UNITED STATES
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 SEPTEMBER 30, 2004
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
(State or other jurisdiction of
incorporation or organization)
13-4075851
(I.R.S. Employer
Identification Number)
200 Park Avenue, New York, NY
(Address of principal
executive offices)
10166-0188
(Zip Code)
(212) 578-2211
(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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
At November 1, 2004, 744,336,306 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........................................ 4
Unaudited Interim Condensed Consolidated Balance Sheets at
September 30, 2004 and December 31, 2003........................... 4
Unaudited Interim Condensed Consolidated Statements of Income for the
Three Months and Nine Months Ended September 30, 2004 and 2003..... 5
Unaudited Interim Condensed Consolidated Statement of Stockholders'
Equity for the Nine Months Ended September 30, 2004................ 6
Unaudited Interim Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2004 and 2003.................. 7
Notes to Unaudited Interim Condensed Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 38
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.. 87
ITEM 4. CONTROLS AND PROCEDURES..................................... 87
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 88
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. 92
ITEM 6. EXHIBITS.................................................... 93
SIGNATURES............................................................ 94
2
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 results or other
consequences from litigation, arbitration or regulatory investigations; (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 and
its affiliates' claims paying ability, financial strength or credit 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) discrepancies between
actual experience and assumptions used in establishing liabilities related to
other contingencies or obligations; (xiii) the effects of business disruption or
economic contraction due to terrorism or other hostilities; (xiv) the Company's
ability to identify and consummate on successful terms any future acquisitions,
and to successfully integrate acquired businesses with minimal disruption; and
(xv) other risks and uncertainties described from time to time in MetLife,
Inc.'s filings with the U.S. 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.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost: $166,972 and $158,333, respectively) $ 176,091 $ 167,752
Equity securities, at fair value
(cost: $1,597 and $1,215, respectively) 1,869 1,584
Mortgage loans on real estate 29,620 26,249
Policy loans 8,801 8,749
Real estate and real estate joint ventures held-for-investment 4,170 3,786
Real estate held-for-sale 93 891
Other limited partnership interests 2,846 2,600
Short-term investments 2,451 1,809
Other invested assets 4,394 4,637
------------- ------------
Total investments 230,335 218,057
Cash and cash equivalents 3,592 3,683
Accrued investment income 2,491 2,186
Premiums and other receivables 7,089 7,024
Deferred policy acquisition costs 13,920 12,943
Assets of subsidiaries held-for-sale 217 183
Other assets 7,354 7,009
Separate account assets 81,181 75,756
------------- ------------
Total assets $ 346,179 $ 326,841
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 98,197 $ 94,148
Policyholder account balances 81,798 75,901
Other policyholder funds 6,812 6,343
Policyholder dividends payable 1,125 1,049
Policyholder dividend obligation 2,161 2,130
Short-term debt 1,566 3,642
Long-term debt 6,695 5,703
Shares subject to mandatory redemption 277 277
Liabilities of subsidiaries held-for-sale 80 70
Current income taxes payable 501 651
Deferred income taxes payable 2,468 2,397
Payables under securities loaned transactions 28,662 27,083
Other liabilities 11,681 10,542
Separate account liabilities 81,181 75,756
------------- ------------
Total liabilities 323,204 305,692
------------- ------------
Stockholders' Equity:
Preferred stock, par value $0.01 per share; 200,000,000 shares
authorized; none issued -- --
Common stock, par value $0.01 per share; 3,000,000,000 shares
authorized; 786,766,664 shares issued at September 30, 2004
and December 31, 2003; 744,523,174 shares outstanding at
September 30, 2004 and 757,186,137 shares outstanding at
December 31, 2003 8 8
Additional paid-in capital 15,027 14,991
Retained earnings 6,440 4,193
Treasury stock, at cost; 42,243,490 shares at September 30, 2004
and 29,580,527 shares at December 31, 2003 (1,294) (835)
Accumulated other comprehensive income 2,794 2,792
------------- ------------
Total stockholders' equity 22,975 21,149
------------- ------------
Total liabilities and stockholders' equity $ 346,179 $ 326,841
============= ============
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
4
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
REVENUES
Premiums $ 5,736 $ 5,079 $ 16,434 $ 14,994
Universal life and investment-type product policy fees 738 623 2,143 1,798
Net investment income 3,076 2,846 9,126 8,555
Other revenues 292 299 889 886
Net investment gains (losses) 206 (126) 369 (428)
-------- -------- -------- --------
Total revenues 10,048 8,721 28,961 25,805
-------- -------- -------- --------
EXPENSES
Policyholder benefits and claims 5,933 5,149 16,713 15,044
Interest credited to policyholder account balances 739 767 2,220 2,275
Policyholder dividends 456 473 1,369 1,483
Other expenses 1,920 1,638 5,606 5,133
-------- -------- -------- --------
Total expenses 9,048 8,027 25,908 23,935
-------- -------- -------- --------
Income from continuing operations before provision for income taxes 1,000 694 3,053 1,870
Provision for income taxes 301 143 851 463
-------- -------- -------- --------
Income from continuing operations 699 551 2,202 1,407
Income (Loss) from discontinued operations, net of income taxes (4) 23 131 109
-------- -------- -------- --------
Income before cumulative effect of a change in accounting 695 574 2,333 1,516
Cumulative effect of a change in accounting, net of income taxes -- -- (86) --
-------- -------- -------- --------
Net income $ 695 $ 574 $ 2,247 $ 1,516
======== ======== ======== ========
Income from continuing operations available to common
shareholders per share
Basic $ 0.93 $ 0.72 $ 2.93 $ 1.90
======== ======== ======== ========
Diluted $ 0.93 $ 0.72 $ 2.91 $ 1.90
======== ======== ======== ========
Net income available to common shareholders per share
Basic $ 0.93 $ 0.75 $ 2.99 $ 2.05
======== ======== ======== ========
Diluted $ 0.92 $ 0.75 $ 2.97 $ 2.04
======== ======== ======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
5
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(DOLLARS IN MILLIONS)
Accumulated Other Comprehensive
Income (Loss)
-------------------------------------
Net
Unrealized Foreign Minimum
Additional Treasury Investment Currency Pension
Common Paid-in Retained Stock Gains Translation Liability
Stock Capital Earnings at Cost (Losses) Adjustment Adjustment Total
------ ---------- -------- -------- ---------- ----------- ---------- -------
Balance at December 31, 2003 $ 8 $ 14,991 $ 4,193 $ (835) $ 2,972 $ (52) $ (128) $21,149
Treasury stock transactions, net 36 (459) (423)
Comprehensive income (loss):
Net income 2,247 2,247
Other comprehensive income (loss):
Unrealized gains (losses) on
derivative instruments, net
of income taxes 80 80
Unrealized investment gains
(losses), net of related
offsets, reclassification
adjustments and income taxes (134) (134)
Cumulative effect of a change
in accounting, net of income
taxes 90 90
Foreign currency translation
adjustments (34) (34)
-------
Other comprehensive income
(loss) 2
-------
Comprehensive income (loss) 2,249
------ ---------- -------- -------- ---------- ----------- ---------- -------
Balance at September 30, 2004 $ 8 $ 15,027 $ 6,440 $ (1,294) $ 3,008 $ (86) $ (128) $22,975
====== ========== ======== ======== ========== =========== ========== =======
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
6
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(DOLLARS IN MILLIONS)
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
2004 2003
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 5,254 $ 4,947
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales, maturities and repayments of:
Fixed maturities 60,474 55,201
Equity securities 689 220
Mortgage loans on real estate 2,542 2,268
Real estate and real estate joint ventures 1,009 258
Other limited partnership interests 560 204
Purchases of:
Fixed maturities (67,501) (71,904)
Equity securities (867) (10)
Mortgage loans on real estate (5,781) (3,212)
Real estate and real estate joint ventures (366) (248)
Other limited partnership interests (671) (431)
Net change in short-term investments (516) (800)
Purchase of businesses, net of cash received -- 18
Proceeds from sales of businesses 29 5
Net change in payable under securities loaned transactions 1,579 6,804
Other, net (545) (650)
-------- --------
Net cash used in investing activities (9,365) (12,277)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits 27,183 27,928
Withdrawals (21,648) (20,504)
Net change in short-term debt (2,076) 1,774
Long-term debt issued 1,129 225
Long-term debt repaid (122) (53)
Treasury stock acquired (496) --
Settlement of common stock purchase contracts -- 1,006
Stock options exercised 39 3
-------- --------
Net cash provided by financing activities 4,009 10,379
-------- --------
Change in cash and cash equivalents (102) 3,049
Cash and cash equivalents, beginning of period 3,733 2,323
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,631 $ 5,372
======== ========
Cash and cash equivalents, subsidiaries held-for-sale, beginning of period $ 50 $ 54
======== ========
CASH AND CASH EQUIVALENTS, SUBSIDIARIES HELD-FOR-SALE, END OF PERIOD $ 39 $ 60
======== ========
Cash and cash equivalents, from continuing operations, beginning of period $ 3,683 $ 2,269
======== ========
CASH AND CASH EQUIVALENTS, FROM CONTINUING OPERATIONS, END OF PERIOD $ 3,592 $ 5,312
======== ========
Supplemental disclosures of cash flow information:
Net cash paid during the period for:
Interest $ 248 $ 258
======== ========
Income taxes $ 628 $ 329
======== ========
Non-cash transactions during the period:
Business acquisitions - assets $ -- $ 126
======== ========
Business acquisitions - liabilities $ -- $ 144
======== ========
Business dispositions - assets $ 820 $ 9
======== ========
Business dispositions - liabilities $ 820 $ 4
======== ========
Purchase money mortgage on real estate sale $ -- $ 50
======== ========
MetLife Capital Trust I transactions $ -- $ 1,037
======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
7
METLIFE, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
BUSINESS
"MetLife" or the "Company" refers to MetLife, Inc., a Delaware corporation
(the "Holding Company"), and its subsidiaries, including Metropolitan Life
Insurance Company ("Metropolitan Life"). MetLife is a leading provider of
insurance and other financial services to a broad spectrum of individual and
institutional customers. The Company offers life insurance, annuities,
automobile and homeowners insurance and mutual funds and retail banking services
to individuals, as well as 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 critical estimates include those used in
determining: (i) investment impairments; (ii) the fair value of investments in
the absence of quoted market values; (iii) the fair value of derivatives; (iv)
the capitalization and amortization of deferred policy acquisition costs; (v)
the liability for future policyholder benefits; (vi) the liability for
litigation and regulatory matters; and (vii) accounting for reinsurance
transactions, derivatives and employee benefit plans. In applying these
policies, management makes subjective and complex judgments that frequently
require estimates about matters that are inherently uncertain. Many of these
policies, estimates and related judgments are common in the insurance and
financial services industries; others are specific to the Company's businesses
and operations. Actual results could differ from those estimates.
The accompanying unaudited interim condensed consolidated financial
statements include the accounts of (i) the Holding Company and its subsidiaries;
(ii) partnerships and joint ventures in which the Company has control; and (iii)
variable interest entities ("VIEs") for which the Company is deemed to be the
primary beneficiary. Closed block assets, liabilities, revenues and expenses are
combined on a line-by-line basis with the assets, liabilities, revenues and
expenses outside the closed block based on the nature of the particular item
(See Note 6). Assets, liabilities, revenues and expenses of the general account
for 2004 include amounts related to certain separate accounts previously
reported in separate account assets and liabilities. See "-- Application of
Recent Accounting Pronouncements." Intercompany accounts and transactions have
been eliminated.
The Company uses the equity method of accounting for investments in equity
securities, real estate joint ventures and other limited partnership interests
in which it has more than a minor equity interest or more than minor influence
over the partnership's operations, but does not have a controlling interest and
is not the primary beneficiary. The Company uses the cost method of accounting
for interests in which it has a minor equity investment and virtually no
influence over the partnership's operations.
Minority interest related to consolidated entities included in other
liabilities was $1,037 million and $950 million at September 30, 2004 and
December 31, 2003, respectively.
Certain amounts in the prior year period's unaudited interim condensed
consolidated financial statements have been reclassified to conform with the
2004 presentation.
The accompanying unaudited interim condensed consolidated financial
statements reflect all adjustments (including normal recurring adjustments)
necessary to present fairly the consolidated financial position of the Company
at September 30, 2004, its consolidated results of operations for the three
months and nine months ended September 30, 2004 and 2003, its consolidated cash
flows for the nine months ended September 30, 2004 and 2003 and its consolidated
statement of stockholders' equity for the nine months ended September 30, 2004,
in accordance with GAAP. Interim results are not necessarily indicative of full
year performance. These unaudited interim condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements of the Company for the year ended December 31, 2003 included in
MetLife, Inc.'s 2003 Annual Report on Form 10-K filed with the U.S. Securities
and Exchange Commission ("SEC").
8
On August 25, 2004, the Company entered into an agreement to sell its
wholly owned subsidiary, SSRM Holdings Inc. ("SSRM"), to a third party. Closing
of the sale is expected occur in early 2005 and the Company expects the
transaction to have a positive impact on net income of between $145 million and
$165 million. Under the terms of the agreement, MetLife will receive at closing
up to $375 million in cash and stock, subject to adjustment at that time based
on certain measures. MetLife will have an opportunity to receive, prior to the
end of 2006, additional payments aggregating up to approximately 25% of the base
purchase price, based on, among other things, certain revenue retention and
growth measures. The purchase price is also subject to reduction over 5 years,
depending on retention of certain MetLife-related business. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"), the Company has
reclassified the assets, liabilities and operations of SSRM into discontinued
operations for all periods presented in this Quarterly Report on Form 10-Q.
Additionally, the pending sale of SSRM resulted in the elimination of the
Company's Asset Management segment. The remaining Asset Management business,
which is insignificant, has been reclassified into Corporate & Other.
FEDERAL INCOME TAXES
Federal income taxes for interim periods have been computed using an
estimated annual effective income 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 income tax rate.
APPLICATION OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the Emerging Issues Task Force ("EITF") reached further
consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments ("EITF 03-1"). EITF 03-1 provides
accounting guidance regarding the determination of when an impairment of debt
and marketable equity securities and investments accounted for under the cost
method should be considered other-than-temporary and recognized in income. An
EITF 03-1 consensus reached in November 2003 also requires certain quantitative
and qualitative disclosures for debt and marketable equity securities classified
as available-for-sale or held-to-maturity under SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, that are impaired at the
balance sheet date but for which an other-than-temporary impairment has not been
recognized. The Company has complied with the disclosure requirements of EITF
03-1 which were effective December 31, 2003. The accounting guidance of EITF
03-1 relating to the recognition of investment impairment which was to be
effective in the third quarter of 2004 has been delayed pending the development
of additional guidance. The Company is actively monitoring the deliberations
relating to this issue at the Financial Accounting Standards Board ("FASB") and
currently is unable to determine the impact of EITF 03-1 on its unaudited
interim condensed consolidated financial statements.
In March 2004, the EITF reached consensus on Issue No. 03-6, Participating
Securities and the Two-Class Method under FASB Statement No. 128 ("EITF 03-6").
EITF 03-6 provides guidance in determining whether a security should be
considered a participating security for purposes of computing earnings per share
and how earnings should be allocated to the participating security. EITF 03-6,
which was effective for the Company in the second quarter of 2004, did not have
an impact on the Company's earnings per share calculations or amounts.
In March 2004, the EITF reached consensus on Issue No. 03-16, Accounting
for Investments in Limited Liability Companies ("EITF 03-16"). EITF 03-16
provides guidance regarding whether a limited liability company should be viewed
as similar to a corporation or similar to a partnership for purposes of
determining whether a noncontrolling investment should be accounted for using
the cost method or the equity method of accounting. EITF 03-16, which was
effective in the third quarter of 2004, did not have a material impact on the
Company's unaudited interim condensed consolidated financial statements.
Effective January 1, 2004, the Company adopted Statement of Position 03-1,
Accounting and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts ("SOP 03-1"). SOP 03-1
provides guidance on (i) the classification and valuation of long-duration
contract liabilities; (ii) the accounting for sales inducements; and (iii)
separate account presentation and valuation. In June 2004, the FASB released
Staff Position Paper No. 97-1, Situations in Which Paragraphs 17(b) and 20 of
FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale
of Investments, Permit or Require Accrual of an Unearned Revenue Liability ("FSP
97-1") which included clarification that unearned revenue liabilities should be
considered in determining the necessary insurance benefit liability required
under SOP 03-1. Since the Company had considered unearned revenue in determining
its SOP 03-1 benefit liabilities, FSP 97-1 did not impact its unaudited interim
condensed consolidated financial statements. In September 2004, the American
Institute of Certified Public Accountants issued Technical Practice Aids
relating to SOP 03-1. One of the Technical Practice Aids provided additional
guidance relating to the definition of policy assessments in determining benefit
liabilities. This new guidance, which the Company was required to apply
retroactively to January 1, 2004, resulted in an increase to net income
previously
9
reported for the three months ended March 31, 2004 and June 30, 2004 (see Note
2). As a result of the adoption of SOP 03-1 and the Technical Practice Aids,
effective January 1, 2004, the Company decreased the liability for future
policyholder benefits for changes in the methodology relating to various
guaranteed death and annuitization benefits and for determining reserves for
certain universal life insurance contracts by $4 million, which has been
reported as a cumulative effect of a change in accounting. This amount is net of
corresponding changes in deferred policy acquisition costs ("DAC"), including
value of business acquired and unearned revenue liability ("offsets") under
certain variable annuity and life contracts and income taxes. Certain other
contracts sold by the Company provide for a return through periodic crediting
rates, surrender adjustments or termination adjustments based on the total
return of a contractually referenced pool of assets owned by the Company. To the
extent that such contracts are not accounted for under the provisions of SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133") and not already credited to the contract account balance, under SOP 03-1
the change relating to the fair value of the referenced pool of assets is
recorded as a liability through policyholder benefits and claims. Prior to the
adoption of SOP 03-1, the Company recorded the change in such liability as other
comprehensive income. At adoption, this change decreased net income and
increased other comprehensive income by $63 million, net of income taxes, which
were recorded as cumulative effects of a change in accounting. Effective with
the adoption of SOP 03-1, costs associated with enhanced or bonus crediting
rates to contractholders must be deferred and amortized over the life of the
related contract using assumptions consistent with the amortization of DAC.
Since the Company followed a similar approach prior to adoption of SOP 03-1, the
provisions of SOP 03-1 relating to sales inducements had no significant impact
on the Company's unaudited interim condensed consolidated financial statements.
At adoption, the Company reclassified $155 million of ownership in its own
separate accounts from other assets to fixed maturities, equity securities and
cash and cash equivalents. This reclassification had no significant impact on
net income or other comprehensive income at adoption. In accordance with SOP
03-1's guidance for the reporting of certain separate accounts, at adoption, the
Company also reclassified $1.7 billion of separate account assets to general
account investments and $1.7 billion of separate account liabilities to future
policy benefits and policyholder account balances. This reclassification
decreased net income and increased other comprehensive income by $27 million,
net of income taxes, which were reported as cumulative effects of a change in
accounting. For the three months ended September 30, 2004, the impact of SOP
03-1 decreased the Company's net income by $45 million. For the nine months
ended September 30, 2004 the impact of SOP 03-1, which includes retroactive
adjustments through June 30, 2004 as described in Note 2, and the effects of the
cumulative adjustment recorded in the first quarter of 2004, decreased the
Company's net income by $57 million. (See Note 5).
In December 2003, FASB revised SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits -- an Amendment of FASB Statements
No. 87, 88 and 106 ("SFAS 132(r)"). SFAS 132(r) retains most of the disclosure
requirements of SFAS 132 and requires additional disclosure about assets,
obligations, cash flows and net periodic benefit cost of defined benefit pension
plans and other defined postretirement plans. SFAS 132(r) was primarily
effective for fiscal years ending after December 15, 2003; however, certain
disclosures about foreign plans and estimated future benefit payments are
effective for fiscal years ending after June 15, 2004. The Company's adoption of
SFAS 132(r) on December 31, 2003 did not have a significant impact on its
consolidated financial statements since it only revised disclosure requirements.
In May 2004, the FASB issued FASB Staff Position ("FSP") No. 106-2, Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 ("FSP 106-2"), which provides
accounting guidance to a sponsor of a postretirement health care plan that
provides prescription drug benefits. The Company expects to receive subsidies on
prescription drug benefits beginning in 2006 under the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 based on the Company's
determination that the prescription drug benefits offered under certain
postretirement plans are actuarially equivalent to the benefits offered under
Medicare Part D. FSP 106-2 is effective for interim periods beginning after June
15, 2004 and provides for either retroactive application to the date of
enactment of the legislation or prospective application from the date of
adoption of FSP 106-2. Effective July 1, 2004, the Company adopted FSP 106-2
prospectively and the postretirement benefit plan assets and accumulated benefit
obligation were remeasured to determine the effect of the expected subsidies on
net periodic postretirement benefit cost. As a result, the accumulated
postretirement benefit obligation was reduced by $213 million and net periodic
postretirement benefit cost for the third quarter was reduced by $9 million.
Effective October 1, 2003, the Company adopted Statement 133
Implementation Issue No. B36, Embedded Derivatives: Modified Coinsurance
Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That
Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor
under Those Instruments ("Issue B36"). Issue B36 concluded that (i) a company's
funds withheld payable and/or receivable under certain reinsurance arrangements,
and (ii) a debt instrument that incorporates credit risk exposures that are
unrelated or only partially related to the creditworthiness of the obligor
include an embedded derivative feature that is not clearly and closely related
to the host contract. Therefore, the embedded derivative feature is measured at
fair value on the balance sheet and changes in fair value are reported in
income. The Company's adoption of Issue B36 increased (decreased) net income by
$(12) million and $1 million, net of amortization of DAC and income taxes, for
the three months and nine months ended September 30, 2004, respectively.
10
Effective July 1, 2003, the Company adopted SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149").
SFAS 149 amended and clarified the accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Except for certain previously issued and
effective guidance, SFAS 149 was effective for contracts entered into or
modified after June 30, 2003. The Company's adoption of SFAS 149 did not have a
significant impact on its unaudited interim condensed consolidated financial
statements.
During 2003, the Company adopted FASB Interpretation No. 46, Consolidation
of Variable Interest Entities -- An Interpretation of ARB No. 51 ("FIN 46"), and
its December 2003 revision ("FIN 46(r)"). Certain of the Company's asset-backed
securitizations, collateralized debt obligations, structured investment
transactions, and investments in real estate joint ventures and other limited
partnership interests meet the definition of a VIE and must be consolidated, in
accordance with the transition rules and effective dates, because the Company is
deemed to be the primary beneficiary. A VIE is defined as (i) any entity in
which the equity investments at risk in such entity do not have the
characteristics of a controlling financial interest, or (ii) any entity that
does not have sufficient equity at risk to finance its activities without
additional subordinated support from other parties. Effective February 1, 2003,
the Company adopted FIN 46 for VIEs created or acquired on or after February 1,
2003 and, effective December 31, 2003, the Company adopted FIN 46(r) with
respect to interests in entities formerly considered special purpose entities
("SPEs"), including interests in asset-backed securities and collateralized debt
obligations. The adoption of FIN 46 as of February 1, 2003 did not have a
significant impact on the Company's unaudited interim condensed consolidated
financial statements. The adoption of the provisions of FIN 46(r) at December
31, 2003 did not require the Company to consolidate any additional VIEs that
were not previously consolidated. In accordance with the provisions of FIN
46(r), the Company elected to defer until March 31, 2004 the consolidation of
interests in VIEs for non-SPEs acquired prior to February 1, 2003 for which it
is the primary beneficiary. As of March 31, 2004, the Company consolidated
assets and liabilities relating to real estate joint ventures of $78 million and
$15 million, respectively, and assets and liabilities relating to other limited
partnerships of $29 million and $1 million, respectively, for VIEs for which the
Company was deemed to be the primary beneficiary.
2. IMPACT OF TECHNICAL PRACTICE AIDS RELATED TO SOP 03-1 ON PRIOR INTERIM
PERIODS
As discussed in Note 1, the Company was required to apply the Technical
Practice Aids issued by the AICPA in September 2004 related to SOP 03-1 on a
retroactive basis to January 1, 2004. This accounting change increased income
from continuing operations for the three months ended June 30, 2004 and March
31, 2004 by $7 million ($0.01 per basic and diluted share) and $3 million ($0.01
per basic and diluted share), respectively, and net income available to common
shareholders for the three months ended June 30, 2004 and March 31, 2004 by $7
million ($0.01 per basic and diluted share) and $75 million ($0.10 per basic and
diluted share), respectively. Income from continuing operations available for
common shareholders and net income available to common shareholders and related
per share amounts for prior interim periods after giving effect to the
accounting change were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------------------------- -------------------------
MARCH 31, 2004 JUNE 30, 2004 JUNE 30, 2004
------------------------- ------------------------- -------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS)
Income from continuing operations
available to common shareholders $ 659 $ 662 $ 852 $ 859 $ 1,510 $ 1,520
=========== =========== =========== =========== =========== ===========
Basic earnings per share $ 0.87 $ 0.88 $ 1.13 $ 1.14 $ 2.00 $ 2.01
=========== =========== =========== =========== =========== ===========
Diluted earnings per share $ 0.87 $ 0.88 $ 1.12 $ 1.13 $ 1.99 $ 2.00
=========== =========== =========== =========== =========== ===========
Cumulative effect of a change in
accounting, net of income taxes $ (158) $ (86) $ -- $ -- $ (158) $ (86)
=========== =========== =========== =========== =========== ===========
Basic earnings per share $ (0.21) $ (0.11) $ -- $ -- $ (0.21) $ (0.11)
=========== =========== =========== =========== =========== ===========
Diluted earnings per share $ (0.21) $ (0.11) $ -- $ -- $ (0.21) $ (0.11)
=========== =========== =========== =========== =========== ===========
Net income available to common
shareholders $ 523 $ 598 $ 947 $ 954 $ 1,470 $ 1,552
=========== =========== =========== =========== =========== ===========
Basic earnings per share $ 0.69 $ 0.79 $ 1.26 $ 1.27 $ 1.95 $ 2.06
=========== =========== =========== =========== =========== ===========
Diluted earnings per share $ 0.69 $ 0.79 $ 1.25 $ 1.26 $ 1.94 $ 2.04
=========== =========== =========== =========== =========== ===========
11
3. INVESTMENTS
NET INVESTMENT GAINS (LOSSES)
Net investment gains (losses) were as follows:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
(DOLLARS IN MILLIONS)
Fixed maturities $ 61 $ (23) $ 92 $ (215)
Equity securities 44 5 141 (3)
Mortgage loans on real estate (8) (36) (8) (58)
Real estate and real estate joint ventures (1) 10 2 12 (2)
Other limited partnership interests 52 (11) 42 (73)
Sales of businesses -- -- 23 --
Derivatives (2) 35 (74) (3) (91)
Other 12 11 70 14
------- ------- ------- -------
Total net investment gains (losses) $ 206 $ (126) $ 369 $ (428)
======= ======= ======= =======
- ----------
(1) The amounts presented exclude net investment gains (losses) related to
sales of real estate held-for-sale presented as discontinued operations in
accordance with SFAS 144 of ($16) million and $136 million, respectively,
for the three months and nine months ended September 30, 2004 and $7
million and $97 million, respectively, for the three months and nine
months ended September 30, 2003.
(2) The amounts presented include net investment gains related to scheduled
periodic settlement payments on derivative instruments that do not qualify
for hedge accounting under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133") of $12 million and $48
million, respectively, for the three months and nine months ended
September 30, 2004 and $35 million and $55 million, respectively, for the
three months and nine months ended September 30, 2003.
12
The following tables show the estimated fair values and gross unrealized
losses of the Company's fixed maturities in an unrealized loss position,
aggregated by sector and length of time that the securities have been in a
continuous unrealized loss position, at September 30, 2004 and December 31,
2003:
SEPTEMBER 30, 2004
---------------------------------------------------------------------------
EQUAL TO OR
LESS THAN 12 MONTHS GREATER THAN 12 MONTHS TOTAL
----------------------- ----------------------- -----------------------
GROSS GROSS GROSS
ESTIMATED UNREALIZED ESTIMATED UNREALIZED ESTIMATED UNREALIZED
FAIR VALUE LOSS FAIR VALUE LOSS FAIR VALUE LOSS
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
U.S. corporate securities $ 9,236 $ 121 $ 1,375 $ 48 $ 10,611 $ 169
Residential mortgage-backed securities 9,448 78 686 17 10,134 95
Foreign corporate securities 3,717 48 494 14 4,211 62
U.S. treasuries/agencies 3,027 25 4 -- 3,031 25
Asset-backed securities 4,488 29 397 13 4,885 42
Commercial mortgage-backed securities 2,579 21 399 6 2,978 27
Foreign government securities 1,105 32 102 13 1,207 45
State and political subdivisions 291 7 86 5 377 12
Other fixed income assets 41 35 31 1 72 36
---------- ---------- ---------- ---------- ---------- ----------
Total bonds 33,932 396 3,574 117 37,506 513
Redeemable preferred stocks 541 71 -- -- 541 71
---------- ---------- ---------- ---------- ---------- ----------
Total fixed maturities $ 34,473 $ 467 $ 3,574 $ 117 $ 38,047 $ 584
========== ========== ========== ========== ========== ==========
DECEMBER 31, 2003
---------------------------------------------------------------------------
EQUAL TO OR
LESS THAN 12 MONTHS GREATER THAN 12 MONTHS TOTAL
----------------------- ----------------------- -----------------------
GROSS GROSS GROSS
ESTIMATED UNREALIZED ESTIMATED UNREALIZED ESTIMATED UNREALIZED
FAIR VALUE LOSS FAIR VALUE LOSS FAIR VALUE LOSS
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
U.S. corporate securities $ 7,214 $ 152 $ 1,056 $ 100 $ 8,270 $ 252
Residential mortgage-backed securities 8,372 98 27 4 8,399 102
Foreign corporate securities 2,583 65 355 14 2,938 79
U.S. treasuries/agencies 3,697 26 -- -- 3,697 26
Asset-backed securities 2,555 34 861 26 3,416 60
Commercial mortgage-backed securities 2,449 20 282 2 2,731 22
Foreign government securities 331 28 2 -- 333 28
State and political subdivisions 389 12 38 3 427 15
Other fixed income assets 130 73 40 10 170 83
---------- ---------- ---------- ---------- ---------- ----------
Total bonds 27,720 508 2,661 159 30,381 667
Redeemable preferred stocks 222 62 278 14 500 76
---------- ---------- ---------- ---------- ---------- ----------
Total fixed maturities $ 27,942 $ 570 $ 2,939 $ 173 $ 30,881 $ 743
========== ========== ========== ========== ========== ==========
At September 30, 2004 and December 31, 2003, the Company had gross
unrealized losses of $25 million and $6 million, respectively, from equity
securities that had been in an unrealized loss position for less than twelve
months. The amount of unrealized losses from equity securities that had been in
an unrealized loss position for twelve months or greater is less than $1 million
at both September 30, 2004 and December 31, 2003. The fair value of those equity
securities that had been in an unrealized loss position for less than twelve
months is $364 million and $53 million at September 30, 2004 and December 31,
2003, respectively. The fair value of those equity securities that had been in
an unrealized loss position for twelve months or greater is $3 million and $22
million at September 30, 2004 and December 31, 2003, respectively. The Company
continually evaluates its intent and ability to hold securities in an unrealized
loss position in its determination of other than temporary impairments.
STRUCTURED INVESTMENT TRANSACTIONS
The Company invests in structured notes and similar type instruments,
which generally provide equity-based returns on debt securities. The carrying
value of such investments was approximately $848 million and $880 million at
September 30, 2004 and December 31, 2003, respectively. The related income
(loss) recognized was ($8) million and $25 million for the three months ended
September 30, 2004 and 2003, respectively, and $25 million and $49 million for
the nine months ended September 30, 2004 and 2003, respectively.
13
VARIABLE INTEREST ENTITIES
As discussed in Note 1, the Company has adopted the provisions of FIN
46(r). The adoption of FIN 46(r) required the Company to consolidate certain
VIEs for which it is the primary beneficiary. The following table presents the
total assets of and maximum exposure to loss relating to VIEs for which the
Company has concluded that (i) it is the primary beneficiary and which are
consolidated in the Company's unaudited interim condensed consolidated financial
statements at September 30, 2004, and (ii) it holds significant variable
interests but it is not the primary beneficiary and which have not been
consolidated:
SEPTEMBER 30, 2004
---------------------------------------------------
PRIMARY BENEFICIARY NOT PRIMARY BENEFICIARY
------------------------ ------------------------
MAXIMUM MAXIMUM
TOTAL EXPOSURE TO TOTAL EXPOSURE TO
ASSETS (1) LOSS (2) ASSETS (1) LOSS (2)
---------- ----------- ---------- -----------
(DOLLARS IN MILLIONS)
Asset-backed securitizations
and collateralized debt obligations $ -- $ -- $ 2,324 $ 15
Real estate joint ventures (3) 16 14 132 --
Other limited partnerships (4) 80 76 587 57
---------- ----------- ---------- -----------
Total $ 96 $ 90 $ 3,043 $ 72
========== =========== ========== ===========
- ----------
(1) The assets of the asset-backed securitizations and collateralized debt
obligations are reflected at fair value as of September 30, 2004. The
assets of the real estate joint ventures and other limited partnerships
are reflected at the carrying amounts at which such assets would have been
reflected on the Company's balance sheet had the Company consolidated the
VIE from the date of its initial investment in the entity.
(2) The maximum exposure to loss of the asset-backed securitizations and
collateralized debt obligations is equal to the carrying amounts of
retained interests. In addition, the Company provides collateral
management services for certain of these structures for which it collects
a management fee. The maximum exposure to loss relating to real estate
joint ventures and other limited partnerships is equal to the carrying
amounts plus any unfunded commitments, reduced by amounts guaranteed by
other partners.
