. 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 Life & Other reporting unit was not recoverable and recorded a non-cash charge of $66 million ($57 million, net of income tax) for the impairment of the entire goodwill balance in the consolidated statements of operations for the year ended December 31, 2013. The full amount was impaired at MetLife Insurance Company of Connecticut.
In addition, the Company performed its annual goodwill impairment test of its Corporate Benefit Funding reporting unit using a market multiple valuation approach and concluded that the fair value of such reporting unit was in excess of its carrying value and, therefore, goodwill was not impaired.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
10. Goodwill (continued)
Information regarding goodwill by segment, as well as Corporate & Other, was as follows:
|
| | | | | | | | | | | | | | | |
| | Retail | | Corporate Benefit Funding | | Corporate & Other (1) | | Total |
| | (In millions) |
| Balance at January 1, 2012 | | | | | | | |
| Goodwill | $ | 241 |
| | $ | 307 |
| | $ | 405 |
| | $ | 953 |
|
| Accumulated impairment | — |
| | — |
| | — |
| | — |
|
| Total goodwill, net | $ | 241 |
| | $ | 307 |
| | $ | 405 |
| | $ | 953 |
|
| Impairments (2) | (218 | ) | | — |
| | (176 | ) | | (394 | ) |
| Balance at December 31, 2012 | | | | | | | |
| Goodwill | $ | 241 |
| | $ | 307 |
| | $ | 405 |
| | $ | 953 |
|
| Accumulated impairment | (218 | ) | | — |
| | (176 | ) | | (394 | ) |
| Total goodwill, net | $ | 23 |
| | $ | 307 |
| | $ | 229 |
| | $ | 559 |
|
| Impairments | (23 | ) | | — |
| | (43 | ) | | (66 | ) |
| Balance at December 31, 2013 | | | | | | | |
| Goodwill | $ | 241 |
| | $ | 307 |
| | $ | 405 |
| | $ | 953 |
|
| Accumulated impairment | (241 | ) | | — |
| | (219 | ) | | (460 | ) |
| Total goodwill, net | $ | — |
| | $ | 307 |
| | $ | 186 |
| | $ | 493 |
|
______________
| |
| (1) | For purposes of goodwill impairment testing, the $229 million of net goodwill in Corporate & Other at December 31, 2012, which resulted from goodwill acquired as part of the 2005 Travelers acquisition, was allocated to business units of the Retail and Corporate Benefit Funding segments in the amounts of $43 million and $186 million, respectively. As reflected in the table, the $43 million related to the Retail segment was impaired for the year ended December 31, 2013. |
| |
| (2) | In connection with its annual goodwill impairment testing, 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 $394 million ($147 million, net of income tax) for the impairment of the entire goodwill balance in the consolidated statements of operations for the year ended December 31, 2012. Of this amount, $327 million ($80 million, net of income tax) was impaired at MetLife Insurance Company of Connecticut. |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
11. Debt
Long-term debt outstanding was as follows:
|
| | | | | | | | | | | |
| | Interest Rate | | Maturity | | December 31, |
| | | 2013 | | 2012 |
| | | | | | (In millions) |
| Surplus notes — affiliated | 8.60% | | 2038 | | $ | 750 |
| | $ | 750 |
|
| Long-term debt — unaffiliated (1) | 7.03% | | 2030 | | 40 |
| | 41 |
|
| Total long-term debt (2) | | | | | $ | 790 |
| | $ | 791 |
|
______________
| |
| (1) | Principal and interest is paid quarterly. |
| |
| (2) | Excludes $1.5 billion and $2.6 billion of long-term debt relating to CSEs at December 31, 2013 and 2012, respectively. See Note 7. |
The aggregate maturities of long-term debt at December 31, 2013 are $1 million in each of 2014, 2015, 2016, and 2017, $2 million in 2018 and $784 million thereafter.
Interest expense related to the Company’s indebtedness included in other expenses was $68 million, $68 million and $67 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Payments of interest and principal on the surplus notes, which are subordinate to all other obligations at the operating company level, may be made only with the prior approval of the insurance department of the state of domicile.
12. Equity
Return of Capital
During the year ended December 31, 2011, Sino-US MetLife Insurance Company Limited ("Sino"), an insurance underwriting joint venture of the Company accounted for under the equity method, merged with United MetLife Insurance Company Limited ("United"), another insurance underwriting joint venture of an affiliate of the Company. MetLife Insurance Company of Connecticut’s ownership interest in the merged entity, Sino-US United MetLife Insurance Company Limited ("Sino-United") was determined based on its contributed capital and share of undistributed earnings of Sino compared to the contributed capital and undistributed earnings of all other investees of Sino and United. Since both of the joint ventures were under common ownership both prior to and subsequent to the merger, MetLife Insurance Company of Connecticut’s investment in Sino-United is based on the carrying value of its investment in Sino. Pursuant to the merger, MetLife Insurance Company of Connecticut entered into an agreement to pay the affiliate an amount based on the relative fair values of their respective investments in Sino-United. Accordingly, upon completion of the estimation of fair value, $47 million, representing a return of capital, was paid during the year ended December 31, 2011. MetLife Insurance Company of Connecticut’s investment in Sino-United is accounted for under the equity method and is included in other invested assets.
Common Stock
The Company has 40,000,000 authorized shares of common stock, 34,595,317 shares of which were outstanding at both December 31, 2013 and 2012. Of such outstanding shares, 30,000,000 shares are owned directly by MetLife and the remaining shares are owned by MetLife Investors Group, Inc.
Statutory Equity and Income
Each 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”). 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. The RBC ratio for MetLife Insurance Company of Connecticut and its U.S. insurance subsidiary, MLI-USA, were in excess of 400% for all periods presented.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
12. Equity (continued)
MetLife Insurance Company of Connecticut and its insurance subsidiaries prepare statutory-basis financial statements in accordance with statutory accounting practices prescribed or permitted by the insurance department of the state of domicile or applicable foreign jurisdiction. 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 Insurance Company of Connecticut and MLI-USA.
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, reporting of reinsurance agreements 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 from temporary differences between statutory accounting principles basis and tax basis not expected to reverse and become recoverable within three years.
Statutory net income (loss) of MetLife Insurance Company of Connecticut, a Connecticut domiciled insurer, was $790 million, $848 million and $46 million for the years ended December 31, 2013, 2012 and 2011, respectively. Statutory capital and surplus was $4.8 billion and $5.3 billion at December 31, 2013 and 2012, respectively. All such amounts are derived from the statutory-basis financial statements as filed with the Connecticut Insurance Department.
Statutory net income (loss) of MLI-USA, a Delaware domiciled insurer, was $209 million, $84 million and $178 million for the years ended December 31, 2013, 2012 and 2011, respectively. Statutory capital and surplus was $1.9 billion and $1.7 billion at December 31, 2013 and 2012, respectively. All such amounts are derived from the statutory-basis financial statements as filed with the Delaware Department of Insurance.
As of December 31, 2013, MetLife Insurance Company of Connecticut’s sole foreign insurance subsidiary, MetLife Assurance Limited (“MAL”) was regulated by authorities in the United Kingdom and was subject to minimum capital and solvency requirements before corrective action commences. The required capital and surplus was $165 million and the actual regulatory capital and surplus was $573 million as of the date of the most recent capital adequacy calculation for the jurisdiction. MAL exceeded these minimum capital and solvency requirements for all other periods presented. See Note 17 for additional information on MAL.
