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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<Table>
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</Table>
COMMISSION FILE NUMBER: 001-15787
---------------------
METLIFE, INC.
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 13-4075851
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 PARK AVENUE, NEW YORK, NY 10166-0188
(Address of principal (Zip Code)
executive offices)
</Table>
(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 [ ]
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
At November 2, 2005, 757,277,230 shares of the Registrant's Common Stock,
$.01 par value per share, were outstanding.
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.............................. 4
Interim Condensed Consolidated Balance Sheets at September
30, 2005 (Unaudited) and December 31, 2004............. 4
Interim Condensed Consolidated Statements of Income for
the Three Months and Nine Months Ended September 30,
2005 and 2004 (Unaudited).............................. 5
Interim Condensed Consolidated Statement of Stockholders'
Equity for the Nine Months Ended September 30, 2005
(Unaudited)............................................ 6
Interim Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2005 and 2004
(Unaudited)............................................ 7
Notes to Interim Condensed Consolidated Financial
Statements (Unaudited)................................. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 61
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................ 126
ITEM 4. CONTROLS AND PROCEDURES........................... 130
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................. 131
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS............................................... 136
ITEM 6. EXHIBITS.......................................... 138
SIGNATURES................................................ 139
EXHIBIT INDEX............................................. 140
</Table>
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 MetLife, Inc. and its subsidiaries, as well as other statements
including words such as "anticipate," "believe," "plan," "estimate," "expect,"
"intend" and other similar expressions. Forward-looking statements are made
based upon management's current expectations and beliefs concerning future
developments and their potential effects on MetLife, Inc. and its subsidiaries.
Such forward-looking statements are not guarantees of future performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METLIFE, INC.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 (UNAUDITED) AND DECEMBER 31, 2004
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost: $224,633 and $166,980, respectively)... $231,614 $176,746
Trading securities, at fair value (cost: $797 and $0,
respectively)........................................... 805 --
Equity securities available-for-sale, at fair value (cost:
$2,944 and $1,913, respectively)........................ 3,159 2,188
Mortgage and consumer loans............................... 36,094 32,406
Policy loans.............................................. 9,841 8,899
Real estate and real estate joint ventures
held-for-investment..................................... 4,318 3,076
Real estate held-for-sale................................. 187 1,157
Other limited partnership interests....................... 4,345 2,907
Short-term investments.................................... 4,481 2,662
Other invested assets..................................... 7,499 4,926
-------- --------
Total investments....................................... 302,343 234,967
Cash and cash equivalents................................... 6,950 4,048
Accrued investment income................................... 3,299 2,338
Premiums and other receivables.............................. 14,391 6,695
Deferred policy acquisition costs........................... 19,211 14,327
Assets of subsidiaries held-for-sale........................ -- 410
Goodwill, net............................................... 4,564 633
Other assets................................................ 8,017 6,621
Separate account assets..................................... 124,044 86,769
-------- --------
Total assets............................................ $482,819 $356,808
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Future policy benefits.................................... $121,591 $100,154
Policyholder account balances............................. 127,431 86,246
Other policyholder funds.................................. 8,521 7,251
Policyholder dividends payable............................ 978 898
Policyholder dividend obligation.......................... 1,735 2,243
Short-term debt........................................... 1,303 1,445
Long-term debt............................................ 9,492 7,412
Junior subordinated debt securities underlying common
equity units............................................ 2,134 --
Shares subject to mandatory redemption.................... 278 278
Liabilities of subsidiaries held-for-sale................. -- 268
Current income taxes payable.............................. 97 421
Deferred income taxes payable............................. 1,456 2,473
Payables under securities loaned transactions............. 40,127 28,678
Other liabilities......................................... 14,875 9,448
Separate account liabilities.............................. 124,044 86,769
-------- --------
Total liabilities....................................... 454,062 333,984
-------- --------
Stockholders' Equity:
Preferred stock, par value $0.01 per share; 200,000,000
shares authorized; 84,000,000 shares issued and
outstanding at September 30, 2005; none issued and
outstanding at December 31, 2004; $2,100 aggregate
liquidation preference.................................... 1 --
Common stock, par value $0.01 per share; 3,000,000,000
shares authorized; 786,766,664 shares issued at September
30, 2005 and December 31, 2004; 757,056,777 shares and
732,487,999 shares outstanding at September 30, 2005 and
December 31, 2004, respectively........................... 8 8
Additional paid-in capital.................................. 17,273 15,037
Retained earnings........................................... 10,582 6,608
Treasury stock, at cost; 29,709,887 shares and 54,278,665
shares at September 30, 2005 and December 31, 2004,
respectively.............................................. (981) (1,785)
Accumulated other comprehensive income...................... 1,874 2,956
-------- --------
Total stockholders' equity.............................. 28,757 22,824
-------- --------
Total liabilities and stockholders' equity.............. $482,819 $356,808
======== ========
</Table>
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
METLIFE, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2005 2004 2005 2004
------- ------ ------- -------
REVENUES
Premiums............................................ $ 6,514 $5,679 $18,514 $16,400
Universal life and investment-type product policy
fees.............................................. 1,112 736 2,716 2,120
Net investment income............................... 4,088 3,059 10,784 9,076
Other revenues...................................... 348 292 948 889
Net investment gains (losses)....................... (50) 206 268 369
------- ------ ------- -------
Total revenues................................. 12,012 9,972 33,230 28,854
------- ------ ------- -------
EXPENSES
Policyholder benefits and claims.................... 6,837 5,924 19,018 16,775
Interest credited to policyholder account
balances.......................................... 1,149 739 2,764 2,220
Policyholder dividends.............................. 426 407 1,261 1,252
Other expenses...................................... 2,615 1,933 6,591 5,645
------- ------ ------- -------
Total expenses................................. 11,027 9,003 29,634 25,892
------- ------ ------- -------
Income from continuing operations before provision
for income taxes.................................. 985 969 3,596 2,962
Provision for income taxes.......................... 246 290 1,049 817
------- ------ ------- -------
Income from continuing operations................... 739 679 2,547 2,145
Income from discontinued operations, net of income
taxes............................................. 34 16 1,458 188
------- ------ ------- -------
Income before cumulative effect of a change in
accounting........................................ 773 695 4,005 2,333
Cumulative effect of a change in accounting, net of
income taxes...................................... -- -- -- (86)
------- ------ ------- -------
Net income.......................................... 773 695 4,005 2,247
Preferred stock dividend............................ 31 -- 31 --
------- ------ ------- -------
Net income available to common shareholders......... $ 742 $ 695 $ 3,974 $ 2,247
======= ====== ======= =======
Income from continuing operations per common share
Basic............................................. $ 0.97 $ 0.91 $ 3.42 $ 2.85
======= ====== ======= =======
Diluted........................................... $ 0.96 $ 0.90 $ 3.38 $ 2.83
======= ====== ======= =======
Net income available to common shareholders per
common share
Basic............................................. $ 0.98 $ 0.93 $ 5.33 $ 2.98
======= ====== ======= =======
Diluted........................................... $ 0.97 $ 0.92 $ 5.28 $ 2.97
======= ====== ======= =======
</Table>
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
METLIFE, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED)
(IN MILLIONS)
<Table>
<Caption>
ADDITIONAL TREASURY
PREFERRED COMMON PAID-IN RETAINED STOCK AT
STOCK STOCK CAPITAL EARNINGS COST
--------- ------ ---------- -------- --------
Balance at January 1, 2005.............. $ -- $8 $15,037 $ 6,608 $(1,785)
Treasury stock transactions, net........ 57 77
Common stock issued in connection with
acquisition........................... 283 727
Dividends on preferred stock............ (31)
Issuance of preferred stock............. 1 2,042
Issuance of stock purchase contracts
related to common equity units........ (146)
Comprehensive income (loss):
Net income............................ 4,005
Other comprehensive income (loss):
Unrealized gains (losses) on
derivative instruments, net of
income taxes......................
Unrealized investment gains
(losses), net of related offsets
and income taxes..................
Foreign currency translation
adjustments.......................
Minimum pension liability
adjustment........................
Other comprehensive
income (loss).....................
Comprehensive income (loss)...........
----- -- ------- ------- -------
Balance at September 30, 2005........... $ 1 $8 $17,273 $10,582 $ (981)
===== == ======= ======= =======
<Caption>
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
-----------------------------------------
NET FOREIGN MINIMUM
UNREALIZED CURRENCY PENSION
INVESTMENT TRANSLATION LIABILITY
GAINS (LOSSES) ADJUSTMENT ADJUSTMENT TOTAL
-------------- ----------- ---------- -------
Balance at January 1, 2005.............. $2,994 $ 92 $(130) $22,824
Treasury stock transactions, net........ 134
Common stock issued in connection with
acquisition........................... 1,010
Dividends on preferred stock............ (31)
Issuance of preferred stock............. 2,043
Issuance of stock purchase contracts
related to common equity units........ (146)
Comprehensive income (loss):
Net income............................ 4,005
Other comprehensive income (loss):
Unrealized gains (losses) on
derivative instruments, net of
income taxes...................... 177 177
Unrealized investment gains
(losses), net of related offsets
and income taxes.................. (1,246) (1,246)
Foreign currency translation
adjustments....................... (60) (60)
Minimum pension liability
adjustment........................ 47 47
-------
Other comprehensive
income (loss)..................... (1,082)
-------
Comprehensive income (loss)........... 2,923
------ ---- ----- -------
Balance at September 30, 2005........... $1,925 $ 32 $ (83) $28,757
====== ==== ===== =======
</Table>
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
METLIFE, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
(IN MILLIONS)
<Table>
<Caption>
NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------
2005 2004
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 4,822 $ 4,260
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales, maturities and repayments of:
Fixed maturities........................................ 109,462 60,474
Equity securities....................................... 844 689
Mortgage and consumer loans............................. 5,582 2,542
Real estate and real estate joint ventures.............. 3,261 1,063
Other limited partnership interests..................... 801 560
Purchases of:
Fixed maturities........................................ (122,471) (67,501)
Equity securities....................................... (1,049) (867)
Mortgage and consumer loans............................. (6,957) (5,781)
Real estate and real estate joint ventures.............. (1,319) (619)
Other limited partnership interests..................... (911) (671)
Net change in short-term investments...................... 1,093 (516)
Purchases of businesses, net of cash received of $852..... (10,154) --
Proceeds from sales of businesses......................... 240 29
Net change in other invested assets....................... (419) (316)
Other, net................................................ (141) (29)
--------- --------
Net cash used in investing activities....................... (22,138) (10,943)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits................................................ 36,011 28,480
Withdrawals............................................. (32,285) (21,958)
Net change in payable under securities loaned
transactions............................................ 10,286 1,579
Net change in short-term debt............................. (166) (2,076)
Long-term debt issued..................................... 3,363 1,129
Long-term debt repaid..................................... (1,188) (116)
Preferred stock issued.................................... 2,100 --
Dividends on preferred stock.............................. (31) --
Junior subordinated debt securities issued................ 2,134 --
Treasury stock acquired................................... -- (496)
Stock options exercised................................... 58 39
Other, net................................................ (122) --
--------- --------
Net cash provided by financing activities................... 20,160 6,581
--------- --------
Change in cash and cash equivalents......................... 2,844 (102)
Cash and cash equivalents, beginning of period.............. 4,106 3,733
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 6,950 $ 3,631
========= ========
Cash and cash equivalents, subsidiaries held-for-sale,
beginning of period....................................... $ 58 $ 57
========= ========
CASH AND CASH EQUIVALENTS, SUBSIDIARIES HELD-FOR-SALE, END
OF PERIOD................................................. $ -- $ 41
========= ========
Cash and cash equivalents, from continuing operations,
beginning of period....................................... $ 4,048 $ 3,676
========= ========
CASH AND CASH EQUIVALENTS, FROM CONTINUING OPERATIONS, END
OF PERIOD................................................. $ 6,950 $ 3,590
========= ========
Supplemental disclosures of cash flow information:
Net cash paid during the period for:
Interest................................................ $ 287 $ 248
========= ========
Income taxes............................................ $ 1,082 $ 628
========= ========
Non-cash transactions during the period:
Business Acquisitions:
Assets acquired....................................... $ 101,744 $ --
Less: liabilities assumed............................. 89,728 --
--------- --------
Net assets acquired................................... 12,016 --
Less: cash paid....................................... 11,006 --
--------- --------
Business acquisition, common stock issued............. $ 1,010 $ --
========= ========
Business Dispositions:
Assets disposed....................................... $ 366 $ 923
Less: liabilities disposed............................ 269 820
--------- --------
Net assets disposed................................... $ 97 $ 103
Plus: equity securities received...................... 43 --
Less: cash disposed................................... 43 103
--------- --------
Business disposition, net of cash disposed............ $ 97 $ --
========= ========
Contribution of equity securities to MetLife
Foundation............................................. $ -- $ 50
========= ========
Accrual for stock purchase contracts related to common
equity units........................................... $ 97 $ --
========= ========
Transfer from funds withheld at interest to fixed
maturities............................................. $ -- $ 606
========= ========
</Table>
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF ACCOUNTING POLICIES
BUSINESS
"MetLife" or the "Company" refers to MetLife, Inc., a Delaware corporation
incorporated in 1999 (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 individual and
institutional customers. The Company offers life insurance, annuities,
automobile and homeowner's insurance and retail banking services to individuals,
as well as group insurance, reinsurance and retirement & 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) application of the consolidation
rules to certain investments; (iv) the fair value of and accounting for
derivatives; (v) the capitalization and amortization of deferred policy
acquisition costs ("DAC"), including value of business acquired ("VOBA"); (vi)
the measurement of goodwill and related impairment, if any; (vii) the liability
for future policyholder benefits; (viii) the liability for litigation and
regulatory matters; (ix) accounting for reinsurance transactions; and (x)
accounting for employee benefit plans. The application of purchase accounting
requires the use of estimation techniques in determining the fair value of the
assets acquired and liabilities assumed -- the most significant of which relate
to the aforementioned critical estimates. 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 service industries;
others are specific to the Company's businesses and operations. Actual results
could differ from these 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 5.
The Company uses the equity method of accounting for investments in equity
securities in which it has more than a 20% interest and for 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 real estate
joint ventures and other limited partnership 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 $1,355 million and $1,145 million at September 30, 2005 and
December 31, 2004, respectively.
Certain amounts in the prior year periods' consolidated financial
statements have been reclassified to conform with the 2005 presentation. Such
reclassifications include $1,023 million relating to net bank deposits
reclassified from net cash provided by operating activities to cash flows from
financing activities. This reclassification also resulted in the
reclassification of balances to policyholder account balances from other
liabilities on the interim condensed consolidated balance sheet at December 31,
2004. In addition, $1,579 million relating to the net change in payable under
securities loaned transactions were reclassified from cash flows
8
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
from investing activities to cash flows from financing activities on the interim
condensed consolidated statements of cash flows for the nine months ended
September 30, 2004.
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, 2005, its consolidated results of operations for the three
months and nine months ended September 30, 2005 and 2004, its consolidated cash
flows for the nine months ended September 30, 2005 and 2004 and its consolidated
statement of stockholders' equity for the nine months ended September 30, 2005,
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, 2004 included in
MetLife, Inc.'s 2004 Annual Report on Form 10-K filed with the U.S. Securities
and Exchange Commission ("SEC").
On July 1, 2005, the Holding Company completed the acquisition of The
Travelers Insurance Company ("TIC"), excluding certain assets, most
significantly, Primerica, from Citigroup Inc. ("Citigroup"), and substantially
all of Citigroup Inc.'s international insurance businesses (collectively,
"Travelers"), which is more fully described in Note 2. The acquisition is being
accounted for using the purchase method of accounting. Travelers' assets,
liabilities and results of operations are included in the Company's results
beginning July 1, 2005.
SIGNIFICANT ACCOUNTING POLICIES
In connection with the acquisition of Travelers, the following policies
have been updated from MetLife Inc.'s 2004 Annual Report on Form 10-K filed with
the SEC:
Goodwill
Goodwill is the excess of cost over the fair value of net assets acquired.
Changes in net goodwill are as follows:
<Table>
<Caption>
NINE MONTHS
ENDED
SEPTEMBER 30,
2005
-------------
(IN MILLIONS)
Balance, beginning of year.................................. $ 633
Acquisitions................................................ 3,946
Disposition and other....................................... (15)
------
Balance, end of period...................................... $4,564
======
</Table>
Goodwill is not amortized but is tested for impairment at least annually or
more frequently if events or circumstances, such as adverse changes in the
business climate, indicate that there may be justification for conducting an
interim test. Impairment testing is performed using the fair value approach,
which requires the use of estimates and judgment, at the "reporting unit" level.
A reporting unit is the operating segment, or a business one level below that
operating segment if discrete financial information is prepared and regularly
reviewed by management at that level. For purposes of goodwill impairment
testing, goodwill within Corporate & Other is allocated to reporting units
within the Company's business segments. If the carrying value of a reporting
unit's goodwill exceeds its fair value, the excess is recognized as an
impairment and recorded as a charge against net income. The fair values of the
reporting units are determined using discounted cash flow models. When available
and as appropriate, comparative market multiples are used to corroborate
discounted cash flow results.
9
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Trading Securities
During the first quarter of 2005, the Company established a trading
securities portfolio to support investment strategies that involve the active
and frequent purchase and sale of securities. Trading securities are recorded at
fair value with subsequent changes in fair value recognized in net investment
income.
As part of the acquisition of Travelers on July 1, 2005, the Company
acquired Travelers' investment in Tribeca Citigroup Investments Ltd.
("Tribeca"). This is a feeder fund investment structure whereby the feeder fund
invests substantially all of its assets in the master fund, Tribeca Global
Convertible Instruments Ltd. The primary investment objective of the master fund
is to achieve enhanced risk-adjusted return by investing in domestic and foreign
equities and equity-related securities utilizing such strategies as convertible
securities arbitrage. MetLife is the majority owner of the feeder fund and
consolidates the fund within its unaudited interim condensed consolidated
financial statements. Approximately $509 million of Tribeca's investments are
reported as trading securities in the accompanying unaudited interim condensed
consolidated financial statements with changes in fair value recognized in net
investment income.
Earnings Per Common Share
Basic earnings per common share is computed based on the weighted average
number of common shares outstanding during the period. Diluted earnings per
common share includes the dilutive effect of the assumed: (i) conversion of
forward purchase contracts; (ii) exercise of stock options; and (iii) issuance
under deferred stock compensation using the treasury stock method. Under the
treasury stock method, conversion of forward purchase contracts, exercise of the
stock options and issuance under deferred stock compensation is assumed with the
proceeds used to purchase common stock at the average market price for the
period. The difference between the number of shares assumed issued and number of
shares assumed purchased represents the dilutive shares, including the effects,
if any, of the stock purchase contracts on common equity units. See Note 7.
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. For federal income tax purposes, the
Company has made an election under Internal Revenue Code ("IRC") Section 338 as
it relates to the Travelers acquisition. As a result of this election, the tax
basis in the acquired assets and liabilities will be adjusted as of the
acquisition date resulting in a change to the related deferred income taxes.
APPLICATION OF RECENT ACCOUNTING PRONOUNCEMENTS
In September 2005, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 05-1, Accounting by Insurance
Enterprises for Deferred Acquisition Costs in Connection with Modifications or
Exchanges of Insurance Contracts ("SOP 05-1"). SOP 05-1 provides guidance on
accounting by insurance enterprises for deferred acquisition costs on internal
replacements of insurance and investment contracts other than those specifically
described in Statement of Financial Accounting Standards ("SFAS") No. 97,
Accounting and Reporting by Insurance Enterprises for Certain Long-Duration
Contracts and For Realized Gains and Losses from the Sale of Investments. SOP
05-1 defines an internal replacement as a modification in product benefits,
features, rights, or coverages that occurs by the exchange of a contract for a
new contract, or by amendment, endorsement, or rider to a contract, or by the
election of a feature or coverage within a contract. Under SOP 05-1,
modifications that result in a substantially unchanged contract will be
accounted for as a continuation of the replaced contract. A replacement contract
that is substantially changed will be accounted for as an extinguishment of the
replaced contract resulting in a release of unamortized deferred acquisition
costs, unearned revenue and deferred sales
10
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
inducements associated with the replaced contract. The guidance in SOP 05-1 will
be applied prospectively and is effective for internal replacements occurring in
fiscal years beginning after December 15, 2006. The Company is currently
evaluating the impact of SOP 05-1 and does not expect that the pronouncement
will have a material impact on the Company's unaudited interim condensed
consolidated financial statements.
In September 2005, the Emerging Issues Task Force ("EITF") reached
consensus on Issue No. 05-7, Accounting for Modifications to Conversion Options
Embedded in Debt Instruments and Related Issues ("EITF 05-7"). EITF 05-7
provides guidance on whether a modification of conversion options embedded in
debt results in an extinguishment of that debt. In certain situations, companies
may change the terms of an embedded conversion option as part of a debt
modification. The EITF concluded that the change in the fair value of an
embedded conversion option upon modification should be included in the analysis
of EITF Issue No. 96-19, Debtor's Accounting for a Modification or Exchange of
Debt Instrument, to determine whether a modification or extinguishment has
occurred and that a change in the fair value of a conversion option should be
recognized upon the modification as a discount (or premium) associated with the
debt, and an increase (or decrease) in additional paid-in capital. EITF 05-7
will be applied prospectively and is effective for all debt modifications
occurring in periods beginning after December 15, 2005. EITF 05-7 is not
expected to have a material impact on the Company's unaudited interim condensed
consolidated financial statements.
In September 2005, the EITF reached consensus on Issue No. 05-8, Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature
("EITF 05-8"). EITF 05-8 concludes that (i)the issuance of convertible debt with
a beneficial conversion feature results in a basis difference that should be
accounted for as a temporary difference and (ii) the establishment of the
deferred tax liability for the basis difference should result in an adjustment
to additional paid in capital. EITF 05-8 will be applied retrospectively for all
instruments with a beneficial conversion feature accounted for in accordance
with EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios, and EITF Issue
No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, and
is effective for periods beginning after December 15, 2005. EITF 05-8 is not
expected to have a material impact on the Company's unaudited interim condensed
consolidated financial statements.
Effective July 1, 2005, the Company adopted SFAS No. 153, Exchanges of
Nonmonetary Assets, an amendment of Accounting Principles Board ("APB") Opinion
No. 29 ("SFAS 153"). SFAS 153 amended prior guidance to eliminate the exception
for nonmonetary exchanges of similar productive assets and replaced it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of SFAS 153 were required to be applied
prospectively. SFAS 153 did not have a material impact on the Company's
unaudited interim condensed consolidated financial statements.
Effective July 1, 2005, the Company adopted EITF Issue No. 05-6,
Determining the Amortization Period for Leasehold Improvements ("EITF 05-6").
EITF 05-6 provides guidance on determining the amortization period for leasehold
improvements acquired in a business combination or acquired subsequent to lease
inception. As required by EITF 05-6, the Company adopted this guidance on a
prospective basis which had no material impact on the Company's unaudited
interim condensed consolidated financial statements.
In June 2005, the Financial Accounting Standards Board ("FASB") completed
its review of EITF 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.
EITF 03-1 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
11
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
("SFAS 115"), that are impaired at the balance sheet date but for which an
other-than-temporary impairment has not been recognized. The FASB decided not to
provide additional guidance on the meaning of other-than-temporary impairment
but has issued FASB Staff Position ("FSP") 115-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments ("FSP
115-1"), which nullifies the accounting guidance on the determination of whether
an investment is other-than-temporarily impaired as set forth in EITF 03-1. FSP
115-1 is effective on a prospective basis for other-than-temporary impairments
on certain investments in periods beginning after December 15, 2005. The Company
has complied with the disclosure requirements of EITF 03-1, which was effective
December 31, 2003 and will remain in effect until the adoption of FSP 115-1. The
Company does not anticipate that the adoption will have a material impact on its
unaudited interim condensed consolidated financial statements.
In June 2005, the EITF reached consensus on Issue No. 04-5, Determining
Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights ("EITF 04-5"). EITF 04-5 provides a framework for determining whether a
general partner controls and should consolidate a limited partnership or a
similar entity in light of certain rights held by the limited partners. The
consensus also provides additional guidance on substantive rights. EITF 04-5 was
effective after June 29, 2005 for all newly formed partnerships and for any
pre-existing limited partnerships that modified their partnership agreements
after that date. The adoption of this provision of EITF 04-5 did not have a
material impact on the Company's unaudited interim condensed consolidated
financial statements. EITF 04-5 must be adopted by January 1, 2006 for all other
limited partnerships through a cumulative effect of a change in accounting
principle recorded in opening equity or it may be applied retrospectively by
adjusting prior period financial statements. The adoption of this provision of
EITF 04-5 is not expected to have a material impact on the Company's unaudited
interim condensed consolidated financial statements.
In June 2005, the FASB cleared SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), Implementation Issue No. B38,
Embedded Derivatives: Evaluation of Net Settlement with Respect to the
Settlement of a Debt Instrument through Exercise of an Embedded Put Option or
Call Option ("Issue B38") and Implementation Issue No. B39, Embedded
Derivatives: Application of Paragraph 13(b) to Call Options That Are Exercisable
Only by the Debtor ("Issue B39"). Issue B38 clarifies that the potential
settlement of a debtor's obligation to a creditor that would occur upon exercise
of a put or call option meets the net settlement criteria of SFAS No. 133. Issue
B39 clarifies that an embedded call option, in which the underlying is an
interest rate or interest rate index, that can accelerate the settlement of a
debt host financial instrument should not be bifurcated and fair valued if the
right to accelerate the settlement can be exercised only by the debtor
(issuer/borrower) and the investor will recover substantially all of its initial
net investment. Issue Nos. B38 and B39, which must be adopted as of the first
day of the first fiscal quarter beginning after December 15, 2005, are not
expected to have a material impact on the Company's unaudited interim condensed
consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS
154"). The statement requires retrospective application to prior periods'
financial statements for a voluntary change in accounting principle unless it is
deemed impracticable. It also requires that a change in the method of
depreciation, amortization, or depletion for long-lived, non-financial assets be
accounted for as a change in accounting estimate rather than a change in
accounting principle. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
SFAS 154 is not expected to have a material impact on the Company's unaudited
interim condensed consolidated financial statements.
In December 2004, the FASB issued SFAS 123 (revised 2004) Share-Based
Payment ("SFAS 123(r)"), which revised SFAS No. 123, Accounting for Stock-Based
Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS 123(r) provides additional guidance
12
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
on determining whether certain financial instruments awarded in share-based
payment transactions are liabilities. SFAS 123(r) also requires that the cost of
all share-based transactions be measured at fair value and recognized over the
period during which an employee is required to provide service in exchange for
an award. The SEC issued a final ruling in April 2005 allowing a public company
that is not a small business issuer to implement SFAS 123(r) at the beginning of
the next fiscal year after June 15, 2005. Thus, the revised pronouncement must
be adopted by the Company by January 1, 2006. As permitted under SFAS 148,
Accounting for Stock-Based Compensation -- Transition and Disclosure -- an
amendment of FASB Statement No. 123, the Company elected to use the prospective
method of accounting for stock options granted subsequent to December 31, 2002.
Options granted prior to January 1, 2003 will continue to be accounted for under
the intrinsic value method until the adoption of SFAS 123(r). In addition, the
pro forma impact of accounting for these options at fair value will continue to
be accounted for under the intrinsic value method until the last of those
options vest in 2005. As all stock options currently accounted for under the
intrinsic value method will vest prior to the effective date, implementation of
SFAS 123(r) will not have a significant impact on the Company's unaudited
interim condensed consolidated financial statements. See Note 11.
In December 2004, the FASB issued FSP 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004 ("FSP 109-2"). The American Jobs Creation Act of 2004
("AJCA") introduced a one-time dividend received deduction on the repatriation
of certain earnings to a U.S. taxpayer. FSP 109-2 provides companies additional
time beyond the financial reporting period of enactment to evaluate the effects
of the AJCA on their plans to repatriate foreign earnings for purposes of
applying SFAS No. 109, Accounting for Income Taxes. The Company is currently
evaluating the repatriation provision of the AJCA. During the third quarter of
2005, the Company recorded a $15 million tax benefit related to the repatriation
of foreign earnings pursuant to Internal Revenue Code Section 965 for which a
U.S. deferred tax provision had previously been recorded. The Company does not
anticipate that further implementation of the repatriation provision will have a
material impact on the Company's income tax expense and deferred income tax
assets and liabilities.
Effective July 1, 2004, the Company prospectively adopted FSP No. 106-2,
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 ("FSP 106-2"). FSP 106-2
provides accounting guidance to employers that sponsor postretirement health
care plans that provide 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. 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. FSP 106-2 did not have a
material impact on the Company's unaudited interim condensed consolidated
financial statements.
Effective July 1, 2004, the Company adopted EITF 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 did not have a
material impact on the Company's unaudited interim condensed consolidated
financial statements.
Effective April 1, 2004, the Company adopted EITF Issue No. 03-6,
Participating Securities and the Two-Class Method under FASB Statement No. 128
("EITF 03-6"). EITF 03-6 provides guidance on determining whether a security
should be considered a participating security for purposes of computing earnings
per common share and how earnings should be allocated to the participating
security. EITF 03-6 did not have an impact on the Company's earnings per common
share calculations or amounts.
13
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Effective January 1, 2004, the Company adopted SOP 03-1, Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts ("SOP 03-1"), as interpreted by a Technical
Practice Aid ("TPA"), issued by the AICPA. 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 FSP 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. As a result of the adoption of SOP 03-1, 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 liabilities 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,
including VOBA 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 as derivatives under the provisions of SFAS
No. 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 with the change in the liability recorded as
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 changes 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. 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 changes in
accounting. Due to the adoption of SOP 03-1, the Company recorded a cumulative
effect of a change in accounting of $86 million, net of income taxes of $46
million, for the nine months ended September 30, 2004.
2. ACQUISITIONS
TRAVELERS
On July 1, 2005, the Holding Company completed the acquisition of Travelers
for $12.0 billion. The results of Travelers operations have been included in the
consolidated financial statements beginning July 1, 2005. As a result of the
acquisition, the Company is expecting to increase significantly the size and
scale in its core insurance and annuity products and expand its presence in both
the retirement & savings domestic markets, as well as the international markets.
It also expects that the distribution agreements executed with Citigroup as part
of the acquisition will provide the Company with one of the broadest
distribution networks in the industry. Consideration paid by the Holding Company
for the purchase consisted of approximately $10.9 billion in cash and 22,436,617
shares of the Holding Company's common stock with a market value of
14
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
approximately $1.0 billion to Citigroup and approximately $100 million in other
transaction costs. Consideration paid to Citigroup will be finalized subject to
review of the June 30, 2005 financial statements of Travelers by both the
Company and Citigroup and interpretation of the provisions of the acquisition
agreement by both parties. In addition to the cash on-hand, the purchase price
was financed through the issuance of common stock as described above, debt
securities as described in Note 6, common equity units as described in Note 7,
and preferred shares as described in Note 10. The $7.0 billion unsecured senior
bridge credit facility entered into by the Holding Company on May 16, 2005 to
finance a portion of the purchase price of Travelers was terminated unused on
July 1, 2005.