(3) Real estate joint ventures include partnerships and other ventures, which
engage in the acquisition, development, management and disposal of real
estate investments.
(4) Other limited partnerships include partnerships established for the
purpose of investing in real estate funds, public and private debt and
equity securities, as well as limited partnerships established for the
purpose of investing in low-income housing that qualifies for federal tax
credits.
4. DERIVATIVE INSTRUMENTS
The Company uses derivative instruments to manage risk through one of five
principal strategies, the hedging of: (i) liabilities; (ii) invested assets;
(iii) portfolios of assets or liabilities; (iv) net investments in certain
foreign operations; and (v) firm commitments and forecasted transactions.
Additionally, the Company enters into income generation and replication
derivative transactions as permitted by its insurance subsidiaries' Derivatives
Use Plans approved by the applicable state insurance departments. The Company's
derivative hedging strategy employs a variety of instruments, including
financial futures, financial forwards, interest rate swaps, caps and floors,
credit default swaps, foreign currency swaps and foreign currency forwards and
options.
On the date the Company enters into a derivative contract for hedging
purposes, management designates the derivative as a hedge of the identified
exposure (fair value, cash flow or foreign currency). If a derivative does not
qualify for hedge accounting, according to SFAS 133, the changes in its fair
value and all scheduled periodic settlement receipts and payments are reported
in income.
14
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, foreign
operation, or forecasted transaction that has been designated as a hedged item,
states how the hedging instrument is expected to hedge the risks related to the
hedged item, and sets forth the method that will be used to retrospectively and
prospectively assess the hedging instrument's effectiveness and the method that
will be used to measure hedge ineffectiveness. 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 notional amount and fair value
of derivatives by type of hedge designation at:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
-------------------------------- --------------------------------
FAIR VALUE FAIR VALUE
NOTIONAL --------------------- NOTIONAL ---------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
-------- ------- ----------- -------- ------- -----------
(DOLLARS IN MILLIONS)
BY TYPE OF HEDGE
Fair value $ 6,743 $ 56 $ 277 $ 4,027 $ 27 $ 297
Cash flow 14,468 88 415 13,173 59 449
Foreign operations 535 -- 19 527 -- 10
Non-qualifying 20,632 222 165 21,807 170 142
-------- ------- ----------- -------- ------- -----------
Total $ 42,378 $ 366 $ 876 $ 39,534 $ 256 $ 898
======== ======= =========== ======== ======= ===========
Non-qualifying derivatives are comprised of derivative instruments which
do not meet the requirements for, or for which the Company does not seek, hedge
accounting under SFAS 133. These include certain interest rate, foreign
currency, credit default and total return swaps, interest rate caps, foreign
currency forwards, purchased options and futures, embedded conversion options,
and derivatives held in consolidated separate accounts. The non-qualifying
notional amount at September 30, 2004 and December 31, 2003, includes $5,690
million and $5,177 million, respectively, related to synthetic guaranteed
investment product contracts that meet the definition of a derivative, but are
not considered to be accounting hedges. The fair value of such contracts at
September 30, 2004 and December 31, 2003 exceeds the contract value.
Based upon the type of derivative instrument and strategy, the income
effects of qualifying derivatives are reported with the results of the
associated risk. Therefore, the periodic settlements, amortization, and disposal
gains and losses from interest rate caps, options, futures and interest rate,
foreign currency and credit default swaps that qualify for hedge accounting are
reported as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2004 2003 2004 2003
------ ------ ------ ------
(DOLLARS IN MILLIONS)
Net investment income (loss) $ (32) $ (21) $ (115) $ (36)
Net investment gains (losses) (1) (15) (73) 12
Foreign currency translation adjustments (23) -- (16) --
Interest credited to policyholder account balances 13 -- 26 --
------ ------ ------ ------
Total $ (43) $ (36) $ (178) $ (24)
====== ====== ====== ======
15
The following table represents fair value hedges for the:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2004 2003 2004 2003
------ ------ ------ ------
(DOLLARS IN MILLIONS)
Changes in the fair value of qualifying hedges $ (62) $ (10) $ 60 $ (102)
Changes in the hedged items reported in net
investment gains (losses) 77 (14) (22) 72
------ ------ ------ ------
Net ineffectiveness gains (losses) from fair
value hedging activities $ 15 $ (24) $ 38 $ (30)
====== ====== ====== ======
There were no discontinued fair value hedges during the three months and
nine months ended September 30, 2004 or 2003.
The following table represents cash flow hedges for the:
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
2004 2004 2003 2003 2003
------------- ------------- ------------ ------------- -------------
(DOLLARS IN MILLIONS)
Changes in the fair value of qualifying hedges $ 31 $ 161 $ (456) $ (176) $ (298)
Less: Gains (losses) deferred in other
comprehensive income on the effective portion
of cash flow hedges 6 160 (387) (134) (250)
------------- ------------- ------------ ------------- -------------
Net ineffectiveness recorded in net investment
gains (losses) from cash flow hedging activities $ 25 $ 1 $ (69) $ (42) $ (48)
============= ============= ============ ============= =============
Other comprehensive income balance at the
beginning of the period $ (273) $ (417) $ (24) $ (131) $ (24)
Gains (losses) deferred in other comprehensive
income on the effective portion of cash flow
hedges 6 160 (387) (134) (250)
Amounts reclassified to net investment income 1 2 2 -- 1
Amounts reclassified to net investment gains
(losses) 2 (3) -- (12) --
Amortization of transition adjustment (1) (7) (8) (2) (6)
------------- ------------- ------------ ------------- -------------
Other comprehensive income balance at the end
of the period $ (265) $ (265) $ (417) $ (279) $ (279)
============= ============= ============ ============= =============
There were no discontinued cash flow hedges during the three months and
nine months ended September 30, 2004 or 2003.
The Company uses forward exchange contracts to provide a hedge on portions
of its net investments in foreign operations against adverse movements in
foreign currency exchange rates. For the three months and nine months ended
September 30, 2004, the Company experienced net unrealized losses of $13 million
and $9 million, respectively, related to hedges of its investments in foreign
operations. Unrealized losses of $19 million and $10 million were recorded as
components of accumulated other comprehensive income at September 30, 2004 and
December 31, 2003, respectively. There were no hedges of the net investment in
foreign operations during the three months and nine months ended September 30,
2003.
Based on the type of derivative instrument and strategy, the income
effects of non-qualifying derivatives are reported with the results of the
associated risk. Therefore, periodic settlements and gains and losses for
non-qualifying derivatives were reported as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2004 2003 2004 2003
------ ------ ------ ------
(DOLLARS IN MILLIONS)
Net investment gains (losses) $ (4) $ 7 $ 31 $ (25)
Policyholder benefits and claims (1) -- (1) --
------ ------ ------ ------
Total $ (5) $ 7 $ 30 $ (25)
====== ====== ====== ======
The use of these non-speculative derivatives is permitted by the relevant
state insurance departments.
16
5. INSURANCE
CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS
The Company issues variable annuity contracts which may include
contractual guarantees to the contractholder for: (i) return of no less than
total deposits made to the contract less any partial withdrawals ("return of net
deposits") and (ii) the highest contract value on a specified anniversary date
minus any withdrawals following the contract anniversary, or total deposits made
to the contract less any partial withdrawals plus a minimum return ("anniversary
contract value" or "minimum return"). The Company also issues annuity contracts
that apply a lower rate of funds deposited if the contractholder elects to
surrender the contract for cash and a higher rate if the contractholder elects
to annuitize ("two tier annuities"). These guarantees include benefits that are
payable in the event of death or at annuitization. The Company also issues
universal and variable life contracts where the Company contractually guarantees
to the contractholder a secondary guarantee or a guaranteed paid up benefit.
The assets supporting the variable portion of contracts with guarantees
are carried at fair value and reported in total separate account assets with an
equivalent amount reported in separate account liabilities in the unaudited
interim condensed consolidated balance sheets. Net investment income, net
realized investment gains (losses) and net unrealized investment gains (losses)
relating to such separate accounts accrue directly to the contractholders and,
accordingly, are reflected net in the Company's unaudited interim condensed
consolidated statements of income. Amounts assessed against the contractholders
for mortality, administrative, and other services are included in universal life
and investment-type policy fees. Liabilities for guarantees and changes in such
liabilities are included in future policy benefits and policyholder benefits and
claims in the unaudited interim condensed consolidated balance sheets and
statements of income, respectively.
The Company had the following types of guarantees relating to annuity and
universal and variable life contracts at:
ANNUITY CONTRACTS SEPTEMBER 30, 2004
-------------------------------------
IN THE AT
EVENT OF DEATH ANNUITIZATION
-------------- -------------
(DOLLARS IN MILLIONS)
RETURN OF NET DEPOSITS
Separate account value $ 5,967 N/A
Net amount at risk $ 33 (1) N/A
Average attained age of contractholders 60 years N/A
ANNIVERSARY CONTRACT VALUE OR MINIMUM RETURN
Separate account value $ 40,334 $ 12,334
Net amount at risk $1,391 (1) $ 194 (2)
Average attained age of contractholders 61 years 58 years
TWO TIER ANNUITIES
General account value N/A $ 301
Net amount at risk N/A $ 36 (3)
Average attained age of contractholders N/A 58 years
UNIVERSAL AND VARIABLE LIFE CONTRACTS SEPTEMBER 30, 2004
------------------------------------
SECONDARY PAID UP
GUARANTEES GUARANTEES
---------- ----------
(DOLLARS IN MILLIONS)
Account value (general and separate account) $ 4,307 $ 4,578
Net amount at risk $ 92,250 (1) $ 43,052 (1)
Average attained age of policyholders 45 years 51 years
- ----------
(1) The net amount at risk for guarantees of amounts in the event of death is
defined as the current guaranteed minimum death benefit in excess of the
current account balance at the balance sheet date.
17
(2) The net amount at risk for guarantees of amounts at annuitization is
defined as the present value of the minimum guaranteed annuity payments
available to the contractholder determined in accordance with the terms of
the contract in excess of the current account balance.
(3) The net amount at risk for two tier annuities is based on the excess of
the upper tier, adjusted for a profit margin, less the lower tier.
The net amount at risk is based on the direct amount at risk (excluding
reinsurance).
The Company's annuity and life contracts with guarantees may offer more
than one type of guarantee in each contract. Therefore, the amounts listed above
may not be mutually exclusive.
Liabilities for guarantees (excluding base policy liabilities) relating to
annuity and universal and variable life contracts including the retroactive
adjustments for universal and variable life contracts through June 30, 2004 as
described in Note 2 are as follows:
UNIVERSAL AND VARIABLE
ANNUITY CONTRACTS LIFE CONTRACTS
------------------------------- -------------------------
GUARANTEED
GUARANTEED ANNUITIZATION SECONDARY PAID UP
DEATH BENEFITS BENEFITS GUARANTEES GUARANTEES TOTAL
-------------- ------------- ---------- ---------- -----
(DOLLARS IN MILLIONS)
Balance at January 1, 2004 $ 9 $17 $ 6 $25 $ 57
Incurred guaranteed benefits 4 3 1 1 9
Paid guaranteed benefits (2) -- -- -- (2)
---- --- --- --- ----
Balance at March 31, 2004 11 20 7 26 64
---- --- --- --- ----
Incurred guaranteed benefits 2 3 1 1 7
Paid guaranteed benefits (2) -- (1) -- (3)
---- --- --- --- ----
Balance at June 30, 2004 11 23 7 27 68
---- --- --- --- ----
Incurred guaranteed benefits 16 -- 1 1 18
Paid guaranteed benefits (2) -- (1) -- (3)
---- --- --- --- ----
Balance at September 30, 2004 $ 25 $23 $ 7 $28 $ 83
==== === === === ====
The guaranteed death benefit liabilities are determined by estimating the
expected value of death benefits in excess of the projected account balance and
recognizing the excess ratably over the accumulation period based on total
expected assessments. The Company regularly evaluates estimates used and adjusts
the additional liability balance, with a related charge or credit to benefit
expense, if actual experience or other evidence suggests that earlier
assumptions should be revised. The assumptions used in estimating the liability
at September 30, 2004 are consistent with those used for amortizing DAC,
including the mean reversion assumption. The assumptions of investment
performance and volatility are consistent with historical S&P experience. The
benefits used in calculating the liabilities are based on the average benefits
payable over a range of scenarios.
The guaranteed annuitization benefit liabilities are determined by
estimating the expected value of the annuitization benefits in excess of the
projected account balance at the date of annuitization and recognizing the
excess ratably over the accumulation period based on total expected assessments.
The Company regularly evaluates estimates used and adjusts the additional
liability balance, with a related charge or credit to benefit expense, if actual
experience or other evidence suggests that earlier assumptions should be
revised. The assumptions used for calculating such guaranteed annuitization
benefit liabilities at September 30, 2004 are consistent with those used for
calculating the guaranteed death benefit liabilities. In addition, the
calculation of the guaranteed annuitization benefit liabilities incorporates a
percentage of the potential annuitizations that may be elected by the
contractholder.
18
The liabilities for universal and variable life secondary guarantees and
paid-up guarantees are determined by estimating the expected value of death
benefits payable when the account balance is projected to be zero and
recognizing those benefits ratably over the accumulation period based on total
expected assessments. The Company regularly evaluates estimates used and adjusts
the additional liability balances, with a related charge or credit to benefit
expense, if actual experience or other evidence suggests that earlier
assumptions should be revised. The assumptions used in estimating the secondary
and paid up guarantee liabilities at September 30, 2004 are consistent with
those used for amortizing deferred acquisition costs. The assumptions of
investment performance and volatility for variable products are consistent with
historical S&P experience. The benefits used in calculating the liabilities are
based on the average benefits payable over a range of scenarios.
SEPARATE ACCOUNTS
Account balances of contracts with guarantees are invested in separate
account asset classes as follows at:
SEPTEMBER 30, 2004 JANUARY 1, 2004
------------------ ---------------
(DOLLARS IN MILLIONS)
Mutual Fund Groupings
Equity $27,122 $23,784
Bond 4,126 3,531
Balanced 1,582 1,368
Money Market 450 501
Specialty 227 55
------- -------
TOTAL $33,507 $29,239
======= =======
At September 30, 2004, fixed maturities, equity securities, and cash and
cash equivalents reported on the unaudited consolidated balance sheet include
$58 million, $36 million and $4 million, respectively, of the Company's
proportional interest in separate accounts.
During the three months and nine months ended September 30, 2004, there
were no investment gains (losses) on transfers of assets from the general
account to the separate account.
SALES INDUCEMENTS
The Company defers sales inducements and amortizes them over the life of
the policy using the same methodology and assumptions used to amortize DAC. The
Company has two different types of sales inducements: (i) the policyholder
receives a bonus whereby the policyholder's initial account balance is increased
by an amount equal to a specified percentage of the customer's deposit and (ii)
the policyholder receives a higher interest rate than the normal general account
interest rate credited on money in the enhanced dollar cost averaging program.
Changes in deferred sales inducements are as follows:
SALES INDUCEMENTS
---------------------
(DOLLARS IN MILLIONS)
Balance at January 1, 2004 $ 196
Capitalization 40
Amortization (1)
-----
Balance at March 31, 2004 235
-----
Capitalization 24
Amortization (3)
-----
Balance at June 30, 2004 256
-----
Capitalization 33
Amortization (8)
-----
Balance at September 30, 2004 $ 281
=====
19
6. CLOSED BLOCK
On April 7, 2000, (the "date of demutualization"), 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 (the
"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.
Liabilities and assets designated to the closed block are as follows:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(DOLLARS IN MILLIONS)
CLOSED BLOCK LIABILITIES
Future policy benefits $ 42,137 $ 41,928
Other policyholder funds 250 260
Policyholder dividends payable 757 682
Policyholder dividend obligation 2,161 2,130
Payables under securities loaned transactions 5,210 6,418
Other liabilities 257 180
-------- --------
Total closed block liabilities 50,772 51,598
-------- --------
ASSETS DESIGNATED TO THE CLOSED BLOCK
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost: $28,884 and $30,381, respectively) 30,818 32,348
Equity securities, at fair value (cost: $572 and $217,
respectively) 615 250
Mortgage loans on real estate 8,026 7,431
Policy loans 4,052 4,036
Short-term investments 65 123
Other invested assets 467 108
-------- --------
Total investments 44,043 44,296
Cash and cash equivalents 237 531
Accrued investment income 527 527
Deferred income taxes 1,019 1,043
Premiums and other receivables 117 164
-------- --------
Total assets designated to the closed block 45,943 46,561
-------- --------
Excess of closed block liabilities over assets designated
to the closed block 4,829 5,037
-------- --------
Amounts included in accumulated other comprehensive loss:
Net unrealized investment gains, net of deferred
income tax of $712 and $730, respectively 1,265 1,270
Unrealized derivative gains (losses), net of deferred income
tax benefit of ($20) and ($28), respectively (35) (48)
Allocated from policyholder dividend obligation, net of
deferred income tax benefit of ($733) and ($778), respectively (1,303) (1,352)
-------- --------
(73) (130)
-------- --------
Maximum future earnings to be recognized from closed
block assets and liabilities $ 4,756 $ 4,907
======== ========
20
Information regarding the policyholder dividend obligation is as follows:
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
(DOLLARS IN MILLIONS)
Balance at beginning of period $ 2,130 $1,882
Impact on revenues, net of expenses and income taxes 125 --
Change in unrealized investment and derivative gains (losses) (94) 248
------- ------
Balance at end of period $ 2,161 $2,130
======= ======
Closed block revenues and expenses are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
2004 2003 2004 2003
---- ---- ---- ----
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 759 $ 809 $2,283 $ 2,433
Net investment income and other revenues 629 639 1,892 1,904
Net investment gains (losses) 24 (29) 9 (81)
------ ------- ------ -------
Total revenues 1,412 1,419 4,184 4,256
------ ------- ------ -------
EXPENSES
Policyholder benefits and claims 815 879 2,518 2,643
Policyholder dividends 368 392 1,098 1,178
Change in policyholder dividend obligation 85 -- 125 --
Other expenses 67 73 207 225
------ ------- ------ -------
Total expenses 1,335 1,344 3,948 4,046
------ ------- ------ -------
Revenues net of expenses before income taxes 77 75 236 210
Income taxes 28 27 85 76
------ ------- ------ -------
Revenues net of expenses and income taxes $ 49 $ 48 $ 151 $ 134
====== ======= ====== =======
The change in maximum future earnings of the closed block is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2004 2003 2004 2003
---- ---- ---- ----
(DOLLARS IN MILLIONS)
Balance at end of period $ 4,756 $ 4,980 $ 4,756 $ 4,980
Balance at beginning of period 4,805 5,028 4,907 5,114
------- ------- ------- -------
Change during period $ (49) $ (48) $ (151) $ (134)
======= ======= ======= =======
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 demutualization. Metropolitan Life also charges the closed block for
expenses of maintaining the policies included in the closed block.
21
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 notional
amount and fair value of derivatives by type of hedge designation at:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
---------------------------------- -----------------------------------
FAIR VALUE FAIR VALUE
NOTIONAL ---------------------- NOTIONAL ---------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
-------- ------ ----------- ------ ------ -----------
(DOLLARS IN MILLIONS)
BY TYPE OF HEDGE
Fair value $ 47 $-- $ 1 $ 6 $ -- $ 1
Cash flow 626 1 91 473 -- 80
Non-qualifying 138 -- 19 90 -- 12
---- --- ---- ---- ------ ---
Total $811 $ 1 $111 $569 $ -- $93
==== === ==== ==== ====== ===
Based upon the type of derivative instrument and strategy, the income
effects of qualifying derivatives are reported with the results of the
associated risk. Therefore, the periodic settlements, amortization, and disposal
gains and losses from interest rate caps, options, futures and interest rate,
foreign currency and credit default swaps that qualify for hedge accounting are
reported as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
---- ---- ---- ----
(DOLLARS IN MILLIONS)
Net investment income (loss) $ 1 $ -- $ -- $ (1)
Net investement gains (losses) (1) -- (2) 5
------------- --------------- ------------- ---------------
Total $ -- $ -- $ (2) $ 4
============= =============== ============= ===============
The following table represents fair value hedges for the:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
---- ---- ---- ----
(DOLLARS IN MILLIONS)
Changes in the fair value of qualifying hedges $ -- $ 4 $ -- $3
Changes in the hedged items reported in net investment
gains (losses) -- -- -- 1
-------- --- -------- --
Net ineffectiveness gains (losses) from fair value
hedging activities $ -- $ 4 $ -- $4
======== === ======== ==
There were no discontinued fair value hedges during the three months and
nine months ended September 30, 2004 or 2003.
The following table represents cash flow hedges for the:
THREE NINE THREE NINE
MONTHS ENDED MONTHS ENDED YEAR ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
2004 2004 2003 2003 2003
------------- ------------- ------------ ------------- -------------
(DOLLARS IN MILLIONS)
Changes in the qualifying hedges $ 16 $ 24 $(106) $(25) $(73)
Less: Gains (losses) deferred in other
comprehensive income on the effective portion
of cash flow hedges 7 24 (93) (15) (63)
---- ---- ----- ---- ----
Net ineffectiveness recorded in net investment
gains (losses) from cash flow hedging activities $ 9 $ -- $ (13) $(10) $(10)
==== ==== ===== ==== ====
Other comprehensive income balance at the beginning
of the period $(61) $(76) $ 20 $(29) $ 20
Gains (losses) deferred in other comprehensive
income on the effective portion of cash flow hedges 7 24 (93) (15) (63)
Amortization of transition adjustment (1) (3) (3) (1) (2)
---- ---- ----- ---- ----
Other comprehensive income balance at the end of
the period $(55) $(55) $ (76) $(45) $(45)
==== ==== ===== ==== ====
There were no discontinued cash flow hedges during the three months and
nine months ended September 30, 2004 or 2003.
22
Based on the type of derivative instrument and strategy, the income
effects of non-qualifying derivatives are reported with the results of the
associated risk. For the three months and nine months ended September 30, 2004,
the Company recognized net investment losses of $8 million and net investment
gains of $1 million, respectively, from derivatives not qualifying for hedge
accounting. For the three months and nine months ended September 30, 2003, the
Company recognized net investment gains of $7 million and net investment losses
of $15 million, respectively, from derivatives not qualifying for hedge
accounting. The use of these non-speculative derivatives is permitted by the
relevant state insurance departments.
7. COMMITMENTS, CONTINGENCIES AND GUARANTEES
The Company is a defendant in a large number of litigation matters. In
some of the matters, very large and/or indeterminate amounts, including punitive
and treble damages, are sought. Modern pleading practice in the United States
permits considerable variation in the assertion of monetary damages or other
relief. Jurisdictions may permit claimants to not specify the monetary damages
sought or may permit claimants to state only that the amount sought is
sufficient to invoke the jurisdiction of the trial court. In addition,
jurisdictions may permit plaintiffs to allege monetary damages in amounts well
exceeding reasonably possible verdicts in the jurisdiction for similar matters.
This variability in pleadings, together with the actual experience of the
Company in litigating or resolving through settlement numerous claims over an
extended period of time, demonstrate to management that the monetary relief
which may be specified in a lawsuit or claim bears little relevance to its
merits or disposition value. Thus, unless stated below, the specific monetary
relief sought is not noted.
Due to the vagaries of litigation, the outcome of a litigation matter and
the amount or range of potential loss at particular points in time may normally
be inherently impossible to ascertain with any degree of certainty. Inherent
uncertainties can include how fact finders will view individually and in their
totality documentary evidence, the credibility and effectiveness of witnesses'
testimony, and how trial and appellate courts will apply the law in the context
of the pleadings or evidence presented, whether by motion practice, or at trial
or on appeal. Disposition valuations are also subject to the uncertainty of how
opposing parties and their counsel will themselves view the relevant evidence
and applicable law.
On a quarterly and yearly basis, the Company reviews relevant information
with respect to liabilities for litigation and contingencies to be reflected in
the Company's consolidated financial statements. The review includes senior
legal and financial personnel. Unless stated below, estimates of possible
additional losses or ranges of loss for particular matters cannot in the
ordinary course be made with a reasonable degree of certainty. Liabilities are
established when it is probable that a loss has been incurred and the amount of
the loss can be reasonably estimated. It is possible that some of the matters
could require the Company to pay damages or make other expenditures or establish
accruals in amounts that could not be estimated as of September 30, 2004.
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, a federal court approved a settlement resolving sales
practices claims on behalf of a class of 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.
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. In October 2000, a federal court approved a
settlement resolving sales practices claims on behalf of a class of owners of
permanent life insurance policies issued by New England Mutual between January
1, 1983 through August 31, 1996. The class includes owners of approximately
600,000 in-force or terminated policies. A federal court has approved a
settlement resolving sales practices claims on behalf of a class of owners of
permanent life insurance policies issued by General American between January 1,
1982 through December 31, 1996. An appellate court has affirmed the order
approving the settlement. The class includes owners of approximately 250,000
in-force or terminated policies.
23
Certain class members have opted out of the class action settlements noted
above and have brought or continued non-class action sales practices lawsuits.
In addition, other sales practices lawsuits have been brought. As of September
30, 2004, there are approximately 333 sales practices lawsuits pending against
Metropolitan Life; approximately 46 sales practices lawsuits pending against New
England Mutual, New England Life Insurance Company, and New England Securities
Corporation (collectively, "New England"); and approximately 56 sales practices
lawsuits pending against General American. Metropolitan Life, New England and
General American continue to defend themselves vigorously 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.
The Company believes adequate provision has been made in its unaudited
interim condensed consolidated financial statements for all probable and
reasonably estimable losses for sales practices claims against Metropolitan
Life, New England and General American.
Regulatory authorities in a small number of states have had investigations
or inquiries relating to Metropolitan Life's, New England'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 nor has Metropolitan Life
issued liability or workers' compensation insurance to companies in the business
of manufacturing, producing, distributing or selling asbestos or
asbestos-containing products. Rather, these lawsuits 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 have alleged 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. Metropolitan Life believes that it should not have legal liability in
such cases.
Legal theories asserted against Metropolitan Life have included
negligence, intentional tort claims and conspiracy claims concerning the health
risks associated with asbestos. Although Metropolitan Life believes it has
meritorious defenses to these claims, and has not suffered any adverse monetary
judgments in respect of these claims, due to the risks and expenses of
litigation, almost all past cases have been resolved by settlements.
Metropolitan Life's defenses (beyond denial of certain factual allegations) to
plaintiffs' claims include that: (i) Metropolitan Life owed no duty to the
plaintiffs -- it had no special relationship with the plaintiffs and did not
manufacture, produce, distribute or sell the asbestos products that allegedly
injured plaintiffs; (ii) plaintiffs cannot demonstrate justifiable detrimental
reliance; and (iii) plaintiffs cannot demonstrate proximate causation. In
defending asbestos cases, Metropolitan Life selects various strategies depending
upon the jurisdictions in which such cases are brought and other factors which,
in Metropolitan Life's judgment, best protect Metropolitan Life's interests.
Strategies include seeking to settle or compromise claims, motions challenging
the legal or factual basis for such claims or defending on the merits at trial.
In 2002, 2003 and 2004, trial courts in California, Utah, Texas and Georgia
granted motions dismissing claims against Metropolitan Life on some or all of
the above grounds. Other courts have denied motions brought by Metropolitan Life
to dismiss cases without the necessity of trial. There can be no assurance that
Metropolitan Life will receive favorable decisions on motions in the future.
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.
See Note 12 of Notes to Consolidated Financial Statements for the year
ended December 31, 2003 included in the MetLife, Inc. Annual Report on Form 10-K
for information regarding historical asbestos claims information and the
increase of its recorded liability at December 31, 2002.
Metropolitan Life continues to study its claims experience, review
external literature regarding asbestos claims experience in the United States
and consider numerous variables that can affect its asbestos liability exposure,
including bankruptcies of other
24
companies involved in asbestos litigation and legislative and judicial
developments, to identify trends and to assess their impact on the recorded
asbestos liability.
Recent bankruptcies of other companies involved in asbestos litigation, as
well as advertising by plaintiffs' asbestos lawyers, may result in an increase
in the number of claims and the cost of resolving claims, as well as the number
of trials and possible adverse 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. In
addition, publicity regarding legislative reform efforts may result in an
increase in the number of claims.
Metropolitan Life previously reported that it had received approximately
60,300 asbestos-related claims in 2003 and approximately 53,200 such claims in
the first nine months of 2003. In the context of a change in Metropolitan Life's
asbestos claims administrator in the second half of 2003, there was a minor
overstatement of Metropolitan Life's reported asbestos-related claims in 2003
and the first half of 2004. Accordingly, Metropolitan Life now reports that it
received approximately 58,650 asbestos-related claims in 2003 and 19,100 of such
claims in the first nine months of 2004 (12,900 claims in the first six months
of 2004), compared to approximately 53,000 in the first nine months of 2003.
The Company believes adequate provision has been made in its unaudited
interim condensed consolidated financial statements for all probable and
reasonably estimable losses for asbestos-related claims. The ability of
Metropolitan Life to estimate its ultimate asbestos exposure is subject to
considerable uncertainty due to numerous factors. The availability of data is
limited and it is difficult to predict with any certainty numerous variables
that can affect liability estimates, including the number of future claims, the
cost to resolve claims, the disease mix and severity of disease, the
jurisdiction of claims filed, tort reform efforts and the impact of any possible
future adverse verdicts and their amounts.
The number of asbestos cases that may be brought or the aggregate amount
of any liability that Metropolitan Life may ultimately incur is uncertain.
Accordingly, 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
unaudited interim condensed 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.
During 1998, Metropolitan Life paid $878 million in premiums for excess
insurance policies for asbestos-related claims. The excess insurance policies
for asbestos-related claims provide for recovery of losses up to $1,500 million,
which is in excess of a $400 million self-insured retention. The
asbestos-related policies are also subject to annual and per-claim sublimits.
Amounts are recoverable under the policies annually with respect to claims paid
during the prior calendar year. Although amounts paid by Metropolitan Life in
any given year that may be recoverable in the next calendar year under the
policies will be reflected as a reduction in the Company's operating cash flows
for the year in which they are paid, management believes that the payments will
not have a material adverse effect on the Company's liquidity.
Each asbestos-related policy contains an experience fund and a reference
fund that provides for payments to Metropolitan Life at the commutation date if
the reference fund is greater than zero at commutation or pro rata reductions
from time to time in the loss reimbursements to Metropolitan Life if the
cumulative return on the reference fund is less than the return specified in the
experience fund. The return in the reference fund is tied to performance of the
Standard & Poor's 500 Index and the Lehman Brothers Aggregate Bond Index. A
claim was made under the excess insurance policies in 2003 and 2004 for the
amounts paid with respect to asbestos litigation in excess of the retention. As
the performance of the indices impact the return in the reference fund, it is
possible that loss reimbursements to the Company and the recoverable with
respect to later periods may be less than the amount of the recorded losses.
Such foregone loss reimbursements may be recovered upon commutation depending
upon future performance of the reference fund. If at some point in the future,
the Company believes the liability for probable and reasonably estimable losses
for asbestos-related claims should be increased, an expense would be recorded
and the insurance recoverable would be adjusted subject to the terms, conditions
and limits of the excess insurance policies. Portions of the change in the
insurance recoverable would be recorded as a deferred gain and amortized into
income over the estimated remaining settlement period of the insurance policies.
Metropolitan Life also has been named as a defendant in a small number of
silicosis, welding and mixed dust cases in various states. The Company intends
to defend itself vigorously against these cases.
25
PROPERTY AND CASUALTY ACTIONS
A purported class action has been filed against Metropolitan Property and
Casualty Insurance Company's subsidiary, Metropolitan Casualty Insurance
Company, in Florida alleging breach of contract and unfair trade practices with
respect to allowing the use of parts not made by the original manufacturer to
repair damaged automobiles. Discovery is ongoing and a motion for class
certification is pending. During the first quarter of 2004, a purported class
action was filed against Metropolitan Property and Casualty Insurance Company in
Florida on behalf of medical practitioners who provide MRI services. The suit
claims breach of contract and unjust enrichment arising out of the alleged
failure to include a consumer price index adjustment when paying MRI provider
fees. Metropolitan Property and Casualty Insurance Company is vigorously
defending itself against this lawsuit. Two purported nationwide class actions
have been filed against Metropolitan Property and Casualty Insurance Company in
Illinois. One suit claims breach of contract and fraud due to the alleged
underpayment of medical claims arising from the use of a purportedly biased
provider fee pricing system. A motion for class certification has been filed and
discovery is ongoing. The second suit claims breach of contract and fraud
arising from the alleged use of preferred provider organizations to reduce
medical provider fees covered by the medical claims portion of the insurance
policy. Discovery is ongoing.
A purported class action has been filed against Metropolitan Property and
Casualty Insurance Company in Montana. This suit alleges breach of contract and
bad faith for not aggregating medical payment and uninsured coverages provided
in connection with the several vehicles identified in insureds' motor vehicle
policies. This suit has been stayed pending resolution of these issues by the
Montana Supreme Court in a suit involving another insurer. Certain plaintiffs'
lawyers in another action have alleged that the use of certain automated
databases to provide total loss vehicle valuation methods was improper.
Metropolitan Property and Casualty Insurance Company, along with a number of
other insurers, tentatively agreed in January 2004 to resolve this issue in a
class action format. The amount to be paid in resolution of this matter will not
be material to Metropolitan Property and Casualty Insurance Company.
