1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO __________________
COMMISSION FILE NUMBER: 001-15787
METLIFE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 13-4075851
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE MADISON AVENUE
NEW YORK, NEW YORK 10010-3690
(212) 578-2211
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE, AND
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
At August 10, 2001, 732,234,534 shares of the Registrant's Common Stock, $.01
par value per share, were outstanding.
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TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Interim Condensed Consolidated Balance Sheets at June 30, 2001
(Unaudited) and December 31, 2000 4
Unaudited Interim Condensed Consolidated Statements of Operations for the
three months and six months ended June 30, 2001 and 2000 5
Unaudited Interim Condensed Consolidated Statement of Stockholders'
Equity for the six months ended June 30, 2001 6
Unaudited Interim Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 2001 and 2000 7
Notes to Unaudited Interim Condensed Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 58
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 58
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 60
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the Management's Discussion
and Analysis of Financial Condition and Results of Operations, contains
statements which constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including statements relating
to trends in operations and financial results and the business and the products
of the Registrant and its subsidiaries, as well as other statements including
words such as "anticipate," "believe," "plan," "estimate," "expect," "intend"
and other similar expressions. "MetLife" or the "Company" refers to MetLife,
Inc., a Delaware corporation (the "Holding Company"), and its subsidiaries,
including Metropolitan Life Insurance Company ("Metropolitan Life").
Forward-looking statements are made based upon management's current expectations
and beliefs concerning future developments and their potential effects on the
Company. Such forward-looking statements are not guarantees of future
performance.
Actual results may differ materially from those included in the
forward-looking statements as a result of risks and uncertainties including, but
not limited to the following: (i) changes in general economic conditions,
including the performance of financial markets and interest rates; (ii)
heightened competition, including with respect to pricing, entry of new
competitors and the development of new products by new and existing competitors;
(iii) unanticipated changes in industry trends; (iv) the Company's primary
reliance, as a holding company, on dividends from its subsidiaries to meet debt
payment obligations and the applicable regulatory restrictions on the ability of
the subsidiaries to pay such dividends; (v) deterioration in the experience of
the "closed block" established in connection with the reorganization of
Metropolitan Life; (vi) catastrophe losses; (vii) adverse litigation or
arbitration results; (viii) regulatory, accounting or tax changes that may
affect the cost of, or demand for, the Company's products or services; (ix)
downgrades in the Company's affiliates' financial strength ratings; (x)
discrepancies between actual claims experience and assumptions used in setting
prices for the Company's products and establishing the liabilities for the
Company's obligations for future policy benefits and claims; and (xi) other
risks and uncertainties described from time to time in the Company's filings
with the Securities and Exchange Commission, including its S-1 and S-3
registration statements. The Company specifically disclaims any obligation to
update or revise any forward-looking statement, whether as a result of new
information, future developments or otherwise.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METLIFE, INC.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 (UNAUDITED) AND DECEMBER 31, 2000
(DOLLARS IN MILLIONS)
2001 2000
--------- ---------
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value $ 115,488 $ 112,979
Equity securities, at fair value 2,140 2,193
Mortgage loans on real estate 22,561 21,951
Real estate and real estate joint ventures 5,420 5,504
Policy loans 8,122 8,158
Other limited partnership interests 1,644 1,652
Short-term investments 827 1,269
Other invested assets 3,427 2,821
--------- ---------
Total investments 159,629 156,527
Cash and cash equivalents 4,748 3,434
Accrued investment income 2,063 2,050
Premiums and other receivables 8,139 8,343
Deferred policy acquisition costs 10,753 10,618
Other assets 4,113 3,796
Separate account assets 65,332 70,250
--------- ---------
Total assets $ 254,777 $ 255,018
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 82,716 $ 81,974
Policyholder account balances 55,517 54,309
Other policyholder funds 5,176 5,705
Policyholder dividends payable 1,116 1,082
Policyholder dividend obligation 524 385
Short-term debt 2,121 1,094
Long-term debt 2,309 2,426
Current income taxes payable 310 112
Deferred income taxes payable 1,167 752
Payables under securities loaned transactions 12,709 12,301
Other liabilities 7,923 7,149
Separate account liabilities 65,332 70,250
--------- ---------
Total liabilities 236,920 237,539
--------- ---------
Commitments and contingencies (Note 6)
Company-obligated mandatorily redeemable securities of subsidiary trusts 1,094 1,090
--------- ---------
Stockholders' Equity:
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized;
none issued -- --
Series A junior participating preferred stock -- --
Common stock, par value $0.01 per share; 3,000,000,000 shares authorized;
786,766,664 shares issued at June 30, 2001 and December 31, 2000;
743,838,689 shares outstanding at June 30, 2001 and 760,681,913 shares
outstanding at December 31, 2000 8 8
Additional paid-in capital 14,926 14,926
Retained earnings 1,628 1,021
Treasury stock, at cost; 42,927,975 shares at June 30, 2001 and 26,084,751
shares at December 31, 2000 (1,124) (613)
Accumulated other comprehensive income 1,325 1,047
--------- ---------
Total stockholders' equity 16,763 16,389
--------- ---------
Total liabilities and stockholders' equity $ 254,777 $ 255,018
========= =========
See accompanying notes to unaudited interim condensed
consolidated financial statements.
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METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- -----------------------
2001 2000 2001 2000
------- ------- -------- --------
REVENUES
Premiums $ 4,118 $ 4,117 $ 8,352 $ 7,977
Universal life and investment-type product policy fees 473 448 947 917
Net investment income 2,983 2,924 5,980 5,708
Other revenues 373 575 784 1,181
Net investment losses (net of amounts allocable to other
accounts of $49, $(2), $79 and $17, respectively) (136) (55) (281) (167)
------- ------- -------- --------
Total revenues 7,811 8,009 15,782 15,616
------- ------- -------- --------
EXPENSES
Policyholder benefits and claims (excludes amounts directly
related to net investment losses of $27, $(3), $63 and $1, respectively) 4,289 4,234 8,724 8,281
Interest credited to policyholder account balances 723 724 1,483 1,421
Policyholder dividends 505 513 1,020 981
Payments to former Canadian policyholders -- 327 -- 327
Demutualization costs -- 175 -- 230
Other expenses (excludes amounts directly related to net
investment losses of $22, $1, $16 and $16, respectively) 1,801 2,019 3,635 3,939
------- ------- -------- --------
Total expenses 7,318 7,992 14,862 15,179
------- ------- -------- --------
Income before provision for income taxes 493 17 920 437
Provision for income taxes 173 132 313 316
------- ------- -------- --------
Net income (loss) $ 320 $ (115) $ 607 $ 121
======= ======= ======== ========
Net income after date of demutualization $ 341 $ 341
======= ========
Net income per share
Basic $ 0.43 $ 0.44 $ 0.81 $ 0.44
======= ======= ======== ========
Diluted $ 0.41 $ 0.44 $ 0.78 $ 0.44
======= ======= ======== ========
See accompanying notes to unaudited interim condensed
consolidated financial statements.
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METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(DOLLARS IN MILLIONS)
ADDITIONAL TREASURY
COMMON PAID-IN RETAINED STOCK
STOCK CAPITAL EARNINGS AT COST
----- ------- -------- -------
Balance at January 1, 2001 $ 8 $14,926 $1,021 $ (613)
Net treasury stock acquired (511)
Comprehensive income:
Net income 607
Other comprehensive income:
Cumulative effect of change in accounting
for derivatives, net of income taxes
Unrealized investment gains, net of
related offsets, reclassification
adjustments and income taxes
Unrealized gains on derivative
instruments, net of income taxes
Foreign currency translation adjustments
Other comprehensive income
Comprehensive income
--- ------- ------ -------
Balance at June 30, 2001 $ 8 $14,926 $1,628 $(1,124)
=== ======= ====== =======
ACCUMULATED OTHER
COMPREHENSIVE INCOME
--------------------------------------------
NET
UNREALIZED FOREIGN MINIMUM
INVESTMENT CURRENCY PENSION
AND DERIVATIVE TRANSLATION LIABILITY
GAINS ADJUSTMENT ADJUSTMENT TOTAL
----- ---------- ---------- -----
Balance at January 1, 2001 $1,175 $(100) $ (28) $ 16,389
Net treasury stock acquired (511)
Comprehensive income:
Net income 607
Other comprehensive income:
Cumulative effect of change in accounting
for derivatives, net of income taxes 32 32
Unrealized investment gains, net of
related offsets, reclassification
adjustments and income taxes 242 242
Unrealized gains on derivative
instruments, net of income taxes 25 25
Foreign currency translation adjustments (21) (21)
--------
Other comprehensive income 278
--------
Comprehensive income
885
------ ----- ----- --------
Balance at June 30, 2001 $1,474 $(121) $ (28) $ 16,763
====== ===== ===== ========
See accompanying notes to unaudited interim condensed
consolidated financial statements.
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METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(DOLLARS IN MILLIONS)
2001 2000
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,455 $ 993
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales, maturities and repayments of:
Fixed maturities 25,358 25,088
Equity securities 467 391
Mortgage loans on real estate 999 1,102
Real estate and real estate joint ventures 207 338
Other limited partnership interests 232 263
Purchases of:
Fixed maturities (27,363) (28,964)
Equity securities (505) (400)
Mortgage loans on real estate (1,582) (1,218)
Real estate and real estate joint ventures (158) (186)
Other limited partnership interests (220) (338)
Net change in short-term investments 436 1,855
Net change in policy loans 36 (112)
Purchase of businesses, net of cash received (16) (419)
Proceeds from sales of business -- 107
Net change in payables under securities loaned transactions 408 3,373
Other, net (577) (491)
-------- --------
Net cash (used in) provided by investing activities (2,278) 389
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits 14,215 14,769
Withdrawals (13,477) (14,633)
Net change in short-term debt 1,027 (2,435)
Long-term debt issued 49 119
Long-term debt repaid (166) (13)
Common stock issued -- 4,009
Net proceeds from issuance of company-obligated
mandatorily redeemable securities of subsidiary trusts -- 969
Net treasury stock acquired (511) (214)
Cash payments for eligible policyholders -- (2,550)
-------- --------
Net cash provided by financing activities 1,137 21
-------- --------
Change in cash and cash equivalents 1,314 1,403
Cash and cash equivalents, beginning of period 3,434 2,789
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,748 $ 4,192
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 186 $ 238
======== ========
Income taxes $ 210 $ 235
======== ========
Non-cash transactions during the period:
Policy credits to eligible policyholders $ -- $ 408
======== ========
Business acquisitions - assets $ 90 $ 23,686
======== ========
Business acquisitions - liabilities $ 76 $ 22,406
======== ========
Business dispositions - assets $ -- $ 12
======== ========
Business dispositions - liabilities $ -- $ 39
======== ========
Real estate acquired in satisfaction of debt $ 5 $ 17
======== ========
See accompanying notes to unaudited interim condensed
consolidated financial statements.
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METLIFE, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
MetLife, Inc. (the "Holding Company") and its subsidiaries (together with
the Holding Company, "MetLife" or the "Company") is a leading provider of
insurance and financial services to a broad section of individual and
institutional customers. The Company offers life insurance, annuities and mutual
funds to individuals and group insurance, reinsurance and retirement and savings
products and services to corporations and other institutions.
BASIS OF PRESENTATION
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. The most significant estimates include
those used in determining deferred policy acquisition costs, investment
allowances, liability for litigation matters and liability for future
policyholder benefits. Actual results could differ from those estimates.
The accompanying unaudited interim condensed consolidated financial
statements include the accounts of the Holding Company and its subsidiaries,
partnerships and joint ventures in which the Company has a majority voting
interest or general partner interest with limited removal rights by limited
partners. Closed block assets, liabilities, revenues and expenses are combined
on a line by line basis with the assets, liabilities, revenues and expenses
outside the closed block based on the nature of the particular item.
Intercompany accounts and transactions have been eliminated.
The Company uses the equity method to account for its investments in real
estate joint ventures and other limited partnership interests in which it does
not have a controlling interest, but has more than a minimal interest.
Minority interest related to consolidated entities included in other
liabilities is $442 million and $479 million at June 30, 2001 and December 31,
2000, respectively.
Certain amounts in the prior years' unaudited interim condensed
consolidated financial statements have been reclassified to conform with the
2001 presentation.
The accompanying unaudited interim condensed consolidated financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the consolidated financial position of
the Company and its consolidated results of operations and cash flows for the
periods presented. Interim results are not necessarily indicative of full year
performance. These unaudited interim condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements of the
Company for the year ended December 31, 2000 included in MetLife Inc.'s 2000
Annual Report on Form 10-K filed with the Securities and Exchange Commission
("SEC").
DEMUTUALIZATION AND INITIAL PUBLIC OFFERING
On April 7, 2000 (the "date of demutualization"), Metropolitan Life
Insurance Company ("Metropolitan Life") converted from a mutual life insurance
company to a stock life insurance company and became a wholly-owned subsidiary
of MetLife, Inc. The conversion was pursuant to an order by the New York
Superintendent of Insurance ("Superintendent") approving Metropolitan Life's
plan of reorganization, as amended (the "plan").
On the date of demutualization, policyholders' membership interests in
Metropolitan Life were extinguished and eligible policyholders received, in
exchange for their interests, trust interests representing 494,466,664 shares of
common stock of MetLife, Inc. to be held in a trust, cash payments aggregating
$2,550 million and adjustments to their policy values in the form of policy
credits aggregating $408 million, as provided in the plan. In addition,
Metropolitan Life's Canadian branch made cash payments of $327 million in the
second quarter of 2000 to holders of certain policies transferred to Clarica
Life Insurance Company in connection with the sale of a substantial portion of
Metropolitan Life's Canadian operations in 1998, as a result of a commitment
made in connection with obtaining Canadian regulatory approval of that sale.
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FEDERAL INCOME TAXES
Federal income taxes for interim periods have been computed using an
estimated annual effective tax rate. This rate is revised, if necessary, at the
end of each successive interim period to reflect the current estimate of the
annual effective tax rate. The income tax provision for 2000 includes amounts
for surplus tax applicable to mutual life insurance companies.
APPLICATION OF ACCOUNTING PRONOUNCEMENTS
Effective December 31, 2000, the Company early adopted Statement of
Position ("SOP") 00-3, Accounting by Insurance Enterprises for Demutualizations
and Formations of Mutual Insurance Holding Companies and for Certain
Long-Duration Participating Contracts ("SOP 00-3"). SOP 00-3 provides guidance
on accounting by insurance enterprises for demutualizations and the formation of
mutual insurance holding companies, including the emergence of earnings from and
the financial statement presentation of the closed block formed as a part of a
demutualization. As a result of SOP 00-3, the assets, liabilities, revenues and
expenses of the closed block were combined with those outside the closed block.
The adoption of SOP 00-3 had no material impact on the Company's unaudited
interim condensed consolidated results of operations, other than the
reclassification of demutualization costs as operating expenses rather than as
an extraordinary item.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities ("SFAS 133") as amended by SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an Amendment to
FASB Statement No. 133 ("SFAS 138"). SFAS 133 and SFAS 138 established new
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
The cumulative effect of the adoption of SFAS 133 and SFAS 138, as of January 1,
2001, resulted in a $32 million increase in other comprehensive income, net of
income taxes of $19 million, and had no material impact on net income. The
increase to other comprehensive income is attributable to net gains on cash
flow-type hedges at transition. Also at transition, the amortized cost of fixed
income securities decreased and other invested assets increased by $33 million,
representing the fair value of certain interest rate swaps that were accounted
for prior to SFAS No. 133 using fair value-type settlement accounting.
Approximately $10 million of the pre-tax gain reported in accumulated other
comprehensive income at transition is expected to be reclassified into net
income during the twelve months ending December 31, 2001 as the underlying
investments mature or expire according to their original terms. The Financial
Accounting Standards Board ("FASB") continues to issue additional guidance
relating to the accounting for derivatives under SFAS 133 and SFAS 138. Until
this accounting guidance is finalized, the Company can not determine the impact,
if any, it may have on the Company's consolidated financial statements.
Effective April 1, 2001, the Company adopted certain additional accounting
and reporting requirements of SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities -- a
replacement of FASB Statement No. 125 relating to the derecognition of
transferred assets and extinguished liabilities and the reporting of servicing
assets and liabilities. The adoption of these requirements had no material
impact on the Company's unaudited interim condensed consolidated financial
statements.
Effective April 1, 2001, the Company adopted Emerging Issues Task Force
Issue No. 99-20, Recognition of Interest Income and Impairment on Certain
Investments ("EITF 99-20"). This pronouncement requires investors in certain
asset-backed securities to record changes in their estimated yield on a
prospective basis and to apply specific evaluation methods to these securities
for an other-than-temporary decline in value. The adoption of EITF 99-20 had no
material impact on the Company's unaudited interim condensed consolidated
financial statements.
In June 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS
141"), and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS
No. 141, which was generally effective July 1, 2001, requires the purchase
method of accounting for all business combinations and separate recognition of
intangible assets apart from goodwill if such intangible assets meet certain
criteria. SFAS No. 142, effective for fiscal years beginning after December 15,
2001, eliminates the systematic amortization and establishes criteria for
measuring the impairment of goodwill and certain other intangible assets.
Amortization of goodwill and other intangible assets was $13 million and $23
million for the three months ended June 30, 2001 and 2000, respectively, and $25
million and $48 million for the six months ended June 30, 2001 and 2000,
respectively. These amounts are not necessarily indicative of the amortization
that will not be recorded in future periods in accordance with SFAS 142. The
Company has not yet determined the effect, if any, on its consolidated financial
statements of applying the new impairment guidance to goodwill and intangible
assets that will be required upon adoption of SFAS 142.
In July 2001, the SEC released Staff Accounting Bulletin No. 102, Selected
Loan Loss Allowance and Documentation Issues ("SAB 102"). SAB 102 summarizes
certain of the SEC's views on the development, documentation and application of
a systematic methodology for determining allowances for loan and lease losses.
Adoption of SAB 102 by the Company is not expected to have a material impact on
the Company's consolidated financial statements.
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2. CLOSED BLOCK
On the date of demutualization, Metropolitan Life established a closed
block for the benefit of holders of certain individual life insurance policies
of Metropolitan Life.
Closed block liabilities and assets designated to the closed block are as
follows:
JUNE 30, DECEMBER 31,
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
CLOSED BLOCK LIABILITIES
Future policy benefits $ 39,743 $ 39,415
Other policyholder funds 274 278
Policyholder dividends payable 793 740
Policyholder dividend obligation 524 385
Payables under securities loaned transactions 3,319 3,268
Other 310 78
-------- --------
Total closed block liabilities 44,963 44,164
-------- --------
ASSETS DESIGNATED TO THE CLOSED BLOCK
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost: $25,751 and $25,657) 26,003 25,634
Equity securities, at fair value (amortized cost: $49 and $52) 53 54
Mortgage loans on real estate 6,142 5,801
Policy loans 3,874 3,826
Short-term investments 255 223
Other invested assets (amortized cost: $264 and $250) 291 248
-------- --------
Total investments 36,618 35,786
Cash and cash equivalents 705 661
Accrued investment income 551 557
Deferred income taxes 1,113 1,234
Premiums and other receivables 365 158
-------- --------
Total assets designated to the closed block 39,352 38,396
-------- --------
Excess of closed block liabilities over assets designated to
the closed block 5,611 5,768
-------- --------
Amounts included in accumulated other comprehensive loss:
Net unrealized investment gains (losses), net of deferred
income tax expense (benefit) of $93 and $(9) 159 (14)
Unrealized derivative gains, net of deferred income
tax of $8 14 --
Allocated to policyholder dividend obligation, net of
deferred income tax of $193 and $143 (331) (242)
-------- --------
(158) (256)
-------- --------
Maximum future earnings to be recognized from closed
block assets and liabilities $ 5,453 $ 5,512
======== ========
Information regarding the policyholder dividend obligation is as follows:
JUNE 30, DECEMBER 31,
2001 2000
----- -----
(DOLLARS IN MILLIONS)
>
Balance at beginning of period (1) $ 385 $ --
Impact on net income before losses allocable to policyholder
dividend obligation 63 85
Net investment losses (63) (85)
Change in unrealized investment and derivative gains 139 385
----- -----
Balance at end of period $ 524 $ 385
===== =====
- ----------
(1) For the period ended at December 31, 2000, the beginning of the period is
April 7, 2000. See Note 1 "Summary of Significant Accounting Policies --
Demutualization and Initial Public Offering."
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Closed block revenues and expenses are as follows:
FOR THE PERIOD
FOR THE THREE APRIL 7, 2000 FOR THE SIX
MONTHS ENDED THROUGH MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001
------------- ------------- -------------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 895 $ 936 $ 1,775
Net investment income 665 626 1,329
Net investment losses (net of amounts allocable to the
policyholder dividend obligation of $27, ($7) and $63) (29) (20) (44)
------- ------- -------
Total revenues 1,531 1,542 3,060
------- ------- -------
EXPENSES
Policyholder benefits and claims 934 918 1,845
Policyholder dividends 393 376 766
Change in policyholder dividend obligation (excludes amounts
directly related to net investment losses of $27, ($7) and $63) 27 27 63
Other expenses 154 143 292
------- ------- -------
Total expenses 1,508 1,464 2,966
------- ------- -------
Revenues net of expenses before income taxes 23 78 94
Income taxes 9 29 35
------- ------- -------
Revenues net of expenses and income taxes $ 14 $ 49 $ 59
======= ======= =======
The change in maximum future earnings of the closed block is as follows:
FOR THE PERIOD
FOR THE THREE APRIL 7, 2000 FOR THE SIX
MONTHS ENDED THROUGH MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001
------------- ------------- -------------
(DOLLARS IN MILLIONS)
Beginning of period $ 5,467 $ 5,628 $ 5,512
End of period 5,453 5,579 5,453
------- ------- -------
Change during the period $ (14) $ (49) $ (59)
======= ======= =======
Many of the derivative instrument strategies used by the Company are also
used for the closed block. The cumulative effect of the adoption of SFAS 133 and
SFAS 138, as of January 1, 2001, resulted in $11 million of other comprehensive
income, net of income taxes of $6 million, and an immaterial amount of revenue
for the closed block. For the three months and six months ended June 30, 2001,
the closed block recognized net investment gains of $4 million and $9 million,
respectively, primarily relating to non-speculative derivative uses that are
permitted by the New York Insurance Department but that have not met the
requirements of SFAS 133 to qualify for hedge accounting. Excluding the
transition adjustment, the changes in other comprehensive income for the three
months and six months ended June 30, 2001 were immaterial.
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3. EARNINGS AFTER DATE OF DEMUTUALIZATION AND EARNINGS PER SHARE
Net income after the date of demutualization is based on the results of
operations after March 31, 2000, adjusted for the payments to the former
Canadian policyholders and costs of demutualization recorded in April 2000 which
are applicable to the period prior to April 7, 2000.
The following presents a reconciliation of the weighted average shares used
in calculating basic earnings per share to those used in calculating diluted
earnings per share.