The acquisition is being accounted for using the purchase method of
accounting, which requires that the assets and liabilities of Travelers be
measured at their fair value as of July 1, 2005.
Purchase Price Allocation and Goodwill -- Preliminary
The purchase price has been allocated to the assets acquired and
liabilities assumed using management's best estimate of their fair values as of
the acquisition date. The computation of the purchase price and the allocation
of the purchase price to the net assets acquired based upon their respective
fair values as of July 1, 2005, and the resulting goodwill, are presented below.
The fair value of certain assets acquired and liabilities assumed, including
goodwill, may be adjusted during the allocation period due to finalization of
the purchase price to be paid to Citigroup as noted previously, agreement
between Citigroup and MetLife as to the tax basis purchase price to be allocated
to the acquired subsidiaries, and receipt of information regarding the
estimation of certain fair values. In no case will the adjustments extend beyond
one year from the acquisition date.
<Table>
<Caption>
AS OF JULY 1,
2005
-----------------
(IN MILLIONS)
SOURCES:
Cash...................................................... $ 4,192
Debt...................................................... 2,716
Junior subordinated debt securities associated with common
equity units........................................... 2,134
Preferred stock........................................... 2,100
Common stock.............................................. 1,010
-------
TOTAL SOURCES OF FUNDS...................................... $12,152
=======
USES:
Debt and equity issuance costs............................ $ 128
Investment in MetLife Capital Trusts II and III........... 64
Acquisition costs......................................... 107
Purchase price paid to Citigroup.......................... 11,853
-------
TOTAL PURCHASE PRICE...................................... 11,960
-------
TOTAL USES OF FUNDS....................................... $12,152
=======
</Table>
15
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
AS OF JULY 1,
2005
-----------------
(IN MILLIONS)
TOTAL PURCHASE PRICE........................................ $11,960
NET ASSETS ACQUIRED FROM TRAVELERS.......................... $ 9,412
ADJUSTMENTS TO REFLECT ASSETS ACQUIRED AT FAIR VALUE:
Fixed maturities available-for-sale....................... (22)
Mortgage and consumer loans............................... 71
Real estate and real estate joint ventures
held-for-investment.................................... 17
Real estate held-for-sale................................. 22
Other limited partnerships................................ 18
Other invested assets..................................... 201
Premiums and other receivables............................ 1,010
Elimination of historical deferred policy acquisition
costs.................................................. (3,210)
Value of business acquired................................ 3,780
Value of distribution agreement acquired.................. 645
Value of customer relationships acquired.................. 17
Elimination of historical goodwill........................ (197)
Net deferred income tax assets............................ 1,995
Other assets.............................................. (43)
ADJUSTMENTS TO REFLECT LIABILITIES ASSUMED AT FAIR VALUE:
Future policy benefits.................................... (3,730)
Policyholder account balances............................. (1,904)
Other liabilities......................................... (11)
-------
NET FAIR VALUE OF ASSETS AND LIABILITIES ASSUMED............ 8,071
-------
GOODWILL RESULTING FROM THE ACQUISITION..................... $ 3,889
=======
</Table>
Goodwill resulting from the acquisition has been allocated to the Company's
segments, as well as Corporate & Other, that are expected to benefit from the
acquisition as follows:
<Table>
<Caption>
AS OF JULY 1,
2005
-------------
(IN MILLIONS)
Institutional............................................... $ 824
Individual.................................................. 2,492
International............................................... 193
Corporate & Other........................................... 380
------
TOTAL..................................................... $3,889
======
</Table>
Of the goodwill of $3.9 billion, approximately $1.5 billion is estimated to
be deductible for tax purposes.
16
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Condensed Statement of Net Assets Acquired
The condensed statement of net assets acquired reflects the fair value of
Travelers net assets as of July 1, 2005 as follows:
<Table>
<Caption>
AS OF JULY 1,
2005
-------------
(IN MILLIONS)
ASSETS:
Fixed maturities available-for-sale....................... $ 44,355
Trading securities........................................ 555
Equity securities available-for-sale...................... 641
Mortgage and consumer loans............................... 2,364
Policy loans.............................................. 884
Real estate and real estate joint ventures
held-for-investment.................................... 77
Real estate held-for-sale................................. 49
Other limited partnership interests....................... 1,091
Short-term investments.................................... 2,801
Other invested assets..................................... 1,686
--------
Total investments...................................... 54,503
--------
Cash and cash equivalents................................. 844
Accrued investment income................................. 539
Premiums and other receivables............................ 4,888
Value of business acquired................................ 3,780
Goodwill.................................................. 3,889
Other intangible assets................................... 662
Deferred tax assets....................................... 984
Other assets.............................................. 782
Separate account assets................................... 30,799
--------
Total assets acquired.................................. 101,670
--------
LIABILITIES:
Future policy benefits.................................... 18,161
Policyholder account balances............................. 36,633
Other policyholder funds.................................. 324
Short-term debt........................................... 25
Current income taxes payable.............................. 66
Other liabilities......................................... 3,702
Separate account liabilities.............................. 30,799
--------
Total liabilities assumed.............................. 89,710
--------
Net assets acquired.................................... $ 11,960
========
</Table>
17
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Other Intangible Assets
VOBA reflects the estimated fair value of in-force contracts acquired and
represents the portion of the purchase price that is allocated to the value of
the right to receive future cash flows from the life insurance and annuity
contracts in force at the acquisition date. VOBA is based on actuarially
determined projections, by each block of business, of future policy and contract
charges, premiums, mortality and morbidity, separate account performance,
surrenders, operating expenses, investment returns and other factors. Actual
experience on the purchased business may vary from these projections. If
estimated gross profits or premiums differ from expectations, the amortization
of VOBA is adjusted to reflect actual experience.
The value of the other identifiable intangibles reflects the estimated fair
value of Citigroup/Travelers distribution agreement and customer relationships
acquired at July 1, 2005 and will be amortized in relation to the expected
economic benefits of the agreement. If actual experience under the distribution
agreements or with customer relationships differs from expectations, the
amortization of these intangibles will be adjusted to reflect actual experience.
The use of discount rates was necessary to establish the fair value of
VOBA, as well as the other identifiable intangible assets. In selecting the
appropriate discount rates, management considered its weighted average cost of
capital as well as the weighted average cost of capital required by market
participants. A discount rate of 11.5% was used to value these intangible
assets.
The fair values of business acquired, distribution agreements and customer
relationships acquired are as follows:
<Table>
<Caption>
AS OF JULY 1,
2005
-------------
(IN MILLIONS)
Value of business acquired.................................. $3,780
Value of distribution agreements and customer relationships
acquired.................................................. 662
------
Total value of amortizable intangible assets acquired..... 4,442
Non-amortizable intangible assets acquired.................. --
------
Total value of intangible assets acquired, excluding
goodwill............................................... $4,442
======
</Table>
The estimated future amortization of the values of business acquired,
distribution agreements and customer relationships acquired from 2005 to 2010 is
as follows:
<Table>
<Caption>
AS OF SEPTEMBER 30,
2005
-------------------
(IN MILLIONS)
Three months ended December 31, 2005........................ $ 93
2006........................................................ $376
2007........................................................ $363
2008........................................................ $347
2009........................................................ $330
2010........................................................ $307
</Table>
Unaudited Pro Forma Interim Condensed Consolidated Financial Information
The following unaudited pro forma interim condensed consolidated financial
information presents the results of operations for the Company assuming the
Travelers acquisition had occurred at the beginning of the respective periods
presented. Discontinued operations and the cumulative effects of changes in
accounting and the related earnings per share have been excluded from the
presentation of the unaudited pro forma interim
18
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
condensed consolidated statements of income as these are non-recurring in
nature. Additionally, the unaudited pro forma interim condensed consolidated
statements of income reflect the reduction in investment income from the sale of
fixed maturity securities, but does not reflect a reduction of investment income
from the sale of real estate property as such investment income is reported as
discontinued operations. The unaudited pro forma interim condensed consolidated
statements of income do not reflect the gains (losses) on the sale of real
estate property or fixed maturity securities as such gains (losses) would be
reported as discontinued operations or are sales that would not be part of the
normal course of business. This pro forma information does not necessarily
represent what the Company's actual results of operations would have been if the
acquisition had occurred as of the date indicated or what such results would be
for any future periods.
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2005 2004
--------- ---------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
REVENUES
Premiums.................................................... $19,014 $17,382
Universal life and investment-type product policy fees...... 3,144 2,674
Net investment income....................................... 12,282 10,977
Other revenues.............................................. 1,112 972
Net investment gains (losses)............................... 309 357
------- -------
Total revenues............................................ 35,861 32,362
------- -------
EXPENSES
Policyholder benefits and claims............................ 19,630 17,795
Interest credited to policyholder account balances.......... 3,334 3,068
Policyholder dividends...................................... 1,261 1,369
Other expenses.............................................. 7,249 6,419
------- -------
Total expenses............................................ 31,474 28,651
------- -------
Income from continuing operations before provision for
income taxes.............................................. 4,387 3,711
Provision for income taxes.................................. 1,300 1,060
------- -------
Income from continuing operations........................... $ 3,087 $ 2,651
======= =======
Income from continuing operations per common share
Basic..................................................... $ 4.06 $ 3.42
======= =======
Diluted................................................... $ 4.02 $ 3.40
======= =======
Weighted average number of common shares outstanding
Basic..................................................... 760.6 775.0
======= =======
Diluted................................................... 768.0 779.6
======= =======
</Table>
The weighted average number of common shares outstanding in the preceding
table assumes the 22.4 million shares issued in connection with the Travelers
acquisition were outstanding as of the beginning of the periods presented.
Income from continuing operations per common share as presented in the
preceding table does not include a deduction for the impact of the preferred
stock dividend of approximately $93 million, assuming that such preferred shares
had been issued as of the beginning of the periods presented, for the nine
months ended September 30, 2005 and 2004. Income from continuing operations
available to common shareholders per
19
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
common share would have been $3.94 and $3.30 for the nine months ended September
30, 2005 and 2004, respectively, deducting the impact of the preferred stock
dividend.
Restructuring Costs and Other Charges
During fiscal 2005, as part of the integration of Travelers' operations,
management approved and initiated plans to reduce approximately 1,000 domestic
and international Travelers employees which is expected to be completed by
December 2006.
In the third quarter of 2005, MetLife recorded restructuring costs,
including severance, relocation and outplacement services of Travelers'
employees, as liabilities assumed in the purchase business combination.
Management currently estimates total restructuring costs associated with such
actions to approximate $49 million. Estimated restructuring expenses may change
as management continues to execute the approved plan. Decreases to these
estimates are recorded as an adjustment to goodwill indefinitely. Increases to
these estimates are recorded as an adjustment to goodwill during the purchase
price allocation period (generally within one year of the acquisition date) and
will be recorded as operating expenses thereafter. The components of the
restructuring costs associated with the Travelers acquisition, are as follows:
<Table>
<Caption>
ACCRUED CASH PAYMENTS FOR ACCRUED
RESTRUCTURING AT THREE MONTHS ENDED RESTRUCTURING AT
JULY 1, SEPTEMBER 30, SEPTEMBER 30, TOTAL COSTS
2005 2005 2005 INCURRED TO DATE
---------------- ------------------ ---------------- ----------------
(IN MILLIONS)
RESTRUCTURING COST.............. $49 $(13) $36 $49
</Table>
There were no adjustments to the liability for restructuring costs other
than cash payments during the period.
CITISTREET ASSOCIATES
On September 1, 2005, the Holding Company completed the acquisition of
CitiStreet Associates, a division of CitiStreet LLC that is primarily involved
in the distribution of annuity products and retirement plans, to the education,
healthcare, and not-for-profit markets, for approximately $56 million,
substantially all of which has been initially allocated to goodwill within the
Individual Segment. CitiStreet Associates will be integrated with MetLife
Resources, a division of MetLife dedicated to providing retirement plans and
financial services to the same markets. This integration is expected to be
completed by January 1, 2006.
20
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
3. INVESTMENTS
FIXED MATURITIES BY SECTOR AND EQUITY SECURITIES AVAILABLE-FOR-SALE
The following tables set forth the cost or amortized cost, gross unrealized
gain and loss, and estimated fair value of the Company's fixed maturities by
sector and equity securities, the percentage of the total fixed maturities
holdings that each sector represents and the percentage of the total equity
securities at:
<Table>
<Caption>
SEPTEMBER 30, 2005
--------------------------------------------------
COST OR GROSS UNREALIZED
AMORTIZED ----------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
--------- ------- ------- ---------- -----
(IN MILLIONS)
U.S. corporate securities.............. $ 76,106 $3,082 $ 716 $ 78,472 33.9%
Residential mortgage-backed
securities........................... 43,184 351 335 43,200 18.7
Foreign corporate securities........... 33,479 2,037 301 35,215 15.2
U.S. treasury/agency securities........ 25,238 1,364 134 26,468 11.4
Commercial mortgage-backed
securities........................... 17,299 260 170 17,389 7.5
Asset-backed securities................ 13,852 91 75 13,868 6.0
Foreign government securities.......... 9,665 1,403 19 11,049 4.8
State and political subdivision
securities........................... 4,564 201 43 4,722 2.0
Other fixed maturity securities........ 1,055 21 38 1,038 0.4
-------- ------ ------ -------- -----
Total bonds.......................... 224,442 8,810 1,831 231,421 99.9
Redeemable preferred stocks............ 191 4 2 193 0.1
-------- ------ ------ -------- -----
Total fixed maturities............... $224,633 $8,814 $1,833 $231,614 100.0%
======== ====== ====== ======== =====
Common stocks.......................... $ 1,942 $ 216 $ 34 $ 2,124 67.2%
Nonredeemable preferred stocks......... 1,002 40 7 1,035 32.8
-------- ------ ------ -------- -----
Total equity securities.............. $ 2,944 $ 256 $ 41 $ 3,159 100.0%
======== ====== ====== ======== =====
</Table>
21
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
DECEMBER 31, 2004
-------------------------------------------------
COST OR GROSS UNREALIZED
AMORTIZED ---------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
--------- -------- ----- ---------- -----
(IN MILLIONS)
U.S. corporate securities............... $ 58,022 $ 3,870 $172 $ 61,720 34.9%
Residential mortgage-backed
securities............................ 31,683 612 65 32,230 18.2
Foreign corporate securities............ 25,341 2,582 85 27,838 15.7
U.S. treasury/agency securities......... 16,534 1,314 22 17,826 10.1
Commercial mortgage-backed securities... 12,099 440 38 12,501 7.1
Asset-backed securities................. 10,784 125 33 10,876 6.2
Foreign government securities........... 7,621 973 26 8,568 4.8
State and political subdivision
securities............................ 3,683 220 4 3,899 2.2
Other fixed maturity securities......... 887 131 33 985 0.6
-------- ------- ---- -------- -----
Total bonds........................... 166,654 10,267 478 176,443 99.8
Redeemable preferred stocks............. 326 -- 23 303 0.2
-------- ------- ---- -------- -----
Total fixed maturities................ $166,980 $10,267 $501 $176,746 100.0%
======== ======= ==== ======== =====
Common stocks........................... $ 1,412 $ 244 $ 5 $ 1,651 75.5%
Nonredeemable preferred stocks.......... 501 39 3 537 24.5
-------- ------- ---- -------- -----
Total equity securities............... $ 1,913 $ 283 $ 8 $ 2,188 100.0%
======== ======= ==== ======== =====
</Table>
22
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
UNREALIZED LOSSES FOR FIXED MATURITIES AND EQUITY SECURITIES
AVAILABLE-FOR-SALE
The following tables show the estimated fair values and gross unrealized
losses of the Company's fixed maturities (aggregated by sector) and equity
securities in an unrealized loss position, aggregated by length of time that the
securities have been in a continuous unrealized loss position at September 30,
2005 and December 31, 2004:
<Table>
<Caption>
SEPTEMBER 30, 2005
------------------------------------------------------------------------------------------
EQUAL TO OR GREATER THAN
LESS THAN 12 MONTHS 12 MONTHS TOTAL
---------------------------- ---------------------------- ----------------------------
ESTIMATED GROSS ESTIMATED GROSS ESTIMATED GROSS
FAIR VALUE UNREALIZED LOSS FAIR VALUE UNREALIZED LOSS FAIR VALUE UNREALIZED LOSS
---------- --------------- ---------- --------------- ---------- ---------------
(DOLLARS IN MILLIONS)
U.S. corporate
securities............ $ 31,477 $ 643 $2,255 $ 73 $ 33,732 $ 716
Residential mortgage-
backed securities..... 31,800 312 828 23 32,628 335
Foreign corporate
securities............ 11,209 256 1,407 45 12,616 301
U.S. treasury/agency
securities............ 13,436 133 145 1 13,581 134
Commercial mortgage-
backed securities..... 10,217 157 406 13 10,623 170
Asset-backed
securities............ 7,239 63 397 12 7,636 75
Foreign government
securities............ 1,185 17 85 2 1,270 19
State and political
subdivision
securities............ 1,186 43 15 -- 1,201 43
Other fixed maturity
securities............ 367 33 54 5 421 38
-------- ------ ------ ---- -------- ------
Total bonds........... 108,116 1,657 5,592 174 113,708 1,831
Redeemable preferred
stocks................ 77 2 -- -- 77 2
-------- ------ ------ ---- -------- ------
Total fixed
maturities......... $108,193 $1,659 $5,592 $174 $113,785 $1,833
======== ====== ====== ==== ======== ======
Equity securities....... $ 690 $ 39 $ 60 $ 2 $ 750 $ 41
======== ====== ====== ==== ======== ======
Total number of
securities in an
unrealized loss
position.............. 10,563 729 11,292
======== ====== ========
</Table>
23
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
DECEMBER 31, 2004
------------------------------------------------------------------------------------------
EQUAL TO OR GREATER THAN
LESS THAN 12 MONTHS 12 MONTHS TOTAL
---------------------------- ---------------------------- ----------------------------
ESTIMATED GROSS ESTIMATED GROSS ESTIMATED GROSS
FAIR VALUE UNREALIZED LOSS FAIR VALUE UNREALIZED LOSS FAIR VALUE UNREALIZED LOSS
---------- --------------- ---------- --------------- ---------- ---------------
(DOLLARS IN MILLIONS)
U.S. corporate
securities............ $ 9,963 $120 $1,211 $52 $11,174 $172
Residential mortgage-
backed securities..... 8,545 58 375 7 8,920 65
Foreign corporate
securities............ 3,979 71 456 14 4,435 85
U.S. treasury/agency
securities............ 5,014 22 4 -- 5,018 22
Commercial mortgage-
backed securities..... 3,920 33 225 5 4,145 38
Asset-backed
securities............ 3,927 25 209 8 4,136 33
Foreign government
securities............ 896 21 117 5 1,013 26
State and political
subdivision
securities............ 211 2 72 2 283 4
Other fixed maturity
securities............ 46 33 26 -- 72 33
------- ---- ------ --- ------- ----
Total bonds........... 36,501 385 2,695 93 39,196 478
Redeemable preferred
stocks................ 303 23 -- -- 303 23
------- ---- ------ --- ------- ----
Total fixed
maturities......... $36,804 $408 $2,695 $93 $39,499 $501
======= ==== ====== === ======= ====
Equity securities....... $ 136 $ 6 $ 27 $ 2 $ 163 $ 8
======= ==== ====== === ======= ====
Total number of
securities in an
unrealized loss
position.............. 4,206 402 4,608
======= ====== =======
</Table>
AGING OF GROSS UNREALIZED LOSSES FOR FIXED MATURITIES AND EQUITY SECURITIES
AVAILABLE-FOR-SALE
The following table presents the cost or amortized cost, gross unrealized
losses and number of securities for fixed maturities and equity securities at
September 30, 2005 where the estimated fair value had declined and remained
below cost or amortized cost by less than 20%, or 20% or more for:
<Table>
<Caption>
SEPTEMBER 30, 2005
------------------------------------------------------------
COST OR GROSS NUMBER OF
AMORTIZED COST UNREALIZED LOSSES 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............ $ 97,743 $263 $1,358 $81 9,029 182
Six months or greater but less
than nine months.............. 8,015 -- 154 -- 736 3
Nine months or greater but less
than twelve months............ 4,560 -- 105 -- 613 --
Twelve months or greater........ 5,805 23 170 6 706 23
-------- ---- ------ --- ------ ---
Total......................... $116,123 $286 $1,787 $87 11,084 208
======== ==== ====== === ====== ===
</Table>
24
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
This information should be read in conjunction with the significant
accounting policies and estimates related to investments and the Company's
evaluation of investments for impairment as disclosed in Note 1 to the
Consolidated Financial Statements for the year ended December 31, 2004 included
in MetLife Inc.'s 2004 Annual Report on Form 10-K filed with the SEC.
NET INVESTMENT GAINS (LOSSES)
Net investment gains (losses) are as follows:
<Table>
<Caption>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- --------------
2005 2004 2005 2004
----- ----- ------ -----
(IN MILLIONS)
Fixed maturities........................................ $(98) $ 61 $(301) $ 92
Equity securities....................................... 4 44 91 141
Mortgage and consumer loans............................. 13 (8) (6) (8)
Real estate and real estate joint ventures.............. 5 10 4 12
Other limited partnership interests..................... 16 52 36 42
Sales of businesses..................................... -- -- -- 23
Derivatives............................................. (40) 35 353 (3)
Other................................................... 50 12 91 70
---- ---- ----- ----
Net investment gains (losses)......................... $(50) $206 $ 268 $369
==== ==== ===== ====
</Table>
The Company periodically disposes of fixed maturity and equity securities
at a loss. Generally, such losses are insignificant in amount or in relation to
the cost basis of the investment or are attributable to declines in fair value
occurring in the period of disposition.
TRADING SECURITIES
Net investment income for the three months and nine months ended September
30, 2005 includes $13 million and $15 million, respectively, of gains (losses)
on securities classified as trading. Of these amounts, $0.4 million and $0.8
million, respectively, relate to net gains (losses) recognized on trading
securities sold during the three months and nine months ended September 30,
2005. The remaining $13 million and $14 million, respectively, for the three
months and nine months ended September 30, 2005, relate to changes in fair value
on trading securities held at September 30, 2005. The Company did not have any
trading securities during the three months and nine months ended September 30,
2004.
As part of the acquisition of Travelers on July 1, 2005, the Company
acquired Travelers' investment in Tribeca. This is a feeder fund investment
structure whereby the feeder fund invests substantially all of its assets in the
master fund, Tribeca Global Convertible Instruments Ltd. The primary investment
objective of the master fund is to achieve enhanced risk-adjusted return by
investing in domestic and foreign equities and equity-related securities
utilizing such strategies as convertible securities arbitrage. MetLife is the
majority owner of the feeder fund and consolidates the fund within its unaudited
interim condensed consolidated financial statements. Approximately $509 million
of Tribeca's investments are reported as trading securities in the accompanying
unaudited interim condensed consolidated financial statements with changes in
fair value recognized in net investment income.
25
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
4. DERIVATIVE FINANCIAL INSTRUMENTS
TYPES OF DERIVATIVE INSTRUMENTS
The following table provides a summary of the notional amounts and current
market or fair value of derivative financial instruments held at:
<Table>
<Caption>
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------------------- -------------------------------
CURRENT MARKET CURRENT MARKET
OR FAIR VALUE OR FAIR VALUE
NOTIONAL -------------------- NOTIONAL --------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
-------- ------ ----------- -------- ------ -----------
(IN MILLIONS)
Interest rate swaps................... $22,074 $ 436 $ 76 $12,681 $284 $ 22
Interest rate floors.................. 9,725 121 -- 3,325 38 --
Interest rate caps.................... 22,541 185 -- 7,045 12 --
Financial futures..................... 1,691 33 16 611 -- 13
Foreign currency swaps................ 13,556 611 1,024 8,214 150 1,302
Foreign currency forwards............. 3,615 40 85 1,013 5 57
Options............................... 525 271 3 825 37 7
Financial forwards.................... 2,122 11 3 326 -- --
Credit default swaps.................. 2,732 11 8 1,897 11 5
Synthetic GICs........................ 5,497 -- -- 5,869 -- --
Other................................. -- -- -- 450 1 1
------- ------ ------ ------- ---- ------
Total............................... $84,078 $1,719 $1,215 $42,256 $538 $1,407
======= ====== ====== ======= ==== ======
</Table>
The Company previously disclosed in its consolidated financial statements
for the year ended December 31, 2004 its types and uses of derivative
instruments. During the nine months ended September 30, 2005, the Company began
using swap spread locks and credit default swaps without the use of the
replication synthetic asset transaction structure. Swap spread locks are used to
hedge invested assets on an economic basis against the risk of changes in credit
spreads and are included in financial forwards in the preceding table. Credit
default swaps are used as a means of both hedging and diversifying credit risk
exposure in certain portfolios.
In addition, during the three months ended September 30, 2005, the Company,
in conjunction with the acquisition of Travelers, began using equity variance
swaps, basis swaps, and currency option contracts. Equity variance swaps are
used to hedge on an economic basis the risk of increases in equity volatility
which affect variable annuity equity riders and are included in financial
forwards in the preceding table. Basis swaps are used to better match the cash
flows from assets and related liabilities and are included in interest rate
swaps in the preceding table. Currency option contracts are used to hedge on an
economic basis the Company's exposure to foreign currency exchange rates that
result from the Company's direct foreign currency investments. They are included
in options in the preceding table.
The Company enters into various collateral arrangements, which require both
the pledging and accepting of collateral in connection with its derivative
instruments. As of September 30, 2005, the Company was obligated to return cash
collateral under its control of $164 million. This unrestricted cash collateral
is included in cash and cash equivalents and the obligation to return it is
included in other liabilities in the interim condensed consolidated balance
sheets. As of September 30, 2005, the Company had also accepted collateral
consisting of various securities with a fair market value of $465 million, which
is held in separate custodial accounts and is not reflected in the interim
condensed consolidated financial statements. The Company is permitted by
contract to sell or repledge this collateral, but as of September 30, 2005 none
of the collateral had been sold or repledged. The Company did not have any cash
or other collateral related to derivative instruments at December 31, 2004.
26
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
This information should be read in conjunction with Note 3 of Notes to
Consolidated Financial Statements for the year ended December 31, 2004 included
in MetLife, Inc.'s 2004 Annual Report on Form 10-K filed with the SEC.
HEDGING
The table below provides a summary of the notional amount and fair value of
derivatives by type of hedge designation at:
<Table>
<Caption>
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------------------- -------------------------------
FAIR VALUE FAIR VALUE
NOTIONAL -------------------- NOTIONAL --------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
-------- ------ ----------- -------- ------ -----------
(IN MILLIONS)
Fair value............................ $ 4,430 $ 57 $ 67 $ 4,879 $173 $ 234
Cash flow............................. 9,007 39 567 8,787 41 689
Foreign operations.................... 1,849 4 81 535 -- 47
Non-qualifying........................ 68,792 1,619 500 28,055 324 437
------- ------ ------ ------- ---- ------
Total............................... $84,078 $1,719 $1,215 $42,256 $538 $1,407
======= ====== ====== ======= ==== ======
</Table>
The following table provides the settlement payments recorded in income for
the:
<Table>
<Caption>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- --------------
2005 2004 2005 2004
----- ----- ----- ------
(IN MILLIONS)
Qualifying hedges:
Net investment income.................................. $15 $(44) $19 $(111)
Interest credited to policyholder account balances..... 5 13 17 26
Other expenses......................................... (2) -- (5) --
Non-qualifying hedges:
Net investment gains (losses).......................... 19 12 56 48
--- ---- --- -----
Total............................................... $37 $(19) $87 $ (37)
=== ==== === =====
</Table>
FAIR VALUE HEDGES
The Company designates and accounts for the following as fair value hedges
when they have met the requirements of SFAS 133: (i) interest rate swaps to
convert fixed rate investments to floating rate investments; (ii) foreign
currency swaps to hedge the foreign currency fair value exposure of foreign
currency denominated investments and liabilities; and (iii) treasury futures to
hedge against changes in value of fixed rate securities.
27
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
The Company recognized net investment gains (losses) representing the
ineffective portion of all fair value hedges as follows:
<Table>
<Caption>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- -------------
2005 2004 2005 2004
------ ----- ----- -----
(IN MILLIONS)
Changes in the fair value of derivatives.................. $ (3) $(70) $(74) $ 5
Changes in the fair value of the items hedged............. 3 83 76 23
----- ---- ---- ---
Net ineffectiveness of fair value hedging activities...... $ -- $ 13 $ 2 $28
===== ==== ==== ===
</Table>
All components of each derivative's gain or loss were included in the
assessment of hedge ineffectiveness. There were no instances in which the
Company discontinued fair value hedge accounting due to a hedged firm commitment
no longer qualifying as a fair value hedge.
CASH FLOW HEDGES
The Company designates and accounts for the following as cash flow hedges
when they have met the requirements of SFAS 133: (i) interest rate swaps to
convert floating rate investments to fixed rate investments; (ii) interest rate
swaps to convert floating rate liabilities into fixed rate liabilities; (iii)
foreign currency swaps to hedge the foreign currency cash flow exposure of
foreign currency denominated investments and liabilities; (iv) treasury futures
to hedge against changes in value of securities to be acquired; (v) treasury
futures to hedge against changes in interest rates on liabilities to be issued;
and (vi) financial forwards to gain exposure to the investment risk and return
of securities not yet available.
For the three months and nine months ended September 30, 2005, the Company
recognized net investment gains (losses) of $4 million and $(24) million,
respectively, which represented the ineffective portion of all cash flow hedges.
For the three months and nine months ended September 30, 2004, the Company
recognized net investment gains (losses) of $24 million and $(5) million,
respectively, which represented the ineffective portion of all cash flow hedges.
All components of each derivative's gain or loss were included in the assessment
of hedge ineffectiveness. In certain instances, the Company discontinued cash
flow hedge accounting because the forecasted transactions did not occur on the
anticipated date or in the additional time period permitted by SFAS 133. The net
amounts reclassified into net investment gains (losses) for the three months and
nine months ended September 30, 2005, due to discontinuance of the cash flow
hedge because the transaction did not occur on the anticipated date or in the
additional time period permitted by SFAS 133 were losses of $1 million and $29
million, respectively. Such amounts for the three months and nine months ended
September 30, 2004, were losses of $5 million and $48 million, respectively.