DEMUTUALIZATION ACTIONS
Several lawsuits were brought in 2000 challenging the fairness of
Metropolitan Life's plan of reorganization, as amended (the "plan") and the
adequacy and accuracy of Metropolitan Life's disclosure to policyholders
regarding the plan. These actions named as defendants some or all of
Metropolitan Life, MetLife, Inc. (the "Holding Company"), the individual
directors, the New York Superintendent of Insurance (the "Superintendent") and
the underwriters for MetLife, Inc.'s initial public offering, Goldman Sachs &
Company and Credit Suisse First Boston. On February 21, 2003, a trial court
within the commercial part of the New York State court granted the defendants'
motions to dismiss two purported class actions. On April 27, 2004, the appellate
court modified the trial court's order by reinstating certain claims against
Metropolitan Life, the Holding Company and the individual directors. Plaintiffs
in these actions have filed a consolidated amended complaint. Defendants have
moved to dismiss part of the consolidated amended complaint, and plaintiffs have
served their motion to certify a litigation class. Another purported class
action filed in New York State court in Kings County has been consolidated with
this action. The plaintiffs in the state court class actions seek compensatory
relief and punitive damages. Five persons 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. Respondents have moved to dismiss
the proceeding. In a purported class action against Metropolitan Life and the
Holding Company pending in the United States District Court for the Eastern
District of New York, plaintiffs served a second consolidated amended complaint
on April 2, 2004. In this action, plaintiffs assert violations of the Securities
Act of 1933 and the Securities Exchange Act of 1934 in connection with the plan,
claiming that the Policyholder Information Booklets failed to disclose certain
material facts. They seek rescission and compensatory damages. On June 22, 2004,
the court denied the defendants' motion to dismiss the claim of violation of the
Securities Exchange Act of 1934. The court had previously denied defendants'
motion to dismiss the claim for violation of the Securities Act of 1933. On
September 8, 2004, the court denied defendants' motion for summary judgment as
premature. 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; 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.
26
On April 30, 2004, a lawsuit was filed in New York state court in New York
County against the Holding Company and Metropolitan Life on behalf of a proposed
class comprised of the settlement class in the Metropolitan Life sales practices
class action settlement approved in December 1999 by the United States District
Court for the Western District of Pennsylvania. In July 2004, the plaintiffs
served an amended complaint. The amended complaint challenges the treatment of
the cost of the sales practices settlement in the demutualization of
Metropolitan Life and asserts claims of breach of fiduciary duty, common law
fraud, and unjust enrichment. Plaintiffs seek compensatory and punitive damages,
as well as attorneys' fees and costs. The Holding Company and Metropolitan Life
have moved to dismiss the amended complaint. In October 2003, the United States
District Court for the Western District of Pennsylvania dismissed plaintiffs'
similar complaint alleging that the demutualization breached the terms of the
1999 settlement agreement and unjustly enriched the Holding Company and
Metropolitan Life. The Holding Company and Metropolitan Life intend to contest
this matter vigorously.
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 affiliates. The New York
Insurance Department concluded its examination of Metropolitan Life concerning
possible past race-conscious underwriting practices. On April 28, 2003, the
United States District Court for the Southern District of New York approved a
class action settlement of a consolidated action against Metropolitan Life
alleging racial discrimination in the marketing, sale, and administration of
life insurance policies. Metropolitan Life also entered into settlement
agreements to resolve the regulatory examination.
Twenty lawsuits involving approximately 140 plaintiffs were filed in
federal and state court in Alabama, Mississippi and Tennessee alleging federal
and/or state law claims of racial discrimination in connection with the sale,
formation, administration or servicing of life insurance policies. Metropolitan
Life resolved the claims of some of these plaintiffs through settlement, and
some additional plaintiffs have voluntarily dismissed their claims. Metropolitan
Life resolved claims of some additional persons who opted out of the settlement
class referenced in the preceding paragraph but who had not filed suit. The
actions filed in Alabama and Tennessee have been dismissed; one action filed in
Mississippi remains pending. In the pending action, Metropolitan Life is
contesting plaintiffs' claims vigorously.
The Company believes that adequate provision has been made to cover the
costs associated with the resolution of these matters.
OTHER
A putative class action lawsuit is pending in the United States District
Court for the District of Columbia, in which plaintiffs allege that they were
denied certain ad hoc pension increases awarded to retirees under the
Metropolitan Life retirement plan. The ad hoc pension increases were awarded
only to retirees (i.e., individuals who were entitled to an immediate retirement
benefit upon their termination of employment) and not available to individuals
like these plaintiffs whose employment, or whose spouses' employment, had
terminated before they became eligible for an immediate retirement benefit. The
plaintiffs seek to represent a class consisting of former Metropolitan Life
employees, or their surviving spouses, who are receiving deferred vested annuity
payments under the retirement plan and who were allegedly eligible to receive
the ad hoc pension increases awarded in 1977, 1980, 1989, 1992, 1996 and 2001,
as well as increases awarded in earlier years. Metropolitan Life is vigorously
defending itself against these allegations.
As previously reported, the SEC is conducting a formal investigation of New
England Securities Corporation ("NES"), a subsidiary of New England Life
Insurance Company ("NELICO"), in response to NES informing the SEC that certain
systems and controls relating to one NES advisory program were not operating
effectively. NES is cooperating fully with the SEC.
Prior to filing the Company's June 30, 2003 Form 10-Q, MetLife announced a
$31 million after-tax charge resulting from certain improperly deferred expenses
at an affiliate, New England Financial. MetLife notified the SEC about the
nature of this charge prior to its announcement. The SEC is pursuing a formal
investigation of the matter and MetLife is fully cooperating with the
investigation.
The American Dental Association and two individual providers have sued
MetLife, Mutual of Omaha and Cigna in a purported class action lawsuit brought
in a Florida federal district court. The plaintiffs purport to represent a
nationwide class of in-network providers who allege that their claims are being
wrongfully reduced by downcoding, bundling, and the improper use and programming
of software. The complaint alleges federal racketeering and various state law
theories of liability. MetLife is vigorously defending the case and a motion to
dismiss has been filed and argued.
27
A purported class action in which two policyholders seek to represent a
class of owners of participating life insurance policies is pending in state
court in New York. Plaintiffs assert that Metropolitan Life breached their
policies in the manner in which it allocated investment income across lines of
business during a period ending with the 2000 demutualization. In August 2003,
an appellate court affirmed the dismissal of fraud claims in this action.
Plaintiffs have moved to certify a litigation class. Metropolitan Life is
vigorously defending the case.
Regulatory bodies have contacted the Company and have requested information
relating to market timing and late trading of mutual funds and variable
insurance products and, generally, the marketing of products. The Company
believes that many of these inquiries are similar to those made to many
financial services companies as part of industry-wide investigations by various
regulatory agencies. State Street Research Investment Services ("SSRIS"), one of
the Company's indirect broker/dealer subsidiaries, has entered into a settlement
with the NASD resolving all outstanding issues relating to its investigation.
The SEC has commenced an investigation with respect to market timing and late
trading in a limited number of privately-placed variable insurance contracts
that were sold through General American. As previously reported, in May 2004,
General American received a so-called "Wells Notice" stating that the SEC staff
is considering recommending that the SEC bring a civil action alleging
violations of the U.S. securities laws against General American. Under the SEC
procedures, General American can avail itself of the opportunity to respond to
the SEC staff before it makes a formal recommendation regarding whether any
action alleging violations of the U.S. securities laws should be considered.
General American has responded to the Wells Notice. The Company is fully
cooperating with regard to these information requests and investigations. The
Company at the present time is not aware of any systemic problems with respect
to such matters that may have a material adverse effect on the Company's
consolidated financial position.
In October 2004, the SEC informed MetLife that it anticipates issuing a
formal order of investigation related to certain sales by a former MetLife sales
representative to the Sheriff's Department of Fulton County, Georgia. The
Company intends to fully cooperate with respect to any inquiries from the SEC.
The Company has received a number of subpoenas and other requests from the
Office of the Attorney General of the State of New York seeking, among other
things, information regarding and relating to compensation agreements between
insurance brokers and the Company, whether MetLife has provided or is aware of
the provision of "fictitious" or "inflated" quotes and information regarding
tying arrangements with respect to reinsurance. Based upon an internal review,
the Company advised the Attorney General for the State of New York that MetLife
was not aware of any instance in which MetLife had provided a "fictitious" or
"inflated" quote. MetLife also has received a subpoena, including a set of
interrogatories, from the Office of the Attorney General of the State of
Connecticut seeking information and documents concerning contingent commission
payments to brokers and MetLife's awareness of any "sham" bids for business.
MetLife is continuing to conduct an internal review of its commission payment
practices. The Company continues to fully cooperate with these inquiries and is
responding to the subpoenas and other requests.
Two class action lawsuits were filed in the United States District Court
for the Southern District of New York, on behalf of proposed classes of all
persons who purchased the securities of MetLife, Inc. between April 5, 2000 and
October 19, 2004 against defendants MetLife and certain officers of the Company.
In the context of contingent commissions, the Complaints allege that defendants
violated the federal securities laws by issuing materially false and misleading
statements and failing to disclose material facts regarding the Company's
financial performance throughout the class period that had the effect of
artificially inflating the market price of the Company's securities. The
plaintiffs in these actions seek compensatory and other relief. The Company and
other defendants intend to vigorously defend these cases.
A case has been brought in California state court against MetLife, other
insurers and an insurance broker, among others, alleging that the insurers and
the broker violated Section 17200 of the California Business and Profession Act
by engaging in unfair trade practices concerning contingent commissions and fees
paid to the broker. Additionally, a civil RICO action has been brought against
MetLife, other insurers, and a broker in a California federal court with respect
to issues concerning contingent commissions and fees paid to the broker. The
Company intends to vigorously defend these cases.
In addition to those discussed above, a number of inquiries of the
insurance industry by regulators and others are now pending regarding industry
brokerage practices and related matters and others may begin. It is reasonably
possible that MetLife will receive additional subpoenas, interrogatories,
requests and lawsuits. MetLife will fully cooperate with all regulatory
inquiries and vigorously defend all lawsuits.
Various litigation, claims and assessments against the Company, in
addition to those discussed above and those otherwise provided for in the
Company's unaudited interim condensed consolidated financial statements, have
arisen in the course of the Company's business, including, but not limited to,
in connection with its activities as an insurer, employer, investor, investment
28
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 consolidated net income or cash flows in particular quarterly or
annual periods.
COMMITMENTS TO FUND PARTNERSHIP INVESTMENTS
The Company makes commitments to fund partnership investments in the normal
course of business. The amounts of these unfunded commitments were approximately
$1.4 billion at both September 30, 2004 and December 31, 2003. The Company
anticipates that these amounts will be invested in the partnerships over the
next three to five years.
GUARANTEES
In the course of its business, the Company has provided certain indemnities,
guarantees and commitments to third parties pursuant to which it may be required
to make payments now or in the future.
In the context of acquisition, disposition, investment and other
transactions, the Company has provided indemnities and guarantees, including
those related to tax, environmental and other specific liabilities, and other
indemnities and guarantees that are triggered by, among other things, breaches
of representations, warranties or covenants provided by the Company. In
addition, in the normal course of business, the Company provides
indemnifications to counterparties in contracts with triggers similar to the
foregoing, as well as for certain other liabilities, such as third party
lawsuits. These obligations are often subject to time limitations that vary in
duration, including contractual limitations and those that arise by operation of
law, such as applicable statutes of limitation. In some cases, the maximum
potential obligation under the indemnities and guarantees is subject to a
contractual limitation ranging from less than $1 million to $800 million, while
in other cases such limitations are not specified or applicable. Since certain
of these obligations are not subject to limitations, the Company does not
believe that it is possible to determine the maximum potential amount due under
these guarantees in the future.
In addition, the Company indemnifies its directors and officers as provided
in its charters and by-laws. Also, the Company indemnifies other of its agents
for liabilities incurred as a result of their representation of the Company's
interests. Since these indemnities are generally not subject to limitation with
respect to duration or amount, the Company does not believe that it is possible
to determine the maximum potential amount due under these indemnities in the
future.
During the nine months ended September 30, 2004, the Company recorded
liabilities of $10 million with respect to indemnities provided in certain
dispositions. The approximate term for these liabilities ranges from 12 to 18
months. The maximum potential amount of future payments that MetLife could be
required to pay is $73 million. Due to the uncertainty in assessing changes to
the liabilities over the term, the liability on the balance sheet will remain
until either expiration or settlement of the guarantee unless evidence clearly
indicates that the estimates should be revised. The fair value of the remaining
indemnities, guarantees and commitments entered into was insignificant and thus,
no liabilities were recorded. The Company's recorded liability at September 30,
2004 and December 31, 2003 for indemnities, guarantees and commitments provided
to third parties, excluding amounts recorded during the first nine months of
2004, is insignificant.
The Company writes credit default swap obligations requiring payment of
principal due in exchange for the reference credit obligation, depending on the
nature or occurrence of specified credit events for the referenced entities. In
the event of a specified credit event, the Company's maximum amount at risk,
assuming the value of the referenced credits become worthless, is $1.3 billion
at September 30, 2004. The credit default swaps expire at various times during
the next seven years.
29
8. EMPLOYEE BENEFIT PLANS
PENSION BENEFIT AND OTHER BENEFIT PLANS
The Company is both the sponsor and administrator of defined benefit pension
plans covering eligible employees and sales representatives of the Company.
Retirement benefits are based upon years of credited service and final average
or career average earnings history.
The Company also provides certain postemployment benefits and certain
postretirement health care and life insurance benefits for retired employees
through insurance contracts. Substantially all of the Company's employees may,
in accordance with the plans applicable to the postretirement benefits, become
eligible for these benefits if they attain retirement age, with sufficient
service, while working for the Company.
The Company uses December 31 as the measurement date for all of its pension
and postretirement benefit plans.
The components of net periodic benefit cost were as follows:
OTHER
PENSION BENEFITS PENSION BENEFITS BENEFITS OTHER BENEFITS
------------------- ------------------ --------------- -----------------
FOR THE THREE FOR THE NINE FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
Service cost $ 32 $ 31 $ 97 $ 92 $ 7 $ 10 $ 25 $ 30
Interest cost 78 78 234 235 28 31 90 93
Expected return on plan assets (107) (84) (322) (251) (19) (18) (57) (54)
Amortization of prior
actuarial gains 30 26 88 76 (5) (3) (7) (9)
Curtailment (credit) cost -- 3 -- 9 -- 1 -- 3
---- ---- ---- ---- --- ---- --- ----
Net periodic benefit (credit) cost $ 33 $ 54 $ 97 $ 161 $ 11 $ 21 $ 51 $ 63
==== ==== ==== ==== === ==== === ====
The Company expects to receive subsidies on prescription drug benefits
beginning in 2006 under the Medicare Prescription Drug, Improvement and
Modernization Act of 2003. The postretirement benefit plan assets and
accumulated benefit obligation were remeasured effective July 1, 2004 in order
to determine the effect of the expected subsidies on net periodic postretirement
benefit cost. As a result, the accumulated postretirement benefit obligation was
reduced $213 million and net periodic postretirement benefit cost for the third
quarter was reduced $9 million. The reduction of net periodic benefit cost is
due to reductions in service cost of $2 million, interest cost of $3 million,
and amortization of prior actuarial loss of $4 million.
EMPLOYER CONTRIBUTIONS
As of September 30, 2004, contributions of $575 million have been made to
the pension plans and the Company presently anticipates contributing an
additional $15 million to fund its pension plans in 2004 for a total of $590
million. Contributions to the postretirement benefit plans are expected to be
$89 million.
30
9. STOCK COMPENSATION PLANS
Under the MetLife, Inc. 2000 Stock Incentive Plan, as amended, (the "Stock
Incentive Plan"), awards granted may be in the form of non-qualified or
incentive stock options qualifying under Section 422A of the Internal Revenue
Code. Under the MetLife, Inc. 2000 Directors Stock Plan, as amended (the
"Directors Stock Plan"), awards granted may be in the form of stock awards,
non-qualified stock options, or a combination of the foregoing to outside
Directors of the Company. The aggregate number of options to purchase shares of
stock that may be awarded under the Stock Incentive Plan and the Directors Stock
Plan is subject to a maximum limit of 37,823,333, of which no more than 378,233
may be awarded under the Directors Stock Plan. The Directors Stock Plan has a
maximum limit of 500,000 stock awards.
All options granted have an exercise price equal to the fair market value
price of the Company's common stock on the date of grant, and an option's
maximum term is ten years. Certain options under the Stock Incentive Plan become
exercisable over a three year period commencing with the date of grant, while
other options become exercisable three years after the date of grant. Options
issued under the Directors Stock Plan are exercisable immediately.
The Company has elected to apply the fair value method of accounting for
stock options granted by the Company subsequent to December 31, 2002. Options
granted prior to January 1, 2003 continue to be accounted for under the
intrinsic value method. Had compensation costs for grants prior to January 1,
2003 been determined based on fair value at the date of grant, the Company's
earnings and earnings per share amounts would have been reduced to the following
pro forma amounts for the:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Net income $695 $574 $2,247 $1,516
Charge for conversion of company-obligated mandatorily
redeemable securities of a subsidiary trust (1) -- -- -- (21)
----- ----- ------ ------
Net income available to common shareholders 695 574 2,247 1,495
Add: Stock-based employee compensation expense, net of
income taxes, included in reported net income 7 2 20 7
Deduct: Total stock-based employee compensation
determined under fair value based method for all awards, net
of income taxes (11) (9) (34) (29)
----- ----- ------ ------
Pro forma net income available to common shareholders (2) (3) $691 $567 $2,233 $1,473
===== ===== ====== ======
BASIC EARNINGS PER SHARE
As reported $0.93 $0.75 $2.99 $2.05
===== ===== ====== ======
Pro forma (2) (3) $0.92 $0.75 $2.97 $2.02
===== ===== ====== ======
DILUTED EARNINGS PER SHARE
As reported $0.92 $0.75 $2.97 $2.04
===== ===== ====== ======
Pro forma (2) (3) $0.92 $0.75 $2.95 $2.01
===== ===== ====== ======
- ----------
(1) MetLife Capital Trust I ("Trust") was dissolved on February 5, 2003, and
$1,006 million aggregate principal amount of 8.00% debentures of the
Holding Company (the "MetLife debentures"), the sole assets of the Trust,
were distributed to the owners of the Trust's capital securities in
exchange for their capital securities. The MetLife debentures were
remarketed on behalf of the debenture owners on February 12, 2003 and the
interest rate on the MetLife debentures was reset as of February 15, 2003
to 3.911% per annum for a yield to maturity of 2.876%. As a result of the
remarketing, the debenture owners received $21 million ($0.03 per diluted
common share) in excess of the carrying value of the capital securities.
This excess was recorded by the Company as a charge to additional paid-in
capital and, for the purpose of calculating earnings per share, is
subtracted from net income to arrive at net income available to common
shareholders.
(2) The pro forma earnings disclosures are not necessarily representative of
the effects on net income and earnings per share in future years.
(3) Includes the Company's ownership share of stock compensation costs related
to the Reinsurance Group of America, Incorporated ("RGA"), incentive stock
plan.
31
10. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
(DOLLARS IN MILLIONS)
Net income $695 $574 $2,247 $1,516
Other comprehensive income (loss):
Unrealized gains (losses) on derivative instruments, net of
income taxes (5) (96) 80 (165)
Unrealized investment gains (losses), net of related offsets,
reclassification adjustments and income taxes 1,021 (183) (134) 1,051
Cumulative effect of a change in accounting, net of income taxes -- -- 90 --
Foreign currency translation adjustments 61 (18) (34) 125
Minimum pension liability adjustment -- -- -- (9)
------ ---- ------ ------
Other comprehensive income (loss): 1,077 (297) 2 1,002
------ ---- ------ ------
Comprehensive income (loss) $1,772 $277 $2,249 $2,518
====== ==== ====== ======
32
11. EARNINGS PER SHARE
The following table presents the weighted average shares used in
calculating basic earnings per share and those used in calculating diluted
earnings per share for each income category presented below:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------- --------------------------------
2004 2003 2004 2003
---- ---- ---- ----
(DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
Weighted average common stock outstanding for basic
earnings per share 747,996,528 760,146,381 752,592,506 730,788,635
Incremental shares from assumed:
Exercise of stock options 4,134,660 65,029 3,519,095 --
Issuance under deferred stock compensation 1,233,617 716,283 1,037,985 533,422
------------- ------------- ------------- -------------
Weighted average common stock outstanding for diluted
earnings per share 753,364,805 760,927,693 757,149,586 731,322,057
============= ============= ============= =============
INCOME FROM CONTINUING OPERATIONS $ 699 $ 551 $ 2,202 $ 1,407
Charge for conversion of company-obligated mandatorily
redeemable securities of a subsidiary trust (1) -- -- -- (21)
------------- ------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS AVAILABLE
TO COMMON SHAREHOLDERS $ 699 $ 551 $ 2,202 $ 1,386
============= ============= ============= =============
Basic earnings per share $ 0.93 $ 0.72 $ 2.93 $ 1.90
============= ============= ============= =============
Diluted earnings per share $ 0.93 $ 0.72 $ 2.91 $ 1.90
============= ============= ============= =============
INCOME (LOSS) FROM DISCONTINUED OPERATIONS AVAILABLE
TO COMMON SHAREHOLDERS $ (4) $ 23 $ 131 $ 109
============= ============= ============= =============
Basic earnings per share $ (0.01) $ 0.03 $ 0.17 $ 0.15
============= ============= ============= =============
Diluted earnings per share $ (0.01) $ 0.03 $ 0.17 $ 0.15
============= ============= ============= =============
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING, NET
OF INCOME TAXES $ -- $ -- $ (86) $ --
============= ============= ============= =============
Basic earnings per share $ -- $ -- $ (0.11) $ --
============= ============= ============= =============
Diluted earnings per share $ -- $ -- $ (0.11) $ --
============= ============= ============= =============
NET INCOME $ 695 $ 574 $ 2,247 $ 1,516
Charge for conversion of company-obligated mandatorily
redeemable securities of a subsidiary trust (1) -- -- -- (21)
------------- ------------- ------------- -------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 695 $ 574 $ 2,247 $ 1,495
============= ============= ============= =============
Basic earnings per share $ 0.93 $ 0.75 $ 2.99 $ 2.05
============= ============= ============= =============
Diluted earnings per share $ 0.92 $ 0.75 $ 2.97 $ 2.04
============= ============= ============= =============
- ------------
(1) See Note 9 for a discussion of this charge included in the calculation of
net income available to common shareholders.
On October 26, 2004, the Holding Company's Board of Directors authorized a
$1 billion common stock repurchase program. This program will begin after the
completion of an earlier $1 billion repurchase program that was announced on
February 19, 2002. Under these authorizations, the Holding Company may purchase
common stock from the MetLife Policyholder Trust, in the open market and in
privately negotiated transactions. The Holding Company acquired 13,931,885
shares of common stock for approximately $496 million during the nine months
ended September 30, 2004. The Holding Company did not acquire any shares of
common stock during the nine months ended September 30, 2003. The Holding
Company issued 1,268,922 shares of common stock from treasury stock for $37
million during the nine months ended September 30, 2004. During the nine months
ended September 30, 2003, 59,884,064 shares of common stock were issued from
treasury stock, 59,771,221 of which were issued in connection with the
settlement of common stock purchase contracts for approximately $1,006 million.
At September 30, 2004, the Holding Company had approximately $213 million
remaining on its existing share repurchase program.
33
12. BUSINESS SEGMENT INFORMATION
The Company provides insurance and financial services to customers in the
United States, Canada, Central America, South America, Asia and various other
international markets. The Company's business is divided into five segments:
Institutional, Individual, Auto & Home, International and Reinsurance. These
segments are managed separately because they either provide different products
and services, require different strategies or have different technology
requirements.
Institutional offers a broad range of group insurance and retirement and
savings products and services, including group life insurance, non-medical
health insurance, such as short and long-term disability, long-term care, and
dental insurance, and other insurance products and services. Individual offers a
wide variety of individual insurance and investment products, including life
insurance, annuities and mutual funds. Auto & Home provides insurance coverages,
including private passenger automobile, homeowners and personal excess liability
insurance. International provides life insurance, accident and health insurance,
annuities and retirement and savings products to both individuals and groups,
and auto and homeowners coverage to individuals. Reinsurance provides primarily
reinsurance of life and annuity policies in North America and various
international markets. Additionally, reinsurance of critical illness policies is
provided in select international markets.
34
Set forth in the tables below is certain financial information with respect
to the Company's operating segments for the three months and nine months ended
September 30, 2004 and 2003. The accounting policies of the segments are the
same as those of the Company, except for the method of capital allocation and
the accounting for gains (losses) from intercompany sales, which are eliminated
in consolidation. The Company allocates capital to each segment based upon an
internal capital allocation system that allows the Company to more effectively
manage its capital. The Company evaluates the performance of each operating
segment based upon net income excluding certain net investment gains (losses),
net of income taxes, and the impact from the cumulative effect of changes in
accounting, net of income taxes. Scheduled periodic settlement payments on
derivative instruments not qualifying for hedge accounting are included in net
investment gains (losses). The Company allocates certain non-recurring items,
such as expenses associated with certain legal proceedings, to Corporate &
Other.
FOR THE THREE MONTHS ENDED AUTO & CORPORATE &
SEPTEMBER 30, 2004 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE OTHER TOTAL
- -------------------------------- ------------- ---------- ------ ------------- ----------- ----------- -----
(DOLLARS IN MILLIONS)
Premiums $2,711 $1,023 $740 $445 $822 $ (5) $5,736
Universal life and investment-
type product policy fees 178 467 -- 91 -- 2 738
Net investment income 1,101 1,526 40 151 144 114 3,076
Other revenues 152 109 8 2 14 7 292
Net investment gains (losses) 121 107 (1) 3 (17) (7) 206
Income (loss) from continuing
operations before provision for
income taxes 516 375 40 58 22 (11) 1,000
FOR THE THREE MONTHS ENDED AUTO & CORPORATE &
SEPTEMBER 30, 2003 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE OTHER TOTAL
- -------------------------------- ------------- ---------- ------ ------------- ----------- ----------- -----
(DOLLARS IN MILLIONS)
Premiums $ 2,260 $1,064 $735 $445 $579 $ (4) $5,079
Universal life and investment-
type product policy fees 167 386 -- 70 -- -- 623
Net investment income 976 1,549 39 119 122 41 2,846
Other revenues 144 96 10 20 11 18 299
Net investment gains (losses) (36) (76) 2 8 5 (29) (126)
Income (loss) from continuing
operations before provision for
income taxes 347 226 56 62 30 (27) 694
FOR THE NINE MONTHS ENDED AUTO & CORPORATE &
SEPTEMBER 30, 2004 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE OTHER TOTAL
- -------------------------------- ------------- ---------- ------ ------------- ----------- ----------- -----
(DOLLARS IN MILLIONS)
Premiums $ 7,518 $3,008 $2,211 $1,262 $2,445 $(10) $16,434
Universal life and investment-
type product policy fees 536 1,345 -- 260 -- 2 2,143
Net investment income 3,298 4,584 130 411 410 293 9,126
Other revenues 471 332 23 14 41 8 889
Net investment gains (losses) 263 119 (6) 26 35 (68) 369
Income (loss) from continuing
operations before provision for
income taxes 1,652 1,010 189 253 104 (155) 3,053
FOR THE NINE MONTHS ENDED AUTO & CORPORATE &
SEPTEMBER 30, 2003 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE OTHER TOTAL
- -------------------------------- ------------- ---------- ------ ------------- ----------- ----------- -----
(DOLLARS IN MILLIONS)
Premiums $6,730 $3,160 $2,168 $1,230 $1,719 $(13) $14,994
Universal life and investment-
type product policy fees 482 1,124 -- 192 -- -- 1,798
Net investment income 2,948 4,636 119 373 353 126 8,555
Other revenues 438 291 23 54 35 45 886
Net investment gains (losses) (144) (199) (4) 7 6 (94) (428)
Income (loss) from continuing
operations before provision for
income taxes 968 617 130 196 93 (134) 1,870
35
The following amounts are reported as discontinued operations on investments
in Real Estate -- Held-for-Sale in accordance with SFAS 144:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
(DOLLARS IN MILLIONS)
Net investment income
Institutional $ 3 $-- $ 4 $ 4
Individual (1) 1 -- 4
Corporate & Other -- 20 39 43
---- --- ---- ---
Total net investment income $ 2 $21 $ 43 $51
==== === ==== ===
Net investment gains (losses)
Institutional $ (5) $ 5 $ (3) $45
Individual 1 -- 4 47
Corporate & Other (12) 2 135 5
---- --- ---- ---
Total net investment gains (losses) $(16) $ 7 $136 $97
==== === ==== ===
The following table presents assets with respect to the Company's operating
segments at:
SEPTEMBER 30, DECEMBER 31,
2004 2003
-------- --------
(DOLLARS IN MILLIONS)
Assets
Institutional $123,241 $113,743
Individual 171,612 165,774
Auto & Home 5,534 4,698
International 10,076 9,935
Reinsurance 14,080 12,833
Corporate & Other 21,636 19,858
-------- --------
Total $346,179 $326,841
======== ========
Corporate & Other includes various start-up and run-off entities, as well as
the elimination of all intersegment amounts. The elimination of intersegment
amounts relates to intersegment loans, which bear interest rates commensurate
with related borrowings, as well as intersegment reinsurance transactions.
Additionally, the Company's ancillary Asset Management business is included in
the results of operations for Corporate & Other.
Net investment income and net investment gains (losses) are based upon the
actual results of each segment's specifically identifiable asset portfolio
adjusted for allocated capital. Other costs are allocated to each of the
segments based upon: (i) a review of the nature of such costs; (ii) time studies
analyzing the amount of employee compensation costs incurred by each segment;
and (iii) cost estimates included in the Company's product pricing.
Revenues derived from any customer did not exceed 10% of consolidated
revenues. Revenues from U.S. operations were $9,056 million and $7,829 million
for the three months ended September 30, 2004 and 2003, respectively, which
represented 90% and 90%, respectively, of consolidated revenues. Revenues from
U.S. operations were $26,084 million and $23,294 million for the nine months
ended September 30, 2004 and 2003, respectively, which represented 90% and 90%,
respectively, of consolidated revenues.
13. DISCONTINUED OPERATIONS
REAL ESTATE
The Company actively manages its real estate portfolio with the objective to
maximize earnings through selective acquisitions and dispositions. Income
related to real estate classified as held-for-sale is presented as discontinued
operations. These assets are carried at the lower of cost or market.
36
The following table presents the components of income from discontinued
operations:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
Investment income $ 5 $ 46 $ 76 $ 125
Investment expense (3) (25) (33) (74)
Net investment gains (losses) (16) 7 136 97
------------ ------------ ------------ ------------
Total revenues (14) 28 179 148
Interest expense -- 1 13 1
Provision for income taxes (5) 9 58 53
------------ ------------ ------------ ------------
Income (Loss) from discontinued operations $ (9) $ 18 $ 108 $ 94
============ ============ ============ ============
The carrying value of real estate related to discontinued operations was
$93 million and $891 million at September 30, 2004 and December 31, 2003,
respectively.
In February of 2004, MetLife entered into a marketing agreement to sell
one of its real estate investments, Sears Tower, and reclassified the property
from Real Estate -- Held-for-Investment to Real Estate -- Held-for-Sale. The
sale, which occurred in April 2004, resulted in a gain of $85 million, net of
income taxes.
OPERATIONS
As discussed in Note 1, during the third quarter of 2004, the Company
entered into an agreement to sell its wholly owned subsidiary, SSRM, to a third
party. Accordingly, the assets, liabilities and operations of SSRM have been
reclassified into discontinued operations for all periods presented. The
operations of SSRM include affiliated revenues of $15 million and $44 million,
respectively, for the three months and nine months ended September 30, 2004 and
$14 million and $40 million, respectively, for the three months and nine months
ended September 30, 2003 related to asset management services provided by SSRM
to the Company that have not been eliminated from discontinued operations as
these transactions are expected to continue after the sale of SSRM. The
following tables present the operations of SSRM:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
Revenues from discontinued operations $ 65 $ 51 $ 208 $ 152
------------ ------------ ------------ ------------
Income from discontinued operations before provision for
income taxes $ 9 $ 9 $ 39 $ 25
Provision for income taxes 4 4 16 10
------------ ------------ ------------ ------------
Income from discontinued operations $ 5 $ 5 $ 23 $ 15
============ ============ ============ ============
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
(DOLLARS IN MILLIONS)
Equity securities $ 28 $ 14
Real estate and real estate joint ventures 18 3
Short term investments 13 17
Other invested assets 11 8
Cash and cash equivalents 39 50
Premiums and other receivables 33 23
Deferred income taxes receivable 1 --
Other assets 74 68
------------ ------------
Total assets $ 217 $ 183
============ ============
Current income taxes payable $ 2 $ 1
Deferred income taxes payable -- 2
Other liabilities 78 67
------------ ------------
Total liabilities $ 80 $ 70
============ ============
37
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., a Delaware corporation (the "Holding Company"), 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.
SUMMARY OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP") requires
management to adopt accounting policies and make estimates and assumptions that
affect amounts reported in the unaudited interim condensed consolidated
financial statements. The critical accounting policies, estimates 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,
estimates and related judgments 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 impairments and
income, as well as the determination of fair values. The assessment of whether
impairments have occurred is based on management's case-by-case evaluation of
the underlying reasons for the decline in fair value. Management considers a
wide range of factors about the security issuer and uses its best judgment in
evaluating the cause of the decline in the estimated fair value of the security
and in assessing the prospects for near-term recovery. Inherent in management's
evaluation of the security are assumptions and estimates about the operations of
the issuer and its future earnings potential. Considerations used by the Company
in the impairment evaluation process include, but are not limited to: (i) the
length of time and the extent to which the market value has been below amortized
cost; (ii) the potential for impairments of securities when the issuer is
experiencing significant financial difficulties; (iii) the potential for
impairments in an entire industry sector or sub-sector; (iv) the potential for
impairments in certain economically depressed geographic locations; (v) the
potential for impairments of securities where the issuer, series of issuers or
industry has suffered a catastrophic type of loss or has exhausted natural
resources; (vi) the Company's ability and intent to hold the security for a
period of time sufficient to allow for the recovery of its value to an amount
equal to or greater than amortized cost; (vii) unfavorable changes in forecasted
cash flows on asset-backed securities; and (viii) other subjective factors,
including concentrations and information obtained from regulators and rating
agencies. 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. The determination of
fair values in the absence of quoted market values is based on: (i) valuation
methodologies; (ii) securities the Company deems to be comparable; and (iii)
assumptions deemed appropriate given the circumstances. The use of different
methodologies and assumptions may have a material effect on the estimated fair
value amounts. In addition, the Company enters into certain structured
investment transactions, real estate joint ventures and limited partnerships for
which the Company may be deemed to be the primary beneficiary and, therefore,
may be required to consolidate such investments. The accounting rules for the
determination of the primary beneficiary are complex and require evaluation of
the contractual rights and obligations associated with each party involved in
the entity, an estimate of the entity's expected losses and expected residual
returns and the allocation of such estimates to each party.