Dividend Restrictions
Under Connecticut State Insurance Law, MetLife Insurance Company of Connecticut 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. MetLife Insurance Company of Connecticut 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 either approves the distribution of the dividend or does not disapprove the payment within 30 days after notice. In addition, any dividend that exceeds earned surplus (defined as “unassigned funds (surplus)” 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 stockholders. During the year ended December 31, 2013, MetLife Insurance Company of Connecticut paid a dividend to its stockholders in the amount of $1.0 billion. During the year ended December 31, 2012, MetLife Insurance Company of Connecticut paid total dividends of $706 million. During June 2012, the Company distributed all of the issued and outstanding shares of common stock of MetLife Europe to its stockholders 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. During December 2012, MetLife Insurance Company of Connecticut paid a dividend to its stockholders in the amount of $504 million, which represented its ordinary dividend capacity at year-end 2012. Due to the June 2012 in-kind dividend, a portion of this was extraordinary and regulatory approval was obtained. During the years ended December 31, 2011, MetLife Insurance Company of Connecticut paid a dividend of $517 million. Based on amounts at December 31, 2013, MetLife Insurance Company of Connecticut could pay a stockholder dividend in 2014 of $1.0 billion without prior approval of the Connecticut Commissioner.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
12. Equity (continued)
Under Delaware State Insurance Law, MLI-USA is permitted, without prior insurance regulatory clearance, to pay a stockholder dividend to MetLife Insurance Company of Connecticut 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 net statutory gain from operations for the immediately preceding calendar year (excluding realized capital gains). MLI-USA will be permitted to pay a dividend to MetLife Insurance Company of Connecticut 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 (surplus)”) as of the immediately preceding calendar year 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 stockholders. During the years ended December 31, 2013, 2012 and 2011, MLI-USA did not pay dividends to MetLife Insurance Company of Connecticut. Because MLI-USA’s statutory unassigned funds were negative at December 31, 2013, MLI-USA cannot pay any dividends in 2014 without prior regulatory approval.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
12. Equity (continued)
Accumulated Other Comprehensive Income (Loss)
Information regarding changes in the balances of each component of AOCI, net of income tax, was as follows:
|
| | | | | | | | | | | | | | | |
| | Unrealized Investment Gains (Losses), Net of Related Offsets (1) | | Unrealized Gains (Losses) on Derivatives | | Foreign Currency Translation Adjustments | | Total |
| | (In millions) |
| Balance at December 31, 2010 | $ | 412 |
| | $ | (70 | ) | | $ | (125 | ) | | $ | 217 |
|
| OCI before reclassifications | 2,118 |
| | 356 |
| | (16 | ) | | 2,458 |
|
| Income tax expense (benefit) | (747 | ) | | (125 | ) | | 2 |
| | (870 | ) |
| OCI before reclassifications, net of income tax | 1,783 |
| | 161 |
| | (139 | ) | | 1,805 |
|
| Amounts reclassified from AOCI | (44 | ) | | (9 | ) | | — |
| | (53 | ) |
| Income tax expense (benefit) | 16 |
| | 3 |
| | — |
| | 19 |
|
| Amounts reclassified from AOCI, net of income tax | (28 | ) | | (6 | ) | | — |
| | (34 | ) |
| Balance at December 31, 2011 | 1,755 |
| | 155 |
| | (139 | ) | | 1,771 |
|
| OCI before reclassifications | 945 |
| | 7 |
| | 88 |
| | 1,040 |
|
| Income tax expense (benefit) | (350 | ) | | (1 | ) | | 2 |
| | (349 | ) |
| OCI before reclassifications, net of income tax | 2,350 |
| | 161 |
| | (49 | ) | | 2,462 |
|
| Amounts reclassified from AOCI | (95 | ) | | (3 | ) | | — |
| | (98 | ) |
| Income tax expense (benefit) | 35 |
| | 1 |
| | — |
| | 36 |
|
| Amounts reclassified from AOCI, net of income tax | (60 | ) | | (2 | ) | | — |
| | (62 | ) |
| Balance at December 31, 2012 | 2,290 |
| | 159 |
| | (49 | ) | | 2,400 |
|
| OCI before reclassifications | (2,039 | ) | | (193 | ) | | 28 |
| | (2,204 | ) |
| Income tax expense (benefit) | 671 |
| | 68 |
| | (2 | ) | | 737 |
|
| OCI before reclassifications, net of income tax | 922 |
| | 34 |
| | (23 | ) | | 933 |
|
| Amounts reclassified from AOCI | (55 | ) | | (11 | ) | | — |
| | (66 | ) |
| Income tax expense (benefit) | 18 |
| | 4 |
| | — |
| | 22 |
|
| Amounts reclassified from AOCI, net of income tax | (37 | ) | | (7 | ) | | — |
| | (44 | ) |
| Balance at December 31, 2013 | $ | 885 |
| | $ | 27 |
| | $ | (23 | ) | | $ | 889 |
|
__________________
| |
| (1) | See Note 7 for information on offsets to investments related to insurance liabilities and DAC and VOBA. |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
12. Equity (continued)
Information regarding amounts reclassified out of each component of AOCI, was as follows:
|
| | | | | | | | | | | | | | |
| AOCI Components | | Amounts Reclassified from AOCI | | Statement of Operations and Comprehensive Income (Loss) Location |
| | | Years Ended December 31, | | |
| | | 2013 | | 2012 | | 2011 | | |
| | | (In millions) | | |
| Net unrealized investment gains (losses): | | | | | | | | |
| Net unrealized investment gains (losses) | | $ | 48 |
| | $ | 98 |
| | $ | 14 |
| | Other net investment gains (losses) |
| Net unrealized investment gains (losses) | | 16 |
| | 6 |
| | 25 |
| | Net investment income |
| Net unrealized investment gains (losses) | | 2 |
| | (12 | ) | | 10 |
| | Net derivative gains (losses) |
| OTTI | | (11 | ) | | 3 |
| | (5 | ) | | OTTI on fixed maturity securities |
| Net unrealized investment gains (losses), before income tax | | 55 |
| | 95 |
| | 44 |
| | |
| Income tax (expense) benefit | | (18 | ) | | (35 | ) | | (16 | ) | | |
| Net unrealized investment gains (losses), net of income tax | | $ | 37 |
| | $ | 60 |
| | $ | 28 |
| | |
| Unrealized gains (losses) on derivatives - cash flow hedges: | | | | | | | | |
| Interest rate swaps | | — |
| | — |
| | 1 |
| | Net derivative gains (losses) |
| Interest rate forwards | | 9 |
| | 1 |
| | 9 |
| | Net derivative gains (losses) |
| Interest rate forwards | | 1 |
| | 1 |
| | — |
| | Net investment income |
| Foreign currency swaps | | — |
| | 1 |
| | (2 | ) | | Net derivative gains (losses) |
| Credit forwards | | — |
| | — |
| | 1 |
| | Net derivative gains (losses) |
| Credit forwards | | 1 |
| | — |
| | — |
| | Net investment income |
| Gains (losses) on cash flow hedges, before income tax | | 11 |
| | 3 |
| | 9 |
| | |
| Income tax (expense) benefit | | (4 | ) | | (1 | ) | | (3 | ) | | |
| Gains (losses) on cash flow hedges, net of income tax | | $ | 7 |
| | $ | 2 |
| | $ | 6 |
| | |
| Total reclassifications, net of income tax | | $ | 44 |
| | $ | 62 |
| | $ | 34 |
| | |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
13. Other Expenses
Information on other expenses was as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Compensation | $ | 352 |
| | $ | 402 |
| | $ | 357 |
|
| Commissions | 639 |
| | 939 |
| | 1,418 |
|
| Volume-related costs | 138 |
| | 159 |
| | 196 |
|
| Affiliated interest costs on ceded reinsurance | 212 |
| | 271 |
| | 271 |
|
| Capitalization of DAC | (504 | ) | | (886 | ) | | (1,365 | ) |
| Amortization of DAC and VOBA | 50 |
| | 1,035 |
| | 1,159 |
|
| Interest expense on debt and debt issuance costs | 190 |
| | 231 |
| | 389 |
|
| Premium taxes, licenses and fees | 57 |
| | 63 |
| | 75 |
|
| Professional services | 41 |
| | 25 |
| | 50 |
|
| Rent and related expenses | 31 |
| | 37 |
| | 29 |
|
| Other | 453 |
| | 444 |
| | 402 |
|
| Total other expenses | $ | 1,659 |
| | $ | 2,720 |
| | $ | 2,981 |
|
Capitalization of DAC and Amortization of DAC and VOBA
See Note 5 for additional information on DAC and VOBA including impacts of capitalization and amortization.