There were no hedged forecasted transactions, other than the receipt or payment
of variable interest payments.
28
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Presented below is a rollforward of the components of other comprehensive
income (loss), before income taxes, related to cash flow hedges:
<Table>
<Caption>
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
2005 2005 2004 2004 2004
------------- ------------- ------------ ------------- -------------
(IN MILLIONS)
Other comprehensive income (loss)
balance at the beginning of the
period......................... $(211) $(456) $(417) $(273) $(417)
Gains (losses) deferred in other
comprehensive income (loss) on
the effective portion of cash
flow hedges.................... (25) 189 (97) 97
Amounts reclassified to net
investment gains (losses)...... 7 38 63 7 59
Amounts reclassified to net
investment income.............. 1 2 2 1 2
Amortization of transition
adjustment..................... -- (1) (7) -- (6)
----- ----- ----- ----- -----
Other comprehensive income (loss)
balance at the end of the
period......................... $(228) $(228) $(456) $(265) $(265)
===== ===== ===== ===== =====
</Table>
HEDGES OF NET INVESTMENTS IN FOREIGN OPERATIONS
The Company uses forward exchange contracts and foreign currency swaps to
hedge portions of its net investment in foreign operations against adverse
movements in exchange rates. The Company measures ineffectiveness on the forward
exchange contracts based upon the change in forward rates. There was no
ineffectiveness recorded for the three months and nine months ended September
30, 2005 or 2004.
In the Company's consolidated statements of stockholders' equity for the
nine months ended September 30, 2005, losses of $103 million were recorded on
foreign currency contracts used to hedge its net investments in foreign
operations. At September 30, 2005 and December 31, 2004, the cumulative foreign
currency translation loss recorded in accumulated other comprehensive income
(loss) ("AOCI") related to these hedges was approximately $161 million and $57
million, respectively. When substantially all of the net investments in foreign
operations are sold or liquidated, the amounts in AOCI are reclassified to the
consolidated statements of income, while a pro rata portion will be reclassified
upon partial sale of the net investments in foreign operations.
NON-QUALIFYING DERIVATIVES AND DERIVATIVES FOR PURPOSES OTHER THAN HEDGING
The Company enters into the following derivatives that do not qualify for
hedge accounting under SFAS 133 or for purposes other than hedging: (i) interest
rate swaps, purchased caps and floors, and treasury futures to minimize its
exposure to interest rate volatility; (ii) foreign currency forwards, swaps and
option contracts to minimize its exposure to adverse movements in exchange
rates; (iii) swaptions to sell embedded call options in fixed rate liabilities;
(iv) credit default swaps to minimize its exposure to adverse movements in
credit; (v) equity futures, equity options and equity variance swaps to
economically hedge liabilities embedded in certain variable annuity products;
(vi) swap spread locks to hedge invested assets against the risk of changes in
credit spreads; (vii) synthetic guaranteed interest contracts ("GICs") to
synthetically create traditional GICs; and (viii) replication synthetic asset
transactions ("RSATs") and total rate of return swaps ("TRRs")
29
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
to synthetically create investments; and (ix) basis swaps to better match the
cash flows from assets and related liabilities.
Effective at the date of acquisition, the Travelers' derivative positions
which previously qualified for hedge accounting were dedesignated in accordance
with SFAS 133. Such derivative positions were not redesignated and were included
with the Company's other nonqualifying derivative positions from the date of
acquisition through September 30, 2005. For the three months and nine months
ended September 30, 2005, the Company recognized as net investment gains
(losses) changes in fair value of $(64) million and $368 million, respectively,
related to derivatives that do not qualify for hedge accounting. For the three
months and nine months ended September 30, 2004, the Company recognized as net
investment gains (losses) changes in fair value of $(14) million and $(16)
million, respectively, related to derivatives that do not qualify for hedge
accounting. For the three months and nine months ended September 30, 2005, the
Company recorded changes in fair value of $(16) million and $(5) million,
respectively, as interest credited to policyholder account balances related to
derivatives that do not qualify for hedge accounting. The Company did not have
interest credited to policyholder account balances related to such derivatives
for the three months and nine months ended September 30, 2004.
EMBEDDED DERIVATIVES
The Company has certain embedded derivatives which are required to be
separated from their host contracts and accounted for as derivatives. These host
contracts include guaranteed rate of return contracts, guaranteed minimum
withdrawal, accumulation, and interest benefit contracts, and modified
coinsurance contracts. The fair value of the Company's embedded derivative
assets was $51 million and $46 million at September 30, 2005 and December 31,
2004, respectively. The fair value of the Company's embedded derivative
liabilities was $50 million and $26 million at September 30, 2005 and December
31, 2004, respectively. The amounts recorded in net investment gains (losses)
during the three months and nine months ended September 30, 2005, were gains of
$63 million and $65 million, respectively. The amounts included in net
investment gains (losses) during the three months and nine months ended
September 30, 2004, were losses of $32 million and gains of $5 million,
respectively.
5. 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.
30
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Liabilities and assets designated to the closed block are as follows:
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(IN MILLIONS)
CLOSED BLOCK LIABILITIES
Future policy benefits...................................... $42,541 $42,348
Other policyholder funds.................................... 260 258
Policyholder dividends payable.............................. 756 690
Policyholder dividend obligation............................ 1,735 2,243
Payables under securities loaned transactions............... 5,623 4,287
Other liabilities........................................... 297 199
------- -------
Total closed block liabilities......................... 51,212 50,025
------- -------
ASSETS DESIGNATED TO THE CLOSED BLOCK
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost: $29,350 and $27,757, respectively).... 30,875 29,766
Equity securities available-for-sale, at fair value (cost:
$1,043 and $898, respectively)......................... 1,170 979
Mortgage loans on real estate............................. 7,782 8,165
Policy loans.............................................. 4,124 4,067
Short-term investments.................................... 66 101
Other invested assets..................................... 490 221
------- -------
Total investments...................................... 44,507 43,299
Cash and cash equivalents................................... 574 325
Accrued investment income................................... 500 511
Deferred income taxes....................................... 932 1,002
Premiums and other receivables.............................. 112 103
------- -------
Total assets designated to the closed block............ 46,625 45,240
------- -------
Excess of closed block liabilities over assets designated to
the closed block.......................................... 4,587 4,785
------- -------
Amounts included in accumulated other comprehensive income
(loss):
Net unrealized investment gains, net of deferred income
tax of $594 and $752, respectively..................... 1,058 1,338
Unrealized derivative gains (losses), net of deferred
income tax benefit of ($21) and ($31), respectively.... (38) (55)
Allocated to policyholder dividend obligation, net of
deferred income tax benefit of ($573) and ($763),
respectively........................................... (1,020) (1,356)
------- -------
Total amounts included in accumulated other comprehensive
income (loss).......................................... -- (73)
------- -------
Maximum future earnings to be recognized from closed block
assets and liabilities.................................... $ 4,587 $ 4,712
======= =======
</Table>
31
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Information regarding the closed block policyholder dividend obligation is
as follows:
<Table>
<Caption>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ -----------------
(IN MILLIONS)
Balance at beginning of period...................... $2,243 $2,130
Impact on revenues, net of expenses and income
taxes............................................. 19 124
Change in unrealized investment and derivative gains
(losses).......................................... (527) (11)
------ ------
Balance at end of period............................ $1,735 $2,243
====== ======
</Table>
Closed block revenues and expenses are as follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
2005 2004 2005 2004
------- ------- ------ ------
(IN MILLIONS)
REVENUES
Premiums....................................... $ 735 $ 759 $2,211 $2,283
Net investment income and other revenues....... 574 629 1,785 1,892
Net investment gains (losses).................. 29 24 41 9
------ ------ ------ ------
Total revenues............................ 1,338 1,412 4,037 4,184
------ ------ ------ ------
EXPENSES
Policyholder benefits and claims............... 852 815 2,529 2,518
Policyholder dividends......................... 371 368 1,098 1,098
Change in policyholder dividend obligation..... (16) 85 19 125
Other expenses................................. 65 67 199 207
------ ------ ------ ------
Total expenses............................ 1,272 1,335 3,845 3,948
------ ------ ------ ------
Revenues, net of expenses before income
taxes........................................ 66 77 192 236
Income taxes................................... 22 28 67 85
------ ------ ------ ------
Revenues, net of expenses and income taxes..... $ 44 $ 49 $ 125 $ 151
====== ====== ====== ======
</Table>
The change in maximum future earnings of the closed block is as follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
2005 2004 2005 2004
------- ------- ------ ------
(IN MILLIONS)
Balance at end of period....................... $4,587 $4,756 $4,587 $4,756
Balance at beginning of period................. 4,631 4,805 4,712 4,907
------ ------ ------ ------
Change during period........................... $ (44) $ (49) $ (125) $ (151)
====== ====== ====== ======
</Table>
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.
32
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
6. DEBT
In connection with financing the acquisition of Travelers on July 1, 2005,
which is more fully described in Note 2, the Holding Company issued the
following debt:
On June 23, 2005, the Holding Company issued in the United States
public market $1,000 million aggregate principal amount of 5.00% senior
notes due June 15, 2015 at a discount of $2.7 million ($997.3 million), and
$1,000 million aggregate principal amount of 5.70% senior notes due June
15, 2035 at a discount of $2.4 million ($997.6 million). In connection with
the offering, the Holding Company incurred approximately $12.4 million of
issuance costs which have been capitalized, are included in other assets,
and are being amortized using the effective interest method over the
respective term of the related senior notes.
On June 29, 2005, the Holding Company issued 400 million pounds
sterling ($729.2 million at issuance) aggregate principal amount of 5.25%
senior notes due June 29, 2020 at a discount of 4.5 million pounds sterling
($8.1 million at issuance), for aggregate proceeds of 395.5 million pounds
sterling ($721.1 million at issuance). The senior notes were initially
offered and sold outside the United States in reliance upon Regulation S
under the Securities Act of 1933, as amended. In connection with the
offering, the Holding Company incurred approximately $3.7 million of
issuance costs which have been capitalized, are included in other assets,
and are being amortized using the effective interest method over the term
of the related senior notes.
At September 30, 2005, debt outstanding subsequent to the aforementioned
issuances and the debt outstanding at December 31, 2004 is as follows:
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(IN MILLIONS)
Senior notes, interest rates ranging from 5.00% to 7.25%,
maturity dates ranging from 2006 to 2035.................. $ 7,647 $6,017
Surplus notes, interest rates ranging from 7.00% to 7.88%,
maturity dates ranging from 2005 to 2025.................. 946 946
Fixed rate notes, interest rates ranging from 4.20% to
10.50%, maturity dates ranging from 2005 to 2010.......... 106 110
Capital lease obligations................................... 72 66
Other notes with varying interest rates..................... 721 273
------- ------
Total long-term debt........................................ 9,492 7,412
Total short-term debt....................................... 1,303 1,445
------- ------
Total..................................................... $10,795 $8,857
======= ======
</Table>
The aggregate maturities of long-term debt as of September 30, 2005 for the
Company are $281 million in 2005, $713 million in 2006, $114 million in 2007,
$284 million in 2008, $74 million in 2009, $192 million in 2010, and $7,834
million thereafter.
See also Note 7 for a description of junior subordinated debt securities of
$2,134 million issued in connection with the common equity units.
7. COMMON EQUITY UNITS
SUMMARY
In connection with financing the acquisition of Travelers on July 1, 2005,
which is more fully described in Note 2, the Company distributed and sold 82.8
million 6.375% common equity units for $2,070 million in
33
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
proceeds in a registered public offering on June 21, 2005. As described below,
the common equity units consist of interests in trust preferred securities
issued by MetLife Capital Trusts II and III, and stock purchase contracts issued
by the Holding Company. The only assets of MetLife Capital Trusts II and III are
junior subordinated debt securities issued by the Holding Company.
COMMON EQUITY UNITS
Each common equity unit has an initial stated amount of $25 per unit and
consists of:
- A 1/80 or 1.25% ($12.50), undivided beneficial ownership interest in a
series A trust preferred security of MetLife Capital Trust II ("Series A
Trust"), with an initial liquidation amount of $1,000.
- A 1/80 or 1.25% ($12.50), undivided beneficial ownership interest in a
series B trust preferred security of MetLife Capital Trust III ("Series B
Trust" and, together with the Series A Trust, the "Trusts"), with an
initial liquidation amount of $1,000.
- A stock purchase contract under which the holder of the common equity
unit will purchase and the Holding Company will sell, on each of the
initial stock purchase date and the subsequent stock purchase date, a
variable number of shares of the Holding Company's common stock, par
value $.01 per share, for a purchase price of $12.50.
JUNIOR SUBORDINATED DEBENTURES ISSUED TO SUPPORT TRUST COMMON AND PREFERRED
SECURITIES
The Holding Company issued $1,067 million 4.82% Series A and $1,067 million
4.91% Series B junior subordinated debt securities due no later than February
15, 2039 and February 15, 2040, respectively, for a total of $2,134 million, in
exchange for $2,070 million in aggregate proceeds from the sale of the trust
preferred securities by the Series A and Series B Trusts and $64 million in
trust common securities issued equally by the Series A and Series B Trusts. The
common and preferred securities of the Series A and Series B Trusts, totaling
$2,134 million, represent undivided beneficial ownership interests in the assets
of the Series A and Series B Trusts, have no stated maturity and must be
redeemed upon maturity of the corresponding series of junior subordinated debt
securities -- the sole assets of the respective Trusts. The Series A and Series
B Trusts will make quarterly distributions on the common and preferred
securities at an annual rate of 4.82% and 4.91%, respectively.
The trust common securities, which are held by the Holding Company,
represent a 3% interest in the respective Series A and Series B Trusts and are
reflected as fixed maturities in the accompanying unaudited interim condensed
consolidated balance sheet of MetLife, Inc. The Series A and Series B Trusts are
variable interest entities in accordance with the FASB Interpretation ("FIN")
No. 46, Consolidation of Variable Interest Entities -- An Interpretation of
Accounting Research Bulletin ("ARB") No. 51 ("FIN 46") and its December 2003
revision ("FIN 46(r)"), and the Company does not consolidate its interest in
MetLife Capital Trusts II and III as it is not the primary beneficiary of the
respective trust.
The Holding Company has directly guaranteed the repayment of the trust
preferred securities to the holders thereof to the extent that there are funds
available in the Trusts. The guarantee will remain in place until the full
redemption of the trust preferred securities. The trust preferred securities
held by the common equity unit holders are pledged to the Holding Company to
collateralize the obligation of the common equity unit holders under the related
stock purchase contracts. The common equity unit holder may substitute certain
zero coupon treasury securities in place of the trust preferred securities as
collateral under the stock purchase contract.
The trust preferred securities have remarketing dates which correspond with
the initial and subsequent stock purchase dates to provide the holders of the
common equity units with the proceeds to exercise the stock purchase contracts.
The initial stock purchase date is expected to be August 15, 2008, but could be
deferred
34
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
for quarterly periods until February 15, 2009, and the subsequent stock purchase
date is expected to be February 15, 2009, but could be deferred for quarterly
periods until February 15, 2010. At the remarketing date, the remarketing agent
will have the ability to reset the interest rate on the trust preferred
securities to generate sufficient remarketing proceeds to satisfy the common
equity unit holder's obligation under the stock purchase contract, subject to a
reset cap for each of the first two attempted remarketings of each series. The
interest rate on the supporting junior subordinated debt securities issued by
the Holding Company will be reset at a commensurate rate. If the initial
remarketing is unsuccessful, the remarketing agent will attempt to remarket the
trust preferred securities, as necessary, in subsequent quarters through
February 15, 2009 for the Series A trust preferred securities and through
February 15, 2010 for the Series B trust preferred securities. The final attempt
at remarketing will not be subject to the reset cap. If all remarketing attempts
are unsuccessful, the Holding Company has the right, as a secured party, to
apply the liquidation amount on the trust preferred securities to the common
equity unit holders obligation under the stock purchase contract and to deliver
to the common equity unit holder a junior subordinated debt security payable on
August 15, 2010 at an annual rate of 4.82% and 4.91%, respectively, on the
Series A and Series B trust preferred securities, in payment of any accrued and
unpaid distributions.
STOCK PURCHASE CONTRACTS
Each stock purchase contract requires the holder of the common equity unit
to purchase, and the Holding Company to sell, for $12.50, on each of the initial
stock purchase date and the subsequent stock purchase date, a number of newly
issued or treasury shares of the Holding Company's common stock, par value $0.01
per share, equal to the applicable settlement rate. The settlement rate at the
respective stock purchase date will be calculated based on the closing price of
the common stock during a specified twenty day period immediately preceding the
applicable stock purchase date. If the market value of the Holding Company's
common stock is less than the threshold appreciation price of $53.10 but greater
than $43.35, the reference price, the settlement rate will be a number of the
Holding Company's common stock equal to the stated amount of $12.50 divided by
the market value. If the market value is less than or equal to the reference
price, the settlement rate will be 0.28835 shares of the Holding Company's
common stock. If the market value is greater than or equal to the threshold
appreciation price, the settlement rate will be 0.23540 shares of the Holding
Company's common stock. Accordingly, upon settlement in the aggregate, the
Holding Company will receive proceeds of $2,070 million and issue between 39.0
million and 47.8 million common shares. The stock purchase contract may be
exercised at the option of the holder at any time prior to the settlement date.
However, upon early settlement, the holder will receive the minimum settlement
rate.
The stock purchase contracts further require the Holding Company to pay the
holder of the common equity unit quarterly contract payments on the stock
purchase contracts at the annual rate of 1.510% on the stated amount of $25 per
stock purchase contract until the initial stock purchase date and at the annual
rate of 1.465% on the remaining stated amount of $12.50 per stock purchase
contract thereafter.
The quarterly distributions on the Series A and Series B trust preferred
securities of 4.82% and 4.91%, respectively, combined with the contract payments
on the stock purchase contract of 1.510%, (1.465% after the initial stock
purchase date) result in the 6.375% yield on the common equity units.
If the Holding Company defers any of the contract payments on the stock
purchase contract, then it will accrue additional amounts on the deferred
amounts at the annual rate of 6.375% until paid, to the extent permitted by law.
The value of the stock purchase contracts at issuance, $96.6 million, were
calculated as the present value of the future contract payments due under the
stock purchase contract of 1.510% through the initial stock purchase date, and
1.465% up to the subsequent stock purchase date, discounted at the interest rate
on the supporting junior subordinated debt securities issued by the Holding
Company, 4.82% or 4.91%. The value of the stock purchase contracts were recorded
in other liabilities with an offsetting decrease in additional paid-in
35
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
capital. The other liability balance related to the stock purchase contracts
will accrue interest at the discount rate of 4.82% or 4.91%, as applicable, with
an offsetting increase to interest expense. When the contract payments are made
under the stock purchase contracts they will reduce the other liability balance.
During the three months ended September 30, 2005, the Holding Company increased
the other liability balance for the accretion of the discount on the contract
payment of $1 million and made a contract payment of $5 million.
ISSUANCE COSTS
In connection with these offerings, the Holding Company incurred
approximately $55.3 million of issuance costs of which $5.8 million relate to
the issuance of the junior subordinated debt securities which fund the Series A
and Series B trust preferred securities and $49.5 million relate to the expected
issuance of the common stock under the stock purchase contracts. The $5.8
million in debt issuance costs have been capitalized, are included in other
assets, and will be amortized using the effective interest method over the
period from issuance date of the common equity units to the initial and
subsequent stock purchase date. The remaining $49.5 million of costs relate to
the common stock issuance under the stock purchase contracts and have been
recorded as a reduction of additional paid-in capital.
EARNINGS PER COMMON SHARE
The stock purchase contracts are reflected in diluted earnings per common
share using the treasury stock method, and are dilutive when the weighted
average market price of the Holding Company's common stock is greater than or
equal to the threshold appreciation price. During the period from the date of
issuance through September 30, 2005, the weighted average market price of the
Holding Company's common stock was less than the threshold appreciation price.
Accordingly, the stock purchase contracts did not have an impact on diluted
earnings common per share. See Note 14.
8. COMMITMENTS, CONTINGENCIES AND GUARANTEES
LITIGATION
The Company is a defendant in a large number of litigation matters. In some
of the matters, very large and/or indeterminate amounts, including punitive and
treble damages, are sought. Modern pleading practice in the United States
permits considerable variation in the assertion of monetary damages or other
relief. Jurisdictions may permit claimants not to specify the monetary damages
sought or may permit claimants to state only that the amount sought is
sufficient to invoke the jurisdiction of the trial court. In addition,
jurisdictions may permit plaintiffs to allege monetary damages in amounts well
exceeding reasonably possible verdicts in the jurisdiction for similar matters.
This variability in pleadings, together with the actual experience of the
Company in litigating or resolving through settlement numerous claims over an
extended period of time, 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
36
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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, 2005.
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 generally are 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.
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. 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.
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, including lawsuits relating to the
sale of mutual funds and other products, have been brought. As of September 30,
2005, there are approximately 318 sales practices lawsuits pending against
Metropolitan Life; approximately 45 sales practices lawsuits pending against New
England Mutual, New England Life Insurance Company ("NELICO"), and New England
Securities Corporation ("NES," together with New England Mutual and NELICO,
collectively, "New England"); approximately 34 sales practices lawsuits pending
against General American and approximately 34 sales practices lawsuits pending
against Walnut Street Securities, Inc. ("Walnut Street"). Metropolitan Life, New
England, General American and Walnut Street 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, mutual funds and other products 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 consolidated
financial statements for all probable and reasonably estimable losses for sales
practices claims against Metropolitan Life, New England, General American and
Walnut Street.
Regulatory authorities in a small number of states have had investigations
or inquiries relating to Metropolitan Life's, New England's, General American's
or Walnut Street's sales of individual life insurance policies or annuities or
other products. Over the past several years, these and a number of
investigations by
37
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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 principally have 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. Since 2002, trial courts in
California, Utah, Georgia, New York, Texas, and Ohio 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 10 of Notes to Consolidated Financial Statements for the year
ended December 31, 2004 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 companies involved in asbestos litigation and
legislative and judicial developments, to identify trends and to assess their
impact on the recorded asbestos liability.
Bankruptcies of other companies involved in asbestos litigation, as well as
advertising by plaintiffs' asbestos lawyers, may be resulting in an increase in
the cost of resolving claims and could result in an increase in 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 bankruptcies by certain other defendants. In addition,
publicity regarding legislative reform efforts may result in an increase or
decrease in the number of claims. Metropolitan Life previously reported that it
had received approximately 23,500 asbestos-related claims in 2004 and
approximately 19,100 such claims in the first nine months of 2004. In the
38
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
context of reviewing in the third quarter of 2005 certain pleadings received in
2004, it was determined that there was a small undercount of Metropolitan Life's
asbestos-related claims in 2004. Accordingly, Metropolitan Life now reports that
it received approximately 23,900 asbestos-related claims in 2004 and
approximately 12,100 and 19,500 asbestos-related claims during the first nine
months of 2005 and 2004, respectively.
The Company believes adequate provision has been made in its 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 with respect to the prior year was made under the excess insurance
policies in 2003, 2004 and 2005 for the amounts paid with respect to asbestos
litigation in excess of the retention. As the performance of the indices impacts
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. The foregone loss reimbursements
were approximately $8.3 million with respect to 2002 claims, $15.5 million with
respect to 2003 claims and $15.1 million with respect to 2004 claims and
estimated as of September 30, 2005, to be approximately $59 million in the
aggregate, including future years.
39
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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. Two purported nationwide class actions have been filed
against Metropolitan Property and Casualty Insurance Company ("MPC") 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. A motion to dismiss has been filed.
A purported class action has been filed against MPC 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. A recent decision by the Montana Supreme
Court in a suit involving another insurer determined that aggregation is
required. MPC has recorded a liability in an amount the Company believes is
adequate to resolve the claims underlying this matter. The amount to be paid
will not be material to MPC. Certain plaintiffs' lawyers in another action have
alleged that the use of certain automated databases to provide total loss
vehicle valuation methods was improper. MPC, along with a number of other
insurers, agreed in July 2005 to resolve this issue in a class action format.
Management believes that the amount to be paid in resolution of this matter will
not be material to MPC.
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, the Holding Company, the individual directors, the
Superintendent and the underwriters for MetLife, Inc.'s initial public offering,
Goldman Sachs & Company and Credit Suisse First Boston. In 2003, a trial court
within the commercial part of the New York State court granted the defendants'
motions to dismiss two purported class actions. In 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. On October 11,
2005, the trial court granted in part and denied in part defendants' motion to
dismiss or strike portions of the consolidated amended complaint. Plaintiffs'
motion to certify a litigation class is pending. 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 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 in 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 and contained
certain material misstatements. 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. In 2004, the court reaffirmed its earlier decision denying
defendants' motion for summary judgment as premature. On July 19, 2005, this
federal trial court certified a class action against Metropolitan Life and the
Holding Company. Metropolitan Life and the Holding Company have filed
40
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
a petition seeking permission for an interlocutory appeal from this order.
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.
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 their amended complaint,
plaintiffs challenged the treatment of the cost of the sales practices
settlement in the demutualization of Metropolitan Life and asserted claims of
breach of fiduciary duty, common law fraud, and unjust enrichment. In an order
dated July 13, 2005, the court granted the defendants' motion to dismiss the
action and the plaintiffs have filed a notice of appeal.
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. In September 2005, Metropolitan
Life's motion for summary judgment was granted. Plaintiffs have moved for
reconsideration.
As previously reported, the SEC is conducting a formal investigation of
NES, a subsidiary of 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.
The American Dental Association and three individual providers have sued
MetLife 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 matter. The district
court has granted in part and denied in part MetLife's motion to dismiss.
MetLife has filed another motion to dismiss, and written and oral discovery will
be taken.
In 2004, a New York state court granted plaintiffs' motion to certify a
litigation class of owners of certain participating life insurance policies and
a sub-class of New York owners of such policies in an action asserting that
Metropolitan Life breached their policies and violated New York's General
Business Law in the manner in which it allocated investment income across lines
of business during a period ending with the 2000 demutualization. Metropolitan
Life's appeal from the order granting this motion is pending. In 2003, an
appellate court affirmed the dismissal of fraud claims in this action.
Metropolitan Life's motion for summary
41
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
judgment on the remaining claims is pending with the court. Plaintiffs seek
compensatory damages. 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. 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 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.
As anticipated, the SEC issued 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 is fully cooperating with
respect to 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 subpoenas, including sets of
interrogatories, from the Office of the Attorney General of the State of
Connecticut seeking information and documents including contingent commission
payments to brokers and MetLife's awareness of any "sham" bids for business.
MetLife also has received a Civil Investigative Demand from the Office of the
Attorney General for the State of Massachusetts seeking information and
documents concerning bids and quotes that the Company submitted to potential
customers in Massachusetts, the identity of agents, brokers, and producers to
whom the Company submitted such bids or quotes, and communications with a
certain broker. The Company has received two subpoenas from the District
Attorney of the County of San Diego, California. The subpoenas seek numerous
documents including incentive agreements entered into with brokers. The Florida
Department of Financial Services and the Florida Office of Insurance Regulation
also have served subpoenas on the Company asking for answers to interrogatories
and document requests concerning topics that include compensation paid to
intermediaries. The Office of the Attorney General for the State of Florida has
also served a subpoena on the Company seeking, among other things, copies of
materials produced in response to the subpoenas discussed above. The Company has
received a subpoena from the Office of the U.S. Attorney for the Southern
District of California asking for documents regarding the insurance broker,
Universal Life Resources. The Insurance Commissioner of Oklahoma has served a
subpoena, including a set of interrogatories, on the Company seeking, among
other things, documents and information concerning the compensation of insurance
producers for insurance covering Oklahoma entities and persons. The Company
continues to cooperate fully with these inquiries and is responding to the
subpoenas and other requests. MetLife is continuing to conduct an internal
review of its commission payment practices.
Approximately sixteen broker-related lawsuits in which the Company was
named as a defendant were filed. Voluntary dismissals and consolidations have
reduced the number of pending actions to four. In one of
42
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
these, the California Insurance Commissioner has brought an action in California
state court against MetLife, Inc., and other companies alleging that the
defendants violated certain provisions of the California Insurance Code. Another
of these actions is pending in a multi-district proceeding established in the
federal district court in the District of New Jersey. In this proceeding,
plaintiffs have filed an amended class action complaint consolidating the claims
from separate actions that had been filed in or transferred to the District of
New Jersey. The consolidated amended complaint alleges that the Holding Company,
Metropolitan Life Insurance Company, several other insurance companies and
several insurance brokers violated RICO, ERISA, and antitrust laws and committed
other misconduct in the context of providing insurance to employee benefit plans
and to persons who participate in such employee benefit plans. Plaintiffs seek
to represent classes of employers that established employee benefit plans and
persons who participated in such employee benefit plans. Plaintiffs in several
other actions have voluntarily dismissed their claims. The Company intends to
vigorously defend these cases.
In addition to those discussed above, regulators and others have made a
number of inquiries of the insurance industry regarding industry brokerage
practices and related matters and other inquiries 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 intends to vigorously defend all lawsuits.
The Company has received a subpoena from the Connecticut Attorney General
requesting information regarding its participation in any finite reinsurance
transactions. MetLife has also received information requests relating to finite
insurance or reinsurance from other regulatory and governmental authorities.
MetLife believes it has appropriately accounted for its transactions of this
type and intends to cooperate fully with these information requests. The Company
believes that a number of other industry participants have received similar
requests from various regulatory and governmental authorities. It is reasonably
possible that MetLife or its subsidiaries may receive additional requests.
MetLife and any such subsidiaries will fully cooperate with all such requests.
As previously disclosed, the NASD staff notified MetLife Securities, Inc.
("MSI"), NES and Walnut Street, all direct or indirect subsidiaries of MetLife,
Inc., that it has made a preliminary determination to file charges of violations
of the NASD's and the SEC's rules against the firms. The pending investigation
was initiated after the firms reported to the NASD that a limited number of
mutual fund transactions processed by firm representatives and at the firms'
consolidated trading desk, during the period April through December 2003, had
been received from customers after 4:00 p.m., Eastern time, and received the
same day's net asset value. The potential charges of violations of the NASD's
and the SEC's rules relate to the processing of transactions received after 4:00
p.m., the firms' maintenance of books and records, supervisory procedures and
responses to the NASD's information requests. Under the NASD's procedures, the
firms have submitted a response to the NASD staff. The NASD staff has not made a
formal recommendation regarding whether any action alleging violations of the
rules should be filed. MetLife continues to cooperate fully with the NASD in its
investigation.