DERIVATIVES
The Company enters into freestanding derivative transactions primarily to
manage the risk associated with variability in cash flows or changes in fair
values related to the Company's financial assets and liabilities or to changing
fair values. The Company also uses derivative instruments to hedge its currency
exposure associated with net investments in certain foreign operations, and to
hedge certain equity risks associated with guarantees offered on certain
non-traditional long duration contracts. The Company also purchases investment
securities, issues certain insurance policies and engages in certain reinsurance
contracts that have 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; (ii) ineffectiveness
of designated hedges; and (iii) counterparty default. In addition, there is a
risk that embedded derivatives requiring bifurcation are not identified and
reported at fair value in the unaudited interim condensed
38
consolidated financial statements. Accounting for derivatives is complex, as
evidenced by significant authoritative 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. Such assumptions include estimated
volatility and interest rates used in the determination of fair value where
quoted market values are not available. The use of different assumptions may
have a material effect on the estimated fair value amounts.
DEFERRED POLICY ACQUISITION COSTS
The Company incurs significant costs in connection with acquiring new and
renewal insurance business. These costs, which vary with and are primarily
related to the production of that business, are deferred. The recovery of such
costs is dependent upon the future profitability of the related business. The
amount of future profit is dependent principally on investment returns in excess
of the amounts credited to policyholders, mortality, morbidity, persistency,
interest crediting rates, expenses to administer the business, creditworthiness
of reinsurance counterparties and certain economic variables, such as inflation.
Of these factors, the Company anticipates that investment returns are most
likely to impact the rate of amortization of such costs. The aforementioned
factors enter into management's estimates of gross margins and profits, which
generally are used to amortize 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. In
addition, the Company utilizes the reversion to the mean assumption, a standard
industry practice, in its determination of the capitalization and amortization
of deferred policy acquisition costs ("DAC"), including value of business
acquired ("VOBA"). This practice assumes that the expectation for long-term
appreciation in equity markets is not changed by minor short-term market
fluctuations, but that it does change when large interim deviations have
occurred.
FUTURE POLICY BENEFITS
The Company establishes liabilities for amounts payable under insurance
policies, including traditional life insurance, annuities and disability
insurance. Generally, amounts are payable over an extended period of time and
liabilities are established based on methods and underlying assumptions in
accordance with GAAP and applicable actuarial standards. Principal assumptions
used in the establishment of liabilities for future policy benefits are
mortality, morbidity, expenses, persistency, investment returns and inflation.
The Company also establishes liabilities for unpaid claims and claims
expenses for property and casualty insurance. 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 with respect
to current developments, anticipated trends and risk management strategies.
Differences between the actual experience and assumptions used in pricing
these policies and in the establishment of liabilities result in variances in
profit and could result in losses.
REINSURANCE
The Company enters into reinsurance transactions as both a provider and a
purchaser of reinsurance. Accounting for reinsurance requires extensive use of
assumptions and estimates, particularly related to the future performance of the
underlying business and the potential impact of counterparty credit risks. The
Company periodically reviews actual and anticipated experience compared to the
aforementioned assumptions used to establish assets and liabilities relating to
ceded and assumed reinsurance and evaluates the financial strength of
counterparties to its reinsurance agreements using criteria similar to that
evaluated in the security impairment process discussed previously. 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 reinsurer is subject or features that
delay the timely reimbursement of claims. If the Company determines that a
reinsurance contract does not expose the reinsurer 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 and regulatory
investigations. Given the inherent unpredictability of these matters, it is
difficult to estimate the impact on the Company's consolidated financial
position. Liabilities are established when it is
39
probable that a loss has been incurred and the amount of the loss can be
reasonably estimated. Liabilities related to certain lawsuits, including the
Company's asbestos-related liability, are especially difficult to estimate due
to the limitation of available data and uncertainty regarding numerous variables
used to determine amounts recorded. The data and variables that impact the
assumption used to estimate the Company's asbestos-related liability include the
number of future claims, the cost to resolve claims, the disease mix and
severity of disease, the jurisdiction of claims filed, tort reform efforts and
the impact of any possible future adverse verdicts and their amounts. [On a
quarterly and yearly basis the Company reviews relevant information with
respect to liabilities for litigation, regulatory investigations and
contingencies to be reflected in the Company's consolidated financial
statements. [The review includes senior legal and financial personnel.]] It is
possible that an adverse outcome in certain of the Company's litigation and
regulatory investigations, including asbestos-related cases, or the use of
different assumptions in the determination of amounts recorded could have a
material effect upon the Company's consolidated net income or cash flows in
particular quarterly or annual periods.
EMPLOYEE BENEFIT PLANS
The Company sponsors pension and other retirement plans in various forms
covering employees who meet specified eligibility requirements. The reported
expense and liability associated with these plans requires an extensive use of
assumptions which include the discount rate, expected return on plan assets and
rate of future compensation increases as determined by the Company. Management
determines these assumptions based upon currently available market and industry
data, historical performance of the plan and its assets, and consultation with
an independent consulting actuarial firm to aid it in selecting appropriate
assumptions and valuing its related liabilities. The expected return on plan
assets includes an expectation of long-term market appreciation in equity
markets which is not changed by short-term market fluctuations. These
assumptions used by the Company may differ materially from actual results due to
changing market and economic conditions, higher or lower withdrawal rates or
longer or shorter life spans of the participants. These differences may have a
significant effect on the Company's unaudited interim condensed consolidated
financial statements and liquidity.
RESULTS OF OPERATIONS
EXECUTIVE SUMMARY
MetLife, Inc., through its subsidiaries and affiliates, is a leading
provider of insurance and other financial services to individual and
institutional customers. The MetLife companies serve individuals in
approximately 13 million households in the U.S. and provide benefits to 37
million employees and family members through their plan sponsors. Outside the
U.S., the MetLife companies serve approximately 8 million customers through
direct insurance operations in Argentina, Brazil, Chile, China, Hong Kong,
India, Indonesia, Mexico, South Korea, Taiwan and Uruguay. MetLife is organized
into five business segments: Institutional, Individual, Auto & Home,
International and Reinsurance.
On August 25, 2004, the Company entered into an agreement to sell its
wholly owned subsidiary, SSRM Holdings Inc. ("SSRM"), to a third party. Closing
of the sale is expected to occur in early 2005 and the Company expects the
transaction to have a positive impact on net income of between $145 million and
$165 million. Under the terms of the agreement, MetLife will receive at closing
up to $375 million in cash and stock, subject to adjustment at that time based
on certain measures. MetLife will have an opportunity to receive, prior to the
end of 2006, additional payments aggregating up to approximately 25% of the base
purchase price, based on, among other things, certain revenue retention and
growth measures. The purchase price is also subject to reduction over 5 years,
depending on retention of certain MetLife-related business. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"), the Company has
reclassified the assets, liabilities and operations of SSRM into discontinued
operations for all periods presented in this Quarterly Report on Form 10-Q.
Additionally, the pending sale of SSRM resulted in the elimination of the
Company's Asset Management segment. The remaining Asset Management business,
which is insignificant, has been reclassified into Corporate & Other.
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2003
The Company reported $695 million in net income and diluted earnings per
share of $0.92 for the three months ended September 30, 2004 compared to $574
million in net income and diluted earnings per share of $0.75 for the three
months ended September 30, 2003. Continued top-line revenue growth across all of
the Company's business segments, strong interest rate spreads, and an
improvement in net investment gains (losses) are the leading contributors to the
21% increase in net income in the third quarter of 2004 over the comparable 2003
period. Total premiums, fees and other revenues increased to $6.8 billion, up
13%, from the third quarter of 2003, primarily from continued sales growth
across most of the Company's business segments, as well as the positive impact
of the U.S. financial markets on policy fees. Policy fees from variable life and
annuity and investment-type products are typically calculated as a percentage of
the average assets in policyholder accounts. The value of these assets can
fluctuate depending on equity performance. Continued improvement in interest
rate spreads is largely due to higher than normal net investment income
resulting from fees on corporate bond and commercial mortgage prepayments. In
addition, an improvement in net investment gains (losses), net of income taxes,
of $211 million is primarily due to lower credit-related losses and
40
the recognition of equity gains from improved market conditions. The three
months ended September 30, 2004 and 2003 benefited from certain items, the
timing, nature and amount of which are generally not predictable. These items
contributed a benefit of $9 million, net of income taxes, to the three months
ended September 30, 2004 and a benefit of $64 million, net of income taxes, to
the comparable 2003 period.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
The Company reported $2,247 million in net income and diluted earnings per
share of $2.97 for the nine months ended September 30, 2004 compared to $1,516
million in net income and diluted earnings per share of $2.04 for the nine
months ended September 30, 2003. Continued top-line revenue growth across all of
the Company's business segments, strong interest rate spreads and an improvement
in net investment gains (losses) are the leading contributors to the 48%
increase in net income for the nine months ended September 30, 2004 over the
comparable 2003 period. Total premiums, fees and other revenues increased to
$19.5 billion, up 10%, from the first nine months of 2003, primarily from
continued sales growth across most of the Company's business segments, as well
as the positive impact of the U.S. financial markets on policy fees. Policy fees
from variable life and annuity and investment-type products are typically
calculated as a percentage of the average assets in policyholder accounts. The
value of these assets can fluctuate depending on equity performance. Continued
improvement in interest rate spreads is largely due to higher than normal net
investment income from fees on corporate bond and commercial mortgage
prepayments. In addition, an improvement in net investment gains (losses), net
of income taxes, of $506 million is primarily attributable to lower
credit-related losses and the recognition of equity gains from improved U.S.
financial market conditions. These increases are partially offset by an $86
million, net of income taxes, cumulative effect of a change in accounting
recorded in accordance with Statement of Position 03-1, Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts ("SOP 03-1"). The nine months ended
September 30, 2004 and 2003 benefited from certain items, the timing, nature
and amount of which are generally not predictable. These items contributed a
benefit of $113 million, net of income taxes, to the nine months ended
September 30, 2004 and a benefit of $159 million, net of income taxes, to the
comparable 2003 period.
INDUSTRY TRENDS
The Company's segments continue to be influenced by a variety of industry
trends and the Company believes that each of its businesses is well positioned
to capitalize on those trends. In general, the Company sees more employers, both
large and small, outsourcing their benefits functions. Further, companies are
offering broader arrays of voluntary benefits to help retain employees while
adding little to their overall benefits costs. These trends will likely continue
and in fact expand across companies of all sizes. Employers are also demanding
substantial online access for their employees for various self-service
functions. This functionality requires substantial information technology
investment that smaller companies will find difficult to absorb. This will put
pressure on those smaller and mid-size companies to gain scale quickly or exit
the business. Additionally, the Company is seeing a continuing trend of
employers moving to defined contribution plans over defined benefit plans.
In addition, alternative benefit structures, such as simple fixed benefit
products, are becoming more popular as the cost of traditional medical indemnity
products has continued to increase rapidly. These low cost fixed benefit
products can provide effective catastrophic protection for high cost illnesses
to supplement the basic health coverage provided by medical indemnity insurance.
From a demographics standpoint, the bulk of the U.S. population is moving
from an asset accumulation phase to an asset distribution phase. People within
ten years of retirement hold significant assets. With continually lengthening
lifespans and unstructured asset distribution, the Company believes many of
these people may outlive their retirement savings and/or require long-term care.
As a result, the Company expects that the demand for retirement payout solutions
with guarantees will increase dramatically over the next decade. In each of
these demographic scenarios, the quality of the guarantee will be a key driver
of growth. The Company believes that these guarantees will be evaluated through
balance sheet strength, the claims paying ability and financial strength ratings
of the guarantor, as well as the reputation of the Company. The Company believes
that in each of these comparisons, it will be at a distinct advantage versus the
industry on average.
The combination of these trends will continue to favor those with scale,
breadth of distribution and product, ability to provide advice and financial
strength to support long-term guarantees.
41
DISCUSSION OF RESULTS
The following table presents consolidated financial information for the
Company for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 5,736 $ 5,079 $ 16,434 $ 14,994
Universal life and investment-type product policy fees 738 623 2,143 1,798
Net investment income 3,076 2,846 9,126 8,555
Other revenues 292 299 889 886
Net investment gains (losses) 206 (126) 369 (428)
------------ ------------ ------------ ------------
Total revenues 10,048 8,721 28,961 25,805
------------ ------------ ------------ ------------
EXPENSES
Policyholder benefits and claims 5,933 5,149 16,713 15,044
Interest credited to policyholder account balances 739 767 2,220 2,275
Policyholder dividends 456 473 1,369 1,483
Other expenses 1,920 1,638 5,606 5,133
------------ ------------ ------------ ------------
Total expenses 9,048 8,027 25,908 23,935
------------ ------------ ------------ ------------
Income from continuing operations before provision
for income taxes 1,000 694 3,053 1,870
Provision for income taxes 301 143 851 463
------------ ------------ ------------ ------------
Income from continuing operations 699 551 2,202 1,407
Income (Loss) from discontinued operations, net of income taxes (4) 23 131 109
------------ ------------ ------------ ------------
Income before cumulative effect of a change in accounting 695 574 2,333 1,516
Cumulative effect of a change in accounting, net of income taxes -- -- (86) --
------------ ------------ ------------ ------------
Net income $ 695 $ 574 $ 2,247 $ 1,516
============ ============ ============ ============
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2003 -- THE COMPANY
Income from continuing operations increased by $148 million, or 27%, to
$699 million for the three months ended September 30, 2004 from $551 million in
the comparable 2003 period. Income from continuing operations for the three
months ended September 30, 2004 and 2003 includes the impact of certain
transactions or events, the timing, nature and amount of which are generally not
predictable. These items contributed a benefit of $9 million, net of income
taxes, to the three months ended September 30, 2004 and a benefit of $64
million, net of income taxes to the comparable 2003 period, both of which are
described in the Corporate & Other discussion below. Excluding the impact of
these items, income from continuing operations increased by $203 million for
the three months ended September 30, 2004 compared to the 2003 period. Included
in this increase is an improvement in net investment gains (losses), net of
income taxes, of $211 million. Also contributing to the increase is higher
earnings from interest rate spreads of approximately $75 million, net of income
taxes, in the Institutional and Individual segments. Additionally, Corporate &
Other benefited from higher net investment income of $50 million, net of income
taxes, and the Individual segment contributed $44 million, net of income taxes,
as a result of increased income from policy fees on investment-type products.
Partially offsetting these increases are non-deferrable expenses of $53
million, net of income taxes, primarily within the Institutional segment and
Corporate & Other. Higher DAC amortization of $35 million, net of income taxes,
and increased policyholder dividends of $28 million, net of income taxes,
within the Individual segment also offset these increases. Additionally, the
Auto & Home segment experienced increased catastrophe losses of $58 million,
net of income taxes.
Premiums, fees and other revenues increased by $765 million, or 13%, to
$6,766 million for the three months ended September 30, 2004 from $6,001 million
for the comparable 2003 period. The Institutional segment represents
approximately 61% of the year over year increase. This increase stems largely
from increased structured settlements sales and pension close-outs, sales growth
and the acquisitions of new businesses in the group life and the non-medical
health and other businesses. The Reinsurance segment contributed approximately
32% to the Company's period over period increase in premium, fees and other
revenues. This growth is primarily attributable to this segment's coinsurance
agreement with Allianz Life Insurance Company of North America ("Allianz Life")
and continued growth in the Reinsurance segment's traditional and life
reinsurance operations.
Interest rate spreads, which generally represent the margin between net
investment income and interest credited to policyholder account balances, were
considerably higher across the Institutional and Individual segments during the
three months ended September 30, 2004 compared to the prior year period.
Earnings from interest rate spreads are influenced by several factors including
business growth, movement in interest rates, and certain investment and
investment-related transactions such as corporate joint ventures and corporate
bond and commercial mortgage prepayments for which the timing of occurrence is
uncertain, and as a result can fluctuate from period to period. If interest
rates remain low, it may result in compression of the Company's interest rate
spreads on several of its products, which provide guaranteed minimum rates of
return to policyholders. This compression could negatively impact the Company's
future financial results.
42
Underwriting results in the Institutional and Individual segments were
relatively flat in the third quarter of 2004 compared to the same period of the
prior year. Underwriting results are significantly influenced by mortality and
morbidity experience and the reinsurance activity related to certain blocks of
business, and, as a result, can fluctuate from period to period. Underwriting
results in the Auto & Home segment were favorable as the combined ratio declined
to an unusually low level of 84.8%, excluding catastrophes, from 95.9% in the
prior year period. This result is largely due to continued improvement in both
auto and homeowner claim frequencies, lower auto severities and an increase in
average earned premiums.
Other expenses increased by $282 million, or 17%, to $1,920 million for
the three months ended September 30, 2004 from $1,638 million for the comparable
2003 period. The 2003 quarter includes a $44 million benefit from the reduction
of a previously established liability related to the Company's race-conscious
underwriting settlement. Excluding the impact of this item, other expenses
increased by $238 million, or 14%, from the comparable 2003 period. This
variance is, in part, attributable to an increase in non-deferrable commission
and premium tax expenses associated with general business growth as well as
increases in direct business support expenses in the Institutional segment.
Additionally, the Individual segment's other expenses increased due to
accelerated DAC amortization. Further, the transaction with Allianz Life,
mentioned above, contributed to this overall increase. The International
segment's other expenses increased due to general business growth, which was
more than offset by the sale of the Spanish operations, resulting in a decrease
in expenses for that segment.
Net investment gains (losses) improved by $332 million, or 263%, to $206
million for the three months ended September 30, 2004 from ($126) million for
the comparable 2003 period. This improvement is primarily due to lower
credit-related losses and the recognition of equity gains from the improved
market conditions.
Income tax expense for the three months ended September 30, 2004 was $301
million, or 30% of income from continuing operations before provision for income
taxes, compared with $143 million, or 21%, for the comparable 2003 period. The
2004 effective tax rate differs from the corporate tax rate of 35% primarily due
to the impact of non-taxable investment income and tax credits for investments
in low income housing. In addition, the 2004 effective tax rate reflects an
adjustment consisting primarily of a revision in the estimate of income taxes
for 2003. The 2003 effective tax rate differs from the corporate tax rate of 35%
primarily due to the impact of non-taxable investment income, tax credits for
investments in low income housing, and tax benefits related to the sale of
foreign subsidiaries. In addition, the 2003 effective tax rate reflects an
adjustment consisting primarily of a revision in the estimate of income taxes
for 2002.
The income (loss) from discontinued operations is comprised of the
operations of SSRM and net investment income and net investment gains related to
properties that the Company has classified as available-for-sale. The Company
entered into an agreement to sell SSRM during the third quarter of 2004. The
sale is expected to close in early 2005 and is expected to result in a positive
impact on net income of between $145 million and $165 million.
Income (Loss) from discontinued operations, net of income taxes, decreased
$27 million, or 117%, to ($4) million for the three months ended September 30,
2004 from $23 million for the comparable 2003 period. The decrease in income
(loss) from discontinued operations is primarily due to a decrease in income
from the sale of income-producing properties in the fourth quarter of 2003 and
the second quarter of 2004, as well as the recognition of losses on properties
classified as held-for-sale in the third quarter of 2004. For the three months
ended September 30, 2004 and 2003, the Company recognized $16 million of net
investment losses and $7 million of net investment gains, respectively, from
discontinued operations related to real estate properties sold or held-for-sale.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2003 -- THE COMPANY
Income from continuing operations increased by $795 million, or 57%, to
$2,202 million for the nine months ended September 30, 2004 from $1,407 million
in the comparable 2003 period. Income from continuing operations for the nine
months ended September 30, 2004 and 2003 includes the impact of certain
transactions or events, the timing, nature and amount of which are generally not
predictable. These transactions are described in the applicable segment's
discussion below. These items contributed a benefit of $113 million, net of
income taxes, to the nine months ended September 30, 2004 and a benefit of $159
million, net of income taxes, to the comparable 2003 period. Excluding the
impact of these items, income from continuing operations increased by $841
million for the nine months ended September 30, 2004 compared to the prior 2003
period. This increase is primarily the result of an improvement in net
investment gains (losses), net of income taxes, of $506 million. Also
contributing to the increase is higher earnings from interest rate spreads of
approximately $237 million, net of income taxes, in the Institutional and
Individual segments. Additionally, the Individual segment contributed $134
million, net of income taxes, as a result of increased income from policy fees
on investment-type products, and Corporate & Other benefited from higher net
investment income of $106 million, net of income taxes. Partially offsetting
these increases are higher catastrophe losses of $69 million, net of income
taxes, in the Auto & Home segment. Also, contributing to this offset is an
increase in direct business support expenses across several segments.
43
Premiums, fees and other revenues increased by $1,788 million, or 10%, to
$19,466 million for the nine months ended September 30, 2004 from $17,678
million from the comparable 2003 period. The Institutional segment contributed
49% of the period over period increase. This increase stems largely from
increased structured settlements sales and pension close outs, sales growth and
the acquisitions of new businesses in the group life and the non-medical health
and other businesses. The Reinsurance segment contributed approximately 41% to
the Company's period over period increase in premium, fees and other revenues.
This growth is primarily attributable to this segment's coinsurance agreement
with Allianz Life and continued growth in its traditional life reinsurance
operations.
Interest rate spreads, which generally represent the margin between net
investment income and interest credited to policyholder account balances,
increased across the Institutional and Individual segments during the nine
months ended September 30, 2004 compared to the prior year period. Earnings from
interest rate spreads are influenced by several factors including business
growth, movement in interest rates, and certain investment and
investment-related transactions such as corporate joint ventures and corporate
bond and commercial mortgage prepayments for which the timing of occurrence is
uncertain, and as a result can fluctuate from period to period. If interest
rates remain low, it could result in compression of the Company's interest rate
spreads on several of its products, which provide guaranteed minimum rates of
return to policyholders. This compression would adversely impact the Company's
future financial results.
Underwriting results in the Institutional and Individual segments in the
nine months ended September 30, 2004 were less favorable compared to the 2003
period. Underwriting results are significantly influenced by mortality and
morbidity experience and the reinsurance activity related to certain blocks of
business, and, as a result, can fluctuate from period to period. Underwriting
results in the Auto & Home segment were favorable as the combined ratio declined
to an unusually low level of 89.8%, excluding catastrophes, from 97.6% in the
prior year period. This result is largely due to continued improvement in both
auto and homeowner claim frequencies, lower auto severities and an increase in
average earned premiums.
Other expenses increased by $473 million, or 9%, to $5,606 million for the
nine months ended September 30, 2004 from $5,133 million for the comparable 2003
period. The 2003 period includes the impact of a $144 million reduction of a
previously established liability related to the Company's race-conscious
underwriting settlement. In addition, the 2003 period includes a $48 million
charge related to certain improperly deferred expenses at New England Financial
and a $45 million charge related to a change in reserve methodology in the
Company's International segment. The 2004 period reflects a $49 million
reduction of a premium tax liability and a $22 million reduction of a liability
for interest associated with the resolution of all issues relating to the
Internal Revenue Service's audit of Metropolitan Life's and its subsidiaries'
tax returns for the years 1997-1999. These decreases were partially offset by
a $50 million contribution of appreciated stock to the MetLife Foundation.
Excluding the impact of these transactions, other expenses increased by $443
million, or 9%, from the comparable 2003 period. This variance is attributable
to an increase in non-deferrable commission and premium tax expenses associated
with general business growth, as well as increases in direct business support
expenses, infrastructure improvements and costs associated with office
consolidations in the Institutional segment. The Individual segment increased
due to accelerated DAC amortization, as well as an increase in expenses
associated with general business growth. Additionally, the transaction with
Allianz Life, mentioned above, contributed to this overall increase. The
International segment's other expenses increased due to general business
growth, which is more than offset by the sale of the Spanish operations,
resulting in a decrease in expenses.
Net investment gains (losses) improved by $797 million, or 186%, to $369
million for the nine months ended September 30, 2004 from ($428) million for the
comparable 2003 period. This improvement is primarily due to lower
credit-related losses and the recognition of equity gains from the improved
market conditions.
Income tax expense for the nine months ended September 30, 2004 was $851
million, or 28% of income from continuing operations before provision for income
taxes, compared with $463 million, or 25%, for the comparable 2003 period. The
2004 effective tax rate differs from the corporate tax rate of 35% primarily due
to the impact of non-taxable investment income and tax credits for investments
in low income housing, decreasing the deferred tax valuation allowance to
recognize the effect of certain foreign net operating loss carryforward in
Korea, and the contribution of appreciated stock to the MetLife Foundation. In
addition, the 2004 effective tax rate reflects an adjustment for the resolution
of all issues relating to the Internal Revenue Service's audit of Metropolitan
Life's and its subsidiaries' tax returns for the years 1997-1999. Also, the 2004
effective tax rate reflects an adjustment consisting primarily of a revision in
the estimate of income taxes for 2003. The 2003 effective tax rate differs from
the corporate tax rate of 35% primarily due to the impact of non-taxable
investment income, tax credits for investments in low income housing, a tax
recovery of prior year tax overpayments on tax-exempt bonds, a reduction of the
deferred tax valuation allowance to recognize the effect of certain foreign net
operating loss carryforwards, and tax benefits related to the sale of foreign
subsidiaries. In addition, the 2003 effective tax rate reflects an adjustment
consisting primarily of a revision in the estimate of income taxes for 2002.
44
The income (loss) from discontinued operations is comprised of the
operations of SSRM and net investment income and net investment gains related to
properties that the Company has classified as available-for-sale. The Company
entered into an agreement to sell SSRM during the third quarter of 2004. The
sale is expected to close in early 2005 and is expected to have a positive
impact on net income of between $145 million and $165 million.
Income (Loss) from discontinued operations, net of income taxes, increased
$22 million, or 20%, to $131 million for the nine months ended September 30,
2004 from $109 million for the comparable 2003 period. The increase in income
(loss) from discontinued operations is primarily due to the $85 million gain on
the sale of Sears Tower in April 2004, partially offset by lower recognized net
investment gains from real estate properties sold in the nine months ended
September 30, 2004 as compared to the prior 2003 period. For the nine months
ended September 30, 2004 and 2003, the Company recognized $136 million and $97
million of net investment gains, respectively, from discontinued operations
related to real estate properties sold or held-for-sale. A portion of the
increase in income (loss) from discontinued operations is due to the SSRM
operations. This increase is primarily due to higher revenue earned on higher
average assets under management, as well as higher performance fees earned in
the second quarter of 2004, partially offset by a regulatory settlement and
associated legal costs, as well as expense increases resulting from higher
average assets under management.
During the nine months ended September 30, 2004, the Company recorded an
$86 million charge for a cumulative effect of a change in accounting in
accordance with SOP 03-1, which provides guidance on (i) the classification and
valuation of long-duration contract liabilities; (ii) the accounting for sales
inducements; and (iii) separate account presentation and valuation. This charge
is primarily related to those long-duration contract liabilities where the
amount of the liability is indexed to the performance of a target portfolio of
investment securities.
45
INSTITUTIONAL
The following table presents consolidated financial information for the
Institutional segment for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 2,711 $ 2,260 $ 7,518 $ 6,730
Universal life and investment-type product policy fees 178 167 536 482
Net investment income 1,101 976 3,298 2,948
Other revenues 152 144 471 438
Net investment gains (losses) 121 (36) 263 (144)
------------ ------------ ------------ ------------
Total revenues 4,263 3,511 12,086 10,454
------------ ------------ ------------ ------------
EXPENSES
Policyholder benefits and claims 2,971 2,509 8,263 7,394
Interest credited to policyholder account balances 242 234 701 686
Policyholder dividends 40 14 85 107
Other expenses 494 407 1,385 1,299
------------ ------------ ------------ ------------
Total expenses 3,747 3,164 10,434 9,486
------------ ------------ ------------ ------------
Income from continuing operations before
provision for income taxes 516 347 1,652 968
Provision for income taxes 172 122 563 342
------------ ------------ ------------ ------------
Income from continuing operations 344 225 1,089 626
Income (Loss) from discontinued operations, net of income taxes (2) 3 -- 31
------------ ------------ ------------ ------------
Income before cumulative effect of a change in accounting 342 228 1,089 657
Cumulative effect of a change in accounting, net of income taxes -- -- (60) --
------------ ------------ ------------ ------------
Net income $ 342 $ 228 $ 1,029 $ 657
============ ============ ============ ============
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2003 -- INSTITUTIONAL
The Company's Institutional segment offers a broad range of group
insurance and retirement and savings products and services to corporations and
other institutions. Group insurance products are offered as either an
employer-contributed benefit, or as a voluntary benefit with premiums paid by
the employee. Retirement and savings products and services include an array of
annuity and investment products, as well as bundled administrative and
investment services sold to sponsors of small- and mid-sized 401(k) and other
defined contribution plans.
Income from continuing operations increased by $119 million, or 53%, to
$344 million for the three months ended September 30, 2004 from $225 million for
the comparable 2003 period. An improvement of $100 million, net of income taxes,
in net investment gains (losses) is a significant component of the increase. In
addition, favorable interest rate spreads are estimated to contribute $51
million, net of income taxes, compared to the prior year period, with the
Retirement & Savings products generating $45 million of this increase. Higher
investment yields, growth in the asset base and lower crediting rates are the
primary drivers of the period over period increase in interest rate spreads.
These spreads are generally the percentage point difference between the yield
earned on invested assets and the interest rate the Company uses to accrue on
certain liabilities. Therefore, given a constant value of assets and
liabilities, an increase in interest rate spreads would result in higher income
to the Company. Interest rate spreads for the three months ended September 30,
2004 increased to 1.56% and 1.43% for retirement & savings and the non-medical
health & other businesses, respectively, from 1.20% and 1.06% for the retirement
& savings, and the non-medical health & other businesses, respectively, in the
comparable prior year period. The group life interest rate spread declined from
1.98% for the three months ended September 30, 2003 to 1.87% for the current
year period. Management generally expects these spreads to typically be in the
range of 1.60% to 1.80%, 1.30% to 1.45%, and 1.30% to 1.50% for the group life,
retirement & savings, and the non-medical health & other businesses,
respectively. Earnings from interest rate spreads are influenced by several
factors including business growth, movement in interest rates, and certain
investment and investment-related transactions such as corporate joint ventures
and corporate bond and commercial mortgage prepayments for which the timing of
occurrence is uncertain, and as a result can fluctuate from period to period.
These increases were
46
partially offset by an increase of approximately $30 million, net of income
taxes, in direct business support expenses and costs related primarily to
infrastructure improvements and the closing of one of the Company's disability
claims centers.
Total revenues, excluding net investment gains (losses), increased by $595
million, or 17%, to $4,142 million for the three months ended September 30, 2004
from $3,547 million for the comparable 2003 period. Growth of $470 million in
premiums, fees, and other revenues contributed to the revenue increase.
Retirement & savings' premiums, fees and other revenues increased by $221
million, which is largely due to an increase in premiums of $215 million,
resulting primarily from structured settlement sales and pension close-outs in
the third quarter of 2004. Premiums, fees and other revenues from retirement &
savings products are significantly influenced by large transactions and, as a
result, can fluctuate from period to period. A $141 million increase in
premiums, fees and other revenue in the non-medical health and other business
compared to the prior year period is partly due to the continued growth in
long-term care of $48 million, $17 million of which is related to the 2004
acquisition of TIAA/CREF's long-term care business. Additionally, growth in the
small business center, disability business, and dental business contributed $80
million to the period over period increase. Further, group life insurance
premiums, fees and other revenues increased by $108 million, which management
primarily attributes to continued strong sales and favorable persistency, as
well as the acquisition of the John Hancock group life insurance business in
late 2003, which contributed $22 million to the increase. Also contributing to
the increase in revenues is a $125 million increase in net investment income,
which is primarily due to higher income from growth in the asset base, earnings
on corporate joint ventures and fees associated with corporate bond and
commercial mortgage prepayments. This increase is a component of the favorable
interest rate spreads discussed above.
Total expenses increased by $583 million, or 18%, to $3,747 million for
the three months ended September 30, 2004 from $3,164 million for the comparable
2003 period. Policyholder benefits and claims combined with policyholder
dividends increased by $488 million to $3,011 million for the three months ended
September 30, 2004 from $2,523 million in the comparable prior year period. This
growth is primarily attributable to the retirement & savings, non-medical health
& other, and the group life businesses in the amounts of $232 million, $161
million, and $95 million, respectively. These increases are predominately
attributable to the business growth detailed in the revenue discussion above.
The increases in group life of $21 million and the non-medical health & other
businesses of $15 million include the impact of the acquisition of certain
businesses from John Hancock and TIAA/CREF, respectively. In addition, less
favorable claim experience in the non-medical health & other business and in
retirement & savings contributed to the increase. The increases are partially
offset by favorable claim experience in the group life business. Other operating
expenses increased $87 million, approximately $40 million of which is
attributable to increases in non-deferrable commissions and premium taxes, which
is commensurate with the aforementioned revenue growth. In addition, direct
business support expenses increased by approximately $30 million. The remaining
balance is largely attributable to infrastructure improvements and expenses
related to the closing of one of the Company's disability claims centers.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2003 -- INSTITUTIONAL
Income from continuing operations increased by $463 million, or 74%, to
$1,089 million for the nine months ended September 30, 2004 from $626 million
for the comparable 2003 period. An improvement of $258 million, net of income
taxes, in net investment gains (losses) is a significant component of the
increase. In addition, favorable interest rate spreads are estimated to
contribute $191 million, net of income taxes, compared to the prior year period,
with the Retirement & Savings products generating $136 million of this increase.
