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 MARCH 31, 2002
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 incorporation or organization) (I.R.S. Employer 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 May 9, 2002, 705,430,687 shares of the Registrant's Common Stock, $.01 par
value per share, were outstanding.
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Interim Condensed Consolidated Balance Sheets at March 31, 2002
(Unaudited) and December 31, 2001 3
Unaudited Interim Condensed Consolidated Statements of Income for the
three months ended March 31, 2002 and 2001 4
Unaudited Interim Condensed Consolidated Statement of Stockholders'
Equity for the three months ended March 31, 2002 5
Unaudited Interim Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2002 and 2001 6
Notes to Unaudited Interim Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 52
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 52
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 53
1
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 the 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) MetLife, Inc.'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' claims paying ability, financial
strength or debt ratings; (x) changes in rating agency policies or practices;
(xi) 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; (xii) the
effects of business disruption or economic contraction due to terrorism or other
hostilities; and (xiii) other risks and uncertainties described from time to
time in MetLife, Inc.'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.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METLIFE, INC.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 (UNAUDITED) AND DECEMBER 31, 2001
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
2002 2001
---------- ----------
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value $ 118,477 $ 115,398
Equity securities, at fair value 1,494 3,063
Mortgage loans on real estate 23,684 23,621
Real estate and real estate joint ventures 5,862 5,730
Policy loans 8,310 8,272
Other limited partnership interests 1,817 1,637
Short-term investments 2,410 1,203
Other invested assets 3,512 3,298
---------- ----------
Total investments 165,566 162,222
Cash and cash equivalents 4,024 7,473
Accrued investment income 2,186 2,062
Premiums and other receivables 8,111 6,437
Deferred policy acquisition costs 11,436 11,167
Other assets 4,849 4,823
Separate account assets 62,538 62,714
---------- ----------
Total assets $ 258,710 $ 256,898
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 85,607 $ 84,924
Policyholder account balances 60,236 58,923
Other policyholder funds 5,680 5,332
Policyholder dividends payable 1,037 1,046
Policyholder dividend obligation 413 708
Short-term debt 546 355
Long-term debt 3,434 3,628
Current income taxes payable 150 306
Deferred income taxes payable 1,167 1,526
Payables under securities loaned transactions 13,665 12,661
Other liabilities 7,659 7,457
Separate account liabilities 62,538 62,714
---------- ----------
Total liabilities 242,132 239,580
---------- ----------
Commitments and contingencies (Note 6)
Company-obligated mandatorily redeemable securities of subsidiary trusts 1,258 1,256
---------- ----------
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 March 31, 2002 and December 31, 2001;
707,826,484 shares outstanding at March 31, 2002 and 715,506,525
shares outstanding at December 31, 2001 8 8
Additional paid-in capital 14,966 14,966
Retained earnings 1,678 1,349
Treasury stock, at cost; 78,940,180 shares at March 31, 2002 and 71,260,139
shares at December 31, 2001 (2,174) (1,934)
Accumulated other comprehensive income 842 1,673
---------- ----------
Total stockholders' equity 15,320 16,062
---------- ----------
Total liabilities and stockholders' equity $ 258,710 $ 256,898
========== ==========
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS
ENDED MARCH 31,
----------------------
2002 2001
-------- --------
REVENUES
Premiums $ 4,481 $ 4,234
Universal life and investment-type product policy fees 457 474
Net investment income 2,789 2,816
Other revenues 367 411
Net investment losses (net of amounts allocable to other
accounts of $(13) and $(30), respectively) (92) (145)
-------- --------
Total revenues 8,002 7,790
-------- --------
EXPENSES
Policyholder benefits and claims (excludes amounts directly
related to net investment losses of $(7) and $(36), respectively) 4,618 4,435
Interest credited to policyholder account balances 714 760
Policyholder dividends 497 515
Other expenses (excludes amounts directly related to net
investment losses of $(6) and $6, respectively) 1,653 1,653
-------- --------
Total expenses 7,482 7,363
-------- --------
Income before provision for income taxes and cumulative effect of
change in accounting 520 427
Provision for income taxes 196 140
-------- --------
Income before cumulative effect of change in accounting 324 287
Cumulative effect of change in accounting 5 --
-------- --------
Net income $ 329 $ 287
======== ========
Income before cumulative effect of accounting change per share
Basic $ 0.46 $ 0.38
======== ========
Diluted $ 0.44 $ 0.37
======== ========
Net income per share
Basic $ 0.46 $ 0.38
======== ========
Diluted $ 0.44 $ 0.37
======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
4
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(DOLLARS IN MILLIONS)
ADDITIONAL TREASURY
COMMON PAID-IN RETAINED STOCK
STOCK CAPITAL EARNINGS AT COST
------ ---------- -------- --------
Balance at January 1, 2002 $ 8 $ 14,966 $ 1,349 $ (1,934)
Treasury stock acquired (240)
Comprehensive loss:
Net income 329
Other comprehensive loss:
Unrealized losses on derivative instruments,
net of income taxes
Unrealized investment losses, net of related
offsets, reclassification adjustments
and income taxes
Other comprehensive loss
Comprehensive loss
------ ---------- -------- --------
Balance at March 31, 2002 $ 8 $ 14,966 $ 1,678 $ (2,174)
====== ========== ======== ========
ACCUMULATED OTHER
COMPREHENSIVE INCOME
-----------------------------------------
NET
UNREALIZED FOREIGN MINIMUM
INVESTMENT CURRENCY PENSION
AND DERIVATIVE TRANSLATION LIABILITY
GAINS ADJUSTMENT ADJUSTMENT TOTAL
-------------- ----------- ---------- -----------
Balance at January 1, 2002 $ 1,879 $ (160) $ (46) $ 16,062
Treasury stock acquired (240)
Comprehensive loss:
Net income 329
Other comprehensive loss:
Unrealized losses on derivative instruments,
net of income taxes (10) (10)
Unrealized investment losses, net of related
offsets, reclassification adjustments
and income taxes (821) (821)
-----------
Other comprehensive loss (831)
-----------
Comprehensive loss (502)
-------------- ----------- ---------- -----------
Balance at March 31, 2002 $ 1,048 $ (160) $ (46) $ 15,320
============== =========== ========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
5
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2002 2001
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 578 $ 791
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales, maturities and repayments of:
Fixed maturities 14,754 11,800
Equity securities 1,513 264
Mortgage loans on real estate 608 415
Real estate and real estate joint ventures 42 76
Other limited partnership interests 151 145
Purchases of:
Fixed maturities (20,471) (13,623)
Equity securities (21) (210)
Mortgage loans on real estate (707) (438)
Real estate and real estate joint ventures (55) (53)
Other limited partnership interests (82) (73)
Net change in short-term investments (1,206) 351
Purchase of businesses, net of cash received -- (16)
Net change in payables under securities loaned transactions 1,004 970
Other, net (377) (710)
---------- ----------
Net cash used in investing activities (4,847) (1,102)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits 6,229 8,706
Withdrawals (5,166) (7,891)
Net change in short-term debt 191 502
Long-term debt issued -- 3
Long-term debt repaid (194) --
Treasury stock acquired (240) (238)
---------- ----------
Net cash provided by financing activities 820 1,082
---------- ----------
Change in cash and cash equivalents (3,449) 771
Cash and cash equivalents, beginning of period 7,473 3,434
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,024 $ 4,205
========== ==========
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the period for:
Interest $ 66 $ 75
========== ==========
Income taxes $ (41) $ (235)
========== ==========
Non-cash transactions during the period:
Business acquisitions - assets $ -- $ 92
========== ==========
Business acquisitions - liabilities $ -- $ 76
========== ==========
Real estate acquired in satisfaction of debt $ 17 $ 8
========== ==========
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
6
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 ("GAAP") requires
management to adopt accounting policies and make estimates and assumptions that
affect amounts reported in the unaudited interim condensed consolidated
financial statements. The most significant estimates include those used in
determining investment allowances, the fair value of derivatives, deferred
policy acquisition costs, liability for future policyholder benefits, accounting
for reinsurance transactions and liability for litigation matters. 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 $419 million and $442 million at March 31, 2002 and December 31,
2001, respectively.
Certain amounts in the prior years' unaudited interim condensed
consolidated financial statements have been reclassified to conform with the
2002 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 at March 31, 2002 and its consolidated results of operations and
cash flows for the three months ended March 31, 2002 and 2001. 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 and the notes thereto for
the year ended December 31, 2001 included in MetLife, Inc.'s 2001 Annual Report
on Form 10-K filed with the Securities and Exchange Commission ("SEC").
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.
APPLICATION OF ACCOUNTING PRONOUNCEMENTS
Effective April 1, 2001, the Company adopted certain additional accounting
and reporting requirements of Statement of Financial Accounting Standards
("SFAS") No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities--a replacement of Financial Accounting Standards
Board ("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 did not have a material impact
on the Company's unaudited interim condensed consolidated financial statements.
7
Effective April 1, 2001, the Company adopted Emerging Issues Task Force
("EITF") 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 did not
have a 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
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. In
accordance with SFAS 141, the elimination of $5 million of negative goodwill has
been reported in income as a cumulative effect of a change in accounting. SFAS
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 by reporting unit.
The Company did not amortize goodwill for the three months ended March 31, 2002,
whereas for the three months ended March 31, 2001, the Company recorded
amortization of $12 million. The Company is in the process of developing an
estimate of the impact of the adoption of SFAS 142 on its unaudited interim
condensed consolidated financial statements. The Company (i) has determined that
there were no significant reclassifications between goodwill and other
intangible asset balances, (ii) has tentatively determined that there will be no
significant impairment of other intangible assets as of January 1, 2002, (iii)
will complete the first step of the impairment test by June 30, 2002, and (iv)
will determine the amount of goodwill impairment, if any, by December 31, 2002.
In July 2001, the SEC released Staff Accounting Bulletin ("SAB") 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. The application of SAB 102 by the Company did not have a material
impact on the Company's unaudited interim condensed consolidated financial
statements.
Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144
provides a single model for accounting for long-lived assets to be disposed of
by superceding SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of ("SFAS 121"), and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30, Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions ("APB 30"). Under SFAS 144, discontinued operations are measured at
the lower of carrying value or fair value less costs to sell, rather than on a
net realizable value basis. Future operating losses relating to discontinued
operations also are no longer recognized before they occur. SFAS 144: broadens
the definition of a discontinued operation to include a component of an entity
(rather than a segment of a business); requires long-lived assets to be disposed
of other than by sale to be considered held and used until disposed; and retains
the basic provisions of (i) APB 30 regarding the presentation of discontinued
operations in the statements of income, (ii) SFAS 121 relating to recognition
and measurement of impaired long-lived assets (other than goodwill), and (iii)
SFAS 121 relating to the measurement of long-lived assets classified as held for
sale. The adoption of SFAS 144 by the Company did not have a material impact on
the Company's unaudited interim condensed consolidated financial statements.
8
2. CLOSED BLOCK
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,
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:
MARCH 31, DECEMBER 31,
2002 2001
-------- --------
(DOLLARS IN MILLIONS)
CLOSED BLOCK LIABILITIES
Future policy benefits $ 40,417 $ 40,325
Other policyholder funds 321 321
Policyholder dividends payable 791 757
Policyholder dividend obligation 413 708
Payables under securities loaned transactions 3,695 3,350
Other 232 90
-------- --------
Total closed block liabilities 45,869 45,551
-------- --------
ASSETS DESIGNATED TO THE CLOSED BLOCK
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost: $26,332 and $25,761, respectively) 26,516 26,331
Equity securities, at fair value (cost: $234 and $240, respectively) 273 282
Mortgage loans on real estate 6,450 6,358
Policy loans 3,900 3,898
Short-term investments 530 170
Other invested assets (amortized cost: $167 and $137, respectively) 193 159
-------- --------
Total investments 37,862 37,198
Cash and cash equivalents 659 1,119
Accrued investment income 651 550
Deferred income taxes 937 1,060
Premiums and other receivables 378 244
-------- --------
Total assets designated to the closed block 40,487 40,171
-------- --------
Excess of closed block liabilities over assets designated
to the closed block 5,382 5,380
-------- --------
Amounts included in accumulated other comprehensive loss:
Net unrealized investment gains, net of deferred
income tax of $80 and $219, respectively 139 389
Unrealized derivative gains, net of deferred income
tax of $11 and $9, respectively 19 17
Allocated to policyholder dividend obligation, net of
deferred income tax of $151 and $255, respectively (262) (453)
-------- --------
(104) (47)
-------- --------
Maximum future earnings to be recognized from closed
block assets and liabilities $ 5,278 $ 5,333
======== ========
Information regarding the policyholder dividend obligation is as follows:
THREE
MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2002 2001
---------- ----------
(DOLLARS IN MILLIONS)
Balance at beginning of period $ 708 $ 385
Impact on income before losses allocable to policyholder
dividend obligation 7 159
Net investment losses (7) (159)
Change in unrealized investment and derivative gains (295) 323
---------- ----------
Balance at end of period $ 413 $ 708
========== ==========
9
Closed block revenues and expenses are as follows:
THREE MONTHS ENDED
MARCH 31,
---------------------
2002 2001
-------- --------
REVENUES
Premiums $ 842 $ 880
Net investment income 637 614
Net investment gains (losses) (net of amounts allocable
to the policyholder dividend obligation of
$(7) and $(36), respectively) 5 (15)
-------- --------
Total revenues 1,484 1,479
-------- --------
EXPENSES
Policyholder benefits and claims 912 911
Policyholder dividends 399 373
Change in policyholder dividend obligation (excludes
amounts directly related to net investment losses of
$(7) and $(36), respectively) 7 36
Other expenses 80 88
-------- --------
Total expenses 1,398 1,408
-------- --------
Revenues net of expenses before income taxes 86 71
Income taxes 31 26
-------- --------
Revenues net of expenses and income taxes $ 55 $ 45
======== ========
The change in maximum future earnings of the closed block is as follows:
THREE MONTHS ENDED
MARCH 31,
-----------------------
2002 2001
-------- --------
Beginning of period $ 5,333 $ 5,512
End of period 5,278 5,467
-------- --------
Change during the period $ (55) $ (45)
======== ========
Metropolitan Life charges the closed block with federal income taxes,
state and local premium taxes, and other additive state or local taxes, as well
as investment management expenses relating to the closed block as provided in
the plan of reorganization. Metropolitan Life also charges the closed block for
expenses of maintaining the policies included in the closed block.