The staff of the NASD has notified MSI that it has made a preliminary
determination to recommend charging MSI with the (i) failure to adopt, maintain
and enforce written supervisory procedures reasonably designed to achieve
compliance with suitability requirements regarding the sale of college savings
plans, also known as 529 plans, and (ii) failure to enforce its written
supervisory procedures with respect to disclosure obligations in the sale of 529
plans. This notification follows an industry-wide inquiry by the NASD examining
sales of 529 plans. Under the NASD's procedures, MSI intends to respond to the
NASD staff before the NASD staff makes a formal recommendation regarding whether
any action alleging violations of applicable rules should be filed. MSI
continues to cooperate fully with the NASD.
In August 1999, an amended putative class action complaint was filed in
Connecticut state court against Travelers Life and Annuity Company ("TLAC"),
Travelers Equity Sales, Inc. and certain former affiliates. The amended
complaint alleges Travelers Property Casualty Corporation, a former TLAC
affiliate, purchased
43
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
structured settlement annuities from TLAC and spent less on the purchase of
those structured settlement annuities than agreed with claimants, and that
commissions paid to brokers for the structured settlement annuities, including
an affiliate of TLAC, were paid in part to Travelers Property Casualty
Corporation. On May 26, 2004, the Connecticut Superior Court certified a
nationwide class action involving the following claims against TLAC: violation
of the Connecticut Unfair Trade Practice Statute, unjust enrichment, and civil
conspiracy. On June 15, 2004, the defendants appealed the class certification
order and the appeal is now pending before the Connecticut Supreme Court.
A former registered representative of Tower Square Securities, Inc. ("Tower
Square"), a broker-dealer subsidiary of The Travelers Insurance Company ("TIC"),
is alleged to have defrauded individuals by diverting funds for his personal
use. In June 2005, the SEC issued a formal order of investigation with respect
to Tower Square and served Tower Square with a subpoena. The Securities and
Business Investments Division of the Connecticut Department of Banking and the
NASD are also reviewing this matter. Tower Square intends to fully cooperate
with the SEC, the NASD and the Connecticut Department of Banking. One
arbitration matter was commenced in June 2005 against Tower Square and the other
unaffiliated broker-dealers with whom the registered representative was formerly
registered. It is reasonably possible that other matters will be brought
regarding this matter. Tower Square intends to defend itself vigorously in all
such cases.
Metropolitan Life also has been named as a defendant in a number of
silicosis, welding and mixed dust cases in various states. The Company intends
to defend itself vigorously against these cases.
Various litigation, claims and assessments against the Company, in addition
to those discussed above and those otherwise provided for in the Company's
consolidated financial statements, have arisen in the course of the Company's
business, including, but not limited to, in connection with its activities as an
insurer, employer, investor, investment advisor and taxpayer. Further, state
insurance regulatory authorities and other federal and state authorities
regularly make inquiries and conduct investigations concerning the Company's
compliance with applicable insurance and other laws and regulations.
Summary
It is not feasible to predict or determine the ultimate outcome of all
pending investigations and legal proceedings or provide reasonable ranges of
potential losses, except as noted above in connection with specific matters. In
some of the matters referred to above, very large and/or indeterminate amounts,
including punitive and treble damages, are sought. Although in light of these
considerations it is possible that an adverse outcome in certain cases could
have a material adverse effect upon the Company's consolidated financial
position, based on information currently known by the Company's management, in
its opinion, the outcomes of such pending investigations and legal proceedings
are not likely to have such an effect. However, given the large and/or
indeterminate amounts sought in certain of these matters and the inherent
unpredictability of litigation, it is possible that an adverse outcome in
certain matters could, from time to time, have a material adverse effect on the
Company's consolidated net income or cash flows in particular quarterly or
annual periods.
ARGENTINA
As a part of the Travelers acquisition, the Company acquired Citigroup's
insurance operations in Argentina. The Argentinean economic, regulatory and
legal environment, including interpretations of laws and regulations by
regulators and courts, is uncertain. Potential legal or governmental actions
related to pension reform, fiduciary responsibilities, performance guarantees
and tax rulings could adversely affect the results of the Company. Upon
acquisition, the Company established liabilities related to insurance
liabilities, most significantly death and disability policy liabilities, based
upon its interpretation of Argentinean law and the Company's best estimate of
its obligations under such law. Additionally, the Company has established
certain liabilities related to its estimated obligations associated with
litigation and tax rulings related to pesification.
44
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
COMMITMENTS TO FUND PARTNERSHIP INVESTMENTS
The Company makes commitments to fund partnership investments in the normal
course of business. The amounts of these unfunded commitments were $2,780
million and $1,324 million at September 30, 2005 and December 31, 2004,
respectively. The Company anticipates that these amounts will be invested in
partnerships over the next five years.
MORTGAGE LOAN COMMITMENTS
The Company commits to lend funds under mortgage loan commitments. The
amounts of these mortgage loan commitments were $2,195 million and $1,189
million, respectively, at September 30, 2005 and December 31, 2004.
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 $2 billion, while in
other cases such limitations are not specified or applicable. Since certain of
these obligations are not subject to limitations, the Company does not believe
that it is possible to determine the maximum potential amount 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.
In the first quarter of 2005, the Company recorded a liability of $4
million with respect to indemnities provided in a certain disposition. The
approximate term for this liability is 18 months. The maximum potential amount
of future payments the Company could be required to pay is approximately $500
million. Due to the uncertainty in assessing changes to the liability 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. In the third quarter of 2005, the Company released $6 million
of a liability due to the expiration of indemnities provided in a prior year
disposition. The Company's recorded liabilities at September 30, 2005 and
December 31, 2004 for indemnities, guarantees and commitments were $8 million
and $10 million, respectively.
In conjunction with RSATs, 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 becomes worthless, is $698 million at September 30, 2005. The credit
default swaps expire at various times during the next six years.
45
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
OTHER
TIC, a wholly-owned subsidiary of MetLife, Inc., is a member of the Federal
Home Loan Bank of Boston (the "Bank") and holds $70 million of common stock of
the Bank, which is included in equity securities in the unaudited interim
condensed consolidated balance sheet. TIC has also entered into several funding
agreements (the "funding agreements") with the Bank whereby TIC has issued such
funding agreements in exchange for cash and for which the Bank has been granted
a blanket lien on TIC's residential mortgages and mortgage-backed securities to
collateralize TIC's obligations under the funding agreements. TIC maintains
control over these pledged assets, and may use, commingle, encumber or dispose
of any portion of the collateral as long as there is no event of default and the
remaining qualified collateral is sufficient to satisfy the collateral
maintenance level. The funding agreements, the related security agreement
represented by this blanket lien, provide that upon any event of default by TIC,
the Bank's recovery is limited to the amount of TIC's liability under the
outstanding funding agreements. The amount of the Company's liability for
funding agreements with the Bank as of September 30, 2005 is $1 billion, which
is included in policyholder account balances.
IMPACT OF HURRICANE KATRINA
On August 29, 2005, Hurricane Katrina made landfall in the states of
Louisiana, Mississippi and Alabama causing catastrophic damage to these coastal
regions. In the third quarter of 2005, the Company recognized total net losses
related to the catastrophe of $130 million, net of income taxes and reinsurance
recoverables and including reinstatement premiums and other reinsurance related
premium adjustments, which impacted, most substantially, the Auto & Home and
Institutional segments. The Auto & Home and Institutional segments recorded net
losses related to the catastrophe of $116 million and $14 million, each net of
income taxes and reinsurance recoverables and including reinstatement premiums
and other reinsurance related premium adjustments, respectively. MetLife's gross
losses from Katrina were approximately $340 million, primarily arising from the
Company's homeowners business.
Additional hurricane-related losses may be recorded in future periods as
claims are received from insureds and claims to reinsurers are processed.
Reinsurance recoveries are dependent on the continued creditworthiness of the
reinsurers, which may be affected by their other reinsured losses in connection
with Hurricane Katrina and otherwise. In addition, lawsuits, including purported
class actions, have been filed in Mississippi and Louisiana challenging the
property and casualty insurance industry's exclusion of water damage from
homeowners policies. While MPC is not a named party in the lawsuits, rulings in
these cases may affect interpretation of its policies. Any limitation on this
exclusion could result in an increase in the Company's hurricane-related claim
exposure and losses. Based on information currently known by management, it does
not believe that additional claim losses resulting from Hurricane Katrina will
have a material adverse impact on the Company's consolidated financial
statements.
9. EMPLOYEE BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Subsidiaries of the Holding Company are sponsors and/or administrators of
the defined benefit pension plans covering eligible employees and sales
representatives. Retirement benefits are based upon years of credited service
and final average or career average earnings history.
Subsidiaries of the Holding Company also provide certain postemployment
benefits and certain postretirement health care and life insurance benefits for
retired employees, in part through insurance contracts. Employees of certain
subsidiaries of the Holding Company who were hired prior to 2003 (or, in certain
cases, rehired during or after 2003) and meet age and service criteria while
working for a covered
46
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
subsidiary, may become eligible for these postretirement benefits, at various
levels, in accordance with the applicable plans.
In connection with the acquisition of Travelers, the employees of Travelers
became employees of certain subsidiaries of the Holding Company and will be
credited with service recognized by Citigroup for purposes of determining
eligibility and vesting under The Metropolitan Life Retirement Plan for United
States Employees (the "Plan"), a noncontributory qualified defined benefit
pension plan, with respect to benefits earned under the Plan subsequent to the
closing date of the acquisition. Neither the Holding Company nor its
subsidiaries assumed an obligation for benefits earned under defined benefit
plans of Citigroup or Travelers prior to the acquisition.
A December 31 measurement date is used for all of the Company's defined
benefit pension and other postretirement benefit plans.
The components of net periodic benefit cost were as follows:
<Table>
<Caption>
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
----------------------------- -----------------------------
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- ------------- -------------
2005 2004 2005 2004 2005 2004 2005 2004
----- ----- ----- ----- ----- ----- ----- -----
(IN MILLIONS)
Service cost............. $ 36 $ 32 $ 107 $ 97 $ 9 $ 7 $ 28 $ 25
Interest cost............ 79 78 239 234 30 28 92 90
Expected return on plan
assets................. (111) (107) (336) (322) (20) (19) (59) (57)
Amortization of prior
service cost........... 4 3 12 11 (4) (5) (14) (15)
Amortization of prior
actuarial losses....... 29 27 87 77 3 -- 10 8
----- ----- ----- ----- ---- ---- ---- ----
Net periodic benefit
cost................... $ 37 $ 33 $ 109 $ 97 $ 18 $ 11 $ 57 $ 51
===== ===== ===== ===== ==== ==== ==== ====
</Table>
EMPLOYER CONTRIBUTIONS
The Company disclosed in Note 11 of Notes to Consolidated Financial
Statements for the year ended December 31, 2004 included in the MetLife, Inc.
Annual Report on Form 10-K filed with the SEC, that those subsidiaries which
participate in the pension and other postretirement benefit plans discussed
above expected to contribute $32 million and $93 million, respectively, to such
plans in 2005. As of September 30, 2005, contributions of $26 million have been
made to the pension plans and it is anticipated that certain subsidiaries will
contribute an additional $6 million to fund such pension plans in 2005, for a
total of $32 million. As of September 30, 2005, contributions of $75 million
have been made to the other postretirement benefit plans and it is anticipated
that certain subsidiaries will contribute an additional $18 million to fund such
other postretirement benefit plans in 2005 for a total of $93 million.
47
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
10. EQUITY
PREFERRED STOCK
In connection with financing the acquisition of Travelers on July 1, 2005,
which is more fully described in Note 2, the Company issued preferred shares as
follows:
On June 13, 2005, the Holding Company issued 24 million shares of Floating
Rate Non-Cumulative Preferred Stock, Series A (the "Series A preferred shares")
with a $0.01 par value per share, and a liquidation preference of $25 per share
for aggregate proceeds of $600 million.
On June 16, 2005, the Holding Company issued 60 million shares of 6.50%
Non-Cumulative Preferred Stock, Series B (the "Series B preferred shares"), with
a $0.01 par value per share, and a liquidation preference of $25 per share, for
aggregate proceeds of $1.5 billion.
The Series A and Series B preferred shares (the "Preferred Shares") rank
senior to the common stock with respect to dividends and liquidation rights.
Dividends on the Preferred Shares are not cumulative. Holders of the Preferred
Shares will be entitled to receive dividend payments only when, as and if
declared by the Holding Company's board of directors or a duly authorized
committee of the board. If dividends are declared on the Series A preferred
shares, they will be payable quarterly, in arrears, at an annual rate of the
greater of (i) 1.00% above three-month LIBOR on the related LIBOR determination
date, or (ii) 4.00%. Any dividends declared on the Series B preferred shares
will be payable quarterly, in arrears, at an annual fixed rate of 6.50%.
Accordingly, in the event that dividends are not declared on the Preferred
Shares for payment on any dividend payment date, then those dividends will cease
to accrue and be payable. If a dividend is not declared before the dividend
payment date, the Holding Company has no obligation to pay dividends accrued for
that dividend period whether or not dividends are declared and paid in future
periods. No dividends may, however, be paid or declared on the Holding Company's
common stock -- or any other securities ranking junior to the Preferred
Shares -- unless the full dividends for the latest completed dividend period on
all Preferred Shares, and any parity stock, have been declared and paid or
provided for.
The Holding Company is prohibited from declaring dividends on the Preferred
Shares if it fails to meet specified capital adequacy, net income and
shareholders' equity levels. In addition, under Federal Reserve Board policy,
the Holding Company may not be able to pay dividends if it does not earn
sufficient operating income.
The Preferred Shares do not have voting rights except in certain
circumstances where the dividends have not been paid for an equivalent of six or
more dividend payment periods whether or not those periods are consecutive.
Under such circumstances, the holders of the Preferred Shares have certain
voting rights with respect to members of the Board of Directors of the Holding
Company.
The Preferred Shares are not subject to any mandatory redemption, sinking
fund, retirement fund, purchase fund or similar provisions. The Preferred Shares
are redeemable but not prior to September 15, 2010. On and after that date,
subject to regulatory approval, the Preferred Shares will be redeemable at the
Holding Company's option in whole or in part, at a redemption price of $25 per
Preferred Share, plus declared and unpaid dividends.
In connection with the offering of the Preferred Shares, the Holding
Company incurred approximately $56.8 million of issuance costs which have been
recorded as a reduction of additional paid-in capital.
On August 22, 2005, the Company's board of directors declared dividends of
$0.286569 per share, for a total of $7 million, on the Series A preferred shares
and $0.4017361 per share, for a total of $24 million, on the Series B preferred
shares. Both dividends were paid on September 15, 2005 to shareholders of record
as of August 31, 2005.
48
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
COMMON STOCK
On October 26, 2004, the Holding Company's Board of Directors authorized a
$1 billion common stock repurchase program. Under this authorization, the
Holding Company may purchase its common stock from the MetLife Policyholder
Trust, in the open market and in privately negotiated transactions. As a result
of the acquisition of Travelers (see Note 2), the Holding Company has currently
suspended its common stock repurchase activity. Future common stock repurchases
will be dependent upon several factors, including the Company's capital
position, its financial strength and credit ratings, general market conditions
and the price of the Holding Company's common stock.
On December 16, 2004, the Holding Company repurchased 7,281,553 shares of
its outstanding common stock at an aggregate cost of $300 million under an
accelerated common stock repurchase agreement with a major bank. The bank
borrowed the stock sold to the Holding Company from third parties and purchased
the common shares in the open market to return to such third parties. In April
2005, the Holding Company received a cash adjustment of approximately $7 million
based on the actual amount paid by the bank to purchase the common stock, for a
final purchase price of $293 million. The Holding Company recorded the shares
initially repurchased as treasury stock and recorded the amount received as an
adjustment to the cost of the treasury stock.
See Note 7 regarding stock purchase contracts issued by the Company on June
21, 2005 in connection with the issuance of the common equity units.
The Company did not acquire any shares of the Holding Company's common
stock during the nine months ended September 30, 2005. The Company acquired
13,931,885 shares of the Holding Company's common stock for $496 million during
the nine months ended September 30, 2004. During the nine months ended September
30, 2005 and 2004, 24,568,778 and 1,268,922 shares of common stock were issued
from treasury stock with a cost of $804 million and $37 million, respectively,
of which 22,436,617 shares for approximately $1 billion were issued in
connection with the acquisition of Travelers on July 1, 2005. See Note 2. At
September 30, 2005, the Holding Company had approximately $716 million remaining
on the October 26, 2004 common stock repurchase program.
DIVIDEND RESTRICTIONS
Under New York State Insurance Law, Metropolitan Life is permitted, without
prior insurance regulatory clearance, to pay stockholder dividends to the
Holding Company as long as the aggregate amount of all such dividends in any
calendar year does not exceed the lesser of (i) 10% of its surplus to
policyholders as of the immediately preceding calendar year, or (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 Superintendent and the Superintendent does not
disapprove the distribution within 30 days of its filing. Under New York State
Insurance Law, the Superintendent has broad discretion in determining whether
the financial condition of a stock life insurance company would support the
payment of such dividends to its stockholders. The New York State Department of
Insurance 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. During the
nine months ended September 30, 2005, Metropolitan Life paid to the Holding
Company $880 million in ordinary dividends, the maximum amount which could be
paid to the Holding Company in 2005 without prior regulatory approval and an
additional $2,320 million in special dividends, as approved by the
Superintendent. Further dividend payments to the Holding Company in 2005 require
prior regulatory approval.
Under Connecticut State Insurance Law, TIC is permitted, without prior
insurance regulatory clearance, to pay shareholder dividends to its parent as
long as the amount of such dividend, when aggregated with all other dividends in
the preceding twelve months, does not exceed the greater of (i) 10% of its
surplus to
49
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
policyholders as of the immediately preceding calendar year, or (ii) its
statutory net gain from operations for the immediately preceding calendar year.
TIC will be permitted to pay a cash dividend in excess of the greater of such
two amounts only if it files notice of its declaration of such a dividend and
the amount thereof with the Connecticut Commissioner of Insurance
("Commissioner") and the Commissioner does not disapprove the payment within 30
days after notice or until the Commissioner has approved the dividend, whichever
is sooner. In addition, any dividend that exceeds earned surplus (unassigned
funds, reduced by 25% of unrealized appreciation in value or revaluation of
assets or unrealized profits on investments) as of the last filed annual
statutory statement requires insurance regulatory approval. Under Connecticut
State Insurance Law, the Commissioner has broad discretion in determining
whether the financial condition of a stock life insurance company would support
the payment of such dividends to its stockholders. The Connecticut State
Insurance Law requires prior approval for any dividends for a period of two
years following a change in control. As a result of the acquisition of TIC by
the Holding Company, under Connecticut State Insurance Law all dividend payments
by TIC through June 30, 2007 require prior approval of the Commissioner.
Under Rhode Island State Insurance Law, MPC is permitted, without prior
insurance regulatory clearance, to pay a stockholder dividend to the Holding
Company as long as the aggregate amount of all such dividends in any
twelve-month period does not exceed the lesser of (i) 10% of its surplus to
policyholders as of the immediately preceding calendar year, or (ii) the next
preceding two year net income reduced by capital gains and dividends paid to
stockholders. MPC will be permitted to pay a stockholder dividend to the Holding
Company in excess of the lesser of such two amounts only if it files notice of
its intention to declare such a dividend and the amount thereof with the Rhode
Island Superintendent of Insurance and the Rhode Island Superintendent does not
disapprove the distribution within 30 days of its filing. Under Rhode Island
State Insurance Law, the Rhode Island Superintendent has broad discretion in
determining whether the financial condition of stock property and casualty
insurance company would support the payment of such dividends to its
stockholders. As of December 31, 2004, the maximum amount of the ordinary
dividend which could be paid to the Holding Company from MPC in 2005 without
prior regulatory approval was $187 million, with a scheduled date of payment
subsequent to November 16, 2005. Dividend payments prior to this date require
prior insurance regulatory clearance. During the nine months ended September 30,
2005, MPC paid to the Holding Company $400 million in a special dividend, as
approved by the Rhode Island Superintendent. Further dividend payments to the
Holding Company in 2005 require prior regulatory approval.
Under Delaware State Insurance Law, Metropolitan Tower Life Insurance
Company ("MTL") is permitted, without prior insurance regulatory clearance, to
pay a stockholder dividend to the Holding Company as long as the amount of the
dividend when aggregated with all other dividends in the preceding 12 months
does not exceed the greater of (i) 10% of its surplus to policyholders as of the
immediately preceding calendar year, or (ii) its statutory net gain from
operations for the immediately preceding calendar year (excluding capital
gains). MTL will be permitted to pay a cash dividend to the Holding Company in
excess of the greater of such two amounts only if it files notice of the
declaration of such a dividend and the amount thereof with the Delaware
Superintendent of Insurance (the "Delaware Superintendent") and the Delaware
Superintendent does not disapprove the distribution within 30 days of its
filing. In addition, any dividend that exceeds earned surplus (defined as
unassigned funds) as of the immediately preceding calendar year requires
insurance regulatory approval. Under Delaware State Insurance Law, the Delaware
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. As of December 31, 2004, the maximum amount of
the ordinary dividend which could be paid to the Holding Company from MTL in
2005 without prior regulatory approval was $119 million. During the nine months
ended September 30, 2005, MTL paid to the Holding Company, $54 million in
ordinary dividends, the maximum amount which could be paid to the Holding
Company at the time of payment without prior regulatory approval, and an
additional $873 million in special dividends, as approved by the Delaware
Superintendent. Further dividend payments in 2005 require prior regulatory
approval.
50
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
11. STOCK COMPENSATION PLANS
The MetLife, Inc. 2000 Stock Incentive Plan, as amended (the "Stock
Incentive Plan"), authorized the granting of awards in the form of non-qualified
or incentive stock options qualifying under Section 422A of the Internal Revenue
Code. The MetLife, Inc. 2000 Directors Stock Plan, as amended (the "Directors
Stock Plan"), authorized the granting of awards in the form of stock awards,
non-qualified stock options, or a combination of the foregoing to outside
Directors of the Holding Company. Under the MetLife, Inc. 2005 Stock and
Incentive Compensation Plan, as amended (the "2005 Stock Plan"), awards granted
may be in the form of non-qualified stock options or incentive stock options
qualifying under Section 422A of the Internal Revenue Code, Stock Appreciation
Rights, Restricted Stock or Restricted Stock Units, Performance Shares or
Performance Share Units, Cash-Based Awards, and Stock-Based Awards (each as
defined in the 2005 Stock Plan). Under the MetLife, Inc. 2005 Non-Management
Director Stock Compensation Plan (the "2005 Directors Stock Plan"), awards
granted may be in the form of non-qualified stock options, Stock Appreciation
Rights, Restricted Stock or Restricted Stock Units, or Stock-Based Awards (each
as defined in the 2005 Directors Stock Plan). The Stock Incentive Plan,
Directors Stock Plan, 2005 Stock Plan, the 2005 Directors Stock Plan and the
Long-Term Performance Compensation Plan ("LTPCP"), as described below, are
hereinafter collectively referred to as the "Incentive Plans."
The aggregate number of shares reserved for issuance under the 2005 Stock
Plan is 68,000,000 plus those shares available but not utilized under the Stock
Incentive Plan and those shares utilized under the Stock Incentive Plan that are
recovered due to forfeiture of stock options. At the commencement of the 2005
Stock Plan, additional shares carried forward from the Stock Incentive Plan and
available for issuance under the 2005 Stock Plan were 11,917,472. Each share
issued under the 2005 Stock Plan in connection with a stock option or Stock
Appreciation Right reduces the number of shares remaining for issuance under
that plan by one, and each share issued under the 2005 Stock Plan in connection
with awards other than stock options or Stock Appreciation Rights reduces the
number of shares remaining for issuance under that plan by 1.179 shares. The
number of shares reserved for issuance under the 2005 Directors Stock Plan is
2,000,000.
All stock options granted have an exercise price equal to the fair market
value price of the Holding Company's common stock on the date of grant, and a
maximum term of ten years. Certain stock options granted under the Stock
Incentive Plan and the 2005 Stock Plan become exercisable over a three year
period commencing with the date of grant, while other stock options become
exercisable three years after the date of grant. Stock options issued under the
Directors Stock Plan are exercisable immediately. Stock options issued under the
2005 Directors Stock Plan will be exercisable at the times determined at the
time they are granted.
Effective January 1, 2003, the Company elected to prospectively apply the
fair value method of accounting for stock options granted by the Company
subsequent to December 31, 2002. As permitted under SFAS 148, stock options
granted prior to January 1, 2003 will continue to be accounted for under APB No.
25, Accounting for Stock Issued to Employees ("APB 25"). Had compensation
expense for grants awarded prior to January 1, 2003 been determined based on
fair value at the date of grant in accordance with
51
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
SFAS 123, the Company's earnings and earnings per common share amounts would
have been reduced to the following pro forma amounts:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
2005 2004 2005 2004
-------- -------- -------- --------
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
Net income...................................... $ 773 $ 695 $4,005 $2,247
Preferred stock dividend........................ 31 -- 31 --
----- ----- ------ ------
Net income available to common shareholders..... 742 695 3,974 2,247
Add: Stock option-based employee compensation
expense included in reported net income, net
of income taxes............................... 8 7 24 20
Deduct: Total stock option-based employee
compensation determined under fair value based
method for all awards, net of income taxes.... (9) (11) (26) (34)
----- ----- ------ ------
Pro forma net income available to common
shareholders(1)............................... $ 741 $ 691 $3,972 $2,233
===== ===== ====== ======
BASIC EARNINGS PER COMMON SHARE
As reported..................................... $0.98 $0.93 $ 5.33 $ 2.98
===== ===== ====== ======
Pro forma(1).................................... $0.98 $0.92 $ 5.33 $ 2.96
===== ===== ====== ======
DILUTED EARNINGS PER COMMON SHARE
As reported..................................... $0.97 $0.92 $ 5.28 $ 2.97
===== ===== ====== ======
Pro forma(1).................................... $0.96 $0.92 $ 5.27 $ 2.95
===== ===== ====== ======
</Table>
- ---------------
(1) The pro forma earnings disclosures are not necessarily representative of the
effects on net income and earnings per common share in future years.
The fair value of stock options issued prior to January 1, 2005 was
estimated on the date of grant using a Black-Scholes option-pricing model. The
fair value of stock options issued on or after January 1, 2005, was estimated on
the date of grant using a binomial lattice option pricing model. On April 15,
2005, the Company granted 4,215,125 stock options to employees of the Company,
including members of management. The fair value of these stock options was
approximately $42 million on the date of grant.
The Company also awards long-term stock-based compensation to certain
members of management. Under the LTPCP, awards are payable in their entirety at
the end of a three-year performance period. Each participant was assigned a
target compensation amount at the inception of the performance period with the
final compensation amount determined based on the total shareholder return on
the Holding Company's stock over the three-year performance period, subject to
limited further adjustment approved by the Holding Company's Board of Directors.
Final awards may be paid in whole or in part with shares of the Holding
Company's stock, as approved by the Holding Company's Board of Directors.
Beginning in 2005, no further LTPCP target compensation amounts were set.
Instead, certain members of management were awarded Performance Shares under the
2005 Stock Plan. Participants are awarded an initial target number of
Performance Shares with the final number of Performance Shares payable being
determined by the product of the initial target multiplied by a factor of 0.0 to
2.0. The factor applied is based on measurements of the Holding Company's
performance with respect to net operating earnings and total shareholder return,
as defined, with reference to the three-year performance period relative to
other companies in the Standard and
52
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Poor's Insurance Index with reference to the same three-year period. Performance
Share awards will normally vest in their entirety at the end of the three-year
performance period (subject to certain contingencies) and will be payable
entirely in shares of the Holding Company's stock. On April 15, 2005, the
Company granted 1,036,950 Performance Shares for which the total fair value on
the date of grant was approximately $40 million. For the three months and nine
months ended September 30, 2005, compensation expense related to the LTPCP and
Performance Shares was $14 million and $36 million, respectively. For the three
months and nine months ended September 30, 2004, compensation expense related to
the LTPCP was $14 million and $35 million, respectively.
For the three months and nine months ended September 30, 2005, the
aggregate stock-based compensation expense related to the Incentive Plans was
$27 million and $73 million, respectively, including stock-based compensation
for non-employees of $55 thousand and $263 thousand, respectively. For the three
months and nine months ended September 30, 2004, the aggregate stock-based
compensation expense related to the Incentive Plans was $25 million and $65
million, respectively, including stock-based compensation for non-employees of
$71 thousand and $403 thousand, respectively.
12. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2005 2004 2005 2004
------- ------ ------- ------
(IN MILLIONS)
Net income................................... $ 773 $ 695 $ 4,005 $2,247
Other comprehensive income (loss):
Unrealized gains (losses) on derivative
instruments, net of income taxes........ (11) (5) 177 80
Unrealized investment-related gains
(losses), net of related offsets and
income taxes............................ (1,177) 1,021 (1,246) (134)
Cumulative effect of a change in
accounting, net of income taxes......... -- -- -- 90
Foreign currency translation adjustments... (19) 61 (60) (34)
Minimum pension liability adjustment....... -- -- 47 --
------- ------ ------- ------
Other comprehensive income (loss):........... (1,207) 1,077 (1,082) 2
------- ------ ------- ------
Comprehensive income (loss)............. $ (434) $1,772 $ 2,923 $2,249
======= ====== ======= ======
</Table>
13. OTHER EXPENSES
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2005 2004 2005 2004
------- ------- ------- -------
(IN MILLIONS)
Compensation................................. $ 861 $ 706 $ 2,284 $ 2,089
Commissions.................................. 939 705 2,356 2,155
Interest and debt issue cost................. 194 123 462 284
Amortization of policy acquisition costs..... 650 475 1,757 1,418
Capitalization of policy acquisition costs... (936) (751) (2,561) (2,367)
Rent, net of sublease income................. 71 60 229 184
Minority interest............................ 54 27 113 117
Other........................................ 782 588 1,951 1,765
------ ------ ------- -------
Total other expenses....................... $2,615 $1,933 $ 6,591 $ 5,645
====== ====== ======= =======
</Table>
53
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
14. EARNINGS PER COMMON SHARE
The following table presents the weighted average common shares used in
calculating basic earnings per common share and those used in calculating
diluted earnings per common share for each income category presented below:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
(IN MILLIONS, EXCEPT SHARE AND PER COMMON SHARE DATA)
Weighted average common stock
outstanding for basic earnings per
common share.......................... 759,837,955 749,217,335 745,675,472 753,814,045
Incremental common shares from assumed:
Exercise of stock options............. 8,623,494 4,134,660 6,968,350 3,519,095
Issuance under LTPCP.................. 237,830 -- 420,847 --
------------ ------------ ------------ ------------
Weighted average common stock
outstanding for diluted earnings per
common share.......................... 768,699,279 753,351,995 753,064,669 757,333,140
============ ============ ============ ============
INCOME FROM CONTINUING OPERATIONS PER
COMMON SHARE.......................... $ 739 $ 679 $ 2,547 $ 2,145
============ ============ ============ ============
Basic................................. $ 0.97 $ 0.91 $ 3.42 $ 2.85
============ ============ ============ ============
Diluted............................... $ 0.96 $ 0.90 $ 3.38 $ 2.83
============ ============ ============ ============
INCOME FROM DISCONTINUED OPERATIONS, NET
OF INCOME TAXES, PER COMMON SHARE..... $ 34 $ 16 $ 1,458 $ 188
============ ============ ============ ============
Basic................................. $ 0.04 $ 0.02 $ 1.96 $ 0.25
============ ============ ============ ============
Diluted............................... $ 0.04 $ 0.02 $ 1.94 $ 0.25
============ ============ ============ ============
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING, NET OF INCOME TAXES, PER
COMMON SHARE.......................... $ -- $ -- $ -- $ (86)
============ ============ ============ ============
Basic................................. $ -- $ -- $ -- $ (0.11)
============ ============ ============ ============
Diluted............................... $ -- $ -- $ -- $ (0.11)
============ ============ ============ ============
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS PER COMMON SHARE......... $ 742 $ 695 $ 3,974 $ 2,247
============ ============ ============ ============
Basic................................. $ 0.98 $ 0.93 $ 5.33 $ 2.98
============ ============ ============ ============
Diluted............................... $ 0.97 $ 0.92 $ 5.28 $ 2.97
============ ============ ============ ============
</Table>
15. BUSINESS SEGMENT INFORMATION
The Company provides insurance and financial services to customers in the
United States, Asia Pacific, Latin America, and Europe. The Company's business
is divided into five operating segments: Institutional, Individual, Auto & Home,
International and Reinsurance, as well as Corporate & Other. These segments are
managed separately because they either provide different products and services,
require different strategies or have different technology requirements.