Interest Expense on Debt and Debt Issuance Costs
Interest expense on debt and debt issuance costs includes interest expense on debt (see Note 11) and interest expense related to CSEs (see Note 7).
Affiliated Expenses
Commissions, capitalization of DAC and amortization of DAC include the impact of affiliated reinsurance transactions. See Notes 6, 11 and 16 for discussion of affiliated expenses included in the table above.
14. Income Tax
The provision for income tax from continuing operations was as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Current: | | | | | |
| Federal | $ | (41 | ) | | $ | (235 | ) | | $ | (157 | ) |
| Foreign | 8 |
| | (10 | ) | | (5 | ) |
| Subtotal | (33 | ) | | (245 | ) | | (162 | ) |
| Deferred: | | | | | |
| Federal | 242 |
| | 598 |
| | 613 |
|
| Foreign | 18 |
| | 19 |
| | 42 |
|
| Subtotal | 260 |
| | 617 |
| | 655 |
|
| Provision for income tax expense (benefit) | $ | 227 |
| | $ | 372 |
| | $ | 493 |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
14. Income Tax (continued)
The Company’s income (loss) from continuing operations before income tax expense (benefit) from domestic and foreign operations were as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Income (loss) from continuing operations: | | | | | |
| Domestic | $ | 869 |
| | $ | 1,492 |
| | $ | 1,545 |
|
| Foreign | 78 |
| | (2 | ) | | 122 |
|
| Total | $ | 947 |
| | $ | 1,490 |
| | $ | 1,667 |
|
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, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Tax provision at U.S. statutory rate | $ | 331 |
| | $ | 522 |
| | $ | 583 |
|
| Tax effect of: | | | | | |
| Dividend received deduction | (81 | ) | | (70 | ) | | (69 | ) |
| Tax-exempt income | — |
| | (1 | ) | | (2 | ) |
| Prior year tax | (4 | ) | | 3 |
| | (9 | ) |
| Tax credits | (10 | ) | | (8 | ) | | (11 | ) |
| Foreign tax rate differential | (2 | ) | | 13 |
| | (1 | ) |
| Change in valuation allowance | — |
| | 22 |
| | (2 | ) |
| Goodwill impairment | 13 |
| | (109 | ) | | — |
|
| Sale of subsidiary | (24 | ) | | — |
| | — |
|
| Other, net | 4 |
| | — |
| | 4 |
|
| Provision for income tax expense (benefit) | $ | 227 |
| | $ | 372 |
| | $ | 493 |
|
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
14. Income Tax (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, |
| | 2013 | | 2012 |
| | (In millions) |
| Deferred income tax assets: | | | |
| Policyholder liabilities and receivables | $ | 1,282 |
| | $ | 883 |
|
| Net operating loss carryforwards | 22 |
| | 32 |
|
| Employee benefits | — |
| | 3 |
|
| Tax credit carryforwards | 125 |
| | 92 |
|
| Other | 7 |
| | 35 |
|
| Total gross deferred income tax assets | 1,436 |
| | 1,045 |
|
| Less: Valuation allowance | — |
| | 25 |
|
| Total net deferred income tax assets | 1,436 |
| | 1,020 |
|
| Deferred income tax liabilities: | | | |
| Investments, including derivatives | 651 |
| | 258 |
|
| Net unrealized investment gains | 575 |
| | 1,336 |
|
| DAC and VOBA | 1,543 |
| | 1,281 |
|
| Other | 52 |
| | 15 |
|
| Total deferred income tax liabilities | 2,821 |
| | 2,890 |
|
| Net deferred income tax asset (liability) | $ | (1,385 | ) | | $ | (1,870 | ) |
The following table sets forth the domestic net operating carryforwards for tax purposes at December 31, 2013:
|
| | | | | |
| | Net Operating Loss Carryforwards |
| | Amount | | Expiration |
| | (In millions) | | |
| Domestic | $ | 64 |
| | Beginning in 2028 |
Tax credit carryforwards of $125 million at December 31, 2013 will expire beginning in 2015.
Pursuant to Internal Revenue Service (“IRS”) rules, the Company was excluded from MetLife’s life/non-life consolidated federal tax return for the five years subsequent to MetLife’s July 2005 acquisition of the Company. In 2011, MetLife Insurance Company of Connecticut and its subsidiaries joined the consolidated return and became a party to the MetLife tax sharing agreement. Prior to 2011, MetLife Insurance Company of Connecticut filed a consolidated tax return with its includable subsidiaries. Non-includable subsidiaries filed either separate individual corporate tax returns or separate consolidated tax returns.
The Company participates in a tax sharing agreement with MetLife, as described in Note 1. Pursuant to this tax sharing agreement, the amounts due from affiliates included $194 million, $135 million, and $151 million at December 31, 2013, 2012, and 2011, respectively.
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. The Company is no longer subject to U.S. federal, state or local income tax examinations in major taxing jurisdictions for years prior to 2005. In 2012, the Company and the IRS completed and settled substantially all the issues identified in the audit years of 2005 and 2006. The issues not settled are under review at the IRS Appeals Division.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
14. Income Tax (continued)
The Company’s liability for unrecognized tax benefits may increase or decrease in the next 12 months. A reasonable estimate of the increase or decrease cannot be made at this time. However, the Company continues to believe that the ultimate resolution of the pending 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, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Balance at January 1, | $ | (1 | ) | | $ | 29 |
| | $ | 38 |
|
| Additions for tax positions of prior years | 25 |
| | 46 |
| | — |
|
| Reductions for tax positions of prior years | (1 | ) | | (76 | ) | | (3 | ) |
| Additions for tax positions of current year | 1 |
| | 9 |
| | 2 |
|
| Reductions for tax positions of current year | (1 | ) | | (9 | ) | | (8 | ) |
| Balance at December 31, | $ | 23 |
| | $ | (1 | ) | | $ | 29 |
|
| Unrecognized tax benefits that, if recognized would impact the effective rate | $ | 23 |
| | $ | (1 | ) | | $ | (3 | ) |
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 was as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Interest recognized in the consolidated statements of operations | $ | 1 |
| | $ | (9 | ) | | $ | — |
|
| | | | | | |
| | | | December 31, |
| | | | 2013 | | 2012 |
| | | | (In millions) |
| Interest included in other liabilities in the consolidated balance sheets | | | $ | 1 |
| | $ | — |
|
The Company had no penalties for the years ended December 31, 2013, 2012 and 2011.