10
Many of the derivative instrument strategies used by the Company are also
used for the closed block. The table below provides a summary of the carrying
value, notional amount and fair value of derivatives by hedge accounting
classification at:
MARCH 31, 2002 DECEMBER 31, 2001
--------------------------------------------------- ---------------------------------------------------
FAIR VALUE FAIR VALUE
CARRYING NOTIONAL ----------------------- CARRYING NOTIONAL -----------------------
VALUE AMOUNT ASSETS LIABILITIES VALUE AMOUNT ASSETS LIABILITIES
----- ------ ------ ----------- ----- ------ ------ -----------
(DOLLARS IN MILLIONS)
BY TYPE OF HEDGE
Fair Value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Cash flow 11 61 11 -- 10 65 10 --
Not designated 26 218 26 -- 20 218 25 5
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 37 $ 279 $ 37 $ -- $ 30 $ 283 $ 35 $ 5
======== ======== ======== ======== ======== ======== ======== ========
For the three months ended March 31, 2002 and 2001, the amount related to
cash flow hedge ineffectiveness was insignificant and there were no discontinued
fair value or cash flow hedges.
At March 31, 2002 and December 31, 2001, the accumulated amount in other
comprehensive income relating to cash flow hedges was $24 million and $21
million, respectively. For the three months ended March 31, 2002 and 2001, the
Company recognized other comprehensive income of $4 million and $10 million,
respectively, relating to the effective portion of cash flow hedges. During the
three months ended March 31, 2002, $1 million of other comprehensive income was
reclassified into net investment income. There was no other comprehensive income
reclassified into net investment income for the three months ended March 31,
2001. Approximately $3 million of the pre-tax gain reported in accumulated
other comprehensive income is expected to be reclassified into net income
during the year ending December 31, 2002 as the underlying investments mature
or expire according to their original terms. The reclassifications are
recognized over the life of the hedged item.
For the three months ended March 31, 2002 and 2001, the Company did not
recognize any net investment income and recognized net investment gains of $2
million and $6 million, respectively, from derivatives not designated as
accounting hedges. The use of these non-speculative derivatives is permitted by
the New York Insurance Department (the "Department").
11
3. EARNINGS PER SHARE
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.
THREE MONTHS ENDED MARCH 31,
------------------------------
2002 2001
------------ ------------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE DATA)
Weighted average common stock outstanding for basic earnings per share 712,065,191 757,568,016
Incremental shares from assumed:
Conversion of forward purchase contracts 27,062,683 27,697,719
Exercise of stock options 338,127 --
------------ ------------
Weighted average common stock outstanding for diluted earnings per share 739,466,001 785,265,735
============ ============
CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 5 N/A
============
Basic earnings per share $ 0.00 N/A
============
Diluted earnings per share $ 0.00 N/A
============
NET INCOME $ 329 $ 287
============ ============
Basic earnings per share $ 0.46 $ 0.38
============ ============
Diluted earnings per share $ 0.44 $ 0.37
============ ============
On February 19, 2002, the Holding Company's Board of Directors authorized
a $1 billion common stock repurchase program. This program will begin after the
completion of the March 28, 2001 and June 27, 2000 repurchase programs, each of
which authorized the repurchase of $1 billion of common stock. Under these
authorizations, the Holding Company may purchase common stock from the MetLife
Policyholder Trust, in the open market, and in privately negotiated
transactions. For the three months ended March 31, 2002 and 2001, 7,680,041 and
7,829,619 shares of common stock, respectively, were acquired for $240 million
and $238 million, respectively.
12
4. DERIVATIVE INSTRUMENTS
The Company uses derivative instruments to manage risk through one of four
principal risk management strategies: the hedging of liabilities, invested
assets, portfolios of assets or liabilities and anticipated transactions.
Additionally, Metropolitan Life enters into income generation and replication
derivative transactions as permitted by its derivative use plan that was
approved by the Department. 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.
On the date the Company enters into a derivative contract, management
determines the purpose of the derivative and designates the derivative as a
hedge, if appropriate, of the identified exposure (fair value, cash flow or
foreign currency). If a derivative does not qualify for hedge accounting,
according to SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, 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 de-designated 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 table below provides a summary of the carrying value, notional amount
and fair value of derivatives by hedge accounting classification at:
MARCH 31, 2002 DECEMBER 31, 2001
--------------------------------------------------- ---------------------------------------------------
FAIR VALUE FAIR VALUE
CARRYING NOTIONAL ----------------------- CARRYING NOTIONAL -----------------------
VALUE AMOUNT ASSETS LIABILITIES VALUE AMOUNT ASSETS LIABILITIES
----- ------ ------ ----------- ----- ------ ------ -----------
(DOLLARS IN MILLIONS)
BY TYPE OF HEDGE
Fair value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Cash flow 52 754 59 7 64 640 65 1
Non-qualifying 166 8,665 204 38 176 13,583 222 46
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 218 $ 9,419 $ 263 $ 45 $ 240 $ 14,223 $ 287 $ 47
======== ======== ======== ======== ======== ======== ======== ========
For the three months ended March 31, 2002 and 2001, the amount related to
fair value and cash flow hedge ineffectiveness was insignificant and there were
no discontinued fair value or cash flow hedges.
At March 31, 2002 and December 31, 2001, the accumulated amount in other
comprehensive income relating to cash flow hedges was $56 million and $71
million, respectively. For the three months ended March 31, 2002, the Company
recognized other comprehensive losses relating to the effective portion of cash
flow hedges of $12 million, whereas for the three months ended March 31, 2001,
the Company recognized $45 million of other comprehensive income. During the
three months ended March 31, 2002, $3 million of other comprehensive income was
reclassified into net investment income. There was no other comprehensive income
reclassified into net investment income for the three months ended March 31,
2001. Approximately $12 million of the pre-tax gain reported in accumulated
other comprehensive income is expected to be reclassified into net income
during the year ending December 31, 2002 as the underlying investments mature
or expire according to their original terms. Reclassifications are recognized
over the life of the hedged item.
For the three months ended March 31, 2002 and 2001, the Company recognized
net investment income of $2 million and $10 million, respectively, and net
investment gains of $29 million and $70 million, respectively, from derivatives
not qualifying as accounting hedges. The use of these non-speculative
derivatives is permitted by the Department.
13
5. NET INVESTMENT LOSSES
Net investment losses, including changes in valuation allowances, are as
follows:
THREE MONTHS ENDED
MARCH 31,
-----------------------
2002 2001
-------- --------
Fixed maturities $ (165) $ (151)
Equity securities 192 1
Mortgage loans on real estate (19) 2
Real estate and real estate joint ventures (2) 5
Other limited partnership interests (31) (100)
Other (80) 68
-------- --------
(105) (175)
Amounts allocable to:
Deferred policy acquisition costs 6 (6)
Policyholder dividend obligation 7 36
-------- --------
Total investment losses $ (92) $ (145)
======== ========
Investment gains and losses have been reduced by (i) deferred policy
acquisition cost amortization to the extent that such amortization results from
investment gains and losses, and (ii) adjustments to the policyholder dividend
obligation resulting from investment gains and losses. This presentation may not
be comparable to presentations made by other insurers.
6. COMMITMENTS AND CONTINGENCIES
Sales Practices Claims
Over the past several years, Metropolitan Life, New England Mutual Life
Insurance Company ("New England Mutual") and General American Life Insurance
Company ("General American") have faced numerous claims, including class action
lawsuits, alleging improper marketing and sales of individual life insurance
policies or annuities. These lawsuits are generally referred to as "sales
practices claims."
In December 1999, the United States District Court for the Western
District of Pennsylvania approved a class action settlement resolving litigation
against Metropolitan Life involving certain alleged sales practices claims. 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. Implementation of the
settlement is substantially completed.
Similar sales practices class actions against New England Mutual, with
which Metropolitan Life merged in 1996, and General American, which was acquired
in 2000, have been settled. The New England Mutual case, approved by the United
States District Court for the District of Massachusetts in October 2000,
involves approximately 600,000 life insurance policies sold during the period
January 1, 1983 through August 31, 1996. Implementation of the New England
Mutual class action settlement is substantially completed. The General American
case, approved by the United States District Court for the Eastern District of
Missouri and affirmed by the appellate court in October 2001, involves
approximately 250,000 life insurance policies sold during the period January 1,
1982 through December 31, 1996. A petition for writ of certiorari to the United
States Supreme Court has been filed by objectors to the settlement.
Implementation of the General American class action settlement is proceeding.
Metropolitan Life expects that the total cost of its class action
settlement will be approximately $957 million. It is expected that the total
cost of the New England Mutual class action settlement will be approximately
$160 million. General American expects that the total cost of its class action
settlement will be approximately $68 million.
14
Certain class members have opted out of the class action settlements noted
above and have brought or continued non-class action sales practices lawsuits.
As of March 31, 2002, there are approximately 420 sales practices lawsuits
pending against Metropolitan Life, approximately 70 sales practices lawsuits
pending against New England Mutual and approximately 50 sales practices lawsuits
pending against General American. Metropolitan Life, New England Mutual and
General American continue to vigorously defend themselves against these
lawsuits. 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 Metropolitan Life class action settlement did not resolve two putative
class actions involving sales practices claims filed against Metropolitan Life
in Canada, and these actions remain pending. In March 2002, a purported class
action complaint was filed in the United States District Court for the District
of Kansas by S-G Metals Industries, Inc. against New England Mutual. The
complaint seeks certification of a class on behalf of policyholders who
purchased corporate owned life insurance policies, bank owned life insurance
policies, pension policies and work site marketing policies. These policyholders
were not part of the New England Mutual class action settlement noted above. New
England Mutual intends to vigorously defend itself against the case.
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 against Metropolitan Life, New
England Mutual and General American.
See Note 11 of Notes to Consolidated Financial Statements for the year
ended December 31, 2001 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.
Asbestos-Related Claims
Metropolitan Life is also a defendant in thousands of 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.
See Note 11 of Notes to Consolidated Financial Statements for the year
ended December 31, 2001 included in the MetLife, Inc. 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 are very difficult to predict due to the limitations of
available data and the substantial 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 59,500 asbestos-related claims in
2001. During the first three months of 2002, Metropolitan Life received
approximately 11,800 asbestos-related claims. Metropolitan Life is studying its
recent claims experience, published literature regarding asbestos claims
experience in the United States and numerous variables that
15
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.
Property and Casualty Actions
Purported class action suits involving claims by policyholders for the
alleged diminished value of automobiles after accident-related repairs have been
filed in Rhode Island, Texas, Georgia and Tennessee against Metropolitan
Property and Casualty Insurance Company; Rhode Island and Texas trial courts
denied plaintiffs' motions for class certification and a hearing on plaintiffs'
motion in Tennessee for class certification is to be scheduled. A tentative
settlement has been reached in the Georgia action which was filed in February
2002 in a Georgia state court. A purported class action has been filed against
Metropolitan Property and Casualty Insurance Company's subsidiary, Metropolitan
Casualty Insurance Company, in Florida. The complaint alleges 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. A two-plaintiff individual
lawsuit brought in Alabama alleges that Metropolitan Property and Casualty
Insurance Company and CCC, a valuation company, violated state law by failing to
pay the proper valuation amount for a total loss. Total loss valuation methods
also are the subject of national class actions involving other insurance
companies. A Pennsylvania state court purported class action lawsuit filed in
2001 alleges that Metropolitan Property and Casualty Insurance Company
improperly took depreciation on partial homeowner losses where the insured
replaced the covered item. In addition, in Florida, Metropolitan Property and
Casualty Insurance Company has been named in a class action alleging that it
improperly established preferred provider organizations (hereinafter "PPO").
Other insurers have been named in both the Pennsylvania and the PPO cases.
Metropolitan Property and Casualty Insurance Company and Metropolitan Casualty
Insurance Company are vigorously defending themselves against these lawsuits.
Demutualization Actions
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 Superintendent 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 Superintendent who 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 in 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. In 2001,
pursuant to a motion to dismiss filed by Metropolitan Life, this case was
dismissed by the District Court. Plaintiffs have appealed 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.
In 2001, a lawsuit was filed in the Superior Court of Justice, Ontario,
Canada on behalf of a proposed class of certain former Canadian policyholders
against the Holding Company, Metropolitan Life, and Metropolitan Life Insurance
Company of Canada. Plaintiffs' allegations concern the way that their policies
were treated in connection with the demutualization of Metropolitan Life;
16
they seek damages, declarations, and other non-pecuniary relief. The defendants
believe they have meritorious defenses to the plaintiffs' claims and will
contest vigorously all of plaintiffs' claims in this matter.