Higher investment yields, growth in the asset base and lower crediting rates are
the primary drivers of the period over period increase in interest rate spreads.
These spreads are generally the percentage point difference between the yield
earned on invested assets and the interest rate the Company uses to accrue on
certain liabilities. Therefore, given a constant value of assets and
liabilities, an increase in interest rate spreads would result in higher income
to the Company. Interest rate spreads for the nine months ended September 30,
2004 increased to 2.15%, 1.60% and 1.83% for group life, retirement & savings
and the non-medical health & other businesses, respectively, from 1.87%, 1.26%
and 1.30% for the group life, retirement & savings, and the non-medical health &
other businesses, respectively, in the comparable prior year period. Management
generally expects these spreads to typically be in the range of 1.60% to 1.80%,
1.30% to 1.45%, and 1.30% to 1.50% for the group life, retirement & savings, and
the non-medical health & other businesses, respectively. Earnings from interest
rate spreads are influenced by several factors including business growth,
movement in interest rates, and certain investment and investment-related
transactions such as corporate joint ventures and corporate bond and commercial
mortgage prepayments for which the timing and amount are generally not
predictable. As a result, income for these transactions may fluctuate from
period to period. A reduction in a premium tax liability of $31 million in the
second quarter of 2004, net of income taxes, also contributed to the increase in
income from continuing operations. In addition, underwriting results are
estimated to have declined $29 million compared to the prior year period.
Approximately $22 million of this decrease management attributes to mixed claim
experience in the non-medical health & other business. Underwriting results are
significantly influenced by mortality trends and claim experience and as a
result can fluctuate from period to period.
47
Total revenues, excluding net investment gains (losses), increased by
$1,225 million, or 12%, to $11,823 million for the nine months ended September
30, 2004 from $10,598 million for the comparable 2003 period. Growth of $875
million in premiums, fees, and other revenues contributed to the revenue
increase. Retirement & savings', premiums, fees and other revenues increased by
$201 million, which is largely due to a growth in premiums of $150 million,
resulting primarily from an increase in structured settlement sales and pension
close-outs. Premiums, fees and other revenues from retirement & savings products
are significantly influenced by large transactions, and as a result, can
fluctuate from period to period. A $332 million increase in premiums, fees and
other revenue in the non-medical health & other business compared to the prior
year period is partly due to the continued growth in long-term care of $104
million, of which $26 million is related to the 2004 acquisition of TIAA/CREF's
long-term care business. Further, growth in the small business center,
disability business, and dental business contributed $213 million to the period
over period increase. Group life insurance premiums, fees and other revenues
increased by $342 million, which management primarily attributes to continued
strong sales and favorable persistency, as well as the acquisition of the John
Hancock group life insurance business in late 2003, which contributed $72
million to the increase. In addition, an increase of $350 million in net
investment income, which is primarily due to higher income from growth in the
asset base, earnings on corporate joint ventures and fees associated with
corporate bonds and commercial mortgage prepayments contributed to the overall
increase in revenues. This increase is a component of the favorable interest
rate spreads discussed above.
Total expenses increased by $948 million, or 10%, to $10,434 million for
the nine months ended September 30, 2004 from $9,486 million for the comparable
2003 period. Policyholder benefits and claims combined with policyholder
dividends increased by $847 million to $8,348 million for the nine months ended
September 30, 2004 from $7,501 million for the comparable prior year period.
This increase is primarily attributable to a $349 million, $321 million, and
$177 million increase in the group life, non-medical health & other, and
retirement & savings businesses, respectively. These increases are predominately
attributable to the business growth discussed in the revenue discussion above.
The increases in group life of $69 million and the non-medical health & other
businesses of $27 million include the impact of the acquisition of certain
businesses from John Hancock and TIAA/CREF, respectively. Also included in the
increase is the impact of less favorable claim experience in the non-medical
health & other and in the group life businesses. Other operating expenses
increased $86 million. The largest component of this expense growth is an
increase of approximately $60 million related to increases in non-deferrable
commissions and premium taxes which is commensurate with the aforementioned
revenue growth. In addition, direct business support expenses increased by
approximately $45 million. Infrastructure improvements and expenses related to
the closing of one of the Company's disability claims centers contributed an
additional $30 million to the period over period increase. Partially offsetting
the increases in operating expenses is a $49 million reduction in a premium tax
related liability which occurred in the second quarter of 2004.
48
INDIVIDUAL
The following table presents consolidated financial information for the
Individual segment for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 1,023 $ 1,064 $ 3,008 $ 3,160
Universal life and investment-type product policy fees 467 386 1,345 1,124
Net investment income 1,526 1,549 4,584 4,636
Other revenues 109 96 332 291
Net investment gains (losses) 107 (76) 119 (199)
------------ ------------ ------------ ------------
Total revenues 3,232 3,019 9,388 9,012
------------ ------------ ------------ ------------
EXPENSES
Policyholder benefits and claims 1,303 1,232 3,735 3,647
Interest credited to policyholder account balances 412 452 1,262 1,347
Policyholder dividends 401 442 1,232 1,321
Other expenses 741 667 2,149 2,080
------------ ------------ ------------ ------------
Total expenses 2,857 2,793 8,378 8,395
------------ ------------ ------------ ------------
Income from continuing operations before provision
for income taxes 375 226 1,010 617
Provision for income taxes 127 72 330 210
------------ ------------ ------------ ------------
Income from continuing operations 248 154 680 407
Income from discontinued operations, net of income taxes -- -- 3 32
------------ ------------ ------------ ------------
Income before cumulative effect of a change in accounting 248 154 683 439
Cumulative effect of a change in accounting, net of income taxes -- -- -- --
------------ ------------ ------------ ------------
Net income $ 248 $ 154 $ 683 $ 439
============ ============ ============ ============
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2003 -- INDIVIDUAL
MetLife's Individual segment offers a wide variety of protection and asset
accumulation products aimed at serving the financial needs of its customers
throughout their entire life cycle. Products offered by Individual include
insurance products, such as traditional, universal and variable life insurance
and variable and fixed annuities. In addition, Individual sales representatives
distribute disability insurance and long-term care insurance products offered
through the Institutional segment, investment products, such as mutual funds,
and other products offered by the Company's other businesses.
Income from continuing operations increased by $94 million, or 61%, to
$248 million for the three months ended September 30, 2004 from $154 million for
the comparable 2003 period. This increase includes additional fee income of $45
million, net of income taxes, primarily related to separate account products. In
addition, improvement in interest rate spreads contributed $25 million, net of
income taxes, to the period over period increase. Interest rate spreads include
income from certain investment transactions, including corporate joint ventures
and corporate bond and commercial mortgage prepayments, the timing and amount of
which are generally not predictable. As a result, income from these transactions
may fluctuate from period to period. These types of transactions contributed $9
million, net of income taxes, to the improvement in interest rate spreads. The
increase also includes an improvement in net investment gains of $116 million,
net of income taxes, and a reduction in policyholder dividends of $26 million,
net of income taxes. These increases are partially offset by a $54 million, net
of income taxes, reduction in earnings from an increase in the closed block
related policyholder dividend obligation, associated in part with an improvement
in net investment gains (losses). Higher DAC amortization of $35 million, net of
income taxes, including $20 million, net of income taxes, of DAC and unearned
revenue unlocking events in the variable and universal life and annuity product
lines, also reduced earnings in the third quarter of 2004. Also offsetting the
increases are less favorable underwriting results in the traditional and
universal life products of $17 million, net of income taxes. These underwriting
results are significantly influenced by mortality experience and the reinsurance
activity related to certain blocks of business, and as a result can fluctuate
from period to period. In addition, the application of SOP 03-1 liabilities in
the current period reduced earnings by $9 million, net of income taxes, in
policyholder liabilities.
49
Total revenues, excluding net investment gains (losses), increased by $30
million, or 1%, to $3,125 million for the three months ended September 30, 2004
from $3,095 million for the comparable 2003 period. This increase includes
higher fee income primarily from separate account products of $81 million
resulting from a combination of higher account balances and improved overall
market performance. Policy fees from variable life and annuity and
investment-type products are typically calculated as a percentage of the average
assets in policyholder accounts. The value of these assets can fluctuate
depending on equity performance. In addition, management attributes higher
premiums of $9 million in the third quarter of 2004 to the active marketing of
immediate annuity products. The increased volume of sales in 2004 also resulted
in higher broker/dealer and other subsidiaries revenue of $7 million. Partially
offsetting the increases in total revenues for the three months ended September
30, 2004 are lower premiums related to the Company's closed block of business of
$50 million, which continues to run off at management's expected range of 3% to
6% per year and a $23 million decrease in net investment income due to lower
investment yields.
Total expenses increased by $64 million, or 2%, to $2,857 million for the
three months ended September 30, 2004 from $2,793 million for the comparable
2003 period. Higher expenses are primarily the result of an increase in the
closed block related policyholder dividend obligation of $85 million, which is
primarily due to improvement in net investment gains (losses), and higher DAC
amortization of $65 million. The increase in DAC amortization is due to
accelerated amortization associated with improvement in net investment gains
(losses) and the impact of revisions to assumptions used to determine estimated
gross margins. The increase in expenses also includes a $9 million increase in
future policy benefits related to higher immediate annuity premiums, a $14
million increase in expenses resulting from the application of SOP 03-1 and
higher broker/dealer and other subsidiaries expenses of $6 million related to
higher sale volumes. This primary driver of the current period impact for
SOP-03-1 is an increase in the fair value of the underlying assets associated
with these contracts. Partially offsetting these increases in expenses are a $40
million decrease in interest credited to policyholder account balances as a
result of lower crediting rates; a $41 million decline in policyholder
dividends, primarily due to reductions in the dividend scale in late 2003; and
the lowering of reserves related to the Company's closed block of business of
$39 million due to the run off of this block of business.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2003 -- INDIVIDUAL
Income from continuing operations increased by $273 million, or 67%, to
$680 million for the nine months ended September 30, 2004 from $407 million for
the comparable 2003 period. This increase includes additional fee income of $134
million, net of income taxes, primarily related to separate account products. In
addition, improvement in interest rate spreads contributed $46 million, net of
income taxes, to the period over period increase. Interest rate spreads include
income from certain investment transactions, including corporate joint ventures
and corporate bond and commercial mortgage prepayments, the timing and amount of
which are generally not predictable. As a result, income from these transaction
may fluctuate from period to period. These types of transactions contributed $14
million, net of income taxes, to the improvement in interest rate spreads. The
increase also includes an improvement in net investment gains of $202 million,
net of income taxes, and a reduction in policyholder dividends of $57 million,
net of income taxes. These increases are partially offset by a $79 million, net
of income taxes, reduction in earnings from an increase in the closed block
related policyholder dividend obligation, associated in part with an improvement
in net investment gains (losses). Higher DAC amortization of $18 million, net of
income taxes, also reduced earnings in the nine months ended September 30, 2004.
Additionally offsetting the increases are less favorable underwriting results in
the traditional and universal life products of $22 million, net of income taxes.
These underwriting results are significantly influenced by mortality experience
and the reinsurance activity related to certain blocks of business, and as a
result can fluctuate from period to period. In addition, the application of SOP
03-1 liabilities in the 2004 period reduced earnings by $16 million, net of
income taxes, in policyholder liabilities. Also the prior 2003 period includes a
$31 million charge, net of income taxes, related to certain improperly deferred
expenses at New England Financial.
Total revenues, excluding net investment gains (losses), increased by $58
million, or 1%, to $9,269 million for the nine months ended September 30, 2004
from $9,211 million for the comparable 2003 period. This increase includes
higher fee income primarily from separate account products of $221 million
resulting from a combination of higher account balances and improved overall
market performance. Policy fees from variable life and annuity and
investment-type products are typically calculated as a percentage of the average
assets in policyholder accounts. The value of these assets can fluctuate
depending on equity performance. In addition, management attributes higher
premiums of $13 million in the third quarter of 2004 to the active marketing of
immediate annuity products. The increased volume of sales in 2004 also resulted
in higher broker/dealer and other subsidiaries revenue of $23 million. Partially
offsetting the increases in total revenues for the nine months ended September
30, 2004 are lower premiums related to the Company's closed block of business of
$150 million, which continues to run off at management's expected range of 3% to
6% per year and a $52 million decrease in net investment income due to lower
investment yields partially offset by growth in the business.
Total expenses decreased by $17 million, or less than 1%, to $8,378
million for the nine months ended September 30, 2004 from $8,395 million for the
comparable 2003 period. Lower expenses are primarily the result of a decrease in
policyholder dividends of $89 million resulting from reductions in the dividend
scale in late 2003 and an $85 million decline in interest credited to
policyholder account balances due to lower crediting rates. Partially offsetting
these decreases is an increase in policyholder benefits of $88 million. This
increase is primarily attributable to a $125 million increase in the closed
block related policyholder dividend obligation, a $13 million increase in future
policy benefits commensurate with the increase in immediate annuity premiums and
a $25 million increase resulting from the application of SOP 03-1. Partially
offsetting these increases is a $75 million decrease in policyholder benefits
partially attributable
50
to lower activity associated with the run off of the Company's closed block of
business and the primary driver of the current period impact for SOP 03-1 is an
increase in the fair value of the underlying assets associated with these
contracts. Higher DAC amortization of $39 million also offset the decrease in
total expenses. Higher DAC amortization is the result of accelerated
amortization resulting from improvement in net investment gains (losses) and the
update of management's assumptions used to determine estimated gross margins
partially offset by the prior 2003 period charge related to certain improperly
deferred expenses at New England Financial of $48 million. Also offsetting the
decrease in total expenses is an increase of $24 million in broker/dealer and
other subsidiaries expenses commensurate with the increase in sales volume.
51
AUTO & HOME
The following table presents consolidated financial information for the
Auto & Home segment for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 740 $ 735 $ 2,211 $ 2,168
Net investment income 40 39 130 119
Other revenues 8 10 23 23
Net investment gains (losses) (1) 2 (6) (4)
------------ ------------ ------------ ------------
Total revenues 787 786 2,358 2,306
------------ ------------ ------------ ------------
EXPENSES
Policyholder benefits and claims 552 543 1,583 1,604
Policyholder dividends 1 -- 1 --
Other expenses 194 187 585 572
------------ ------------ ------------ ------------
Total expenses 747 730 2,169 2,176
------------ ------------ ------------ ------------
Income before provision (benefit) for income taxes 40 56 189 130
Provision (benefit) for income taxes 7 13 42 19
------------ ------------ ------------ ------------
Net income $ 33 $ 43 $ 147 $ 111
============ ============ ============ ============
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2003 -- AUTO & HOME
Auto & Home, operating through Metropolitan Property and Casualty
Insurance Company, and its subsidiaries, offers personal lines property and
casualty insurance directly to employees at the workplace, as well as through a
variety of retail distribution channels. Auto & Home primarily sells auto
insurance and homeowners insurance.
Net income decreased by $10 million, or 23%, to $33 million for the three
months ended September 30, 2004 from $43 million for the comparable 2003 period.
This decrease is primarily attributable to an increase in catastrophe losses of
$58 million, net of income taxes, in the three months ended September 30, 2004
from the comparable 2003 period as a result of hurricanes Charley, Frances,
Jeanne and Ivan which struck the Southeastern United States in August and
September 2004. This amount reflects catastrophe losses of approximately $50
million, net of income taxes, above expected levels for the quarter. The storms
resulted in catastrophe losses of approximately $66 million, net of income
taxes, in the third quarter of 2004. Partially offsetting this increase is a
benefit of $37 million, net of income taxes, from an improved non-catastrophe
combined ratio, which is driven by improvement in automobile and homeowners
non-catastrophe claim frequencies and a $13 million, net of income taxes, net
favorable change in claim development related to the comparable 2003 period.
Total revenues, excluding net investment gains (losses), increased by $4
million, or 1%, to $788 million for the three months ended September 30, 2004
from $784 million for the comparable 2003 period. This increase is primarily
attributable to a $5 million increase in premiums, resulting primarily from an
increase in the average earned premium from continued rate increases.
Total expenses increased by $17 million, or 2%, to $747 million for the
three months ended September 30, 2004 from $730 million for the comparable 2003
period. This increase is largely the result of an $89 million increase in
catastrophes, partially offset by a $78 million decline in non-catastrophe
policyholder benefits and claims resulting from improved automobile and
homeowners claim frequencies and a favorable change in claims development
related to prior accident years. The combined ratio excluding catastrophes
declined to an unusually low level of 84.8% for the three months ended September
30, 2004 versus 95.9 % for the comparable 2003 period.
52
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2003 -- AUTO & HOME
Net income increased by $36 million, or 32%, to $147 million for the nine
months ended September 30, 2004 from $111 million for the comparable 2003
period. This increase is primarily attributable to an improved non-catastrophe
combined ratio, which resulted in a benefit of $56 million, net of income taxes,
favorable claim development related to prior accident years of $45 million, net
of income taxes, and an increase in net investment income of $7 million, net of
income taxes. Partially offsetting these favorable drivers are increased
catastrophe losses of $69 million, net of income taxes, of which $66 million is
related to the four hurricanes that struck the Southeastern United States in
August and September of 2004.
Total revenues, excluding net investment gains (losses), increased by $54
million, or 2%, to $2,364 million for the nine months ended September 30, 2004
from $2,310 million for the comparable 2003 period. This increase is primarily
attributable to a $43 million increase in premiums, which is largely the result
of an increase in the average earned premium resulting from continued rate
increases. In addition, an $11 million increase in net investment income is
largely attributable to growth in the underlying asset base.
Total expenses decreased by $7 million, or less than 1%, to $2,169 for the
nine months ended September 30, 2004 from $2,176 million for the comparable 2003
period. This decrease is the result of an improvement in policyholder benefits
and claims due to a favorable change of $69 million in prior year claim
development, as well as a decrease in expenses of $86 million resulting from an
improved non-catastrophe combined ratio primarily attributable to lower
automobile and homeowners claim frequencies. These favorable changes in expenses
are partially offset by an increase in losses from catastrophes of $106 million
and increased expenses related to growth in the business of $39 million. The
combined ratio excluding catastrophes declined to 89.8% for the nine months
ended September 30, 2004 from 97.6 % for the comparable 2003 period.
53
INTERNATIONAL
The following table presents consolidated financial information for the
International segment for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 445 $ 445 $ 1,262 $ 1,230
Universal life and investment-type product policy fees 91 70 260 192
Net investment income 151 119 411 373
Other revenues 2 20 14 54
Net investment gains (losses) 3 8 26 7
------------ ------------ ------------ ------------
Total revenues 692 662 1,973 1,856
------------ ------------ ------------ ------------
EXPENSES
Policyholder benefits and claims 437 398 1,158 1,042
Interest credited to policyholder account balances 37 34 106 107
Policyholder dividends 9 12 36 39
Other expenses 151 156 420 472
------------ ------------ ------------ ------------
Total expenses 634 600 1,720 1,660
------------ ------------ ------------ ------------
Income from continuing operations before provision
for income taxes 58 62 253 196
Provision for income taxes 20 11 79 19
------------ ------------ ------------ ------------
Income from continuing operations 38 51 174 177
Cumulative effect of a change in accounting, net of income taxes -- -- (30) --
------------ ------------ ------------ ------------
Net income $ 38 $ 51 $ 144 $ 177
============ ============ ============ ============
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2003 -- INTERNATIONAL
International provides life insurance, accident and health insurance,
annuities and savings and retirement products to both individuals and groups.
The Company focuses on emerging markets in the Latin America and Asia/Pacific
regions.
Income from continuing operations decreased by $13 million, or 26%, to $38
million for the three months ended September 30, 2004 from $51 million for the
comparable 2003 period. The prior year period includes $12 million of income
from continuing operations related to the Company's Spanish operations which
were sold during 2003. Business growth in several countries is more than offset
by the current period impact of the application of SOP 03-1, which resulted in a
$9 million increase, net of income taxes, in policyholder liabilities in Mexico.
The primary driver of the current period impact is an increase in the fair value
of the underlying assets associated with these contracts.
Total revenues, excluding net investment gains (losses), increased by $35
million, or 5%, to $689 million for the three months ended September 30, 2004
from $654 million for the comparable 2003 period. The prior year period includes
$62 million of revenues related to the Company's Spanish operations which were
sold during 2003. Excluding the sale of these operations, revenues increased by
$97 million, or 16%. The operations in Chile and Mexico contributed increases to
total revenues of $35 million and $18 million, respectively. Higher revenues in
these countries are primarily due to growth in the businesses, as well as higher
net investment income, which resulted from an increase in the invested asset
base and higher investment yields. The Company's South Korean and Taiwan
operations also increased revenues by $27 million and $11 million, respectively,
primarily due to increased new sales and renewal business. Changes in foreign
currency exchange rates contributed approximately $8 million to the period over
period increase in revenues.
Total expenses increased by $34 million, or 6%, to $634 million for the
three months ended September 30, 2004 from $600 million for the comparable 2003
period. The prior year period includes $55 million of expenses related to the
Company's Spanish operations, which were sold in 2003. Excluding the sales of
these operations, expenses increased by $89 million, or 16%. The Company's
Chilean, South Korean, and Taiwan operations had increases in expenses of $34
million, $19 million, and $11 million, respectively, commensurate with the
revenue growth discussed above. The Company's Mexican operation has increased
expenses of
54
$12 million, which is primarily attributable to the aforementioned impact of SOP
03-1 of $14 million, before income taxes. Changes in foreign currency exchange
rates contributed approximately $6 million to the period over period increase in
total expenses.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2003 -- INTERNATIONAL
Income from continuing operations decreased by $3 million, or 2%, to $174
million for the nine months ended September 30, 2004 from $177 million for the
comparable 2003 period. The prior year period includes a $62 million benefit,
net of income taxes, from the merger of the Mexican operations and a reduction
in policyholder liabilities resulting from a change in reserve methodology. The
prior year period also includes a $10 million benefit related to the Spanish
operations, which were sold in 2003. Excluding these items, income from
continuing operations increased by $69 million or 66%. A significant component
of this increase is attributable to the application of SOP 03-1 in the current
period, which resulted in a $25 million decrease, net of income taxes, in
policyholder liabilities in Mexico. The primary driver of the current period
impact is a decline in the fair value of the underlying assets associated with
these contracts. Additionally, a $19 million, net of income taxes, increase in
net investment gains is primarily due to the gain in the sale of the Spanish
operations. In addition, the 2004 period, includes $8 million of certain
tax-related benefits in South Korea. The remainder of the increase can be
attributed to business growth.
Total revenues, excluding net investment gains (losses), increased by $98
million, or 5%, to $1,947 million for the nine months ended September 30, 2004
from $1,849 million for the comparable 2003 period. The prior year period
includes $167 million of revenues related to the Spanish operations, which were
sold in 2003. Excluding the sales of these operations, revenues increased by
$265 million, or 16%. The Company's Chilean and Mexican operations increased
revenues by $68 million and $65 million, respectively, primarily due to growth
in the business, as well as improved investment earnings. The Company's
operations in South Korea and Taiwan also have increased revenues by $73 million
and $26 million, respectively, primarily due to increased new sales and renewal
business. Changes in foreign currency exchange rates contributed approximately
$3 million to the period over period increase in revenues.
Total expenses increased by $60 million, or 4%, to $1,720 million for the
nine months ended September 30, 2004 from $1,660 million for the comparable 2003
period. The prior year period includes expenses of $153 million related to the
Spanish operations, which were sold in 2003. The prior year period also includes
a $79 million benefit related to a reduction in the Mexican operation's
policyholder liabilities resulting from a change in reserve methodology,
partially offset by a related increase of $45 million in amortization of value
of business acquired. Excluding these items, expenses increased $179 million
over the prior year period. Expenses grew by $69 million, $62 million, $28
million, and $21 million for the operations in Chile, South Korea, Taiwan, and
Mexico, respectively, which is commensurate with the aforementioned revenue
growth discussed above. In addition, the 2004 period includes a $39 million
decrease in Mexico's policyholder liabilities resulting from the application of
SOP 03-1. Changes in foreign currency exchange rates contributed approximately
$3 million to the period over period increase in expenses. The remainder of the
increase in total expenses is primarily related to the ongoing investment in
infrastructure.
55
REINSURANCE
The following table presents consolidated financial information for the
Reinsurance segment for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 822 $ 579 $ 2,445 $ 1,719
Net investment income 144 122 410 353
Other revenues 14 11 41 35
Net investment gains (losses) (17) 5 35 6
------------ ------------ ------------ ------------
Total revenues 963 717 2,931 2,113
------------ ------------ ------------ ------------
EXPENSES
Policyholder benefits and claims 670 465 1,970 1,353
Interest credited to policyholder account balances 48 47 151 135
Policyholder dividends 5 5 15 16
Other expenses 218 170 691 516
------------ ------------ ------------ ------------
Total expenses 941 687 2,827 2,020
------------ ------------ ------------ ------------
Income before provision for income taxes 22 30 104 93
Provision for income taxes 8 11 36 32
------------ ------------ ------------ ------------
Income from continuing operations 14 19 68 61
Cumulative effect of a change in accounting, net of income taxes -- -- 5 --
------------ ------------ ------------ ------------
Net income $ 14 $ 19 $ 73 $ 61
============ ============ ============ ============
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2003 -- REINSURANCE
MetLife's Reinsurance segment is comprised of the life reinsurance
business of Reinsurance Group of America, Incorporated ("RGA"), a publicly
traded company, and MetLife's ancillary life reinsurance business. RGA has
operations in North America and has subsidiary companies, branch offices, or
representative offices in Australia, Barbados, Hong Kong, India, Ireland, Japan,
Mexico, South Africa, South Korea, Spain, Taiwan and the United Kingdom.
Income from continuing operations decreased by $5 million, or 26%, to $14
million for the three months ended September 30, 2004 from $19 million for the
comparable 2003 period. This decrease is primarily attributable to a negotiated
claim settlement in RGA's accident and health business, which is currently in
run-off, of $8 million for the third quarter 2004, net of income taxes and
minority interest. This decrease is partially offset by continued growth in
RGA's traditional life reinsurance operations. The $14 million decrease in net
investment gains (losses), net of income taxes, is primarily due to fluctuations
in the fair value of embedded derivatives in certain funds withheld treaties,
and is largely offset by a $9 million, net of income taxes, decrease in other
expenses related to the change in DAC associated with these treaties.
Total revenues, excluding net investment gains (losses), increased by $268
million, or 38%, to $980 million for the three months ended September 30, 2004
from $712 million for the comparable 2003 period. Approximately $129 million of
the increase during the third quarter of 2004 is a result of RGA's coinsurance
agreement with Allianz Life under which RGA assumed 100% of Allianz Life's U.S.
traditional life reinsurance business. This transaction closed during the fourth
quarter of 2003. The remaining balance of the increase in total revenues, or
$139 million, primarily relates to new premiums from facultative and automatic
treaties and renewal premiums on existing blocks of business in the U.S. and
certain international operations. Premium levels are significantly influenced by
large transactions, such as the Allianz Life transaction, and reporting
practices of ceding companies and, as a result, can fluctuate from period to
period.
Total expenses increased by $254 million, or 37%, to $941 million for the
three months ended September 30, 2004 from $687 million for the comparable 2003
period. This increase is primarily attributable to an increase of $205 million
in policyholder benefits and claims associated with RGA's growth in insurance in
force of approximately $500 billion, of which Allianz Life represents
approximately $300 billion, and a negotiated claim settlement in RGA's accident
and health business of $24 million. Additionally,
56
other expenses increased primarily due to an increase of $37 million in
allowances and related expenses on assumed reinsurance associated with RGA's
growth in premiums and insurance in force and an increase in minority interest
expense of $4 million.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2003 - REINSURANCE
Income from continuing operations increased $7 million, or 11%, to $68
million for the nine months ended September 30, 2004 from $61 million for the
comparable 2003 period. This increase is primarily attributable to strong
premium growth across all of RGA's geographical segments, which includes the
effect of the Allianz Life transaction. Additionally, this increase is
attributable to a $36 million, net of income taxes, or 16%, increase in net
investment income, which resulted primarily from growth in invested assets and a
$18 million, net of income taxes, increase in net investment gains. These
favorable variances are partially offset by higher minority interest expense as
MetLife's ownership in RGA decreased from 59% to 52% in the comparable periods
and the aforementioned loss from RGA's accident and health business.
Total revenues, excluding net investment gains (losses), increased by $789
million, or 37%, to $2,896 million for the nine months ended September 30, 2004
from $2,107 million for the comparable 2003 period. Approximately $387 million
of the increase during the nine months ended September 30, 2004 is the result of
the coinsurance agreement with Allianz Life. The remaining balance of the
increase in total revenues, relates to new premiums from facultative and
automatic treaties and renewal premiums on existing blocks of business in the
U.S. and certain international operations. Premium levels are significantly
influenced by large transactions, such as the Allianz Life transaction, and
reporting practices of ceding companies and as a result, can fluctuate from
period to period.
Total expenses increased by $807 million, or 40%, to $2,827 million for
the nine months ended September 30, 2004 from $2,020 million for the comparable
2003 period. This increase is primarily attributable to an increase of $617
million in policyholder benefits and claims, primarily associated with RGA's
growth in insurance in force of approximately $500 billion, including
approximately $300 billion of insurance in force associated with the Allianz
Life transaction. Additionally, other expenses increased primarily due to an
increase of $143 million in allowances and related expenses on assumed
reinsurance associated with RGA's growth in premiums and insurance in force. The
balance of the growth in other expenses is primarily due to the aforementioned
increase in minority interest expense.
57
CORPORATE & OTHER
The following table presents consolidated financial information for
Corporate & Other for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ (5) $ (4) $ (10) $ (13)
Universal life and investment-type product policy fees 2 -- 2 --
Net investment income 114 41 293 126
Other revenues 7 18 8 45
Net investment gains (losses) (7) (29) (68) (94)
------------ ------------ ------------ ------------
Total revenues 111 26 225 64
------------ ------------ ------------ ------------
EXPENSES
Policyholder benefits and claims -- 2 4 4
Other expenses 122 51 376 194
------------ ------------ ------------ ------------
Total expenses 122 53 380 198
------------ ------------ ------------ ------------
Income (Loss) from continuing operations before income tax
benefit (11) (27) (155) (134)
Provision for income taxes (33) (86) (199) (159)
------------ ------------ ------------ ------------
Income (Loss) from continuing operations 22 59 44 25
Income (Loss) from discontinued operations, net of income taxes (2) 20 128 46
------------ ------------ ------------ ------------
Income (Loss) before cumulative effect of change in accounting 20 79 172 71
Cumulative effect of a change in accounting, net of income taxes -- -- (1) --
------------ ------------ ------------ ------------
Net income $ 20 $ 79 $ 171 $ 71
============ ============ ============ ============
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2003 -- CORPORATE & OTHER
Corporate & Other contains the excess capital not allocated to the
business segments, as well as expenses associated with the resolution of certain
legal proceedings, and interest expense related to the majority of the Company's
outstanding debt. In addition, the operations of the Company's ancillary asset
management business are reported in Corporate & Other.
Income from continuing operations decreased by $37 million, or 63%, to $22
million for the three months ended September 30, 2004 from $59 million for the
comparable 2003 period. The 2004 period includes a $9 million benefit from a
revision of the estimate of income taxes for 2003. The 2003 period includes a
$28 million benefit, net of income taxes, from the reduction of a previously
established liability related to the Company's race-conscious underwriting
settlement, as well as a $36 million benefit from a revision of the estimate of
income taxes for 2002. Excluding the impact of these items, income from
continuing operations increased by $18 million in the three months ended
September 30, 2004 from the comparable 2003 period. The increase in income from
continuing operations in 2004 over the prior year period is primarily
attributable to an increase in net investment income of $46 million net of
income taxes and net investment gains (losses) of $14 million, net of income
taxes, which is partially offset by increases of $11 million and $11 million in
legal fees and interest expense, respectively, also net of income taxes. The
remaining change of $20 million is a result of a change in the Company's income
taxes.
Total revenues, excluding net investment gains (losses), increased by $63
million, or 115%, to $118 million for the three months ended September 30, 2004
from $55 million for the comparable 2003 period. This increase is mainly
attributable to increases in income from fixed maturity securities, mortgage
loans on real estate and equity securities.
Total expenses increased by $69 million, or 130%, to $122 million for the
three months ended September 30, 2004 from $53 million for the comparable 2003
period. Total expenses in the 2003 period include a $44 million benefit from a
reduction of a previously established liability associated with the Company's
race-conscious underwriting settlement. In addition, other expenses increased by
$29 million primarily as a result of the issuance of senior notes at the end of
2003 and during 2004, as well as higher legal fees of $18 million, which is
partially offset by lower interest expense on surplus notes of $11 million.
58
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2003 -- CORPORATE & OTHER
Income from continuing operations increased by $19 million, or 76%, to $44
million for the nine months ended September 30, 2004 from $25 million for the
comparable 2003 period. The 2004 period includes a $105 million benefit
associated with the resolution of issues relating to the Internal Revenue
Service's audit of Metropolitan Life's and its subsidiaries' tax returns for the
years 1997-1999. Also included in the 2004 period is an expense related to a $32
million, net of income taxes, contribution to the MetLife Foundation and a $9
million benefit from a revision of the estimate of income taxes for 2003. The
nine months ended September 30, 2003 include a $92 million benefit, net of
income taxes, from the reduction of a previously established liability related
to the Company's race-conscious underwriting settlement, as well as a $36
million benefit from a revision of the estimate of income taxes for 2002.