NET PER SHARE
INCOME SHARES AMOUNTS
------ ------ -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED JUNE 30, 2001
Amounts for basic earnings per share $ 320 748,313,490 $ 0.43
=========== ========
Incremental shares from assumed:
Conversion of forward purchase contracts 26,487,683
Exercise of stock options 102,305
-----------
Amounts for diluted earnings per share $ 320 774,903,478 $ 0.41
=========== =========== ========
FOR THE PERIOD APRIL 7, 2000 THROUGH JUNE 30, 2000
Amounts for basic earnings per share $ 341 778,447,249 $ 0.44
=========== =========== ========
Incremental shares from assumed conversion of forward purchase contracts 2,256,016
-----------
Amounts for diluted earnings per share $ 341 780,703,265 $ 0.44
=========== =========== ========
FOR THE SIX MONTHS ENDED JUNE 30, 2001
Amounts for basic earnings per share $ 607 752,915,188 $ 0.81
=========== ========
Incremental shares from assumed:
Conversion of forward purchase contracts 27,100,561
Exercise of stock options 151,650
-----------
Amounts for diluted earnings per share $ 607 780,167,399 $ 0.78
=========== =========== ========
Earnings per share amounts, on a basic and diluted basis, have been
calculated based on the weighted average common shares outstanding or deemed to
be outstanding only for the period after the date of demutualization.
On March 28, 2001, the Holding Company's Board of Directors authorized an
additional $1 billion common stock repurchase program. This program will begin
after the completion of an earlier $1 billion repurchase program that was
announced on June 27, 2000. Under these authorizations, the Holding Company may
purchase common stock from the Metropolitan Life Policyholder Trust, in the open
market, and in privately negotiated transactions. For the six months ended June
30, 2001, 16,907,844 shares of common stock have been acquired for $513 million.
During the same period, 62,552 of these shares were reissued for $2 million. See
Note 10 for a discussion of a repurchase transaction announced on August 8,
2001.
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4. DERIVATIVE INSTRUMENTS
The Company primarily uses derivative instruments to reduce the risk
associated with variable cash flows related to the Company's financial assets
and liabilities or to changing market values. This objective is achieved through
one of two principal risk management strategies: hedging the variable cash flows
of assets, liabilities or forecasted transactions or hedging the changes in fair
value of financial assets, liabilities or firm commitments. Hedged forecasted
transactions, other than the receipt or payment of variable interest payments,
are not expected to occur more than 12 months after hedge inception.
On the date the Company enters into a derivative contract, management
designates the derivative as a hedge of the identified exposure (fair value,
cash flow or foreign currency). If a derivative does not qualify as a hedge,
according to SFAS 133 the derivative is recorded at fair value and changes in
its fair value are reported in net investment gains or losses.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objective and
strategy for undertaking various hedge transactions. In this documentation, the
Company specifically identifies the asset, liability, firm commitment, or
forecasted transaction that has been designated as a hedged item and states how
the hedging instrument is expected to hedge the risks related to the hedged
item. The Company formally measures effectiveness of its hedging relationships
both at the hedge inception and on an ongoing basis in accordance with its risk
management policy. The Company generally determines hedge effectiveness based on
total changes in fair value of a derivative instrument. The Company discontinues
hedge accounting prospectively when: (i) it is determined that the derivative is
no longer effective in offsetting changes in the fair value or cash flows of a
hedged item, (ii) the derivative expires or is sold, terminated, or exercised,
(iii) the derivative is dedesignated as a hedge instrument, (iv) it is probable
that the forecasted transaction will not occur, (v) a hedged firm commitment no
longer meets the definition of a firm commitment, or (vi) management determines
that designation of the derivative as a hedge instrument is no longer
appropriate.
The Company's derivative hedging strategy employs a variety of instruments
including financial futures, financial forwards, interest rate, credit and
foreign currency swaps, foreign exchange contracts, and options, including caps
and floors. The Company designates and accounts for the following as cash flow
hedges, when they have met the effectiveness requirements of SFAS 133 and SFAS
138: (i) various types of interest rate swaps to convert floating rate
investments to fixed rate investments, (ii) receive US dollar fixed on foreign
currency swaps to hedge the foreign currency cash flow exposure of foreign
currency denominated investments, (iii) foreign currency forwards to hedge the
exposure of future payments or receipts in foreign currencies, and (iv) other
instruments to hedge the cash flows of various other anticipated transactions.
For all qualifying and highly effective cash flow hedges, the effective portion
of changes in fair value of the derivative instrument are reported in other
comprehensive income or loss. The ineffective portion of changes in fair value
of the derivative instrument are reported in net investment gains or losses.
The Company designates and accounts for the following as fair value hedges
when they have met the effectiveness requirements of SFAS 133 and SFAS 138: (i)
various types of interest rate swaps to convert fixed rate investments to
floating rate investments, (ii) receive US dollar floating on foreign currency
swaps to hedge the foreign currency fair value exposure of foreign currency
denominated investments, and (iii) other instruments to hedge various other fair
value exposures of investments. For all qualifying and highly effective fair
value hedges, the changes in fair value of the derivative instrument are
reported as net investment gains or losses. In addition, changes in fair value
attributable to the hedged portion of the underlying instrument are reported in
net investment gains and losses.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair value hedge, the derivative
will continue to be carried on the balance sheet at its fair value, but the
hedged asset or liability will no longer be adjusted for changes in fair value.
When hedge accounting is discontinued because the hedged item no longer meets
the definition of a firm commitment, the derivative will continue to be carried
on the balance sheet at its fair value, and any asset or liability that was
recorded pursuant to recognition of the firm commitment will be removed from the
balance sheet and recognized as a net investment gain or loss in the current
period. When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the derivative will continue to be
carried on the balance sheet at its fair value, and gains and losses that were
accumulated in other comprehensive income or loss will be recognized immediately
in net investment gains or losses. When the hedged forecasted transaction is no
longer probable, but is reasonably possible, the accumulated gain or loss
remains in other comprehensive income or loss and will be recognized when the
transaction affects net income or loss; however, prospective hedge accounting
for the transaction is terminated. In all other situations in which hedge
accounting is discontinued, the derivative will be carried at its fair value on
the balance sheet, with changes in its fair value recognized in current period
net investment gains or losses.
The Company may enter into contracts that are not themselves derivative
instruments but contain embedded derivatives. For each contract, the Company
assesses whether the economic characteristics of the embedded derivative are
clearly and closely related to those of the host contract and determines whether
a separate instrument with the same terms as the embedded instrument would meet
the definition of a derivative instrument. When it is determined that the
embedded derivative possesses economic characteristics that
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are not clearly and closely related to the economic characteristics of the host
contract, and that a separate instrument with the same terms would qualify as a
derivative instrument, the embedded derivative is separated from the host
contract and accounted for as a stand-alone derivative. Such embedded
derivatives are recorded on the balance sheet at fair value and changes in their
fair value are recorded currently in net investment gains or 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 fair value.
The Company also uses derivatives to synthetically create investments that
are either more expensive or otherwise unavailable in the cash markets. These
securities, called replication synthetic asset transactions ("RSATs"), are a
combination of a derivative and a cash security to synthetically create a third
replicated security. As of June 30, 2001, two such RSATs have been created
through the combination of a credit default swap and a US Treasury security. The
notional amounts are insignificant.
For the three months and six months ended June 30, 2001, the Company
recognized net investment losses of $23 million and net investment gains of $45
million, respectively, relating to derivatives. The amounts recognized relate
primarily to non-speculative derivative uses that are permitted by the New York
Insurance Department but that have not met the requirements of SFAS 133 to
qualify for hedge accounting. The amounts relating to the ineffective portion of
cash flow and fair value hedges were immaterial. The amounts relating to the
effective portion of fair value hedges and the amounts relating to the changes
in fair value attributable to the hedged portion of the underlying instruments
were immaterial.
For the three months and six months ended June 30, 2001, respectively, the
Company recognized other comprehensive losses of $15 million and other
comprehensive income of $38 million relating to the effective portion of cash
flow hedges. During the three months and six months ended June 30, 2001, $3
million and $5 million of other comprehensive income related to hedged items
were reclassified into net investment income, respectively.
5. NET INVESTMENT LOSSES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2001 2000 2001 2000
----- ----- ----- -----
(DOLLARS IN MILLIONS)
Fixed maturities $(189) $ (75) $(340) $(244)
Equity securities 24 11 25 79
Mortgage loans on real estate (7) 5 (5)
6
Real estate and real estate joint ventures 19 14 24 27
Other limited partnership interests 2 (7) (98) (3)
Sales of businesses -- 3 -- 3
Other (34) (4) 34 (52)
----- ----- ----- -----
(185) (53) (360) (184)
Amounts allocable to:
Deferred policy acquisition costs 22 1 16 16
Participating contracts -- 4 -- 8
Policyholder dividend obligation 27 (7) 63 (7)
----- ----- ----- -----
Total investment losses $(136) $ (55) $(281) $(167)
===== ===== ===== =====
Net investment losses, including changes in valuation allowances, are as
follows:
Investment gains and losses have been reduced by (1) deferred policy
acquisition cost amortization to the extent that such amortization results from
investment gains and losses, (2) additions to participating contractholders'
accounts when amounts equal to such investment gains and losses are credited to
the contractholders' accounts, and (3) adjustments to the policyholder dividend
obligation resulting from investment gains and losses. This presentation may not
be comparable to presentations made by other insurers.
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6. COMMITMENTS AND CONTINGENCIES
Metropolitan Life is currently a defendant in approximately 540 lawsuits
raising allegations of improper marketing and sales of individual life insurance
policies or annuities. These lawsuits are generally referred to as "sales
practices claims."
On December 28, 1999, after a fairness hearing, the United States District
Court for the Western District of Pennsylvania approved a class action
settlement resolving a multidistrict litigation proceeding involving alleged
sales practices claims. No appeal was taken, and the settlement is final. The
settlement class includes most of the owners of permanent life insurance
policies and annuity contracts or certificates issued pursuant to individual
sales in the United States by Metropolitan Life, Metropolitan Insurance and
Annuity Company or Metropolitan Tower Life Insurance Company between January 1,
1982 and December 31, 1997. The class includes owners of approximately six
million in-force or terminated insurance policies and approximately one million
in-force or terminated annuity contracts or certificates.
In addition to dismissing the consolidated class actions, the District
Court's order also bars sales practices claims by class members with respect to
policies or annuities issued by the defendant insurers during the class period,
effectively resolving all pending sales practices class actions against these
insurers in the United States.
Under the terms of the order, only those class members who excluded
themselves from the settlement may continue an existing, or start a new, sales
practices lawsuit against Metropolitan Life, Metropolitan Insurance and Annuity
Company or Metropolitan Tower Life Insurance Company for policies or annuities
issued during the class period. Approximately 20,000 class members elected to
exclude themselves from the settlement. At June 30, 2001, approximately 350 of
these "opt-outs" have filed new individual lawsuits.
Metropolitan Life expects that the total cost of the settlement will be
approximately $957 million. This amount is equal to the amount of the increase
in liabilities for the death benefits provided for in the class action
settlement and policy adjustments and the present value of expected cash
payments to be provided to included class members, as well as attorneys' fees
and expenses and estimated other administrative costs, but does not include the
cost of litigation with policyholders who are excluded from the settlement. The
Company believes that the cost to it of the settlement will be substantially
covered by available reinsurance and the provisions made in its unaudited
interim condensed consolidated financial statements, and thus will not have a
material adverse effect on its business, results of operations or financial
position. Metropolitan Life has made some recoveries under those reinsurance
agreements and, although there is no assurance that other reinsurance claim
submissions will be paid, Metropolitan Life believes payment is likely to occur.
The Company believes it has made adequate provision in its unaudited interim
condensed consolidated financial statements for all probable losses for sales
practices claims, including litigation costs involving policyholders who are
excluded from the settlement as well as for the two class action settlements
described in the following two paragraphs.
Separate from the Metropolitan Life class action settlement, similar sales
practices class action litigation against New England Mutual Life Insurance
Company ("New England Mutual"), with which Metropolitan Life merged in 1996, and
General American Life Insurance Company ("General American"), which was acquired
in 2000, has been settled. The New England Mutual case, a consolidated
multidistrict litigation in the United States District Court for the District of
Massachusetts, involves approximately 600,000 life insurance policies sold
during the period January 1, 1983 through August 31, 1996. The settlement of
this case was approved by the District Court in October 2000 and is not being
appealed. Implementation of the class action settlement is proceeding. The
Company expects that the total cost of this settlement will be approximately
$160 million. Approximately 2,400 class members opted-out of the settlement. As
of June 30, 2001, New England Mutual was a defendant in approximately 35 opt-out
lawsuits involving sales practices claims. A Mississippi federal court recently
dismissed on abstention grounds a declaratory judgment action filed by
Metropolitan Life, as successor of New England Mutual. The lawsuit named as
defendants Mississippi residents who opted out of the New England Mutual class
action settlement. Metropolitan Life, as successor of New England Mutual, plans
to appeal the dismissal, and vigorously defend itself against these opt-out
lawsuits.
The settlement of the consolidated multidistrict sales practices class
action case against General American was approved by the United States District
Court for the Eastern District of Missouri. The General American case involves
approximately 250,000 life insurance policies sold during the period January 1,
1982 through December 31, 1996. Two appeals have been filed. The Company expects
that the approximate cost of the settlement will be $55 million, not including
legal fees and costs for plaintiffs' counsel. Implementation of the settlement
is proceeding. Plaintiffs' motion with respect to legal fees and costs for
plaintiffs' counsel is pending. Approximately 700 class members have elected to
exclude themselves from the General American settlement. As of June 30, 2001,
General American was a defendant in approximately 35 opt-out lawsuits involving
sales practices claims.
The Metropolitan Life class action settlement did not resolve two putative
class actions involving sales practices claims filed against Metropolitan Life
in Canada. A certified class action with conditionally certified subclasses is
pending in the United States District Court for the Southern District of New
York against Metropolitan Life, Metropolitan Insurance and Annuity Company,
Metropolitan Tower Life Insurance Company and various individual defendants
alleging improper sales abroad. The District Court
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has preliminarily approved a proposed settlement agreement, and notices have
been sent to class members. A fairness hearing has been scheduled for September
25, 2001. The settlement is within amounts previously recorded by the Company.
In the past, some individual sales practices claims have been resolved
through settlement, won by dispositive motions, or, in a few instances, have
gone to trial. Most of the current cases seek substantial damages, including in
some cases punitive and treble damages and attorneys' fees. Additional
litigation relating to the Company's marketing and sales of individual life
insurance may be commenced in the future.
The Company believes adequate provision has been made in its unaudited
interim condensed consolidated financial statements for all reasonably probable
and estimable losses for sales practices claims.
See Note 10 of Notes to Consolidated Financial Statements for the year
ended December 31, 2000 included in MetLife, Inc.'s Annual Report on Form 10-K
filed with the SEC for information regarding reinsurance contracts related to
sales practices claims.
Regulatory authorities in a small number of states have had investigations
or inquiries relating to Metropolitan Life's, New England Mutual's or General
American's sales of individual life insurance policies or annuities. Over the
past several years, these and a number of investigations by other regulatory
authorities were resolved for monetary payments and certain other relief. The
Company may continue to resolve investigations in a similar manner.
Metropolitan Life is also a defendant in numerous lawsuits seeking
compensatory and punitive damages for personal injuries allegedly caused by
exposure to asbestos or asbestos-containing products. Metropolitan Life has
never engaged in the business of manufacturing, producing, distributing or
selling asbestos or asbestos-containing products. Rather, these lawsuits,
currently numbering in the thousands, have principally been based upon
allegations relating to certain research, publication and other activities of
one or more of Metropolitan Life's employees during the period from the 1920's
through approximately the 1950's and alleging that Metropolitan Life learned or
should have learned of certain health risks posed by asbestos and, among other
things, improperly publicized or failed to disclose those health risks. Legal
theories asserted against Metropolitan Life have included negligence,
intentional tort claims and conspiracy claims concerning the health risks
associated with asbestos. While Metropolitan Life believes it has meritorious
defenses to these claims, and has not suffered any adverse judgments in respect
of these claims, most of the cases have been resolved by settlements.
Metropolitan Life intends to continue to exercise its best judgment regarding
settlement or defense of such cases, including when trials of these cases are
appropriate. The number of such cases that may be brought or the aggregate
amount of any liability that Metropolitan Life may ultimately incur is
uncertain. Significant portions of amounts paid in settlement of such cases have
been funded with proceeds from a previously resolved dispute with Metropolitan
Life's primary, umbrella and first level excess liability insurance carriers.
See Note 10 of Notes to Consolidated Financial Statements for the year
ended December 31, 2000 included in MetLife, Inc.'s Annual Report on Form 10-K
filed with the SEC for information regarding historical asbestos claims
information and insurance policies obtained in 1998 related to asbestos-related
claims.
The Company believes adequate provision has been made in its unaudited
interim condensed consolidated financial statements for all reasonably probable
and estimable losses for asbestos-related claims. Estimates of the Company's
asbestos exposure can be uncertain due to the limitations of available data and
the difficulty of predicting with any certainty numerous variables that can
affect liability estimates, including the number of future claims, the cost to
resolve claims and the impact of any possible future adverse verdicts and their
amounts. Recent bankruptcies of other companies involved in asbestos litigation,
as well as advertising by plaintiffs' asbestos lawyers, may be resulting in an
increase in the number of claims and the cost of resolving claims, as well as
the number of trials and possible verdicts Metropolitan Life may experience.
Plaintiffs are seeking additional funds from defendants, including Metropolitan
Life, in light of such recent bankruptcies by certain other defendants. As
reported in MetLife, Inc.'s Annual Report on Form 10-K, Metropolitan Life
received approximately 54,500 asbestos-related claims in 2000. During the first
six months of 2001, Metropolitan Life received approximately 34,600
asbestos-related claims. Metropolitan Life is studying its recent claims
experience and numerous variables that can affect its asbestos liability
exposure, including the recent bankruptcies of other companies involved in
asbestos litigation and legislative and judicial developments, to identify
trends and to assess their impact on the previously recorded asbestos liability.
It is reasonably possible that the Company's total exposure to asbestos claims
may be greater than the liability recorded by the Company in its consolidated
financial statements and that future charges to income may be necessary. While
the potential future charges could be material in particular quarterly or annual
periods in which they are recorded, based on information currently known by
management, it does not believe any such charges are likely to have a material
adverse effect on the Company's consolidated financial position.
A purported class action suit involving policyholders in four states has
been filed in a Rhode Island state court against a Metropolitan Life subsidiary,
Metropolitan Property and Casualty Insurance Company, with respect to claims by
policyholders for the
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alleged diminished value of automobiles after accident-related repairs. The
trial court recently denied a motion by Metropolitan Property and Casualty
Insurance Company for summary judgment. However, in a more significant ruling,
plaintiffs' motion for class certification has been denied. No appeal is
expected. Similar "diminished value" purported class action suits have been
filed in Texas and Tennessee against Metropolitan Property and Casualty
Insurance Company. A purported class action has been filed against Metropolitan
Property and Casualty Insurance Company's subsidiary, Metropolitan Casualty
Insurance Company, in Florida by a policyholder alleging breach of contract and
unfair trade practices with respect to allowing the use of parts not made by the
original manufacturer to repair damaged automobiles. Discovery is ongoing and a
motion for class certification is pending. In addition, a plaintiff in Louisiana
state court amended an individual lawsuit to state a putative class action on
behalf of Louisiana insureds challenging the method that Metropolitan Property
and Casualty Insurance Company uses to determine the value of a motor vehicle
that has sustained a total loss. The matter was resolved as an individual claim.
Two plaintiffs recently have brought a similar lawsuit, which is not a class
action, in federal court in Alabama. The complaint alleges that Metropolitan
Property and Casualty Insurance Company and CCC, a valuation company, engaged in
violations of state law and the federal RICO statute by conspiring to fail to
pay the proper amounts for a motor vehicle that sustained a total loss.
Metropolitan Property and Casualty Insurance Company and Metropolitan Casualty
Insurance Company intend to defend themselves vigorously against these suits.
Similar suits have been filed against many other personal lines property and
casualty insurers.
In 2000, Metropolitan Life completed a tender offer to purchase the shares
of Conning Corporation that it had not already owned. After Metropolitan Life
had announced its intention to make a tender offer, three putative class actions
were filed by Conning shareholders alleging that the prospective offer was
inadequate and constituted a breach of fiduciary duty. The parties to the
litigation have reached an agreement providing for a settlement of the actions.
The Supreme Court, New York County has preliminarily approved the proposed
settlement and scheduled a fairness hearing for September 12, 2001.
Several lawsuits were brought in 2000 challenging the fairness of
Metropolitan Life's plan of reorganization and the adequacy and accuracy of
Metropolitan Life's disclosure to policyholders regarding the plan. These
actions name as defendants some or all of Metropolitan Life, the Holding
Company, the individual directors, the New York Superintendent of Insurance and
the underwriters for MetLife, Inc.'s initial public offering, Goldman Sachs &
Company and Credit Suisse First Boston. Five purported class actions pending in
the Supreme Court of the State of New York for New York County have been
consolidated within the commercial part. Metropolitan Life has moved to dismiss
these consolidated cases on a variety of grounds. In addition, there remains a
separate purported class action in New York state court in New York County that
Metropolitan Life also has moved to dismiss. Another purported class action in
New York state court in Kings County has been voluntarily held in abeyance by
plaintiffs. The plaintiffs in the state court class actions seek injunctive,
declaratory and compensatory relief, as well as an accounting and, in some
instances, punitive damages. Some of the plaintiffs in the above described
actions also have brought a proceeding under Article 78 of New York's Civil
Practice Law and Rules challenging the Opinion and Decision of the New York
Superintendent of Insurance that approved the plan. In this proceeding,
petitioners seek to vacate the Superintendent's Opinion and Decision and enjoin
him from granting final approval of the plan. This case also is being held in
abeyance by plaintiffs. Another purported class action is pending in the Supreme
Court of the State of New York for New York County and has been brought on
behalf of a purported class of beneficiaries of Metropolitan Life annuities
purchased to fund structured settlements claiming that the class members should
have received common stock or cash in connection with the demutualization.
Metropolitan Life has moved to dismiss this case on a variety of grounds. Three
purported class actions were filed in the United States District Court for the
Eastern District of New York claiming violation of the Securities Act of 1933.
The plaintiffs in these actions, which have been consolidated, claim that the
Policyholder Information Booklets relating to the plan failed to disclose
certain material facts and seek rescission and compensatory damages.
Metropolitan Life's motion to dismiss these three cases was denied on July 23,
2001. A purported class action also was filed in the United States District
Court for the Southern District of New York seeking damages from Metropolitan
Life and the Holding Company for alleged violations of various provisions of the
Constitution of the United States in connection with the plan of reorganization.
On July 9, 2001, pursuant to a motion to dismiss filed by Metropolitan Life,
this case was dismissed by the District Court. Plaintiffs have since noticed an
appeal to the United States Court of Appeals for the Second Circuit.
Metropolitan Life, the Holding Company and the individual defendants believe
they have meritorious defenses to the plaintiffs' claims and are contesting
vigorously all of the plaintiffs' claims in these actions.