Race-Conscious Underwriting Claims
Insurance Departments in a number of states initiated inquiries in 2000
about possible race-conscious underwriting of life insurance. These inquiries
generally have been directed to all life insurers licensed in their respective
states, including Metropolitan Life and certain of its subsidiaries. The
Department has commenced examinations of certain domestic life insurance
companies, including Metropolitan Life, concerning possible past race-conscious
underwriting practices. Metropolitan Life is cooperating fully with that
inquiry, which is ongoing. Four purported class action lawsuits filed against
Metropolitan Life in 2000 and 2001 alleging racial discrimination in the
marketing, sale, and administration of life insurance policies have been
consolidated in the United States District Court for the Southern District of
New York. The plaintiffs 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. 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
purportedly harmed by the practices alleged in the complaint. Metropolitan Life
has opposed the class certification motion. Metropolitan Life has been involved
in settlement discussions to resolve the regulatory examination and the actions
pending in the United States District Court for the Southern District of New
York. In that connection, Metropolitan Life recorded a $250 million pre-tax
charge in the fourth quarter of 2001 as probable and estimable costs associated
with the anticipated resolution of these matters.
In 2001, 12 lawsuits were filed against Metropolitan Life on behalf of
approximately 109 non-Caucasian plaintiffs in their individual capacities in
state court in Tennessee. The complaints allege under state common law theories
that Metropolitan Life discriminated against non-Caucasians in the sale,
formation and administration of life insurance policies. The plaintiffs have
stipulated that they do not seek and will not accept more than $74,000 per
person if they prevail on their claims. Early in 2002, two individual actions
were filed against Metropolitan Life in federal court in Alabama alleging both
federal and state law claims of racial discrimination in connection with the
sale of life insurance policies. Metropolitan Life is contesting vigorously
plaintiffs' claims in the Tennessee and Alabama actions.
Other
In 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.
A lawsuit has been filed against Metropolitan Life in Ontario, Canada by
Clarica Life Insurance Company regarding the sale of the majority of
Metropolitan Life's Canadian operation to Clarica in 1998. Clarica alleges that
Metropolitan Life breached certain representations and warranties contained in
the sale agreement, that Metropolitan Life made misrepresentations upon which
Clarica relied during the negotiations and that Metropolitan Life was negligent
in the performance of certain of its obligations and duties under the sale
agreement. Metropolitan Life is vigorously defending itself against this
lawsuit.
General American has received and responded to subpoenas for documents and
other information from the office of the U.S. Attorney for the Eastern District
of Missouri with respect to certain administrative services provided by its
former Medicare Unit during the period January 1, 1988 through December 31,
1998, which services ended and which unit was disbanded prior to MetLife's
acquisition of General American. The subpoenas were issued as part of the
Government's criminal investigation alleging that General American's former
Medicare Unit engaged in improper billing and claims payment practices. The
Government is also conducting a civil investigation under the federal False
Claims Act. General American is cooperating fully with the Government's
investigations. In March 2002, General American and the Government reached an
agreement in principle to resolve all issues through a civil settlement. MetLife
has recorded a $48 million charge, net of income taxes, to cover costs
associated with the anticipated resolution of the investigations. The agreement
is subject to approvals and there can be no assurance that it will be approved.
17
Various litigation, claims and assessments against the Company, in
addition to those discussed above and those otherwise provided for in the
Company's consolidated financial statements, have arisen in the course of the
Company's business, including, but not limited to, in connection with its
activities as an insurer, employer, investor, investment advisor and taxpayer.
Further, state insurance regulatory authorities and other federal and state
authorities regularly make inquiries and conduct investigations concerning the
Company's compliance with applicable insurance and other laws and regulations.
Summary
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, except as noted above in connection with specific matters. 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
Comprehensive income (loss) is as follows:
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
2002 2001
-------- --------
(DOLLARS IN MILLIONS)
Net income $ 329 $ 287
Other comprehensive income (loss):
Cumulative effect of change in accounting for derivatives,
net of income taxes -- 32
Unrealized gains (losses) on derivative instruments, net of
income taxes (10) 34
Unrealized investment gains (losses), net of related offsets,
reclassification adjustments and income taxes (821) 570
Foreign currency translation adjustments -- (52)
-------- --------
Other comprehensive income (loss) (831) 584
-------- --------
Comprehensive income (loss) $ (502) $ 871
======== ========
18
8. BUSINESS SEGMENT INFORMATION
AUTO
&
FOR THE THREE MONTHS ENDED MARCH 31, 2002 INDIVIDUAL INSTITUTIONAL REINSURANCE HOME
- ------------------------------------------------------------------------------------------------
Premiums $ 1,084 $ 1,860 $ 475 $ 692
Universal life and investment-type product
policy fees 298 152 -- --
Net investment income 1,531 985 99 45
Other revenues 128 172 8 7
Net investment (losses) gains 3 (82) 2 (14)
Income (loss) before provision for income taxes
and cumulative effect of accounting change 276 283 37 27
================================================================================================
ASSET CORPORATE
FOR THE THREE MONTHS ENDED MARCH 31, 2002 MANAGEMENT INTERNATIONAL & OTHER TOTAL
- ------------------------------------------------------------------------------------------------
Premiums $ -- $ 375 $ (5) $ 4,481
Universal life and investment-type product
policy fees -- 7 -- 457
Net investment income 14 75 40 2,789
Other revenues 40 3 9 367
Net investment (losses) gains (4) (22) 25 (92)
Income (loss) before provision for income taxes
and cumulative effect of accounting change (2) (2) (99) 520
================================================================================================
AUTO
&
FOR THE THREE MONTHS ENDED MARCH 31, 2001 INDIVIDUAL INSTITUTIONAL REINSURANCE HOME
- ------------------------------------------------------------------------------------------------
Premiums $ 1,106 $ 1,868 $ 410 $ 673
Universal life and investment-type product
policy fees 313 150 -- --
Net investment income 1,533 996 97 51
Other revenues 146 167 9 6
Net investment (losses) gains (53) (70) 5 (3)
Income (loss) before provision for income taxes
and cumulative effect of accounting change 235 229 29 (45)
================================================================================================
ASSET CORPORATE
FOR THE THREE MONTHS ENDED MARCH 31, 2001 MANAGEMENT INTERNATIONAL & OTHER TOTAL
- ------------------------------------------------------------------------------------------------
Premiums $ -- $ 177 $ -- $ 4,234
Universal life and investment-type product
policy fees -- 11 -- 474
Net investment income 19 64 56 2,816
Other revenues 56 4 23 411
Net investment (losses) gains -- 1 (25) (145)
Income (loss) before provision for income taxes
and cumulative effect of accounting change 9 20 (50) 427
================================================================================================
AT MARCH 31, AT DECEMBER 31,
2002 2001
-------- --------
Assets
Individual $132,166 $131,314
Institutional 89,620 89,661
Reinsurance 8,265 7,911
Auto & Home 4,583 4,581
Asset Management 227 256
International 5,485 5,308
Corporate & Other 18,364 17,867
-------- --------
Total $258,710 $256,898
======== ========
As part of the acquisition of GenAmerica Financial Corporation in 2000,
the Company acquired Conning Corporation ("Conning"), the results of which were
included in the Asset Management segment due to the types of products and
strategies employed by the entity from its acquisition date to July 2001, the
date of its disposition. The Company sold Conning, receiving $108 million in the
transaction, and reported a gain of approximately $16 million, net of income
taxes of $9 million, in the third quarter of 2001.
Corporate & Other consists of various start-up and run-off entities,
including MetLife Bank, N.A., as well as the elimination of all intersegment
amounts. The principal component of the intersegment amounts relates to
intersegment loans, which bear interest rates commensurate with related
borrowings.
Net investment income and net investment gains and losses are based upon
the actual results of each segment's specifically identifiable asset portfolio.
Other costs and operating costs were allocated to each of the segments based
upon: (i) a review of the nature of such costs, (ii) time studies analyzing the
amount of employee compensation costs incurred by each segment, and (iii) cost
estimates included in the Company's product pricing.
Revenues derived from any customer did not exceed 10% of consolidated
revenues. Revenues from U.S. operations were $7,564 million and $7,533 million
for the three months ended March 31, 2002 and 2001, respectively, which
represented 95% and 97% of consolidated revenues for the three months ended
March 31, 2002 and 2001, respectively.
19
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 to MetLife, Inc. (the "Holding Company"), a Delaware corporation, and its
subsidiaries, including Metropolitan Life Insurance Company ("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.
ACQUISITIONS AND DISPOSITIONS
In November 2001, the Company acquired Compania de Seguros de Vida
Santander S.A. and Compania de Reaseguros de Vida Soince Re S.A., wholly-owned
subsidiaries of Santander Central Hispano in Chile (collectively, the "Chilean
acquisitions"). These acquisitions mark MetLife's entrance into the Chilean
insurance market and the newest addition to the Company's Latin American
operations.
In July 2001, the Company completed its sale of Conning Corporation
("Conning"), an affiliate acquired in the acquisition of GenAmerica Financial
Corporation ("GenAmerica") in 2000.
In May 2001, the Company acquired Seguradora America Do Sul S.A.
("Seasul"), a life and pension company in Brazil. Seasul is being integrated
into MetLife's wholly-owned Brazilian subsidiary, Metropolitan Life Seguros e
Previdencia Privada S.A, or MetLife Brazil.
In February 2001, the Holding Company consummated the purchase of Grand
Bank, N.A., which was renamed MetLife Bank, N.A. ("MetLife Bank"), and 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, N.A.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP") requires
management to adopt accounting policies and make estimates and assumptions that
affect amounts reported in the unaudited interim condensed consolidated
financial statements. The critical accounting policies and related judgments
underlying the Company's unaudited interim condensed consolidated financial
statements are summarized below. In applying these policies, management makes
subjective and complex judgments that frequently require estimates about matters
that are inherently uncertain. Many of these policies are common in the
insurance and financial services industries; others are specific to the
Company's businesses and operations.
Investments
The Company's principal investments are in fixed maturities, mortgage
loans and real estate, all of which are exposed to three primary sources of
investment risk: credit, interest rate and market valuation. The financial
statement risks are those associated with the recognition of income, impairments
and the determination of fair values. In addition, the earnings on certain
investments are dependent upon market conditions which could result in
prepayments and changes in amounts to be earned due to changing interest rates
or equity markets.
Derivatives
The Company enters into freestanding derivative transactions to manage the
risk associated with variability in cash flows related to the Company's
financial assets and liabilities or to changing fair values. The Company also
purchases investment securities and issues certain insurance policies with
embedded derivatives. The associated financial statement risk is the volatility
in net income, which can result from (i) changes in fair value of derivatives
not qualifying as accounting hedges, and (ii) ineffectiveness of designated
hedges in an environment of changing interest rates or fair values. In
addition, accounting for derivatives is complex, as evidenced by significant
interpretations of the primary accounting standards which continue to evolve,
as well as the significant judgments and estimates involved in determining fair
value in the absence of quoted market values. These estimates are based on
valuation methodologies and assumptions deemed appropriate in the
circumstances; however, the use of different assumptions may have a material
effect on the estimated fair value amounts.
20
Deferred Policy Acquisition Costs
The Company incurs significant costs in connection with acquiring new
insurance business. These costs, which vary with and are primarily related to
the production of new business, are deferred. The recovery of such costs is
dependent on the future profitability of the related business. The amount of
future profit is dependent principally on investment returns, mortality,
morbidity, persistency, expenses to administer the business and certain economic
variables, such as inflation. These factors enter into management's estimates of
gross margins and profits which generally are used to amortize certain of such
costs. Revisions to estimates result in changes to the amounts expensed in the
reporting period in which the revisions are made and could result in the
impairment of the asset and a charge to income if estimated future gross margins
and profits are less than amounts deferred.
Future Policy Benefits
The Company also establishes liabilities for amounts payable under
insurance policies, including traditional life insurance, annuities and disabled
lives. Generally, amounts are payable over an extended period of time and the
profitability of the products is dependent on the pricing of the products.
Principal assumptions used in pricing policies and in the establishment of
liabilities for future policy benefits are mortality, morbidity, expenses,
persistency, investment returns and inflation. Differences between the actual
experience and assumptions used in pricing the policies and in the establishment
of liabilities result in variances in profit and could result in losses.
The Company establishes liabilities for unpaid claims and claims expenses
for property and casualty insurance. Pricing of this insurance takes into
account the expected frequency and severity of losses, the costs of providing
coverage, competitive factors, characteristics of the property covered and the
insured, and profit considerations. Liabilities for property and casualty
insurance are dependent on estimates of amounts payable for claims reported but
not settled and claims incurred but not reported. These estimates are influenced
by historical experience and actuarial assumptions of current developments,
anticipated trends and risk management strategies.
Reinsurance
Accounting for reinsurance requires extensive use of assumptions and
estimates, particularly related to the future performance of the underlying
business. The Company periodically reviews actual and anticipated experience
compared to the assumptions used to establish policy benefits. Additionally, for
each of its reinsurance contracts, the Company must determine if the contract
provides indemnification against loss or liability relating to insurance risk,
in accordance with applicable accounting standards. The Company must review all
contractual features, particularly those that may limit the amount of insurance
risk to which the Company is subject or features that delay the timely
reimbursement of claims. If the Company determines that a contract does not
expose it to a reasonable possibility of a significant loss from insurance risk,
the Company records the contract using the deposit method of accounting.
Litigation
The Company is a party to a number of legal actions. Given the inherent
unpredictability of litigation, it is difficult to estimate the impact of
litigation on the Company's consolidated financial position. Liabilities are
established when it is probable that a loss has been incurred and the amount of
the loss can be reasonably estimated. Liabilities related to certain lawsuits
are especially difficult to estimate due to the limitation of available data and
uncertainty around numerous variables used to determine amounts recorded. It is
possible that an adverse outcome in certain cases could have a material adverse
effect upon the Company's operating results or cash flows in particular
quarterly or annual periods. See "Legal Proceedings."