As a part of the Travelers acquisition, management realigned certain
products and services within several of its segments to better conform to the
way it intends to manage and assess the business going forward.
54
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Accordingly, all prior period segment results have been adjusted to reflect such
product reclassifications. Also in connection with the Travelers acquisition,
management has utilized its economic capital model to evaluate the deployment of
capital based upon the unique and specific nature of the risks inherent in the
Company's existing and newly acquired businesses and has adjusted such
allocations based upon this model.
Institutional offers a broad range of group insurance and retirement &
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 protection and asset accumulation products, including life
insurance, annuities and mutual funds. Auto & Home provides personal lines
property and casualty insurance, including private passenger automobile,
homeowner's and personal excess liability insurance. International provides life
insurance, accident and health insurance, annuities and retirement & savings
products to both individuals and groups. Through the Company's majority-owned
subsidiary, Reinsurance Group of America, Incorporated, Reinsurance provides
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.
Corporate & Other contains the excess capital not allocated to the business
segments, various start-up entities, including MetLife Bank, N.A. ("MetLife
Bank"), a national bank, and run-off entities, as well as interest expense
related to the majority of the Company's outstanding debt and expenses
associated with certain legal proceedings and income tax audit issues. Corporate
& Other also includes the elimination of all intersegment amounts, which
generally relate to intersegment loans, which bear interest rates commensurate
with related borrowings, as well as intersegment transactions. Additionally, the
Company's asset management business, including amounts reported as discontinued
operations, is included in the results of operations for Corporate & Other. See
Note 16 for disclosures regarding discontinued operations, including real
estate.
Set forth in the tables below is certain financial information with respect
to the Company's segments, as well as Corporate & Other, for the three months
and nine months ended September 30, 2005 and 2004. 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 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, adjustments related to 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.
<Table>
<Caption>
FOR THE THREE MONTHS ENDED AUTO & CORPORATE &
SEPTEMBER 30, 2005 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE OTHER TOTAL
- -------------------------------------- ------------- ---------- ------ ------------- ----------- ----------- ------
(IN MILLIONS)
Premiums.............................. $3,066 $1,140 $716 $614 $976 $ 2 $6,514
Universal life and investment-type
product policy fees................. 197 746 -- 170 (2) 1 1,112
Net investment income................. 1,684 1,745 46 238 158 217 4,088
Other revenues........................ 163 150 8 9 13 5 348
Net investment gains (losses)......... (81) (41) (5) 5 7 65 (50)
Income (loss) from continuing
operations before provision
(benefit) for income taxes.......... 514 430 (59) 30 44 26 985
</Table>
55
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
FOR THE THREE MONTHS ENDED AUTO & CORPORATE &
SEPTEMBER 30, 2004 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE OTHER TOTAL
- -------------------------------------- ------------- ---------- ------ ------------- ----------- ----------- ------
(IN MILLIONS)
Premiums.............................. $2,662 $1,032 $740 $437 $819 $(11) $5,679
Universal life and investment-type
product policy fees................. 183 461 -- 90 -- 2 736
Net investment income................. 1,127 1,498 40 151 134 109 3,059
Other revenues........................ 159 102 8 2 13 8 292
Net investment gains (losses)......... 104 125 (1) 3 (19) (6) 206
Income (loss) from continuing
operations before provision
(benefit) for income taxes.......... 501 383 40 60 21 (36) 969
</Table>
<Table>
<Caption>
FOR THE NINE MONTHS ENDED AUTO & CORPORATE &
SEPTEMBER 30, 2005 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE OTHER TOTAL
- ------------------------------------ ------------- ---------- ------ ------------- ----------- ----------- -------
(IN MILLIONS)
Premiums............................ $8,744 $3,233 $2,182 $1,550 $2,807 $ (2) $18,514
Universal life and investment-type
product policy fees............... 575 1,726 -- 414 -- 1 2,716
Net investment income............... 4,251 4,836 135 582 445 535 10,784
Other revenues...................... 487 367 25 11 45 13 948
Net investment gains (losses)....... 131 191 (9) 12 28 (85) 268
Income (loss) from continuing
operations before provision
(benefit) for income taxes........ 1,692 1,526 180 214 94 (110) 3,596
</Table>
<Table>
<Caption>
FOR THE NINE MONTHS ENDED AUTO & CORPORATE &
SEPTEMBER 30, 2004 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE OTHER TOTAL
- ------------------------------------ ------------- ---------- ------ ------------- ----------- ----------- -------
(IN MILLIONS)
Premiums............................ $7,519 $3,033 $2,211 $1,229 $2,431 $ (23) $16,400
Universal life and investment-type
product policy fees............... 534 1,325 -- 259 -- 2 2,120
Net investment income............... 3,378 4,494 130 410 381 283 9,076
Other revenues...................... 489 314 23 14 40 9 889
Net investment gains (losses)....... 248 134 (6) 26 35 (68) 369
Income (loss) from continuing
operations before provision
(benefit) for income taxes........ 1,642 988 189 258 105 (220) 2,962
</Table>
The following table presents assets with respect to the Company's segments,
as well as Corporate & Other, at:
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(IN MILLIONS)
Institutional............................................... $177,714 $132,054
Individual.................................................. 227,575 164,847
Auto & Home................................................. 5,599 5,445
International............................................... 17,519 14,754
Reinsurance................................................. 15,270 15,482
Corporate & Other........................................... 39,142 24,226
-------- --------
Total..................................................... $482,819 $356,808
======== ========
</Table>
56
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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 one customer did not exceed 10% of consolidated
revenues. Revenues from U.S. operations were $10,581 million and $29,511 million
for the three months and nine months ended September 30, 2005, respectively,
which represented 88% and 89% of consolidated revenues, respectively. Revenues
from U.S. operations were $8,989 million and $26,012 million for the three
months and nine months ended September 30, 2004, respectively, which both
represented 90% of consolidated revenues.
16. DISCONTINUED OPERATIONS
REAL ESTATE
The Company actively manages its real estate portfolio with the objective
of maximizing earnings through selective acquisitions and dispositions. Income
related to real estate classified as held-for-sale or sold is presented in
discontinued operations. These assets are carried at the lower of depreciated
cost or fair value less expected disposition costs.
The following table presents the components of income from discontinued
real estate operations:
<Table>
<Caption>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- --------------
2005 2004 2005 2004
----- ----- ------ -----
(IN MILLIONS)
Investment income..................................... $ 8 $ 89 $ 128 $ 320
Investment expense.................................... (10) (54) (76) (181)
Net investment gains.................................. 46 (16) 1,969 136
---- ---- ------ -----
Total revenues...................................... 44 19 2,021 275
Interest expense...................................... -- -- -- 13
Provision for income taxes............................ 17 6 719 92
---- ---- ------ -----
Income from discontinued operations, net of income
taxes............................................ $ 27 $ 13 $1,302 $ 170
==== ==== ====== =====
</Table>
The carrying value of real estate related to discontinued operations was
$187 million and $1,157 million at September 30, 2005 and December 31, 2004,
respectively.
57
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
The following table shows the discontinued real estate operations by
segment:
<Table>
<Caption>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2005 2004 2005 2004
----- ----- ------ ----
(IN MILLIONS)
Net investment income
Institutional......................................... $-- $ 8 $ 12 $ 19
Individual............................................ -- 6 14 22
Corporate & Other..................................... (2) 21 26 98
--- ---- ------ ----
Total net investment income........................ $(2) $ 35 $ 52 $139
=== ==== ====== ====
Net investment gains (losses)
Institutional......................................... $-- $ (5) $ 241 $ (3)
Individual............................................ 41 1 373 4
Corporate & Other..................................... 5 (12) 1,355 135
--- ---- ------ ----
Total net investment gains (losses)................ $46 $(16) $1,969 $136
=== ==== ====== ====
Interest expense
Corporate & Other..................................... -- -- -- 13
--- ---- ------ ----
Total interest expense............................. $-- $ -- $ -- $ 13
=== ==== ====== ====
</Table>
In the second quarter of 2005, the Company sold its One Madison Avenue and
200 Park Avenue properties in Manhattan, New York for $918 million and $1.72
billion, respectively, resulting in gains, net of income taxes, of $431 million
and $762 million, respectively. The gains are included in income from
discontinued operations in the accompanying unaudited interim condensed
consolidated statements of income. In connection with the sale of the 200 Park
Avenue property, the Company has retained rights to existing signage and related
equipment and is leasing space in the property for 20 years with optional
renewal periods through 2205.
In the second quarter of 2004, the Company sold one of its real estate
investments, Sears Tower, resulting in a realized gain of $85 million, net of
income taxes.
OPERATIONS
On September 29, 2005, the Company completed the sale of P.T. Sejahtera
("MetLife Indonesia") to a third party resulting in a gain upon disposal of $10
million, net of income taxes. As a result of this sale, the Company recognized
income from discontinued operations of $7 million, net of income taxes, for the
three months ended September 30, 2005. The Company reclassified the assets,
liabilities and operations of MetLife Indonesia into discontinued operations for
all periods presented.
58
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
The following tables present the amounts related to the operations and
financial position of MetLife Indonesia that has been combined with the
discontinued real estate operations in the consolidated income statements:
<Table>
<Caption>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- -------------
2005 2004 2005 2004
----- ----- ----- -----
(IN MILLIONS)
Revenues from discontinued operations...................... $ 1 $ 1 $ 5 $ 4
Expenses from discontinued operations...................... 4 3 10 9
--- --- --- ---
Income from discontinued operations before provision for
income taxes............................................. (3) (2) (5) (5)
Provision for income taxes................................. -- -- -- --
--- --- --- ---
Income from discontinued operations, net of income
taxes................................................. (3) (2) (5) (5)
Net investment gains, net of income taxes.................. 10 -- 10 --
--- --- --- ---
Income from discontinued operations, net of income
taxes................................................. $ 7 $(2) $ 5 $(5)
=== === === ===
</Table>
<Table>
<Caption>
AS OF
DECEMBER 31,
2004
-------------
(IN MILLIONS)
Fixed maturities............................................ $17
Short-term investments...................................... 1
Cash and cash equivalents................................... 3
Deferred policy acquisition costs........................... 9
Premiums and other receivables.............................. 1
---
Total assets held-for-sale................................ $31
===
Future policy benefits...................................... $ 5
Policyholder account balances............................... 12
Other policyholder funds.................................... 7
Other liabilities........................................... 4
---
Total liabilities held-for-sale........................... $28
===
</Table>
On January 31, 2005, the Holding Company completed the sale of SSRM
Holdings, Inc. ("SSRM") to a third party for $328 million in cash and stock. As
a result of the sale of SSRM, the Company recognized income from discontinued
operations of approximately $157 million, net of income taxes, comprised of a
realized gain of $165 million, net of income taxes, and an operating expense
related to a lease abandonment of $8 million, net of income taxes. Under the
terms of the agreement, 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 five
years, depending on retention of certain MetLife-related business. The Company
reclassified the assets, liabilities and operations of SSRM into discontinued
operations for the period ended December 31, 2004 and all preceding periods
presented. Additionally, the 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. The
Company's discontinued operations
59
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
for the nine months ended September 30, 2005 also includes expenses of
approximately $6 million, net of income taxes, related to the sale of SSRM.
The operations of SSRM include affiliated revenues of $5 million for the
nine months ended September 30, 2005 and $14 million and $44 million,
respectively, for the three months and nine months ended September 30, 2004,
related to asset management services provided by SSRM to the Company that have
not been eliminated from discontinued operations as these transactions continue
after the sale of SSRM. The following tables present the amounts related to
operations and financial position of SSRM that have been combined with the
discontinued real estate operations in the consolidated income statements:
<Table>
<Caption>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2004 2005 2004
------------- ----- -----
(IN MILLIONS)
Revenues from discontinued operations..................... $70 $ 19 $224
Expenses from discontinued operations..................... 61 38 185
--- ---- ----
Income from discontinued operations before provision for
income taxes............................................ 9 (19) 39
Provision for income taxes................................ 4 (5) 16
--- ---- ----
Income from discontinued operations, net of income
taxes................................................ 5 (14) 23
Net investment gain, net of income taxes.................. -- 165 --
--- ---- ----
Income from discontinued operations, net of income
taxes................................................ $ 5 $151 $ 23
=== ==== ====
</Table>
<Table>
<Caption>
AS OF
DECEMBER 31,
2004
-------------
(IN MILLIONS)
Equity securities........................................... $ 49
Real estate and real estate joint ventures.................. 96
Short-term investments...................................... 33
Other invested assets....................................... 20
Cash and cash equivalents................................... 55
Premiums and other receivables.............................. 38
Other assets................................................ 88
----
Total assets held-for-sale................................ $379
====
Short-term debt............................................. $ 19
Current income taxes payable................................ 1
Deferred income taxes payable............................... 1
Other liabilities........................................... 219
----
Total liabilities held-for-sale........................... $240
====
</Table>
17. SUBSEQUENT EVENTS
On November 1, 2005, the Company repaid a maturing 7% $250 million surplus
note.
On October 25, 2005, the Holding Company's Board of Directors approved an
annual dividend for 2005 of $0.52 per common share payable on December 15, 2005
to shareholders of record on November 7, 2005. The 2005 dividend represents a
13% increase from the 2004 annual dividend of $0.46 per common share. The
Company estimates the aggregate dividend payment to be approximately $400
million.
60
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.
This 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 Company and its subsidiaries,
as well as other statements including words such as "anticipate," "believe,"
"plan," "estimate," "expect," "intend" and other similar expressions.
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 United States Securities and Exchange Commission
("SEC"), 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.
ACQUISITIONS AND DISPOSITIONS
On September 29, 2005, the Company completed the sale of P.T. Sejahtera
("MetLife Indonesia") to a third party resulting in a gain upon disposal of $10
million, net of income taxes. As a result of this sale, the Company recognized
income from discontinued operations of $7 million, net of income taxes, for the
three months ended September 30, 2005. The Company reclassified the assets,
liabilities and operations of MetLife Indonesia into discontinued operations for
all periods presented.
On September 1, 2005, the Holding Company completed the acquisition of
CitiStreet Associates, a division of CitiStreet LLC that is primarily involved
in the distribution of annuity products and retirement plans to the education,
healthcare, and not-for-profit markets, for approximately $56 million.
CitiStreet Associates will be integrated with MetLife Resources, a division of
MetLife dedicated to providing retirement plans and financial services to the
same markets. This integration is expected to be completed by January 1, 2006.
61
On July 1, 2005, the Holding Company completed the acquisition of The
Travelers Insurance Company ("TIC"), excluding certain assets, most
significantly, Primerica, from Citigroup Inc. ("Citigroup"), and substantially
all of Citigroup Inc.'s international insurance businesses (collectively,
"Travelers"), for $12.0 billion. The results of Travelers operations have been
included in the consolidated financial statements beginning July 1, 2005. As a
result of the acquisition, the Company is expecting to increase significantly
the size and scale in its core insurance and annuity products and expand its
presence in both the retirement & savings domestic markets, as well as the
international markets. It also expects that the distribution agreements executed
with Citigroup as part of the acquisition will provide the Company with one of
the broadest distribution networks in the industry. Consideration paid by the
Holding Company for the purchase consisted of approximately $10.9 billion in
cash and 22,436,617 shares of the Holding Company's common stock with a market
value of approximately $1.0 billion to Citigroup and approximately $100 million
in other transaction costs. Consideration paid to Citigroup will be finalized
subject to review of the June 30, 2005 financial statements of Travelers by both
the Company and Citigroup and interpretation of the provisions of the
acquisition agreement by both parties. In addition to the cash on-hand, the
purchase price was financed through the issuance of common stock as described
above, debt securities, common equity units, and preferred shares. See
"-- Liquidity and Capital Resources -- The Holding Company -- Liquidity
Sources." The $7.0 billion unsecured senior bridge credit facility entered into
by the Holding Company on May 16, 2005 to finance a portion of the purchase
price of Travelers was terminated unused on July 1, 2005.
On January 31, 2005, the Holding Company completed the sale of SSRM
Holdings, Inc. ("SSRM") to a third party for $328 million in cash and stock. As
a result of the sale of SSRM, the Company recognized income from discontinued
operations of approximately $157 million, net of income taxes, comprised of a
realized gain of $165 million, net of income taxes, and an operating expense
related to a lease abandonment of $8 million, net of income taxes. Under the
terms of the agreement, 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 five
years, depending on retention of certain MetLife-related business. The Company
reclassified the assets, liabilities and operations of SSRM into discontinued
operations for the period ended December 31, 2004 and all preceding periods
presented. Additionally, the 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. The
Company's discontinued operations for the nine months ended September 30, 2005
also includes expenses of approximately $6 million, net of income taxes, related
to the sale of SSRM.
IMPACT OF HURRICANE KATRINA
On August 29, 2005, Hurricane Katrina made landfall in the states of
Louisiana, Mississippi and Alabama causing catastrophic damage to these coastal
regions. In the third quarter of 2005, the Company recognized total net losses
related to the catastrophe of $130 million, net of income taxes and reinsurance
recoverables and including reinstatement premiums and other reinsurance related
premium adjustments, which impacted, most substantially, the Auto & Home and
Institutional segments. The Auto & Home and Institutional segments recorded net
losses related to the catastrophe of $116 million and $14 million, each net of
income taxes and reinsurance recoverables and including reinstatement premiums
and other reinsurance related premium adjustments, respectively. MetLife's gross
losses from Katrina were approximately $340 million, primarily arising from the
Company's homeowners business.
Additional hurricane-related losses may be recorded in future periods as
claims are received from insureds and claims to reinsurers are processed.
Reinsurance recoveries are dependent on the continued creditworthiness of the
reinsurers, which may be affected by their other reinsured losses in connection
with Hurricane Katrina and otherwise. In addition, lawsuits, including purported
class actions, have been filed in Mississippi and Louisiana challenging the
property and casualty insurance industry's exclusion of water damage from
homeowners policies. While Metropolitan Property and Casualty Insurance Company
is not a named party in the lawsuits, rulings in these cases may affect
interpretation of its policies. Any limitation on this exclusion could result in
an increase in the Company's hurricane-related claim exposure and losses. Based
62
on information currently known by management, it does not believe that
additional claim losses resulting from Hurricane Katrina will have a material
adverse impact on the Company's consolidated financial statements.
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 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) application of the consolidation
rules to certain investments; (iv) the fair value of and accounting for
derivatives; (v) the capitalization and amortization of deferred policy
acquisition costs ("DAC"), including value of business acquired ("VOBA"); (vi)
the measurement of goodwill and related impairment, if any; (vii) the liability
for future policyholder benefits; (viii) the liability for litigation and
regulatory matters; (ix) accounting for reinsurance transactions; and (x)
accounting for employee benefit plans. The application of purchase accounting
requires the use of estimation techniques in determining the fair value of the
assets acquired and liabilities assumed -- the most significant of which relate
to the aforementioned critical estimates. 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 these estimates.
INVESTMENTS
The Company's principal investments are in fixed maturities, mortgage and
consumer 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 cost or amortized cost; (ii) the potential for
impairments of securities when the issuer is experiencing significant financial
difficulties; (iii) the potential for impairments in an entire industry sector
or sub-sector; (iv) the potential for impairments in certain economically
depressed geographic locations; (v) the potential for impairments of securities
where the issuer, series of issuers or industry has suffered a catastrophic type
of loss or has exhausted natural resources; (vi) 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 or 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.
63
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. The Company
also uses derivative instruments to hedge its currency exposure associated with
net investments in certain foreign operations. 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
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 under 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 common
industry practice, in its determination of the amortization of DAC. 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.
VOBA reflects the estimated fair value of in-force contracts acquired and
represents the portion of the purchase price that is allocated to the value of
the right to receive future cash flows from the life insurance and annuity
contracts in force at the acquisition date. VOBA is based on actuarially
determined projections, by each block of business, of future policy and contract
charges, premiums, mortality and morbidity, separate account performance,
surrenders, operating expenses, investment returns and other factors. Actual
experience on the purchased business may vary from these projections. If
estimated gross profits or premiums differ from expectations, the amortization
of VOBA is adjusted to reflect actual experience.
GOODWILL
Goodwill is the excess of cost over the fair value of net assets acquired.
The Company tests goodwill for impairment at least annually or more frequently
if events or circumstances, such as adverse changes in the business climate,
indicate that there may be justification for conducting an interim test.
Impairment testing is performed using the fair value approach, which requires
the use of estimates and judgment, at the "reporting unit" level. A reporting
unit is the operating segment, or a business one level below that operating
segment if discrete financial information is prepared and regularly reviewed by
management at that level. For purposes of goodwill impairment testing, goodwill
within Corporate & Other is allocated to reporting units within the Company's
business segments. If the carrying value of a reporting unit's goodwill exceeds
its fair value, the excess is recognized as an impairment and recorded as a
charge against net income. The fair values of the
64
reporting units are determined using discounted cash flow models. When available
and as appropriate, comparative market multiples are used to corroborate
discounted cash flow results.
LIABILITY FOR FUTURE POLICY BENEFITS AND UNPAID CLAIMS AND CLAIM EXPENSES
The Company establishes liabilities for amounts payable under insurance
policies, including traditional life insurance, traditional annuities and
non-medical health 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 claim
expenses for property and casualty claim insurance which represent the amount
estimated for claims that have been reported but not settled and claims incurred
but not reported. Liabilities for unpaid claims are estimated based upon the
Company's historical experience and other actuarial assumptions that consider
the effects of current developments, anticipated trends and risk management
programs, reduced for anticipated salvage and subrogation.
Differences between actual experience and the assumptions used in pricing
these policies and in the establishment of liabilities result in variances in
profit and could result in losses. The effects of changes in such estimated
reserves are included in the results of operations in the period in which the
changes occur.
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 unaudited interim condensed
consolidated financial position. Liabilities are established when it is probable
that a loss has been incurred and the amount of the loss can be reasonably
estimated. Liabilities related to certain lawsuits, 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
assumptions 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 annual basis the Company reviews relevant information with respect
to liabilities for litigation, regulatory investigations and litigation-related
contingencies to be reflected in the Company's consolidated financial
statements. 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.
65
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. 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.
FINANCIAL CONDITION
As a result of the Travelers acquisition, the Company expects to increase
significantly the size and scale in its core insurance and annuity products and
expand its presence in both the retirement & savings domestic markets, as well
as, the international markets. It also expects that the distribution agreements
executed with Citigroup as part of the acquisition will provide the Company with
one of the broadest distribution networks in the industry.
The Travelers assets and liabilities acquired of $102 billion and $90
billion, respectively, have been included in the consolidated balance sheet of
the Company at their estimated fair market values as of the date of acquisition,
July 1, 2005, and significantly increased the Company's assets and liabilities
as included in the unaudited condensed consolidated financial statements of the
Company as of September 30, 2005 as included elsewhere herein. The purchase
price of $12 billion was financed through the issuance of common stock of $1
billion, preferred stock of $2 billion, common equity units of $2 billion, and
debt securities of $3 billion and cash of $4 billion.
RESULTS OF OPERATIONS
EXECUTIVE SUMMARY
MetLife, Inc., is a leading provider of insurance and other financial
services to millions of individual and institutional customers throughout the
United States. Through its subsidiaries and affiliates, the Company offers life
insurance, annuities, automobile and homeowner's insurance and retail banking
services to individuals, as well as group insurance, reinsurance, and retirement
& savings products and services to corporations and other institutions. Outside
the United States, the MetLife companies have direct insurance operations in
Asia Pacific, Latin America, and Europe. MetLife is organized into five
operating segments: Institutional, Individual, Auto & Home, International and
Reinsurance, as well as Corporate & Other.
Management's discussion and analysis which follows isolates, in order to be
meaningful, the results of the Travelers acquisition in the period over period
comparison as the Travelers acquisition was not included in the results of the
Company until July 1, 2005. The Travelers' amounts which have been isolated
represent the results of the Travelers legal entities which have been acquired.
During the three months ended September 30, 2005, these amounts represent the
impact of the Travelers acquisition; however, as business currently transacted
through the Travelers acquired legal entities is transitioned to legal entities
already owned by the Company, some of which has already occurred, the
identification of the Travelers legal entity business will not necessarily be
indicative of the impact of the Travelers acquisition on the results of the
Company.
As a part of the Travelers acquisition, management realigned certain
products and services within several of its segments to better conform to the
way it intends to manage and assess the business going forward. Accordingly, all
prior period segment results have been adjusted to reflect such product
reclassifications. Also in connection with the Travelers acquisition, management
has utilized its economic capital model to evaluate the deployment of capital
based upon the unique and specific nature of the risks inherent in the Company's
existing and newly acquired businesses and has adjusted such allocations based
upon this model.
66
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2004
The Company reported $742 million in net income available to common
shareholders and diluted earnings per common share of $0.97 for the three months
ended September 30, 2005 compared to $695 million in net income available to
common shareholders and diluted earnings per common share of $0.92 for the three
months ended September 30, 2004. The acquisition of Travelers contributed $181
million to net income available to common shareholders for the three months
ended September 30, 2005. Excluding the impact of Travelers, net income
available to common shareholders decreased by $134 million in the 2005 period.
The three months ended September 30, 2005 and 2004 includes the impact of
certain transactions or events, the timing, nature and amount of which are
generally unpredictable. These transactions are described in each applicable
segment's discussion below. These items contributed a benefit of $31 million,
net of income taxes, for the three months ended September 30, 2005 and a benefit
of $9 million, net of income taxes, in the comparable 2004 period. Excluding the
impact of these items, net income available to common shareholders decreased by
$156 million for the three months ended September 30, 2005 compared to the prior
2004 period.
Net investment gains (losses) decreased by $163 million, net of income
taxes, for the three months ended September 30, 2005 as compared to the
corresponding period in 2004. The acquisition of Travelers contributed a loss of
$10 million, net of income taxes, to this decrease. Excluding the impact of
Travelers, net investment gains (losses) decreased by $153 million, net of
income taxes, in the 2005 period. This decrease is primarily due to losses on
fixed maturity security sales resulting from portfolio repositioning in the 2005
period and losses from the mark-to-market on derivatives in the 2005 period. The
derivative losses resulted from changes in the value of the dollar versus major
currencies, including the euro and pound sterling, and changes in U.S. interest
rates during the three months ended September 30, 2005.
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2004
The Company reported $3,974 million in net income available to common
shareholders and diluted earnings per common share of $5.28 for the nine months
ended September 30, 2005 compared to $2,247 million in net income available to
common shareholders and diluted earnings per common share of $2.97 for the nine
months ended September 30, 2004. The acquisition of Travelers contributed $181
million to net income available to common shareholders for the nine months ended
September 30, 2005. Excluding the impact of Travelers, net income available to
common shareholders increased by $1,546 million in the 2005 period. The nine
months ended September 30, 2005 and 2004 includes the impact of certain
transactions or events, the timing, nature and amount of which are generally
unpredictable. These transactions are described in each applicable segment's
discussion below. These items contributed a benefit of $71 million, net of
income taxes, to the nine months ended September 30, 2005 and a benefit of $113
million, net of income taxes, to the comparable 2004 period. Excluding the
impact of these items, net income available to common shareholders increased by
$1,588 million for the nine months ended September 30, 2005 compared to the
prior 2004 period.
In the second quarter of 2005, the Company completed the sale of the One
Madison Avenue and 200 Park Avenue properties in Manhattan, New York, which
combined resulted in a gain of $1,193 million, net of income taxes. In the
second quarter of 2004 the Company completed the sale of the Sears Tower
property resulting in a gain of $85 million, net of income taxes. During the
first quarter of 2005, the Company completed the sale of SSRM and recognized a
gain of $165 million. Accordingly, income from discontinued operations, and
correspondingly net income, increased by $1,270 million for the nine months
ended September 30, 2005 compared to the 2004 period as a result of gains
associated with the sale of these real estate properties and the sale of SSRM.
These increases were partially offset by a decrease in net investment gains
(losses) of $64 million, net of income taxes, for the nine months ended
September 30, 2005 as compared to the corresponding period in 2004. The
acquisition of Travelers contributed a loss of $10 million, net of income taxes,
to this decrease. Excluding the impact of Travelers, net investment gains
(losses) decreased by $54 million, net of income taxes, in the 2005 period. This
decrease is primarily due to losses on fixed maturity security sales resulting
from continuing portfolio repositioning in the 2005 period, as well as higher
gains from the sale of equity securities in the 2004 period. Significantly
offsetting these reductions is an increase in gains from the mark-to-
67
market on derivatives in 2005. The derivative gain resulted from changes in the
value of the dollar versus major currencies, including the euro and pound
sterling, and changes in U.S. interest rates during the nine months ended
September 30, 2005.
The increase in net income available to common shareholders during the nine
months ended September 30, 2005 as compared to the same period in the prior year
is partially due to the decrease in net income available to common shareholders
in the prior year of $86 million, net of income taxes, as a result of a
cumulative effect of a change in accounting principle in 2004 recorded in
accordance with Statement of Position ("SOP") 03-1, Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts ("SOP 03-1").