Excluding the impact of these items, income from continuing operations increased
by $65 million in the nine months ended September 30, 2004 from the comparable
2003 period. The increase in earnings in 2004 over the prior year period is
primarily attributable to an increase in net investment income of $106 million,
net of income taxes and net investment gains (losses) of $17 million, net of
income taxes. This is partially offset by $11 million, $10 million and $7
million in higher legal fees, interest credited on bankholder deposits and
interest on debt, respectively, also net of income taxes. The remaining change
of $30 million is a result of a change in the Company's income taxes.
Total revenues, excluding net investment gains (losses), increased by $135
million, or 85%, to $293 million for the nine months ended September 30, 2004
from $158 million for the comparable 2003 period. The increase in revenue is
primarily attributable to increases in income on fixed maturity securities,
mortgage loans on real estate and equity securities.
Total expenses increased by $182 million, or 92%, to $380 million for the
nine months ended September 30, 2004 from $198 million for the comparable 2003
period. The nine month period ended September 30, 2004 includes a $50 million
contribution to the MetLife Foundation, partially offset by a $22 million
reduction of a liability associated with the resolution of all issues relating
to the Internal Revenue Service's audit of Metropolitan Life's and its
subsidiaries' tax returns for the years 1997-1999. The nine month period ended
September 30, 2003 includes a $144 million benefit from a reduction of a
previously established liability associated with the Company's race-conscious
underwriting settlement. Excluding these items, other expenses increased by $10
million for the nine months ended September 30, 2004. This increase is
attributable to higher interest expense of $23 million as a result of the
issuance of senior notes at the end of 2003 and during 2004, higher legal
expenses of $17 million in the 2004 period, as well as higher interest credited
to bank deposits of $14 million as a result of growth in MetLife Bank's
business. This increase is partially offset by a decrease of $34 million from
lower interest expense on surplus notes.
59
LIQUIDITY AND CAPITAL RESOURCES
For purposes of this discussion, the terms "MetLife" or the "Company"
refer to MetLife, Inc., a Delaware corporation (the "Holding Company"), and its
subsidiaries, including Metropolitan Life Insurance Company ("Metropolitan
Life").
THE COMPANY
CAPITAL
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; similar rules apply to each of the Company's domestic insurance
subsidiaries. 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 to take various actions against, insurers whose
total adjusted capital does not exceed certain RBC levels. At December 31, 2003,
Metropolitan Life's and each of the Holding Company's domestic 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
Codification of Statutory Accounting Principles ("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 New York Insurance Department (the "Department") required
adoption of Codification with certain modifications for the preparation of
statutory financial statements of insurance companies domiciled in New York
effective January 1, 2001. Effective December 31, 2002, the Department adopted a
modification to its regulations to be consistent with Codification with respect
to the admissibility of deferred income taxes by New York insurers, subject to
certain limitations. The adoption of Codification, as modified by the
Department, did not adversely affect Metropolitan Life's statutory capital and
surplus. Further modifications by state insurance departments may impact the
effect of Codification on the statutory capital and surplus of Metropolitan Life
and the Holding Company's other insurance subsidiaries.
ASSET/LIABILITY MANAGEMENT
The Company actively manages its assets using an approach that balances
quality, diversification, asset/liability matching, liquidity and investment
return. The goals of the investment process are to optimize, net of income
taxes, risk-adjusted investment income and risk-adjusted total return while
ensuring that the assets and liabilities are managed on a cash flow and duration
basis. The asset/liability management process is the shared responsibility of
the Portfolio Management Unit, the Business Finance Asset/Liability Management
unit, and the operating business segments under the supervision of the various
product line specific Asset/Liability Management Committees ("A/LM Committees").
The A/LM Committees' duties include reviewing and approving target portfolios on
a periodic basis, establishing investment guidelines and limits and providing
oversight of the asset/liability management process.
The Company establishes target asset portfolios for each major insurance
product, which represent the investment strategies used to profitably fund its
liabilities within acceptable levels of risk. These strategies include
objectives for effective duration, yield curve sensitivity, convexity,
liquidity, asset sector concentration and credit quality. In executing these
asset/liability-matching strategies, management regularly re-evaluates the
estimates used in determining the approximate amounts and timing of payments to
or on behalf of policyholders for insurance liabilities. Many of these estimates
are inherently subjective and could impact the Company's ability to achieve its
asset/liability management goals and objectives.
The Company's liquidity position (cash and cash equivalents and short-term
investments, excluding securities lending) was approximately $5 billion for both
periods at September 30, 2004 and December 31, 2003, respectively. Liquidity
needs are determined from a rolling 12-month forecast by portfolio and are
monitored daily. Asset mix and maturities are adjusted based on forecast. Cash
flow testing and stress testing provide additional perspectives on liquidity.
60
LIQUIDITY
Liquidity refers to a company's ability to generate adequate amounts of
cash to meet its needs. The Company believes that it has sufficient liquidity to
fund its cash needs under various scenarios that include the potential risk of
early contractholder and policyholder withdrawal. The Company includes
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 funds liabilities) sold to
employee benefit plan sponsors. Certain of these provisions prevent the customer
from making withdrawals prior to the maturity date of the product.
In the event of significant unanticipated cash requirements beyond normal
liquidity, the Company has multiple liquidity alternatives available based on
market conditions and the amount and timing of the liquidity need. These options
include cash flow from operations (insurance premiums, annuity considerations
and deposit funds), borrowings under committed credit facilities, secured
borrowings, the ability to issue commercial paper, long-term debt, capital
securities, common equity and, if necessary, the sale of liquid long-term
assets.
The Company's ability to sell investment assets could be limited by
accounting rules including rules relating to the intent and ability to hold
impaired securities until the market value of those securities recovers.
In extreme circumstances, all general account assets within a statutory
legal entity are available to fund any obligation of the general account within
that legal entity.
LIQUIDITY SOURCES
Cash Flow from Operations. The Company's principal cash inflows from its
insurance activities come from insurance premiums, annuity considerations and
deposit funds. A primary liquidity concern with respect to these cash inflows is
the risk of early contractholder and policyholder withdrawal. The Company
includes 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 come
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 market volatilities.
The Company closely monitors and manages these risks through its credit risk
management process.
Liquid Assets. An integral part of the Company's liquidity management is
the amount of liquid assets it holds. Liquid assets include cash, cash
equivalents, short-term investments and marketable fixed maturity and equity
securities. Liquid assets exclude assets relating to securities lending and
dollar roll activities. At September 30, 2004 and December 31, 2003, the Company
had $132 billion and $124 billion in liquid assets, respectively.
Global Funding Sources. Liquidity is also provided by a variety of both
short and long-term instruments, including repurchase agreements, commercial
paper, medium and long-term debt, capital securities and stockholders' equity.
The diversification of the Company's funding sources enhances funding
flexibility, limits dependence on any one source of funds and generally lowers
the cost of funds.
At September 30, 2004 and December 31, 2003, the Company had $1.6 billion
and $3.6 billion in short-term debt outstanding and $6.7 billion and $5.7
billion in long-term debt outstanding, respectively.
MetLife Funding, Inc., a subsidiary of Metropolitan Life ("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 September 30, 2004 and
December 31, 2003, MetLife Funding had a tangible net worth of $10.8 million.
MetLife Funding raises funds from various funding sources and uses the proceeds
to extend loans, through MetLife Credit Corp., another subsidiary of
Metropolitan Life, 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 September 30, 2004 and December 31, 2003, MetLife Funding had total
outstanding liabilities, including accrued interest payable, of $766 million and
$1,042 million, respectively, consisting primarily of commercial paper.
61
Credit Facilities. The Company maintains committed and unsecured credit
facilities aggregating $2.8 billion ($1.1 billion expiring in 2005, $175 million
expiring in 2006 and $1.5 billion expiring in 2009). If these facilities were
drawn upon, they would bear interest at varying rates in accordance with the
respective agreements. The facilities can be used for general corporate purposes
and also as back-up lines of credit for the Company's commercial paper programs.
At September 30, 2004, the Company had drawn approximately $53 million under the
facilities expiring in 2005 at interest rates ranging from 5.32% to 6.18% and
approximately $50 million under a facility expiring in 2006 at an interest rate
of 2.34%.
LIQUIDITY USES
Insurance Liabilities. 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 aforementioned products, as well as payments for policy
surrenders, withdrawals and loans.
Investment and Other. Additional cash outflows include those related to
obligations of securities lending and dollar roll activities, investments in
real estate, limited partnerships and joint ventures, as well as
litigation-related liabilities.
The following table summarizes the Company's major contractual obligations as of
September 30, 2004:
LESS THAN THREE TO FIVE MORE THAN FIVE
CONTRACTUAL OBLIGATIONS TOTAL THREE YEARS YEARS YEARS
------------------------------------------ ------------ ------------ ------------- --------------
(DOLLARS IN MILLIONS)
Other long-term liabilities (1) (2) $ 79,183 $ 10,305 $ 6,021 $ 62,857
Long-term debt (3) 6,645 2,090 59 4,496
Partnership investments (4) 1,350 1,350 -- --
Operating leases (5) 1,110 400 229 481
Mortgage commitments 2,494 2,494 -- --
Shares subject to mandatory redemption (3) 350 -- -- 350
Capital leases 65 22 23 20
------------ ------------ ------------ ------------
Total $ 91,197 $ 16,661 $ 6,332 $ 68,204
============ ============ ============ ============
- ----------
(1) Other long-term liabilities include various investment-type products with
contractually scheduled maturities including guaranteed interest
contracts, structured settlements, pension closeouts and certain annuity
policies.
(2) Other long-term liabilities include benefit and claim liabilities for
which the Company believes the amount and timing of the payment is
essentially fixed and determinable. Such amounts generally relate to (i)
policies or contracts where the Company is currently making payments and
will continue to do so until the occurrence of a specific event such as
death and (ii) life insurance and property and casualty incurred and
reported claims. Liabilities for future policy benefits of approximately
$71 billion and policyholder account balances of approximately $76 billion
at September 30, 2004, have been excluded from this table. Amounts
excluded from the table are generally comprised of policies or contracts
where (i) the Company is not currently making payments and will not make
payments in the future until the occurrence of an insurable event, such as
death or disability or (ii) the occurrence of a payment triggering event,
such as a surrender of a policy or contract, is outside of the control of
the Company. The determination of these liability amounts and the timing
of payment are not reasonably fixed and determinable since the insurable
event or payment triggering event has not yet occurred. Such excluded
liabilities primarily represent future policy benefits of approximately
$60 billion relating to traditional life, health and disability insurance
products and policyholder account balances of approximately $29 billion
relating to deferred annuities, approximately $22 billion for group and
universal life products and approximately $13 billion for funding
agreements without fixed maturity dates. Significant uncertainties
relating to these liabilities include mortality, morbidity, expenses,
persistency, investment returns, inflation and the timing of payments. See
"The Company -- Asset/Liability Management."
62
Amounts included in other long-term liabilities reflect estimated
cash payments to be made to policyholders. Such cash outflows
reflect adjustments for the estimated timing of mortality,
retirement, and other appropriate factors, but are undiscounted with
respect to interest. The amount shown in the more than five years
column represents the sum of cash flows, also adjusted for the
estimated timing of mortality, retirement and other appropriate
factors and undiscounted with respect to interest, extending for
more than 100 years from the present date. As a result, the sum of
the cash outflows shown for all years in the table of $76.3 billion
exceeds the corresponding liability amounts of $31.7 billion
included in the consolidated financial statements at September 30,
2004. The liability amount in the consolidated financial statements
reflects the discounting for interest as well as adjustments for the
timing of other factors as described above.
(3) Amounts differ from the balances presented on the consolidated
balance sheets. The amounts above do not include related premiums
and discounts or capital leases which are presented separately.
(4) The Company anticipates that these amounts could be invested in
these partnerships any time over the next five years, but are
presented in the current period, as the timing of the fulfillment of
the obligation cannot be predicted.
(5) Excluded from operating leases in the above contractual obligations
table is $120 million, $28 million, $25 million, and $67 million for
total, less than three years, three to five years, and more than
five years, respectively, related to discontinued operations
pertaining to SSRM.
As of September 30, 2004, and relative to its liquidity program, the
Company had no material (individually or in the aggregate) purchase obligations
or material (individually or in the aggregate) unfunded pension or other
postretirement benefit obligations due within one year.
On April 11, 2003, an affiliate of the Company elected not to make future
payments required by the terms of a non-recourse loan obligation. The book value
of this loan was approximately $16 million at September 30, 2004. The Company's
exposure under the terms of the applicable loan agreement is limited solely to
its investment in certain securities held by an affiliate.
Letters of Credit. At September 30, 2004 and December 31, 2003, the
Company had outstanding approximately $865 million and $828 million,
respectively, 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, these amounts do not necessarily
reflect the actual future cash funding requirements.
Support Agreements. Metropolitan Life entered into a net worth maintenance
agreement with New England Life Insurance Company ("NELICO") at the time
Metropolitan Life merged with New England Mutual Life Insurance Company. Under
the agreement, Metropolitan Life agreed, without limitation as to the amount, to
cause NELICO to have a minimum capital and surplus of $10 million, total
adjusted capital at a level not less than the company action level RBC, as
defined by state insurance statutes, and liquidity necessary to enable it to
meet its current obligations on a timely basis. At September 30, 2004, the
capital and surplus of NELICO was in excess of the minimum capital and surplus
amount referenced above, and its total adjusted capital was in excess of the
most recent referenced RBC-based amount calculated at December 31, 2003.
In connection with the Company's acquisition of GenAmerica Financial
Corporation ("GenAmerica"), Metropolitan Life entered into a net worth
maintenance agreement with General American Life Insurance Company ("General
American"). Under the agreement, Metropolitan Life agreed, without limitation as
to amount, to cause General American to have a minimum capital and surplus of
$10 million, total adjusted capital at a level not less than 180% of the company
action level RBC, as defined by state insurance statutes, and liquidity
necessary to enable it to meet its current obligations on a timely basis. The
agreement was subsequently amended to provide that, for the five year period
from 2003 through 2007, total adjusted capital must be maintained at a level not
less than 200% of the company action level RBC, as defined by state insurance
statutes. At September 30, 2004, the capital and surplus of General American was
in excess of the minimum capital and surplus amount referenced above, and its
total adjusted capital was in excess of the most recent referenced RBC-based
amount calculated at December 31, 2003.
Metropolitan Life has also entered into arrangements for the benefit of
some of its other subsidiaries and affiliates to assist such subsidiaries and
affiliates in meeting various jurisdictions' regulatory requirements regarding
capital and surplus and security deposits. In addition, Metropolitan Life has
entered into a support arrangement with respect to a subsidiary under which
Metropolitan Life may become responsible, in the event that the subsidiary
becomes the subject of insolvency proceedings, for the payment of certain
reinsurance recoverables due from the subsidiary to one or more of its cedents
in accordance with the terms and conditions of the applicable reinsurance
agreements.
63
General American has agreed to guarantee the contractual obligations of
its subsidiary, Paragon Life Insurance Company, and certain contractual
obligations of its former subsidiaries, MetLife Investors Insurance Company
("MetLife Investors"), First MetLife Investors Insurance Company and MetLife
Investors Insurance Company of California. In addition, General American has
entered into a contingent reinsurance agreement with MetLife Investors. Under
this agreement, in the event that MetLife Investors' statutory capital and
surplus is less than $10 million or total adjusted capital falls below 150% of
the company action level RBC, as defined by state insurance statutes, General
American would assume as assumption reinsurance, subject to regulatory approvals
and required consents, all of MetLife Investors' life insurance policies and
annuity contract liabilities. At September 30, 2004, the capital and surplus of
MetLife Investors was in excess of the minimum capital and surplus amount
referenced above, and its total adjusted capital was in excess of the most
recent referenced RBC-based amount calculated at December 31, 2003.
Management does not anticipate that these arrangements will place any
significant demands upon the Company's liquidity resources.
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 except with respect to certain matters. 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 consolidated net income or cash flows in
particular quarterly or annual periods.
Based on management's analysis of its expected cash inflows from operating
activities, the dividends it receives from subsidiaries, including Metropolitan
Life, that are permitted to be paid without prior insurance regulatory approval
and its portfolio of liquid assets and other anticipated cash flows, management
believes there will be sufficient liquidity to enable the Company to make
payments on debt, make cash dividend payments on its common stock, pay all
operating expenses, and meet its cash needs. The nature of the Company's diverse
product portfolio and customer base lessens the likelihood that normal
operations will result in any significant strain on liquidity.
Consolidated cash flows. Net cash provided by operating activities was
$5,254 million and $4,947 million for the nine months ended September 30, 2004
and 2003, respectively. The $307 million increase in operating cash flows in
2004 over the comparable 2003 period is primarily attributable to continued
growth in the group life, disability and long-term care businesses. The late
2003 acquisition of John Hancock's group life business and the acquisition of
TIAA-CREF's long-term care business also contributed to growth in the 2004
period. In addition, an increase in MetLife Bank's customer deposits,
particularly in personal and business savings accounts, contributed to the
increase in operating cash flows.
Net cash used in investing activities was $9,365 million and $12,277
million for the nine months ended September 30, 2004 and 2003, respectively. The
$2,912 million decrease in net cash used in investing activities in 2004 over
the comparable 2003 period is primarily due to additional proceeds from the sale
of fixed maturities and real estate, a decrease in cash used for the purchase of
fixed maturities, and a decrease in cash used for the purpose of short-term
investments. In addition, the 2004 period includes proceeds associated with the
sale of Sears Tower in April 2004. These items were partially offset by a
decrease in the amount of securities lending cash collateral invested in
connection with the program and an increase in mortgage loans funded in 2004
over the comparable 2003 period.
Net cash provided by financing activities was $4,009 million and $10,379
million for the nine months ended September 30, 2004 and 2003, respectively. The
$6,370 million decrease in net cash provided by financing activities in 2004
over the comparable 2003 period is primarily attributable to an increase in
repayments of short-term debt related to dollar roll activity and a decrease in
net cash provided by policyholder account balances. In addition, the 2004 period
includes the purchase of treasury stock under the authorization of the Company's
common stock repurchase program. The 2003 period included cash received from the
settlement of
64
common stock purchase contracts. These items were somewhat offset by an increase
in long-term debt issued in connection with the Holding Company's shelf
registration.
THE HOLDING COMPANY
CAPITAL
Restrictions and Limitations on Bank Holding Companies and Financial
Holding Companies -- Capital. MetLife, Inc. and its insured depository
institution subsidiary, MetLife Bank, N.A. ("MetLife Bank"), a national bank,
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 September 30, 2004, MetLife, Inc. and MetLife Bank were in
compliance with the aforementioned guidelines.
LIQUIDITY
Liquidity is managed to preserve stable, reliable and cost-effective
sources of cash to meet all current and future financial obligations and is
provided by a variety of sources, including a portfolio of liquid assets, a
diversified mix of short and long-term funding sources from the wholesale
financial markets and the ability to borrow through committed credit facilities.
The Holding Company is an active participant in the global financial markets
through which it obtains a significant amount of funding. These markets, which
serve as cost-effective sources of funds, are critical components of the Holding
Company's liquidity management. Decisions to access these markets are based upon
relative costs, prospective views of balance sheet growth and a targeted
liquidity profile. A disruption in the financial markets could limit the Holding
Company's access to liquidity.
The Holding Company's ability to maintain regular access to competitively
priced wholesale funds is fostered by its current debt ratings from the major
credit rating agencies. Management views its capital ratios, credit quality,
stable and diverse earnings streams, diversity of liquidity sources and its
liquidity monitoring procedures as critical to retaining high credit ratings.
Liquidity is monitored through the use of internal liquidity risk metrics,
including the composition and level of the liquid asset portfolio, timing
differences in short-term cash flow obligations, access to the financial markets
for capital and debt transactions and exposure to contingent draws on the
Holding Company's liquidity.
LIQUIDITY SOURCES
Dividends. The primary source of the Holding Company's liquidity is
dividends it receives from Metropolitan Life. Under the New York Insurance Law,
Metropolitan Life is permitted, without prior insurance regulatory clearance, to
pay a cash 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 end 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 cash dividend to the Holding Company in excess of the lesser
of such two amounts only if it files notice of its intention to declare such a
dividend and the amount thereof with the New York Superintendent of Insurance
(the "Superintendent") and the Superintendent does not disapprove the
distribution. Under the New York Insurance Law, the Superintendent has broad
discretion in determining whether the financial condition of a stock life
insurance company would support the payment of such dividends to its
stockholders. The 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 Holding 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. In
addition, the Holding Company receives dividends from its other subsidiaries.
The Holding Company's other insurance subsidiaries are also subject to similar
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 insurance regulators of various states in
which the Company conducts business, differ in certain respects from accounting
principles used in financial statements prepared in conformity with GAAP. The
significant differences relate to the treatment of DAC, certain deferred income
taxes, required investment reserves, reserve calculation assumptions, goodwill
and surplus notes.
65
Liquid Assets. An integral part of the Holding Company's liquidity
management is the amount of liquid assets that it holds. Liquid assets include
cash, cash equivalents, short-term investments and marketable fixed maturity and
equity securities. Liquid assets exclude assets relating to securities lending
and dollar roll activities. At September 30, 2004 and December 31, 2003, the
Holding Company had $1,829 million and $1,123 million in liquid assets,
respectively.
Global Funding Sources. Liquidity is also provided by a variety of both
short and long-term instruments, including repurchase agreements, commercial
paper, medium and long-term debt, capital securities and stockholders' equity.
The diversification of the Holding Company's funding sources enhances funding
flexibility and limits dependence on any one source of funds, and generally
lowers the cost of funds.
At September 30, 2004, the Holding Company had no short-term debt
outstanding as compared to $106 million at December 31, 2003. At September 30,
2004 and December 31, 2003, the Holding Company had $5.1 billion and $4.0
billion in long-term debt outstanding, respectively.
As of September 30, 2004, the Holding Company has issued an aggregate
principal amount of senior debt of $1.1 billion under the $5.0 billion shelf
registration statement filed with the U.S. Securities and Exchange Commission
("SEC") during the first quarter of 2004. The shelf registration will permit the
registration and issuance of a wide range of debt and equity securities.
Approximately $44 million of registered but unissued securities remaining from
the Company's 2001 $4.0 billion shelf registration statement was carried over to
this shelf registration.
The Holding Company issued senior debt in the aggregate principal amount
of $2.95 billion under the 2001 $4.0 billion shelf registration statement. In
addition, under this shelf registration statement, the Holding Company
remarketed debentures in the aggregate principal amount of $1.01 billion in
connection with the issuance of equity security units in February of 2003.
The following table summarizes the Holding Company's senior debt issuances:
ISSUE DATE PRINCIPAL INTEREST RATE MATURITY
- ---------- --------- ------------- --------
(DOLLARS IN MILLIONS)
June 2004 (1) $350 5.50% 2014
June 2004 (1) $750 6.38% 2034
November 2003 $500 5.00% 2013
November 2003 $200 5.88% 2033
December 2002 $400 5.38% 2012
December 2002 $600 6.50% 2032
November 2001 $500 5.25% 2006
November 2001 $750 6.13% 2011
- ----------
(1) On July 23, 2004, the Holding Company reopened its June 3, 2004 senior
notes offering and increased the principal outstanding on the 5.50% notes
due June 2014, from $200 million to $350 million and on the 6.38% notes
due June 2034, from $400 million to $750 million.
Other sources of the Holding Company's liquidity include programs for
short and long-term borrowing, as needed, arranged through Metropolitan Life.
Credit Facilities. The Holding Company maintains committed and unsecured
credit facilities aggregating $2.5 billion ($1 billion expiring in 2005 and $1.5
billion expiring in 2009) which it shares with Metropolitan Life and MetLife
Funding. Drawdowns under these facilities bear interest at varying rates stated
in the agreements. These facilities are primarily used for general corporate
purposes and as back-up lines of credit for the borrowers' commercial paper
programs. At September 30, 2004, neither the Holding Company, Metropolitan Life
nor MetLife Funding had drawn against these credit facilities.
66
LIQUIDITY USES
The primary uses of liquidity of the Holding Company include cash
dividends on common stock, service on debt, capital contributions to
subsidiaries, payment of general operating expenses and the repurchase of the
Holding Company's common stock.
Dividends. On September 28, 2004, the Holding Company's Board of Directors
approved an annual dividend for 2004 of $0.46 per share payable on December 13,
2004 to shareholders of record on November 5, 2004. The 2004 dividend represents
a 100% increase from the 2003 annual dividend of $0.23 per share. Future
dividend decisions will be determined by the Holding Company's Board of
Directors after taking into consideration factors such as the Holding Company's
current earnings, expected medium and long-term earnings, financial condition,
regulatory capital position, and applicable governmental regulations and
policies.
Capital Contributions to Subsidiaries. During the nine months ended
September 30, 2004 and 2003, the Holding Company contributed an aggregate of
$309 million and $127 million to various subsidiaries, respectively.
Share Repurchase. On October 26, 2004, the Holding Company's Board of
Directors authorized a $1 billion common stock repurchase program. This program
will begin after the completion of an earlier $1 billion repurchase program that
was announced on February 19, 2002. Under these authorizations, the Holding
Company may purchase its common stock from the MetLife Policyholder Trust, in
the open market and in privately negotiated transactions. The Holding Company
acquired 13,931,885 shares of common stock for approximately $496 million during
the nine months ended September 30, 2004. The Holding Company did not acquire
any shares of common stock during the nine months ended September 30, 2003.
At September 30, 2004, the Holding Company had approximately $213 million
remaining on its existing share repurchase program.
In the fourth quarter of 2003, RGA offered to the public 12,075,000 shares
of its common stock at $36.65 per share. MetLife and its affiliates purchased
3,000,000 shares of the common stock offered by RGA. As a result of this
offering, MetLife's ownership percentage of outstanding shares of RGA common
stock was reduced from approximately 59% at December 31, 2002 to approximately
52% at December 31, 2003. MetLife's ownership percentage of the outstanding
shares of RGA common stock is approximately 52% at September 30, 2004.
Support Agreements. In 2002, the Holding Company entered into a net worth
maintenance agreement with three of its insurance subsidiaries, MetLife
Investors Insurance Company, First MetLife Investors Insurance Company and
MetLife Investors Insurance Company of California. Under the agreements, the
Holding Company agreed, without limitation as to the amount, to cause each of
these subsidiaries to have a minimum capital and surplus of $10 million (or,
with respect to MetLife Investors Insurance Company of California, $5 million),
total adjusted capital at a level not less than 150% of the company action level
RBC, as defined by state insurance statutes, and liquidity necessary to enable
it to meet its current obligations on a timely basis. At September 30, 2004, the
capital and surplus of each of these subsidiaries is in excess of the minimum
capital and surplus amounts referenced above, and their total adjusted capital
was in excess of the most recent referenced RBC-based amount calculated at
December 31, 2003.
Based on management's analysis and comparison of its current and future
cash inflows from the dividends it receives from subsidiaries, including
Metropolitan Life, that are permitted to be paid without prior insurance
regulatory approval and its portfolio of liquid assets and other anticipated
cash flows, management believes there will be sufficient liquidity to enable the
Holding Company to make payments on debt, make cash dividend payments on its
common stock, contribute capital to its subsidiaries, pay all operating
expenses, and meet its cash needs.
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.
APPLICATION OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the Emerging Issues Task Force ("EITF") reached further
consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments ("EITF 03-1"). EITF 03-1 provides
accounting guidance regarding the determination of when an impairment of debt
and marketable equity securities and investments accounted for under the cost
method should be considered other-than-temporary and recognized in income. An
EITF 03-1 consensus reached in November
67
2003 also requires certain quantitative and qualitative disclosures for debt and
marketable equity securities classified as available-for-sale or
held-to-maturity under SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, that are impaired at the balance sheet date but for which
an other-than-temporary impairment has not been recognized. The Company has
complied with the disclosure requirements of EITF 03-1 which were effective
December 31, 2003. The accounting guidance of EITF 03-1 relating to the
recognition of investment impairment which was to be effective in the third
quarter of 2004 has been delayed pending the development of additional guidance.
The Company is actively monitoring the deliberations relating to this issue at
the Financial Accounting Standards Board ("FASB") and currently is unable to
determine the impact of EITF 03-1 on its unaudited interim condensed
consolidated financial statements.
In March 2004, the EITF reached consensus on Issue No. 03-6, Participating
Securities and the Two-Class Method under FASB Statement No. 128 ("EITF 03-6").
EITF 03-6 provides guidance in determining whether a security should be
considered a participating security for purposes of computing earnings per share
and how earnings should be allocated to the participating security. EITF 03-6,
which was effective for the Company in the second quarter of 2004, did not have
an impact on the Company's earnings per share calculations or amounts.
In March 2004, the EITF reached consensus on Issue No. 03-16, Accounting
for Investments in Limited Liability Companies ("EITF 03-16"). EITF 03-16
provides guidance regarding whether a limited liability company should be viewed
as similar to a corporation or similar to a partnership for purposes of
determining whether a noncontrolling investment should be accounted for using
the cost method or the equity method of accounting. EITF 03-16, which was
effective in the third quarter of 2004, did not have a material impact on the
Company's unaudited interim condensed consolidated financial statements.
Effective January 1, 2004, the Company adopted Statement of Position 03-1,
Accounting and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts ("SOP 03-1"). SOP 03-1
provides guidance on (i) the classification and valuation of long-duration
contract liabilities; (ii) the accounting for sales inducements; and (iii)
separate account presentation and valuation. In June 2004, the FASB released
Staff Position Paper No. 97-1, Situations in Which Paragraphs 17(b) and 20 of
FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale
of Investments, Permit or Require Accrual of an Unearned Revenue Liability ("FSP
97-1") which included clarification that unearned revenue liabilities should be
considered in determining the necessary insurance benefit liability required
under SOP 03-1. Since the Company had considered unearned revenue in determining
its SOP 03-1 benefit liabilities, FSP 97-1 did not impact its unaudited interim
condensed consolidated financial statements. In September 2004, the American
Institute of Certified Public Accountants issued Technical Practice Aids
relating to SOP 03-1. One of the Technical Practice Aids provided additional
guidance relating to the definition of policy assessments in determining benefit
liabilities. This new guidance, which the Company was required to apply
retroactively to January 1, 2004, resulted in an increase to net income
previously reported for the three months ended March 31, 2004 and June 30, 2004.
As a result of the adoption of SOP 03-1 and the Technical Practice Aids,
effective January 1, 2004, the Company decreased the liability for future
policyholder benefits for changes in the methodology relating to various
guaranteed death and annuitization benefits and for determining reserves for
certain universal life insurance contracts by $4 million, which has been
reported as a cumulative effect of a change in accounting. This amount is net of
corresponding changes in DAC and unearned revenue liability ("offsets") under
certain variable annuity and life contracts and income taxes. Certain other
contracts sold by the Company provide for a return through periodic crediting
rates, surrender adjustments or termination adjustments based on the total
return of a contractually referenced pool of assets owned by the Company. To the
extent that such contracts are not accounted for under the provisions of SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133") and not already credited to the contract account balance, under SOP 03-1
the change relating to the fair value of the referenced pool of assets is
recorded as a liability through policyholder benefits and claims. Prior to the
adoption of SOP 03-1, the Company recorded the change in such liability as other
comprehensive income. At adoption, this change decreased net income and
increased other comprehensive income by $63 million, net of income taxes, which
were recorded as cumulative effects of a change in accounting. Effective with
the adoption of SOP 03-1, costs associated with enhanced or bonus crediting
rates to contractholders must be deferred and amortized over the life of the
related contract using assumptions consistent with the amortization of DAC.
Since the Company followed a similar approach prior to adoption of SOP 03-1, the
provisions of SOP 03-1 relating to sales inducements had no significant impact
on the Company's unaudited interim condensed consolidated financial statements.
At adoption, the Company reclassified $155 million of ownership in its own
separate accounts from other assets to fixed maturities, equity securities and
cash and cash equivalents. This reclassification had no significant impact on
net income or other comprehensive income at adoption. In accordance with SOP
03-1's guidance for the reporting of certain separate accounts, at adoption, the
Company also reclassified $1.7 billion of separate account assets to general
account investments and $1.7 billion of separate account liabilities to future
policy benefits and policyholder account balances. This reclassification
decreased net income and increased other comprehensive income by $27 million,
net of income taxes, which were reported as cumulative effects of a change in
accounting. For the three months ended September 30, 2004, the impact of SOP
03-1 decreased the Company's net income by $45 million. For the nine months
ended
68
September 30, 2004 the impact of SOP 03-1, which includes retroactive
adjustments through June 30, 2004, and the effects of the cumulative adjustment
recorded in the first quarter of 2004, decreased the Company's net income by $57
million.
In December 2003, FASB revised SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits -- an Amendment of FASB Statements
No. 87, 88 and 106 ("SFAS 132(r)"). SFAS 132(r) retains most of the disclosure
requirements of SFAS 132 and requires additional disclosure about assets,
obligations, cash flows and net periodic benefit cost of defined benefit pension
plans and other defined postretirement plans. SFAS 132(r) was primarily
effective for fiscal years ending after December 15, 2003; however, certain
disclosures about foreign plans and estimated future benefit payments are
effective for fiscal years ending after June 15, 2004. The Company's adoption of
SFAS 132(r) on December 31, 2003 did not have a significant impact on its
consolidated financial statements since it only revised disclosure requirements.
In May 2004, the FASB issued FASB Staff Position ("FSP") No. 106-2, Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 ("FSP 106-2"), which provides
accounting guidance to a sponsor of a postretirement health care plan that
provides prescription drug benefits. The Company expects to receive subsidies on
prescription drug benefits beginning in 2006 under the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 based on the Company's
determination that the prescription drug benefits offered under certain
postretirement plans are actuarially equivalent to the benefits offered under
Medicare Part D. FSP 106-2 is effective for interim periods beginning after June
15, 2004 and provides for either retroactive application to the date of
enactment of the legislation or prospective application from the date of
adoption of FSP 106-2. Effective July 1, 2004, the Company adopted FSP 106-2
prospectively and the postretirement benefit plan assets and accumulated benefit
obligation were remeasured to determine the effect of the expected subsidies on
net periodic postretirement benefit cost. As a result, the accumulated
postretirement benefit obligation was reduced by $213 million and net periodic
postretirement benefit cost for the third quarter was reduced by $9 million.