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, 2013 and 2012, the Company recognized an income tax benefit of $92 million and $70 million, respectively, related to the separate account DRD. The 2013 benefit included a benefit of $11 million related to a true-up of the 2012 tax return. The 2012 benefit included an expense of less than $1 million related to a true-up of the 2011 tax return.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
15. Contingencies, Commitments and Guarantees
Contingencies
Litigation
The Company is a defendant in a number of litigation matters. In some of the matters, 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.
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 some of the matters 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, 2013.
Matters as to Which an Estimate Can Be Made
For some of the matters discussed 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, 2013, the aggregate range of reasonably possible losses in excess of amounts accrued for these matters was not material for the Company.
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.
Unclaimed Property Inquiries
In April 2012, MetLife, for itself and on behalf of entities including MetLife Insurance Company of Connecticut, reached agreements with representatives of the U.S. jurisdictions that were conducting audits of MetLife 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. On December 28, 2012, the West Virginia Treasurer filed an action (West Virginia ex rel. John D. Perdue v. MetLife Insurance Company of Connecticut, Circuit Court of Putnam County) 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. On November 14, 2012, the Treasurer filed a substantially identical suit against MLI-USA. On December 30, 2013, the court granted defendants’ motions to dismiss all of the West Virginia Treasurer’s actions. The Treasurer has filed a notice to appeal the dismissal order. At least one other jurisdiction is pursuing a similar market conduct examination. 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.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
15. Contingencies, Commitments and Guarantees (continued)
Sales Practices Claims
Over the past several years, the Company has faced claims and regulatory inquires and investigations, alleging improper marketing or sales of individual life insurance policies, annuities, mutual funds or other products. 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.
Summary
Various litigation, 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, 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, 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.
Assets and liabilities held for insolvency assessments were as follows:
|
| | | | | | | |
| | December 31, |
| | 2013 | | 2012 |
| | (In millions) |
| Other Assets: | | | |
| Premium tax offset for future undiscounted assessments | $ | 10 |
| | $ | 19 |
|
| Premium tax offsets currently available for paid assessments | 10 |
| | 2 |
|
| | $ | 20 |
| | $ | 21 |
|
| Other Liabilities: | | | |
| Insolvency assessments | $ | 14 |
| | $ | 37 |
|
On September 1, 2011, the 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 involves the satisfaction of insurers’ financial obligations under a number of state life and health insurance guaranty associations and also provides additional industry support for certain ELNY policyholders.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
15. Contingencies, Commitments and Guarantees (continued)
Commitments
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 $956 million and $1.0 billion at December 31, 2013 and 2012, respectively. The Company anticipates that these amounts will be invested in partnerships over the next five years.
Mortgage Loan Commitments
The Company commits to lend funds under mortgage loan commitments. The amounts of these mortgage loan commitments were $147 million and $181 million at December 31, 2013 and 2012, respectively.
Commitments to Fund Bank Credit Facilities and Private Corporate Bond Investments
The Company commits to lend funds under bank credit facilities and private corporate bond investments. The amounts of these unfunded commitments were $57 million and $144 million at December 31, 2013 and 2012, respectively.
Other Commitments
The Company has entered into collateral arrangements with affiliates, which require the transfer of collateral in connection with secured demand notes. At December 31, 2013 and 2012, the Company had agreed to fund up to $61 million and $86 million, respectively, of cash upon the request by these affiliates and had transferred collateral consisting of various securities with a fair market value of $74 million and $106 million, respectively, to custody accounts to secure the demand notes. Each of these affiliates is permitted by contract to sell or repledge this collateral.
See Note 7 “— Related Party Investment Transactions” for additional other commitments.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements — (Continued)
15. Contingencies, Commitments and Guarantees (continued)
Guarantees
In the normal course of its business, the Company has provided certain indemnities, guarantees and commitments to third parties such that it may be required to make payments now or in the future. In the context of acquisition, disposition, investment and other transactions, the Company has provided indemnities and guarantees, including those related to tax, environmental and other specific liabilities and other indemnities and guarantees that are triggered by, among other things, breaches of representations, warranties or covenants provided by the Company. In addition, in the normal course of business, the Company provides indemnifications to counterparties in contracts with triggers similar to the foregoing, as well as for certain other liabilities, such as third-party lawsuits. These obligations are often subject to time limitations that vary in duration, including contractual limitations and those that arise by operation of law, such as applicable statutes of limitation. The maximum potential obligation under the indemnities and guarantees is subject to a contractual limitation, ranging from $36 million to $233 million, with a cumulative maximum of $269 million, in the case of MetLife International Insurance Company, Ltd. (“MLII”), a former affiliate, discussed below. 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.
The Company has provided a guarantee on behalf of MLII that is triggered if MLII cannot pay claims because of insolvency, liquidation or rehabilitation. Life insurance coverage in-force, representing the maximum potential obligation under this guarantee, was $233 million and $235 million at December 31, 2013 and 2012, respectively. The Company does not hold any collateral related to this guarantee, but has a recorded liability of $1 million that was based on the total account value of the guaranteed policies plus the amounts retained per policy at both December 31, 2013 and 2012. The remainder of the risk was ceded to external reinsurers.
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.
16. Related Party Transactions
Service Agreements
The Company has entered into various agreements with affiliates for services necessary to conduct its activities. Typical services provided under these agreements include management, policy administrative functions, personnel, investment advice and distribution services. For certain agreements, charges are based on various performance measures or activity-based costing. The bases for such charges are modified and adjusted by management when necessary or appropriate to reflect fairly and equitably the actual incidence of cost incurred by the Company and/or affiliate. Expenses incurred with affiliates related to these agreements, recorded in other expenses, were $1.6 billion, $1.7 billion and $1.9 billion for the years ended December 31, 2013, 2012 and 2011, respectively. Revenues received from affiliates related to these agreements, recorded in universal life and investment-type product policy fees, were $209 million, $179 million and $145 million for the years ended December 31, 2013, 2012 and 2011, respectively. Revenues received from affiliates related to these agreements, recorded in other revenues, were $186 million, $166 million and $136 million for the years ended December 31, 2013, 2012 and 2011, respectively.
The Company had net payables to affiliates, related to the items discussed above, of $210 million and $109 million at December 31, 2013 and 2012, respectively.
See Notes 6, 7 and 11 for additional information on related party transactions.