The remaining increase in net income available to common shareholders of
$286 million is attributable to the increase in total revenues, offset by a
commensurate increase in total expenses resulting from business growth as
described in the discussion of results for the Company and by segment.
INDUSTRY TRENDS
The Company's segments continue to be influenced by a variety of trends
that affect the industry, as well as the Company.
Financial Environment. The financial environment presents a challenge for
the life insurance industry. A low general level of short-term and long-term
interest rates can have a negative impact on the demand for and the
profitability of spread-based products such as fixed annuities, guaranteed
interest contracts and universal life insurance. In addition, continued low
interest rates could put pressure on interest spreads on existing blocks of
business as declining investment portfolio yields draw closer to minimum
crediting rate guarantees on certain products. The compression of the yields
between spread-based products and interest rates will be a concern until new
money rates on corporate bonds are higher than overall life insurer investment
portfolio yields. Recent equity market performance has also presented challenges
for life insurers, as fee revenue from variable annuities and pension products
is tied to separate account balances, which reflect equity market performance.
Also, variable annuity product demand often mirrors consumer demand for equity
market investments.
Improving Economy. A recovery in the employment market combined with
higher corporate confidence should improve demand for group insurance and
retirement & savings type products. Group insurance premium growth, for example,
life and disability, are closely tied to employers' total payroll growth.
Additionally, the potential market for these products is expanded by new
business creation. Bond portfolio credit losses have also benefited from an
increasingly healthy economy.
Demographics. In the coming decade, a key driver shaping the actions of
the industry will be the rising income protection, wealth accumulation,
protection and transfer needs of the retiring Baby Boomers -- the first of whom
have entered their pre-retirement, peak savings years. As a result of increasing
longevity, retirees will need to accumulate sufficient savings to finance
retirements that may span 30 or more years. Helping the Baby Boomers accumulate
assets for retirement and subsequently converting these assets into retirement
income represents a transformative opportunity for the life insurance industry.
Life insurers are well positioned to address the Baby Boomers' rapidly
increasing need for savings tools and for income protection. In light of recent
Social Security reform and pension solvency concerns, "protection" is what sets
the U.S. life insurance industry apart from other financial services providers
pursuing the retiring Baby Boomer segment. The Company believes that, among life
insurers, those with strong brands, high financial strength ratings, and broad
distribution, are best positioned to capitalize on the opportunity to offer
income protection products to Baby Boomers.
Moreover, the life insurance industry's products and the needs they are
designed to address are complex. The Company believes that individuals
approaching retirement age will need to seek advice to plan for and manage their
retirements and that, in the workplace, as employees take greater responsibility
for their benefit options and retirement planning, they will need individually
tailored advice. The challenge for the life insurance industry remains
delivering tailored advice in a cost effective manner.
68
Competitive Pressures. The life insurance industry is becoming
increasingly competitive. The product development and product life-cycles have
shortened in many product segments, leading to more intense competition with
respect to product features. Larger companies have the ability to invest in
brand equity, product development and risk management, which are among the
fundamentals for sustained profitable growth in the life insurance industry. In
addition, several of the industry's products can be quite homogeneous and
subject to intense price competition, and sufficient scale, financial strength
and flexibility are becoming prerequisites for sustainable growth in the life
insurance industry. Larger market participants tend to have the capacity to
invest in additional distribution capability and the information technology
needed to offer the superior customer service demanded by an increasingly
sophisticated industry client base.
Regulatory Changes. The life insurance industry is regulated at the state
level, with some products also subject to federal regulation. As life insurers
introduce new and often more complex products, regulators refine capital
requirements and introduce new reserving standards for the life insurance
industry. Regulation recently adopted or currently under review can potentially
impact the reserve and capital requirements for several of the industry's
products. In addition, regulators have undertaken market and sales practices
reviews of several markets or products including equity-indexed annuities,
variable annuities and group products.
69
DISCUSSION OF RESULTS
The following table presents consolidated financial information for the
Company for the periods indicated:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2005 2004 2005 2004
------- ------ ------- -------
(IN MILLIONS)
REVENUES
Premiums.................................... $ 6,514 $5,679 $18,514 $16,400
Universal life and investment-type product
policy fees............................... 1,112 736 2,716 2,120
Net investment income....................... 4,088 3,059 10,784 9,076
Other revenues.............................. 348 292 948 889
Net investment gains (losses)............... (50) 206 268 369
------- ------ ------- -------
Total revenues............................ 12,012 9,972 33,230 28,854
------- ------ ------- -------
EXPENSES
Policyholder benefits and claims............ 6,837 5,924 19,018 16,775
Interest credited to policyholder account
balances.................................. 1,149 739 2,764 2,220
Policyholder dividends...................... 426 407 1,261 1,252
Other expenses.............................. 2,615 1,933 6,591 5,645
------- ------ ------- -------
Total expenses............................ 11,027 9,003 29,634 25,892
------- ------ ------- -------
Income from continuing operations before
provision for income taxes................ 985 969 3,596 2,962
Provision for income taxes.................. 246 290 1,049 817
------- ------ ------- -------
Income from continuing operations........... 739 679 2,547 2,145
Income from discontinued operations, net of
income taxes.............................. 34 16 1,458 188
------- ------ ------- -------
Income before cumulative effect of a change
in accounting............................. 773 695 4,005 2,333
Cumulative effect of a change in accounting,
net of income taxes....................... -- -- -- (86)
------- ------ ------- -------
Net income.................................. 773 695 4,005 2,247
Preferred stock dividend.................... 31 -- 31 --
------- ------ ------- -------
Net income available to common
shareholders.............................. $ 742 $ 695 $ 3,974 $ 2,247
======= ====== ======= =======
</Table>
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2004 -- THE COMPANY
Income from continuing operations increased by $60 million, or 9%, to $739
million for the three months ended September 30, 2005 from $679 million in the
comparable 2004 period. The current period includes $181 million of income from
continuing operations related to the acquisition of Travelers. Excluding the
acquisition of Travelers, income from continuing operations decreased by $121
million, or 18%. Income from continuing operations for the three months ended
September 30, 2005 and 2004 includes the impact of certain transactions or
events, the timing, nature and amount of which are generally unpredictable.
These transactions are described in each applicable segment's discussion below.
These items contributed a benefit of $31 million, net of income taxes, for the
three months ended September 30, 2005 and a benefit of $9 million, net of income
taxes, in the comparable 2004 period. Excluding the impact of these items,
income from continuing operations
70
decreased by $143 million for the three months ended September 30, 2005 compared
to the prior 2004 period. The Auto & Home segment contributed $62 million, net
of income taxes, to this decrease primarily due to an increase in catastrophe
losses as a result of the impact of Hurricane Katrina. The Individual segment
contributed $55 million, net of income taxes, to the decrease, as a result of a
decline in net investment gains (losses), higher general spending and corporate
incentives, as well as a revision to the estimate for policyholder dividends in
the prior period. These decreases were partially offset by higher fee income
primarily from separate account products, favorable underwriting, an improvement
in interest rate spreads and lower amortization of DAC. The Institutional
segment contributed $41 million, net of income taxes, to this decrease primarily
due to a decline in net investment gains (losses) and unfavorable underwriting,
partially offset by an improvement in interest spreads. These decreases are
partially offset by a $15 million, net of income taxes, increase in the
Reinsurance segment. The Reinsurance segment's increase is largely attributable
to favorable mortality experience as a result of lower claim levels in the U.S.
and Canada.
Premiums, fees and other revenues increased by $1,267 million, or 19%, to
$7,974 million for the three months ended September 30, 2005 from $6,707 million
from the comparable 2004 period. The current period includes $559 million of
premium, fees and other revenues related to the acquisition of Travelers.
Excluding the acquisition of Travelers, premium, fees and other revenues
increased by $708 million, or 11%. The Institutional segment contributed $301
million, or 43%, to the period over period increase. This increase is primarily
due to overall business growth, favorable persistency and favorable sales in
group life and non medical health & other partially offset by a decrease in
closeout and structured settlement sales in retirement & savings. The
Reinsurance segment contributed $155 million, or 22%, to the Company's period
over period increase in premiums, fees and other revenues. This growth is
primarily attributable to new premiums from facultative and automatic treaties
and renewal premiums on existing blocks of business, as well as favorable
exchange rate movements. The Individual segment contributed $141 million, or
20%, to the period over period increase primarily due to higher fee income
primarily from separate account products, active marketing of income annuity
products and growth in the business in traditional products. The growth in
traditional products more than offset the decline in premiums in the Company's
closed block business as this business continues to run-off. The International
segment contributed $129 million, or 18%, to the period over period increase
primarily due to business growth through increased sales and renewal business in
Mexico, South Korea, Brazil, Taiwan and India, as well as changes in foreign
currency rates. These increases were partially offset by a decline of $24
million, or 3%, in the Auto & Home segment primarily due to Hurricane Katrina.
Interest rate margins, which generally represent the margin between net
investment income and interest credited to policyholder account balances,
increased in the Institutional and Individual segments for the three months
ended September 30, 2005 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 venture income and bond
and commercial mortgage prepayment fees for which the timing and amount are
generally unpredictable, 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 could adversely
impact the Company's future financial results.
Underwriting results were favorable within the life products in the
Individual segment and within the Reinsurance segment while they were
unfavorable in the retirement & savings and non medical health & other products
within the Institutional segment. Underwriting results are generally the
difference between the portion of premium and fee income intended to cover
mortality, morbidity or other insurance costs less claims incurred and the
change in insurance related liabilities. Underwriting results are significantly
influenced by mortality, morbidity, or other insurance related experience trends
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 unfavorable for the three months ended September 30, 2005 as
the combined ratio, excluding catastrophes and before the reinstatement premium
and other reinsurance related premium adjustments due to Hurricane Katrina,
increased to 86.8% from 84.8% in the prior year period.
71
Other expenses increased by $682 million, or 35%, to $2,615 million for the
three months ended September 30, 2005 from $1,933 million for the comparable
2004 period. The current period includes $292 million of other expenses related
to the acquisition of Travelers. Excluding the acquisition of Travelers, other
expenses increased by $390 million, or 20%. Corporate & Other contributed $118
million, or 30%, to the period over period variance primarily due to higher
interest expense, integration costs associated with the Travelers acquisition
and growth in the interest credited to bank holder deposits at MetLife Bank,
N.A. ("MetLife Bank"), partially offset by lower legal related costs. The
Individual segment contributed $90 million, or 23%, to the period over period
increase primarily due to higher corporate incentive expenses, general spending
and broker dealer expenses partially offset by lower amortization of DAC. In
addition, $61 million, or 16%, of this increase is primarily attributable to an
increase in corporate incentive accruals, higher corporate support-related
expenses and an increase in non-deferrable volume-related expenses associated
with general business growth in the Institutional segment. The International
segment contributed $53 million, or 14%, to the period over period variance
primarily due to higher amortization of DAC, changes in foreign currency rates
and business growth commensurate with the increase in revenues discussed above.
The Reinsurance segment contributed $53 million, or 14%, to the period over
period variance primarily due to an increase in minority interest expense
associated with an increase in Reinsurance Group of America, Incorporated's
("RGA") earnings and higher amortization of DAC, as well as a change in DAC
associated with the increase in net investment gains (losses). In addition, the
Auto & Home segment contributed $15 million, or 4%, to this increase primarily
due to increased advertising and incentive and other compensation costs.
Net investment gains (losses) decreased by $256 million, or 124%, to ($50)
million for the three months ended September 30, 2005 from $206 million for the
comparable 2004 period. The current period includes ($15) million of net
investment gains (losses) related to the acquisition of Travelers. Excluding the
acquisition of Travelers, net investment gains (losses) decreased by $241
million, or 117%. This decrease is primarily due to losses on fixed maturity
security sales resulting from portfolio repositioning in the 2005 period and
losses from the mark-to-market on derivatives in the 2005 period. The derivative
losses resulted from changes in the value of the dollar versus major currencies,
including the euro and pound sterling, and changes in U.S. interest rates during
the three months ended September 30, 2005.
Income tax expense for the three months ended September 30, 2005 is $246
million, or 25% of income from continuing operations before provision for income
taxes, compared with $290 million, or 30%, for the comparable 2004 period. The
current period includes $95 million of income tax expense related to the
acquisition of Travelers. Excluding the acquisition of Travelers, income tax
expense for the three months ended September 30, 2005 is $151 million, or 21% of
income from continuing operations before provision for income taxes, compared
with $290 million, or 30%, for the comparable 2004 period. The 2005 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 2005 effective tax rate reflects a tax benefit related
to the repatriation of foreign earnings pursuant to Internal Revenue Code
Section 965 for which a U.S. deferred tax provision had previously been recorded
and an adjustment of a benefit of $31 million consisting primarily of a revision
in the estimate of income taxes for 2004. 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 of a benefit of $9
million consisting primarily of a revision in the estimate of income taxes for
2003.
Income from discontinued operations during the three months ended September
30, 2005 and 2004 includes the net investment income and net investment gains
related to real estate properties that the Company has classified as
available-for-sale or has sold. For the three months ended September 30, 2005
income from discontinued operations includes the discontinued operations and the
gain upon disposal on the sale of MetLife Indonesia on September 29, 2005. For
the three months ended September 30, 2004 income from discontinued operations
includes the discontinued operations of SSRM and MetLife Indonesia. As
previously discussed, SSRM was sold effective January 31, 2005. Income from
discontinued operations, net of income taxes, increased by $18 million, or 113%,
to $34 million for the three months ended September 30, 2005 from $16 million
for the comparable 2004 period. For the three months ended September 30, 2005,
the
72
Company recognized $28 million of investment gains, net of income taxes, from
discontinued operations related to real estate properties sold or held-for-sale
and a gain upon sale of $10 million, net of income taxes, related to the sale of
MetLife Indonesia offset by net investment losses on real estate properties of
$1 million, net of income taxes, and a loss from discontinued operations of $3
million, net of income taxes, on MetLife Indonesia. For the three months ended
September 30, 2004, the Company recognized $10 million of investment losses, net
of income taxes, from discontinued operations related to real estate properties
sold or held-for-sale offset by net investment income on real estate properties
of $23 million, net of income taxes, and income from discontinued operations of
SSRM of $5 million, net of income taxes, and a loss from operations of $2
million, net of income taxes, on MetLife Indonesia.
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2004 -- THE COMPANY
Income from continuing operations increased by $402 million, or 19%, to
$2,547 million for the nine months ended September 30, 2005 from $2,145 million
in the comparable 2004 period. The current period includes $181 million of
income from continuing operations related to the acquisition of Travelers.
Excluding the acquisition of Travelers, income from continuing operations
increased by $221 million, or 10%. Income from continuing operations for the
nine months ended September 30, 2005 and 2004 includes the impact of certain
transactions or events, the timing, nature and amount of which are generally
unpredictable. These transactions are described in each applicable segment's
discussion below. These items contributed a benefit of $71 million, net of
income taxes, to the nine months ended September 30, 2005 and a benefit of $113
million, net of income taxes, to the comparable 2004 period. Excluding the
impact of these items, income from continuing operations increased by $263
million for the nine months ended September 30, 2005 compared to the prior 2004
period. The Individual segment contributed $261 million, net of income taxes, to
the increase, as a result of an improvement in net investment gains (losses) and
interest rate spreads, increased fee income related to the growth in separate
account products and favorable underwriting. These increases were partially
offset by higher DAC amortization, higher general spending and corporate
incentives offset by revisions to certain expense, premium tax and policyholder
liability estimates. The Institutional segment contributed $19 million, net of
income taxes, to this increase primarily due to an improvement in interest
spreads, partially offset by a decrease in net investment gains (losses) and
unfavorable underwriting. These increases were partially offset by a decrease of
$15 million, net of income taxes, in the International segment. This decrease is
primarily due to an increase in unrealized investment gains supporting certain
policyholder liabilities, which resulted in an increase in such liabilities,
partially offset by a tax benefit derived from a dividend paid in the current
period. In addition, the Auto & Home segment contributed $2 million to this
decrease primarily due to an increase in catastrophe losses as a result of the
impact of Hurricane Katrina partially offset by improved severity and claim
frequency in the first half of the year.
Premiums, fees and other revenues increased by $2,769 million, or 14%, to
$22,178 million for the nine months ended September 30, 2005 from $19,409
million from the comparable 2004 period. The current period includes $559
million of premium, fees and other revenues related to the acquisition of
Travelers. Excluding the acquisition of Travelers, premium, fees and other
revenues increased by $2,210 million, or 11%. The Institutional segment
contributed $1,143 million, or 52%, to the period over period increase. This
increase is primarily due to sales growth and the acquisition of new business in
the non-medical health & other business, as well as improved sales and favorable
persistency in group life and higher structured settlement sales and pension
close-outs in retirement & savings. The Reinsurance segment contributed $381
million, or 17%, to the Company's period over period increase in premiums, fees
and other revenues. This growth is primarily attributable to new premiums from
facultative and automatic treaties and renewal premiums on existing blocks of
business, as well as favorable exchange rate movements. The Individual segment
contributed $354 million, or 16%, to the period over period increase primarily
due to higher fee income primarily from separate account and universal life
products, active marketing of income annuity products and growth in the business
in traditional life products. The growth in traditional products more than
offset the decline in premiums in the Company's closed block business as this
business continues to run-off. The International segment contributed $338
million, or 15%, to the period over period increase primarily due to business
growth
73
through increased sales and renewal business in Mexico, South Korea, Brazil,
Taiwan and India, as well as changes in foreign currency rates.
Interest rate margins, which generally represent the margin between net
investment income and interest credited to policyholder account balances,
increased in the Institutional and Individual segments for the nine months ended
September 30, 2005 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 venture income and bond and commercial
mortgage prepayment fees for which the timing and amount are generally
unpredictable, 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 could adversely impact the Company's
future financial results.
Underwriting results were favorable within the life products in the
Individual segment while they were unfavorable in the retirement & savings and
non medical health & other products within the Institutional segment.
Underwriting results are generally the difference between the portion of premium
and fee income intended to cover mortality, morbidity or other insurance costs
less claims incurred and the change in insurance-related liabilities.
Underwriting results are significantly influenced by mortality, morbidity or
other insurance-related experience trends 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 for the
nine months ended September 30, 2005, as the combined ratio, excluding
catastrophes and before the reinstatement premium and other reinsurance related
premium adjustments due to Hurricane Katrina, decreased to 88.0% from 89.9% in
the prior year period.
Other expenses increased by $946 million, or 17%, to $6,591 million for the
nine months ended September 30, 2005 from $5,645 million for the comparable 2004
period. The current period includes $292 million of other expenses related to
the acquisition of Travelers. Excluding the acquisition of Travelers, other
expenses increased by $654 million, or 12%. The nine months ended September 30,
2005 includes a $28 million benefit associated with the reduction of a
previously established real estate transfer tax liability related to the
Company's demutualization in 2000. The nine months ended September 30, 2004
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 $661 million, or 12%, from the comparable 2004 period. Corporate &
Other contributed $249 million, or 38%, to the period over period variance
primarily due to higher interest expense, growth in the interest credited to
bank holder deposits at MetLife Bank and integration costs associated with the
Travelers acquisition, partially offset by lower legal related costs. The
International segment contributed $156 million, or 24%, to the period over
period variance primarily due to higher amortization of DAC, changes in foreign
currency rates and business growth commensurate with the increase in revenues
discussed above. In addition, $141 million, or 21%, of this increase is
primarily attributable to higher non-deferrable volume-related expenses
associated with general business growth, corporate support expenses and higher
expenses related to additional Travelers incentive accruals in the Institutional
segment. The Individual segment contributed $54 million, or 8%, to the period
over period increase primarily due to higher corporate incentive expenses,
general spending and broker dealer expenses and higher amortization of DAC. The
Reinsurance segment also contributed $34 million, or 5%,to this increase
primarily due to an increase in the amortization of DAC. In addition, the Auto &
Home segment contributed $27 million, or 4%, to this increase primarily due to
increased information technology, advertising and incentive and other
compensation costs.
Net investment gains (losses) decreased by $101 million, or 27%, to $268
million for the nine months ended September 30, 2005 from a net investment gain
of $369 million for the comparable 2004 period. The current period includes
($15) million of net investment gains (losses) related to the acquisition of
Travelers. Excluding the acquisition of Travelers, net investment gains (losses)
decreased by $86 million, or 23%. This decrease is primarily due to losses on
fixed maturity security sales resulting from continuing portfolio repositioning
in the 2005 period, as well as higher gains from the sale of equity securities
in the 2004 period.
74
Significantly offsetting these reductions is an increase in gains from the
mark-to-market on derivatives in 2005. The derivative gains resulted from
changes in the value of the dollar versus major currencies, including the euro
and pound sterling, and changes in U.S. interest rates during the nine months
ended September 30, 2005.
Income tax expense for the nine months ended September 30, 2005 is $1,049
million, or 29% of income from continuing operations before provision for income
taxes, compared with $817 million, or 28%, for the comparable 2004 period. The
current period includes $95 million of income tax expense related to the
acquisition of Travelers. Excluding the acquisition of Travelers, income tax
expense for the nine months ended September 30, 2005 is $954 million, or 29% of
income from continuing operations before provision for income taxes, compared
with $817 million, or 28%, for the comparable 2004 period. The 2005 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 2005 effective tax rate reflects a tax benefit related
to the repatriation of foreign earnings pursuant to Internal Revenue Code
Section 965 for which a U.S. deferred tax provision had previously been recorded
and an adjustment of a benefit of $31 million consisting primarily of a revision
in the estimate of income taxes for 2004. The 2004 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, decreasing
the deferred tax valuation allowance to recognize the effect of certain foreign
net operating loss carryforward in South 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 and an adjustment of a benefit of $9 million
consisting primarily of a revision in the estimate of income taxes for 2003.
Income from discontinued operations is comprised of the operations and the
gain upon disposal from the sale of MetLife Indonesia on September 29, 2005 and
SSRM on January 31, 2005, as well as net investment income and net investment
gains related to real estate properties that the Company has classified as
available-for-sale or has sold. Income from discontinued operations, net of
income taxes, increased by $1,270 million, or 676%, to $1,458 million for the
nine months ended September 30, 2005 from $188 million for the comparable 2004
period. This increase is primarily due to a gain of $1,193 million, net of
income taxes, on the sales of the One Madison Avenue and 200 Park Avenue
properties in Manhattan, New York and the gains on the sale of SSRM and MetLife
Indonesia of $165 million and $10 million, respectively, both net of income
taxes, in the nine months ended September 30, 2005. Partially offsetting this
increase is the gain on the sale of the Sears Tower property of $85 million, net
of income taxes, in the nine months ended September 30, 2004.
During the nine months ended September 30, 2004, the Company recorded an
$86 million charge, net of income taxes, 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.
75
INSTITUTIONAL
The following table presents consolidated financial information for the
Institutional segment for the periods indicated:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2005 2004 2005 2004
------- ------- ------- -------
(IN MILLIONS)
REVENUES
Premiums..................................... $3,066 $2,662 $ 8,744 $ 7,519
Universal life and investment-type product
policy fees................................ 197 183 575 534
Net investment income........................ 1,684 1,127 4,251 3,378
Other revenues............................... 163 159 487 489
Net investment gains (losses)................ (81) 104 131 248
------ ------ ------- -------
Total revenues............................. 5,029 4,235 14,188 12,168
------ ------ ------- -------
EXPENSES
Policyholder benefits and claims............. 3,427 2,970 9,734 8,356
Interest credited to policyholder account
balances................................... 501 255 1,128 743
Policyholder dividends....................... -- (1) -- (1)
Other expenses............................... 587 510 1,634 1,428
------ ------ ------- -------
Total expenses............................. 4,515 3,734 12,496 10,526
------ ------ ------- -------
Income from continuing operations before
provision for income taxes................. 514 501 1,692 1,642
Provision for income taxes................... 170 168 572 562
------ ------ ------- -------
Income from continuing operations............ 344 333 1,120 1,080
Income (loss) from discontinued operations,
net of income taxes........................ (1) 2 162 10
------ ------ ------- -------
Income before cumulative effect of a change
in accounting.............................. 343 335 1,282 1,090
Cumulative effect of a change in accounting,
net of income taxes........................ -- -- -- (60)
------ ------ ------- -------
Net income................................... $ 343 $ 335 $ 1,282 $ 1,030
====== ====== ======= =======
</Table>
The Company's Institutional segment offers a broad range of group insurance
and retirement & savings products and services to corporations and other
institutions. Group insurance products are offered as either employer-paid
benefits, or as voluntary benefits where all or a portion of the premiums are
paid by the employee. Retirement & 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.
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2004 -- INSTITUTIONAL
Income from continuing operations increased by $11 million, or 3%, to $344
million for the three months ended September 30, 2005 from $333 million for the
comparable 2004 period. The acquisition of Travelers contributed $52 million to
the period over period increase. Excluding the impact of Travelers, income from
continuing operations decreased $41 million, or 12%, from the comparable 2004
period. A decrease of $109 million, net of income taxes, in net investment gains
(losses), partially offset by a decrease of
76
$41 million, net of income taxes, in policyholder benefits and claims related to
net investment gains (losses), contributed to the decrease in income from
continuing operations. Underwriting results were lower in the retirement &
savings and non-medical health and other products by $6 million and $5 million,
respectively. Underwriting results are generally the difference between the
portion of premium and fee income intended to cover mortality, morbidity or
other insurance costs less claims incurred and the change in insurance related
liabilities. Underwriting results are significantly influenced by mortality,
morbidity, or other insurance related experience trends and the reinsurance
activity related to certain blocks of business. In addition, increases in
operating expenses, which include higher expenses related to Travelers
integration costs, have more than offset growth in premiums, fees and other
revenues compared to the prior year period. Partially offsetting these decreases
to income from continuing operations is an increase of $48 million, net of
income taxes, due to an improvement in interest spreads compared to the prior
year period. The retirement & savings, non-medical health & other, and group
life products generated a $26 million, $17 million, and $5 million, net of
income taxes, increase, respectively. Higher earnings primarily from corporate
and real estate joint venture income and growth in the asset base are the
primary drivers of the period over period increase. Interest spreads are
generally the percentage point difference between the yield earned on invested
assets and the interest rate the Company uses to credit 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, excluding the impact from the Travelers acquisition, for the three
months ended September 30, 2005 decreased to 1.77% and 2.03% from 1.81%, and
2.07% in the comparable prior year period, for the retirement & savings and
group life businesses, respectively. Interest rate spreads for the three months
ended September 30, 2005 increased to 3.33% from 2.37% in the comparable prior
year period for the non-medical health & other business. Management generally
expects these spreads to be in the range of 1.60% to 1.80%, 1.20% to 1.35%, and
1.30% to 1.60% 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 venture income and bond and commercial mortgage prepayment fees
for which the timing and amount are generally unpredictable. As a result, income
from these investment transactions may fluctuate from period to period.
Total revenues, excluding net investment gains (losses), increased by $979
million, or 24%, to $5,110 million for the three months ended September 30, 2005
from $4,131 million for the comparable 2004 period. The acquisition of Travelers
contributed $479 million to the period over period increase. Excluding the
impact of the Travelers acquisition, total revenues, excluding net investment
gains (losses), increased by $500 million, or 12%, from the comparable 2004
period. This increase is comprised of growth of $301 million in premiums, fees,
and other revenues and $199 million in higher net investment income. The
increase in premiums, fees, and other revenues is primarily due to an increase
in group life of $225 million, which is largely due to business growth,
favorable persistency and a significant increase in premiums from two large
customers. In addition, non-medical health & others' premiums, fees and other
revenues increased by $128 million, compared to the prior year period primarily
due to growth in the dental, disability, long-term care and accidental death and
dismemberment ("AD&D") products. Management attributes the growth in these
products primarily to favorable sales results and improved persistency. These
increases are partially offset by a decrease in retirement & savings of $52
million. This decrease is primarily due to lower closeout and structured
settlement sales of $30 million and $20 million, respectively. The remaining
decrease is due to minor declines among several products. 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. Net
investment income increased by $199 million, primarily due to higher income from
growth in the asset base driven by sales, particularly in guaranteed interest
contracts and the structured settlement business. In addition, increases in
corporate and real estate joint venture income and higher short-term interest
rates contributed to the growth compared to the prior year period.
Total expenses increased by $781 million, or 21%, to $4,515 million for the
three months ended September 30, 2005 from $3,734 million for the comparable
2004 period. The acquisition of Travelers contributed $379 million to the period
over period increase. Excluding the impact of the Travelers acquisition, total
expenses increased $402 million, or 11%, from the comparable 2004 period. This
increase is due to higher
77
policyholder benefits and claims of $249 million, an increase in interest
credited to policyholder account balances of $91 million and other expenses of
$61 million. The increase of $249 million in policyholder benefits is primarily
attributable to increases of $224 million and $78 million in the group life and
non-medical health & other businesses, respectively, both of which are
predominately attributable to the business growth referenced in the revenue
section. These increases include $2 million and $18 million of policyholder
benefits related to Hurricane Katrina in the group life and non-medical health &
other businesses, respectively. These increases are partially offset by a
decrease in retirement & savings of $52 million, which is consistent with the
decrease in premiums referenced in the revenue discussion above. Interest
credited to policyholder account balances increased by $91 million over the
prior year period primarily as a result of the impact of growth in guaranteed
interest contracts within the retirement & savings business. In addition, the
impact of higher short-term interest rates, in the current period, contributed
to the increase compared to the prior year period. Other expenses increased $61
million. This increase is primarily attributable to Travelers related
integration costs, principally incentive accruals, of $34 million, higher
corporate support related expenses of $21 million and an increase in
non-deferrable volume-related expenses of $6 million, which are associated with
general growth in the business.