Effective October 1, 2003, the Company adopted Statement 133
Implementation Issue No. B36, Embedded Derivatives: Modified Coinsurance
Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That
Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor
under Those Instruments ("Issue B36"). Issue B36 concluded that (i) a company's
funds withheld payable and/or receivable under certain reinsurance arrangements,
and (ii) a debt instrument that incorporates credit risk exposures that are
unrelated or only partially related to the creditworthiness of the obligor
include an embedded derivative feature that is not clearly and closely related
to the host contract. Therefore, the embedded derivative feature is measured at
fair value on the balance sheet and changes in fair value are reported in
income. The Company's adoption of Issue B36 increased (decreased) net income by
$(12) million and $1 million, net of amortization of DAC and income taxes, for
the three months and nine months ended September 30, 2004, respectively.
Effective July 1, 2003, the Company adopted SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149").
SFAS 149 amended and clarified the accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Except for certain previously issued and
effective guidance, SFAS 149 was effective for contracts entered into or
modified after June 30, 2003. The Company's adoption of SFAS 149 did not have a
significant impact on its unaudited interim condensed consolidated financial
statements.
During 2003, the Company adopted FASB Interpretation No. 46, Consolidation
of Variable Interest Entities -- An Interpretation of ARB No. 51 ("FIN 46"), and
its December 2003 revision ("FIN 46(r)"). Certain of the Company's asset-backed
securitizations, collateralized debt obligations, structured investment
transactions, and investments in real estate joint ventures and other limited
partnership interests meet the definition of a variable interest entities
("VIEs") and must be consolidated, in accordance with the transition rules and
effective dates, because the Company is deemed to be the primary beneficiary. A
VIE is defined as (i) any entity in which the equity investments at risk in such
entity do not have the characteristics of a controlling financial interest, or
(ii) any entity that does not have sufficient equity at risk to finance its
activities without additional subordinated support from other parties. Effective
February 1, 2003, the Company adopted FIN 46 for VIEs created or acquired on or
after February 1, 2003 and, effective December 31, 2003, the Company adopted FIN
46(r) with respect to interests in entities formerly considered special purpose
entities ("SPEs"), including interests in asset-backed securities and
collateralized debt obligations. The adoption of FIN 46 as of February 1, 2003
did not have a significant impact on the Company's unaudited interim condensed
consolidated financial statements. The adoption of the provisions of FIN 46(r)
at December 31, 2003 did not require the Company to consolidate any additional
VIEs that were not previously consolidated. In accordance with the provisions of
FIN 46(r), the Company elected to defer until March 31, 2004 the consolidation
of interests in VIEs for non-SPEs acquired prior to February 1, 2003 for which
it is the primary beneficiary. As of March 31, 2004, the Company consolidated
assets and liabilities relating to real estate joint ventures of $78 million and
$15 million, respectively, and assets and liabilities relating to other limited
partnerships of $29 million and $1 million, respectively, for VIEs for which the
Company was deemed to be the primary beneficiary.
69
INVESTMENTS
The Company had total cash and invested assets at September 30, 2004 and
December 31, 2003 of $233.9 billion and $221.7 billion, respectively. In
addition, the Company had $81.2 billion and $75.8 billion held in its separate
accounts, for which the Company generally does not bear investment risk, as of
September 30, 2004 and December 31, 2003, respectively.
The following table summarizes the Company's cash and invested assets at:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
--------------------- -----------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
----- ----- ----- -----
(DOLLARS IN MILLIONS)
Fixed maturities available-for-sale, at fair value $176,091 75.3% $167,752 75.7%
Mortgage loans on real estate 29,620 12.7 26,249 11.8
Real estate and real estate joint ventures held-for-investment 4,170 1.8 3,786 1.7
Real estate held-for-sale 93 -- 891 0.4
Policy loans 8,801 3.8 8,749 3.9
Equity securities, at fair value and other limited partnership interests 4,715 2.0 4,184 1.9
Cash and cash equivalents 3,592 1.5 3,683 1.7
Short-term investments 2,451 1.0 1,809 0.8
Other invested assets 4,394 1.9 4,637 2.1
-------- ----- -------- -----
Total cash and invested assets $233,927 100.0% $221,740 100.0%
======== ===== ======== =====
INVESTMENT RESULTS
Net investment income, including net investment income from discontinued
operations and scheduled periodic settlement payments on derivative instruments
that do not qualify for hedge accounting under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended ("SFAS 133"), on
general account cash and invested assets totaled $3,108 million and $2,914
million for the three months ended September 30, 2004 and 2003, respectively,
and $9,266 million and $8,702 million for the nine months ended September 30,
2004 and 2003, respectively. The annualized yields on general account cash and
invested assets, including net investment income from discontinued operations
and scheduled periodic settlement payments on derivative instruments that do not
qualify for hedge accounting under SFAS 133, and excluding all net investment
gains (losses), were 6.38% and 6.51% for the three months ended September 30,
2004 and 2003, respectively, and 6.47% and 6.70% for the nine months ended
September 30, 2004 and 2003, respectively. The decline in annualized yields is
due primarily to the decline in interest rates during these periods.
70
The following table illustrates the net investment income and annualized
yields on average assets for each of the components of the Company's investment
portfolio for the three months and nine months ended September 30, 2004 and
2003:
AT OR FOR THE THREE MONTHS AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------------------- -----------------------------------------
2004 2003 2004 2003
------------------ ------------------ ------------------ ------------------
YIELD (1) AMOUNT YIELD (1) AMOUNT YIELD (1) AMOUNT YIELD (1) AMOUNT
--------- ------ --------- ------ --------- ------ --------- ------
(DOLLARS IN MILLIONS)
FIXED MATURITIES: (2)
Investment income 6.44% $ 2,246 6.83% $ 2,140 6.58% $ 6,769 6.89% $ 6,257
Net investment gains (losses) 61 (23) 92 (215)
--------- --------- --------- ---------
Total $ 2,307 $ 2,117 $ 6,861 $ 6,042
--------- --------- --------- ---------
Ending assets $ 176,091 $ 159,940 $ 176,091 $ 159,940
--------- --------- --------- ---------
MORTGAGE LOANS ON REAL ESTATE: (3)
Investment income 7.02% $ 507 7.37% $ 468 6.87% $ 1,424 7.45% $ 1,410
Net investment gains (losses) (8) (36) (8) (58)
--------- --------- --------- ---------
Total $ 499 $ 432 $ 1,416 $ 1,352
--------- --------- --------- ---------
Ending assets $ 29,620 $ 25,535 $ 29,620 $ 25,535
--------- --------- --------- ---------
REAL ESTATE AND REAL ESTATE JOINT
VENTURES HELD-FOR-INVESTMENT: (4)
Investment income, net of expenses (7) 10.53% $ 111 10.14% $ 124 11.91% $ 398 10.63% $ 376
Net investment gains (losses) (5) 10 149 96
--------- --------- --------- ---------
Total $ 106 $ 134 $ 547 $ 472
--------- --------- --------- ---------
Ending assets (9) $ 4,281 $ 5,255 $ 4,281 $ 5,255
--------- --------- --------- ---------
POLICY LOANS:
Investment income 6.14% $ 135 6.54% $ 141 6.13% $ 403 6.49% $ 419
--------- --------- --------- ---------
Ending assets $ 8,801 $ 8,668 $ 8,801 $ 8,668
--------- --------- --------- ---------
EQUITY SECURITIES AND OTHER LIMITED
PARTNERSHIP INTERESTS:
Investment income (7) 7.37% $ 76 (1.26%) $ (11) 6.92% $ 205 2.73% $ 75
Net investment gains (losses) 96 (6) 183 (76)
--------- --------- --------- ---------
Total $ 172 $ (17) $ 388 $ (1)
--------- --------- --------- ---------
Ending assets (9) $ 4,743 $ 4,218 $ 4,743 $ 4,218
--------- --------- --------- ---------
CASH, CASH EQUIVALENTS AND SHORT-TERM
INVESTMENTS:
Investment income (7) 3.14% $ 43 1.95% $ 35 2.75% $ 103 2.93% $ 141
Net investment gains (losses) -- -- -- (4)
--------- --------- --------- ---------
Total $ 43 $ 35 $ 103 $ 137
--------- --------- --------- ---------
Ending assets (9) $ 6,095 $ 8,090 $ 6,095 $ 8,090
--------- --------- --------- ---------
OTHER INVESTED ASSETS: (5)
Investment income (7) 5.57% $ 55 9.32% $ 84 5.10% $ 154 8.75% $ 216
Net investment gains (losses) (6) (8) 34 (96) 42 (118)
--------- --------- --------- ---------
Total $ 89 $ (12) $ 196 $ 98
--------- --------- --------- ---------
Ending assets (9) $ 4,406 $ 4,617 $ 4,406 $ 4,617
--------- --------- --------- ---------
TOTAL INVESTMENTS:
Investment income before expenses
and fees 6.51% $ 3,173 6.66% $ 2,981 6.60% $ 9,456 6.85% $ 8,894
Investment expenses and fees (7) (0.13%) (65) (0.15%) (67) (0.13%) (190) (0.15%) (192)
----- --------- ----- --------- ----- --------- ----- ---------
Net investment income 6.38% $ 3,108 6.51% $ 2,914 6.47% $ 9,266 6.70% $ 8,702
Net investment gains (losses) 178 (151) 458 (375)
--------- --------- --------- ---------
Total $ 3,286 $ 2,763 $ 9,724 $ 8,327
========= ========= ========= =========
- ----------
(1) Yields are based on quarterly average asset carrying values, excluding
recognized and unrealized investment gains (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 $848 million and
$893 million at September 30, 2004 and 2003, 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 securities lending program.
(3) Investment income from mortgage loans on real estate includes prepayment
fees.
(4) Real estate and real estate joint venture income is shown net of
depreciation of $46 million and $48 million for the three months ended
September 30, 2004 and 2003, respectively, and $132 million and $137
million for the nine months ended September 30, 2004 and 2003,
respectively. Real estate and real estate joint venture income includes
amounts classified as discontinued operations of $2 million and $21
million for the three months ended September 30, 2004 and 2003,
respectively, and $43 million and $51 million for the nine months ended
September 30, 2004 and 2003, respectively. These amounts are net of
depreciation of $0 million and $8 million for the three months ended
September 30, 2004 and 2003, respectively, and $5 million and $21 million
for the nine months ended September 30, 2004 and 2003, respectively. Net
investment gains (losses) include $16 million of losses
71
and $7 million of gains classified as discontinued operations for the
three months ended September 30, 2004 and 2003, respectively, and $136
million and $97 million of gains classified as discontinued operations for
the nine months ended September 30, 2004 and 2003, respectively.
(5) Investment income from other invested assets includes scheduled periodic
settlement payments on derivative instruments that do not qualify for
hedge accounting under SFAS 133 of $12 million and $35 million for the
three months ended September 30, 2004 and 2003, respectively, and $48
million and $55 million for the nine months ended September 30, 2004 and
2003, respectively. These amounts are excluded from net investment gains
(losses).
(6) Included in net investment gains (losses) for the nine months ended
September 30, 2004 is a $23 million gain from the sale of a subsidiary.
(7) Included in investment income from real estate, equity securities, cash,
other invested assets, and investment expenses and fees is a total of $16
million and $14 million for the three months ended September 30, 2004 and
2003, respectively, and $47 million and $41 million for the nine months
ended September 30, 2004 and 2003, respectively, related to discontinued
operations pertaining to SSRM.
(8) Included in investment gains (losses) from other invested assets is $0
million and $2 million for the three months ended September 30, 2004 and
2003, respectively, and $0 million and $10 million for the nine months
ended September 30, 2004 and 2003, respectively, related to discontinued
operations pertaining to SSRM.
(9) Included in ending assets for real estate, equity securities, cash, and
other invested assets is a total of $18 million, $28 million, $52 million,
and $11 million, respectively, pertaining to SSRM at September 30, 2004.
FIXED MATURITIES
Fixed maturities consist principally of publicly traded and privately
placed debt securities, and represented 75.3% and 75.7% of total cash and
invested assets at September 30, 2004 and December 31, 2003, respectively. Based
on estimated fair value, public fixed maturities represented $154,380 million,
or 87.7% and $147,489 million, or 87.9%, of total fixed maturities at September
30, 2004 and December 31, 2003, respectively. Based on estimated fair value,
private fixed maturities represented $21,711 million, or 12.3% and $20,263
million, or 12.1%, of total fixed maturities at September 30, 2004 and December
31, 2003, respectively.
In cases where quoted market prices are not available, fair values are
estimated using present value or valuation techniques. The fair value estimates
are made at a specific point in time, based on available market information and
judgments about the financial instruments, including estimates of the timing and
amounts of expected future cash flows and the credit standing of the issuer or
counter-party. Factors considered in estimating fair value include: coupon rate,
maturity, estimated duration, call provisions, sinking fund requirements, credit
rating, industry sector of the issuer and quoted market prices of comparable
securities.
The Securities Valuation Office of the NAIC evaluates the fixed maturity
investments of insurers for regulatory reporting purposes and assigns securities
to one of six investment categories called "NAIC designations." The NAIC ratings
are similar to the rating agency designations of the Nationally Recognized
Statistical Rating Organizations for marketable bonds. NAIC ratings 1 and 2
include bonds generally 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 ratings 3 through 6 include
bonds generally considered below investment grade (rated "Ba1" or lower by
Moody's, or rated "BB+" or lower by S&P).
72
The following table presents the Company's total fixed maturities by
Nationally Recognized Statistical Rating Organizations designation and the
equivalent ratings of the NAIC, as well as the percentage, based on estimated
fair value, that each designation is comprised of at:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
---------------------------- ----------------------------
ESTIMATED ESTIMATED
NAIC RATING AGENCY AMORTIZED FAIR % OF AMORTIZED FAIR % OF
RATING DESIGNATION (1) COST VALUE TOTAL COST VALUE TOTAL
- ------ ------------------------- -------- -------- ------- -------- -------- ------
(DOLLARS IN MILLIONS)
1 Aaa/Aa/A $112,245 $117,658 66.8% $106,779 $112,333 67.0%
2 Baa 42,768 45,728 25.9 39,006 42,057 25.0
3 Ba 6,964 7,514 4.3 7,388 8,011 4.8
4 B 3,856 4,089 2.3 3,578 3,814 2.3
5 Caa and lower 407 443 0.3 630 629 0.4
6 In or near default 120 118 0.1 341 371 0.2
-------- -------- ----- -------- -------- -----
Subtotal 166,360 175,550 99.7 157,722 167,215 99.7
Redeemable preferred stock 612 541 0.3 611 537 0.3
-------- -------- ----- -------- -------- -----
Total fixed maturities $166,972 $176,091 100.0% $158,333 $167,752 100.0%
======== ======== ===== ======== ======== =====
- ----------
(1) Amounts presented are based on rating agency designations. Comparisons
between NAIC ratings and rating agency designations are published by the
NAIC. The rating agency designations are based on availability and the
lower of the applicable ratings between Moody's and S&P. The current
period ratings are presented so that the consolidated rating is equal to
the Moody's or S&P rating, whichever is more conservative. If no rating is
available from a rating agency, then the MetLife rating will be used.
73
The fixed maturities portfolio is diversified across a broad range of
asset sectors, and the sector mix did not change significantly in the third
quarter of 2004. The following tables set forth the amortized cost, gross
unrealized gain and loss, and estimated fair value of the Company's fixed
maturities by sector, as well as the percentage of the total fixed maturities
holdings that each sector represents at:
SEPTEMBER 30, 2004
-------------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
-------- ---- ---- ---------- -----
(DOLLARS IN MILLIONS)
U.S. treasuries/agencies $ 15,253 $ 1,333 $ 25 $ 16,561 9.4%
State and political subdivisions 3,648 217 12 3,853 2.2
U.S. corporate securities 59,467 3,832 169 63,130 35.8
Foreign government securities 7,627 798 45 8,380 4.8
Foreign corporate securities 24,973 2,165 62 27,076 15.4
Residential mortgage-backed securities 30,439 634 95 30,978 17.6
Commercial mortgage-backed securities 11,553 490 27 12,016 6.8
Asset-backed securities 12,813 141 42 12,912 7.3
Other fixed income assets 587 93 36 644 0.4
-------- -------- -------- -------- -----
Total bonds 166,360 9,703 513 175,550 99.7
Redeemable preferred stocks 612 -- 71 541 0.3
-------- -------- -------- -------- -----
Total fixed maturities $166,972 $ 9,703 $ 584 $176,091 100.0%
======== ======== ======== ======== =====
DECEMBER 31, 2003
-------------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
-------- ---- ---- ---------- -----
(DOLLARS IN MILLIONS)
U.S. treasuries/agencies $ 14,707 $ 1,264 $ 26 $ 15,945 9.5%
State and political subdivisions 3,155 209 15 3,349 2.0
U.S. corporate securities 56,757 3,886 252 60,391 36.0
Foreign government securities 7,789 1,003 28 8,764 5.2
Foreign corporate securities 21,727 2,194 79 23,842 14.2
Residential mortgage-backed securities 30,836 720 102 31,454 18.8
Commercial mortgage-backed securities 10,523 530 22 11,031 6.6
Asset-backed securities 11,736 187 60 11,863 7.1
Other fixed income assets 492 167 83 576 0.3
-------- -------- -------- -------- -----
Total bonds 157,722 10,160 667 167,215 99.7
Redeemable preferred stocks 611 2 76 537 0.3
-------- -------- -------- -------- -----
Total fixed maturities $158,333 $ 10,162 $ 743 $167,752 100.0%
======== ======== ======== ======== =====
Fixed Maturity Impairment. The Company classifies all of its fixed
maturities as available-for-sale and marks them to market through other
comprehensive income. All securities with gross unrealized losses at the
consolidated balance sheet date are subjected to the Company's process for
identifying other-than-temporary impairments. The Company writes down to fair
value securities that it deems to be other-than-temporarily impaired in the
period the securities are deemed to be so impaired. The assessment of whether
such impairment has occurred is based on management's case-by-case evaluation of
the underlying reasons for the decline in fair value. Management considers a
wide range of factors, as described below, about the security issuer and uses
its best judgment in evaluating the cause of the decline in the estimated fair
value of the security and in assessing the prospects for near-term recovery.
Inherent in management's evaluation of the security are assumptions and
estimates about the operations of the issuer and its future earnings potential.
74
Considerations used by the Company in the impairment evaluation process
include, but are not limited to, the following:
- length of time and the extent to which the market value has been
below amortized cost;
- potential for impairments of securities when the issuer is
experiencing significant financial difficulties, including a review
of all securities of the issuer, including its known subsidiaries
and affiliates, regardless of the form of the Company's ownership;
- potential for impairments in an entire industry sector or
sub-sector;
- potential for impairments in certain economically depressed
geographic locations;
- potential for impairments of securities where the issuer, series of
issuers or industry has suffered a catastrophic type of loss or has
exhausted natural resources;
- the Company's ability and intent to hold the security for a period
of time sufficient to allow for the recovery of its value to an
amount equal to or greater than cost;
- unfavorable changes in forecasted cash flows on asset-backed
securities; and
- other subjective factors, including concentrations and information
obtained from regulators and rating agencies.
The Company's review of its fixed maturities for impairments includes an
analysis of the total gross unrealized losses by three categories of securities:
(i) securities where the estimated fair value had declined and remained below
amortized cost by less than 20%; (ii) securities where the estimated fair value
had declined and remained below amortized cost by 20% or more for less than six
months; and (iii) securities where the estimated fair value had declined and
remained below amortized cost by 20% or more for six months or greater. While
all of these securities are monitored for potential impairment, the Company's
experience indicates that the first two categories do not present as great a
risk of impairment, and often, fair values recover over time as the factors that
caused the declines improve.
The Company records writedowns 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. Writedowns of fixed
maturities were $13 million and $38 million for the three months ended September
30, 2004 and 2003, respectively, and $65 million and $277 million for the nine
months ended September 30, 2004 and 2003, respectively. The Company's three
largest writedowns totaled $12 million and $23 million for the three months
ended September 30, 2004 and 2003, respectively, and $33 million and $110
million for the nine months ended September 30, 2004 and 2003, respectively. The
circumstances that gave rise to these impairments were either financial
restructurings or bankruptcy filings. During the three months ended September
30, 2004 and 2003, the Company sold fixed maturities with a fair value of $8,279
million and $4,984 million, respectively, at a loss of $157 million and $81
million, respectively. During the nine months ended September 30, 2004 and 2003,
the Company sold fixed maturities with a fair value of $17,157 million and
$12,736 million, respectively, at a loss of $335 million and $201 million,
respectively.
The following table presents the total gross unrealized losses for fixed
maturities where the estimated fair value had declined and remained below
amortized cost by:
SEPTEMBER 30, 2004
--------------------------------
GROSS % OF
UNREALIZED LOSSES TOTAL
----------------- -----
(DOLLARS IN MILLIONS)
Less than 20% $530 90.8%
20% or more for less than six months 44 7.5
20% or more for six months or greater 10 1.7
---- ----
Total $584 100%
==== ====
75
The gross unrealized loss related to the Company's fixed maturities at
September 30, 2004 was $584 million. These fixed maturities mature as follows:
4% due in one year or less; 26% due in greater than one year to five years; 14%
due in greater than five years to ten years; 54% due in greater than ten years;
and 2% in redeemable preferred (calculated as a percentage of amortized cost).
Additionally, such securities are concentrated by sector in U.S. corporates
(29%); mortgage-backed (21%); and redeemable preferred (12%); and are
concentrated by industry in mortgage-backed (24%); redeemable preferred (12%);
and finance (9%) (calculated as a percentage of gross unrealized loss).
Non-investment grade securities represent 5% of the $38,047 million fair value
and 10% of the $584 million gross unrealized loss.
The following table presents the amortized cost, gross unrealized losses
and number of securities for fixed maturities where the estimated fair value had
declined and remained below amortized cost by less than 20%, or 20% or more for:
SEPTEMBER 30, 2004
----------------------------------------------------------------------------
AMORTIZED COST GROSS UNREALIZED LOSSES NUMBER OF SECURITIES
---------------------- ----------------------- --------------------
LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR
20% MORE 20% MORE 20% MORE
--------- ------ --------- ------- ---------- ------
(DOLLARS IN MILLIONS)
Less than six months $31,299 $ 119 $ 346 $ 44 2,565 39
Six months or greater but less than nine months 2,742 24 57 6 381 7
Nine months or greater but less than twelve months 756 -- 14 -- 86 --
Twelve months or greater 3,687 4 113 4 536 8
------- ------- ------- ------- ----- --
Total $38,484 $ 147 $ 530 $ 54 3,568 54
======= ======= ======= ======= ===== ==
The category of fixed maturity securities where the estimated fair value
has declined and remained below amortized cost by less than 20% matures as
follows: 4% due in one year or less; 26% due in greater than one year to five
years; 14% due in greater than five years to ten years; 54% due in greater than
ten years; and 2% in redeemable preferred (calculated as a percentage of
amortized cost). Additionally, such securities are concentrated by sector in
U.S. corporates (28%); mortgage-backed (23%); and redeemable preferred (13%);
and are concentrated by industry in mortgage-backed (24%); redeemable preferred
(13%); and finance (8%) (calculated as a percentage of gross unrealized loss).
Non-investment grade securities represent 5% of the $37,954 million fair value
and 10% of the $530 million gross unrealized loss.
The category of fixed maturity securities where the estimated fair value
has declined and remained below amortized cost by 20% or more for less than six
months matures as follows: 1% due in one year or less; 13% due in one to five
years; 39% due in greater than five years to ten years; and 47% due in greater
than ten years (calculated as a percentage of amortized cost). Additionally,
such securities are concentrated by sector in U.S. corporates (46%); U.S.
government (31%); and state and political subdivisions (4%); and are
concentrated by industry in mortgage-backed (31%); finance (14%); and
transportation (8%) (calculated as a percentage of gross unrealized loss).
Non-investment grade securities represent 25% of the $75 million fair value and
18% of the $44 million gross unrealized loss.
The category of fixed maturity securities where the estimated fair value
has declined and remained below amortized cost by 20% or more for six months or
greater matures as follows: 1% due in greater than one year to five years; 65%
due in greater than five years to ten years; and 34% due in greater than ten
years (calculated as a percentage of amortized cost). Additionally, such
securities are concentrated by sector in asset-backed (95%); and mortgage-backed
(5%); and are concentrated by industry in asset-backed (95%); and
mortgage-backed (5%) (calculated as a percentage of gross unrealized loss).
Non-investment grade securities represent 77% of the $18 million fair value and
46% of the $10 million gross unrealized loss.
The Company did not hold any fixed maturity securities with a gross
unrealized loss at September 30, 2004 greater than $10 million.
76
Corporate Fixed Maturities. The table below shows the major industry types
that comprise the corporate bond holdings at:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
--------------------- ---------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
Industrial $36,168 40.1% $34,474 40.9%
Utility 11,017 12.2 9,955 11.8
Finance 15,250 16.9 14,287 17.0
Foreign (1) 27,076 30.0 23,842 28.3
Other 695 0.8 1,675 2.0
------- ----- ------- -----
Total $90,206 100.0% $84,233 100.0%
======= ===== ======= =====
- ----------
(1) Includes U.S. dollar-denominated debt obligations of foreign obligors, and
other foreign investments.
The Company maintains a diversified corporate bond portfolio across
industries and issuers. The portfolio does not have exposure to any single
issuer in excess of 1% of the total invested assets of the portfolio. At
September 30, 2004, the Company's combined holdings in the ten issuers to which
it had the greatest exposure totaled $5,063 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 held at September 30, 2004 was $718 million.
The Company has hedged all of its 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.
Structured Securities. The following table shows the types of structured
securities the Company held at:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
---------------------- ----------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
Residential mortgage-backed securities:
Pass-through securities $13,074 23.4% $15,427 28.4%
Collateralized mortgage obligations 17,904 32.0 16,027 29.5
------- ----- ------- -----
Total residential mortgage-backed securities 30,978 55.4 31,454 57.9
Commercial mortgage-backed securities 12,016 21.5 11,031 20.3
Asset-backed securities 12,912 23.1 11,863 21.8
------- ----- ------- -----
Total $55,906 100.0% $54,348 100.0%
======= ===== ======= =====
The majority of the residential mortgage-backed securities are guaranteed
or otherwise supported by the Federal National Mortgage Association, the Federal
Home Loan Mortgage Corporation or the Government National Mortgage Association.
At September 30, 2004 and December 31, 2003, $30,504 million and $31,210
million, respectively, or 98.5% and 99.2%, respectively, of the residential
mortgage-backed securities were rated Aaa/AAA by Moody's or S&P.
At September 30, 2004 and December 31, 2003, $8,440 million and $6,992
million, respectively, or 70.2% and 63.4%, respectively, of the commercial
mortgage-backed securities were rated Aaa/AAA by Moody's or S&P.
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 maturity
assets and to provide income. The Company's asset-backed securities are
diversified both by sector and by issuer. Credit card and home equity loan
securitizations, accounting for about 28% and 29% of the total holdings,
respectively, constitute the largest exposures in the Company's asset-backed
securities portfolio. Asset-backed securities generally have limited sensitivity
to changes in interest rates. Approximately $8,509 million and $7,528 million,
or 65.9% and 63.5%, of total asset-backed securities were rated Aaa/AAA by
Moody's or S&P at September 30, 2004 and December 31, 2003, respectively.
77
Structured Investment Transactions. The Company participates in structured
investment transactions, primarily asset securitizations and structured notes.
These transactions enhance the Company's total return of the investment
portfolio principally by generating management fee income on asset
securitizations and by providing equity-based returns on debt securities through
structured notes and similar instruments.
The Company 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 management fees on the outstanding
securitized asset balance, which are recorded in income as earned. When the
Company transfers assets to a bankruptcy-remote 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. Beneficial interests in securitizations are carried at fair value in
fixed maturities. Income on these beneficial interests is recognized using the
prospective method in accordance with EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Certain Investments ("EITF 99-20"). The SPEs
used to securitize assets are not consolidated by the Company because the
Company has determined that it is not the primary beneficiary of these entities
based on the framework provided in FIN 46 and the December 2003 revision FIN
46(r). Prior to the adoption of FIN 46(r), such SPEs were not consolidated
because they did not meet the criteria for consolidation under previous
accounting guidance.
The Company purchases or receives beneficial interests in SPEs, which
generally acquire financial assets, including corporate equities, debt
securities and purchased options. The Company has not guaranteed the
performance, liquidity or obligations of the SPEs and the Company's exposure to
loss is limited to its carrying value of the beneficial interests in the SPEs.
The Company uses the beneficial interests as part of its risk management
strategy, including asset-liability management. These SPEs are not consolidated
by the Company because the Company has determined that it is not the primary
beneficiary of these entities based on the framework provided in FIN 46(r).
Prior to the adoption of FIN 46(r), such SPEs were not consolidated because they
did not meet the criteria for consolidation under previous accounting guidance.
These beneficial interests are generally structured notes, as defined by EITF
Issue No. 96-12, Recognition of Interest Income and Balance Sheet Classification
of Structured Notes, which are included in fixed maturities, and their income is
recognized using the retrospective interest method or the level yield method, as
appropriate. Impairments of these beneficial interests are included in net
investment gains (losses).
MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loans on real estate are collateralized by
commercial, agricultural and residential properties. Mortgage loans on real
estate comprised 12.7% and 11.8% of the Company's total cash and invested assets
at September 30, 2004 and December 31, 2003, respectively. The carrying value of
mortgage loans on real estate 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 on real
estate by type at:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
----- ----- ----- -----
(DOLLARS IN MILLIONS)
Commercial $23,267 78.5% $20,300 77.3%
Agricultural 5,593 18.9 5,327 20.3
Residential 760 2.6 622 2.4
------- ----- ------- -----
Total $29,620 100.0% $26,249 100.0%
======= ===== ======= =====
78
Commercial Mortgage Loans. The Company diversifies its commercial mortgage
loans by both geographic region and property type. The following table presents
the distribution across geographic regions and property types for commercial
mortgage loans at:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
--------------------- ---------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
REGION
South Atlantic $ 5,502 23.6% $ 4,978 24.5%
Pacific 5,608 24.3 5,005 24.7
Middle Atlantic 3,704 15.9 3,455 17.0
East North Central 2,443 10.5 1,821 9.0
New England 1,285 5.5 1,278 6.3
West South Central 1,775 7.6 1,370 6.8
Mountain 741 3.2 740 3.6
West North Central 615 2.6 619 3.0
International 1,219 5.2 836 4.1
East South Central 276 1.2 198 1.0
Other 99 0.4 -- 0.0
------- ----- ------- -----
Total $23,267 100.0% $20,300 100.0%
======= ===== ======= =====
PROPERTY TYPE
Office $10,826 46.6% $ 9,170 45.2%
Retail 5,288 22.7 5,006 24.7
Apartments 3,095 13.3 2,832 13.9
Industrial 2,034 8.7 1,911 9.4
Hotel 1,227 5.3 1,032 5.1
Other 797 3.4 349 1.7
------- ----- ------- -----
Total $23,267 100.0% $20,300 100.0%
======= ===== ======= =====
Restructured, Delinquent or Under Foreclosure and Potentially Delinquent.
The Company monitors its mortgage loan investments on an ongoing basis,
including reviewing loans that are restructured, delinquent or under foreclosure
and potentially delinquent. These loan classifications are consistent with those
used in industry practice.
The Company defines potentially delinquent loans as loans that, in
management's opinion, have a high probability of becoming delinquent. 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 as loans in which foreclosure
proceedings have formally commenced. The Company defines restructured mortgage
loans 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.
The Company reviews all mortgage loans on an ongoing basis. These reviews
may include an analysis of the property financial statements and rent roll,
lease rollover analysis, property inspections, market analysis and tenant
creditworthiness.
The Company establishes valuation allowances for loans that it deems
impaired. The Company's valuation allowance is established both on a loan
specific basis for those loans where a property or market specific risk has been
identified that could likely result in a future default, as well as for pools of
loans with similar high risk characteristics where a property specific or market
risk has not been identified. 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 (losses).
79
The following table presents the amortized cost and valuation allowance
for commercial mortgage loans distributed by loan classification at:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------------------------------------ ------------------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST (1) TOTAL ALLOWANCE COST COST (1) TOTAL ALLOWANCE COST
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
Performing $ 23,296 99.7% $ 90 0.4% $ 20,315 99.5% $ 95 0.5%
Restructured 55 0.2 18 32.7% 77 0.4 23 29.9%
Delinquent or under
foreclosure -- -- -- --% -- -- -- --%
Potentially delinquent 26 0.1 2 7.7% 30 0.1 4 13.3%
-------- -------- -------- -------- -------- --------
Total $ 23,377 100.0% $ 110 0.5% $ 20,422 100.0% $ 122 0.6%
======== ======== ======== ======== ======== ========
- ----------
(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:
NINE MONTHS ENDED
SEPTEMBER 30, 2004
--------------------
(DOLLARS IN MILLIONS)
Balance, beginning of period $ 122
Additions 13
Deductions (25)
-------------
Balance, end of period $ 110
=============
Agricultural Mortgage Loans. The Company diversifies its agricultural
mortgage loans by both geographic region and product type.
Approximately 68% of the $5,593 million of agricultural mortgage loans
outstanding at September 30, 2004 were subject to rate resets prior to maturity.