Three lawsuits were also filed against Metropolitan Life in 2000 in the
United States District Courts for the Southern District of New York, for the
Eastern District of Louisiana, and of for the District of Kansas alleging racial
discrimination in the marketing, sale, and administration of life insurance
policies, including "industrial" life insurance policies sold by Metropolitan
Life decades ago. Metropolitan Life successfully transferred the Louisiana and
Kansas actions to the Southern District of New York where the three cases have
been consolidated. A fourth case, originally filed in the United States District
Court for the Southern District of Illinois in 2001, also has been transferred
to the Southern District of New York. The plaintiffs in these actions seek
unspecified monetary damages, punitive damages, reformation, imposition of a
constructive trust, a declaration that the alleged practices are discriminatory
and illegal, injunctive relief requiring Metropolitan Life to discontinue the
alleged discriminatory practices and adjust policy values, and other relief.
Discovery has been underway since late 2000. At the outset of discovery,
Metropolitan Life moved for summary judgment on statute of limitations grounds.
On June 27, 2001, the District Court denied that motion, citing, among other
things,
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ongoing discovery on relevant subjects. The ruling does not prevent Metropolitan
Life from continuing to pursue a statute of limitations defense. Plaintiffs have
moved for certification of a class consisting of all non-Caucasian policyholders
who were purportedly harmed by the practices alleged in the complaint.
Metropolitan Life has opposed the class certification motion, but no hearing
date has yet been set. These cases are scheduled for trial in January 2002.
Metropolitan Life believes it has meritorious defenses and is contesting
vigorously plaintiffs' claims.
Insurance Departments in a number of states initiated inquiries in 2000
about possible race-based underwriting of life insurance. These inquiries
generally have been directed to all life insurers licensed in the respective
states, including Metropolitan Life and certain of its subsidiaries. The New
York Insurance Department has commenced examinations of certain domestic life
insurance companies, including Metropolitan Life, concerning possible past
race-based underwriting practices. Metropolitan Life is cooperating fully with
that inquiry, which is ongoing.
In March 2001, a putative class action was filed against Metropolitan Life
in the United States District Court for the Southern District of New York
alleging gender discrimination and retaliation in the MetLife Financial Services
unit of the Individual segment. The plaintiffs seek unspecified compensatory
damages, punitive damages, a declaration that the alleged practices are
discriminatory and illegal, injunctive relief requiring Metropolitan Life to
discontinue the alleged discriminatory practices, an order restoring class
members to their rightful positions (or appropriate compensation in lieu
thereof), and other relief. Metropolitan Life is vigorously defending itself
against these allegations.
Various litigation, claims and assessments against the Company, in addition
to those discussed above and those otherwise provided for in the Company's
unaudited interim condensed consolidated financial statements, have arisen in
the course of the Company's business, including, but not limited to, 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 feasible to predict or determine the ultimate outcome of all
pending investigations and legal proceedings or provide reasonable ranges of
potential losses. In some of the matters referred to above, very large and/or
indeterminate amounts, including punitive and treble damages, are sought.
Although in light of these considerations it is possible that an adverse outcome
in certain cases could have a material adverse effect upon the Company's
consolidated 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
adverse effect on the Company's operating results or cash flows in particular
quarterly or annual periods.
7. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is as follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
2001 2000 2001 2000
----- ----- ----- -----
(DOLLARS IN MILLIONS)
Net loss before date of demutualization $ -- $(456) $ -- $(220)
Net income after date of demutualization 320 341 607 341
Accumulated other comprehensive income (loss):
Cumulative effect of change in accounting for
derivatives, net of income taxes -- -- 32 --
Unrealized investment gains (losses), net of related offsets,
reclassification adjustments and income taxes (328) (181) 242 (92)
Unrealized gains (losses) on derivative instruments, net of
income taxes (9) -- 25 --
Foreign currency translation adjustments 31 7 (21) 8
----- ----- ----- -----
Accumulated other comprehensive (loss) income (306) (174) 278 (84)
----- ----- ----- -----
Comprehensive income (loss) $ 14 $(289) $ 885 $ 37
===== ===== ===== =====
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8. BUSINESS SEGMENT INFORMATION
Auto Asset Corp-
Institu- Rein- & Mana- Inter- orate
For the three months ended June 30, 2001 Individual tional surance Home gement national & Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
Premiums $ 1,107 $ 1,739 $395 $ 682 $ -- $196 $ (1) $ 4,118
Universal life and investment-type
product policy fees 310 154 -- -- -- 9 -- 473
Net investment income 1,635 1,033 88 51 17 62 97 2,983
Other revenues 119 163 7 6 56 2 20 373
Net investment (losses) gains (61) (47) 9 (3) -- 27 (61) (136)
Income (loss) before provision for
income taxes 232 268 36 8 1 40 (92) 493
- ----------------------------------------------------------------------------------------------------------------------------------
Auto Asset Corp-
Institu- Rein- & Mana- Inter- orate
For the three months ended June 30, 2000 Individual tional surance Home gement national & Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
Premiums $ 1,135 $ 1,784 $ 370 $ 656 $ -- $ 173 $ (1) $ 4,117
Universal life and investment-type
product policy fees 301 136 -- -- -- 11 -- 448
Net investment income 1,598 954 95 47 21 63 146 2,924
Other revenues 142 167 9 5 218 2 32 575
Net investment (losses) gains (18) (25) (2) 1 -- 7 (18) (55)
Income (loss) before provision for
income taxes 278 208 10 (25) 18 (312) (160) 17
- ----------------------------------------------------------------------------------------------------------------------------------
Auto Asset Corp-
Institu- Rein- & Mana- Inter- orate
For the six months ended June 30, 2001 Individual tional surance Home gement national & Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
Premiums $ 2,213 $ 3,607 $805 $ 1,355 $ -- $373 $ (1) $ 8,352
Universal life and investment-type
product policy fees 623 304 -- -- -- 20 -- 947
Net investment income 3,261 2,084 185 102 36 126 186 5,980
Other revenues 265 330 16 12 112 6 43 784
Net investment (losses) gains (114) (117) 14 (6) -- 28 (86) (281)
Income (loss) before provision for
income taxes 467 497 65 (37) 10 60 (142) 920
- ----------------------------------------------------------------------------------------------------------------------------------
Auto Asset Corp-
Institu- Rein- & Mana- Inter- orate
For the six months ended June 30, 2000 Individual tional surance Home gement national & Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
Premiums $ 2,253 $ 3,377 $ 728 $ 1,301 $ -- $ 319 $ (1) $ 7,977
Universal life and investment-type
product policy fees 620 273 -- -- -- 24 -- 917
Net investment income 3,176 1,882 183 83 42 128 214 5,708
Other revenues 311 344 11 18 434 5 58 1,181
Net investment (losses) gains (57) (41) (3) 6 -- 8 (80) (167)
Income (loss) before provision for
income taxes 548 409 50 (9) 40 (296) (305) 437
- ----------------------------------------------------------------------------------------------------------------------------------
At June 30, At December 31,
2001 2000
-------- --------
Assets
Individual $132,918 $132,433
Institutional 89,567 90,279
Reinsurance 7,286 7,280
Auto & Home 4,637 4,511
Asset Management 314 418
International 3,794 5,119
Corporate & Other 16,261 14,978
-------- --------
Total $254,777 $255,018
======== ========
The Individual segment included an equity ownership interest in Nvest, L.P.
and Nvest Companies, L.P. ("Nvest") under the equity method of accounting. Prior
to its sale in October 2000, Nvest was included within the Asset Management
segment due to the types of products and strategies employed by the entity. The
Individual segment's equity in earnings of Nvest, which is included in net
investment income, was $11 million and $21 million for the three months and six
months ended June 30, 2000, respectively.
The Corporate & Other segment consists of various start-up entities,
including Grand Bank, N.A. ("Grand Bank"), and run-off entities, as well as the
elimination of all intersegment amounts. In addition, the elimination of the
Individual segment's ownership interest in Nvest is included for the three
months and six months ended June 30, 2000. The principal component of the
intersegment amounts relates to intersegment loans, which bear interest rates
commensurate with related borrowings.
Revenues derived from any customer did not exceed 10% of consolidated
revenues. Revenues from U.S. operations were $7,475 million and $7,753 million
for the three months ended June 30, 2001 and 2000, respectively, which
represented 96% and 97%, respectively, of consolidated revenues. Such revenues
from U.S. operations were $15,189 million and $15,132 million for the six
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20
months ended June 30, 2001 and 2000, respectively, which represented 96% and
97%, respectively, of consolidated revenues.
9. STOCK OPTIONS AND STOCK GRANTS
During the three months ended June 30, 2001, MetLife, Inc. granted
approximately 12.1 million non-qualified stock options pursuant to its 2000
Stock Incentive Plan. During the same period, MetLife, Inc. granted to its
non-employee directors an aggregate of approximately 19,000 non-qualified stock
options and 6,000 shares of common stock to directors pursuant to its 2000
Directors Stock Plan. All options granted have an exercise price equal to the
fair market value of the Company's common stock on the date of grant. For a
further discussion of the stock plans referenced above, see Note 15 of Notes to
Consolidated Financial Statements included in MetLife, Inc.'s 2000 Annual Report
on Form 10-K filed with the SEC.
10. SUBSEQUENT EVENTS
DISPOSITION
On July 2, 2001, the Company completed its sale of Conning Corporation
("Conning"), an affiliate acquired in the acquisition of GenAmerica Financial
Corporation. Conning specializes in asset management for insurance company
investment portfolios and investment research. The Company received $108 million
in the transaction and will report a gain of approximately $17 million, net of
income taxes of $11 million, in the third quarter. The sale price is subject to
adjustment under certain provisions of the sale contract.
SHARE REPURCHASE
On August 8, 2001, the Company announced that it has agreed to purchase ten
million shares of its common stock for $283 million as part of the sale of 25
million shares of MetLife common stock by Santusa Holdings, S.L., an affiliate
of Banco Santander Central Hispano, S.A. Santusa Holdings, S.L. originally
acquired the shares in a private placement at the time of MetLife's initial
public offering.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For purposes of this discussion, the terms "MetLife" or the "Company"
refer, at all times prior to the date of demutualization (as hereinafter
defined), to Metropolitan Life Insurance Company, a mutual life insurance
company organized under the laws of the State of New York ("Metropolitan Life"),
and its subsidiaries, and at all times on and after the date of demutualization,
to MetLife, Inc. (the "Holding Company"), a Delaware corporation, and its
subsidiaries, including Metropolitan Life. Following this summary is a
discussion addressing the consolidated results of operations and financial
condition of the Company for the periods indicated. This discussion should be
read in conjunction with the Company's unaudited interim condensed consolidated
financial statements included elsewhere herein.
THE DEMUTUALIZATION
On April 7, 2000 (the "date of demutualization"), pursuant to an order by
the New York Superintendent of Insurance ("Superintendent") approving its plan
of reorganization, as amended (the "plan"), Metropolitan Life converted from a
mutual life insurance company to a stock life insurance company and became a
wholly-owned subsidiary of the Holding Company. In conjunction therewith, each
policyholder's membership interest was extinguished and each eligible
policyholder received, in exchange for that interest, trust interests
representing shares of Common Stock held in the Metropolitan Life Policyholder
Trust, cash or an adjustment to their policy values in the form of policy
credits, as provided in the plan. In addition, Metropolitan Life's Canadian
branch made cash payments to holders of certain policies transferred to Clarica
Life Insurance Company in connection with the sale of a substantial portion of
Metropolitan Life's Canadian operations in 1998, as a result of a commitment
made in connection with obtaining Canadian regulatory approval of that sale. The
payments, which were recorded in the second quarter of 2000, were determined in
a manner that was consistent with the treatment of, and fair and equitable to,
eligible policyholders of Metropolitan Life.
On the date of demutualization, the Holding Company conducted an initial
public offering of 202,000,000 shares of its Common Stock and concurrent private
placements of an aggregate of 60,000,000 shares of its Common Stock at an
offering price of $14.25 per share. The shares of Common Stock issued in the
offerings are in addition to 494,466,664 shares of Common Stock of the Holding
Company distributed to the Metropolitan Life Policyholder Trust for the benefit
of policyholders of Metropolitan Life in connection with the demutualization. On
April 10, 2000, the Holding Company issued 30,300,000 additional shares of its
Common Stock as a result of the exercise of over-allotment options granted to
underwriters in the initial public offering.
Concurrently with these offerings, MetLife, Inc. and MetLife Capital Trust
I, a Delaware statutory business trust wholly-owned by MetLife, Inc., issued
20,125,000 8.00% equity security units for an aggregate offering price of $1,006
million. Each unit consists of (i) a contract to purchase shares of Common
Stock, and (ii) a capital security of MetLife Capital Trust I.
On the date of demutualization, Metropolitan Life established a closed
block for the benefit of holders of certain individual life insurance policies
of Metropolitan Life. See Note 2 of Notes to unaudited interim condensed
consolidated financial statements.
ACQUISITIONS AND DISPOSITIONS
On July 2, 2001, the Company completed its sale of Conning Corporation
("Conning"), an affiliate acquired in the acquisition of GenAmerica Financial
Corporation ("GenAmerica"). Conning specializes in asset management for
insurance company investment portfolios and investment research. The Company
received $108 million in the transaction and will report a gain of approximately
$17 million, net of income taxes of $11 million, in the third quarter. The sale
price is subject to adjustment under certain provisions of the sale contract.
On February 28, 2001, the Holding Company consummated the purchase of Grand
Bank, N.A. ("Grand Bank"). Grand Bank, with assets of approximately $90 million,
provides banking services to individuals and small businesses in the Princeton,
New Jersey area. On February 12, 2001, the Federal Reserve Board approved the
Holding Company's application for bank holding company status and to become a
financial holding company upon its acquisition of Grand Bank.
In October 2000, the Company completed the sale of its 48% ownership
interest in its affiliates, Nvest, L.P. and Nvest Companies L.P.
(collectively, "Nvest"). This transaction resulted in an investment gain of
$663 million.
In July 2000, the Company acquired the workplace benefits division of
Business Men's Assurance Company ("BMA"), a Kansas City, Missouri-based insurer.
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RESULTS OF OPERATIONS
THE COMPANY
The following table presents summary consolidated financial information for
the Company for the periods indicated:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- -----------------------
2001 2000 2001 2000
------- ------- -------- --------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 4,118 $ 4,117 $ 8,352 $ 7,977
Universal life and investment-type product policy fees 473 448 947 917
Net investment income 2,983 2,924 5,980 5,708
Other revenues 373 575 784 1,181
Net investment losses (net of amounts allocable to other
accounts of $49, $(2), $79 and $17, respectively) (136) (55) (281) (167)
------- ------- -------- --------
Total revenues 7,811 8,009 15,782 15,616
------- ------- -------- --------
EXPENSES
Policyholder benefits and claims (excludes amounts directly related
to net investment losses of $27, $(3), $63 and $1, respectively) 4,289 4,234 8,724 8,281
Interest credited to policyholder account balances 723 724 1,483 1,421
Policyholder dividends 505 513 1,020 981
Payments to former Canadian policyholders -- 327 -- 327
Demutualization costs -- 175 -- 230
Other expenses (excludes amounts directly related to net
investment losses of $22, $1, $16 and $16, respectively) 1,801 2,019 3,635 3,939
------- ------- -------- --------
Total expenses 7,318 7,992 14,862 15,179
------- ------- -------- --------
Income before provision for income taxes 493 17 920 437
Provision for income taxes 173 132 313 316
------- ------- -------- --------
Net income (loss) $ 320 $ (115) $ 607 $ 121
======= ======= ======== ========
THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2000
Premiums increased by $1 million to $4,118 million for the three months
ended June 30, 2001 from $4,117 million for the comparable 2000 period. This
variance is attributable to increases in the Auto & Home, Reinsurance and
International segments, which are mostly offset by decreases in the
Institutional and Individual segments. A $26 million increase in Auto & Home is
primarily due to higher average premium resulting from rate increases. New
premiums from facultative and automatic treaties and renewal premiums all
contributed to a $25 million increase in Reinsurance. A $23 million increase in
International is primarily due to overall growth in South Korea, Mexico and
Spain, partially offset by a decline in Argentina related to the poor economic
environment. These increases are almost entirely offset by decreases of $45
million and $28 million in Institutional and Individual, respectively. The
variance in Institutional is attributable to a decrease in retirement and
savings premiums, mostly due to higher premiums received in 2000 from existing
customers, which more than offset an increase in group insurance premiums
resulting from sales growth and continued favorable policyholder retention in
the group life, dental, disability and long-term care businesses. A reduction in
sales of traditional life insurance policies, reflecting a continued shift in
customer preferences from those policies to variable life products, is the
primary driver of lower premiums in Individual.
Universal life and investment-type product policy fees increased by $25
million, or 6%, to $473 million for the three months ended June 30, 2001 from
$448 million for the comparable 2000 period. This increase is primarily due to
the Institutional and Individual segments. A rise in sales of group universal
life products is the primary driver of an $18 million increase in Institutional.
A $9 million variance in Individual is due to an increase in policy fees from
insurance products, reflecting the continued shift in customer preferences from
traditional life products to variable life products, partially offset by a
decrease in policy fees from annuity products resulting from poor equity market
performance.
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23
Net investment income increased by $59 million, or 2%, to $2,983 million
for the three months ended June 30, 2001 from $2,924 million for the comparable
2000 period. This increase is primarily due to higher income from (i) fixed
maturities of $82 million, or 4%, (ii) mortgage loans on real estate of $73
million, or 18%, (iii) other invested assets of $14 million, or 52%, (iv) lower
investment expenses of $14 million, or 20%, and (v) interest on policy loans of
$8 million, or 6%. These increases are partially offset by lower income from (i)
equity securities and other limited partnership interests of $114 million, or
113%, (ii) real estate and real estate joint ventures of $10 million, or 6%, and
(iii) cash and short-term investments of $8 million, or 11%.
The increase in income from fixed maturities to $2,165 million in 2001 from
$2,083 million in 2000 is primarily due to a more active securities lending
program. The increase in income from mortgage loans on real estate to $488
million in 2001 from $415 million in 2000 is primarily due to higher mortgage
production volume and increases in prepayments and contingent interest. The
decrease in income from equity securities and other limited partnership
interests to ($13) million in 2001 from $101 million in 2000 is primarily due to
fewer sales of underlying assets held in corporate partnerships, coupled with
losses in underlying portfolios.
The increase in net investment income is largely attributable to the
Institutional and Individual segments, offset by a decline in Corporate &
Other. Net investment income for Institutional and Individual increased
by $79 million and $37 million, respectively. These increases are predominately
due to increased securities lending activity and increases in mortgage
prepayments and contingent interest. Net investment income for Corporate & Other
decreased by $49 million due to fewer sales of underlying assets held in
corporate limited partnerships and an increase in losses in its portfolio. Due
to the nature and timing of certain investment transactions, including sales of
underlying assets held in corporate partnerships, past investment performance is
not necessarily indicative of future performance.
Other revenues decreased by $202 million, or 35%, to $373 million for the
three months ended June 30, 2001 from $575 million for the comparable 2000
period. This variance is primarily attributable to the Asset Management and
Individual segments. A decrease of $162 million in Asset Management is due to
the sale of Nvest on October 30, 2000. A decline of $23 million in Individual is
largely a result of lower commission and fee income related to decreased sales
in the broker/dealer and other subsidiaries. The remaining variance of $15
million is primarily attributable to Corporate & Other. This decrease is largely
due to the sale of certain subsidiaries in 2000.
The Company's investment gains and losses are net of related policyholder
amounts. The amounts netted against investment gains and losses are (i)
amortization of deferred policy acquisition costs attributable to the increase
or decrease in product gross margins or profits resulting from investment gains
and losses, (ii) liabilities for those participating contracts in which the
policyholders' accounts are increased or decreased by the related investment
gains or losses, and (iii) adjustments to the policyholder dividend obligation
resulting from investment gains and losses.
Net investment losses increased by $81 million, or 147%, to $136 million
for the three months ended June 30, 2001 from $55 million for the comparable
2000 period. This increase reflects gross realized investment losses of $185
million, an increase of $132 million, or 249%, from $53 million in 2000, before
the offsets for the amortization of deferred policy acquisition costs of $22
million and $1 million in 2001 and 2000, respectively; changes in the
policyholder dividend obligation of $27 million and ($7) million in 2001 and
2000, respectively; and reductions in participating contracts of $4 million in
2000 related to assets sold. The increase in gross realized investment losses is
attributable to the continuing recognition of deteriorating credits through
asset sales and write-downs.
The Company believes its policy of netting related policyholder amounts
against investment gains and losses provides important information in evaluating
its operating performance. Investment gains and losses are often excluded by
investors when evaluating the overall financial performance of insurers. The
Company believes its presentation enables readers of its unaudited interim
condensed consolidated statements of operations to easily exclude investment
gains and losses and the related effects on the unaudited interim condensed
consolidated statements of operations when evaluating its operating performance.
The Company's presentation of investment gains and losses, net of policyholder
amounts, may be different from the presentation used by other insurance
companies and, therefore, amounts in its unaudited interim condensed
consolidated statements of operations may not be comparable with amounts
reported by other insurers.
Policyholder benefits and claims increased by $55 million, or 1%, to $4,289
million for the three months ended June 30, 2001 from $4,234 million for the
comparable 2000 period. This variance reflects total gross policyholder benefits
and claims of $4,262 million, an increase of $25 million, or 1%, from $4,237
million in 2000, before the offsets for reductions in participating
contractholder accounts of $4 million in 2000 and changes in the policyholder
dividend obligation of $27 million and ($7) million in 2001 and 2000,
respectively, directly related to net investment losses. The net increase in
policyholder benefits and claims is attributable to increases in the
Reinsurance, Individual and International segments. Increases of $22 million and
$14 million in Reinsurance and International, respectively, are commensurate
with the aforementioned growth in those businesses. A $19 million increase in
Individual is predominately due to an increase in liabilities for policyholder
benefits associated with the aging of the block of business.
Interest credited decreased by $1 million to $723 million for the three
months ended June 30, 2001 from $724 million for the comparable 2000 period.
Declines in the Institutional, Reinsurance and International segments are mostly
offset by an increase in the
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Individual segment. A $17 million decrease in Institutional is primarily due to
lower crediting rates resulting from the current interest rate environment. A $9
million decrease in Reinsurance is due to a reduction of the interest credited
on a block of annuities which is determined by the performance of the underlying
assets. A $3 million decrease in International is due to a reduction in Spain's
assets under management resulting from the planned cessation of product lines
offered through a joint venture with Banco Santander Central Hispano, S.A.
("Banco Santander"). These decreases are mostly offset by an increase of $28
million in Individual resulting from higher crediting rates and growth in
policyholder account balances.
Policyholder dividends decreased by $8 million, or 2%, to $505 million for
the three months ended June 30, 2001 from $513 million for the comparable 2000
period. This variance is primarily due to a decrease of $23 million in the
Institutional segment, partially offset by an increase of $13 million in the
Individual segment. Institutional policyholder dividends vary from period to
period based on participating contract experience. The increase in Individual is
due to growth in the assets supporting policies associated with this segment's
large block of traditional life insurance business.