21
RESULTS OF OPERATIONS
The following table presents consolidated financial information for the
Company for the periods indicated:
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
2002 2001
-------- --------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 4,481 $ 4,234
Universal life and investment-type product policy fees 457 474
Net investment income 2,789 2,816
Other revenues 367 411
Net investment losses (net of amounts allocable to other
accounts of $(13) and $(30), respectively) (92) (145)
-------- --------
Total revenues 8,002 7,790
-------- --------
EXPENSES
Policyholder benefits and claims (excludes amounts directly related
to net investment losses of $(7) and $(36), respectively) 4,618 4,435
Interest credited to policyholder account balances 714 760
Policyholder dividends 497 515
Other expenses (excludes amounts directly related to net
investment losses of $(6) and $6, respectively) 1,653 1,653
-------- --------
Total expenses 7,482 7,363
-------- --------
Income before provision for income taxes and
cumulative effect of accounting change 520 427
Provision for income taxes 196 140
-------- --------
Income before cumulative effect of accounting change 324 287
Cumulative effect of accounting change 5 --
-------- --------
Net income $ 329 $ 287
======== ========
THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2001 -- THE COMPANY
Premiums increased by $247 million, or 6%, to $4,481 million for the three
months ended March 31, 2002 from $4,234 million for the comparable 2001 period.
This variance is primarily attributable to increases in the International and
Reinsurance segments, partially offset by a decrease in the Individual segment.
The increase in International is due to the sale of an annuity contract to a
Canadian trust company, a pension manager, the 2001 acquisition of Seasul in
Brazil and the Chilean acquisitions, as well as growth in Mexico and South
Korea. New premiums from facultative and automatic treaties and renewal premiums
on existing blocks of business all contributed to the $65 million premium growth
in the Reinsurance segment. A $22 million decrease in the Individual segment is
primarily due to a decline in traditional life insurance policies, which
reflects a maturing of that business and a continued shift in customer
preference from those policies to variable life products. In addition,
Individual premiums from annuity and investment-type products declined due to
lower sales of supplementary contracts with life contingencies and single
premium immediate annuities.
Universal life and investment-type product policy fees decreased by $17
million, or 4%, to $457 million for the three months ended March 31, 2002 from
$474 million for the comparable 2001 period. This variance is almost entirely
attributable to the Individual segment. Policy fees from Individual insurance
products declined by $16 million, primarily due to lower surrender charges.
Net investment income decreased by $27 million, or 1%, to $2,789 million
for the three months ended March 31, 2002 from $2,816 million for the comparable
2001 period. This decrease is due to declines of (i) $58 million, or 87%, in
income from equity securities and other limited partnerships, (ii) $21 million,
or 31%, in income from other invested assets, and (iii) $11 million, or 7%, in
real estate and real estate joint venture income. These variances are partially
offset by increases of (i) $21 million, or 1%, in fixed
22
maturities income, (ii) $27 million, or 6%, in mortgage loan income, and (iii)
$11 million, or 15%, in income on cash and short-term investments.
The decline in net investment income from equity securities and other
limited partnership interests to $9 million from $67 million is primarily due to
decreases in partnership distributions. The decrease in investment income from
other invested assets to $46 million from $67 million is primarily due to lower
income from derivatives. The decrease in net investment income from real estate
and real estate joint ventures to $150 million from $161 million is primarily
due to a decrease in land sales, partially offset by the transfer of the One
Madison Avenue property from company use to an investment property. The increase
in net investment income from fixed maturities to $1,957 million from $1,936
million was primarily due to increased spreads in security lending and increased
equity linked note income resulting from an improvement in the underlying
Standard & Poor's 500 Index versus the prior year period. This increase was
partially offset by lower market rates on the fixed income portfolio. The rise
in net investment income from mortgage loans to $462 million from $435 million
is predominately due to growth in the mortgage portfolio.
The decrease in net investment income is attributable to decreases in
Corporate & Other, Institutional, Auto & Home and Asset Management, partially
offset by an increase in the International segment. A lower asset base,
resulting from the Company's utilization of its stock repurchase program, is the
primary driver of the $16 million decline in Corporate & Other's net investment
income. An $11 million decline in Institutional is predominately due to lower
market rates on its fixed annuity and mortgage loan portfolio, partially offset
by higher securities lending income. The $6 million decrease in the Auto & Home
segment is due to lower yields on the fixed income portfolio and a shift in the
asset base from higher yielding investments to cash as this segment was
preparing to purchase corporate-owned life insurance. Asset Management's $5
million decrease is primarily due to lower fees commensurate with a decrease in
assets under management. The $11 million increase in International is largely
due to the Chilean acquisitions in November 2001.
Other revenues decreased by $44 million, or 11%, to $367 million for the
three months ended March 31, 2002 from $411 million for the comparable 2001
period. This variance is attributable to decreases in Individual, Asset
Management and Corporate & Other. The $18 million decline in Individual is due
to a decrease in pension administration revenue and reduced revenues in
non-insurance subsidiaries. The sale of Conning, which occurred on July 2, 2001,
is the significant component of the $16 million decline in Asset Management. The
$14 million decrease in Corporate & Other is the result of a decrease in an
experience refund associated with a reinsurance policy.
The Company's investment gains and losses are net of related policyholder
amounts. The amounts netted against investment gains and losses are (i) deferred
policy acquisition amortization, to the extent that such amortization results
from investment gains and losses, and (ii) adjustments to the policyholder
dividend obligation resulting from investment gains and losses.
Net investment losses decreased by $53 million, or 37%, to $92 million for
the three months ended March 31, 2002 from $145 million for the comparable 2001
period. This decrease reflects total gross investment losses of $105 million, a
decrease of $70 million, or 40%, from $175 million in 2001, before offsets for:
the amortization of deferred policy acquisition costs of $6 million and ($6)
million in 2002 and 2001, respectively, and changes in the policyholder dividend
obligation of $7 million and $36 million in 2002 and 2001, respectively.
Increased gains from equity securities of $191 million and additional gains of
$69 million from other limited partnership interests were partially offset by a
$148 million decline in gains from other invested assets. This decrease is
largely attributable to a swing in the mark to market adjustment related to
derivative contracts as well as 2002 foreign currency losses in Argentina.
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 income to easily exclude investment gains
and losses and the related effects on the unaudited interim condensed
consolidated statements of income 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 income may not be comparable to amounts reported by
other insurers.
Policyholder benefits and claims increased by $183 million, or 4%, to
$4,618 million for the three months ended March 31, 2002 from $4,435 million for
the comparable 2001 period. This variance reflects total gross policyholder
benefits and claims of $4,611 million, an increase of $212 million or 5%, from
$4,399 million in 2001, before the offsets for changes in the policyholder
dividend obligation of $7 million and $36 million in 2002 and 2001,
respectively. The net variance in policyholder benefits and claims is due to
increases in the International, Reinsurance and Institutional segments,
partially offset by a decrease in the Auto & Home segment. The increase in
International is primarily attributable to a $103 million increase in
liabilities for the aforementioned sale of an annuity contract, the Chilean
acquisitions and growth in Mexico and South Korea. The increase in
23
Reinsurance is commensurate with the growth in premiums. The increase in
Institutional is largely attributable to growth in this segment's dental,
disability and long-term care businesses, partially offset by a decline in
retirement and savings commensurate with lower premiums, as well as improved
underwriting results in 2002. The decrease in Auto & Home is due to improved
claim frequency in both the Auto and Property businesses resulting from milder
winter weather and increased underwriting and agency management actions.
Interest credited to policyholder account balances decreased by $46
million, or 6%, to $714 million for the three months ended March 31, 2002 from
$760 million for the comparable 2001 period. This variance is predominately the
result of a decrease in the Institutional segment. A $26 million drop in group
life is largely attributable to an overall reduction in crediting rates as a
result of the low interest rate environment. Retirement and savings decreased
by $17 million due to the low interest rate environment for guaranteed interest
and funding agreement contracts.
Policyholder dividends decreased by $18 million, or 3%, to $497 million
for the three months ended March 31, 2002 from $515 million for the comparable
2001 period. This variance is due to a decrease in the Institutional segment,
partially offset by an increase in the Individual segment. The decrease in
Institutional is due to dividend payments made on several group life and group
disability contracts for the three months ended March 31, 2001. Policyholder
dividends vary from period to period based on insurance contract experience. The
increase in Individual is due to growth in the underlying cash value related to
policies within the aging block of traditional life insurance business.
Other expenses are unchanged at $1,653 million for both the three months
ended March 31, 2002 and 2001. Excluding the capitalization and amortization of
deferred policy acquisition costs, which are discussed below, other expenses
increased by $117 million, or 7%, to $1,854 million in 2002 from $1,737 million
in 2001. This variance is attributable to increases in Corporate & Other,
Individual and Reinsurance. The most significant component of the variance in
Corporate & Other is legal costs, incurred in the first quarter of 2002,
associated with the anticipated resolution of federal government investigations
of General American Life Insurance Company's ("General American") former
Medicare business. The increase in Individual is primarily due to increased
sales of new annuity and investment-type products. Although there are expense
savings attributable to continued expense management initiatives, these savings
are largely offset by increased pension and post-retirement benefit expenses
over the comparable 2001 period. The increase in Reinsurance is primarily due
to an increase in allowances paid under reinsurance treaties. Allowances paid
can fluctuate depending on the type of reinsurance written.
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 income 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 by $103
million, or 24%, to $524 million for the three months ended March 31, 2002 from
$421 million for the comparable 2001 period. This variance is primarily due to
the Individual and Reinsurance segments. The increase in Individual is due to
higher sales of variable and universal life insurance policies and annuity and
investment-type products, resulting in higher commissions and other deferrable
expenses. The increase in Reinsurance is consistent with growth in that
segment. Total amortization of deferred policy acquisition costs decreased by
$26 million, or 8%, to $317 million in 2002 from $343 million in 2001.
Amortization of $323 million and $337 million are allocated to other expenses in
2002 and 2001, respectively, while the remainder of the amortization in each
year is allocated to investment gains and losses. The decrease in amortization
allocated to other expenses is attributable to the Individual, Reinsurance and
International segments. The decrease in Individual is due to refinements in the
calculation of estimated gross margins and profits. The increases in
Reinsurance and International are commensurate with business growth in those
segments.
Income tax expense for the three months ended March 31, 2002 was $196
million, or 38% of income before provision for income taxes and cumulative
effect of accounting change, compared with $140 million, or 33%, for the
comparable 2001 period. The 2002 effective tax rate differs from the corporate
tax rate of 35% primarily due to the inability to record tax benefits on certain
foreign capital losses, partially offset by the impact of non-taxable
investment income. The 2001 effective tax rate principally differs from the
corporate tax rate of 35% due to the impact of non-taxable investment income.
24
INDIVIDUAL
The following table presents consolidated financial information for the
Individual segment for the periods indicated:
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2002 2001
-------- --------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 1,084 $ 1,106
Universal life and investment-type product policy fees 298 313
Net investment income 1,531 1,533
Other revenues 128 146
Net investment gains (losses) 3 (53)
-------- --------
Total revenues 3,044 3,045
-------- --------
EXPENSES
Policyholder benefits and claims 1,232 1,233
Interest credited to policyholder account balances 443 444
Policyholder dividends 459 436
Other expenses 634 697
-------- --------
Total expenses 2,768 2,810
-------- --------
Income before provision for income taxes 276 235
Provision for income taxes 100 91
-------- --------
Net income $ 176 $ 144
======== ========
THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2001 - INDIVIDUAL
Premiums decreased by $22 million, or 2%, to $1,084 million for the three
months ended March 31, 2002 from $1,106 million for the comparable 2001 period.
Premiums from insurance products declined by $16 million. This decrease is
primarily due to a decline in traditional life insurance policies, which
reflects a maturing of that business and a continued shift in customer
preference from those policies to variable life products. Premiums from annuity
and investment-type products declined by $6 million, due to lower sales of
supplementary contracts with life contingencies and single premium immediate
annuity business.
Universal life and investment-type product policy fees decreased by $15
million, or 5%, to $298 million for the three months ended March 31, 2002 from
$313 million for the comparable 2001 period. Policy fees from insurance products
declined by $16 million, primarily due to lower surrender charges. Policy fees
from annuity and investment-type products remained essentially unchanged.
Other revenues decreased by $18 million, or 12%, to $128 million for the
three months ended March 31, 2002 from $146 million for the comparable 2001
period due to a decrease in pension administration revenue and reduced revenues
in non-insurance subsidiaries.
Policyholder benefits and claims remained essentially unchanged at $1,232
million for the three months ended March 31, 2002 from $1,233 million in the
comparable 2001 period. The traditional life business decreased $19 million
primarily due to the closed block business. Offsetting this was less favorable
mortality in the other businesses.
Interest credited to policyholder account balances remained essentially
unchanged at $443 million for the three months ended March 31, 2002 from $444
million in the comparable 2001 period. Interest credited for variable universal
life and annuities increased $11 million related to growth in the business,
however, this was entirely offset by the impact of lower crediting rates on
settlement assets and other assets on deposit.
Policyholder dividends increased by $23 million, or 5%, to $459 million
for the three months ended March 31, 2002 from $436 million for the comparable
2001 period. This is largely attributable to the growth in the underlying cash
values related to the policies within the aging block of the traditional life
insurance business.
25
Other expenses declined by $63 million, or 9%, to $634 million for the
three months ended March 31, 2002 from $697 million for the comparable 2001
period. Excluding the capitalization and amortization of deferred policy
acquisition costs that are discussed below, other expenses increased by $31
million, or 4%, to $741 million in 2002 from $710 million in 2001. This
increase is primarily due to increased sales of new annuity and investment-type
products. Excluding increases in commissions and other deferrable costs,
operating expenses remained essentially unchanged. Although there are expense
savings attributable to continued expense management initiatives, these savings
are largely offset by increased pension and post-retirement benefit expenses
over the comparable 2001 period.