A substantial portion of these loans generally is 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:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------------------------------------ ------------------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST (1) TOTAL ALLOWANCE COST COST (1) TOTAL ALLOWANCE COST
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
Performing $ 5,447 97.2% $ 5 0.1% $ 5,162 96.7% $ -- -%
Restructured 67 1.2 -- --% 111 2.1 1 0.9%
Delinquent or under
foreclosure 83 1.5 3 3.6% 36 0.7 2 5.6%
Potentially delinquent 5 0.1 1 20.0% 24 0.5 3 12.5%
-------- ----- -------- -------- ----- --------
Total $ 5,602 100.0% $ 9 0.2% $ 5,333 100.0% $ 6 0.1%
======== ===== ======== ======== ===== ========
- ----------
(1) Amortized cost is equal to carrying value before valuation allowances.
80
The following table presents the changes in valuation allowances for
agricultural mortgage loans for the:
NINE MONTHS ENDED
SEPTEMBER 30, 2004
--------------------
(DOLLARS IN MILLIONS)
Balance, beginning of period $ 6
Additions 5
Deductions (2)
------------
Balance, end of period $ 9
============
REAL ESTATE AND REAL ESTATE JOINT VENTURES
The Company's real estate and real estate joint venture investments
consist of commercial properties located primarily throughout the U.S. At
September 30, 2004 and December 31, 2003, the carrying value of the Company's
real estate, real estate joint ventures and real estate held-for-sale was $4,263
million and $4,677 million, respectively, or 1.8%, and 2.1% of total cash and
invested assets, respectively. The carrying value of real estate is stated at
depreciated cost net of impairments and valuation allowances. The carrying value
of real estate joint ventures is stated at the Company's equity in the real
estate joint ventures net of impairments and valuation allowances. The following
table presents the carrying value of the Company's real estate, real estate
joint ventures, real estate held-for-sale and real estate acquired upon
foreclosure at:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------------- -------------------------
CARRYING CARRYING
TYPE VALUE % OF TOTAL VALUE % OF TOTAL
---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
Real estate held-for-investment $ 3,818 89.6% $ 3,472 74.2%
Real estate joint ventures held-for-investment 350 8.2 312 6.7
Foreclosed real estate held-for-investment 2 -- 2 0.1
---------- ---------- ---------- ----------
4,170 97.8 3,786 81.0
---------- ---------- ---------- ----------
Real estate held-for-sale 93 2.2 890 19.0
Foreclosed real estate held-for-sale -- -- 1 --
---------- ---------- ---------- ----------
93 2.2 891 19.0
---------- ---------- ---------- ----------
Total real estate, real estate joint ventures
and real estate held-for-sale $ 4,263 100.0% $ 4,677 100.0%
========== ========== ========== ==========
The Company's carrying value of real estate held-for-sale, including real
estate acquired upon foreclosure of commercial and agricultural mortgage loans,
in the amounts of $93 million and $891 million at September 30, 2004 and
December 31, 2003, respectively, are net of valuation allowances of $9 million
and $12 million, respectively, and net of prior period impairments of $78
million and $80 million at September 30, 2004 and December 31, 2003,
respectively.
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.
Certain of the Company's investments in real estate joint ventures meet
the definition of a VIE under FIN 46(r). See "-- Investments -- Variable
Interest Entities."
EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS
The Company's carrying value of equity securities, which primarily consist
of investments in common and preferred stocks and mutual fund interests, was
$1,869 million and $1,584 million at September 30, 2004 and December 31, 2003,
respectively. Equity securities include private equity securities with an
estimated fair value of $741 million and $432 million at September 30, 2004 and
December 31, 2003, respectively. 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 $2,846 million and $2,600 million at September 30, 2004 and
December 31, 2003, respectively. The Company classifies its investments in
common
81
stocks as available-for-sale and marks them to market, except for non-marketable
private equities, which are generally carried at cost. The Company uses the
equity method of accounting for investments in limited partnership interests in
which it has more than a minor interest, has influence over the partnership's
operating and financial policies and does not have a controlling interest. The
Company uses the cost method for minor interest investments and when it has
virtually no influence over the partnership's operating and financial policies.
The Company's investments in equity securities excluding partnerships
represented 0.8% and 0.7% of cash and invested assets at September 30, 2004 and
December 31, 2003, respectively.
Some of the Company's investments in other limited partnership interests
meet the definition of a VIE under FIN 46(r). See "-- Investments -- Variable
Interest Entities."
The following tables set forth the cost, gross unrealized gain or loss and
estimated fair value of the Company's equity securities, as well as the
percentage of the total equity securities at:
SEPTEMBER 30, 2004
----------------------------------------------------------------------
GROSS UNREALIZED
------------------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
---------- ---------- ---------- ---------- ---------
(DOLLARS IN MILLIONS)
Equity Securities:
Common stocks $ 1,017 $ 258 $ 20 $ 1,255 67.1%
Nonredeemable preferred stocks 580 39 5 614 32.9
---------- ---------- ---------- ---------- ----------
Total equity securities $ 1,597 $ 297 $ 25 $ 1,869 100.0%
========== ========== ========== ========== ==========
DECEMBER 31, 2003
----------------------------------------------------------------------
GROSS UNREALIZED
------------------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
Equity Securities:
Common stocks $ 613 $ 327 $ 2 $ 938 59.2%
Nonredeemable preferred stocks 602 48 4 646 40.8
---------- ---------- ---------- ---------- ----------
Total equity securities $ 1,215 $ 375 $ 6 $ 1,584 100.0%
========== ========== ========== ========== ==========
Equity Security Impairment. The Company classifies all of its equity
securities as available-for-sale and marks them to market through other
comprehensive income. All securities with gross unrealized losses at the
consolidated balance sheet date are subjected to the Company's process for
identifying other-than-temporary impairments. The Company writes down to fair
value securities that it deems to be other-than-temporarily impaired in the
period the securities are deemed to be so impaired. The assessment of whether
such impairment has occurred is based on management's case-by-case evaluation of
the underlying reasons for the decline in fair value. Management considers a
wide range of factors, as described below, about the security issuer and uses
its best judgment in evaluating the cause of the decline in the estimated fair
value of the security and in assessing the prospects for near-term recovery.
Inherent in management's evaluation of the security are assumptions and
estimates about the operations of the issuer and its future earnings potential.
Considerations used by the Company in the impairment evaluation process
include, but are not limited to, the following:
- length of time and the extent to which the market value has been
below cost;
- potential for impairments of securities when the issuer is
experiencing significant financial difficulties, including a review
of all securities of the issuer, including its known subsidiaries
and affiliates, regardless of the form of the Company's ownership;
- potential for impairments in an entire industry sector or
sub-sector;
- potential for impairments in certain economically depressed
geographic locations;
- potential for impairments of securities where the issuer, series of
issuers or industry has suffered a catastrophic type of loss or has
exhausted natural resources;
82
- the Company's ability and intent to hold the security for a period
of time sufficient to allow for the recovery of its value to an
amount equal to or greater than cost; and
- other subjective factors, including concentrations and information
obtained from regulators and rating agencies.
Equity securities or other limited partnership interests which are deemed
to be other-than-temporarily impaired are written down to fair value. The
Company records writedowns as investment losses and adjusts the cost basis of
the equity securities accordingly. The Company does not change the revised cost
basis for subsequent recoveries in value. Writedowns of equity securities and
other limited partnership interests were $14 million and $12 million for the
three months ended September 30, 2004 and 2003, respectively, and $24 million
and $101 million for the nine months ended September 30, 2004 and 2003,
respectively. During the three months ended September 30, 2004 and 2003, the
Company sold equity securities with an estimated fair value of $31 million and
$2 million, respectively, at a loss of $6 million and $6 million, respectively.
During the nine months ended September 30, 2004 and 2003, the Company sold
equity securities with an estimated fair value of $119 million and $44 million,
at a loss of $20 million and $12 million, respectively.
The gross unrealized loss related to the Company's equity securities at
September 30, 2004 was $25 million. Such securities are concentrated by security
type in mutual funds (42%); and common stock (37%) and are concentrated by
industry in domestic broad market mutual funds (42%); and financial (12%)
(calculated as a percentage of gross unrealized loss).
The following table presents the cost, gross unrealized losses and number
of securities for equity securities where the estimated fair value had declined
and remained below cost by less than 20%, or 20% or more for:
SEPTEMBER 30, 2004
-------------------------------------------------------------------------
COST GROSS UNREALIZED LOSSES NUMBER OF SECURITIES
--------------------- --------------------- ---------------------
LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR
20% MORE 20% MORE 20% MORE
-------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
Less than six months $ 325 $ 37 $ 9 $ 15 205 78
Six months or greater but less than nine months 26 -- 1 -- 4 --
Nine months or greater but less than twelve months 1 -- -- -- 3 --
Twelve months or greater 3 -- -- -- 5 --
-------- -------- -------- -------- -------- --------
Total $ 355 $ 37 $ 10 $ 15 217 78
======== ======== ======== ======== ======== ========
The Company's review of its equity security exposure includes the analysis
of total gross unrealized losses by three categories of securities: (i)
securities where the estimated fair value had declined and remained below cost
by less than 20%; (ii) securities where the estimated fair value had declined
and remained below cost by 20% or more for less than six months; and (iii)
securities where the estimated fair value had declined and remained below cost
by 20% or more for six months or greater. While all of these securities are
monitored for potential impairment, the Company's experience indicates that the
first two categories do not present as great a risk of impairment, and often,
fair values recover over time as the factors that caused the declines improve.
The following table presents the total gross unrealized losses for equity
securities at September 30, 2004 where the estimated fair value had declined and
remained below cost by:
SEPTEMBER 30, 2004
-------------------------
GROSS
UNREALIZED % OF
LOSSES TOTAL
---------- ----------
(DOLLARS IN MILLIONS)
Less than 20% $ 10 40.0%
20% or more for less than six months 15 60.0
20% or more for six months or greater -- 0.0
---------- ----------
Total $ 25 100%
========== ==========
Equity securities where the estimated fair value has declined and remained
below cost by less than 20% are concentrated by security type in preferred stock
(51%); and mutual funds (22%); and concentrated by industry in financial (30%);
and domestic broad market mutual funds (22%) (calculated as a percentage of
gross unrealized loss).
83
Equity securities where the estimated fair value has declined and remained
below cost by 20% or more for less than six months are concentrated by security
type in mutual funds (56%) and common stock (44%) and concentrated by industry
in domestic broad market mutual funds (56%) (calculated as a percentage of gross
unrealized loss). The significant factors considered at September 30, 2004 in
the review of equity securities for other-than-temporary impairment were a
result of generally difficult economic and market conditions.
The Company did not hold any equity securities with a gross unrealized
loss at September 30, 2004 greater than $5 million.
OTHER INVESTED ASSETS
The Company's other invested assets consist principally of leveraged
leases and funds withheld at interest of $3.7 billion and $3.9 billion at
September 30, 2004 and December 31, 2003, respectively. The leveraged leases are
recorded net of non-recourse debt. The Company participates in lease
transactions, which are diversified by industry, asset type and 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 supporting the reinsured policies equal
to the net statutory reserves are withheld and continue to be legally owned by
the ceding company. Other invested assets also include the fair value of
embedded derivatives related to funds withheld and modified coinsurance
contracts. Interest accrues to these funds withheld at rates defined by the
treaty terms and may be contractually specified or directly related to the
investment portfolio. The Company's other invested assets represented 1.9% and
2.1% of cash and invested assets at September 30, 2004 and December 31, 2003,
respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative instruments to manage risk through one of five
principal strategies, the hedging of: (i) liabilities; (ii) invested assets;
(iii) portfolios of assets or liabilities; (iv) net investments in certain
foreign operations; and (v) firm commitments and forecasted transactions.
Additionally, the Company enters into income generation and replication
derivative transactions as permitted by its insurance subsidiaries' Derivatives
Use Plans approved by the applicable state insurance departments. The Company's
derivative hedging strategy employs a variety of instruments, including
financial futures, financial forwards, interest rate swaps, caps and floors,
credit default and foreign currency swaps and foreign currency forwards and
options.
The table below provides a summary of the notional amount and fair value
of derivative financial instruments held at:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
---------------------------------------- ----------------------------------------
CURRENT MARKET CURRENT MARKET
OR FAIR VALUE OR FAIR VALUE
NOTIONAL ------------------------- NOTIONAL -------------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
Financial futures $ 1,423 $ 2 $ 5 $ 1,348 $ 8 $ 30
Interest rate swaps 13,856 265 51 9,944 189 36
Floors 3,325 21 -- 325 5 --
Caps 7,333 13 -- 9,345 29 --
Financial forwards 115 -- -- 1,310 2 3
Foreign currency swaps 7,302 47 779 4,710 9 796
Options 269 2 7 6,065 7 --
Foreign currency forwards 1,065 3 28 695 5 32
Credit default swaps 1,800 7 6 615 2 1
Synthetic GICs 5,690 -- -- 5,177 -- --
Other 200 6 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total $ 42,378 $ 366 $ 876 $ 39,534 $ 256 $ 898
========== ========== ========== ========== ========== ==========
84
VARIABLE INTEREST ENTITIES
The Company has adopted the provisions of FIN 46 and FIN 46(r). See "--
Application of Recent Accounting Pronouncements." The adoption of FIN 46(r)
required the Company to consolidate certain VIEs for which it is the primary
beneficiary. The following table presents the total assets of and maximum
exposure to loss relating to VIEs for which the Company has concluded that (i)
it is the primary beneficiary and which are consolidated in the Company's
unaudited interim condensed consolidated financial statements at September 30,
2004, and (ii) it holds significant variable interests but it is not the primary
beneficiary and which have not been consolidated:
SEPTEMBER 30, 2004
-------------------------------------------------------
PRIMARY BENEFICIARY NOT PRIMARY BENEFICIARY
------------------------- -------------------------
MAXIMUM MAXIMUM
TOTAL EXPOSURE TO TOTAL EXPOSURE TO
ASSETS (1) LOSS (2) ASSETS (1) LOSS (2)
---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
Asset-backed securitizations
and collateralized debt obligations $ -- $ -- $ 2,324 $ 15
Real estate joint ventures (3) 16 14 132 --
Other limited partnerships (4) 80 76 587 57
---------- ---------- ---------- ----------
Total $ 96 $ 90 $ 3,043 $ 72
========== ========== ========== ==========
- ----------
(1) The assets of the asset-backed securitizations and collateralized
debt obligations are reflected at fair value as of September 30,
2004. The assets of the real estate joint ventures and other limited
partnerships are reflected at the carrying amounts at which such
assets would have been reflected on the Company's balance sheet had
the Company consolidated the VIE from the date of its initial
investment in the entity.
(2) The maximum exposure to loss of the asset-backed securitizations and
collateralized debt obligations is equal to the carrying amounts of
retained interests. In addition, the Company provides collateral
management services for certain of these structures for which it
collects a management fee. The maximum exposure to loss relating to
real estate joint ventures and other limited partnerships is equal
to the carrying amounts plus any unfunded commitments, reduced by
amounts guaranteed by other partners.
(3) Real estate joint ventures include partnerships and other ventures,
which engage in the acquisition, development, management and
disposal of real estate investments.
(4) Other limited partnerships include partnerships established for the
purpose of investing in real estate funds, public and private debt
and equity securities, as well as limited partnerships established
for the purpose of investing in low-income housing that qualifies
for federal tax credits.
SECURITIES LENDING
The Company participates in a securities lending program whereby blocks of
securities, which are included in investments, are loaned to third parties,
primarily major brokerage firms. The Company requires a minimum of 102% of the
fair value of the loaned securities to be separately maintained as collateral
for the loans. Securities with a cost or amortized cost of $26,443 million and
$25,121 million and an estimated fair value of $27,842 million and $26,387
million were on loan under the program at September 30, 2004 and December 31,
2003, respectively. The Company was liable for cash collateral under its control
of $28,662 million and $27,083 million at September 30, 2004 and December 31,
2003, respectively. Security collateral on deposit from customers may not be
sold or repledged and is not reflected in the consolidated financial statements.
SEPARATE ACCOUNTS
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
commingled basis in conformity with insurance laws. Effective with the adoption
of SOP 03-1, the Company reports separately, as assets and liabilities,
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investments held in separate accounts and liabilities of the separate accounts
if (i) such separate accounts are legally recognized; (ii) assets supporting the
contract liabilities are legally insulated from the Company's general account
liabilities; (iii) investments are directed by the contractholder; and (iv) all
investment performance, net of contract fees and assessments, is passed through
to the contractholder. The Company reports separate account assets meeting such
criteria at their fair value. Investment performance (including investment
income, net investment gains (losses) and changes in unrealized gains (losses)
and the corresponding amounts credited to contractholders of such separate
accounts subsequent to January 1, 2004 are offset within the same line in the
unaudited interim condensed consolidated statements of income. The Company's
revenues reflect fees charged to the separate accounts, including mortality
charges, risk charges, policy administration fees, investment management fees
and surrender charges. Separate accounts not meeting the above criteria are
combined on a line-by-line basis with the Company's general account assets,
liabilities, revenues and expenses. Effective January 1, 2004, in accordance
with the SOP 03-1 separate account reporting criteria, separate account assets
with a fair value of $1.7 billion were reclassified to general account
investments with a corresponding transfer of separate account liabilities to
future policy benefits and policyholder account balances. See "--Application of
Recent Accounting Pronouncements."
86
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has material exposure to interest rate, equity market and
foreign currency 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. The Company's market risk exposure at
September 30, 2004 is relatively unchanged in amount from that reported on
December 31, 2003, a description of which may be found in the 2003 Annual Report
on Form 10-K.
As disclosed in the 2003 Annual Report on Form 10-K, the Company uses a
variety of strategies to manage interest rate and foreign currency exchange
risk, including the use of derivative instruments. In the third quarter of 2004,
the Company initiated a hedging strategy for certain equity price risks. The
current volume of transactions does not materially change the amounts reported
for market risk exposure on December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
The Holding Company's management, with the participation of the Holding
Company's Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the design and operation of the Holding Company's disclosure
controls and procedures as defined in Exchange Act Rule 13a-15(e) as of the end
of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that these
disclosure controls and procedures are effective. There were no changes in the
Holding Company's internal control over financial reporting as defined in
Exchange Act Rule 13a-15(f) during the quarter ended September 30, 2004 that
have materially affected, or are reasonably likely to materially affect, the
Holding Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following should be read in conjunction with Note 7 to the unaudited
interim condensed consolidated financial statements in Part I of this Report.
The Company is a defendant in a large number of litigation matters. In
some of the matters, very large and/or indeterminate amounts, including punitive
and treble damages, are sought. Modern pleading practice in the United States
permits considerable variation in the assertion of monetary damages or other
relief. Jurisdictions may permit claimants to not specify the monetary damages
sought or may permit claimants to state only that the amount sought is
sufficient to invoke the jurisdiction of the trial court. In addition,
jurisdictions may permit plaintiffs to allege monetary damages in amounts well
exceeding reasonably possible verdicts in the jurisdiction for similar matters.
This variability in pleadings, together with the actual experience of the
Company in litigating or resolving through settlement numerous claims over an
extended period of time, demonstrate to management that the monetary relief
which may be specified in a lawsuit or claim bears little relevance to its
merits or disposition value. Thus, unless stated below, the specific monetary
relief sought is not noted.
Due to the vagaries of litigation, the outcome of a litigation matter and
the amount or range of potential loss at particular points in time may normally
be inherently impossible to ascertain with any degree of certainty. Inherent
uncertainties can include how fact finders will view individually and in their
totality documentary evidence, the credibility and effectiveness of witnesses'
testimony, and how trial and appellate courts will apply the law in the context
of the pleadings or evidence presented, whether by motion practice, or at trial
or on appeal. Disposition valuations are also subject to the uncertainty of how
opposing parties and their counsel will themselves view the relevant evidence
and applicable law.
On a quarterly and yearly basis, the Company reviews relevant information
with respect to liabilities for litigation and contingencies to be reflected in
the Company's consolidated financial statements. The review includes senior
legal and financial personnel. Unless stated below, estimates of possible
additional losses or ranges of loss for particular matters cannot in the
ordinary course be made with a reasonable degree of certainty. Liabilities are
established when it is probable that a loss has been incurred and the amount of
the loss can be reasonably estimated. It is possible that some of the matters
could require the Company to pay damages or make other expenditures or establish
accruals in amounts that could not be estimated as of September 30, 2004.
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." 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 the class action settlements noted
above and have brought or continued non-class action sales practices lawsuits.
In addition, other sales practices lawsuits have been brought. As of September
30, 2004, there are approximately 333 sales practices lawsuits pending against
Metropolitan Life; approximately 46 sales practices lawsuits pending against New
England Mutual, New England Life Insurance Company, and New England Securities
Corporation (collectively, "New England"); and approximately 56 sales practices
lawsuits pending against General American. Metropolitan Life, New England and
General American continue to defend themselves vigorously against these
lawsuits. Additional litigation relating to the Company's marketing and sales of
individual life insurance may be commenced in the future.
The Company believes adequate provision has been made in its unaudited
interim condensed consolidated financial statements for all probable and
reasonably estimable losses for sales practices claims against Metropolitan
Life, New England and General American.
ASBESTOS-RELATED CLAIMS
Metropolitan Life previously reported that it had received approximately
60,300 asbestos-related claims in 2003 and approximately 53,200 such claims in
the first nine months of 2003. In the context of a change in Metropolitan Life's
asbestos claims administrator in
88
the second half of 2003, there was a minor overstatement of Metropolitan Life's
reported asbestos-related claims in 2003 and the first half of 2004.
Accordingly, Metropolitan Life now reports that it received approximately 58,650
asbestos-related claims in 2003 and 19,100 of such claims in the first nine
months of 2004 (12,900 claims in the first six months of 2004), compared to
approximately 53,000 in the first nine months of 2003.
Metropolitan Life continues to study its claims experience, review
external literature regarding asbestos claims experience in the United States
and consider numerous variables that can affect its asbestos liability exposure,
including bankruptcies of other companies involved in asbestos litigation and
legislative and judicial developments, to identify trends and to assess their
impact on the recorded asbestos liability.
The Company believes adequate provision has been made in its unaudited
interim condensed consolidated financial statements for all probable and
reasonably estimable losses for asbestos-related claims. The ability of
Metropolitan Life to estimate its ultimate asbestos exposure is subject to
considerable uncertainty due to numerous factors. The availability of data is
limited and it is difficult to predict with any certainty numerous variables
that can affect liability estimates, including the number of future claims, the
cost to resolve claims, the disease mix and severity of disease, the
jurisdiction of claims filed, tort reform efforts and the impact of any possible
future adverse verdicts and their amounts.
The number of asbestos cases that may be brought or the aggregate amount
of any liability that Metropolitan Life may ultimately incur is uncertain.
Accordingly, 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
unaudited interim condensed 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.
Metropolitan Life also has been named as a defendant in a small number of
silicosis, welding and mixed dust cases in various states. The Company intends
to defend itself vigorously against these cases.
PROPERTY AND CASUALTY ACTIONS
A purported class action has been filed against Metropolitan Property and
Casualty Insurance Company in Montana. This suit alleges breach of contract and
bad faith for not aggregating medical payment and uninsured coverages provided
in connection with the several vehicles identified in insureds' motor vehicle
policies. This suit has been stayed pending resolution of these issues by the
Montana Supreme Court in a suit involving another insurer. Certain plaintiffs'
lawyers in another action have alleged that the use of certain automated
databases to provide total loss vehicle valuation methods was improper.
Metropolitan Property and Casualty Insurance Company, along with a number of
other insurers, tentatively agreed in January 2004 to resolve this issue in a
class action format. The amount to be paid in resolution of this matter will not
be material to Metropolitan Property and Casualty Insurance Company.
DEMUTUALIZATION ACTIONS
Several lawsuits were brought in 2000 challenging the fairness of
Metropolitan Life's plan of reorganization, as amended (the "plan") and the
adequacy and accuracy of Metropolitan Life's disclosure to policyholders
regarding the plan. These actions named as defendants some or all of
Metropolitan Life, MetLife, Inc. (the "Holding Company"), the individual
directors, the New York Superintendent of Insurance (the "Superintendent") and
the underwriters for MetLife, Inc.'s initial public offering, Goldman Sachs &
Company and Credit Suisse First Boston. On February 21, 2003, a trial court
within the commercial part of the New York State court granted the defendants'
motions to dismiss two purported class actions. On April 27, 2004, the appellate
court modified the trial court's order by reinstating certain claims against
Metropolitan Life, the Holding Company and the individual directors. Plaintiffs
in these actions have filed a consolidated amended complaint. Defendants have
moved to dismiss part of the consolidated amended complaint, and plaintiffs have
served their motion to certify a litigation class. Another purported class
action filed in New York State court in Kings County has been consolidated with
this action. The plaintiffs in the state court class actions seek compensatory
relief and punitive damages. Five persons 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. Respondents have moved to dismiss
the proceeding. In a purported class action against Metropolitan Life and the
Holding Company pending in the United States District Court for the Eastern
District of New York, plaintiffs served a second consolidated amended complaint
on April 2, 2004. In this
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action, plaintiffs assert violations of the Securities Act of 1933 and the
Securities Exchange Act of 1934 in connection with the plan, claiming that the
Policyholder Information Booklets failed to disclose certain material facts.
They seek rescission and compensatory damages. On June 22, 2004, the court
denied the defendants' motion to dismiss the claim of violation of the
Securities Exchange Act of 1934. The court had previously denied defendants'
motion to dismiss the claim for violation of the Securities Act of 1933. On
September 8, 2004, the court denied defendants' motion for summary judgment as
premature. 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.
On April 30, 2004, a lawsuit was filed in New York state court in New York
County against the Holding Company and Metropolitan Life on behalf of a proposed
class comprised of the settlement class in the Metropolitan Life sales practices
class action settlement approved in December 1999 by the United States District
Court for the Western District of Pennsylvania. In July 2004, the plaintiffs
served an amended complaint. The amended complaint challenges the treatment of
the cost of the sales practices settlement in the demutualization of
Metropolitan Life and asserts claims of breach of fiduciary duty, common law
fraud, and unjust enrichment. Plaintiffs seek compensatory and punitive damages,
as well as attorneys' fees and costs. The Holding Company and Metropolitan Life
have moved to dismiss the amended complaint. In October 2003, the United States
District Court for the Western District of Pennsylvania dismissed plaintiffs'
similar complaint alleging that the demutualization breached the terms of the
1999 settlement agreement and unjustly enriched the Holding Company and
Metropolitan Life. The Holding Company and Metropolitan Life intend to contest
this matter vigorously.
OTHER
Regulatory bodies have contacted the Company and have requested
information relating to market timing and late trading of mutual funds and
variable insurance products and, generally, the marketing of products. The
Company believes that many of these inquiries are similar to those made to many
financial services companies as part of industry-wide investigations by various
regulatory agencies. State Street Research Investment Services ("SSRIS"), one of
the Company's indirect broker/dealer subsidiaries, has entered into a settlement
with the NASD resolving all outstanding issues relating to its investigation.
The SEC has commenced an investigation with respect to market timing and late
trading in a limited number of privately-placed variable insurance contracts
that were sold through General American. As previously reported, in May 2004,
General American received a so-called "Wells Notice" stating that the SEC staff
is considering recommending that the SEC bring a civil action alleging
violations of the U.S. securities laws against General American. Under the SEC
procedures, General American can avail itself of the opportunity to respond to
the SEC staff before it makes a formal recommendation regarding whether any
action alleging violations of the U.S. securities laws should be considered.
General American has responded to the Wells Notice. The Company is fully
cooperating with regard to these information requests and investigations. The
Company at the present time is not aware of any systemic problems with respect
to such matters that may have a material adverse effect on the Company's
consolidated financial position.
In October 2004, the SEC informed MetLife that it anticipates issuing a
formal order of investigation related to certain sales by a former MetLife sales
representative to the Sheriff's Department of Fulton County, Georgia. The
Company intends to fully cooperate with respect to any inquiries from the SEC.
The Company has received a number of subpoenas and other requests from the
Office of the Attorney General of the State of New York seeking, among other
things, information regarding and relating to compensation agreements between
insurance brokers and the Company, whether MetLife has provided or is aware of
the provision of "fictitious" or "inflated" quotes and information regarding
tying arrangements with respect to reinsurance. Based upon an internal review,
the Company advised the Attorney General for the State of New York that MetLife
was not aware of any instance in which MetLife had provided a "fictitious" or
"inflated" quote. MetLife also has received a subpoena, including a set of
interrogatories, from the Office of the Attorney General of the State of
Connecticut seeking information and documents concerning contingent commission
payments to brokers and MetLife's awareness of any "sham" bids for business.
MetLife is continuing to conduct an internal review of its commission payment
practices. The Company continues to fully cooperate with these inquiries and is
responding to the subpoenas and other requests.
Two class action lawsuits were filed in the United States District Court
for the Southern District of New York, on behalf of proposed classes of all
persons who purchased the securities of MetLife, Inc. between April 5, 2000 and
October 19, 2004 against defendants MetLife and certain officers of the Company.
In the context of contingent commissions, the Complaints allege that defendants
violated the federal securities laws by issuing materially false and misleading
statements and failing to disclose material facts regarding the Company's
financial performance throughout the class period that had the effect of
artificially inflating the market price of the Company's securities. The
plaintiffs in these actions seek compensatory and other relief. The Company and
other defendants intend to vigorously defend these cases.
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A case has been brought in California state court against MetLife, other
insurers and an insurance broker, among others, alleging that the insurers and
the broker violated Section 17200 of the California Business and Profession Act
by engaging in unfair trade practices concerning contingent commissions and fees
paid to the broker. Additionally, a civil RICO action has been brought against
MetLife, other insurers, and a broker in a California federal court with respect
to issues concerning contingent commissions and fees paid to the broker. The
Company intends to vigorously defend these cases.
In addition to those discussed above, a number of inquiries of the
insurance industry by regulators and others are now pending regarding industry
brokerage practices and related matters and others may begin. It is reasonably
possible that MetLife will receive additional subpoenas, interrogatories,
requests and lawsuits. MetLife will fully cooperate with all regulatory
inquiries and vigorously defend all lawsuits.
Various litigation, claims and assessments against the Company, in
addition to those discussed above and those otherwise provided for in the
Company's unaudited interim condensed consolidated financial statements, have
arisen in the course of the Company's business, including, but not limited to,
in connection with its activities as an insurer, employer, investor, investment
advisor and taxpayer. Further, state insurance regulatory authorities 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 consolidated net income or cash flows in particular quarterly or
annual periods.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of common stock made by or on behalf of the Holding Company
during the three months ended September 30, 2004 are set forth below:
(D) MAXIMUM NUMBER (OR
APPROXIMATE DOLLAR
(C) TOTAL NUMBER OF VALUE) OF SHARES THAT
SHARES PURCHASED AS PART MAY YET BE PURCHASED
(A) TOTAL NUMBER OF (B) AVERAGE PRICE OF PUBLICLY ANNOUNCED UNDER THE PLANS OR
PERIOD SHARES PURCHASED(1) PAID PER SHARE PLANS OR PROGRAMS(2) PROGRAMS
- -------------------------------- ------------------- ----------------- ------------------------ -----------------------
July 1 - July 31, 2004 - - - $433,901,324
August 1 - August 31, 2004 3,233,977 $36.02 3,211,781 $318,235,733
September 1 - September 30, 2004 2,789,051 $37.92 2,784,723 $212,628,334
Total 6,023,028 $36.90 5,966,504 $212,628,334
(1) During the period August 1 - August 31, 2004, separate account affiliates
of the Holding Company purchased 22,196 shares of Common Stock on the open
market in nondiscretionary transactions to rebalance index funds. During
the period September 1 - September 30, 2004, separate account affiliates
of the Holding Company purchased 4,328 shares of Common Stock on the open
market in nondiscretionary transactions to rebalance index funds. Except
as disclosed above, there were no shares of Common Stock which were
repurchased by the Holding Company other than through a publicly announced
plan or program.
(2) On February 19, 2002, the Holding Company's Board of Directors authorized
a $1 billion common stock repurchase program. On October 26, 2004, the
Holding Company's Board of Directors authorized an additional $1 billion
common stock repurchase program, which will begin after the completion of
the program authorized on February 19, 2002. Under these authorizations,
the Holding Company may purchase its common stock from the MetLife
Policyholder Trust, in the open market and in privately negotiated
transactions.
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ITEM 6. EXHIBITS
10.1 Letter from MetLife, Inc., Metropolitan Life Insurance Company and
MetLife Funding, Inc. to Bank of America, N.A., as administrative
agent, terminating as of April 23, 2004 the Three-Year Credit
Agreement dated April 23, 2002.
10.2 Metropolitan Life Auxiliary Savings and Investment Plan (amended and
restated) effective January 1, 2004, as adopted August 3, 2004.
10.3 Metropolitan Life Supplemental Auxiliary Savings and Investment Plan
(amended and restated) effective January 1, 2004, as adopted August
3, 2004.
10.4 MetLife Plan for Transition Assistance for Officers dated January 7,
2000, as amended.
10.5 Agreement, Waiver and General Release dated August 18, 2004 between
MetLife Group, Inc. and Stewart G. Nagler.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METLIFE, INC.
By: /s/ Joseph J. Prochaska, Jr.
--------------------------------
Name: Joseph J. Prochaska, Jr.
Title: Senior Vice-President,
Finance Operations and Chief
Accounting Officer (Authorized
Signatory and Chief Accounting Officer)
Date: November 5, 2004
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EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT NAME
- ------- ------------
10.1 Letter from MetLife, Inc., Metropolitan Life Insurance Company and
MetLife Funding, Inc. to Bank of America, N.A., as administrative
agent, terminating as of April 23, 2004 the Three-Year Credit
Agreement dated April 23, 2002.
10.2 Metropolitan Life Auxiliary Savings and Investment Plan (amended and
restated) effective January 1, 2004, as adopted August 3, 2004.
10.3 Metropolitan Life Supplemental Auxiliary Savings and Investment Plan
(amended and restated) effective January 1, 2004, as adopted August
3, 2004.
10.4 MetLife Plan for Transition Assistance for Officers dated January 7,
2000, as amended.
10.5 Agreement, Waiver and General Release dated August 18, 2004 between
MetLife Group, Inc. and Stewart G. Nagler.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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