17. Subsequent Event
On February 14, 2014, a subsidiary of MetLife Insurance Company of Connecticut entered into a definitive agreement to sell its wholly-owned subsidiary, MAL. Beginning in the first quarter of 2014, the Company will account for and report MAL as discontinued operations. MetLife Insurance Company of Connecticut expects to record a charge of between $350 million and $390 million, net of income tax, reflecting the estimated loss on sale, in the first quarter of 2014. The transaction is expected to close in the second quarter of 2014, subject to regulatory approvals and satisfaction of other closing conditions.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Schedule I
Consolidated Summary of Investments —
Other Than Investments in Related Parties
December 31, 2013
(In millions)
|
| | | | | | | | | | | | |
| Types of Investments | | Cost or Amortized Cost (1) | | Estimated Fair Value | | Amount at Which Shown on Balance Sheet |
| Fixed maturity securities: | | | | | | |
| Bonds: | | | | | | |
| U.S. Treasury and agency securities | | $ | 8,188 |
| | $ | 8,294 |
| | $ | 8,294 |
|
| Public utilities | | 3,966 |
| | 4,275 |
| | 4,275 |
|
| State and political subdivision securities | | 2,147 |
| | 2,224 |
| | 2,224 |
|
| Foreign government securities | | 1,038 |
| | 1,122 |
| | 1,122 |
|
| All other corporate bonds | | 19,512 |
| | 20,478 |
| | 20,478 |
|
| Total bonds | | 34,851 |
| | 36,393 |
| | 36,393 |
|
| Mortgage-backed and asset-backed securities | | 8,214 |
| | 8,393 |
| | 8,393 |
|
| Redeemable preferred stock | | 412 |
| | 466 |
| | 466 |
|
| Total fixed maturity securities | | 43,477 |
| | 45,252 |
| | 45,252 |
|
| Equity securities: | | | | | | |
| Common stock: | | | | | | |
| Industrial, miscellaneous and all other | | 161 |
| | 201 |
| | 201 |
|
| Non-redeemable preferred stock | | 236 |
| | 217 |
| | 217 |
|
| Total equity securities | | 397 |
| | 418 |
| | 418 |
|
| Mortgage loans, net | | 7,718 |
| | | | 7,718 |
|
| Policy loans | | 1,219 |
| | | | 1,219 |
|
| Real estate and real estate joint ventures | | 754 |
| | | | 754 |
|
| Other limited partnership interests | | 2,130 |
| | | | 2,130 |
|
| Short-term investments | | 2,107 |
| | | | 2,107 |
|
| Other invested assets | | 2,555 |
| | | | 2,555 |
|
| Total investments | | $ | 60,357 |
| | | | $ | 62,153 |
|
| |
| (1) | Cost or amortized cost for fixed maturity securities and mortgage loans 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. |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Schedule II
Condensed Financial Information
(Parent Company Only)
December 31, 2013 and 2012
(In millions, except share and per share data)
|
| | | | | | | | |
| | | 2013 | | 2012 |
| Condensed Balance Sheets | | | | |
| Assets | | | | |
| Investments: | | | | |
| Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $28,548 and $32,018, respectively) | | $ | 29,690 |
| | $ | 35,152 |
|
| Equity securities available-for-sale, at estimated fair value (cost: $284 and $273, respectively) | | 319 |
| | 277 |
|
| Mortgage loans (net of valuation allowances of $19 and $22, respectively) | | 4,224 |
| | 4,703 |
|
| Policy loans | | 1,068 |
| | 1,086 |
|
| Real estate and real estate joint ventures | | 419 |
| | 371 |
|
| Other limited partnership interests | | 1,318 |
| | 1,181 |
|
| Short-term investments, principally at estimated fair value | | 1,512 |
| | 1,833 |
|
| Investment in subsidiaries | | 6,099 |
| | 6,641 |
|
| Loans to subsidiaries | | 680 |
| | 305 |
|
| Other invested assets, principally at estimated fair value | | 1,139 |
| | 1,682 |
|
| Total investments | | 46,468 |
| | 53,231 |
|
| Cash and cash equivalents, principally at estimated fair value | | 417 |
| | 553 |
|
| Accrued investment income | | 287 |
| | 316 |
|
| Premiums, reinsurance and other receivables | | 7,195 |
| | 7,003 |
|
| Receivables from subsidiaries | | 858 |
| | 833 |
|
| Deferred policy acquisition costs and value of business acquired | | 1,011 |
| | 789 |
|
| Current income tax recoverable | | 88 |
| | — |
|
| Goodwill | | 493 |
| | 558 |
|
| Other assets | | 132 |
| | 140 |
|
| Separate account assets | | 16,036 |
| | 15,238 |
|
| Total assets | | $ | 72,985 |
| | $ | 78,661 |
|
| Liabilities and Stockholders’ Equity | | | | |
| Liabilities | | | | |
| Future policy benefits | | $ | 19,099 |
| | $ | 19,632 |
|
| Policyholder account balances | | 22,387 |
| | 24,039 |
|
| Other policy-related balances | | 246 |
| | 872 |
|
| Payables for collateral under securities loaned and other transactions | | 4,811 |
| | 6,477 |
|
| Long-term debt — affiliated | | 750 |
| | 750 |
|
| Current income tax payable | | — |
| | 3 |
|
| Deferred income tax liability | | 16 |
| | 266 |
|
| Other liabilities | | 852 |
| | 824 |
|
| Separate account liabilities | | 16,036 |
| | 15,238 |
|
| Total liabilities | | 64,197 |
| | 68,101 |
|
| Stockholders’ Equity | | | | |
| Common stock, par value $2.50 per share; 40,000,000 shares authorized; 34,595,317 shares issued and outstanding at December 31, 2013 and 2012 | | 86 |
| | 86 |
|
| Additional paid-in capital | | 6,737 |
| | 6,718 |
|
| Retained earnings | | 1,076 |
| | 1,356 |
|
| Accumulated other comprehensive income (loss) | | 889 |
| | 2,400 |
|
| Total stockholders’ equity | | 8,788 |
| | 10,560 |
|
| Total liabilities and stockholders’ equity | | $ | 72,985 |
| | $ | 78,661 |
|
See accompanying notes to the condensed financial information.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Schedule II
Condensed Financial Information — (Continued)
(Parent Company Only)
For the Years Ended December 31, 2013, 2012 and 2011
(In millions)
|
| | | | | | | | | | | | |
| | | 2013 | | 2012 | | 2011 |
| Condensed Statements of Operations | | | | | | |
| Revenues | | | | | | |
| Premiums | | $ | 181 |
| | $ | 144 |
| | $ | 148 |
|
| Universal life and investment-type product policy fees | | 645 |
| | 662 |
| | 632 |
|
| Net investment income | | 1,797 |
| | 1,854 |
| | 1,943 |
|
| Equity in earnings of subsidiaries | | 287 |
| | 773 |
| | 574 |
|
| Other revenues | | 147 |
| | 151 |
| | 154 |
|
| Net investment gains (losses) | | 54 |
| | 20 |
| | 14 |
|
| Net derivative gains (losses) | | (105 | ) | | (140 | ) | | 241 |