Deferred policy acquisition costs 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 income information regarding the impact of investment gains and
losses on the amount of the amortization, and to 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 by $34
million, or 16%, to $244 million for the three months ended March 31, 2002 from
$210 million for the comparable 2001 period. This increase is primarily due to
higher sales of variable and universal life insurance policies and annuity and
investment-type products, resulting in higher commissions and other deferrable
expenses. Total amortization of deferred policy acquisition costs decreased by
$72 million, or 35%, to $131 million in 2002 from $203 million in 2001.
Amortization of deferred policy acquisition costs of $137 million and $197
million is allocated to other expenses in 2002 and 2001, 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 declined by $29 million in 2002.
Amortization of deferred policy acquisition costs allocated to other expenses
related to annuity and investment products declined by $31 million in 2002.
These decreases are due to refinements implemented in the third quarter of 2001
relating to the estimation of future market performance in determining
estimated gross profits. These estimates are used in determining unamortized
deferred policy acquisition costs balances and the amount of related
amortization.
26
INSTITUTIONAL
The following table presents consolidated financial information for the
Institutional segment for the periods indicated:
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
2002 2001
-------- --------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 1,860 $ 1,868
Universal life and investment-type product policy fees 152 150
Net investment income 985 996
Other revenues 172 167
Net investment losses (82) (70)
-------- --------
Total revenues 3,087 3,111
-------- --------
EXPENSES
Policyholder benefits and claims 2,169 2,151
Interest credited to policyholder account balances 228 271
Policyholder dividends 22 64
Other expenses 385 396
-------- --------
Total expenses 2,804 2,882
-------- --------
Income before provision for income taxes 283 229
Provision for income taxes 106 79
-------- --------
Net income $ 177 $ 150
======== ========
THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2001 - INSTITUTIONAL
Premiums decreased by $8 million, or less than 1%, to $1,860 million for
the three months ended March 31, 2002 from $1,868 million for the comparable
2001 period. Group insurance premiums increased by $35 million as a result of
strong sales in the dental, disability and long-term care businesses, partially
offset by the impact of lower premiums related to a few large group life
customers. In addition, retirement and savings premiums, which can fluctuate
significantly between quarters, decreased $43 million as a result of higher
premiums received in 2001 from existing customers.
Universal life and investment-type product policy fees increased by $2
million, or 1%, to $152 million for the three months ended March 31, 2002 from
$150 million for the comparable 2001 period. Group universal life experienced a
$12 million increase in fees resulting from business growth, partially offset by
a $10 million decrease in corporate-owned life insurance. Sales of
corporate-owned life insurance vary from period to period.
Other revenues increased by $5 million, or 3%, to $172 million for the
three months ended March 31, 2002 from $167 million for the comparable 2001
period. Group insurance other revenues increased by $14 million. This increase
is primarily attributable to sales growth in the dental and disability
administrative services businesses, and a settlement received in 2002 related to
the former medical business. Retirement and savings' other revenues decreased $9
million primarily due to a reduction in Institutional's investment in separate
accounts and a reduction in administrative fees due to the Company's exit from
the large market 401(k) business in late 2001.
Policyholder benefits and claims increased by $18 million, or 1%, to
$2,169 million for the three months ended March 31, 2002 from $2,151 million for
the comparable 2001 period. Group insurance increased by $79 million, which is
largely attributable to growth in this segment's dental, disability and
long-term care businesses. Partially offsetting this increase is a reduction in
retirement and savings of $61 million, resulting primarily from lower premiums,
as noted above, and slightly improved underwriting results.
Interest credited to policyholder account balances decreased by $43
million, or 16%, to $228 million for the three months ended March 31, 2002 from
$271 million for the comparable 2001 period. A $26 million drop in group life is
largely attributable to an
27
overall reduction in crediting rates as a result of the low interest rate
environment. Retirement and savings decreased by $17 million due to the current
low interest rate environment for guaranteed interest and funding agreement
contracts.
Policyholder dividends decreased by $42 million, or 66%, to $22 million
for the three months ended March 31, 2002 from $64 million for the comparable
2001 period. The decrease is primarily attributable to dividend payments made on
several group life and group disability contracts for the three months ended
March 31, 2001. Policyholder dividends vary from period to period based on
insurance contract experience.
Other expenses decreased by $11 million, or 3%, to $385 million for the
three months ended March 31, 2002 from $396 million for the comparable 2001
period. Increases in group insurance of $7 million are primarily due to a rise
in non-deferrable variable expenses associated with business growth.
Non-deferrable variable expenses include premium tax, commissions and
administrative expenses for dental, disability and long-term care businesses.
Other expenses related to retirement and savings decreased $18 million
primarily due to the Company's exit from the large market 401(k) business.
28
REINSURANCE
The following table presents consolidated financial information for the
Reinsurance segment for the periods indicated:
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2002 2001
-------- --------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 475 $ 410
Net investment income 99 97
Other revenues 8 9
Net investment gains 2 5
-------- --------
Total revenues 584 521
-------- --------
EXPENSES
Policyholder benefits and claims 395 343
Interest credited to policyholder account balances 34 29
Policyholder dividends 5 5
Other expenses 94 100
-------- --------
Total expenses 528 477
-------- --------
Income before provision for income taxes 56 44
Provision for income taxes 13 11
Minority interest 19 15
-------- --------
Net income $ 24 $ 18
======== ========
THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2001 -- REINSURANCE
Premiums increased by $65 million, or 16%, to $475 million for the three
months ended March 31, 2002 from $410 million for the comparable 2001 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 decreased by $1 million, or 11%, to $8 million for the
three months ended March 31, 2002 from $9 million for the comparable 2001
period. This decrease is due to lower fees earned on financial reinsurance which
can vary period to period.
Policyholder benefits and claims increased by $52 million, or 15%, to $395
million for the three months ended March 31, 2002 from $343 million for the
comparable 2001 period. As a percentage of premiums, policyholder benefits and
claims decreased to 83% for the three months ended March 31, 2002 from 84% for
the comparable 2001 period. The level of death claims may fluctuate from period
to period, but generally exhibits less volatility over the long-term.
Interest credited to policyholder account balances increased by $5
million, or 17%, to $34 million for the three months ended March 31, 2002 from
$29 million for the comparable 2001 period. Interest credited to policyholder
account balances relates to amounts credited on deposit-type contracts and
certain cash-value contracts. Contributing to this growth was the completion of
new single premium deferred annuity coinsurance agreements in the third quarter
of 2001 and the first quarter of 2002. Additionally, the crediting rate on
certain blocks of annuities is based on the performance of the underlying
assets. Therefore, any fluctuations in interest credited related to these blocks
are generally offset by a corresponding change in net investment income.
Policyholder dividends were $5 million for both the three months ended
March 31, 2002 and 2001.
Other expenses decreased by $6 million, or 6%, to $94 million for the
three months ended March 31, 2002 from $100 million for the comparable 2001
period. Other expenses, which include underwriting, acquisition and insurance
expenses, decreased to 16% of
29
segment revenues for the three months ended March 31, 2002 compared with 19% in
the comparable 2001 period. This percentage fluctuates depending on the mix of
the underlying insurance products being reinsured as allowances paid, and the
related capitalization and amortization, can vary significantly based on the
type of business and the reinsurance treaty.
Minority interest reflects third-party ownership interests in Reinsurance
Group of America, Incorporated ("RGA").
AUTO & HOME
The following table presents consolidated financial information for the
Auto & Home segment for the periods indicated:
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
2002 2001
-------- --------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 692 $ 673
Net investment income 45 51
Other revenues 7 6
Net investment losses (14) (3)
-------- --------
Total revenues 730 727
-------- --------
EXPENSES
Policyholder benefits and claims 495 563
Other expenses 208 209
-------- --------
Total expenses 703 772
-------- --------
Income (Loss) before provision for income taxes 27 (45)
Provision (Benefit) for income taxes 6 (19)
-------- --------
Net income (loss) $ 21 $ (26)
======== ========
THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2001 -- AUTO & HOME
Premiums increased by $19 million, or 3%, to $692 million for the three
months ended March 31, 2002 from $673 million for the comparable 2001 period.
Auto premiums increased by $17 million largely due to an increase in average
premium earned per policy resulting from rate increases. Property premiums
remained constant at $160 million. The impact on premiums of rate increases was
offset by an anticipated reduction in retention. Premiums from other personal
lines increased by $2 million.
Other revenues increased by $1 million, or 17%, to $7 million for the
three months ended March 31, 2002 from $6 million for the comparable 2001
period. The increase is due to higher premium installment fee rates.
Policyholder benefits and claims decreased by $68 million, or 12%, to $495
million for the three months ended March 31, 2002 from $563 million for the
comparable 2001 period. Auto policyholder benefits and claims decreased by $27
million due to improved claim frequency resulting from better winter weather and
increased underwriting and agency management actions. Correspondingly, the
auto loss ratio decreased to 75% in 2002 from 82.9% in 2001. Property
policyholder benefits and claims decreased by $35 million due to improved claim
frequency resulting from milder winter weather and the aforementioned
underwriting and agency management actions. The property loss ratio decreased
to 63.2% in 2002 from 85.5% in 2001. The claims from catastrophes represented
8.7% of the loss ratio in 2002 compared to 11.1% in 2001. Other policyholder
benefits and claims declined by $6 million, due to fewer personal umbrella
claims.
Other expenses decreased $1 million to $208 million for the three months
ended March 31, 2002 from $209 million for the comparable period in 2001. This
decrease is due to a reduction in integration costs associated with the St. Paul
acquisition and lower employee costs, partially offset by an increase in
expenses related to the outsourced New York assigned risk business. The expense
ratio decreased to 30.1% in 2002 from 31.1% in 2001.
30
The effective income tax rates for the three months ended March 31, 2002
and 2001 differ from the corporate tax rate of 35% due to the impact of
non-taxable investment income.
ASSET MANAGEMENT
The following table presents consolidated financial information for the
Asset Management segment for the periods indicated:
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
2002 2001
-------- --------
(DOLLARS IN MILLIONS)
REVENUES
Net investment income $ 14 $ 19
Other revenues 40 56
Net investment losses (4) --
-------- --------
Total revenues 50 75
-------- --------
OTHER EXPENSES 52 66
-------- --------
Income (Loss) before provision (benefit) for income taxes (2) 9
Provision (Benefit) for income taxes (1) 3
-------- --------
Net income (loss) $ (1) $ 6
======== ========
THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2001 -- ASSET MANAGEMENT
Other revenues, which primarily comprise management and advisory fees from
third parties, decreased by $16 million, or 29%, to $40 million for the three
months ended March 31, 2002 from $56 million for the comparable 2001 period.
The most significant factor contributing to this decline is a $17 million
decrease resulting from the sale of Conning, which occurred on July 2, 2001.
Excluding the impact of this transaction, other revenues increased by $1
million, or 3%, to $40 million in 2002 from $39 million in 2001. This is
attributable to an increase in real estate assets under management that command
a higher fee. Assets under management decreased from $52 billion as of March
31, 2001 to $51 billion at March 31, 2002. The decrease is a result of
institutional customer withdrawals partially offset by increased third party
assets under management. This increase reflects continued strong mutual fund
sales and the purchase of a $1.7 billion real estate portfolio in the second
quarter of 2001. 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 $14 million, or 21%, to $52 million for the
three months ended March 31, 2002 from $66 million for the comparable 2001
period. The sale of Conning reduced other expenses by $18 million. Excluding
the impact from this transaction, other expenses increased to $52 million in
2002 from $48 million in 2001, due to additions of distribution and service
employees to build infrastructure for future growth.
31
INTERNATIONAL
The following table presents consolidated financial information for the
International segment for the periods indicated:
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
2002 2001
-------- --------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 375 $ 177
Universal life and investment-type product policy fees 7 11
Net investment income 75 64
Other revenues 3 4
Net investment gains (losses) (22) 1
-------- --------
Total revenues 438 257
-------- --------
EXPENSES
Policyholder benefits and claims 327 144
Interest credited to policyholder account balances 9 16
Policyholder dividends 11 10
Other expenses 93 67
-------- --------
Total expenses 440 237
-------- --------
Income (Loss) before provision for income taxes and
cumulative effect of accounting change (2) 20
Provision for income taxes 7 --
-------- --------
Income (Loss) before cumulative effect of accounting
change (9) 20
Cumulative effect of accounting change 5 --
-------- --------
Net income (loss) $ (4) $ 20
======== ========
THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2001 -- INTERNATIONAL
Premiums increased by $198 million, or 112%, to $375 million for the three
months ended March 31, 2002 from $177 million for the comparable 2001 period.
The majority of this increase is attributable to the sale of an annuity contract
to a Canadian trust company, a pension manager. This transaction accounted for
$103 million of the $198 million fluctuation in premiums. The 2001 acquisition
of Seasul in Brazil and the Chilean acquisitions increased premiums by $6
million and $34 million, respectively. Mexico's premiums increased by $31
million, primarily due to increases in its group life, major medical and
individual life businesses. South Korea's premiums increased by $20 million,
primarily due to improved agent productivity and a larger professional sales
force. The remainder of the variance is attributable to minor fluctuations in
several countries.
Universal life and investment type-product policy fees decreased by $4
million, or 36%, to $7 million for the three months ended March 31, 2002 from
$11 million for the comparable 2001 period. This decrease is primarily due to a
$4 million reduction in fees in Spain caused by a reduction in assets under
management, as a result of a planned cessation of product lines offered through
a joint venture with Banco Santander.