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2004 -- INSTITUTIONAL
Income from continuing operations increased by $40 million, or 4%, to
$1,120 million for the nine months ended September 30, 2005 from $1,080 million
for the comparable 2004 period. The acquisition of Travelers contributed $52
million to the period over period increase. Excluding the impact of the
Travelers acquisition, income from continuing operations decreased $12 million,
or 1%, from the comparable 2004 period. A decrease of $66 million, net of income
taxes, in net investment gains (losses) contributed to the decrease in income
from continuing operations. In addition, a decrease of $31 million, net of
income taxes, is due to the impact of a 2004 prior year period benefit related
to a reduction of a premium tax liability. Underwriting results decreased $22
million, net of income taxes, compared to the prior year period. This decline is
primarily due to less favorable results of $30 million in non-medical health &
other and a $13 million decrease in retirement & savings, partially offset by an
improvement of $21 million in group life's underwriting results, primarily due
to favorable claim experience. Underwriting results are generally the difference
between the portion of premium and fee income intended to cover mortality,
morbidity or other insurance costs less claims incurred and the change in
insurance related liabilities. Underwriting results are significantly influenced
by mortality, morbidity, or other insurance related experience trends and the
reinsurance activity related to certain blocks of business. In addition,
increases to operating expenses, which include higher expenses related to
Travelers integration costs, have more than offset the remaining growth in
premiums, fees and other revenues. These decreases to income from continuing
operations are partially offset by an increase in interest margins of $111
million, net of income taxes, compared to the prior year period. Management
attributes this increase to an improvement in interest spreads for the
retirement & savings and non-medical health products for $80 million and $34
million, both net of income taxes, respectively. Higher earnings from growth in
the asset base and corporate and real estate joint venture income are the
primary drivers of the period over period increase. These increases are
partially offset by a decrease in group life of $3 million, which is primarily
due to a decline in income from securities lending activities. Interest spreads
are generally the percentage point difference between the yield earned on
invested assets and the interest rate the Company uses to credit 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, 2005 increased to
1.86% and 3.40% from 1.94% and 3.10% in the comparable prior year period, for
the retirement & savings and non-medical health & other businesses,
respectively. Interest rate spreads for the nine months ended September 30, 2005
decreased to 2.08% from 2.33% in the comparable prior year period for the group
life business. Management generally expects these spreads to be in the range of
1.60% to 1.80%, 1.20% to 1.35%, and 1.30% to 1.60% 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 venture
income and bond and commercial mortgage prepayment fees for which the timing
78
and amount are generally unpredictable. As a result, income from these
investment transactions may fluctuate from period to period.
Total revenues, excluding net investment gains (losses), increased by
$2,137 million, or 18%, to $14,057 million for the nine months ended September
30, 2005 from $11,920 million for the comparable 2004 period. The acquisition of
Travelers contributed $479 million to the period over period increase. Excluding
the impact of the Travelers acquisition, total revenues, excluding net
investment gains (losses), increased $1,658 million, or 14%, from the comparable
2004 period. This increase is comprised of growth in premiums, fees and other
revenues of $1,143 million and higher net investment income of $515 million. The
increase of $1,143 million in premiums, fees, and other revenues is largely due
to an increase in non-medical health & other of $413 million, primarily due to
growth in the disability, dental and AD&D products of $295 million. In addition,
continued growth in the long-term care business contributed $103 million, of
which $23 million is related to the 2004 acquisition of TIAA/CREF's long-term
care business. Group life insurance premiums, fees and other revenues increased
by $396 million, which management primarily attributes to improved sales and
favorable persistency, as well as a significant increase in premiums from two
large customers. Retirement & savings' premiums, fees and other revenues
increased by $334 million, which is largely due to growth in premiums, resulting
primarily from an increase of $232 million in structured settlement sales and
$106 million in 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. In addition,
net investment income increased $515 million primarily due to higher income from
growth in the asset base driven by sales, particularly in guaranteed interest
contracts and the structured settlement business. In addition, increases in
corporate and real estate joint venture income across the majority of the
businesses, and higher short-term interest rates contributed to the growth
compared to the prior year period.
Total expenses increased by $1,970 million, or 19%, to $12,496 million for
the nine months ended September 30, 2005 from $10,526 million for the comparable
2004 period. The acquisition of Travelers contributed $379 million to the period
over period increase. Excluding the impact of the acquisition of Travelers,
total expenses increased $1,591 million, or 15%, from the comparable 2004
period. This increase is comprised of higher policyholder benefits of $1,170
million, an increase in interest credited to policyholder account balances of
$230 million and an increase in other expenses of $190 million. The increase in
policyholder benefits and claims of $1,170 million is primarily attributable to
a $400 million, a $387 million, and a $385 million increase in the retirement &
savings, the non-medical health & other, and group life businesses,
respectively. These increases are predominately attributable to the business
growth referenced in the revenue discussion above. The increase in expenses in
the non-medical health & other business include the impact of the acquisition of
TIAA/CREF of approximately $30 million. These increases include $2 million and
$18 million of policyholder benefits related to Hurricane Katrina in the group
life and non-medical health & other business, respectively. The increase in
interest credited to policyholder account balances of $230 million is primarily
the result of the impact of growth in guaranteed interest contracts within the
retirement & savings business. In addition, the impact of higher short-term
interest rates, in the current period, also contributed to the increase. The
rise in other expenses of $190 million is primarily due to higher non-deferrable
volume-related expenses of $65 million, which are largely associated with
business growth, an increase of $40 million in corporate support related
expenses, and $35 million of Travelers related integration costs, principally
incentive accruals. In addition, expenses increased as a result of the impact of
a $49 million benefit recorded in the second quarter of 2004, which is related
to a reduction in a premium tax liability.
79
INDIVIDUAL
The following table presents consolidated financial information for the
Individual segment for the periods indicated:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
2005 2004 2005 2004
------- ------- ------- ------
(IN MILLIONS)
REVENUES
Premiums...................................... $1,140 $1,032 $ 3,233 $3,033
Universal life and investment-type product
policy fees................................. 746 461 1,726 1,325
Net investment income......................... 1,745 1,498 4,836 4,494
Other revenues................................ 150 102 367 314
Net investment gains (losses)................. (41) 125 191 134
------ ------ ------- ------
Total revenues.............................. 3,740 3,218 10,353 9,300
------ ------ ------- ------
EXPENSES
Policyholder benefits and claims.............. 1,376 1,303 3,926 3,734
Interest credited to policyholder account
balances.................................... 500 399 1,287 1,220
Policyholder dividends........................ 423 407 1,254 1,247
Other expenses................................ 1,011 726 2,360 2,111
------ ------ ------- ------
Total expenses.............................. 3,310 2,835 8,827 8,312
------ ------ ------- ------
Income from continuing operations before
provision for income taxes.................. 430 383 1,526 988
Provision for income taxes.................... 143 129 509 320
------ ------ ------- ------
Income from continuing operations............. 287 254 1,017 668
Income from discontinued operations, net of
income taxes................................ 27 5 248 17
------ ------ ------- ------
Net income.................................... $ 314 $ 259 $ 1,265 $ 685
====== ====== ======= ======
</Table>
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, as
well as other products offered by the Company's other businesses.
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2004 -- INDIVIDUAL
Income from continuing operations increased by $33 million, or 13%, to $287
million for the three months ended September 30, 2005 from $254 million for the
comparable 2004 period. The acquisition of Travelers accounted for $88 million
of the increase. Excluding the impact of the acquisition of Travelers, income
from continuing operations decreased by $55 million, or 22%, to $199 million for
the three months ended September 30, 2005 from $254 million for the comparable
2004 period. Included in this decrease are net investment losses of $113
million, net of income taxes. Higher general spending and corporate incentives
contributed $71 million, net of income taxes, to the decrease in income from
continuing operations. The prior period includes a revision to the estimate for
policyholder dividends, which contributed $11 million, net of income taxes, to
the decrease in income from continuing operations. Partially offsetting these
decreases, fee income from variable annuity and universal life products in the
current period increased by $47 million, net of
80
income taxes, primarily related to the growth in the business and favorable
market conditions. Favorable underwriting results in the life products increased
income from continuing operations by $34 million, net of income taxes.
Underwriting results are generally the difference between the portion of premium
and fee income intended to cover mortality, morbidity or other insurance costs
less claims incurred and the change in insurance related liabilities.
Underwriting results are significantly influenced by mortality, morbidity, or
other insurance related experience trends and the reinsurance activity related
to certain blocks of business, and as a result can fluctuate from period to
period. Additionally, contributing to the increase in income from continuing
operations was a decline in the closed block related policyholder dividend
obligation of $26 million, net of income taxes, as a result of lower net
investment income in the closed block and improvements in interest rate spreads
of $20 million, net of income taxes. Interest rate spreads are generally the
percentage point difference between the yield earned on invested assets and the
interest rate the Company uses to credit 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
include income from certain investment transactions, including corporate joint
venture income and prepayment fees from bonds and commercial mortgages, the
timing and amount of which are generally unpredictable. Lower DAC amortization
of $13 million, net of income taxes, resulting from amortization associated with
the net investment losses partially offset by growth in the business also
increased income from continuing operations.
Total revenues, excluding net investment gains (losses), increased by $688
million, or 22%, to $3,781 million for the three months ended September 30, 2005
from $3,093 million for the comparable 2004 period. The acquisition of Travelers
accounted for $509 million of the increase. Excluding the impact from the
acquisition of Travelers, total revenues, excluding net investment gains
(losses) increased by $179 million, or 6%, to $3,272 million for the three
months ended September 30, 2005 from $3,093 million for the comparable 2004
period. This increase includes higher fee income primarily from variable annuity
and universal life products of $81 million resulting from growth in the business
and improved overall market performance. Policy fees from variable life and
annuity 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 $49 million in 2005 to the active marketing of income annuity
products. Although premiums associated with the Company's closed block of
business continue to decline as expected, the growth in premiums of other
traditional life products more than offset the decline of the closed block by $8
million. Management attributes the increase in the other traditional products to
growth in the business and a new reinsurance strategy where more business is
retained. Net investment income also increased by $38 million resulting from
higher variable income and growth in the asset base partially offset by a
decline in bond yields.
Total expenses increased by $475 million, or 17%, to $3,310 million for the
three months ended September 30, 2005 from $2,835 million for the comparable
2004 period. The acquisition of Travelers accounted for $382 million of the
increase. Excluding the impact of the acquisition of Travelers, total expenses
increased by $93 million, or 3%, to $2,928 million for the three months ended
September 30, 2005 from $2,835 million for the comparable 2004 period. Higher
expenses are primarily the result of higher corporate incentive expenses of $43
million, higher general spending of $37 million, higher broker dealer expenses
of $16 million and the revision of certain expense and policyholder liabilities
of $11 million in the 2005 period. DAC amortization decreased by $19 million,
which partially offset the increase in expenses, resulting from net investment
losses and an adjustment for management's update of assumptions used to
determine estimated gross margins partially offset by growth in the business.
Policyholder dividends increased by $16 million due to a revision in the
estimate of policyholder dividends in the prior period. Policyholder benefits
decreased primarily due to favorable mortality in the life products of $39
million and a decrease in the closed block related policyholder dividend
obligation of $39 million due to lower net investment income in the closed
block. Partially offsetting the decrease in policyholder benefits was an
increase in future policy benefits of $57 million, commensurate with the net
increase in premium from annuity and life products as discussed above. Interest
credited to policyholder account balances decreased by $7 million due to lower
crediting rates partially offset by growth in policyholder account balances.
81
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2004 -- INDIVIDUAL
Income from continuing operations increased by $349 million, or 52%, to
$1,017 million for the nine months ended September 30, 2005 from $668 million
for the comparable 2004 period. The acquisition of Travelers accounted for $88
million of the increase. Excluding the impact of the acquisition of Travelers,
income from continuing operations increased by $261 million, or 39%, to $929
million for the nine months ended September 30, 2005 from $668 million for the
comparable 2004 period. Included in this increase is an improvement in net
investment gains of $36 million, net of income taxes. Improvements in interest
rate spreads contributed $102 million, net of income taxes, to the period over
period increase. These spreads are generally the percentage point difference
between the yield earned on invested assets and the interest rate the Company
uses to credit 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 are influenced by several
factors, including business growth, movement in interest rates, and certain
investment and investment-related transactions, such as corporate joint venture
income and prepayment fees on bonds and commercial mortgages, for which the
timing and amount are generally unpredictable. As a result, income from these
investment transactions may fluctuate from period to period. Fee income from
variable annuity and universal life products increased by $111 million, net of
income taxes, primarily related to growth in the business and favorable market
conditions. Favorable underwriting results in life products of $35 million, net
of income taxes, also contributed to the increase in income from continuing
operations. Underwriting results are generally the difference between the
portion of premium and fee income intended to cover mortality, morbidity or
other insurance costs less claims incurred and the change in insurance related
liabilities. Underwriting results are significantly influenced by mortality,
morbidity, or other insurance related experience trends and the reinsurance
activity related to certain blocks of business, and as a result can fluctuate
from period to period. The decrease in the closed block related policyholder
dividend obligation of $15 million, net of income taxes, resulting from lower
net investment income in the closed block also contributed to the increase in
income from continuing operations. These increases in income from continuing
operations are partially offset by higher general spending and corporate
incentives offset by revisions to certain expense, premium tax and policyholder
liability estimates of $26 million, net of income taxes and higher DAC
amortization of $9 million, net of income taxes. Higher DAC amortization is a
result of growth in the business and amortization associated with the
improvement of net investment gains offset by an adjustment for management's
update of assumptions used to determine estimated gross margins. In addition,
the prior period includes a revision to the estimate for policyholder dividends
which contributed $5 million, net of income taxes, to the decrease in income
from continuing operations.
Total revenues, excluding net investment gains (losses), increased by $996
million, or 11%, to $10,162 million for the nine months ended September 30, 2005
from $9,166 million for the comparable 2004 period. The acquisition of Travelers
accounted for $509 million of the increase. Excluding the impact of the
acquisition of Travelers, total revenues, excluding net investment gains
(losses) increased by $487 million, or 5%, to $9,653 million for the nine months
ended September 30, 2005 from $9,166 million for the comparable 2004 period.
This increase includes higher fee income primarily from variable annuity and
universal life products of $202 million resulting from a combination of growth
in the business 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 $140 million in 2005 to the active
marketing of income annuity products. Although premiums associated with the
Company's closed block of business continue to decline as expected, the increase
in premiums of other traditional life products more than offset the decline of
the closed block by $8 million. Management attributes the increase in other
traditional products to growth in the business and a new reinsurance strategy
where more business is retained. Net investment income increased $133 million
resulting from higher variable income and growth in the asset base partially
offset by a decline in bond yields.
Total expenses increased by $515 million, or 6%, to $8,827 million for the
nine months ended September 30, 2005 from $8,312 million for the comparable 2004
period. The acquisition of Travelers
82
accounted for $382 million of the increase. Excluding the impact from the
acquisition of Travelers, total expenses increased by $133 million, or 2%, to
$8,445 million for the nine months ended September 30, 2005 from $8,312 million
for the comparable 2004 period. Higher expenses are primarily the result of
higher corporate incentive expenses of $53 million, higher general spending of
$36 million, and higher broker dealer expenses of $14 million, partially offset
by revisions to prior period estimates for certain expense, premium tax and
policyholder liabilities of $64 million in 2005. Additionally, expenses
increased due to higher DAC amortization of $14 million as a result of growth in
the business and amortization associated with the improvement of net investment
gains offset by an adjustment for management's update of assumptions used to
determine estimated gross margins. Policyholder dividends increased by $7
million due to principally to a revision in the estimate of policyholder
dividends in the prior period. Policyholder benefits increased primarily due to
the increase in future policy benefits of $148 million, commensurate with the
net increase in premium as annuity and life products discussed above. The
increase in policyholder benefits was partially offset by favorable mortality in
the life products of $22 million and a reduction in the closed block related
policyholder dividend obligation of $23 million due to lower net investment
income, offset by higher realized gains all in the closed block. Partially
offsetting these increases, interest credited to policyholder account balances
decreased by $41 million due to lower crediting rates partially offset by growth
in policyholder account balances.
AUTO & HOME
The following table presents consolidated financial information for the
Auto & Home segment for the periods indicated:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2005 2004 2005 2004
------ ------ ------ ------
(IN MILLIONS)
REVENUES
Premiums...................................... $716 $740 $2,182 $2,211
Net investment income......................... 46 40 135 130
Other revenues................................ 8 8 25 23
Net investment gains (losses)................. (5) (1) (9) (6)
---- ---- ------ ------
Total revenues.............................. 765 787 2,333 2,358
---- ---- ------ ------
EXPENSES
Policyholder benefits and claims.............. 614 552 1,538 1,583
Policyholder dividends........................ 1 1 3 1
Other expenses................................ 209 194 612 585
---- ---- ------ ------
Total expenses.............................. 824 747 2,153 2,169
---- ---- ------ ------
Income before provision (benefit) for income
taxes....................................... (59) 40 180 189
Provision (benefit) for income taxes.......... (30) 7 35 42
---- ---- ------ ------
Net income.................................... $(29) $ 33 $ 145 $ 147
==== ==== ====== ======
</Table>
Auto & Home, operating through Metropolitan Property and Casualty Insurance
Company and its subsidiaries, offers personal lines property and casualty
insurance directly to employees through employer-sponsored programs, as well as
through a variety of retail distribution channels. Auto & Home primarily sells
auto insurance and homeowner's insurance.
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2004 -- AUTO & HOME
Net income decreased by $62 million, or 188%, to $(29) million for the
three months ended September 30, 2005 from $33 million for the comparable 2004
period. This decrease is primarily the result of
83
Hurricane Katrina which contributed a loss of $116 million, net of income taxes,
in the current period. The $116 million loss includes loss and loss adjustment
expenses and reinstatement and additional reinsurance related premiums which
were caused by the magnitude of reinsurance recoverables. Non-Katrina
catastrophes for the current period were an additional loss of $14 million, net
of income taxes. The total catastrophe loss for current period was $130 million,
net of income taxes. The total catastrophe loss for the prior year period was
$73 million, net of income taxes, which included four Florida hurricanes in the
third quarter of 2004. This increase in catastrophe losses comprises $57 million
of the $62 million decrease in net income from the third quarter of 2004. The
remainder of the decrease consists of a slight increase in the non-catastrophe
combined ratio caused primarily by increased homeowner frequency of
non-catastrophe wind and lightning losses of $13 million, net of income taxes,
offset by improvements in net investment income of $5 million, net of income
taxes, due to a change in the allocation of economic capital and the favorable
development of losses of $5 million, net of income taxes, reported in prior
years.
Total revenues, excluding net investment gains (losses), decreased by $18
million, or 2%, to $770 million for the three months ended September 30, 2005
from $788 million for the comparable 2004 period. This decrease is attributable
to reinstatement and additional reinsurance related premiums due to Hurricane
Katrina of $32 million. This was partially offset by increases in net investment
income, as discussed above, and a decrease in non-voluntary state reinsurance
facility ceded earned premiums.
Total expenses increased by $77 million, or 10%, to $824 million for the
three months ended September 30, 2005 from $747 million for the comparable 2004
period. This increase is largely the result of increased catastrophe losses of
$56 million. Other expenses increased by $15 million due primarily to increased
advertising, incentive and other compensation costs. Non-catastrophe losses
increased by $17 million due mainly to increased non-catastrophe homeowner
frequency and severity. These increases were partially offset by favorable
development of claims reported in prior years of $8 million and decreased
unallocated claim expense, excluding the impact of Katrina, of $4 million due to
favorable settlement patterns. The combined ratio excluding catastrophes and
before the reinstatement premiums and other reinsurance related premium
adjustments due to Hurricane Katrina is 86.8% for the three months ended
September 30, 2005 versus 84.8% for the comparable 2004 period.
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2004 -- AUTO & HOME
Net income decreased by $2 million, or 1%, to $145 million for the nine
months ended September 30, 2005 from $147 million for the comparable 2004
period. Catastrophes, including Hurricane Katrina, increased to $144 million,
net of income taxes, for the nine months ended September 30, 2005, from $108
million, net of income taxes, for the comparable 2004 period. Offsetting this
increase were improvements in the development of prior year claims of $27
million, net of income taxes, an increase in net investment income of $5
million, net of income taxes, due to a change in the allocation of economic
capital, and a slight improvement in the non-catastrophe combined ratio of $2
million, net of income taxes, due to lower non-catastrophe homeowner claim
frequency and lower auto claim severity.
Total revenues, excluding net investment gains (losses), decreased by $22
million, or 1%, to $2,342 million for the nine months ended September 30, 2005
from $2,364 million for the comparable 2004 period. The decrease in earned
premium is attributable to the reinstatement and additional reinsurance related
premiums due to Hurricane Katrina as mentioned above. This was partially offset
by increases in net investment income, as discussed above, and a decrease in
non-voluntary state reinsurance facility ceded earned premiums.
Total expenses decreased by $16 million, or 1%, to $2,153 million for the
nine months ended September 30, 2005 from $2,169 million for the comparable 2004
period. This decrease is predominantly due to improved non-catastrophe losses
and allocated loss expense of $22 million. This is due to a lower non-
catastrophe homeowner claim frequency, lower auto claim severity and a smaller
exposure base for the nine months ended September 30, 2005 versus the comparable
2004 period. Improvements in developments of losses reported in the prior year
contributed a favorable $42 million. Non-catastrophe unallocated claim
84
expense reserves, excluding Hurricane Katrina decreased by $7 million due to
favorable settlement patterns. Other expenses increased by $27 due primarily to
increased information technology, advertising and incentive and other
compensation costs. There were also increases in catastrophe losses, including
Hurricane Katrina, of $24 million. The combined ratio excluding catastrophes and
before the reinstatement premiums and other reinsurance related premium
adjustments due to Hurricane Katrina is 88.0% for the nine months ended
September 30, 2005 versus 89.9% for the comparable 2004 period.
INTERNATIONAL
The following table presents consolidated financial information for the
International segment for the periods indicated:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
2005 2004 2005 2004
------ ---- ------ ------
(IN MILLIONS)
REVENUES
Premiums.................................... $ 614 $437 $1,550 $1,229
Universal life and investment-type product
policy fees............................... 170 90 414 259
Net investment income....................... 238 151 582 410
Other revenues.............................. 9 2 11 14
Net investment gains (losses)............... 5 3 12 26
------ ---- ------ ------
Total revenues............................ 1,036 683 2,569 1,938
------ ---- ------ ------
EXPENSES
Policyholder benefits and claims............ 630 437 1,508 1,157
Interest credited to policyholder account
balances.................................. 84 37 186 106
Policyholder dividends...................... 2 1 4 5
Other expenses.............................. 290 148 657 412
------ ---- ------ ------
Total expenses............................ 1,006 623 2,355 1,680
------ ---- ------ ------
Income from continuing operations before
provision for income taxes................ 30 60 214 258
Provision (benefit) for income taxes........ (4) 20 57 79
------ ---- ------ ------
Income from continuing operations........... 34 40 157 179
Income (loss) from discontinued operations,
net of income taxes....................... 7 (2) 5 (5)
------ ---- ------ ------
Income before cumulative effect of a change
in accounting............................. 41 38 162 174
Cumulative effect of a change in accounting,
net of income taxes....................... -- -- -- (30)
------ ---- ------ ------
Net income.................................. $ 41 $ 38 $ 162 $ 144
====== ==== ====== ======
</Table>
International provides life insurance, accident and health insurance,
credit insurance, annuities and retirement & savings products to both
individuals and groups. The Company focuses on emerging markets primarily within
the Latin American and Asia Pacific regions, as well as its growing presence in
Europe.
85
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2004 -- INTERNATIONAL
Income from continuing operations decreased by $6 million, or 15%, to $34
million for the three months ended September 30, 2005 from $40 million for the
comparable 2004 period. The acquisition of Travelers accounted for $7 million of
this decrease. Excluding the impact of the acquisition of Travelers, income from
operations increased by $1 million over the comparable 2004 period. South
Korea's income from continuing operations increased by $10 million, net of
income taxes, primarily due to revenue growth from larger in-force business, as
well as higher sales of its variable universal life product. Mexico's income
from continuing operations increased by $4 million, net of income taxes. A tax
benefit of $15 million derived from a dividend paid during the current quarter
by Mexico, $9 million in additional one time other revenue items, as well as
increased earnings from net investment income, were partially offset by an
increase in policyholder benefits and claims primarily due to an increase in
unrealized investment gains supporting certain policyholder liabilities which
resulted in an increase in such liabilities. Additionally, income from
continuing operations decreased by $10 million, net of income taxes, primarily
due to a realignment of economic capital.
Total revenues, excluding net investment gains (losses), increased by $351
million, or 52%, to $1,031 million for the three months ended September 30, 2005
from $680 million for the comparable 2004 period. The acquisition of Travelers
accounted for $182 million of this increase. Excluding the impact of the
acquisition of Travelers, total revenues, excluding net investment gains
(losses), increased by $169 million, or 25%, over the comparable 2004 period.
Premiums, fees and other revenues increased by $264 million, or 50%, to $793
million for the three months ended September 30, 2005 from $529 million for the
comparable 2004 period. The acquisition of Travelers resulted in an increase of
$135 million in premiums, fees and other revenues. Excluding the impact of the
acquisition of Travelers, premiums, fees, and other revenues increased by $129
million, or 24%. This increase is primarily the result of continued growth in
business through increased sales and renewal business within South Korea,
Brazil, Taiwan and India of $54 million, $14 million, $7 million and $3 million,
respectively. Mexico's premiums, fees and other revenues increased by $45
million primarily due to increases in institutional and individual traditional
life business of $19 million, higher mortality and expense fees on the variable
life business of $18 million and some one time other revenue items of $8
million. Net investment income increased by $87 million, or 58%, to $238 million
for the three months ended September 30, 2005 from $151 million for the
comparable 2004 period. The acquisition of Travelers accounted for $47 million
of the increase in net investment income. Excluding the impact of the
acquisition of Travelers, net investment income increased by $40 million, or
26%. Mexico's net investment income increased by $28 million due principally to
an increase in invested assets, as well as a higher investment yield in the
current quarter. Chile's net investment income increased by $17 million due to
higher inflation rates and an increase in invested assets. South Korea's and
Taiwan's net investment income increased by $6 million and $3 million,
respectively, primarily due to an increase in invested assets. These increases
were offset by a decrease in net investment income of $15 million due to the
realignment of economic capital. The remainder of the increases in premiums,
fees and other revenues and net investment income can be attributed to general
business growth in other countries. Additionally, a component of the growth in
total revenues, excluding net investment gains (losses), is attributable to
changes in foreign currency exchange rates of $75 million.
Total expenses increased by $383 million, or 61%, to $1,006 million for the
three months ended September 30, 2005 from $623 million for the comparable 2004
period. The acquisition of Travelers accounted for $186 million of this
increase. Excluding the impact of the acquisition of Travelers, total expenses
increased by $197 million, or 32%, over the comparable 2004 period. Policyholder
benefits, claims and dividends and interest credited to policyholder account
balances increased by $241 million, or 51%, to $716 million for the three months
ended September 30, 2005 from $475 million for the comparable 2004 period. The
acquisition of Travelers resulted in an increase of $97 million in policyholder
benefits, claims and dividends. Excluding the impact of the acquisition of
Travelers, policyholder benefits, claims and dividends increased by $144
million, or 30%. Policyholder benefits, claims and dividends in Mexico increased
by $60 million primarily due to an increase in unrealized investment gains
(losses) supporting certain policyholder liabilities which resulted in an
increase in such liabilities, as well as an increase commensurate with the
business growth. Interest credited to policyholder accounts in Mexico increased
by $21 million in line
86
with the net investment income increase discussed above. South Korea, Taiwan,
Brazil, and India's policyholder benefits and interest credited to policyholder
accounts increased by $27 million, $11 million, $8 million and $3 million,
respectively, commensurate with the business growth. Chile's policyholder
benefits and claims increased by $8 million due to an increase in the annuity
insurance liabilities, which, like the net investment income on the related
assets, are linked to the inflation rate. The remainder of the increase can be
attributed to business growth in other countries. Other expenses increased by
$142 million, or 96%, to $290 million for the three months ended September 30,
2005 from $148 million for the comparable 2004 period. The acquisition of
Travelers resulted in an increase of $89 million in other expenses. Excluding
the impact of the acquisition of Travelers, other expenses increased by $53
million, or 36%. Other expenses in South Korea increased by $20 million
primarily due to higher amortization of deferred acquisition costs driven by
growth in the in-force business and an increase in payroll and rent expense.
Mexico's other expenses increased by $9 million primarily due to costs incurred
during the current quarter in connection with the start-up of the Afore
operations. Brazil and India's other expenses increased by $8 million and $2
million, respectively, in line with the growth in business discussed above.
Argentina's other expenses increased by $5 million primarily due to additional
litigation and severance costs. Chile's other expenses increased by $4 million
primarily due to the inclusion of the new distribution channel during 2005. Hong
Kong's other expenses increased by $3 million due to higher DAC amortization
associated with increased lapses in the general agency and brokerage channels.
The remainder of the increase can be attributed to business growth in other
countries, as well as the ongoing investment in this segment's infrastructure.
Additionally, a component of the growth in total expenses is due to changes in
foreign currency exchange rates of $69 million.
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2004 -- INTERNATIONAL
Income from continuing operations decreased by $22 million, or 12%, to $157
million for the nine months ended September 30, 2005 from $179 million for the
comparable 2004 period. The acquisition of Travelers accounted for $7 million of
this decrease. Excluding these items, continuing operations decreased by $15
million over the prior period. The prior period included realized gains of $16
million, net of income taxes, due to the sale of a subsidiary. South Korea's
income from continuing operations increased by $23 million, net of income taxes,
primarily due to growth in business, specifically higher sales of its variable
universal life product and a larger in-force business. Mexico's income from
continuing operations decreased by $9 million, net of income taxes, primarily
due to an increase in policyholder benefits and claims primarily due to an
increase in unrealized investment gains (losses) supporting certain policyholder
liabilities in Mexico which resulted in an increase in such liabilities, as well
as an increase in contingency liabilities, partially offset by a tax benefit of
$15 million derived from a dividend paid during the current period and $9
million in additional one time other revenue items. Additionally, income from
continuing operations decreased by $10 million, net of income taxes, primarily
due to a realignment of economic capital.
Total revenues, excluding net investment gains (losses), increased by $645
million, or 34%, to $2,557 million for the nine months ended September 30, 2005
from $1,912 million for the comparable 2004 period. The acquisition of Travelers
accounted for $182 million of this increase. Excluding the impact of the
acquisition of Travelers, total revenues, excluding net investment gains
(losses), increased by $463 million, or 24%, over the comparable 2004 period.
Premiums, fees and other revenues increased by $473 million, or 31%, to $1,975
million for the nine months ended September 30, 2005 from $1,502 million for the
comparable 2004 period. The acquisition of Travelers resulted in an increase of
$135 million in premiums, fees and other revenues. Excluding the impact of the
acquisition of Travelers, premiums, fees, and other revenues increased by $338
million, or 23%. This increase is primarily the result of continued growth in
business through increased sales and renewal business within South Korea,
Brazil, Taiwan, and India of $169 million, $35 million, $28 million, and $9
million, respectively. Mexico's premiums, fees and other revenues increased by
$61 million, primarily due to increases in institutional and traditional life
lines of business, offset by decreases in the individual annuity business caused
by a large one time sale in the prior period and some one time other revenue
items of $8 million as well. Chile's premiums, fees and other revenues increased
by $31 million mainly due to the establishment of the new bank distribution
channel in the current period offset by a decrease in the annuity premiums due
to changes in the mortality tables. Net investment income
87
increased by $172 million, or 42%, to $582 million for the nine months ended
September 30, 2005 from $410 million for the comparable 2004 period. The
acquisition of Travelers resulted in an increase of $47 million. Excluding the
impact of the acquisition of Travelers, net investment income increased by $125
million, or 30%. Mexico's net investment income increased by $73 million due
principally to increases in interest rates but also as a result of an increase
in invested assets. Chile net investment income increased by $36 million
primarily due to higher inflation rates. Investment valuations and returns on
invested assets in Chile are linked to the inflation rates. South Korea and
Taiwan's net investment income increased by $15 million and $10 million,
respectively, due to an increase in their invested assets. These increases were
offset by a decrease in net investment income of $15 million due to the
realignment of economic capital. The remainder of the increases in premiums,
fees and other revenues and net investment income can be attributed to business
growth and investment income in other countries. Additionally, a component of
this business growth and higher net investment income is due to changes in
foreign currency exchange rates of $156 million.