Payments of $327 million were made during the second quarter of 2000, as
part of Metropolitan Life's demutualization, to holders of certain policies
transferred to Clarica Life Insurance Company in connection with the sale of a
substantial portion of the Canadian operations in 1998.
Demutualization costs of $175 million were incurred during the three months
ended June 30, 2000. These costs are related to Metropolitan Life's
demutualization on April 7, 2000.
Other expenses decreased by $218 million, or 11%, to $1,801 million for the
three months ended June 30, 2001 from $2,019 million for the comparable 2000
period. Excluding the capitalization and amortization of deferred policy
acquisition costs, which are discussed below, other expenses decreased by $127
million, or 6%, to $1,979 million in 2001 from $2,106 million in 2000. This
decrease is primarily attributable to a reduction of $149 million in the Asset
Management segment, partially offset by an increase of $18 million in the
Institutional segment. The variance in Asset Management is due to the sale of
Nvest on October 30, 2000. The rise in expenses in Institutional is attributable
to the non-medical health business, and results from costs incurred in
connection with initiatives focused on improving service delivery capabilities
through investments in technology. This rise in spending is partially offset by
decreases in retirement and savings and group life, which stem from expense
management initiatives and lower interest costs associated with the Company's
securities lending program.
Deferred policy acquisition costs are principally amortized in proportion
to gross margins or profits, including investment gains or losses. The
amortization is allocated to investment gains and losses to provide consolidated
statement of operations information regarding the impact of investment gains and
losses on the amount of the amortization, and other expenses to provide amounts
related to gross margins or profits originating from transactions other than
investment gains and losses.
Capitalization of deferred policy acquisition costs increased slightly to
$448 million for the three months ended June 30, 2001 from $440 million for the
comparable 2000 period. This growth is commensurate with increases in the
Institutional, Reinsurance and International segments. These increases are
partially offset by a decrease in the Individual segment. The decrease in
Individual is primarily due to declines in sales of traditional life insurance
policies and annuity and investment-type products, resulting in lower
commissions and other deferrable expenses. Total amortization of deferred policy
acquisition costs decreased to $248 million in 2001 from $352 million in 2000.
Amortization of deferred policy acquisition costs of $269 million and $353
million are allocated to other expenses in 2001 and 2000, respectively, while
the remainder of the amortization in each year is allocated to investment
losses. The decrease in amortization of deferred policy acquisition costs
allocated to other expenses is primarily attributable to a decrease in
Individual resulting from refinements in the calculation of estimated gross
margins and profits as well as the impact of a product replacement program for
universal life policies initiated in the first quarter of 2000.
Income tax expense for the three months ended June 30, 2001 was $173
million, or 35% of income before provision for income taxes, compared with $132
million, or 776%, for the comparable 2000 period. The 2000 effective income tax
rate differs from the corporate tax rate of 35% primarily due to payments made
to former Canadian policyholders in connection with the demutualization.
24
25
SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2000
Premiums increased by $375 million, or 5%, to $8,352 million for the six
months ended June 30, 2001 from $7,977 million for the comparable 2000 period.
Increases in the Institutional, Reinsurance, Auto & Home and International
segments are partially offset by a decrease in the Individual segment.
Institutional's premiums grew by $230 million due to sales growth and continued
favorable policyholder retention in the group life, dental, disability and long-
term care businesses which more than offset a decrease in retirement and
savings. This variance is attributable to higher premiums received in 2000 from
existing customers. New premiums from facultative and automatic treaties and
renewal premiums all contributed to the $77 million increase in Reinsurance. A
$54 million increase in Auto & Home is primarily due to higher average premium
resulting from rate increases and improved retention. A $54 million increase in
International is largely attributable to overall growth in South Korea, Mexico
and Spain. A decline in sales of traditional life insurance policies, reflecting
a continued shift in customer preferences from those policies to variable life
products, is the primary driver of the $40 million decrease in Individual.
Universal life and investment-type product policy fees increased by $30
million, or 3%, to $947 million for the six months ended June 30, 2001 from $917
million for the comparable 2000 period. A $31 million increase in the
Institutional segment resulted from growth in sales and deposits of group
universal life and corporate-owned life insurance products.
Net investment income increased by $272 million, or 5%, to $5,980 million
for the six months ended June 30, 2001 from $5,708 million for the comparable
2000 period. This increase is primarily due to higher income from (i) fixed
maturities of $160 million, or 4%, (ii) mortgage loans on real estate of $89
million, or 11%, (iii) other invested assets of $57 million, or 112%, (iv) lower
investment expenses of $27 million, or 20%, (v) interest on policy loans of $17
million, or 7%, and (vi) cash and short-term investments of $2 million, or 1%.
These increases are partially offset by lower income from (i) equity securities
and other limited partnership interests of $76 million, or 58%, and (ii) real
estate and real estate joint ventures of $4 million, or 1%.
The increase in income from fixed maturities to $4,282 million in 2001 from
$4,122 million in 2000 is primarily due to a more active securities lending
program. The growth in income from mortgage loans on real estate to $923 million
in 2001 from $834 million in 2000 is largely due to higher mortgage production
volume and increases in prepayments and contingent interest. The decrease in
income from equity securities and other limited partnership interests to $54
million in 2001 from $130 million in 2000 is principally due to sales of
underlying assets held in corporate partnerships, coupled with losses in
underlying portfolios.
The increase in net investment income is largely attributable to the
Institutional and Individual segments. Net investment income from Institutional
and Individual grew by $202 million and $85 million, respectively. These
increases are predominately due to a higher volume of securities lending
activity, increases in mortgage prepayments and contingent interest, and
increased equity in earnings of corporate partnerships resulting principally
from sales of underlying assets. Due to the nature and timing of certain
investment transactions, including sales of underlying assets held in corporate
partnerships, past investment performance is not necessarily indicative of
future performance.
Other revenues decreased by $397 million, or 34%, to $784 million for the
six months ended June 30, 2001 from $1,181 million for the comparable 2000
period. This decrease is primarily attributable to the Asset Management,
Individual and Institutional segments. A reduction of $322 million in Asset
Management results from the sale of Nvest on October 30, 2000. A decrease of $46
million in Individual is largely due to lower commission and fee income related
to decreased sales in the broker/dealer and other subsidiaries. A $14 million
decrease in Institutional is primarily due to the receipt of final settlements,
in 2000, on several cases related to the term life and former medical
businesses, partially offset by increases in the dental and disability
administrative services businesses. The remaining variance is largely
attributable to Corporate & Other.
The Company's investment gains and losses are net of related policyholder
amounts. The amounts netted against investment gains and losses are (i)
amortization of deferred policy acquisition costs attributable to the increase
or decrease in product gross margins or profits resulting from investment gains
and losses, (ii) liabilities for those participating contracts in which the
policyholders' accounts are increased or decreased by the related investment
gains or losses, and (iii) adjustments to the policyholder dividend obligation
resulting from investment gains and losses.
Net investment losses increased by $114 million, or 68%, to $281 million
for the six months ended June 30, 2001 from $167 million for the comparable 2000
period. This increase reflects total gross investment losses of $360 million, an
increase of $176 million, or 96%, from $184 million in 2000, before the offsets
for the amortization of deferred policy acquisition costs of $16 million in both
2001 and 2000; changes in the policyholder dividend obligation of $63 million
and ($7) million in 2001 and 2000, respectively; and reductions in participating
contracts of $4 million in 2000 related to assets sold. The increase in gross
realized investment losses is attributable to the continuing recognition of
deteriorating credits through asset sales and write-downs.
The Company believes its policy of netting related policyholder amounts
against investment gains and losses provides important information in evaluating
its operating performance. Investment gains and losses are often excluded by
investors when evaluating the overall financial performance of insurers. The
Company believes its presentation enables readers of its unaudited interim
25
26
condensed consolidated statements of operations to easily exclude investment
gains and losses and the related effects on the unaudited interim condensed
consolidated statements of operations when evaluating its operating performance.
The Company's presentation of investment gains and losses, net of policyholder
amounts, may be different from the presentation used by other insurance
companies and, therefore, amounts in its unaudited interim condensed
consolidated statements of operations may not be comparable with amounts
reported by other insurers.
Policyholder benefits and claims increased by $443 million, or 5%, to $8,724
million for the six months ended June 30, 2001 from $8,281 million for the
comparable 2000 period. This increase reflects total gross policyholder benefits
and claims of $8,661 million, an increase of $381 million, or 5%, from $8,280
million in 2000, before the offsets for reductions in participating
contractholder accounts of $8 million in 2000 and changes in the policyholder
dividend obligation of $63 million and ($7) million in 2001 and 2000,
respectively, directly related to net investment losses. The net increase is
attributable to growth in the Institutional, Auto & Home, Reinsurance,
Individual and International segments. An increase of $178 million in
Institutional is due to growth in the group insurance businesses, partially
offset by a decrease in retirement and savings. Both of these variances are
commensurate with the premium fluctuations discussed above. Additional expenses
of $83 million in Auto & Home are due to inflationary pressures on claim
severity and growth in the auto business, as well as increased catastrophic
activity and non-catastrophe weather-related losses in 2001. Increases of $80
million and $33 million in Reinsurance and International, respectively, are
commensurate with the aforementioned growth in those businesses. A $67 million
increase in Individual is the result of a $36 million increase in the
policyholder dividend obligation associated with the creation of the closed
block in the second quarter of 2000. In addition, an increase in liabilities for
policyholder benefits commensurate with growth in general account variable and
universal life business contributed to this variance.
Interest credited increased by $62 million, or 4%, to $1,483 million for
the six months ended June 30, 2001 from $1,421 million for the comparable 2000
period. The additional expense is primarily due to a $60 million increase in
Individual resulting from higher crediting rates and growth in policyholder
account balances.
Policyholder dividends increased by $39 million, or 4%, to $1,020 million
for the six months ended June 30, 2001 from $981 million for the comparable 2000
period. This variance is due to increases of $23 million and $11 million in the
Institutional and Individual segments, respectively. Institutional policyholder
dividends vary from period to period based on participating group insurance
contract experience. The increase in Individual is primarily due to growth in
the assets supporting policies associated with this segment's large block of
traditional life insurance business.
Payments of $327 million were made during the second quarter of 2000, as
part of Metropolitan Life's demutualization, to holders of certain policies
transferred to Clarica Life Insurance Company in connection with the sale of a
substantial portion of the Canadian operations in 1998.
Demutualization costs of $230 million were incurred during the six months
ended June 30, 2000. These costs are related to Metropolitan Life's
demutualization on April 7, 2000.
Other expenses decreased by $304 million, or 8%, to $3,635 million for the
six months ended June 30, 2001 from $3,939 million for the comparable 2000
period. Excluding the capitalization and amortization of deferred policy
acquisition costs, which are discussed below, other expenses decreased by $176
million, or 4%, to $3,897 million in 2001 from $4,073 million in 2000. The
majority of this variance is related to the Asset Management and Institutional
segments. A $298 million decrease in Asset Management results from the sale of
Nvest on October 30, 2000. A $102 million expense growth in Institutional is due
to increases in the group life and non-medical health businesses resulting from
costs incurred in connection with initiatives that focused on improving service
delivery capabilities through investments in technology, additional expenses
associated with a higher volume of securities lending activity and an increase
in variable expenses associated with premium growth. Variable expenses include
premium tax, commissions and administrative expenses for dental and disability.
The remaining variance is attributable to the Individual and Reinsurance
segments, as well as to Corporate & Other.
Deferred policy acquisition costs are principally amortized in proportion
to gross margins or profits, including investment gains or losses. The
amortization is allocated to investment gains and losses to provide consolidated
statement of operations information regarding the impact of investment gains and
losses on the amount of the amortization, and other expenses to provide amounts
related to gross margins or profits originating from transactions other than
investment gains and losses.
Capitalization of deferred policy acquisition costs increased slightly to
$869 million for the six months ended June 30, 2001 from $832 million for the
comparable 2000 period. This growth is commensurate with increases in the
Institutional, Reinsurance and International segments' premiums. These increases
are partially offset by a decrease in the Individual segment. The decrease in
Individual is primarily due to the decline in sales of annuity and
investment-type products, resulting in lower commissions and deferrable
expenses. Total amortization of deferred policy acquisition costs decreased to
$591 million in 2001 from $682 million in 2000. Amortization of deferred policy
acquisition costs of $607 million and $698 million are allocated to other
expenses in 2001 and 2000, respectively, while the remainder of the amortization
in each year is allocated to investment losses. The reduction in amortization of
deferred policy acquisition costs allocated to other expenses is primarily
attributable to a decrease in Individual,
26
27
partially offset by an increase in Reinsurance. A decline of $113 million in
Individual is a result of refinements in the calculation of estimated gross
margins and profits, as well as the impact of a product replacement program for
universal life policies initiated in the first quarter of 2000. An increase of
$13 million in Reinsurance is commensurate with the aforementioned growth in the
business.
Income tax expense for the six months ended June 30, 2001 was $313 million,
or 34% of income before provision for income taxes, compared with $316 million,
or 72%, for the comparable 2000 period. The 2001 effective income tax rate
differs from the corporate tax rate of 35% principally due to the impact of
non-taxable investment income. The 2000 effective income tax rate differs from
the corporate tax rate of 35% primarily due to payments made to former Canadian
policyholders in connection with the demutualization.
INDIVIDUAL SEGMENT
The following table presents summary consolidated financial information for
the Individual segment for the periods indicated:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- -------------------------
2001 2000 2001 2000
------- ------- ------- -------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 1,107 $ 1,135 $ 2,213 $ 2,253
Universal life and investment-type product policy fees 310 301 623 620
Net investment income 1,635 1,598 3,261 3,176
Other revenues 119 142 265 311
Net investment losses (61) (18) (114) (57)
------- ------- ------- -------
Total revenues 3,110 3,158 6,248 6,303
------- ------- ------- -------
EXPENSES
Policyholder benefits and claims 1,243 1,224 2,476 2,409
Interest credited to policyholder account balances 444 416 888 828
Policyholder dividends 450 437 886 875
Other expenses 741 803 1,531 1,643
------- ------- ------- -------
Total expenses 2,878 2,880 5,781 5,755
------- ------- ------- -------
Income before provision for income taxes 232 278 467 548
Provision for income taxes 95 96 186 193
------- ------- ------- -------
Net income $ 137 $ 182 $ 281 $ 355
======= ======= ======= =======
THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2000 - INDIVIDUAL SEGMENT
Premiums decreased by $28 million, or 2%, to $1,107 million for the three
months ended June 30, 2001 from $1,135 million for the comparable 2000 period.
Premiums from insurance products declined by $30 million. This decrease is
primarily due to a decline in sales of traditional life insurance policies,
which reflects a continued shift in customer preference from those policies to
variable life products. Premiums from annuity and investment-type products
increased by $2 million, largely attributable to sales growth in immediate
annuities.
Universal life and investment-type product policy fees increased by $9
million, or 3%, to $310 million for the three months ended June 30, 2001 from
$301 million for the comparable 2000 period. Policy fees from insurance products
grew by $27 million, primarily due to increases in variable life products,
reflecting a continued shift in customer preferences from traditional life
products. Policy fees from annuity and investment-type products decreased by $18
million, largely attributable to declines in the average separate account asset
base and lower sales resulting from poor equity market performance. Policy fees
from annuity and investment-type products are typically calculated as a
percentage of average assets. Such assets can fluctuate depending on equity
market performance. If average separate account asset levels continue to remain
below prior year levels, management expects fees will continue to be adversely
impacted.
27
28
Other revenues decreased by $23 million, or 16%, to $119 million for the
three months ended June 30, 2001 from $142 million for the comparable 2000
period, primarily due to lower commission and fee income associated with lower
sales in the broker/dealer and other subsidiaries.
Policyholder benefits and claims increased by $19 million, or 2%, to $1,243
million for the three months ended June 30, 2001 from $1,224 million for the
comparable 2000 period. Policyholder benefits and claims for insurance products
increased by $22 million predominately due to an increase in liabilities for
policyholder benefits associated with the aging of the block of business.
Policyholder benefits and claims for annuity and investment-type products
decreased by $3 million primarily due to underwriting gains associated with
immediate annuities.
Interest credited to policyholder account balances increased by $28
million, or 7%, to $444 million for the three months ended June 30, 2001 from
$416 million for the comparable 2000 period. Interest on insurance products rose
by $16 million, primarily due to a slight elevation in crediting rates and
growth in policyholder account balances. Interest on annuity and investment-type
products increased by $12 million, as a result of slightly higher crediting
rates.
Policyholder dividends increased by $13 million, or 3%, to $450 million for
the three months ended June 30, 2001 as compared to $437 million for the
comparable 2000 period. This increase reflects growth in the assets supporting
policies associated with this segment's large block of traditional life
insurance business.
Other expenses decreased by $62 million, or 8%, to $741 million for the
three months ended June 30, 2001 from $803 million for the comparable 2000
period. Excluding the capitalization and amortization of deferred policy
acquisition costs which are discussed below, other expenses increased by $13
million, or 2%, to $815 million in 2001 from $802 million in 2000. Other
expenses related to insurance products decreased by $14 million due to a
reduction in volume-related commission expenses in the broker/dealer and other
subsidiaries and rebate expenses associated with the Company's securities
lending program. These decreases are partially offset by increased sales-related
costs. Other expenses related to annuity and investment-type products increased
by $27 million. This increase is largely attributable to start-up and transition
costs associated with the creation of MetLife Investors Group.
Deferred policy acquisition costs and value of business acquired are
principally amortized in proportion to gross margins or gross profits, including
investment gains or losses. The amortization is allocated to investment gains
and losses to provide consolidated statement of operations information regarding
the impact of investment gains and losses on the amount of the amortization, and
other expenses to provide amounts related to gross margins or profits
originating from transactions other than investment gains and losses.
Capitalization of deferred policy acquisition costs decreased by $14
million, or 6%, to $206 million for the three months ended June 30, 2001 from
$220 million for the comparable 2000 period. This decline is primarily due to
lower sales of traditional life insurance policies and annuity and
investment-type products, resulting in lower commissions and other deferrable
expenses. Total amortization of deferred policy acquisition costs decreased by
$109 million, or 50%, to $109 million in 2001 from $218 million in 2000.
Amortization of deferred policy acquisition costs of $132 million and $221
million is allocated to other expenses in 2001 and 2000, respectively, while the
remainder of the amortization in each year is allocated to investment gains and
losses. Amortization of deferred policy acquisition costs allocated to other
expenses related to insurance products decreased by $71 million. This decrease
is largely attributable to refinements in the calculation of estimated gross
margins and profits. In addition, the impact of a product replacement program
for universal life policies initiated in the first quarter of 2000 contributed
to this variance. Amortization of deferred policy acquisition costs allocated to
other expenses related to annuity and investment-type products decreased by $18
million, as a result of refinements in the calculation of estimated gross
profits.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2000
- - INDIVIDUAL SEGMENT
Premiums decreased by $40 million, or 2%, to $2,213 million for the six
months ended June 30, 2001 from $2,253 million for the comparable 2000 period.
Premiums from insurance products declined by $44 million. This decrease is
primarily due to a decline in sales of traditional life insurance policies,
which reflects a continued shift in customer preference from those policies to
variable life products. Premiums from annuity and investment-type products grew
by $4 million, largely attributable to increased sales of immediate annuities.
Universal life and investment-type product policy fees increased by $3
million to $623 million for the six months ended June 30, 2001 from $620 million
for the comparable 2000 period. Policy fees from insurance products rose by $51
million, primarily due to increases in variable life products, reflecting a
continued shift in customer preferences from traditional life products. Policy
fees from annuity and investment-type products decreased by $48 million, largely
attributable to declines in the average separate account asset base and lower
sales resulting from poor equity market performance. Policy fees from annuity
and investment-type products are typically calculated as a percentage of average
assets. Such assets can fluctuate depending on equity market performance. If
average separate
28
29
account asset levels continue to remain below prior year levels, management
expects fees will continue to be adversely impacted.
Other revenues decreased by $46 million, or 15%, to $265 million for the
six months ended June 30, 2001 from $311 million for the comparable 2000 period,
primarily due to lower commission and fee income associated with decreased sales
in the broker/dealer and other subsidiaries.
Policyholder benefits and claims increased by $67 million, or 3%, to $2,476
million for the six months ended June 30, 2001 from $2,409 million for the
comparable 2000 period. Policyholder benefits and claims for insurance products
increased by $73 million. This variance is predominately the result of a $36
million increase in the policyholder dividend obligation associated with the
creation of the closed block in the second quarter of 2000. In addition, an
increase in liabilities for policyholder benefits commensurate with growth in
general account variable and universal life businesses contributed to this
variance. Policyholder benefits and claims for annuity and investment products
decreased by $6 million primarily due to underwriting gains associated with
immediate annuities.
Interest credited to policyholder account balances increased by $60
million, or 7%, to $888 million for the six months ended June 30, 2001 from $828
million for the comparable 2000 period. Interest on insurance products increased
by $38 million, primarily due to a slight elevation in crediting rates and
growth in policyholder account balances. Interest on annuity and investment
products increased by $22 million as a result of slightly higher crediting
rates.
Policyholder dividends increased by $11 million, or 1%, to $886 million for
the six months ended June 30, 2001 from $875 million for the comparable 2000
period. This increase is due, in most part, to growth in the assets supporting
policies associated with this segment's large block of traditional life
insurance business.
Other expenses decreased by $112 million, or 7%, to $1,531 for the six
months ended June 30, 2001 from $1,643 million for the comparable 2000 period.
Excluding the capitalization and amortization of deferred policy acquisition
costs which are discussed below, other expenses decreased by $22 million, or 1%,
to $1,618 million in 2001 from $1,640 million in 2000. Other expenses related to
insurance products decreased by $42 million due to a reduction in volume-related
commission expenses in the broker/dealer and other subsidiaries, partially
offset by an increase in rebate expenses associated with the Company's
securities lending program. Other expenses related to annuity and
investment-type products increased by $20 million. This increase can be
attributed to increased start-up and transition costs associated with the
creation of MetLife Investors Group and rebate expenses associated with the
Company's securities lending program.
Deferred policy acquisition costs and value of business acquired are
principally amortized in proportion to gross margins or gross profits, including
investment gains or losses. The amortization is allocated to investment gains
and losses to provide consolidated statement of operations information regarding
the impact of investment gains and losses on the amount of the amortization, and
other expenses to provide amounts related to gross margins or profits
originating from transactions other than investment gains and losses.
Capitalization of deferred policy acquisition costs decreased by $23
million, or 5%, to $416 million for the six months ended June 30, 2001 from $439
million for the comparable 2000 period. This decrease is predominately the
result of a decline in sales of annuity and investment type products, which
resulted in lower commissions and deferrable expenses. Total amortization of
deferred policy acquisition costs decreased by $113 million, or 27%, to $312
million in 2001 from $425 million in 2000. Amortization of deferred policy
acquisition costs of $329 million and $442 million is allocated to other
expenses in 2001 and 2000, respectively, while the remainder of the amortization
in each year is allocated to investment gains and losses. Amortization of
deferred policy acquisition costs allocated to other expenses related to
insurance products decreased by $114 million. This decline is due to refinements
in the calculation of estimated gross margins and profits. In addition, the
impact of a product replacement program for universal life policies initiated in
the first quarter of 2000 contributed to this variance. Amortization of deferred
policy acquisition costs allocated to other expenses related to annuity and
investment products increased by $1 million, as a result of refinements in the
calculation of estimated gross profits.