Other revenues decreased by $1 million, or 25%, for the three months ended
March 31, 2002 from $4 million for the comparable 2001 period. Other revenues in
2001 included $1 million from recoveries related to the settlement of two legal
disputes in Canada.
Policyholder benefits and claims increased by $183 million, or 127%, to
$327 million for the three months ended March 31, 2002 from $144 million for the
comparable 2001 period. The majority of this increase is attributable to a $103
million increase in liabilities for the aforementioned sale of an annuity
contract. Mexico's and South Korea's policyholder benefits and claims increased
by $27 million
32
and $13 million, respectively, commensurate with the overall premium variance
discussed above. The Chilean acquisitions also contributed $38 million to this
variance. The remainder of the variance is attributable to minor fluctuations in
several countries.
Interest credited to policyholder account balances decreased by $7
million, or 44%, to $9 million for the three months ended March 31, 2002 from
$16 million for the comparable 2001 period. Spain's interest credited decreased
by $4 million due to the planned cessation of product lines mentioned above.
Declines in the crediting rates on interest-sensitive products as a result of
the current interest rate environments in Mexico and South Korea are primarily
responsible for reductions of $2 million and $1 million, respectively, in those
countries.
Policyholder dividends increased by $1 million, or 10%, to $11 million for
the three months ended March 31, 2002 from $10 million for the comparable 2001
period. The increase in Mexico's group life sales mentioned above resulted in an
increase in policyholder dividends of $1 million.
Other expenses increased by $26 million, or 39%, to $93 million for the
three months ended March 31, 2002 from $67 million for the comparable 2001
period. Brazil's other expenses increased by $4 million due primarily to the
acquisition of Seasul. The Chilean acquisitions also led to an increase of $7
million over 2001. Argentina's other expenses rose by $5 million due to a
write-off of deferred policy acquisition costs, resulting from a revision in the
calculation of estimated gross margins and profits caused by the economic and
political events in that country. South Korea's and Mexico's other expenses
increased by $6 million and $3 million, respectively, primarily due to the
business growth outlined above. The remainder of the variance is attributable to
minor fluctuations in several countries.
The first quarter 2002 results include the continued effects of the
Argentine economy.
CORPORATE & OTHER
Total revenues for Corporate & Other, which consist of net investment
income, other revenues, and net investment gains and losses that are not
allocated to other business segments, increased by $15 million, or 28%, to $69
million in 2002 from $54 million in 2001. This increase is due to the
recognition of investment gains in 2002 compared to losses in 2001, partially
offset by decreases in net investment income and other revenues. The decrease in
net investment income is due to a lower asset base resulting from the stock
repurchase program. The decrease in other revenues is primarily attributable to
a decrease in an experience refund associated with a reinsurance policy. Total
Corporate & Other expenses increased by $64 million, or 62%, to $168 million in
2002 from $104 million in 2001. The most significant component of this variance
is an increase in litigation costs. The first quarter of 2002 includes amounts
to cover costs associated with the anticipated resolution of federal government
investigations of General American's former Medicare business. In addition,
there were increases in interest expense and expenses associated with MetLife's
banking initiatives.
LIQUIDITY AND CAPITAL RESOURCES
THE HOLDING COMPANY
The primary uses of liquidity of the Holding Company include: cash
dividends on common stock, debt service on outstanding debt, including the
interest payments on debentures issued to MetLife Capital Trust I and senior
notes, contributions to subsidiaries, payment of general operating expenses and
the repurchase of the Company's common stock. The Holding Company irrevocably
guarantees, on a senior and unsecured basis, the payment in full of
distributions on the capital securities and the stated liquidation amount of the
capital securities, in each case to the extent of available trust funds. The
primary source of the Holding Company's liquidity is dividends it receives from
Metropolitan Life and other subsidiaries. Other sources of liquidity also
include programs for short- and long-term borrowing, as needed, arranged
through the Holding Company and MetLife Funding, Inc., a subsidiary of
Metropolitan Life, ("MetLife Funding"). In addition, the Holding Company filed
a shelf registration statement, effective June 1, 2001, with the Securities and
Exchange Commission ("SEC") which permits the registration and issuance of debt
and equity securities as described more fully therein. The Company issued
senior debt in the amount of $1.25 billion in November 2001 under this
registration statement. 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 statutory surplus
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
33
stockholders. The New York Insurance Department (the "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, as prescribed by the Department, differ in certain
respects from accounting principles used in financial statements prepared in
conformity with GAAP. The significant differences relate to deferred policy
acquisition costs, deferred income taxes, required investment reserves, reserve
calculation assumptions, goodwill and surplus notes.
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, will be sufficient to enable the Holding Company to make payments on
the debentures issued to MetLife Capital Trust I and the senior notes, make
dividend payments on its common stock, pay all operating expenses and meet its
other obligations.
On February 19, 2002, the Holding Company's Board of Directors authorized
a $1 billion common stock repurchase program. This program will begin after the
completion of the March 28, 2001 and June 27, 2000 repurchase programs, each of
which authorized the repurchase of $1 billion of common stock. Under these
authorizations, the Holding Company may purchase common stock from the MetLife
Policyholder Trust, in the open market, and in privately negotiated
transactions. For the three months ended March 31, 2002 and 2001, 7,680,041 and
7,829,619 shares of common stock have been acquired for $240 million and $238
million, respectively.
Restrictions and Limitations on Bank Holding Companies and Financial
Holding Companies - Capital. MetLife, Inc. and its insured depository
institution subsidiary are subject to risk-based and leverage capital
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 March 31, 2002
MetLife, Inc. and its insured depository institution subsidiary 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 contract holder 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 risk of default by debtors, and 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, marketable fixed maturity securities and common stocks. The
Company's available portfolio of liquid assets was approximately $109 billion
and $108 billion at March 31, 2002 and December 31, 2001, respectively.
Sources of liquidity also include facilities for short- and long-term
borrowing as needed, arranged through the Holding Company and 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, property and
casualty, annuity and group pension products, operating expenses and 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.
34
The Company's management believes that its sources of liquidity are more
than adequate to meet its current cash requirements. The nature of the Company's
diverse product portfolio and customer base lessen the likelihood that normal
operations will result in any significant strain on liquidity in 2002. The
following table summarizes major contractual obligations, apart from those
arising from its ordinary product and investment purchase activities:
CONTRACTUAL OBLIGATIONS TOTAL 2002 2003 2004 2005 2006 THEREAFTER
- ----------------------- -------- -------- -------- -------- -------- -------- ----------
Long-term debt $ 3,434 $ 10 $ 439 $ 27 $ 377 $ 601 $ 1,980
Operating leases 641 92 124 104 90 71 160
Company-obligated securities 1,356 -- -- -- 1,006 -- 350
Partnership investments 1,934 1,934 -- -- -- -- --
Mortgage commitments 516 516 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total $ 7,881 $ 618 $ 563 $ 2,065 $ 1,473 $ 672 $ 2,490
======== ======== ======== ======== ======== ======== ========
The Company's committed and unsecured credit facilities aggregating $2.4
billion are principally used as backup for the Company's commercial paper
program. A $1 billion facility will expire in 2003 and the remaining facilities
will expire in 2005.
At March 31, 2002, the Company had outstanding approximately $490 million
in letters of credit from various banks, all of which expire within one year.
Since commitments associated with letters of credit and financing arrangements
may expire unused, the amounts shown do not necessarily reflect the actual
future cash funding 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, 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. See Note 6 of Notes to Unaudited Interim Condensed Consolidated
Financial Statements and "Legal Proceedings."
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 December 31, 2001,
Metropolitan Life's and each of the other 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") adopted the
Codification of Statutory Accounting Principles (the "Codification"), which is
intended to standardize regulatory accounting and reporting to state insurance
departments and became effective January 1, 2001. However, statutory accounting
principles continue to be established by individual state laws and permitted
practices. The Department required adoption of the Codification with certain
modifications for the preparation of statutory financial statements effective
January 1, 2001. Further modifications by state insurance departments may impact
the effect of the Codification on the statutory capital and surplus of
Metropolitan Life and the Holding Company's other insurance subsidiaries.
Financing. 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
both March 31, 2002 and December 31, 2001, MetLife Funding had a tangible net
worth of $10.6 million. MetLife Funding raises funds from various funding
sources and uses the proceeds to extend loans, through MetLife Credit Corp., 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 and other affiliated companies. At March 31, 2002 and
December 31, 2001, MetLife Funding had total outstanding liabilities of
$556 million and $133 million, respectively, consisting primarily of commercial
paper. The Holding Company is authorized to raise funds from various funding
sources and uses the proceeds for general corporate purposes. At both
March 31, 2002 and December 31, 2001, the Holding Company
35
had no short-term debt outstanding. In November 2001, the Holding Company issued
$750 million 6.125% senior notes due 2011 and $500 million 5.25% senior notes
due 2006 under the shelf registration statement discussed above in " -- the
Holding Company."
The Company also maintained approximately $2.4 billion in committed credit
facilities at both March 31, 2002 and December 31, 2001. At both March 31, 2002
and December 31, 2001, there was approximately $24 million outstanding under
these facilities. At March 31, 2002, $490 million in letters of credit from
various banks were outstanding.
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
Life"), whereby it is obligated to maintain New England Life'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 Life at March 31, 2002 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 March 31,
2002 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 a subsidiary. Management does not
anticipate that these arrangements will place any significant demands upon the
Company's liquidity resources.
The Holding Company has agreed to make capital contributions, in any event
not to exceed $120 million, to MIAC in the aggregate amount of the excess of (i)
the debt service payments required to be made, and the capital expenditure
payments required to be made or reserved for, under the borrowings made in
November 2001, to fund the purchase by MIAC of certain real estate properties
from Metropolitan Life during the two year period following the date of
borrowings, over (ii) the cash flows generated by these properties.
Consolidated Cash Flows. Net cash provided by operating activities was
$578 million and $791 million for the three months ended March 31, 2002 and
2001, respectively. The fluctuation in cash provided by the Company's
operations between periods is primarily due to an increase in insurance related
liabilities. Net cash provided by operating activities in the periods presented
was more than adequate to meet liquidity requirements.
Net cash used in investing activities was $4,847 million and $1,102
million for the three months ended March 31, 2002 and 2001, respectively.
Purchases of investments exceeded sales, maturities and repayments by $4,268
million and $1,697 million in 2002 and 2001, respectively. The net purchases
were primarily attributable to cash received from the debt offering in the
fourth quarter of 2001 that was reinvested in long-term bonds and short-term
investments during the first quarter of 2002.
Net cash provided by financing activities was $820 million and $1,082
million for the three months ended March 31, 2002 and 2001, respectively.
Deposits to policyholder's account balances exceeded withdrawals by $1,063
million and $815 million for the three months ended March 31, 2002 and 2001,
respectively. Short-term financing increased by $191 million in 2002 compared
with an increase of $502 million in 2001.
The operating, investing and financing activities described above resulted
in a $3,449 million decrease in cash and cash equivalents for the three months
ended March 31, 2002 and a $771 million increase in cash and cash equivalents
for the comparable 2001 period.
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.
36
ACCOUNTING STANDARDS
During 2002, the Company adopted or applied the following accounting
standards: (i) Statement of Financial Accounting Standards ("SFAS") No. 141,
Business Combinations ("SFAS 141"), (ii) SFAS No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"), and (iii) SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"). In accordance with
SFAS 141, the Company eliminated $5 million of negative goodwill, which reflects
a cumulative effect of a change in accounting. On January 1, 2002, the Company
adopted SFAS 142 and, as such, did not record amortization of goodwill for the
three months ended March 31, 2002, whereas for the three months ended March 31,
2001, the Company recorded an expense of $12 million. The Company (i) has
determined that there were no significant reclassifications between goodwill and
other intangible asset balances, (ii) has tentatively determined that there will
be no significant impairment of other intangible assets as of January 1, 2002,
(iii) will complete the first step of the impairment test by June 30, 2002, and,
(iv) will determine the amount of goodwill impairment, if any, by December 31,
2002. The adoption of SFAS 144 by the Company did not have a material impact on
the Company's unaudited interim condensed consolidated financial statements.
The Financial Accounting Standards Board ("FASB") is currently
deliberating the issuance of an interpretation of SFAS No. 94, Consolidation of
All Majority-Owned Subsidiaries, to provide additional guidance to assist
companies in identifying and accounting for special purpose entities ("SPEs"),
including when SPEs should be consolidated by the investor. The interpretation
would introduce a concept that consolidation would be required by the primary
beneficiary of the activities of an SPE unless the SPE can meet certain
independent economic substance criteria. It is not possible to determine at this
time what conclusions will be included in the final interpretation; however, the
result could impact the accounting treatment of these entities by the Company.
The FASB is currently deliberating the issuance of a proposed statement
that would amend SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. The proposed statement will address and resolve certain pending
Derivatives Implementation Group ("DIG") issues. The outcome of the pending DIG
issues and other provisions of the statement could impact the Company's
accounting for beneficial interests, loan commitments and other transactions
deemed to be derivatives under the new statement.
INVESTMENTS
The Company had total cash and invested assets at March 31, 2002 of $169.6
billion. In addition, the Company had $62.5 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.