|
| Total revenues | | 3,006 |
| | 3,464 |
| | 3,706 |
|
| Expenses | | | | | | |
| Policyholder benefits and claims | | 916 |
| | 797 |
| | 755 |
|
| Interest credited to policyholder account balances | | 618 |
| | 666 |
| | 710 |
|
| Goodwill impairment | | 66 |
| | 327 |
| | — |
|
| Other expenses | | 499 |
| | 576 |
| | 772 |
|
| Total expenses | | 2,099 |
| | 2,366 |
| | 2,237 |
|
| Income (loss) from continuing operations before provision for income tax | | 907 |
| | 1,098 |
| | 1,469 |
|
| Provision for income tax expense (benefit) | | 187 |
| | (20 | ) | | 295 |
|
| Income (loss) from continuing operations, net of income tax | | 720 |
| | 1,118 |
| | 1,174 |
|
| Income (loss) from discontinued operations, net of income tax | | — |
| | 8 |
| | — |
|
| Net income (loss) | | $ | 720 |
| | $ | 1,126 |
| | $ | 1,174 |
|
| Comprehensive income (loss) | | $ | (791 | ) | | $ | 1,755 |
| | $ | 2,728 |
|
See accompanying notes to the condensed financial information.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Schedule II
Condensed Financial Information — (Continued)
(Parent Company Only)
For the Years Ended December 31, 2013, 2012 and 2011
(In millions)
|
| | | | | | | | | | | | |
| | | 2013 | | 2012 | | 2011 |
| Condensed Statements of Cash Flows | | | | | | |
| Cash flows from operating activities | | | | | | |
| Net cash provided by (used in) operating activities | | $ | 957 |
| | $ | 1,184 |
| | $ | 886 |
|
| Cash flows from investing activities | | | | | | |
| Sales, maturities, and repayments of: | | | | | | |
| Fixed maturity securities | | 14,647 |
| | 10,714 |
| | 13,921 |
|
| Equity securities | | 56 |
| | 46 |
| | 163 |
|
| Mortgage loans | | 1,154 |
| | 845 |
| | 552 |
|
| Real estate and real estate joint ventures | | 58 |
| | 47 |
| | 12 |
|
| Other limited partnership interests | | 102 |
| | 154 |
| | 159 |
|
| Purchases of: | | | | | | |
| Fixed maturity securities | | (11,000 | ) | | (10,729 | ) | | (11,658 | ) |
| Equity securities | | (51 | ) | | (27 | ) | | (22 | ) |
| Mortgage loans | | (648 | ) | | (428 | ) | | (946 | ) |
| Real estate and real estate joint ventures | | (129 | ) | | (77 | ) | | (83 | ) |
| Other limited partnership interests | | (192 | ) | | (179 | ) | | (214 | ) |
| Cash received in connection with freestanding derivatives | | 73 |
| | 362 |
| | 375 |
|
| Cash paid in connection with freestanding derivatives | | (644 | ) | | (322 | ) | | (453 | ) |
| Dividends from subsidiaries | | 25 |
| | — |
| | — |
|
| Returns of capital from subsidiaries | | 52 |
| | 84 |
| | 49 |
|
| Capital contributions to subsidiaries | | (3 | ) | | (166 | ) | | (422 | ) |
| Issuances of loans to affiliates | | (375 | ) | | — |
| | (305 | ) |
| Net change in policy loans | | 18 |
| | 15 |
| | 26 |
|
| Net change in short-term investments | | 321 |
| | (251 | ) | | (487 | ) |
| Net change in other invested assets | | (39 | ) | | (50 | ) | | (16 | ) |
| Net cash provided by (used in) investing activities | | 3,425 |
| | 38 |
| | 651 |
|
| Cash flows from financing activities | | | | | | |
| Policyholder account balances: | | | | | | |
| Deposits | | 12,156 |
| | 11,577 |
| | 14,151 |
|
| Withdrawals | | (13,987 | ) | | (12,298 | ) | | (15,754 | ) |
| Net change in payables for collateral under securities loaned and other transactions | | (1,666 | ) | | 102 |
| | (482 | ) |
| Financing element on certain derivative instruments | | (21 | ) | | 75 |
| | 127 |
|
| Return of capital | | — |
| | — |
| | (47 | ) |
| Dividends on common stock | | (1,000 | ) | | (504 | ) | | (517 | ) |
| Net cash provided by (used in) financing activities | | (4,518 | ) | | (1,048 | ) | | (2,522 | ) |
| Change in cash and cash equivalents | | (136 | ) | | 174 |
| | (985 | ) |
| Cash and cash equivalents, beginning of year | | 553 |
| | 379 |
| | 1,364 |
|
| Cash and cash equivalents, end of year | | $ | 417 |
| | $ | 553 |
| | $ | 379 |
|
| Supplemental disclosures of cash flow information: | | | | | | |
| Net cash paid (received) for: | | | | | | |
| Interest | | $ | 64 |
| | $ | 64 |
| | $ | 64 |
|
| Income tax | | $ | 120 |
| | $ | (194 | ) | | $ | (66 | ) |
| Non-cash transactions: | | | | | | |
| Capital contribution from MetLife, Inc. | | $ | 19 |
| | $ | 45 |
| | $ | — |
|
| Returns of capital from subsidiaries | | $ | — |
| | $ | 202 |
| | $ | — |
|
| Capital contributions to subsidiaries | | $ | 16 |
| | $ | 31 |
| | $ | — |
|
See accompanying notes to the condensed financial information.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Schedule II
Notes to the Condensed Financial Information
(Parent Company Only)
1. Basis of Presentation
The condensed financial information of MetLife Insurance Company of Connecticut (the “Parent Company”) should be read in conjunction with the consolidated financial statements of MetLife Insurance Company of Connecticut and its subsidiaries and the notes thereto. These condensed unconsolidated financial statements reflect the results of operations, financial position and cash flows for the Parent Company. 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. Support Agreement
The Parent Company has entered into a net worth maintenance agreement with its indirect subsidiary, MetLife Assurance Limited (“MAL”), a United Kingdom company. Under the agreement, the Parent Company agreed, without limitation as to amount, to cause MAL to have capital and surplus equal to the greater of (a) £50 million, (b) such amount that will be sufficient to provide solvency cover equal to 175% of MAL’s capital resources requirement as defined by applicable law and regulation as required by the Financial Services Authority of the United Kingdom (the “FSA”) or any successor body, or (c) such amount that will be sufficient to provide solvency cover equal to 125% of MAL’s individual capital guidance as defined by applicable law and regulation as required by the FSA or any successor body. As described in Note 17 of the Notes to the Consolidated Financial Statements, a subsidiary of MetLife Insurance Company of Connecticut reached an agreement to sell MAL to a third party. Upon the close of such sale, the Parent Company’s obligations under this net worth maintenance agreement will terminate.