29
30
INSTITUTIONAL SEGMENT
The following table presents summary consolidated financial information for the
Institutional Segment for the periods indicated:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- -------------------------
2001 2000 2001 2000
------- ------- ------- -------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 1,739 $ 1,784 $ 3,607 $ 3,377
Universal life and investment-type product policy fees 154 136 304 273
Net investment income 1,033 954 2,084 1,882
Other revenues 163 167 330 344
Net investment losses (47) (25) (117) (41)
------- ------- ------- -------
Total revenues 3,042 3,016 6,208 5,835
------- ------- ------- -------
EXPENSES
Policyholder benefits and claims 2,043 2,043 4,194 4,016
Interest credited to policyholder account balances 250 267 521 514
Policyholder dividends 40 63 104 81
Other expenses 441 435 892 815
------- ------- ------- -------
Total expenses 2,774 2,808 5,711 5,426
------- ------- ------- -------
Income before provision for income taxes 268 208 497 409
Provision for income taxes 96 77 175 148
------- ------- ------- -------
Net income $ 172 $ 131 $ 322 $ 261
======= ======= ======= =======
THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2000 - INSTITUTIONAL SEGMENT
Premiums decreased by $45 million, or 3%, to $1,739 million for the three
months ended June 30, 2001 from $1,784 million for the comparable 2000 period.
Retirement and savings premiums decreased by $169 million primarily due to
higher premiums received in 2000 from existing customers. This decrease was
partially offset by a $124 million increase in group insurance premiums as a
result of sales growth and continued favorable policyholder retention in this
segment's dental, disability and long-term care businesses. Significant premiums
received from several existing group life customers in 2001 and the BMA
acquisition in 2000 also contributed to this variance. These increases are
partially offset by $89 million of additional insurance purchased in 2000 by
existing customers with funds received in the demutualization.
Universal life and investment-type product policy fees increased by $18
million, or 13%, to $154 million for the three months ended June 30, 2001 from
$136 million for the comparable 2000 period. This increase reflects growth in
sales and deposits in group universal life products.
Other revenues decreased by $4 million, or 2%, to $163 million for the
three months ended June 30, 2001 from $167 million for the comparable 2000
period. Retirement and savings declined by $6 million largely due to a
withdrawal by an existing customer and lower performance fees on
index-guaranteed separate accounts as a result of market conditions. Group
insurance was essentially unchanged at $91 million in 2001 from $89 million in
2000.
Policyholder benefits and claims are $2,043 million for both the three
months ended June 30, 2001 and 2000. Group life increased by $137 million
primarily due to overall growth in the business, commensurate with the premium
variance discussed above. An increase of $36 million in the non-medical health
business is largely attributable to growth in this segment's dental, disability
and long-term care insurance businesses. In addition, the BMA acquisition
contributed $16 million to the variance. Completely offsetting these increases
is a $173 million decrease in retirement and savings, commensurate with the
premium variance discussed above.
30
31
Interest credited to policyholder account balances decreased by $17
million, or 6%, to $250 million for the three months ended June 30, 2001 from
$267 million for the comparable 2000 period. Decreases of $5 million and $12
million in group life and retirement and savings, respectively, are primarily
due to a drop in crediting rates in the second quarter 2001 resulting from the
current interest rate environment.
Policyholder dividends decreased by $23 million, or 37%, to $40 million for
the three months ended June 30, 2001 from $63 million for the comparable 2000
period. Policyholder dividends vary from period to period based on participating
contract experience.
Other expenses increased by $6 million, or 1%, to $441 million for the
three months ended June 30, 2001 from $435 million for the comparable 2000
period. Other expenses related to non-medical health rose by $30 million
predominately due to costs incurred in connection with initiatives that focused
on improving service delivery capabilities through investments in technology. In
addition, an increase in variable expenses associated with premium growth
contributed to the variance. Variable expenses include premium taxes,
commissions and administrative expenses for dental and disability. This increase
is partially offset by a $15 million decrease in retirement and savings and a $9
million decrease in group life as a result of expense management initiatives and
lower rebate expense associated with the securities lending program.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2000
- - INSTITUTIONAL SEGMENT
Premiums increased by $230 million, or 7%, to $3,607 million for the six
months ended June 30, 2001 from $3,377 million for the comparable 2000 period.
Group insurance premiums rose by $411 million, as a result of sales growth and
continued favorable policyholder retention in this segment's dental, disability
and long-term care businesses. In addition, significant premiums received from
several existing group life customers in 2001 and the BMA acquisition
contributed to the variance. This increase is partially offset by $89 million
of additional insurance purchased in 2000 by existing customers with funds
received in the demutualization. Premiums for retirement and savings decreased
by $181 million as a result of higher premiums received in 2000 from existing
customers.
Universal life and investment-type product policy fees increased by $31
million, or 11%, to $304 million for the six months ended June 30, 2001 from
$273 million for the comparable 2000 period. This increase reflects growth in
sales and deposits of group universal life and corporate-owned life insurance
products.
Other revenues decreased by $14 million, or 4%, to $330 million for the six
months ended June 30, 2001 from $344 million for the comparable 2000 period.
Other revenues for group insurance declined by $8 million as a result of final
settlements in 2000 on several cases related to the term life and former medical
businesses. This decline is partially offset by increases in the dental and
disability administrative services businesses. Other revenues for retirement and
savings decreased by $6 million, primarily due to lower performance fees on
index-guaranteed separate accounts as a result of market conditions and a large
withdrawal by an existing customer.
Policyholder benefits and claims increased by $178 million, or 4%, to
$4,194 million for the six months ended June 30, 2001 from $4,016 million for
the comparable 2000 period. Group life's expense increased by $270 million,
primarily due to overall growth in the business, commensurate with the premium
variance discussed above. An increase of $103 million in the non-medical health
business is largely attributable to significant growth in this segment's dental,
disability and long-term care businesses. In addition, the BMA acquisition
contributed $34 million to the variance. Partially offsetting these increases is
a decline of $195 million in retirement and savings. This is commensurate with
the premium variance discussed above.
Interest credited to policyholder account balances increased by $7 million,
or 1%, to $521 million for the six months ended June 30, 2001 from $514 million
for the comparable 2000 period. Increases in customer account balances stemming
from asset growth and the investment of demutualization funds in the group
insurance business, resulted in $14 million of additional expenses. This
increase was partially offset by a $7 million decrease in retirement and savings
due to an overall decline in crediting rates in 2001 as a result of the current
interest rate environment. This decline is partially offset by an increase
related to guaranteed interest products.
Policyholder dividends increased by $23 million, or 28%, to $104 million
for the six months ended June 30, 2001 from $81 million for the comparable 2000
period. Policyholder dividends vary from period to period based on participating
insurance contract experience.
31
32
Other expenses increased by $77 million, or 9%, to $892 million for the six
months ended June 30, 2001 from $815 million for the comparable 2000 period.
Increases of $18 million and $60 million in the group life and non-medical
health businesses, respectively, are primarily due to costs incurred in
connection with initiatives focused on improving service delivery through
investments in technology and higher rebate expense associated with the
securities lending program. In addition, an increase in variable expenses
associated with premium growth contributed to the variance. Variable expenses
include premium tax, commissions and administrative expenses for dental and
disability. Other expenses related to retirement and savings are essentially
unchanged at $248 million in 2001 compared with $249 million in 2000.
REINSURANCE SEGMENT
The following table presents summary consolidated financial information for
the Reinsurance segment for the periods indicated:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ---------------------
2001 2000 2001 2000
----- ----- ------ -----
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 395 $ 370 $ 805 $ 728
Net investment income 88 95 185 183
Other revenues 7 9 16 11
Net investment gains (losses) 9 (2) 14 (3)
----- ----- ------ -----
Total revenues 499 472 1,020 919
----- ----- ------ -----
EXPENSES
Policyholder benefits and claims 311 289 654 574
Interest credited to policyholder account balances 19 28 48 51
Policyholder dividends 6 5 11 10
Other expenses 103 113 203 198
----- ----- ------ -----
Total expenses 439 435 916 833
----- ----- ------ -----
Income before provision for income taxes 60 37 104 86
Provision for income taxes 15 3 26 22
Minority interest 24 27 39 36
----- ----- ------ -----
Net income $ 21 $ 7 $ 39 $ 28
===== ===== ====== =====
THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THE THREE MONTHS ENDED JUNE
30, 2000 - REINSURANCE SEGMENT
Premiums increased by $25 million, or 7%, to $395 million for the three
months ended June 30, 2001 from $370 million for the comparable 2000 period. New
premiums from facultative and automatic treaties and renewal premiums on
existing blocks of business all contributed to the premium growth. Premium
levels are significantly influenced by large transactions and reporting
practices of ceding companies and, as a result, can fluctuate from period to
period.
Other revenues were essentially unchanged at $7 million for the three months
ended June 30, 2001 compared with $9 million for the comparable 2000 period.
Policyholder benefits and claims increased by $22 million, or 8%, to $311
million for the three months ended June 30, 2001 from $289 million for the
comparable 2000 period. Policyholder benefits and claims were 79% of premiums
for the three months ended June 30, 2001 compared to 78% in the comparable 2000
period. Mortality experience for the three months ended June 30, 2001 as a
percentage of premiums was in line with management expectations. Mortality is
expected to vary from period to period, but generally remains fairly constant
over the long-term.
32
33
Interest credited to policyholder account balances decreased by $9 million,
or 32%, to $19 million for the three months ended June 30, 2001 from $28 million
for the comparable 2000 period. The decrease is primarily related to a reduction
in the interest credited on a block of annuities. The crediting rate on this
block of annuities is based on the performance of the underlying assets.
Therefore, any fluctuations in interest credited related to this block are
generally offset by a corresponding change in net investment income.
Policyholder dividends are essentially unchanged at $6 million for the
three months ended June 30, 2001 compared with $5 million for the comparable
2000 period.
Other expenses decreased by $10 million, or 9%, to $103 million for the
three months ended June 30, 2001 from $113 million for the comparable 2000
period. Other expenses, which include underwriting, acquisition and insurance
expenses, were 21% of consolidated revenues in 2001 compared with 24% in 2000. A
decrease in allowances paid under reinsurance treaties was the primary
contributor to the decrease in other expenses. This percentage fluctuates
depending on the mix of the underlying insurance products being reinsured.
Minority interest reflects third-party ownership interests in Reinsurance
Group of America, Incorporated.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2000
- - REINSURANCE SEGMENT
Premiums increased by $77 million, or 11%, to $805 million for the six
months ended June 30, 2001 from $728 million for the comparable 2000 period. New
premiums from facultative and automatic treaties and renewal premium on existing
blocks of business all contributed to the premium growth. Premium levels are
significantly influenced by large transactions and reporting practices of ceding
companies and, as a result, can fluctuate from period to period.
Other revenues increased by $5 million, or 45%, to $16 million for the six
months ended June 30, 2001 from $11 million for the comparable 2000 period. This
increase was primarily due to the acquisition during the second half of 2000 of
the remaining 60% of RGA/Swiss Financial Group, L.L.C., which was subsequently
renamed RGA Financial Group, L.L.C. ("RGA Financial Group").
Policyholder benefits and claims increased by $80 million, or 14%, to $654
million for the six months ended June 30, 2001 from $574 million for the
comparable 2000 period. Policyholder benefits and claims were 81% of premiums in
2001 compared with 79% in 2000. Unfavorable mortality experience, primarily in
the U.S. traditional business, during the first three months of 2001 caused the
increase in policy benefits and claims as a percentage of premiums. Mortality is
expected to vary from period to period, but generally remains fairly constant
over the long-term. Analysis of the claims activity during the six months ended
June 30, 2001 suggested no significant variances by cause of death, client
company, or issue year which would indicate any pricing or profitability
problems.
Interest credited to policyholder account balances decreased by $3 million,
or 6%, to $48 million for the six months ended June 30, 2001 from $51 million
for the comparable 2000 period. Interest credited to policyholder account
balances relates to amounts credited on deposit-type contracts and certain cash
value products. The decrease is primarily related to a reduction in the interest
credited on a block of annuities during the second quarter of 2001. The
crediting rate on this block of annuities is based on the performance of the
underlying assets. Therefore, any fluctuations in interest credited related to
this block are generally offset by a corresponding change in net investment
income. This decrease was partially offset by an increase in interest credited
associated with a large block of single premium deferred annuities reinsured
during the second quarter of 2000.
Policyholder dividends are essentially unchanged at $11 million for the
six months ended June 30, 2001 compared with $10 million for the comparable
2000 period.
Other expenses increased by $5 million, or 3%, to $203 million for the six
months ended June 30, 2001 from $198 million for the comparable 2000 period.
Other expenses, which include underwriting, acquisition and insurance expenses,
were 20% of consolidated revenues in 2001 compared with 22% in 2000. This
percentage fluctuates depending on the mix of the underlying insurance products
being reinsured as the amount paid can vary significantly based on the type of
business and the reinsurance treaty. The acquisition of RGA Financial Group
during the second half of 2000 contributed to the overall increase in other
expenses.
Minority interest reflects third-party ownership interests in Reinsurance
Group of America, Incorporated.
33
34
AUTO & HOME SEGMENT
The following table presents summary consolidated financial information for
the Auto & Home segment for the periods indicated:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- -------------------
2001 2000 2001 2000
----- ----- ------ -------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 682 $ 656 $ 1,355 $ 1,301
Net investment income 51 47 102 83
Other revenues 6 5 12 18
Net investment (losses) gains (3) 1 (6) 6
----- ----- ------- -------
Total revenues 736 709 1,463 1,408
----- ----- ------- -------
EXPENSES
Policyholder benefits and claims 530 531 1,093 1,010
Other expenses 198 203 407 407
----- ----- ------- -------
Total expenses 728 734 1,500 1,417
----- ----- ------- -------
Income (Loss) before income tax benefit 8 (25) (37) (9)
Income tax benefit (1) (13) (20) (8)
----- ----- ------- -------
Net income (loss) $ 9 $ (12) $ (17) $ (1)
===== ===== ======= =======
THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2000 - AUTO & HOME SEGMENT
Premiums increased by $26 million, or 4%, to $682 million for the three
months ended June 30, 2001 from $656 million for the comparable 2000 period.
Auto premiums increased by $16 million primarily due to higher average premium
resulting from rate increases and improved retention of existing business.
Policyholder retention in the standard auto business increased by 1% to 89%.
Homeowner premiums increased by $9 million largely due to an increase in average
premium resulting from rate increases. Premiums from other personal lines
increased by $1 million.
Other revenues were essentially unchanged at $6 million for the three
months ended June 30, 2001 compared with $5 million for the comparable 2000
period.
Policyholder benefits and claims decreased by $1 million to $530 million
for the three months ended June 30, 2001 from $531 million for the comparable
2000 period. Auto policyholder benefits and claims decreased by $17 million due
to better catastrophe experience and lower claim frequencies. Correspondingly,
the auto loss ratio decreased to 70.3% in 2001 from 76.0% in 2000. Homeowner
policyholder benefits and claims increased by $15 million due to increases in
claim frequency and severity. The homeowner loss ratio increased to 98.1% in
2001 from 94.9% in 2000. Catastrophes represented 29.3% of the loss ratio in
2001 compared to 30.6% in 2000. Other policyholder benefits and claims increased
by $2 million.
Other expenses decreased by $5 million, or 2%, to $198 million, for the
three months ended June 30, 2001, from $203 million for the comparable 2000
period. This increase is primarily the result of a reduction in integration
costs associated with the acquisition of the standard personal lines property
and casualty insurance operations of The St. Paul Companies in September 1999
("St. Paul acquisition"). The expense ratio decreased to 29.1% in 2001 from
30.9% in 2000.
The effective income tax rates for the three months ended June 30, 2001 and
2000 differ from the corporate tax rate of 35% due to the impact of non-taxable
investment income.
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SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2000
- - AUTO & HOME SEGMENT
Premiums increased by $54 million, or 4%, to $1,355 million for the six
months ended June 30, 2001 from $1,301 million for the comparable 2000 period.
Auto premiums increased by $44 million primarily due to higher average premium
resulting from rate increases and improved retention of existing business.
Policyholder retention in the standard auto business increased by 1% to 89%.
Homeowner premiums increased by $11 million largely due to an increase in
average premium, resulting from rate increases, and improved retention of the
existing business. Premiums from other personal lines decreased by $1 million.
Other revenues decreased by $6 million, or 33%, to $12 million for the six
months ended June 30, 2001 from $18 million for the comparable 2000 period. This
decrease was primarily due to a revision of an estimate to increase a re-
insurance recoverable, related to the disposition of this segment's reinsurance
business in 1990, recorded in the first quarter of 2000.
Policyholder benefits and claims increased by $83 million, or 8%, to $1,093
million for the six months ended June 30, 2001 from $1,010 million for the
comparable 2000 period. Auto policyholder benefits and claims increased by $38
million due to inflationary pressures on claim severity and growth in the book
of business. Correspondingly, the auto loss ratio increased to 76.5% in 2001
from 76.0% in 2000. Homeowner policyholder benefits and claims increased by $36
million due to increased catastrophic activity and non-catastrophe weather
related losses in the first and second quarters of 2001. The homeowner loss
ratio increased to 91.8% in 2001 from 83.8% in 2000. Catastrophes represented
20.2% of the loss ratio in 2001 compared to 17.8% in 2000. Other policyholder
benefits and claims increased by $9 million.
Other expenses were $407 million for both the six months ended June 30,
2001 and 2000. Increases in normal operating expenses were offset by a reduction
in integration costs associated with the St. Paul acquisition. The expense ratio
decreased to 30.1% in 2001 from 31.3% in 2000.
The effective income tax rates for the six months ended June 30, 2001 and
2000 differ from the corporate tax rate of 35% due to the impact of non-taxable
investment income.
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ASSET MANAGEMENT SEGMENT
The following table presents summary consolidated financial information for
the Asset Management segment for the periods indicated:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- -------------------
2001 2000 2001 2000
------- -------- -------- -------
(DOLLARS IN MILLIONS)
REVENUES
Net investment income $17 $ 21 $ 36 $ 42
Other revenues 56 218 112 434
---- ---- ---- ----
Total revenues 73 239 148 476
---- ---- ---- ----
OTHER EXPENSES 72 210 138 412
---- ---- ---- ----
Income before provision for income taxes
and minority interest 1 29 10 64
Provision for income taxes -- 7 3 18
Minority interest -- 11 -- 24
---- ---- ---- ----
Net income $ 1 $ 11 $ 7 $ 22
=== ==== ==== ====
THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2000 - ASSET MANAGEMENT SEGMENT
Other revenues, which primarily comprise management and advisory fees,
decreased by $162 million, or 74%, to $56 million for the three months ended
June 30, 2001 from $218 million for the comparable 2000 period. This decrease
was primarily due to the sale of Nvest, which occurred on October 30, 2000.
Excluding the impact of this transaction, other revenues decreased by $4
million. This variance is attributable to a reduction in average assets under
management during the period. Assets under management decreased to $78 billion
at June 30, 2001 from $80 billion at June 30, 2000. This decline occurred
primarily as a result of the market downturn, customer withdrawals and the
transfer of assets to other asset managers within MetLife, partially offset by
strong mutual fund sales. Management and advisory fees are typically calculated
based on a percentage of assets under management, and are not necessarily
proportionate to average assets managed due to changes in account mix.
Other expenses decreased by $138 million, or 66%, to $72 million for the
three months ended June 30, 2001 from $210 million for the comparable 2000
period. The sale of Nvest reduced other expenses by $137 million. Excluding the
impact of this transaction, other expenses were essentially unchanged at $72
million in 2001 compared with $73 million in 2000.
Minority interest, reflecting third-party ownership interest in Nvest,
decreased by $11 million, or 100%, due to the sale of Nvest.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2000
- - ASSET MANAGEMENT SEGMENT
Other revenues, which primarily comprise management and advisory fees,
decreased by $322 million, or 74%, to $112 million for the six months ended June
30, 2001 from $434 million for the comparable 2000 period. This decrease was
primarily due to the sale of Nvest, which occurred on October 30, 2000.
Excluding the impact of this transaction, other revenues decreased by $5
million. This decrease is attributable to a reduction in average assets under
management during the period. Assets under management decreased to $78 billion
at June 30, 2001 from $80 billion at June 30, 2000. This decline occurred
primarily as a result of the market downturn, customer withdrawals and the
transfer of assets to other asset managers within MetLife, partially offset by
strong mutual fund sales. Management and advisory fees are typically calculated
based on a percentage of assets under management, and are not necessarily
proportionate to average assets managed due to changes in account mix.
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Other expenses decreased by $274 million, or 67%, to $138 million for the
six months ended June 30, 2001 from $412 million for the comparable 2000 period.
The sale of Nvest reduced other expenses by $272 million. Excluding the impact
of this transaction, other expenses decreased by $2 million
Minority interest, reflecting third-party ownership interest in Nvest,
decreased by $24 million, or 100%, due to the sale of Nvest.
INTERNATIONAL SEGMENT
The following table presents summary consolidated financial information for
the International segment for the periods indicated:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ------------------
2001 2000 2001 2000
---- ---- ---- ----
(DOLLARS IN MILLIONS)
REVENUES
Premiums $196 $ 173 $373 $ 319
Universal life and investment-type product policy fees 9 11 20 24
Net investment income 62 63 126 128
Other revenues 2 2 6 5
Net investment gains 27 7 28 8
---- ----- ---- -----
Total revenues 296 256 553 484
---- ----- ---- -----
EXPENSES
Policyholder benefits and claims 161 147 305 272
Interest credited to policyholder account balances 10 13 26 28
Policyholder dividends 9 8 19 15
Payments to former Canadian policyholders -- 327 -- 327
Other expenses 76 73 143 138
---- ----- ---- -----
Total expenses 256 568 493 780
---- ----- ---- -----
Income (Loss) before provision for income taxes 40 (312) 60 (296)
Provision for income taxes 6 1 6 7
---- ----- ---- -----
Net income (loss) $ 34 $(313) $ 54 $(303)
==== ===== ==== =====
THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2000 - INTERNATIONAL SEGMENT
Premiums increased by $23 million, or 13%, to $196 million for the three
months ended June 30, 2001 from $173 million for the comparable 2000 period.
South Korea's premiums increased by $11 million primarily due to sales growth in
protection-type products and continued expansion of the professional sales
force. Mexico's premiums rose by $9 million primarily due to increases in the
worksite marketing and group life businesses. A $7 million increase in Spain's
premiums is due to continued growth in the direct auto business. These
increases are partially offset by a decrease in Argentina's premiums of
$5 million due to a reduction in life sales as a result of the recession.
Universal life and investment type-product policy fees decreased by $2
million, or 18%, to $9 million for the three months ended June 30, 2001 from $11
million for the comparable 2000 period. This decline is primarily due to a
reduction of fees in Spain resulting from a decrease in assets under management.