37
The following table summarizes the Company's cash and invested assets at:
MARCH 31, 2002 DECEMBER 31, 2001
---------------------- ----------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
Fixed maturities available-for-sale, at fair value $118,477 69.9% $115,398 68.0%
Mortgage loans on real estate 23,684 14.0 23,621 13.9
Policy loans 8,310 4.9 8,272 4.9
Cash and cash equivalents 4,024 2.4 7,473 4.4
Real estate and real estate joint ventures 5,862 3.4 5,730 3.4
Equity securities and other limited partnership interests 3,311 1.9 4,700 2.8
Other invested assets 3,512 2.1 3,298 1.9
Short-term investments 2,410 1.4 1,203 0.7
-------- -------- -------- --------
Total cash and invested assets $169,590 100.0% $169,695 100.0%
======== ======== ======== ========
38
INVESTMENT RESULTS
The annualized yields on general account cash and invested assets,
excluding net investment gains and losses, were 7.2% and 7.6% for the three
months ended March 31, 2002 and 2001, 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 ended March 31, 2002 and 2001:
AT OR FOR THE THREE MONTHS ENDED MARCH 31,
---------------------------------------------
2002 2001
--------------------- ---------------------
YIELD (1) AMOUNT YIELD (1) AMOUNT
--------- --------- --------- ---------
(DOLLARS IN MILLIONS)
FIXED MATURITIES: (2)
Investment income 7.56% $ 1,957 7.64% $ 1,936
Net investment losses (165) (151)
--------- ---------
Total $ 1,792 $ 1,785
--------- ---------
Ending assets $ 118,477 $ 116,811
--------- ---------
MORTGAGE LOANS: (3)
Investment income 7.81% $ 462 7.92% $ 435
Net investment gains (losses) (19) 2
--------- ---------
Total $ 443 $ 437
--------- ---------
Ending assets $ 23,684 $ 22,011
--------- ---------
REAL ESTATE AND REAL ESTATE JOINT
VENTURES: (4)
Investment income, net of expenses 10.36% $ 150 11.78% $ 161
Net investment gains (losses) (2) 5
--------- ---------
Total $ 148 $ 166
--------- ---------
Ending assets $ 5,862 $ 5,451
--------- ---------
POLICY LOANS:
Investment income 6.35% $ 131 6.55% $ 134
--------- ---------
Ending assets $ 8,310 $ 8,149
--------- ---------
EQUITY SECURITIES AND OTHER LIMITED
PARTNERSHIP INTERESTS:
Investment income 0.87% $ 9 7.21% $ 67
Net investment gains (losses) 161 (99)
--------- ---------
Total $ 170 $ (32)
--------- ---------
Ending assets $ 3,311 $ 3,585
--------- ---------
CASH, CASH EQUIVALENTS AND SHORT-TERM
INVESTMENTS:
Investment income 4.92% $ 83 5.84% $ 72
Net investment gains 2 --
--------- ---------
Total $ 85 $ 72
--------- ---------
Ending assets $ 6,434 $ 5,123
--------- ---------
OTHER INVESTED ASSETS:
Investment income 5.49% $ 46 8.36% $ 67
Net investment gains (losses) (82) 68
--------- ---------
Total $ (36) $ 135
--------- ---------
Ending assets $ 3,512 $ 3,577
--------- ---------
TOTAL INVESTMENTS:
Investment income before expenses and fees 7.31% $ 2,838 7.72% $ 2,872
Investment expenses and fees (0.13%) (49) (0.15%) (56)
--------- --------- --------- ---------
Net investment income 7.18% $ 2,789 7.57% $ 2,816
Net investment losses (105) (175)
Adjustments to investment losses (5) 13 30
--------- ---------
Total $ 2,697 $ 2,671
========= =========
(1) Yields are based on quarterly average asset carrying values for the three
months ended March 31, 2002 and 2001, excluding recognized and unrealized
gains and losses, and for yield calculation purposes, average assets
exclude collateral associated with the Company's securities lending
program.
(2) Included in fixed maturities are equity-linked notes of $995 million and
$1,224 million at March 31, 2002 and 2001, respectively, which include an
equity-like component as part of the notes' return. Investment income for
fixed maturities includes prepayment fees and income from the securities
lending program. Fixed maturity investment income has been reduced by
rebates paid under the program.
39
(3) Investment income from mortgage loans includes prepayment fees.
(4) Real estate and real estate joint venture income is shown net of
depreciation of $58 million and $54 million for the three months ended
March 31, 2002 and 2001, respectively.
(5) Adjustments to investment gains and losses include amortization of
deferred policy acquisition costs 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 69.9% and 68.0% of total cash and
invested assets at March 31, 2002 and December 31, 2001, respectively.
Based on estimated fair value, public fixed maturities and private fixed
maturities comprised 85.3% and 14.7%, respectively, of total fixed maturities at
March 31, 2002 and 83.7% and 16.3%, respectively, at December 31, 2001. The
Company invests in privately placed fixed maturities to (i) obtain higher yields
than can ordinarily be obtained with comparable public market securities, (ii)
provide the Company with protective covenants, call protection features and,
where applicable, a higher level of collateral, and (iii) increase
diversification. 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
Services ("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, as well as the percentage, based on estimated fair value,
that each designation comprises at:
MARCH 31, 2002 DECEMBER 31, 2001
------------------------------- -------------------------------
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 $ 75,778 $ 77,569 65.5% $ 72,098 $ 75,265 65.2%
2 Baa 30,275 30,314 25.6 29,128 29,581 25.6
3 Ba 5,647 5,546 4.7 6,021 5,856 5.1
4 B 3,426 3,409 2.9 3,205 3,100 2.7
5 Caa and lower 716 625 0.5 726 597 0.5
6 In or near default 317 264 0.2 327 237 0.2
--------- --------- ----- --------- --------- -----
Subtotal 116,159 117,727 99.4 111,505 114,636 99.3
Redeemable preferred stock 791 750 0.6 783 762 0.7
--------- --------- ----- --------- --------- -----
Total fixed maturities $ 116,950 $ 118,477 100.0% $ 112,288 $ 115,398 100.0%
========= ========= ===== ========= ========= =====
Based on estimated fair values, total investment grade public and private
placement fixed maturities comprised 91.1% and 90.9% of total fixed maturities
in the general account at March 31, 2002 and December 31, 2001, respectively.
40
The following table shows the amortized cost and estimated fair value of
fixed maturities, by contractual maturity dates (excluding scheduled sinking
funds) at:
MARCH 31, 2002 DECEMBER 31, 2001
----------------------- -----------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
Due in one year or less $ 3,921 $ 3,962 $ 4,001 $ 4,049
Due after one year through five years 21,443 21,895 20,168 20,841
Due after five years through ten years 22,074 22,160 22,937 23,255
Due after ten years 31,905 32,530 30,565 32,017
-------- -------- -------- --------
Subtotal 79,343 80,547 77,671 80,162
Mortgage-backed and other asset-backed securities 36,816 37,180 33,834 34,474
-------- -------- -------- --------
Subtotal 116,159 117,727 111,505 114,636
Redeemable preferred stock 791 750 783 762
-------- -------- -------- --------
Total fixed maturities $116,950 $118,477 $112,288 $115,398
======== ======== ======== ========
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 deemed to
be other-than-temporary 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.
41
The following table presents the estimated fair value of the Company's
total fixed maturities classified as performing, potential problem, problem and
restructured fixed maturities at:
MARCH 31, 2002 DECEMBER 31, 2001
----------------------- -----------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
Performing $117,767 99.4% $114,879 99.6%
Potential Problem 446 0.4 386 0.3
Problem 242 0.2 111 0.1
Restructured 22 0.0 22 0.0
-------- -------- -------- --------
Total $118,477 100.0% $115,398 100.0%
======== ======== ======== ========
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 $275 million and $47
million for the three months ended March 31, 2002 and 2001, 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:
MARCH 31, 2002 DECEMBER 31, 2001
----------------------- -----------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
U.S. treasuries/agencies $ 8,962 7.6% $ 9,213 8.0%
Corporate securities 63,353 53.6 62,656 54.3
Foreign government securities 5,150 4.3 4,890 4.2
Mortgage-backed securities 28,608 24.1 26,328 22.8
Asset-backed securities 8,573 7.2 8,146 7.1
Other fixed income assets 3,831 3.2 4,165 3.6
-------- -------- -------- --------
Total $118,477 100.0% $115,398 100.0%
======== ======== ======== ========
42
Corporate Fixed Maturities. The table below shows the major industry types
that comprise the corporate bond holdings at:
MARCH 31, 2002 DECEMBER 31, 2001
----------------------- -----------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
Industrial $ 27,705 43.7% $ 27,346 43.7%
Utility 6,636 10.5 7,030 11.2
Finance 13,708 21.6 12,997 20.7
Yankee/Foreign (1) 14,675 23.2 14,767 23.6
Other 629 1.0 516 0.8
-------- -------- -------- --------
Total $ 63,353 100.0% $ 62,656 100.0%
======== ======== ======== ========
(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 exposure to any single issuer in excess of 1% of
its total invested assets. At March 31, 2002, the Company's combined holdings in
the ten issuers to which it had the greatest exposure totaled $4,653 million,
which was less than 3% of the Company's total invested assets at such date. The
exposure to the largest single issuer of corporate bonds the Company held at
March 31, 2002 was $657 million.
At March 31, 2002 and December 31, 2001, investments of $7,237 million and
$7,120 million, respectively, or 49.3% and 48.2%, respectively, 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 generally denominated in local currencies.
Foreign currency denominated securities supporting U.S. dollar liabilities are
generally swapped back into U.S. dollars.
The Company's exposure to future deterioration in the economic and
political environment in Argentina, with respect to its Argentine-related
investments, is limited to the net carrying value of those assets, which totaled
approximately $200 million as of March 31, 2002.
Mortgage-Backed Securities. The following table shows the types of
mortgage-backed securities the Company held at:
MARCH 31, 2002 DECEMBER 31, 2001
----------------------- -----------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
Pass-through securities $ 13,361 46.7% $ 10,542 40.0%
Collateralized mortgage obligations 10,109 35.3 10,432 39.7
Commercial mortgage-backed securities 5,138 18.0 5,354 20.3
-------- -------- -------- --------
Total $ 28,608 100.0% $ 26,328 100.0%
======== ======== ======== ========
At March 31, 2002, pass-through and collateralized mortgage obligations
totaled $23,470 million, or 82.0% 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, the Federal Home Loan Mortgage
Corporation or the Government National Mortgage Association. Other types of
mortgage-backed securities comprised the balance of such amounts reflected in
the table. At March 31, 2002, approximately $2,814 million, or 54.8% of the
commercial mortgage-backed securities, and
43
$21,322 million, or 90.8% of the pass-through securities and collateralized
mortgage obligations, were rated Aaa/AAA by Moody's or S&P.
The principal risks inherent in holding mortgage-backed securities are
prepayment, extension and collateral 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. Approximately $3,694 million
and $3,427 million, or 43.1% and 42.1%, of total asset-backed securities were
rated Aaa/AAA by Moody's or S&P at March 31, 2002 and December 31, 2001,
respectively.
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.
Structured investment transactions. The Company participates in structured
investment transactions as part of its risk management strategy, including asset
liability management, and to enhance the Company's total return on its
investment portfolio. These investments are predominately made through
bankruptcy-remote SPEs, which generally acquire financial assets, including
corporate equities, debt securities and purchased options. These investments are
referred to as beneficial interests.
The Company's exposure to losses related to these SPEs is limited to its
carrying value since the Company has not guaranteed the performance, liquidity
or obligations of the SPEs. As prescribed by GAAP, the Company does not
consolidate such SPEs since unrelated third parties hold controlling interests
through ownership of the SPEs' equity, representing at least three percent of
the total assets of the SPE throughout the life of the SPE, and such equity
class has the substantive risks and rewards of the residual interests in the
SPE.
The Company also sponsors financial asset securitizations of high yield
debt securities, investment grade bonds and structured finance securities and
also is the collateral manager and a beneficial interest holder in such
transactions. As the collateral manager, the Company earns a management fee on
the outstanding securitized asset balance. When the Company transfers assets to
an SPE and surrenders control over the transferred assets, the transaction is
accounted for as a sale. Gains or losses on securitizations are determined with
reference to the carrying amount of the financial assets transferred, which is
allocated to the assets sold and the beneficial interests retained based on
relative fair values at the date of transfer. The Company has sponsored four
securitizations with a total of approximately $1.5 billion in financial assets
as of March 31, 2002. Two of these transactions, which were executed in 2001,
included the transfer of assets totaling approximately $289 million which
resulted in the recognition of an insignificant amount of investment gains. The
Company's beneficial interests in these SPEs and the related investment income
were insignificant as of March 31, 2002 and December 31, 2001 and for the three
months ended March 31, 2002 and 2001.
The Company also invests in structured investment transactions which are
managed and controlled by unrelated third parties. In instances where the
Company exercises significant influence over the operating and financial
policies of an SPE, the beneficial interests are accounted for in accordance
with the equity method of accounting. Where the Company does not exercise
significant influence, the structure of the beneficial interests (i.e., debt or
equity securities) determines the method of accounting for the investment. Such
beneficial interests generally are structured notes, which are classified as
fixed maturities, and the related income is recognized using the retrospective
interest method. Beneficial interests other than structured notes are also
classified as fixed maturities, and the related income is recognized using the
level yield method. The carrying value of all such investments was approximately
$1.6 billion at both March 31, 2002 and December 31, 2001. The related income
(loss) recognized was $33 million and ($13) million for the three months ended
March 31, 2002 and 2001, respectively.