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Schedule III
Consolidated Supplementary Insurance Information
December 31, 2013, 2012 and 2011
(In millions)
|
| | | | | | | | | | | | | | | | | | | | |
| Segment | | DAC and VOBA | | Future Policy Benefits and Other Policy-Related Balances | | Policyholder Account Balances | | Unearned Premiums (1), (2) | | Unearned Revenue (1) |
| 2013 | | | | | | | | | | |
| Retail | | $ | 4,698 |
| | $ | 10,345 |
| | $ | 25,499 |
| | $ | 9 |
| | $ | 156 |
|
| Corporate Benefit Funding | | 6 |
| | 14,270 |
| | 7,952 |
| | — |
| | 2 |
|
| Corporate & Other | | 26 |
| | 6,540 |
| | 2 |
| | 4 |
| | — |
|
| Total | | $ | 4,730 |
| | $ | 31,155 |
| | $ | 33,453 |
| | $ | 13 |
| | $ | 158 |
|
| 2012 | | | | | | | | | | |
| Retail | | $ | 3,738 |
| | $ | 9,355 |
| | $ | 28,287 |
| | $ | 9 |
| | $ | 158 |
|
| Corporate Benefit Funding | | 8 |
| | 15,078 |
| | 8,688 |
| | — |
| | 2 |
|
| Corporate & Other | | — |
| | 6,288 |
| | 1 |
| | 4 |
| | — |
|
| Total | | $ | 3,746 |
| | $ | 30,721 |
| | $ | 36,976 |
| | $ | 13 |
| | $ | 160 |
|
| 2011 | | | | | | | | | | |
| Retail | | $ | 4,080 |
| | $ | 7,915 |
| | $ | 30,001 |
| | $ | 7 |
| | $ | 184 |
|
| Corporate Benefit Funding | | 13 |
| | 14,042 |
| | 8,375 |
| | — |
| | 2 |
|
| Corporate & Other | | 128 |
| | 6,515 |
| | 3,699 |
| | 5 |
| | 72 |
|
| Total | | $ | 4,221 |
| | $ | 28,472 |
| | $ | 42,075 |
| | $ | 12 |
| | $ | 258 |
|
______________
| |
| (1) | Amounts are included within the future policy benefits and other policy-related balances column. |
| |
| (2) | Includes premiums received in advance. |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Schedule III
Consolidated Supplementary Insurance Information — (Continued)
December 31, 2013, 2012 and 2011
(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 | | Other Operating Expenses (1) |
| 2013 | | | | | | | | | | |
| Retail | | $ | 2,688 |
| | $ | 1,515 |
| | $ | 1,875 |
| | $ | 44 |
| | $ | 1,341 |
|
| Corporate Benefit Funding | | 219 |
| | 1,108 |
| | 855 |
| | 5 |
| | 34 |
|
| Corporate & Other | | 35 |
| | 229 |
| | 14 |
| | 1 |
| | 234 |
|
| Total | | $ | 2,942 |
| | $ | 2,852 |
| | $ | 2,744 |
| | $ | 50 |
| | $ | 1,609 |
|
| 2012 | | | | | | | | | | |
| Retail | | $ | 2,716 |
| | $ | 1,434 |
| | $ | 2,031 |
| | $ | 1,023 |
| | $ | 1,381 |
|
| Corporate Benefit Funding | | 658 |
| | 1,111 |
| | 1,318 |
| | 10 |
| | 36 |
|
| Corporate & Other | | 148 |
| | 407 |
| | 187 |
| | 2 |
| | 268 |
|
| Total | | $ | 3,522 |
| | $ | 2,952 |
| | $ | 3,536 |
| | $ | 1,035 |
| | $ | 1,685 |
|
| 2011 | | | | | | | | | | |
| Retail | | $ | 2,596 |
| | $ | 1,360 |
| | $ | 1,984 |
| | $ | 1,149 |
| | $ | 1,268 |
|
| Corporate Benefit Funding | | 1,105 |
| | 1,142 |
| | 1,763 |
| | 4 |
| | 36 |
|
| Corporate & Other | | 83 |
| | 572 |
| | 102 |
| | 6 |
| | 518 |
|
| Total | | $ | 3,784 |
| | $ | 3,074 |
| | $ | 3,849 |
| | $ | 1,159 |
| | $ | 1,822 |
|
______________
| |
| (1) | Includes other expenses, excluding amortization of deferred policy acquisition costs (“DAC”) and value of business acquired (“VOBA”) charged to other expenses. |
MetLife Insurance Company of Connecticut
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Schedule IV
Consolidated Reinsurance
December 31, 2013, 2012 and 2011
(In millions)
|
| | | | | | | | | | | | | | | | | | | |
| | | Gross Amount | | Ceded | | Assumed | | Net Amount | | % Amount Assumed to Net |
| 2013 | | | | | | | | | | |
| Life insurance in-force | | $ | 466,650 |
| | $ | 424,836 |
| | $ | 7,273 |
| | $ | 49,087 |
| | 14.8 | % |
| Insurance premium | | | | | | | | | | |
| Life insurance | | $ | 1,327 |
| | $ | 737 |
| | $ | 10 |
| | $ | 600 |
| | 1.7 | % |
| Accident and health insurance | | 234 |
| | 228 |
| | — |
| | 6 |
| | — |
|
| Total insurance premium | | $ | 1,561 |
| | $ | 965 |
| | $ | 10 |
| | $ | 606 |
| | 1.7 | % |
| 2012 | | | | | | | | | | |
| Life insurance in-force | | $ | 428,803 |
| | $ | 391,045 |
| | $ | 7,750 |
| | $ | 45,508 |
| | 17.0 | % |
| Insurance premium | | | | | | | | | | |
| Life insurance | | $ | 1,815 |
| | $ | 572 |
| | $ | 11 |
| | $ | 1,254 |
| | 0.9 | % |
| Accident and health insurance | | 248 |
| | 241 |
| | — |
| | 7 |
| | — |
|
| Total insurance premium | | $ | 2,063 |
| | $ | 813 |
| | $ | 11 |
| | $ | 1,261 |
| | 0.9 | % |
| 2011 | | | | | | | | | | |
| Life insurance in-force | | $ | 378,153 |
| | $ | 340,477 |
| | $ | 8,085 |
| | $ | 45,761 |
| | 17.7 | % |
| Insurance premium | | | | | | | | | | |
| Life insurance | | $ | 2,180 |
| | $ | 366 |
| | $ | 7 |
| | $ | 1,821 |
| | 0.4 | % |
| Accident and health insurance | | 249 |
| | 242 |
| | — |
| | 7 |
| | — |
|
| Total insurance premium | | $ | 2,429 |
| | $ | 608 |
| | $ | 7 |
| | $ | 1,828 |
| | 0.4 | % |
For the year ended December 31, 2013, reinsurance ceded and assumed included affiliated transactions for life insurance in-force of $269.9 billion and $7.3 billion, respectively, and life insurance premiums of $638 million and $10 million, respectively. For the year ended December 31, 2012, reinsurance ceded and assumed included affiliated transactions for life insurance in-force of $237.2 billion and $7.8 billion, respectively, and life insurance premiums of $478 million and $11 million, respectively. For the year ended December 31, 2011, reinsurance ceded and assumed included affiliated transactions for life insurance in-force of $195.2 billion and $8.1 billion, respectively, and life insurance premiums of $286 million and $7 million, respectively.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.
There were no changes to the Company’s internal control over financial reporting as defined in Exchange Act Rule 15d-15(f) during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Management of MetLife Insurance Company of Connecticut and subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of control procedures. The objectives of internal control include providing management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management’s authorization and recorded properly to permit the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America.
Management has documented and evaluated the effectiveness of the internal control of the Company at December 31, 2013 pertaining to financial reporting in accordance with the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In the opinion of management, MetLife Insurance Company of Connecticut maintained effective internal control over financial reporting at December 31, 2013.
Deloitte & Touche LLP (“Deloitte”), an independent registered public accounting firm, has audited the consolidated financial statements and consolidated financial statement schedules included in the Annual Report on Form 10-K for the year ended December 31, 2013. The Report of the Independent Registered Public Accounting Firm on their audit of the consolidated financial statements and consolidated financial statement schedules is included on page 76.
Item 9B. Other Information
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 11. Executive Compensation
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 14. Principal Accountant Fees and Services
Deloitte, the independent auditor of MetLife, has served as the independent auditor of the Company since it was acquired in 2005, and as auditor of affiliates of the Company for more than 75 years. Its long-term knowledge of the MetLife group of companies, combined with its insurance industry expertise and global presence, has enabled it to carry out its audits of the Company’s financial statements with effectiveness and efficiency. Deloitte is a registered public accounting firm with the Public Company Accounting Oversight Board (United States) (“PCAOB”) as required by the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the Rules of the PCAOB.