This is a result of a planned cessation of product lines offered through the
joint venture with Banco Santander. Further reduction in fees are anticipated in
Spain throughout the year.
Other revenues are $2 million for both the three months ended June 30, 2001
and 2000.
Policyholder benefits and claims increased by $14 million, or 10%, to $161
million for the three months ended June 30, 2001 from $147 million for the
comparable 2000 period. South Korea's and Mexico's policyholder benefits and
claims increased by $5 million and $8 million, respectively, commensurate with
the overall premium growth discussed above. Policyholder benefits and claims
increased by $4 million in Spain primarily due to higher auto claims associated
with the growth in the auto
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portfolio. These increases are partially offset by minor decreases in several
other countries.
Interest credited to policyholder account balances decreased by $3 million,
or 23%, to $10 million for the three months ended June 30, 2001 from $13 million
for the comparable 2000 period. This decline is primarily due to a reduction in
Spain's assets under management resulting from the planned cessation of product
lines offered through the joint venture with Banco Santander.
Policyholder dividends decreased by $1 million, or 13% to $9 million for
the three months ended June 30, 2001 from $8 million for the comparable 2000
period due to minor increases in several countries.
Payments of $327 million were made during the second quarter of 2000, as
part of Metropolitan Life's demutualization, to holders of certain policies
transferred to Clarica Life Insurance Company in connection with the sale of a
substantial portion of the Canadian operations in 1998.
Other expenses increased by $3 million, or 4%, to $76 million for the three
months ended June 30, 2001 from $73 million for the comparable 2000 period. This
variance is primarily due to costs incurred in connection with the introduction
of a private pension product in Argentina.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2000
- - INTERNATIONAL SEGMENT
Premiums increased by $54 million, or 17%, to $373 million for the six
months ended June 30, 2001 from $319 million for the comparable 2000 period.
Mexico's premiums grew by $27 million primarily due to increases in the worksite
marketing and group life businesses. South Korea's premiums rose by $16 million
largely due to increased sales of protection-type products and continued
expansion of the professional sales force. An $11 million increase in Spain's
premiums is due to continued growth in the direct auto business.
Universal life and investment type-product policy fees decreased by $4
million, or 17%, to $20 million for the six months ended June 30, 2001 from $24
million for the comparable 2000 period. This decline is primarily due to a
reduction of fees in Spain resulting from a decrease in assets under management.
This is a result of a planned cessation of product lines offered through the
joint venture with Banco Santander. Further reductions in fees are anticipated
throughout the year.
Other revenues increased by $1 million, or 20%, to $6 million for the six
months ended June 30, 2001 from $5 million for the comparable 2000 period due to
minor increases in several countries.
Policyholder benefits and claims increased by $33 million, or 12%, to $305
for the six months ended June 30, 2001 from $272 for the comparable 2000 period.
Mexico's and South Korea's policyholder benefits and claims grew by $17 million
and $8 million, respectively, commensurate with the overall premium growth
discussed above. Policyholder benefits and claims in Spain rose by $8 million,
primarily due to higher auto claims associated with the growth in the auto
portfolio.
Interest credited to policyholder account balances decreased by $2 million,
or 7%, to $26 million for the six months ended June 30, 2001 from $28 million
for the comparable 2000 period. South Korea's interest credited declined by $4
million due to a reduction in the crediting rates for interest sensitive
products, as a result of the current interest rate environment. Spain's interest
credited decreased by $3 million primarily due to reduction in Spain's assets
under management resulting from the planned cessation of product lines offered
through the joint venture with Banco Santander. These decreases are partially
offset by increases in several countries due to continued growth in mature
operations.
Policyholder dividends increased by $4, or 27%, to $19 million for the six
months ended June 30, 2001 from $15 million for the comparable 2000 period
primarily due to the aforementioned growth in Mexico's worksite marketing and
group life businesses.
Payments of $327 million were made during the second quarter of 2000, as
part of Metropolitan Life's demutualization, to holders of certain policies
transferred to Clarica Life Insurance Company in connection with the sale of a
substantial portion of the Canadian operations in 1998.
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39
Other expenses increased by $5 million, or 4%, to $143 million for the six
months ended June 30, 2001 from $138 million for the comparable 2000 period.
This variance is primarily due to the expansion of business in South Korea and
Mexico as well as an increase in costs incurred in connection with the
introduction of a private pension product in Argentina. These variances are
partially offset by a decrease in Spain resulting from the planned cessation of
product lines offered through the joint venture with Banco Santander.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2000 - CORPORATE & OTHER
Total revenues, which consist of net investment income, other revenues and
net investment losses that are not allocated to other business segments,
decreased by $104 million, or 65%, to $55 million for the three months ended
June 30, 2001 from $159 million for the comparable 2000 period. This decline is
primarily due to a $49 million decrease in net investment income, a $43 million
increase in net investment losses and a $12 million decrease in other revenues.
The reduction in net investment income is principally the result of sales, in
2000, of underlying assets held in corporate limited partnerships. The increase
in net investment losses is primarily attributable to the continuation of the
Company's recognition of deteriorating credits through the proactive sale or
write-down of certain assets. The decrease in other revenues is due, in part, to
the sale of Farmers National Company and NaviSys Incorporated in 2000. This
decrease is partially offset by a $15 million experience refund received in
connection with a reinsurance agreement. Total expenses decreased by $172
million, or 54%, to $147 million in 2001 from $319 million for the comparable
2000 period. This decline is primarily attributable to a $175 million decrease
in expenses associated with the Company's demutualization, which was completed
on April 7, 2000.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2000
- - CORPORATE & OTHER
Total revenues, which consist of net investment income, other revenues and
net investment losses that are not allocated to other business segments,
decreased by $49 million, or 26%, to $142 million for the six months ended June
30, 2001 from $191 million for the comparable 2000 period. This variance is
primarily due to a $28 million decrease in net investment income resulting
principally from sales, in 2000, of underlying assets held in corporate limited
partnerships. In addition, a $6 million increase in net investment losses
primarily attributable to the continuation of the Company's recognition of
deteriorating credits through the proactive sale or write-down of certain
assets, contributed to this variance. The remaining variance is primarily
related to intercompany elimination activity. Total expenses decreased by $212
million, or 43%, to $284 million in 2001 from $496 million for the comparable
2000 period. This decline is largely attributable to a $230 million decrease in
expenses associated with the Company's demutualization, which was completed on
April 7, 2000. This decrease is partially offset by an $18 million increase in
expenses associated with shareholder services costs and start-up costs relating
to MetLife banking initiatives.
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LIQUIDITY AND CAPITAL RESOURCES
THE HOLDING COMPANY
The primary uses of liquidity of the Holding Company include the payment of
common stock dividends, interest payments on debentures issued to MetLife
Capital Trust I and other debt servicing, contributions to subsidiaries, and
payment of general operating expenses. The primary source of the Holding
Company's liquidity is dividends it receives from Metropolitan Life and the
interest received from Metropolitan Life under the capital note described in
Note 9 of Notes to Consolidated Financial Statements for the year ended December
31, 2000 included in MetLife, Inc.'s Annual Report on Form 10-K filed with the
SEC. In addition, sources of liquidity also include programs for short- and
long-term borrowing as needed, arranged through the Holding Company and MetLife
Funding, a subsidiary of Metropolitan Life. In addition, on June 12, 2001, the
Holding Company filed a shelf registration statement with the SEC which permits
the registration and issuance of a combination of debt and equity securities as
described more fully therein. See "--The Company -- Financing" below.
Under the New York Insurance Law, Metropolitan Life is permitted without
prior insurance regulatory clearance to pay a stockholder dividend to the
Holding Company as long as the aggregate amount of all such dividends in any
calendar year does not exceed the lesser of (i) 10% of its surplus to
policyholders as of the immediately preceding calendar year and (ii) its
statutory net gain from operations for the immediately preceding calendar year
(excluding realized capital gains). Metropolitan Life will be permitted to pay a
stockholder dividend to the Holding Company in excess of the lesser of such two
amounts only if it files notice of its intention to declare such a dividend and
the amount thereof with the New York Superintendent of Insurance (the
"Superintendent") and the Superintendent does not disapprove the distribution.
Under the New York Insurance Law, the Superintendent has broad discretion in
determining whether the financial condition of a stock life insurance company
would support the payment of such dividends to its stockholders. The New York
Insurance Department has established informal guidelines for such
determinations. The guidelines, among other things, focus on the insurer's
overall financial condition and profitability under statutory accounting
practices. Management of the Company cannot provide assurance that Metropolitan
Life will have statutory earnings to support payment of dividends to the Holding
Company in an amount sufficient to fund its cash requirements and pay cash
dividends or that the Superintendent will not disapprove any dividends that
Metropolitan Life must submit for the Superintendent's consideration. MetLife's
other insurance subsidiaries are also subject to restrictions on the payment of
dividends to their respective parent companies.
The dividend limitation is based on statutory financial results. Statutory
accounting practices differ in certain respects from accounting principles used
in financial statements prepared in conformity with accounting principles
generally accepted in the United States of America. The significant differences
relate to deferred policy acquisition costs, deferred income taxes, required
investment reserves, reserve calculation assumptions, capital notes and surplus
notes.
In connection with the contribution of the net proceeds from the initial
public offering, the private placements and the offering of equity security
units, Metropolitan Life issued to the Holding Company a $1,006 million 8.00%
mandatorily convertible capital note due 2005.
The Superintendent approved the issuance of the capital note on April 4,
2000. If the payment of interest is prevented by application of the payment
restrictions described in Note 9 in Notes to Consolidated Financial Statements
for the year ended December 31, 2000 included in MetLife, Inc.'s Annual Report
on Form 10-K filed with the SEC, the interest on the capital note will not be
available as a source of liquidity for the Holding Company.
Based on the historic cash flows and the current financial results of
Metropolitan Life, subject to any dividend limitations which may be imposed upon
Metropolitan Life or its subsidiaries by regulatory authorities, management
believes that cash flows from operating activities, together with the dividends
Metropolitan Life is permitted to pay without prior insurance regulatory
clearance and the interest received on the capital note from Metropolitan Life,
will be sufficient to enable the Holding Company to make payments on the
debentures issued to MetLife Capital Trust I, make dividend payments on its
Common Stock, pay all operating expenses and meet its other obligations.
On March 28, 2001, the Holding Company's Board of Directors authorized an
additional $1 billion common stock repurchase program. This program will begin
after the completion of an earlier $1 billion repurchase program that was
announced on June 27, 2000. Under these authorizations, the Holding Company may
purchase the common stock from the Metropolitan Life Policyholder Trust, in the
open market, and in privately negotiated transactions. During the six months
ended June 30, 2001, 16,907,844 shares of common stock have been acquired for
$513 million.
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On August 8, 2001, the Company announced that it has agreed to purchase 10
million shares of its common stock as part of the sale of 25 million shares of
MetLife stock by Santusa Holdings, S.L., an affiliate of Banco Santander Central
Hispano, S.A. The sale by Santusa Holdings, S.L. was made pursuant to a shelf
registration statement filed by the Company with the SEC on June 12, 2001.
Santusa Holdings, S.L. originally acquired the shares in a private placement at
the time of MetLife's initial public offering.
RESTRICTIONS AND LIMITATIONS ON BANK HOLDING COMPANIES AND FINANCIAL
HOLDING COMPANIES - CAPITAL. MetLife, Inc. and its insured depository
institution subsidiaries are subject to risk-based capital and leverage
guidelines issued by the federal banking regulatory agencies for banks and
financial holding companies. The federal banking regulatory agencies are
required by law to take specific prompt corrective actions with respect to
institutions that do not meet minimum capital standards. At June 30, 2001
MetLife, Inc. and its insured depository institution subsidiaries were in
compliance with the aforementioned guidelines.
THE COMPANY
LIQUIDITY SOURCES. The Company's principal cash inflows from its insurance
activities come from life insurance premiums, annuity considerations and deposit
funds. A primary liquidity concern with respect to these cash inflows is the
risk of early contractholder and policyholder withdrawal. The Company seeks to
include provisions limiting withdrawal rights on many of its products, including
general account institutional pension products (generally group annuities,
including guaranteed interest contracts and certain deposit fund liabilities)
sold to employee benefit plan sponsors.
The Company's principal cash inflows from its investment activities result
from repayments of principal, proceeds from maturities and sales of invested
assets and investment income. The primary liquidity concerns with respect to
these cash inflows are the risks of default by debtors, interest rate and other
market volatilities. The Company closely monitors and manages these risks.
Additional sources of liquidity to meet unexpected cash outflows are
available from the Company's portfolio of liquid assets. These liquid assets
include substantial holdings of U.S. Treasury securities, short-term
investments, common stocks and marketable fixed maturity securities. The
Company's available portfolio of liquid assets was approximately $104 billion
and $101 billion at June 30, 2001 and December 31, 2000, respectively.
Sources of liquidity also include facilities for short- and long-term
borrowing as needed, primarily arranged through MetLife Funding, Inc., a
subsidiary of Metropolitan Life. See "--Financing" below.
LIQUIDITY USES. The Company's principal cash outflows primarily relate to
the liabilities associated with its various life insurance, annuity and group
pension products, operating expenses, income taxes, as well as principal and
interest on its outstanding debt obligations. Liabilities arising from its
insurance activities primarily relate to benefit payments under the above-named
products, as well as payments for policy surrenders, withdrawals and loans.
The Company's management believes that its sources of liquidity are more
than adequate to meet its current cash requirements.
LITIGATION. Various litigation, claims and assessments against the Company
have arisen in the course of the Company's business, including, but not limited
to, in connection with its activities as an insurer, 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 feasible to predict or determine the ultimate outcome of all
pending investigations and legal proceedings or provide reasonable ranges of
potential losses. In some of the matters referred to above, very large and/or
indeterminate amounts, including punitive and treble damages, are sought.
Although in light of these considerations it is possible that an adverse outcome
in certain cases would have a material effect upon the Company's consolidated
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 adverse effect on
the Company's operating results or cash flows in particular quarterly or annual
periods. See Note 6 of Notes to unaudited interim condensed consolidated
financial statements and "Legal Proceedings" In Part II Item 1 herein.
LEGISLATIVE DEVELOPMENTS. On May 26, 2001, President Bush signed into law
the Economic Growth and Taxpayer Relief Reconciliation Act, which includes the
repeal of the Federal estate tax over a ten-year period. While it is possible
that the repeal of the Federal estate tax could result in reduced sales of some
of the Company's estate planning products, including survivorship/second to die
life insurance policies, the Company does not expect the repeal to have a
material adverse impact on its overall business.
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RISK-BASED CAPITAL ("RBC"). Section 1322 of the New York Insurance Law
requires that New York domestic life insurers report their RBC based on a
formula calculated by applying factors to various asset, premium and statutory
reserve items. The formula takes into account the risk characteristics of the
insurer, including asset risk, insurance risk, interest rate risk and business
risk. Section 1322 gives the Superintendent explicit regulatory authority to
require various actions by, or take various actions against, insurers whose
total adjusted capital does not exceed certain RBC levels. At June 30, 2001,
Metropolitan Life's and each of its U.S. insurance subsidiaries' total adjusted
capital was in excess of each of the RBC levels required by each state of
domicile.
The National Association of Insurance Commissioners' ("NAIC") Codification
of Statutory Accounting Principles ("Codification"), which is intended to
standardize regulatory accounting and reporting to state insurance departments,
became effective January 1, 2001. However, statutory accounting principles will
continue to be established by individual state laws and permitted practices.
Effective January 1, 2001, the New York Insurance Department also adopted
Codification with certain modifications. The adoption of Codification in
accordance with NAIC guidance and Codification as modified by the New York
Insurance Department increased Metropolitan Life's statutory capital and surplus
by approximately $1.5 billion and $35 million, respectively, on January 1, 2001.
Further modifications by state Insurance Departments may impact the effect of
Codification on Metropolitan Life's statutory surplus and capital.
FINANCING. MetLife Funding, Inc. ("MetLife Funding") serves as a
centralized finance unit for Metropolitan Life. Pursuant to a support agreement,
Metropolitan Life has agreed to cause MetLife Funding to have a tangible net
worth of at least one dollar. At June 30, 2001 and December 31, 2000, MetLife
Funding had a tangible net worth of $10.4 million and $10.3 million,
respectively. MetLife Funding raises funds from various funding sources and uses
the proceeds to extend loans to the Holding Company, Metropolitan Life and other
affiliates. MetLife Funding manages its funding sources to enhance the financial
flexibility and liquidity of Metropolitan Life. At June 30, 2001 and December
31, 2000, MetLife Funding had total outstanding liabilities of $1.7 billion and
$1.1 billion, respectively, consisting primarily of commercial paper.
The Company also maintained approximately $2.4 billion and $2.0 billion in
committed credit facilities at June 30, 2001 and December 31, 2000,
respectively. At June 30, 2001 and December 31, 2000, there was approximately
$144 million and $98 million, respectively, outstanding under these facilities.
SUPPORT AGREEMENTS. In addition to its support agreement with MetLife
Funding described above, Metropolitan Life has entered into a net worth
maintenance agreement with New England Life Insurance Company ("New England"),
whereby it is obligated to maintain New England's statutory capital and surplus
at the greater of $10 million or the amount necessary to prevent certain
regulatory action by Massachusetts, the state of domicile of this subsidiary.
The capital and surplus of New England at June 30, 2001 was in excess of the
amount that would trigger such an event.
In connection with the Company's acquisition of GenAmerica, Metropolitan
Life entered into a net worth maintenance agreement with General American Life
Insurance Company ("General American"), whereby Metropolitan Life is obligated
to maintain General American's statutory capital and surplus at the greater of
$10 million or the amount necessary to maintain the capital and surplus of
General American at a level not less than 180% of the NAIC Risk-Based
Capitalization Model. The capital and surplus of General American at June 30,
2001 was in excess of the required amount.
Metropolitan Life has also entered into arrangements with some of its other
subsidiaries and affiliates to assist such subsidiaries and affiliates in
meeting various jurisdictions' regulatory requirements regarding capital and
surplus. In addition, Metropolitan Life has entered into a support arrangement
with respect to reinsurance obligations of its wholly-owned subsidiary,
Metropolitan Insurance and Annuity Company. Management does not anticipate that
these arrangements will place any significant demands upon the Company's
liquidity resources.
CONSOLIDATED CASH FLOWS. Net cash provided by operating activities was
$2,455 million and $993 million for the six months ended June 30, 2001 and 2000,
respectively. The increase in cash provided by the Company's operations in 2001
compared with 2000 is primarily due to the timing in the settlement of other
receivables and payables. Operating cash flows in the periods presented have
been more than adequate to meet liquidity requirements.
Net cash (used in) provided by investing activities was $(2,278) million and
$389 million for the six months ended June 30, 2001 and 2000, respectively.
Purchases of investments exceeded sales, maturities and repayments by $2,565
million and $3,924 million in 2001 and 2000, respectively. These net purchases
were primarily attributable to the investment of collateral received in
connection with the securities lending program, which increased by $408 million
and $3,373 million, respectively, and investment of cash flows from operations.
Net cash provided by financing activities was $1,137 million and $21 million
for the six months ended June 30, 2001 and 2000, respectively. Short-term
financing increased by $1,027 million in 2001 as compared with a decrease of
$2,436 million in 2000. In
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2000, the primary sources of cash from financing activities include cash
proceeds from the Company's initial public offering and concurrent private
placements in April 2000, as well as the issuance of mandatorily convertible
securities in connection with the formation of MetLife Capital Trust I. The
primary uses of cash in financing activities include cash payments in 2000 to
eligible policyholders in connection with the demutualization and the pay-down
of short-term debt. Deposits to policyholders' account balances exceeded
withdrawals by $738 million and $133 million for the six months ended June 30,
2001 and 2000, respectively.
EFFECTS OF INFLATION
The Company does not believe that inflation has had a material effect on
its consolidated results of operations, except insofar as inflation may affect
interest rates.
ACCOUNTING STANDARDS
During 2001, the Company adopted the following accounting standards: (i)
Statement of Financial Accounting Standards ("SFAS") No. 133 Accounting for
Derivative Instruments and Hedging Activities as amended by SFAS No. 138, (ii)
SFAS No. 140 Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities - a replacement of FASB No. 125, and (iii)
Emerging Issues Task Force Issue No. 99-20 Recognition of Interest Income and
Impairment of certain Investments. Adoption of these standards did not have a
material impact on the Company's unaudited interim condensed consolidated
results of operations.
On July 1, 2001, the Company will adopt SFAS No. 141, Business
Combinations ("SFAS 141") and Staff Accounting Bulletin No. 102, Selected Loan
Loss Allowance and Documentation Issues ("SAB 102"). On January 1, 2002, the
Company will adopt SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS
142"). SFAS No. 141 will be applied to any acquisition after June 30, 2001.
Adoption of SAB 102 is not expected to have a material impact on the Company's
unaudited interim condensed consolidated financial statements. The Company has
not yet determined the effect, if any, of applying the new impairment guidance
to goodwill and intangible assets that will be required upon adoption of SFAS
142.
INVESTMENTS
The Company had total cash and invested assets at June 30, 2001 of $164.4
billion. In addition, the Company had $65.3 billion held in its separate
accounts, for which the Company generally does not bear investment risk.
The Company's primary investment objective is to maximize after-tax
operating income consistent with acceptable risk parameters. The Company is
exposed to three primary sources of investment risk:
- credit risk, relating to the uncertainty associated with the
continued ability of a given obligor to make timely payments
of principal and interest;
- interest rate risk, relating to the market price and cash flow
variability associated with changes in market interest rates;
and
- market valuation risk for equity holdings.
The Company manages risk through in-house fundamental analysis of the
underlying obligors, issuers, transaction structures and real estate properties.
The Company also manages credit risk and market valuation risk through industry
and issuer diversification and asset allocation. For real estate and
agricultural assets, the Company manages credit risk and valuation risk through
geographic, property type, and product type diversification and asset
allocation. The Company manages interest rate risk as part of its asset and
liability management strategies, product design, such as the use of market value
adjustment features and surrender charges, and proactive monitoring and
management of certain non-guaranteed elements of its products, such as the
resetting of credited interest and dividend rates for policies that permit such
adjustments.
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44
The following table summarizes the Company's cash and invested assets at June
30, 2001 and December 31, 2000:
AT JUNE 30, AT DECEMBER 31,
2001 2000
---------------------- ------------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
---------- -------- -------- -------
(DOLLARS IN MILLIONS)
Fixed maturities available-for-sale, at fair value $115,488 70.3% $112,979 70.7%
Mortgage loans on real estate 22,561 13.7 21,951 13.7
Policy loans 8,122 4.9 8,158 5.1
Equity real estate and real estate joint ventures 5,420 3.3 5,504 3.4
Cash and cash equivalents 4,748 2.9 3,434 2.1
Equity securities and other limited partnership interests 3,784 2.3 3,845 2.4
Other invested assets 3,427 2.1 2,821 1.8
Short-term investments 827 0.5 1,269 0.8
-------- ----- -------- -----
Total cash and invested assets $164,377 100.0% $159,961 100.0%
======== ===== ======== =====
44
45
INVESTMENT RESULTS
The annualized yields on general account cash and invested assets,
excluding net investment gains and losses, were 7.5% for both the three months
ended June 30, 2001 and 2000, and 7.6% and 7.4%, for the six months ended June
30, 2001 and 2000, respectively.