44
MORTGAGE LOANS
The Company's mortgage loans are collateralized by commercial,
agricultural and residential properties. Mortgage loans comprised 14.0% and
13.9% of the Company's total cash and invested assets at March 31, 2002 and
December 31, 2001, 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:
MARCH 31, 2002 DECEMBER 31, 2001
---------------------- ----------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
Commercial $ 18,085 76.4% $ 17,959 76.0%
Agricultural 5,196 21.9 5,268 22.3
Residential 403 1.7 394 1.7
-------- -------- -------- --------
Total $ 23,684 100.0% $ 23,621 100.0%
======== ======== ======== ========
45
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:
MARCH 31, 2002 DECEMBER 31, 2001
---------------------- ----------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
REGION
South Atlantic $ 4,736 26.2% $ 4,729 26.3%
Pacific 3,642 20.1 3,593 20.0
Middle Atlantic 3,309 18.3 3,248 18.1
East North Central 1,959 10.8 2,003 11.2
West South Central 993 5.5 1,021 5.7
New England 1,286 7.1 1,198 6.7
Mountain 795 4.4 733 4.1
West North Central 666 3.7 727 4.0
International 519 2.9 526 2.9
East South Central 180 1.0 181 1.0
-------- -------- -------- --------
Total $ 18,085 100.0% $ 17,959 100.0%
======== ======== ======== ========
PROPERTY TYPE
Office $ 8,165 45.1% $ 8,293 46.2%
Retail 4,383 24.2 4,208 23.4
Apartments 2,584 14.3 2,553 14.2
Industrial 1,912 10.6 1,813 10.1
Hotel 828 4.6 864 4.8
Other 213 1.2 228 1.3
-------- -------- -------- --------
Total $ 18,085 100.0% $ 17,959 100.0%
======== ======== ======== ========
The following table presents the scheduled maturities for the Company's
commercial mortgage loans at:
MARCH 31, 2002 DECEMBER 31, 2001
---------------------- ----------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
Due in one year or less $ 955 5.3% $ 840 4.7%
Due after one year through two years 821 4.5 677 3.8
Due after two years through three years 1,338 7.4 1,532 8.5
Due after three years through four years 2,251 12.4 1,772 9.9
Due after four years through five years 1,816 10.1 2,078 11.6
Due after five years 10,904 60.3 11,060 61.5
-------- -------- -------- --------
Total $ 18,085 100.0% $ 17,959 100.0%
======== ======== ======== ========
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.
46
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 at least annually. 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 mortgage review process. The Company defines
impaired loans consistent with SFAS 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.
The following table presents the amortized cost and valuation allowances
for commercial mortgage loans distributed by loan classification at:
MARCH 31, 2002 DECEMBER 31, 2001
---------------------------------------------- ----------------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST (1) TOTAL ALLOWANCE COST COST (1) TOTAL ALLOWANCE COST
-------- ----- --------- ---- -------- ----- --------- ----
(DOLLARS IN MILLIONS)
Performing $ 17,631 96.7% $ 60 0.3% $ 17,495 96.6% $ 52 0.3%
Restructured 451 2.5 54 12.0% 448 2.5 55 12.3%
Delinquent or under
foreclosure 19 0.1 6 31.6% 14 0.1 7 50.0%
Potentially delinquent 132 0.7 28 21.2% 136 0.8 20 14.7%
-------- -------- -------- -------- -------- --------
Total $ 18,233 100.0% $ 148 0.8% $ 18,093 100.0% $ 134 0.7%
======== ======== ======== ======== ======== ========
- ----------
(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:
THREE MONTHS ENDED
MARCH 31, 2002
--------------
(DOLLARS IN MILLIONS)
Balance, beginning of period $ 134
Net additions charged to operations 18
Deductions for writedowns and dispositions (4)
--------
Balance, end of period $ 148
========
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.
47
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 62.4% of the $5,196 million of agricultural mortgage loans
outstanding at March 31, 2002 was subject to rate resets prior to maturity. A
substantial portion of these loans generally are 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.
The following table presents the amortized cost and valuation allowances
for agricultural mortgage loans distributed by loan classification at:
MARCH 31, 2002 DECEMBER 31, 2001
---------------------------------------------- ----------------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST (1) TOTAL ALLOWANCE COST COST (1) TOTAL ALLOWANCE COST
-------- ----- --------- ---- -------- ----- --------- ----
(DOLLARS IN MILLIONS)
Performing $ 4,930 94.8% $ -- 0.0% $ 5,055 95.8% $ 3 0.1%
Restructured 184 3.5 3 1.6% 188 3.6 3 1.6%
Delinquent or under
foreclosure 77 1.5 1 1.3% 29 0.5 2 6.9%
Potentially delinquent 9 0.2 -- 0.0% 5 0.1 1 20.0%
-------- -------- -------- -------- -------- --------
Total $ 5,200 100.0% $ 4 0.1% $ 5,277 100.0% $ 9 0.2%
======== ======== ======== ======== ======== ========
- ----------
(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:
THREE MONTHS ENDED
MARCH 31, 2002
--------------
(DOLLARS IN MILLIONS)
Balance, beginning of period $ 9
Deductions for writedowns and dispositions (5)
--------
Balance, end of period $ 4
========
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.
48
REAL ESTATE AND REAL ESTATE JOINT VENTURES
The Company's 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 March 31, 2002 and December
31, 2001, the carrying value of the Company's real estate and real estate joint
ventures was $5,862 million and $5,730 million, respectively, or 3.4% and 3.4%,
respectively, of total cash and invested assets. The carrying value of 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 the real estate joint ventures net of impairments and
valuation allowances. These holdings consist of 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 real estate and real estate joint ventures at:
MARCH 31, 2002 DECEMBER 31, 2001
---------------------- ----------------------
CARRYING % OF CARRYING % OF
TYPE VALUE TOTAL VALUE TOTAL
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
Real estate $ 5,520 94.1% $ 5,325 92.9%
Real estate joint ventures 291 5.0 356 6.2
-------- -------- -------- --------
Subtotal 5,811 99.1 5,681 99.1
Foreclosed real estate 51 0.9 49 0.9
-------- -------- -------- --------
Total $ 5,862 100.0% $ 5,730 100.0%
======== ======== ======== ========
Office properties representing 62.6% and 63.5% of the Company's real
estate and real estate joint venture holdings at March 31, 2002 and December 31,
2001, respectively, are well diversified geographically, principally within the
United States. The average occupancy level of office properties was 93% and 92%
at March 31, 2002 and December 31, 2001, respectively.
The Company classifies real estate and real estate joint ventures as
held-for-investment or held-for-sale. The carrying value of real estate and real
estate joint ventures held-for-investment was $5,743 million and $5,633 million
at March 31, 2002 and December 31, 2001, respectively. The carrying value of
real estate and real estate joint ventures held-for-sale was $119 million and
$97 million at March 31, 2002 and December 31, 2001, respectively.
Ongoing management of these investments includes quarterly valuations, 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 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 that is expected to be sold within
one year 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. If circumstances arise
that were previously considered unlikely and, as a result, the property is
expected to be on the market longer than anticipated, a held-for-sale property
is reclassified as held-for-investment and measured as such.
The Company's carrying value of 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 $119 million and $97 million at
March 31, 2002 and December 31, 2001, respectively, are net of impairments of
$88 million and $88 million, respectively, and net of valuation allowances of
$33 million and $35 million, respectively.
49
EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS
The Company's carrying value of equity securities, which primarily
consists of investments in common stocks, was $1,494 million and $3,063 million
at March 31, 2002 and December 31, 2001, 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 $1,817 million and $1,637
million at March 31, 2002 and December 31, 2001, 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 0.9% and 1.8% of cash and invested assets at March 31, 2002 and
December 31, 2001, respectively.
Equity securities include, at March 31, 2002 and December 31, 2001, $243
million and $329 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.
During the year ended December 31, 2001, two exchangeable subordinated
debt securities matured, resulting in a gross gain of $44 million on the equity
exchanged in satisfaction of the note. In February 2002, the remaining
exchangeable debt security issued by the Company matured. The debt security was
satisfied for cash, and no equity was exchanged.
The Company makes commitments to fund partnership investments in the
normal course of business. The amounts of these unfunded commitments were $1,934
million and $1,898 million at March 31, 2002 and December 31, 2001,
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 (i) in which significant declines in revenues and/or
margins threaten the ability of the issuer to continue operating, or (ii) 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 (i) cash flows falling
below varying thresholds established for the industry and other relevant
factors, (ii) significant declines in revenues and/or margins, (iii) public
securities trading at a substantial discount compared to original cost as a
result of specific credit concerns, and (iv) 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 three months ended March 31, 2002 and 2001, such write-downs were
$36 million and $97 million, respectively.
OTHER INVESTED ASSETS
The Company's other invested assets consist principally of leveraged
leases and funds withheld at interest of $2.9 billion and $2.7 billion at March
31, 2002 and December 31, 2001, 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 1.9% of cash and
invested assets at March 31, 2002 and December 31, 2001, respectively.
50
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative instruments to manage risk through one of four
principal risk management strategies: the hedging of liabilities, invested
assets, portfolios of assets or liabilities and anticipated transactions.
Additionally, Metropolitan Life enters into income generation and replication
derivative transactions as permitted by its derivatives use plan that was
approved by the Department. 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 table below provides a summary of the carrying value, notional amount
and fair value of derivative financial instruments held at:
MARCH 31, 2002 DECEMBER 31, 2001
---------------------------------------------- ----------------------------------------------
FAIR VALUE FAIR VALUE
CARRYING NOTIONAL --------------------- CARRYING NOTIONAL ---------------------
VALUE AMOUNT ASSETS LIABILITIES VALUE AMOUNT ASSETS LIABILITIES
----- ------ ------ ----------- ----- ------ ------ -----------
(DOLLARS IN MILLIONS)
Financial futures $ (6) $ 260 $ -- $ 6 $ -- $ -- $ -- $ --
Interest rate swaps 35 2,251 58 23 70 1,849 79 9
Floors 3 325 3 -- 11 325 11 --
Caps 2 4,289 2 -- 5 7,890 5 --
Foreign currency swaps 184 1,931 200 16 162 1,925 188 26
Exchange traded options -- -- -- -- (12) 1,857 -- 12
Foreign exchange contracts -- 53 -- -- 4 67 4 --
Written covered calls -- 40 -- -- -- 40 -- --
Credit default swaps -- 270 -- -- -- 270 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total contractual commitments $ 218 $ 9,419 $ 263 $ 45 $ 240 $ 14,223 $ 287 $ 47
======== ======== ======== ======== ======== ======== ======== ========
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 March 31, 2002 and December 31, 2001 had
estimated fair values of $14,006 million and $14,404 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 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 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 income 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.
51
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, including derivative
instruments. There have been no material changes in market risk exposures from
December 31, 2001, a description of which may be found in MetLife's 2001 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.
Sales Practices Claims
As previously disclosed, over the past several years Metropolitan
Life, New England Mutual Life Insurance Company ("New England Mutual") and
General American have faced numerous claims, including class action lawsuits,
alleging improper marketing and sales of individual life insurance policies or
annuities. These lawsuits are generally referred to as "sales practices claims."
Settlements have been reached in the sales practices class actions against
Metropolitan Life, New England Mutual and General American. Certain class
members have opted out of these class action settlements and have brought or
continued non-class action sales practices lawsuits. As of March 31, 2002, there
are approximately 420 sales practices lawsuits pending against Metropolitan
Life, approximately 70 lawsuits pending against New England Mutual and
approximately 50 of such lawsuits pending against General American. Metropolitan
Life, New England Mutual and General American continue to vigorously defend
themselves against these lawsuits.
In March 2002, a purported class action complaint was filed in the
United States District Court for the District of Kansas by S-G Metals
Industries, Inc. against New England Mutual. The complaint seeks certification
of a class on behalf of policyholders who purchased corporate owned life
insurance policies, bank owned life insurance policies, pension policies and
work site marketing policies. These policyholders were not part of the New
England Mutual class action settlement noted above. New England Mutual intends
to vigorously defend itself against the case.
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 against
Metropolitan Life, New England Mutual and General American.
Asbestos-Related Claims
As previously reported, Metropolitan Life received approximately
59,500 asbestos-related claims in 2001. During the first three months of 2002,
Metropolitan Life received approximately 11,800 asbestos-related claims.
Property and Casualty Actions
In February 2002, a new purported class action suit was filed
against Metropolitan Property and Casualty Insurance Company in a state court in
Georgia involving claims by policyholders for the alleged diminished value of
automobiles after accident-related repairs. A tentative settlement has been
reached in this case.
Other
As previously disclosed, General American has received and responded
to subpoenas for documents and other information from the office of the U.S.
Attorney for the Eastern District of Missouri with respect to certain
administrative services provided by its former Medicare Unit during the period
January 1, 1988 through December 31, 1998, which services ended and which unit
was disbanded prior to MetLife's acquisition of General American. In March 2002,
General American and the federal government reached an agreement in principle to
resolve all issues through a civil settlement. MetLife has recorded a $48
million charge, net of income taxes, to cover costs associated with the
anticipated resolution of the investigations. The agreement is subject to
approvals and there can be no assurance that it will be approved.
Various litigation, claims and assessments against the Company, in
addition to those discussed above and those otherwise provided for in the
Company's consolidated financial statements, have arisen in the course of the
Company's business, including, but not limited to, in connection with its
activities as an insurer, employer, investor, investment advisor and taxpayer.
Further, state
52
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.
Summary
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, except as noted above in connection with specific matters. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
During the three months ended March 31, 2002, the following
current reports were filed on Form 8-K:
1. Current Report on Form 8-K filed February 7, 2002 attaching
press release dated February 7, 2002 announcing fourth quarter
2001 charge.
2. Current Report on Form 8-K filed February 12, 2002 attaching
press release dated February 12, 2002 announcing MetLife's
fourth quarter and full year 2001 results.
3. Current Report on Form 8-K filed February 20, 2002 attaching
press release dated February 19, 2002 announcing additional
stock repurchase program.
53
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: May 14, 2002
54
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER EXHIBIT NAME NUMBER
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