Independent Auditor’s Fees for 2013 and 2012
The table below presents fees for professional services rendered by Deloitte for the audit of the Company’s annual financial statements, audit-related services, tax services and all other services for the years ended December 31, 2013 and 2012. All fees shown in the table were related to services that were approved by the Audit Committee of MetLife, Inc. (“Audit Committee”).
|
| | | | | | | |
| | 2013 | | 2012 |
| | (In millions) |
| Audit Fees (1) | $ | 6.56 |
| | $ | 5.93 |
|
| Audit-Related Fees (2) | $ | 0.07 |
| | $ | 0.06 |
|
| Tax Fees (3) | $ | — |
| | $ | — |
|
| All Other Fees (4) | $ | — |
| | $ | — |
|
____________
| |
| (1) | Fees for services to perform an audit or review in accordance with auditing standards of the PCAOB and services that generally only the Company’s independent auditor can reasonably provide, such as comfort letters, statutory audits, attest services, consents and assistance with and review of documents filed with the U.S. Securities and Exchange Commission (“SEC”). |
| |
| (2) | Fees for assurance and related services that are traditionally performed by the Company’s independent auditor, such as audit and related services for due diligence related to mergers, acquisitions and divestitures, accounting consultations and audits in connection with proposed or consummated acquisitions and divestitures, control reviews, attest services not required by statute or regulation, and consultation concerning financial accounting and reporting standards. |
| |
| (3) | Fees for tax compliance, consultation and planning services. Tax compliance generally involves preparation of original and amended tax returns, claims for refunds and tax payment planning services. Tax consultation and tax planning encompass a diverse range of services, including assistance in connection with tax audits and filing appeals, tax advice related to mergers, acquisitions and divestitures, and requests for rulings or technical advice from taxing authorities. |
| |
| (4) | Fees for other types of permitted services, including risk-consulting services, financial advisory services and valuation services. |
Approval of Fees
The Audit Committee approves Deloitte’s audit and non-audit services to MetLife and its subsidiaries, including the Company, in advance as required under Sarbanes-Oxley and SEC rules. Before the commencement of each fiscal year, the Audit Committee appoints the independent auditor to perform audit services that MetLife expects to be performed for the fiscal year and appoints the auditor to perform audit-related, tax and other permitted non-audit services. The Audit Committee or a designated member of the Audit Committee to whom authority has been delegated may, from time to time, pre-approve additional audit and non-audit services to be performed by MetLife’s independent auditor. Any pre-approval of services between Audit Committee meetings must be reported to the full Audit Committee at its next scheduled meeting.
The Audit Committee is responsible for approving fees for the audit and for any audit-related, tax or other permitted non-audit services. If the audit, audit-related, tax and other permitted non-audit fees for a particular period or service exceed the amounts previously approved, the Audit Committee determines whether or not to approve the additional fees.
The Audit Committee assures the regular rotation of the audit engagement team partners as required by law.
Part IV
Item 15. Exhibits and Financial Statement Schedules
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, Notes and Schedules on page 75.
2. Financial Statement Schedules
The financial statement schedules are listed in the Index to Consolidated Financial Statements, Notes and Schedules on page 75.
3. Exhibits
The exhibits are listed in the Exhibit Index which begins on page E-1.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 28, 2014
|
| | | |
| METLIFE INSURANCE COMPANY OF CONNECTICUT |
| | | | |
| By | | /s/ Eric T. Steigerwalt |
| | | Name: | Eric T. Steigerwalt |
| | | Title: | Chairman of the Board, President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| Signature | | Title | | Date |
| | | | | |
| /s/ Elizabeth M. Forget | | Director | | March 28, 2014 |
| Elizabeth M. Forget | | | | |
| | | | | |
| /s/ Gene L. Lunman | | Director | | March 28, 2014 |
| Gene L. Lunman | | | | |
| | | | | |
| /s/ Eric T. Steigerwalt | | Chairman of the Board, President | | March 28, 2014 |
| Eric T. Steigerwalt | | and Chief Executive Officer | | |
| | | (Principal Executive Officer) | | |
| | | | | |
| /s/ Stanley J. Talbi | | Executive Vice President and | | March 28, 2014 |
| Stanley J. Talbi | | Chief Financial Officer | | |
| | | (Principal Financial Officer) | | |
| | | | | |
| /s/ Peter M. Carlson | | Executive Vice President and | | March 28, 2014 |
| Peter M. Carlson | | Chief Accounting Officer | | |
| | | (Principal Accounting Officer) | | |
| | | | | |
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act: None.
No annual report to security holders covering the registrant’s last fiscal year or proxy material with respect to any meeting of security holders has been sent, or will be sent, to security holders.
Exhibit Index
(Note Regarding Reliance on Statements in Our Contracts: In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about MetLife Insurance Company of Connecticut and its subsidiaries, or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and (i) should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; (iii) may apply standards of materiality in a way that is different from what may be viewed as material to investors; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about MetLife Insurance Company of Connecticut and its subsidiaries may be found elsewhere in this Annual Report on Form 10-K and MetLife Insurance Company of Connecticut’s other public filings, which are available without charge through the SEC’s website at www.sec.gov.) |
| | |
| Exhibit No. | | Description |
| | | |
| 2.1 | | Acquisition Agreement between MetLife, Inc. and Citigroup Inc., dated as of January 31, 2005. (Incorporated by reference to Exhibit 2.3 to MetLife, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009). |
| | | |
| 3.1 | | Charter of The Travelers Insurance Company (now MetLife Insurance Company of Connecticut), as effective October 19, 1994. (Incorporated by reference to Exhibit 3.1 to MetLife Insurance Company of Connecticut’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (the “2010 Annual Report”)). |
| | | |
| 3.2 | | Certificate of Amendment of the Charter as Amended and Restated of MetLife Insurance Company of Connecticut, as effective May 1, 2006 (the “Certificate of Amendment”). (Incorporated by reference to Exhibit 3.2 to the 2010 Annual Report). |
| | | |
| 3.3 | | Certificate of Correction to the Certificate of Amendment, filed April 9, 2007. (Incorporated by reference to Exhibit 3.3 to MetLife Insurance Company of Connecticut’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012). |
| | | |
| 3.4 | | By-laws of MetLife Insurance Company of Connecticut, as effective October 20, 1994. (Incorporated by reference to Exhibit 3.4 to the 2010 Annual Report). |
| | | |
| 4.1 | | Service Agreement and Indemnity Combination Coinsurance and Modified Coinsurance Agreement of Certain Life Insurance Policies (effective as of January 1, 2014), between MetLife Insurance Company of Connecticut and Metropolitan Life Insurance Company (Treaty #20132). |
| | | |
| 4.2 | | Service Agreement and Indemnity Combination Coinsurance and Modified Coinsurance Agreement of Certain Annuity Contracts (effective as of January 1, 2014), between MetLife Insurance Company of Connecticut and Metropolitan Life Insurance Company (Treaty #20176). |
| | | |
| 23.1 | | Consent of Deloitte & Touche LLP. |
| | | |
| 31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 101.INS | | XBRL Instance Document. |
| | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document. |
| | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
| | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
| | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
| | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