The following table illustrates the annualized yields on average assets for
each of the components of the Company's investment portfolio for the three
months and six months ended June 30, 2001 and 2000:
AT OR FOR THE THREE MONTHS ENDED JUNE 30, AT OR FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------------- ------------------------------------------
2001 2000 2001 2000
------------------ ------------------ ------------------ -------------------
YIELD (1) AMOUNT YIELD (1) AMOUNT YIELD (1) AMOUNT YIELD (1) AMOUNT
--------- ------ --------- ------ --------- ------ --------- ------
(DOLLARS IN MILLIONS)
FIXED MATURITIES: (2)
Investment income 7.89% $ 2,165 7.61% $ 2,083 7.77% $ 4,282 7.59% $ 4,122
Net investment losses (189) (75) (340) (244)
-------- -------- -------- --------
Total $ 1,976 $ 2,008 $ 3,942 $ 3,878
-------- -------- -------- --------
Ending assets $115,488 $107,579 $115,488 $107,579
-------- -------- -------- --------
MORTGAGE LOANS: (3)
Investment income 8.75% $ 488 7.80% $ 415 8.32% $ 923 7.81% $ 834
Net investment gains (losses) (7) 4 (5) 6
-------- -------- -------- --------
Total $ 481 $ 419 $ 918 $ 840
-------- -------- -------- --------
Ending assets $ 22,561 $ 21,431 $ 22,561 $ 21,431
-------- -------- -------- --------
EQUITY REAL ESTATE AND REAL ESTATE
JOINT VENTURES: (4)
Investment income, net of expenses 11.54% $ 157 11.71% $ 167 11.65% $ 318 11.23% $ 322
Net investment gains 19 14 24 27
-------- -------- -------- --------
Total $ 176 $ 181 $ 342 $ 349
-------- -------- -------- --------
Ending assets $ 5,420 $ 5,619 $ 5,420 $ 5,619
-------- -------- -------- --------
POLICY LOANS:
Investment income 6.65% $ 135 6.43% $ 127 6.60% $ 269 6.37% $ 252
-------- -------- -------- --------
Ending assets $ 8,122 $ 7,955 $ 8,122 $ 7,955
-------- -------- -------- --------
EQUITY SECURITIES AND OTHER LIMITED
PARTNERSHIP INTERESTS:
Investment income (loss) (1.36%) $ (13) 10.95% $ 101 2.91% $ 54 7.27% $ 130
Net investment gains (losses) 26 4 (73) 76
-------- -------- -------- --------
Total $ 13 $ 105 $ (19) $ 206
-------- -------- -------- --------
Ending assets $ 3,784 $ 3,716 $ 3,784 $ 3,716
-------- -------- -------- --------
CASH, CASH EQUIVALENTS AND
SHORT-TERM INVESTMENTS:
Investment income 5.26% $ 65 6.17% $ 73 5.62% $ 137 5.05% $ 135
Net investment losses (5) -- (5) (2)
-------- -------- -------- --------
Total $ 60 $ 73 $ 132 $ 133
-------- -------- -------- --------
Ending assets $ 5,575 $ 5,681 $ 5,575 $ 5,681
-------- -------- -------- --------
OTHER INVESTED ASSETS:
Investment income 4.62% $ 41 4.23% $ 27 6.56% $ 108 4.14% $ 51
Net investment gains (losses) (29) -- 39 (47)
-------- -------- -------- --------
Total $ 12 $ 27 $ 147 $ 4
-------- -------- -------- --------
Ending assets $ 3,427 $ 2,550 $ 3,427 $ 2,550
-------- -------- -------- --------
TOTAL INVESTMENTS:
Investment income before expenses 7.69% $ 3,038 7.71% $ 2,993 7.71% $ 6,091 7.56% $ 5,846
and fees
Investment expenses and fees (0.15%) (55) (0.19%) (69) (0.15%) (111) (0.19%) (138)
------ -------- ------ -------- ------ -------- ------ --------
Net investment income 7.54% $ 2,983 7.52% $ 2,924 7.56% $ 5,980 7.37% $ 5,708
Net investment losses (185) (53) (360) (184)
Adjustments to investment gains 49 (2) 79 17
(losses) (5) -------- -------- -------- --------
Total $ 2,847 $ 2,869 $ 5,699 $ 5,541
======== ======== ======== ========
(1) Yields are based on quarterly average asset carrying values for the three
months and six months ended June 30, 2001 and 2000, excluding recognized
and unrealized gains and losses, and for yield calculation purposes,
average assets exclude collateral associated with the Company's securities
lending program. Fixed maturity investment income has been reduced by
rebates paid under the program.
(2) Included in fixed maturities are equity-linked notes of $1,180 million and
$773 million at June 30, 2001 and 2000, respectively, which include an
equity component as part of the notes' return. Investment income for fixed
maturities includes prepayment fees and income from the securities lending
program.
(3) Investment income from mortgage loans includes prepayment fees.
(4) Equity real estate and real estate joint venture income is shown net of
depreciation of $54 million and $55 million for the three
45
46
months ended June 30, 2001 and 2000, respectively, and $108 million and
$110 million for the six months ended June 30, 2001 and 2000,
respectively.
(5) Adjustments to investment gains and losses include amortization of
deferred policy acquisition costs, charges and credits to participating
contracts, and adjustments to the policyholder dividend obligation
resulting from investment gains and losses.
FIXED MATURITIES
Fixed maturities consist principally of publicly traded and privately
placed debt securities, and represented 70.3% and 70.7% of total cash and
invested assets at June 30, 2001 and December 31, 2000, respectively.
Based on estimated fair value, public fixed maturities and private fixed
maturities comprised 83.8% and 16.2%, respectively, of total fixed maturities at
June 30, 2001 and 83.6% and 16.4%, respectively, at December 31, 2000. The
Company invests in privately placed fixed maturities to enhance the overall
value of its portfolio, increase diversification and obtain higher yields than
can ordinarily be obtained with comparable public market securities. Generally,
private placements provide the Company with protective covenants, call
protection features and, where applicable, a higher level of collateral.
However, the Company may not freely trade its private placements because of
restrictions imposed by federal and state securities laws and illiquid trading
markets.
The Securities Valuation Office of the NAIC evaluates the bond investments
of insurers for regulatory reporting purposes and assigns securities to one of
six investment categories called "NAIC designations." The NAIC designations
parallel the credit ratings of the Nationally Recognized Statistical Rating
Organizations for marketable bonds. NAIC designations 1 and 2 include bonds
considered investment grade (rated "Baa3" or higher by Moody's Investors Service
("Moody's"), or rated "BBB-" or higher by Standard & Poor's ("S&P")) by such
rating organizations. NAIC designations 3 through 6 include bonds considered
below investment grade (rated "Ba1" or lower by Moody's, or rated "BB+" or lower
by S&P).
The following table presents the Company's total fixed maturities by NAIC
designation and the equivalent ratings of the Nationally Recognized Statistical
Rating Organizations at June 30, 2001 and December 31, 2000, as well as the
percentage, based on estimated fair value, that each designation comprises:
AT JUNE 30, 2001 AT DECEMBER 31, 2000
--------------------------------- -------------------------------
ESTIMATED ESTIMATED
NAIC RATING AGENCY AMORTIZED FAIR % OF AMORTIZED FAIR % OF
RATING EQUIVALENT DESIGNATION COST VALUE TOTAL COST VALUE TOTAL
- --------- ----------------------- ----------- ----------- ------ --------- --------- ------
(DOLLARS IN MILLIONS)
1 Aaa/Aa/A $ 73,408 $ 75,649 65.5% $ 72,170 $ 74,389 65.9%
2 Baa 28,886 29,290 25.4 28,470 28,405 25.1
3 Ba 5,670 5,557 4.8 5,935 5,650 5.0
4 B 3,939 3,793 3.3 3,964 3,758 3.3
5 Caa and lower 323 240 0.2 123 95 0.1
6 In or near default 199 212 0.2 319 361 0.3
---------- ---------- ----- --------- --------- -----
Subtotal 112,425 114,741 99.4 110,981 112,658 99.7
Redeemable preferred stock 738 747 0.6 321 321 0.3
---------- ---------- ----- --------- --------- -----
Total fixed maturities $ 113,163 $ 115,488 100.0% $ 111,302 $ 112,979 100.0%
========== ========== ===== ========= ========= =====
Based on estimated fair values, total investment grade public and private
placement fixed maturities comprised 90.9% and 91.0% of total fixed maturities
in the general account at June 30, 2001 and December 31, 2000, respectively.
46
47
The following table shows the amortized cost and estimated fair value of
fixed maturities, by contractual maturity dates (excluding scheduled sinking
funds) at June 30, 2001 and December 31, 2000:
AT JUNE 30, 2001 AT DECEMBER 31, 2000
------------------------ -------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
Due in one year or less $ 3,632 $ 3,658 $ 3,465 $ 3,460
Due after one year through five years 20,490 21,017 21,041 21,275
Due after five years through ten years 23,497 23,757 23,872 23,948
Due after ten years 29,877 31,043 29,564 30,402
-------- -------- -------- --------
Subtotal 77,496 79,475 77,942 79,085
Mortgage-backed and other asset-backed securities 34,929 35,266 33,039 33,573
-------- -------- -------- --------
Subtotal 112,425 114,741 110,981 112,658
Redeemable preferred stock 738 747 321 321
-------- -------- -------- --------
Total fixed maturities $113,163 $115,488 $111,302 $112,979
======== ======== ======== ========
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED FIXED MATURITIES. The Company
monitors fixed maturities to identify investments that management considers to
be problems or potential problems. The Company also monitors investments that
have been restructured.
The Company defines problem securities in the fixed maturities category as
securities as to which principal or interest payments are in default or are to
be restructured pursuant to commenced negotiations, or as securities issued by a
debtor that has entered into bankruptcy.
The Company defines potential problem securities in the fixed maturity
category as securities of an issuer deemed to be experiencing significant
operating problems or difficult industry conditions. The Company uses various
criteria, including the following, to identify potential problem securities:
- debt service coverage or cash flow falling below certain thresholds
which vary according to the issuer's industry and other relevant
factors;
- significant declines in revenues or margins;
- violation of financial covenants;
- public securities trading at a substantial discount as a result of
specific credit concerns; and
- other subjective factors.
The Company defines restructured securities in the fixed maturities
category as securities to which the Company has granted a concession that it
would not have otherwise considered but for the financial difficulties of the
obligor. The Company enters into a restructuring when it believes it will
realize a greater economic value under the new terms rather than through
liquidation or disposition. The terms of the restructuring may involve some or
all of the following characteristics: a reduction in the interest rate, an
extension of the maturity date, an exchange of debt for equity or a partial
forgiveness of principal or interest.
47
48
The following table presents the estimated fair value of the Company's total
fixed maturities classified as performing, problem, potential problem and
restructured fixed maturities at June 30, 2001 and December 31, 2000:
AT JUNE 30, 2001 AT DECEMBER 31, 2000
------------------- ---------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
Performing $114,847 99.5% $112,371 99.5%
Problem 278 0.2 163 0.1
Potential Problem 345 0.3 364 0.3
Restructured 18 0.0 81 0.1
-------- ----- -------- -----
Total $115,488 100.0% $112,979 100.0%
======== ===== ======== =====
The Company classifies all of its fixed maturities as available-for-sale
and marks them to market. The Company writes down to fair value fixed maturities
that it deems to be other than temporarily impaired. The Company records
write-downs as investment losses and adjusts the cost basis of the fixed
maturities accordingly. The Company does not change the revised cost basis for
subsequent recoveries in value. Such write-downs were $177 million and $35
million for the six months ended June 30, 2001 and 2000, respectively.
FIXED MATURITIES BY SECTOR. The Company diversifies its fixed maturities by
security sector. The following table sets forth the estimated fair value of the
Company's fixed maturities by sector, as well as the percentage of the total
fixed maturities holdings that each security sector comprised at June 30, 2001
and December 31, 2000:
AT JUNE 30, 2001 AT DECEMBER 31, 2000
---------------------- -----------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
U.S. treasuries/agencies $ 9,390 8.1% $ 9,634 8.5%
Corporate securities 61,965 53.7 56,553 50.1
Foreign government securities 4,979 4.3 5,341 4.7
Mortgage-backed securities 27,263 23.6 25,726 22.8
Asset-backed securities 8,003 6.9 7,847 6.9
Other fixed income assets 3,888 3.4 7,878 7.0
-------- ----- -------- -----
Total $115,488 100.0% $112,979 100.0%
======== ===== ======== =====
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49
CORPORATE FIXED MATURITIES. The table below shows the major industry types that
comprise the corporate bond holdings at the dates indicated:
AT JUNE 30, 2001 AT DECEMBER 31, 2000
-------------------------- -------------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
Industrial $27,164 43.9% $27,199 48.1%
Utility 7,178 11.6 7,011 12.4
Finance 13,969 22.5 12,722 22.5
Yankee/Foreign (1) 12,883 20.8 9,291 16.4
Other 771 1.2 330 0.6
------- ----- ------- -----
Total $61,965 100.0% $56,553 100.0%
======= ===== ======= =====
(1) Includes publicly traded, dollar-denominated debt obligations of foreign
obligors, known as Yankee bonds, and other foreign investments.
The Company diversifies its corporate bond holdings by industry and issuer.
The portfolio has no significant exposure to any single issuer. At June 30,
2001, the Company's combined holdings in the ten issuers to which it had the
greatest exposure totaled $4,116 million, which was less than 5% of the
Company's total invested assets at such date. The exposure to the largest single
issuer of corporate bonds the Company held at June 30, 2001 was $489 million,
which was less than 1% of its total invested assets at such date.
At June 30, 2001, investments of $6,055 million, or 47.0% of the
Yankee/Foreign sector, represented exposure to traditional Yankee bonds. The
balance of this exposure was primarily dollar-denominated, foreign private
placements and project finance loans. The Company diversifies the Yankee/Foreign
portfolio by country and issuer.
The Company does not have material exposure to foreign currency risk in its
invested assets. In the Company's international insurance operations, both its
assets and liabilities are denominated in local currencies. Foreign currency
denominated securities supporting U.S. dollar liabilities are generally swapped
back into U.S. dollars.
MORTGAGE-BACKED SECURITIES. The following table shows the types of
mortgage-backed securities the Company held at June 30, 2001 and December 31,
2000:
AT JUNE 30, 2001 AT DECEMBER 31, 2000
-------------------------- -------------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
Pass-through securities $11,229 41.2% $10,610 41.3%
Collateralized mortgage obligations 10,908 40.0 9,866 38.3
Commercial mortgage-backed securities 5,126 18.8 5,250 20.4
------- ---- ------- -----
Total $27,263 100.0% $25,726 100.0%
======= ===== ======= =====
At June 30, 2001, pass-through and collateralized mortgage obligations
totaled $22,137 million, or 81.2% of total mortgage-backed securities, and a
majority of this amount represented agency-issued pass-through and
collateralized mortgage obligations guaranteed or otherwise supported by the
Federal National Mortgage Association, Federal Home Loan Mortgage Corporation or
Government National Mortgage Association. Other types of mortgage-backed
securities comprised the balance of such amounts reflected in the table. At June
30, 2001, approximately $2,744 million, or 53.5% of the commercial
mortgage-backed securities, and $21,265 million, or 96.1% of the pass-through
securities and collateralized mortgage obligations, were rated Aaa/AAA by
Moody's or S&P.
49
50
The principal risks inherent in holding mortgage-backed securities are
prepayment and extension risks, which will affect the timing of when cash flow
will be received. The Company's active monitoring of its mortgage-backed
securities mitigates exposure to losses from cash flow risk associated with
interest rate fluctuations.
ASSET-BACKED SECURITIES. Asset-backed securities, which include home equity
loans, credit card receivables, collateralized debt obligations and automobile
receivables, are purchased both to diversify the overall risks of the Company's
fixed maturities assets and to provide attractive returns. The Company's
asset-backed securities are diversified both by type of asset and by issuer.
Home equity loans constitute the largest exposure in the Company's asset-backed
securities investments. Except for asset-backed securities backed by home equity
loans, the asset-backed securities investments generally have little sensitivity
to changes in interest rates. At June 30, 2001, approximately $3,303 million, or
41.3%, of total asset-backed securities were rated Aaa/AAA by Moody's or S&P.
The principal risks in holding asset-backed securities are structural,
credit and capital market risks. Structural risks include the security's
priority in the issuer's capital structure, the adequacy of and ability to
realize proceeds from the collateral and the potential for prepayments. Credit
risks include consumer or corporate credits such as credit card holders,
equipment lessees, and corporate obligors. Capital market risks include the
general level of interest rates and the liquidity for these securities in the
marketplace.
MORTGAGE LOANS
The Company's mortgage loans are collateralized by commercial, agricultural
and residential properties. Mortgage loans comprised 13.7% of the Company's
total cash and invested assets at both June 30, 2001 and December 31, 2000,
respectively. The carrying value of mortgage loans is stated at original cost
net of repayments, amortization of premiums, accretion of discounts and
valuation allowances. The following table shows the carrying value of the
Company's mortgage loans by type at June 30, 2001 and December 31, 2000:
AT JUNE 30, 2001 AT DECEMBER 31, 2000
------------------------ ------------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
----- ----- ----- -----
(DOLLARS IN MILLIONS)
Commercial $17,373 77.0% $16,869 76.8%
Agricultural 5,051 22.4 4,973 22.7
Residential 137 0.6 109 0.5
------- ----- ------- -----
Total $22,561 100.0% $21,951 100.0%
======= ===== ======= =====
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51
COMMERCIAL MORTGAGE LOANS. The Company diversifies its commercial mortgage
loans by both geographic region and property type, and manages these investments
through a network of regional offices overseen by its investment department. The
following table presents the distribution across geographic regions and property
types for commercial mortgage loans at June 30, 2001 and December 31, 2000:
AT JUNE 30, 2001 AT DECEMBER 31, 2000
----------------------- -----------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
----- ----- ----- -----
(DOLLARS IN MILLIONS)
REGION
South Atlantic $ 4,658 26.8% $ 4,542 26.9%
Pacific 3,277 18.9 3,111 18.4
Middle Atlantic 3,257 18.8 2,968 17.6
East North Central 1,926 11.1 1,822 10.8
West South Central 1,026 5.9 1,169 6.9
New England 1,156 6.7 1,157 6.9
Mountain 784 4.5 753 4.5
West North Central 683 3.9 740 4.4
International 442 2.5 433 2.6
East South Central 164 0.9 174 1.0
------- ----- ------- -----
Total $17,373 100.0% $16,869 100.0%
======= ===== ======= =====
PROPERTY TYPE
Office $ 7,943 45.7% $ 7,577 44.9%
Retail 4,103 23.6 4,148 24.6
Apartments 2,556 14.7 2,585 15.3
Industrial 1,680 9.7 1,414 8.4
Hotel 863 5.0 865 5.1
Other 228 1.3 280 1.7
------- ----- ------- -----
Total $17,373 100.0% $16,869 100.0%
======= ===== ======= =====
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52
The following table presents the scheduled maturities for the Company's
commercial mortgage loans at June 30, 2001 and December 31, 2000:
AT JUNE 30, 2001 AT DECEMBER 31, 2000
---------------- --------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
----- ----- ----- -----
(DOLLARS IN MILLIONS)
Due in one year or less $ 684 3.9% $ 644 3.8%
Due after one year through two years 935 5.4 934 5.5
Due after two years through three years 1,321 7.6 830 4.9
Due after three years through four years 734 4.2 1,551 9.2
Due after four years through five years 2,775 16.0 1,654 9.8
Due after five years 10,924 62.9 11,256 66.8
------- ------- ------- -------
Total $17,373 100.0% $16,869 100.0%
======= ======= ======= =======
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED MORTGAGE LOANS. The Company
monitors its mortgage loan investments on a continual basis. Through this
monitoring process, the Company reviews loans that are restructured, delinquent
or under foreclosure and identifies those that management considers to be
potentially delinquent. These loan classifications are generally consistent with
those used in industry practice.
The Company defines restructured mortgage loans, consistent with
industry practice, as loans in which the Company, for economic or legal reasons
related to the debtor's financial difficulties, grants a concession to the
debtor that it would not otherwise consider. This definition provides for loans
to exit the restructured category under certain conditions. The Company defines
delinquent mortgage loans, consistent with industry practice, as loans in which
two or more interest or principal payments are past due. The Company defines
mortgage loans under foreclosure, consistent with industry practice, as loans in
which foreclosure proceedings have formally commenced. The Company defines
potentially delinquent loans as loans that, in management's opinion, have a high
probability of becoming delinquent.
The Company reviews all mortgage loans on an annual basis. These
reviews may include an analysis of the property financial statements and rent
roll, lease rollover analysis, property inspections, market analysis and tenant
creditworthiness. The Company also reviews loan-to-value ratios and debt
coverage ratios for restructured loans, delinquent loans, loans under
foreclosure, potentially delinquent loans, loans with an existing valuation
allowance, loans maturing within two years and loans with a loan-to-value ratio
greater than 90% as determined in the prior year.
The Company establishes valuation allowances for loans that it deems
impaired, as determined through its annual review process. The Company defines
impaired loans consistent with Statement of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan, as loans which it
probably will not collect all amounts due according to applicable contractual
terms of the agreement. The Company bases valuation allowances upon the present
value of expected future cash flows discounted at the loan's original effective
interest rate or the value of the loan's collateral. The Company records
valuation allowances as investment losses. The Company records subsequent
adjustments to allowances as investment gains or losses.
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53
The following table presents the amortized cost and valuation
allowances for commercial mortgage loans distributed by loan classification at
June 30, 2001 and December 31, 2000:
AT JUNE 30, 2001 AT DECEMBER 31, 2000
-------------------------------------------------- --------------------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST (1) TOTAL ALLOWANCE COST COST (1) TOTAL ALLOWANCE COST
-------- ----- --------- ---- -------- ----- --------- ----
(DOLLARS IN MILLIONS)
Performing $16,793 96.3% $ 15 0.1% $16,169 95.5% $ 15 0.1%
Restructured 625 3.6 45 7.2% 646 3.8 47 7.3%
Delinquent or under
foreclosure 7 0.0 4 57.1% 24 0.1 4 16.7%
Potentially delinquent 14 0.1 2 14.3% 106 0.6 10 9.4%
------- ------- ------- ------- ------- -------
Total $17,439 100.0% $ 66 0.4% $16,945 100.0% $ 76 0.4%
======= ======= ======= ======= ======= =======
(1) Amortized cost is equal to carrying value before valuation allowances.
The following table presents the changes in valuation allowances for
commercial mortgage loans for the six months ended June 30, 2001:
SIX MONTHS ENDED
JUNE 30, 2001
-------------
(DOLLARS IN MILLIONS)
Balance, beginning of period $ 76
Additions 2
Deductions for writedowns and dispositions (12)
----
Balance, end of period $ 66
====
The principal risks in holding commercial mortgage loans are property
specific, supply and demand, financial and capital market risks. Property
specific risks include the geographic location of the property, the physical
condition of the property, the diversity of tenants and the rollover of their
leases and the ability of the property manager to attract tenants and manage
expenses. Supply and demand risks include changes in the supply and/or demand
for rental space which cause changes in vacancy rates and/or rental rates.
Financial risks include the overall level of debt on the property and the amount
of principal repaid during the loan term. Capital market risks include the
general level of interest rates, the liquidity for these securities in the
marketplace and the capital available for loan refinancing.
AGRICULTURAL MORTGAGE LOANS. The Company diversifies its agricultural
mortgage loans by both geographic region and product type. The Company manages
these investments through a network of regional offices and field professionals
overseen by its investment department.
Approximately 59.3% of the $5,051 million of agricultural mortgage
loans outstanding at June 30, 2001 was subject to rate resets prior to maturity.
A substantial portion of these loans were successfully renegotiated and remain
outstanding to maturity. The process and policies for monitoring the
agricultural mortgage loans and classifying them by performance status are
generally the same as those for the commercial loans.
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The following table presents the amortized cost and valuation
allowances for agricultural mortgage loans distributed by loan classification at
June 30, 2001 and December 31, 2000:
AT JUNE 30, 2001 AT DECEMBER 31, 2000
-------------------------------------------------- ------------------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST (1) TOTAL ALLOWANCE COST COST (1) TOTAL ALLOWANCE COST
-------- ----- --------- ---- -------- ----- --------- ----
(DOLLARS IN MILLIONS)
Performing $4,794 94.6% $ -- 0.0% $4,771 95.7% $ 1 0.0%
Restructured 142 2.8 -- 0.0% 172 3.5 2 1.2%
Delinquent or under
foreclosure 126 2.5 14 11.1% 24 0.5 4 16.7%
Potentially delinquent 3 0.1 -- 0.0% 13 0.3 -- 0.0%
------ ----- ------ ------ ----- ------
Total $5,065 100.0% $ 14 0.3% $4,980 100.0% $ 7 0.1%
====== ===== ====== ====== ===== ======
(1) Amortized cost is equal to carrying value before valuation allowances.
The following table presents the changes in valuation allowances for
agricultural mortgage loans for the six months ended June 30, 2001:
SIX MONTHS ENDED
JUNE 30, 2001
-------------
(DOLLARS IN MILLIONS)
Balance, beginning of period $ 7
Additions 12
Deductions for writedowns and dispositions (5)
----
Balance, end of period $ 14
====
The principal risks in holding agricultural mortgage loans are property
specific, supply and demand, financial and capital market risks. Property
specific risks include the geographic location of the property, soil types,
weather conditions and the other factors that may impact the borrower's
guaranty. Supply and demand risks include the supply and demand for the
commodities produced on the specific property and the related price for those
commodities. Financial risks include the overall level of debt on the property
and the amount of principal repaid during the loan term. Capital market risks
include the general level of interest rates, the liquidity for these securities
in the marketplace and the capital available for loan refinancing.
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EQUITY REAL ESTATE AND REAL ESTATE JOINT VENTURES
The Company's equity real estate and real estate joint venture
investments consist of commercial and agricultural properties located throughout
the U.S. and Canada. The Company manages these investments through a network of
regional offices overseen by its investment department. At June 30, 2001 and
December 31, 2000, the carrying value of the Company's equity real estate and
real estate joint ventures was $5,420 million and $5,504 million, respectively,
or 3.3% and 3.4%, respectively, of total cash and invested assets. The carrying
value of equity real estate was stated at depreciated cost net of impairments
and valuation allowances. The carrying value of real estate joint ventures was
stated at the Company's equity in real estate joint ventures net of impairments
and valuation allowances. These holdings consist of equity real estate,
interests in real estate joint ventures and real estate acquired upon
foreclosure of commercial and agricultural mortgage loans. The following table
presents the carrying value of the Company's equity real estate and real estate
joint ventures at June 30, 2001 and December 31, 2000:
AT JUNE 30, 2001 AT DECEMBER 31, 2000
---------------- --------------------
CARRYING % OF CARRYING % OF
TYPE VALUE TOTAL VALUE TOTAL
- ---- ----- ----- ----- -----
(DOLLARS IN MILLIONS)
Equity real estate $4,997 92.2% $5,069 92.1%
Real estate joint ventures 349 6.4 369 6.7
------ ----- ------ -----
Subtotal 5,346 98.6 5,438 98.8
Foreclosed real estate 74 1.4 66 1.2
------ ----- ------ -----
Total $5,420 100.0% $5,504 100.0%
====== ===== ====== =====
Office properties representing 67.5% and 66.1% of the Company's equity
real estate and real estate joint venture holdings at June 30, 2001 and December
31, 2000, respectively, are well diversified geographically, principally within
the United States. The average occupancy level of office properties was 92% and
94% at June 30, 2001 and December 31, 2000, respectively.
The Company classifies equity real estate and real estate joint
ventures as held-for-investment or held-for-sale. The carrying value of equity
real estate and real estate joint ventures held-for-investment was $5,256
million and $5,223 million at June 30, 2001 and December 31, 2000, respectively.
The carrying value of equity real estate and real estate joint ventures
held-for-sale was $164 million and $281 million at June 30, 2001 and December
31, 2000, respectively.
Ongoing management of these investments includes quarterly appraisals,
as well as an annual market update and review of each property's budget,
financial returns, lease rollover status and the Company's exit strategy. In
addition to individual property reviews, the Company employs an overall strategy
of selective dispositions and acquisitions as market opportunities arise.
The Company adjusts the carrying value of equity real estate and real
estate joint ventures held-for-investment for impairments whenever events or
changes in circumstances indicate that the carrying value of the property may
not be recoverable. The Company writes down impaired real estate to estimated
fair value, which it generally computes using the present value of future cash
flows from the property, discounted at a rate commensurate with the underlying
risks. The Company records write-downs as investment losses and reduces the cost
basis of the properties accordingly. The Company does not change the revised
cost basis for subsequent recoveries in value.
The Company records real estate acquired upon foreclosure of commercial
and agricultural mortgage loans at the lower of estimated fair value or the
carrying value of the mortgage loan at the date of foreclosure.
Once the Company identifies a property to be sold and commences a firm
plan for marketing the property, the Company establishes and periodically
revises, if necessary, a valuation allowance to adjust the carrying value of the
property to its expected sales value, less associated selling costs, if it is
lower than the property's carrying value. The Company records allowances as
investment losses. The Company records subsequent adjustments to allowances as
investment gains or losses.
The Company's carrying value of equity real estate and real estate
joint ventures held-for-sale, including real estate acquired upon foreclosure of
commercial and agricultural mortgage loans, in the amounts of $164 million and
$281 million at June 30, 2001 and December 31, 2000, respectively, are net of
impairments of $93 million and $97 million, respectively, and net of valuation
allowances of $35 million and $39 million, respectively.
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EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS
The Company's carrying value of equity securities, which primarily
consists of investments in common stocks, was $2,140 million and $2,193 million
at June 30, 2001 and December 31, 2000, respectively. Substantially all of the
common stock is publicly traded on major securities exchanges. The carrying
value of the other limited partnership interests which primarily represent
ownership interests in pooled investment funds that make private equity
investments in companies in the U.S. and overseas was $1,644 million and $1,652
million at June 30, 2001 and December 31, 2000, respectively. The Company
classifies its investments in common stocks as available-for-sale and marks them
to market except for non-marketable private equities which are generally carried
at cost. The Company accounts for its investments in limited partnership
interests in which it does not have a controlling interest in accordance with
the equity method of accounting. The Company's investments in equity securities
represented 1.3% and 1.4% of cash and invested assets at June 30, 2001 and
December 31, 2000, respectively.
Equity securities include, at June 30, 2001 and December 31, 2000, $326
million and $577 million, respectively, of private equity securities. The
Company may not freely trade its private equity securities because of
restrictions imposed by Federal and state securities laws and illiquid trading
markets.
At June 30, 2001 and December 31, 2000 approximately $247 million and
$313 million, respectively, of the Company's equity securities holdings were
effectively fixed at a minimum value of $195 million and $257 million,
respectively, primarily through the use of exchangeable securities. During the
three months ended June 30, 2001, two exchangeable subordinated debt securities
matured, resulting in a gross realized gain of $44 million on the equity
exchanged in satisfaction of the note. The remaining exchangeable debt security
issued by the Company matures in 2002 and the Company may repurchase it earlier
at its discretion.
The Company makes commitments to fund partnership investments in the
normal course of business. The amounts of these unfunded commitments were $1,361
million and $1,311 million at June 30, 2001 and December 31, 2000, respectively.
The Company anticipates that these amounts will be invested in the partnerships
over the next three to five years.
PROBLEM AND POTENTIAL PROBLEM EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP
INTERESTS. The Company monitors its equity securities and other limited
partnership interests on a continual basis. Through this monitoring process, the
Company identifies investments that management considers to be problems or
potential problems.
Problem equity securities and other limited partnership interests are
defined as securities (1) in which significant declines in revenues and/or
margins threaten the ability of the issuer to continue operating or (2) where
the issuer has subsequently entered bankruptcy.
Potential problem equity securities and other limited partnership
interests are defined as securities issued by a company that is experiencing
significant operating problems or difficult industry conditions. Criteria
generally indicative of these problems or conditions are (1) cash flows falling
below varying thresholds established for the industry and other relevant
factors, (2) significant declines in revenues and/or margins, (3) public
securities trading at a substantial discount as a result of specific credit
concerns, and (4) other information that becomes available.
Equity securities or other limited partnership interests which are
deemed to be other than temporarily impaired are written down to fair value.
Write-downs are recorded as investment losses and the cost basis of the equity
securities and other limited partnership interests are adjusted accordingly. The
Company does not change the revised cost basis for subsequent recoveries in
value. For the six months ended June 30, 2001 and 2000, such write-downs were
$97 million and $3 million, respectively.
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OTHER INVESTED ASSETS
The Company's other invested assets consist principally of leveraged
leases and funds withheld at interest of $2.4 billion and $2.3 billion at June
30, 2001 and December 31, 2000, respectively. The leveraged leases are recorded
net of non-recourse debt. The Company participates in lease transactions which
are diversified by geographic area. The Company regularly reviews residual
values and writes down residuals to expected values as needed. Funds withheld
represent amounts contractually withheld by ceding companies in accordance with
reinsurance agreements. For agreements written on a modified coinsurance basis
and certain agreements written on a coinsurance basis, assets equal to the net
statutory reserves are withheld and legally owned by the ceding company.
Interest accrues to these funds withheld at rates defined by the treaty terms.
The Company's other invested assets represented 2.1% and 1.8% of cash and
invested assets at June 30, 2001 and December 31, 2000, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company primarily uses derivative instruments to reduce the risk
associated with variable cash flows related to the Company's financial assets
and liabilities or to changing market values. This objective is achieved through
one of two principal risk management strategies: hedging the variable cash flows
of assets, liabilities or forecasted transactions or hedging the changes in fair
value of financial assets, liabilities or firm commitments. Hedged forecasted
transactions, other than the receipt or payment of variable interest payments,
are not expected to occur more than 12 months after hedge inception.
The Company's derivative hedging strategy employs a variety of
instruments including financial futures, financial forwards, interest rate and
foreign currency swaps, foreign exchange contracts, and options, including caps
and floors. The Company designates and accounts for the following as cash flow
hedges, when they have met the effectiveness requirements of SFAS 133 and SFAS
138: (i) various types of interest rate swaps to convert floating rate
investments to fixed rate investments, (ii) receive fixed foreign currency swaps
to hedge the foreign currency cash flow exposure of foreign currency denominated
investments, (iii) foreign currency forwards to hedge the exposure of future
payments in foreign currencies, and (iv) other instruments to hedge the cash
flows of various other anticipated transactions. For all qualifying and highly
effective cash flow hedges, the effective portion of changes in fair value of
the derivative instrument are reported in other comprehensive income. The
ineffective portion of changes in fair value of the derivative instrument are
reported in net investment gains or losses.
The Company designates and accounts for the following as fair value
hedges, when they have met the effectiveness requirements of SFAS 133 and SFAS
138: (i) various types of interest rate swaps to convert fixed rate investments
to floating rate investments, (ii) receive floating foreign currency swaps to
hedge the foreign currency fair value exposure of foreign currency denominated
investments, and (iii) other instruments to hedge various other fair value
exposures of investments. For all qualifying and highly effective fair value
hedges, the changes in fair value of the derivative instrument are reported as
net investment gains or losses. In addition, changes in fair value attributable
to the hedged portion of the underlying instrument are reported in net
investment gains and losses.
For the three months and six months ended June 30, 2001, the Company
recognized net investment losses of $23 million and net investment gains of $45
million, respectively, relating to derivatives. The amounts recognized relate
primarily to non-speculative derivative uses that are permitted by the New York
Insurance Department but that have not met the requirements of SFAS 133 to
qualify for hedge accounting. The amounts relating to the ineffective portion of
cash flow and fair value hedges were immaterial. The amounts relating to the
effective portion of fair value hedges and the amounts relating to the changes
in fair value attributable to the hedged portion of the underlying instruments
were immaterial.
For the three months and six months ended June 30, 2001, respectively,
the Company recognized other comprehensive losses of $15 million and other
comprehensive income of $38 million relating to the effective portion of cash
flow hedges. For the three months and six months ended June 30, 2001, $3 million
and $5 million of other comprehensive income, related to hedged items, was
reclassified into net investment income, respectively.
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The Company held the following positions in derivative financial
instruments at June 30, 2001 and December 31, 2000:
AT JUNE 30, 2001 AT DECEMBER 31, 2000
----------------------------------------------- -----------------------------------------------
CURRENT MARKET CURRENT MARKET
OR FAIR VALUE OR FAIR VALUE
CARRYING NOTIONAL -------------------- CARRYING NOTIONAL --------------------
VALUE AMOUNT ASSETS LIABILITIES VALUE AMOUNT ASSETS LIABILITIES
----- ------ ------ ----------- ----- ------ ------ -----------
(DOLLARS IN MILLIONS)
Financial futures $ 6 $ 254 $ 6 $-- $ 23 $ 254 $ 23 $--
Interest rate swaps 29 872 32 4 41 1,549 49 1
Floors 3 325 3 -- -- 325 3 --
Caps 1 6,390 1 -- -- 9,950 -- --
Foreign currency swaps 153 1,720 194 41 (1) 1,469 267 85
Exchange traded options -- 9 -- -- 1 10 -- 1
Foreign currency forwards (2) 70 -- 2 -- -- -- --
Written covered calls -- 40 -- -- -- -- -- --
----- ------ ---- --- ---- ------- ---- ---
Total contractual commitments $ 190 $9,680 $236 $47 $ 64 $13,557 $342 $87
===== ====== ==== === ==== ======= ==== ===
SECURITIES LENDING
Pursuant to the Company's securities lending program, it lends
securities to major brokerage firms. The Company's policy requires a minimum of
102% of the fair value of the loaned securities as collateral, calculated on a
daily basis. The Company's securities on loan at June 30, 2001 and December 31,
2000 had estimated fair values of $12,854 million and $12,289 million,
respectively.
SEPARATE ACCOUNT ASSETS
The Company manages each separate account's assets in accordance with
the prescribed investment policy that applies to that specific separate account.
The Company establishes separate accounts on a single client and multi-client
comingled basis in conformity with insurance laws. Generally, separate accounts
are not chargeable with liabilities that arise from any other business of the
Company. Separate account assets are subject to claims of the Company's general
account claims only to the extent that the value of such assets exceeds the
separate account liabilities, as defined by the account's contract. If the
Company uses a separate account to support a contract providing guaranteed
benefits, the Company must comply with the asset maintenance requirements
stipulated under Regulation 128 of the New York Insurance Department. The
Company monitors these requirements at least monthly and, in addition, performs
cash flow analyses, similar to that conducted for the general account, on an
annual basis. The Company reports separately as assets and liabilities
investments held in separate accounts and liabilities of the separate accounts.
The Company reports substantially all separate account assets at their fair
market value. Investment income and gains or losses on the investments of
separate accounts accrue directly to contract holders, and, accordingly, the
Company does not reflect them in its unaudited interim condensed consolidated
statements of operations and cash flows. The Company reflects in its revenues
fees charged to the separate accounts by the Company, including mortality
charges, risk charges, policy administration fees, investment management fees
and surrender charges.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has material exposure to interest rate, equity market and
foreign exchange risk. The Company analyzes interest rate risk using various
models, including multi-scenario cash flow projection models that forecast cash
flows of the liabilities and their supporting investments, such as derivative
instruments. There have been no material changes in market risk exposures from
December 31, 2000, a description of which may be found in MetLife's Annual
Report on Form 10-K filed with the SEC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following should be read in conjunction with Note 6 to unaudited
interim condensed consolidated financial statements in Part I of this Report
("Note 6").
The Company believes adequate provision has been made in its unaudited
interim condensed consolidated financial statements for all reasonably probable
and estimable losses for asbestos-related claims. Estimates of the Company's
asbestos exposure can be uncertain due to the limitations of available data and
the difficulty of predicting with any certainty numerous variables that can
affect liability estimates, including the number of future claims, the cost to
resolve claims and the impact of any possible future adverse verdicts and their
amounts. Recent bankruptcies of other companies involved in asbestos litigation,
as well as advertising by plaintiffs' asbestos lawyers, may be resulting in an
increase in the number of claims and the cost of resolving claims, as well as
the
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number of trials and possible verdicts Metropolitan Life may experience.
Plaintiffs are seeking additional funds from defendants, including Metropolitan
Life, in light of such recent bankruptcies by certain other defendants. As
reported in MetLife, Inc.'s Annual Report on Form 10-K, Metropolitan Life
received approximately 54,500 asbestos-related claims in 2000. During the first
six months of 2001, Metropolitan Life received approximately 34,600
asbestos-related claims. Metropolitan Life is studying its recent claims
experience and numerous variables that can affect its asbestos liability
exposure, including the recent bankruptcies of other companies involved in
asbestos litigation and legislative and judicial developments, to identify
trends and to assess their impact on its previously recorded asbestos liability.
It is reasonably possible that the Company's total exposure to asbestos claims
may be greater than the liability recorded in its financial statements and that
future charges to income may be necessary. While the potential future charges
could be material in particular quarterly or annual periods in which they are
recorded, based on information currently known by management, it does not
believe any such charges are likely to have a material adverse effect on the
Company's consolidated financial position.
As reported in MetLife, Inc.'s Annual Report on Form 10-K, several
lawsuits were brought in 2000 challenging the fairness of Metropolitan Life's
plan of reorganization and the adequacy and accuracy of Metropolitan Life's
disclosure to policyholders regarding the plan. Five purported class actions
pending in the Supreme Court of the State of New York for New York County have
been consolidated within the commercial part. Metropolitan Life has moved to
dismiss these consolidated cases on a variety of grounds. In addition, there
remains a separate purported class action in New York state court in New York
County that Metropolitan Life also has moved to dismiss. Another purported class
action in New York state court in Kings County has been voluntarily held in
abeyance by plaintiffs. Further, the Article 78 proceeding in New York
previously disclosed is also being held in abeyance by the plaintiffs.
Metropolitan Life has moved to dismiss, on a variety of grounds, another
purported class action pending in the Supreme Court of the State of New York for
New York County brought on behalf of a purported class of beneficiaries of
Metropolitan Life annuities purchased to fund structured settlements. Three
purported class actions were filed in the United States District Court for the
Eastern District of New York claiming violation of the Securities Act of 1933.
Metropolitan Life's motion to dismiss these three cases was denied on July 23,
2001. A purported class action was also filed in the United States District
Court for the Southern District of New York seeking damages from Metropolitan
Life and MetLife, Inc. for alleged violations of various provisions of the
Constitution of the United States in connection with the plan of reorganization.
On July 9, 2001, pursuant to a motion to dismiss filed by Metropolitan Life,
this case was dismissed by the District Court. Plaintiffs have since noticed an
appeal to the United States Court of Appeals for the Second Circuit.
Metropolitan Life, MetLife, Inc. and the individual defendants believe they have
meritorious defenses to the plaintiffs' claims and are contesting vigorously all
of the plaintiffs' claims in these actions.
As previously reported by MetLife, Inc., three lawsuits were filed
against Metropolitan Life in 2000 in the United States District Courts for the
Southern District of New York, for the Eastern District of Louisiana, and for
the District of Kansas alleging racial discrimination in the marketing, sale,
and administration of life insurance policies, including "industrial" life
insurance policies sold by Metropolitan Life decades ago. Metropolitan Life
successfully transferred the Louisiana and Kansas actions to the Southern
District of New York where the three cases have been consolidated. A fourth
case, originally filed in the United States District Court for the Southern
District of Illinois in 2001, also has been transferred to the Southern District
of New York. The plaintiffs in these actions seek unspecified monetary damages,
punitive damages, reformation, imposition of a constructive trust, a declaration
that the alleged practices are discriminatory and illegal, injunctive relief
requiring Metropolitan Life to discontinue the alleged discriminatory practices
and adjust policy values, and other relief. Discovery has been underway since
late 2000. At the outset of discovery, Metropolitan Life moved for summary
judgment on statute of limitations grounds. On June 27, 2001, the District Court
denied that motion, citing, among other things, ongoing discovery on relevant
subjects. The ruling does not prevent Metropolitan Life from continuing to
pursue a statute of limitations defense. Plaintiffs have moved for certification
of a class consisting of all non-Caucasian policyholders who were purportedly
harmed by the practices alleged in the complaint. Metropolitan Life has opposed
the class certification motion, but no hearing date has yet been set. These
cases are scheduled for trial in January 2002. Metropolitan Life believes it has
meritorious defenses and is contesting vigorously plaintiffs' claims.
Various litigation, claims and assessments against the Company, in
addition to those discussed above and those otherwise provided for in the
Company's unaudited interim condensed 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 regularly
make inquiries and conduct investigations concerning the Company's compliance
with applicable insurance and other laws and regulations.
It is not feasible to predict or determine the ultimate outcome of all
pending investigations and legal proceedings or provide reasonable ranges of
potential losses. In some of the matters referred to above, very large and/or
indeterminate amounts, including punitive and treble damages, are sought.
Although in light of these considerations it is possible that an adverse outcome
in certain cases could have a material adverse effect upon the Company's
consolidated 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
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unpredictability of litigation, it is possible that an adverse outcome in
certain matters could, from time to time, have a material adverse effect on the
Company's operating results or cash flows in particular quarterly or annual
periods.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
During the three months ended June 30, 2001, the following current
report was filed on Form 8-K:
1. Current Report on Form 8-K filed May 8, 2001 attaching press release dated
May 8, 2001 announcing MetLife's first quarter 2001 results.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METLIFE, INC.
By: /s/ Virginia M. Wilson
------------------------------------
Virginia M. Wilson
Senior Vice-President and Controller
(Authorized signatory and
principal accounting officer)
Date: August 14, 2001
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EXHIBIT INDEX
EXHIBIT PAGE
NUMBER EXHIBIT NAME NUMBER
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