Total expenses increased by $675 million, or 40%, to $2,355 million for the
nine months ended September 30, 2005 from $1,680 million for the comparable 2004
period. The acquisition of Travelers accounted for $186 million of this
increase. Excluding the impact of the acquisition of Travelers, total expenses
increased by $489 million, or 29%, over the comparable 2004 period. Policyholder
benefits, claims and dividends and interest credited to policyholder account
balances increased by $430 million, or 34%, to $1,698 million for the nine
months ended September 30, 2005 from $1,268 million for the comparable 2004
period. The acquisition of Travelers resulted in an increase of $97 million in
policyholder benefits, claims and dividends. Excluding the impact of the
acquisition of Travelers, policyholder benefits, claims and dividends increased
by $333 million, or 26%. Policyholder benefits, claims and dividends in Mexico
increased by $95 million primarily due to an increase in unrealized investment
gains (losses) supporting certain policyholder liabilities which resulted in a
decrease in such liabilities, as well as an increase in interest credited to
policyholder accounts of $47 million in line with the net investment income
increase in Mexico. South Korea, Taiwan, Brazil, and India's policyholder
benefits and interest credited to policyholder accounts increased by $82
million, $34 million, $18 million, and $5 million, respectively, commensurate
with the business growth discussed above. Chile's policyholder benefits and
claims increased by $41 million due to business growth, as well as an increase
in annuity reserves, which, like net investment income on related assets, are
linked to the inflation rate. Hong Kong's policyholder benefits and claims
increased by $4 million due to higher claims and associated increase in reserves
in the current period. The remainder of the increase can be attributed to
business growth in other countries. Other expenses increased by $245 million, or
59%, to $657 million for the nine months ended September 30, 2005 from $412
million for the comparable 2004 period. The acquisition of Travelers resulted in
an increase of $89 million in other expenses. Excluding the impact of the
acquisition of Travelers, other expenses increased by $156 million, or 38%.
South Korea's other expenses increased by $68 million primarily due to higher
amortization of deferred acquisitions costs driven by rapid growth in the
business and a decrease in a payroll tax liability in the prior period resulting
from the resolution of the related tax matter. Mexico's other expenses increased
by $26 million primarily due to the establishment of liabilities related to
potential employment matters in the current year and the decrease in the prior
year of severance accruals. There was also an increase in other expenses due to
costs incurred in connection with the start-up of the Afore operations in the
current period. Brazil and India's other expenses increased by $20 million and
$5 million, respectively, in line with the growth in business discussed above.
Argentina's other expenses increased by $7 million primarily due to additional
litigation reserves and severance costs. Chile's other expenses increased by $16
million due to the establishment of the new bank distribution channel. Hong
Kong's other expenses increased by $7 million due primarily to higher
amortization associated with increased lapses in the general agency and
brokerage channels. Home Office also noted an increase of $8 million in other
expenses due primarily to increased consultant fees for growth initiative
projects and a change in the expense allocation from the prior period. The
remainder of the increase can be attributed to business growth in other
countries, as well as the ongoing investment in this segment's infrastructure.
Additionally, a component of the growth in total expenses is due to changes in
foreign currency exchange rates of $142 million.
88
REINSURANCE
The following table presents consolidated financial information for the
Reinsurance segment for the periods indicated:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2005 2004 2005 2004
------ ---- ------ ------
(IN MILLIONS)
REVENUES
Premiums........................................ $ 976 $819 $2,807 $2,431
Universal life and investment-type product
policy fees................................... (2) -- -- --
Net investment income........................... 158 134 445 381
Other revenues.................................. 13 13 45 40
Net investment gains (losses)................... 7 (19) 28 35
------ ---- ------ ------
Total revenues................................ 1,152 947 3,325 2,887
------ ---- ------ ------
EXPENSES
Policyholder benefits and claims................ 779 660 2,346 1,943
Interest credited to policyholder account
balances...................................... 64 55 163 151
Policyholder dividends.......................... -- (1) -- --
Other expenses.................................. 265 212 722 688
------ ---- ------ ------
Total expenses................................ 1,108 926 3,231 2,782
------ ---- ------ ------
Income before provision for income taxes........ 44 21 94 105
Provision for income taxes...................... 16 8 30 36
------ ---- ------ ------
Income before cumulative effect of a change in
accounting.................................... 28 13 64 69
Cumulative effect of a change in accounting, net
of income taxes............................... -- -- -- --
------ ---- ------ ------
Net income...................................... $ 28 $ 13 $ 64 $ 69
====== ==== ====== ======
</Table>
MetLife's Reinsurance segment is comprised of the life reinsurance business
of RGA, a publicly traded company. 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.
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2004 -- REINSURANCE
Net income increased by $15 million, or 115%, to $28 million for the three
months ended September 30, 2005 from $13 million for the comparable 2004 period.
This increase is attributable to a 19% increase in premiums, offset in part by
an 18% increase in policyholder benefits and claims. Additionally, investment
income increased 18%, primarily related to an increase in RGA's invested asset
base. The increase in net income was largely attributable to a lower loss ratio
in the current year period, primarily due to favorable mortality experience in
the U.S. and Canada and a decrease in the loss reported by RGA's accident and
health business from a $9 million loss for the three months ended September 30,
2004 to a $3 million loss for the three months ended September 30, 2005.
Total revenues, excluding net investment gains (losses), increased by $179
million, or 19%, to $1,145 million for the three months ended September 30, 2005
from $966 million for the comparable 2004 period due primarily to a $157
million, or 19%, increase in premiums and a $24 million, or 18%, increase in net
investment income. The premium increase during the three months ended September
30, 2005 is primarily the
89
result of new premiums from facultative and automatic treaties and renewal
premiums on existing blocks of business in the U.S. and certain international
operations, particularly in the Asia Pacific region and Canada. Premium levels
are significantly influenced by large transactions and reporting practices of
ceding companies and, as a result, can fluctuate from period to period. The
growth in net investment income is the result of the growth in RGA's operations
and invested asset base. Additionally, a component of the total revenue increase
is attributable to changes in foreign currency exchange rate movements,
contributing an estimated $16 million.
Total expenses increased by $182 million, or 20%, to $1,108 million for the
three months ended September 30, 2005 from $926 million for the comparable 2004
period. This increase is primarily attributable to an increase of $119 million
in policyholder benefits and claims, primarily associated with growth in RGA's
insurance in force of approximately $254 billion, offset in part by favorable
mortality experience in the U.S. and Canada. Other expenses increased $53
million, or 25%, from the comparable 2004 period. The increase in other expenses
is primarily driven by a $21 million increase in minority interest expense
associated with an increase in RGA's earnings, an $11 million increase in the
amortization of deferred acquisition costs, and an $18 million increase in
change in deferred acquisition costs associated with the increase in net
investment gains (losses). Additionally, approximately $15 million of the total
expense increase is attributable to changes in foreign currency exchange rate
movements.
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2004 -- REINSURANCE
Net income decreased $5 million, or 7%, to $64 million for the nine months
ended September 30, 2005 from $69 million for the comparable 2004 period. This
decrease is attributable to a 21% increase in policyholder benefits and claims,
partially offset by a 15% increase in premiums. In addition, net investment
income increased $64 million, or 17%, primarily related to an increase in RGA's
invested asset base. The decrease in net income was largely attributable to a
higher loss ratio in the current year period, primarily due to unfavorable
mortality experience as a result of high claims levels in the U.S. and the U.K.
during the first six months of the year, along with strengthening of reserves of
$24 million for RGA's Argentine pension business, which is currently in run-off.
These factors were partially offset by favorable mortality experience in the
U.S. and Canada during the third quarter of 2005.
Total revenues, excluding net investment gains (losses), increased by $445
million, or 16%, to $3,297 million for the nine months ended September 30, 2005
from $2,852 million for the comparable 2004 period due primarily to a $376
million, or 15%, increase in premiums and a $64 million, or 17%, increase in net
investment income. The premium increase during the nine months ended September
30, 2005 is primarily the result of 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 and reporting practices of ceding companies and, as a result,
can fluctuate from period to period. The growth in net investment income is the
result of the growth in RGA's operations and invested asset base. Additionally,
a component of the total revenue increase is attributable to changes in foreign
currency exchange rate movements contributing an estimated $57 million.
Total expenses increased by $449 million, or 16%, to $3,231 million for the
nine months ended September 30, 2005 from $2,782 million for the comparable 2004
period. This increase is primarily attributable to an increase of $403 million
in policyholder benefits and claims, primarily associated with growth in RGA's
insurance in force of approximately $254 billion, the aforementioned unfavorable
mortality experience in the U.S. and U.K. during the first six months of the
year, and strengthening of reserves of $24 million for the Argentine pension
business. These factors were partially offset by favorable mortality experience
in the U.S. and Canada during the third quarter of 2005. Other expenses
increased $34 million, or 5%, due primarily to an increase in the amortization
of deferred acquisition costs. Additionally, approximately $54 million of the
total expense increase is attributable to changes in foreign currency exchange
rate movements.
90
CORPORATE & OTHER
The following table presents consolidated financial information for
Corporate & Other for the periods indicated:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2005 2004 2005 2004
---- ---- ------ ----
(IN MILLIONS)
REVENUES
Premiums........................................ $ 2 $(11) $ (2) $(23)
Universal life and investment-type product
policy fees................................... 1 2 1 2
Net investment income........................... 217 109 535 283
Other revenues.................................. 5 8 13 9
Net investment gains (losses)................... 65 (6) (85) (68)
---- ---- ------ ----
Total revenues................................ 290 102 462 203
---- ---- ------ ----
EXPENSES
Policyholder benefits and claims................ 11 2 (34) 2
Interest credited to policyholder account
balances...................................... -- (7) -- --
Other expenses.................................. 253 143 606 421
---- ---- ------ ----
Total expenses................................ 264 138 572 423
---- ---- ------ ----
Income (loss) from continuing operations before
income tax benefit............................ 26 (36) (110) (220)
Income tax benefit.............................. (49) (42) (154) (222)
---- ---- ------ ----
Income from continuing operations............... 75 6 44 2
Income from discontinued operations, net of
income taxes.................................. 1 11 1,043 166
---- ---- ------ ----
Income before cumulative effect of a change in
accounting.................................... 76 17 1,087 168
Cumulative effect of a change in accounting, net
of income taxes............................... -- -- -- 4
---- ---- ------ ----
Net income...................................... 76 17 1,087 172
Preferred stock dividend........................ 31 -- 31 --
---- ---- ------ ----
Net income available to common shareholders..... $ 45 $ 17 $1,056 $172
==== ==== ====== ====
</Table>
Corporate & Other contains the excess capital not allocated to the business
segments, various start-up entities, including MetLife Bank and run-off
entities, as well as interest expense related to the majority of the Company's
outstanding debt and expenses associated with certain legal proceedings and
income tax audit issues. Corporate & Other also includes the elimination of all
intersegment amounts, which generally relate to intersegment loans, which bear
interest rates commensurate with related borrowings, as well as intersegment
transactions. Additionally, the Company's asset management business, including
amounts reported as discontinued operations, is included in the results of
operations for Corporate & Other.
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2004 -- CORPORATE & OTHER
Income from continuing operations increased by $69 million, or 1,150%, to
$75 million for the three months ended September 30, 2005 from $6 million for
the comparable 2004 period. The acquisition of Travelers, excluding Travelers
financing and integration costs incurred by the Company, accounted for $48
million of this increase. Excluding the impact of the Travelers acquisition,
income from continuing
91
operations increased by $21 million for the three months ended September 30,
2005 from the comparable 2004 period. The 2005 period includes a $31 million
benefit from a revision of the estimate of income taxes for 2004. The 2004
period includes a $9 million benefit from a revision of the estimate of income
taxes for 2003. Excluding the impact of these items, income from continuing
operations decreased by $1 million for the three months ended September 30, 2005
from the comparable 2004 period. The decrease in income in 2005 over the prior
year period is primarily attributable to costs incurred as a result of higher
interest expense on debt (principally associated with the issuance of debt to
finance the Travelers acquisition), integration costs associated with the
acquisition of Travelers and interest credited to bank holder deposits of $47
million, $30 million and $12 million, respectively, all of which are net of
income taxes. This is partially offset by an increase in net investments gains
(losses) of $49 million and net investment income of $27 million, as well as
lower legal related costs of $11 million, predominantly from the reduction of
previously established liabilities related to legal disputes, and a reduction in
allocated corporate support related expenses of $7 million, all of which are net
of income taxes.
Total revenues, excluding net investment gains (losses), increased by $117
million, or 108%, to $225 million for the three months ended September 30, 2005
from $108 million for the comparable 2004 period. The acquisition of Travelers
accounted for $72 million of this increase. Excluding the impact of the
acquisition of Travelers, the increase of $45 million is primarily attributable
to increases in income on fixed maturities as a result of higher yields from
lengthening the duration and a higher asset base, as well as increased income
from corporate joint ventures and mortgage loans on real estate.
Total expenses increased by $126 million, or 91%, to $264 million for the
three months ended September 30, 2005 from $138 million for the comparable 2004
period. The acquisition of Travelers accounted for $4 million of this increase.
Excluding the impact of the acquisition of Travelers, total expenses increased
by $122 million for the three months ended September 30, 2005 from the
comparable 2004 period. This increase is attributable to higher interest expense
of $72 million as a result of the issuance of senior notes throughout 2004 and
2005, which includes $62 million from the financing of the acquisition of
Travelers. In addition, integration costs associated with the acquisition of
Travelers were $46 million. As a result of growth in the business, interest
credited to bank holder deposits increased $19 million at MetLife Bank. This is
partially offset by lower legal related costs of $17 million, predominantly from
the reduction of previously established liabilities related to legal disputes,
and a reduction in allocated corporate support expenses of $10 million.
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2004 -- CORPORATE & OTHER
Income from continuing operations increased by $42 million, or 2,100%, to
$44 million for the nine months ended September 30, 2005 from $2 million for the
comparable 2004 period. The acquisition of Travelers, excluding Travelers
financing and integration costs incurred by the Company, accounted for $48
million of this increase. Excluding the impact of the Travelers acquisition,
income from continuing operations decreased by $6 million for the nine months
ended September 30, 2005 from the comparable 2004 period. The 2005 period
includes a $31 million benefit from a revision of the estimate of income taxes
for 2004, a $30 million benefit, net of income taxes, associated with the
reduction of a previously established liability for settlement death benefits
related to the Company's sales practices class action settlement recorded in
1999, as well as an $18 million benefit, net of income taxes, associated with
the reduction of a previously established real estate transfer tax liability
related to the Company's demutualization in 2000. 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. Excluding the impact of these one-time items, income from
continuing operations decreased by $3 million for the nine months ended
September 30, 2005 from the comparable 2004 period. The decrease in income in
2005 over the prior year period is primarily attributable to higher interest
expense on debt (principally associated with the issuance of debt to finance the
Travelers acquisition), interest credited to bank holder deposits and
integration
92
costs associated with the acquisition of Travelers of $75 million, $29 million,
and $46 million, respectively, all of which are net of income taxes. This is
partially offset by an increase in net investment income of $107 million, net of
income taxes, and a reduction in allocated corporate support expenses of $12
million, net of income taxes and lower legal related costs of $8 million,
predominantly from the reduction of previously established liabilities related
to legal disputes, net of income taxes. The remainder of the difference is
primarily driven by the difference between the actual and the estimated tax rate
allocated to the various segments.
Total revenues, excluding net investment gains (losses), increased by $276
million, or 102%, to $547 million for the nine months ended September 30, 2005
from $271 million for the comparable 2004 period. The acquisition of Travelers
accounted for $72 million of this increase. Excluding the impact of the
acquisition of Travelers, the increase of $204 million is primarily attributable
to increases in income on fixed maturities as a result of higher yields from
lengthening the duration and a higher asset base, as well as increased income
from corporate joint ventures and mortgage loans on real estate.
Total expenses increased by $149 million, or 35%, to $572 million for the
nine months ended September 30, 2005 from $423 million for the comparable 2004
period. The acquisition of Travelers accounted for $4 million of this increase.
Excluding the impact of the acquisition of Travelers, total expenses increased
by $145 million for the three months ended September 30, 2005 from the
comparable 2004 period. The 2005 period includes a $47 million benefit
associated with a reduction of a previously established liability for settlement
death benefits related to the Company's sales practices class action settlement
recorded in 1999, as well as a $28 million benefit associated with the reduction
of a previously established real estate transfer tax liability related to the
Company's demutualization in 2000. The 2004 period 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. Excluding the impact of these
items, total expenses increased by $248 million for the nine months ended
September 30, 2005 from the comparable 2004 period. This increase is
attributable to higher interest expense of $116 million as a result of the
issuance of senior notes throughout 2004 and 2005, which includes $67 million
from the financing of the acquisition of Travelers. In addition integration
costs associated with the acquisition of Travelers were $72 million. As a result
of growth in the business, interest credited to bank holder deposits increased
$46 million at MetLife Bank. This is partially offset by lower legal related
costs of $13 million, predominantly from the reduction of previously established
liabilities related to legal disputes, and a reduction in allocated corporate
support expenses of $19 million.
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") requirements are used as minimum capital
requirements by the National Association of Insurance Commissioners ("NAIC") and
the state insurance departments to identify companies that merit further
regulatory action. RBC is based on a formula calculated by applying factors to
various asset, premium and statutory reserve items and takes into account the
risk characteristics of the insurer, including asset risk, insurance risk,
interest rate risk and business risk. These rules apply to each of the Company's
domestic insurance subsidiaries. At December 31, 2004, Metropolitan Life's and
each of the Holding Company's other domestic insurance subsidiaries' total
adjusted capital was in excess of the RBC levels required by their respective
states of domicile.
The NAIC adopted the Codification of Statutory Accounting Principles
("Codification") in 2001 to standardize regulatory accounting and reporting to
state insurance departments. However, statutory account-
93
ing principles continue to be established by individual state laws and permitted
practices. The New York State Department of Insurance (the "Department") has
adopted Codification with certain modifications for the preparation of statutory
financial statements of insurance companies domiciled in New York. Modifications
by the various 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 portfolio
managers and asset sector specialists, who have responsibility on a day-to-day
basis for risk management of their respective investing activities, implement
the goals and objectives established by the A/LM Committees.
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.
LIQUIDITY
Liquidity refers to a company's ability to generate adequate amounts of
cash to meet its needs. The Company's liquidity position (cash and cash
equivalents and short-term investments, excluding securities lending) was $9.3
billion at September 30, 2005 and $5.4 billion at December 31, 2004. 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.
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
("GICs"), 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 flows from operations, the sale of liquid assets, global funding
sources and various credit facilities.
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.
94
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 GICs 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, marketable fixed maturity and equity
securities. Liquid assets exclude assets relating to securities lending and
dollar roll activities. At September 30, 2005 and December 31, 2004, the Company
had $176 billion and $136 billion in liquid assets, respectively.
Global Funding Sources. Liquidity is also provided by a variety of both
short-term 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, 2005 and December 31, 2004, the Company had $1.3 billion
and $1.4 billion in short-term debt outstanding, respectively, and $9.5 billion
and $7.4 billion in long-term debt outstanding, respectively. See also
"-- Liquidity and Capital Resources -- The Holding Company -- Liquidity
Sources."
MetLife Funding, Inc. ("MetLife Funding"), a subsidiary of Metropolitan
Life, serves as a centralized finance unit for the Company. 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, 2005 and
December 31, 2004, MetLife Funding had a tangible net worth of $10.9 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, 2005 and December 31, 2004, MetLife Funding had total
outstanding liabilities, including accrued interest payable, of $1,070 million
and $1,448 million, respectively, consisting primarily of commercial paper.
Credit Facilities. The Company maintains committed and unsecured credit
facilities aggregating $3.9 billion. 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 $3.0
billion of the
95
facilities also serve as back-up lines of credit for the Company's commercial
paper programs. The following table provides details on these facilities:
<Table>
<Caption>
USAGE AS OF
BORROWER(S) EXPIRATION CAPACITY 9/30/05
- ------------------------------------------------ -------------- -------- -----------
(IN MILLIONS)
MetLife, Inc., MetLife Funding, Inc.,
Metropolitan Life Insurance Company........... April 2009 $1,500 $260*
MetLife, Inc., MetLife Funding, Inc. ........... April 2010 1,500 --
MetLife Bank, N.A. ............................. July 2006 200 --
Reinsurance Group of America, Incorporated...... December 2005 27 27
Reinsurance Group of America, Incorporated...... May 2007 26 26
Reinsurance Group of America, Incorporated...... September 2010 600 50
------ ----
TOTAL $3,853 $363
====== ====
</Table>
- ---------------
* Letter of Credit Issuance
Letters of Credit. At September 30, 2005 and December 31, 2004, the
Company had outstanding $2.9 billion and $961 million, respectively, in letters
of credit from various banks, of which $2.2 billion and $0 million,
respectively, were part of committed facilities. The letters of credit
outstanding at September 30, 2005 and December 31, 2004, all expire within one
year except for $475 million in the current period which expires in ten years.
Since commitments associated with letters of credit and financing arrangements
may expire unused, these amounts do not necessarily reflect the Company's actual
future cash funding requirements.
On July 1, 2005, in connection with the closing of the acquisition of
Travelers, the $2.0 billion amended and restated five-year letter of credit and
reimbursement agreement (the "L/C Agreement") entered into by The Travelers Life
and Annuity Reinsurance Company ("TLARC") and various institutional lenders on
April 25, 2005 became effective. The L/C Agreement amends an agreement under
which Citigroup Insurance Holding Company, the former parent of TLARC, was the
guarantor of TLARC's reimbursement obligations. Also during 2005, Exeter
Reassurance Company Ltd. entered into three ten-year Letter of Credit
Reimbursement Agreements totaling $800 million. The following table provides
details on the capacity and outstanding balances of such committed facilities:
<Table>
<Caption>
USAGE AS OF
ACCOUNT PARTY EXPIRATION CAPACITY 9/30/05
- ------------------------------------------------ -------------- -------- -----------
(IN MILLIONS)
The Travelers Life and Annuity Reinsurance
Company....................................... July 2010 $2,000 $1,730
Exeter Reassurance Company Ltd. ................ March 2015 225 225
Exeter Reassurance Company Ltd. ................ June 2015 250 250
Exeter Reassurance Company Ltd. ................ September 2015 325 --
------ ------
TOTAL $2,800 $2,205
====== ======
</Table>
- ---------------
Note: The Holding Company is the guarantor for the agreements above.
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.
96
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, 2005:
<Table>
<Caption>
LESS THAN THREE TO FIVE MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL THREE YEARS YEARS FIVE YEARS
- ---------------------------------------- -------- ----------- ------------- ----------
(IN MILLIONS)
Other long-term liabilities(1)(2)....... $111,055 $20,259 $ 8,681 $82,115
Long-term debt(3)....................... 9,456 1,253 359 7,844
Partnership investments(4).............. 2,780 2,780 -- --
Operating leases........................ 1,323 578 240 505
Mortgage commitments.................... 2,195 1,591 51 553
Junior subordinated debt securities
underlying common equity units........ 2,134 -- 2,134 --
Shares subject to mandatory
redemption(3)......................... 350 -- -- 350
Capital leases.......................... 72 32 13 27
Contracts to purchase real estate....... 36 36 -- --
-------- ------- ------- -------
Total................................... $129,401 $26,529 $11,478 $91,394
======== ======= ======= =======
</Table>
- ---------------
(1) Other long-term liabilities include various investment-type products with
contractually scheduled maturities, including guaranteed interest contracts,
structured settlements, pension closeouts, certain annuity policies and
certain indemnities.
(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 $80.0 billion and
policyholder account balances of approximately $115.7 billion at September
30, 2005 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 $62.5 billion relating to
traditional life, health and disability insurance products and policyholder
account balances of approximately $42.2 billion relating to deferred
annuities, approximately $27.1 billion for group and universal life products
and approximately $24.9 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 "-- Liquidity and Capital
Resources -- The Company -- Asset/Liability Management."
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 the nine months ended September 30, 2005 in the table of
$111.1 billion exceeds the corresponding liability amounts of $55.7 billion
included in the unaudited interim condensed consolidated financial
statements at September 30, 2005. The liability amount in the unaudited
interim condensed consolidated financial
97
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 any fair value adjustments, 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.
As of September 30, 2005, 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.
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 (or not
less than 125% of the company action level RBC, if NELICO has a negative trend),
as defined by state insurance statutes, and liquidity necessary to enable it to
meet its current obligations on a timely basis. At September 30, 2005, 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 recently referenced RBC-based amount calculated at December 31, 2004.
In connection with the Company's acquisition of the parent of General
American Life Insurance Company ("General American"), Metropolitan Life entered
into a net worth maintenance agreement with 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, 2005,
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,
2004.
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.
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 180% 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, 2005, 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, 2004.
98
In connection with the acquisition of Travelers, MetLife International
Holdings, Inc. ("MIH"), a subsidiary of the Holding Company, committed to the
Australian Prudential Regulatory Authority that it will provide or procure the
provision of additional capital to MetLife General Insurance Limited ("MGIL"),
an Australian subsidiary of MIH, to the extent necessary to enable MGIL to meet
insurance capital adequacy and solvency requirements. In addition, MetLife
International Insurance, Ltd. ("MIIL"), a Bermuda insurance company, was
acquired as part of the Travelers transaction. In connection with the assumption
of a block of business by MIIL from a company in liquidation in 1995, Citicorp
Life Insurance Company ("CLIC"), an affiliate of MIIL and a subsidiary of the
Holding Company, agreed with MIIL and the liquidator to make capital
contributions to MIIL to ensure that, for so long as any policies in such block
remain outstanding, MIIL remains solvent and able to honor the liabilities under
such policies.
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
in addition to those discussed elsewhere herein 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.
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 elsewhere herein in connection with specific
matters. In some of the matters referred to herein, 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
unaudited interim condensed 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.
Other. 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
$4,822 million and $4,260 million for the nine months ended September 30, 2005
and 2004, respectively. The $562 million increase in operating cash flows in
2005 over the comparable 2004 period is primarily attributable to the
acquisition of Travelers, continued growth in the annuity business, as well as
growth in retirement & savings, disability, dental, long-term care businesses
and group life.
Net cash used in investing activities was $22,138 million and $10,943
million for the nine months ended September 30, 2005 and 2004, respectively. The
$11,195 million increase in net cash used in investing activities in 2005 over
the comparable 2004 period is primarily due to the acquisition of Travelers and
CitiStreet Associates and the increase in net purchases of fixed maturities.
This was partially offset by the funding of new mortgage loans, sales of equity
real estate and a decrease in the cash used for short-term investments. In
addition, the 2005 period includes proceeds associated with the sale of SSRM and
MetLife Indonesia.
99
Net cash provided by financing activities was $20,160 million and $6,581
million for the nine months ended September 30, 2005 and 2004, respectively. The
$13,579 million increase in net cash provided by financing activities in 2005
over the comparable 2004 period is primarily attributable to the Holding
Company's funding of the acquisition of Travelers through the issuance of
long-term debt, junior subordinated debt securities and preferred shares. In
addition, there was an increase in the amount of securities lending cash
collateral invested in connection with the program. This increase was partially
offset by a decrease in net cash provided by policyholder account balances, the
repayment of previously issued long-term debt and the payment of dividends on
the preferred shares. The 2004 period includes the repayment of short-term debt
and the purchase of treasury stock under the authorization of the Holding
Company's common stock repurchase program. These items were partially offset by
additional proceeds from the issuance of new long-term debt in 2004.
THE HOLDING COMPANY
CAPITAL
Restrictions and Limitations on Bank Holding Companies and Financial
Holding Companies -- Capital. The Holding Company and its insured depository
institution subsidiary, MetLife 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 December 31, 2004,
MetLife, Inc. and MetLife Bank were in compliance with the aforementioned
minimum capital standards and each had risk-based and leverage capital ratios
that met the federal banking regulatory agencies "well capitalized" standards.
At September 30, 2005, MetLife, Inc. and MetLife Bank met the minimum capital
standards as per federal banking regulatory agencies with all of MetLife Bank's
risk-based and leverage capital ratios meeting the federal banking regulatory
agencies "well capitalized" standards and all of MetLife, Inc.'s risk-based and
leverage capital ratios meeting the "adequately capitalized" standards.
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 credit 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 New York State Insurance
Law, Metropolitan Life is permitted, without prior insurance regulatory
clearance, to pay stockholder dividends to the Holding Company as long as the
aggregate amount of all such dividends in any calendar year does not exceed the
lesser of (i) 10% of its surplus to policyholders as of the immediately
preceding calendar year; or (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
100
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 within 30 days of its filing. Under New
York State Insurance Law, the Superintendent has broad discretion in determining
whether the financial condition of a stock life insurance company would support
the payment of such dividends to its 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.
The maximum amount of the dividends which could be paid to the Holding
Company by Metropolitan Life, TIC, Metropolitan Property and Casualty Insurance
Company and Metropolitan Tower Life Insurance Company, in 2005, without prior
regulatory approval, was $880 million, $0 million, $187 million and $119
million, respectively. During the nine months ended September 30, 2005,
Metropolitan Life paid $880 million in ordinary dividends for which prior
insurance regulatory approval was not required and $2,320 million in special
dividends as approved by the Superintendent. TIC (following the acquisition by
the Holding Company) has not paid any dividends for which prior insurance
regulatory approval was not required nor any special dividends during the three
months ended September 30, 2005. Metropolitan Property and Casualty Insurance
Company paid $400 million in special dividends, as approved by the Rhode Island
Superintendent of Insurance, during the nine months ended September 30, 2005.
Metropolitan Tower Life Insurance Company paid $54 million in ordinary dividends
for which prior insurance regulatory approval was not required and $873 million
in special dividends as approved by the Delaware Superintendent of Insurance
during the nine months ended September 30, 2005. Further dividends to the
Holding Company in 2005 by Metropolitan Life, TIC, Metropolitan Property and
Casualty Insurance Company and Metropolitan Tower Life Insurance Company will
require prior approval by the respective state department of insurance.
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, marketable fixed maturity and
equity securities. Liquid assets exclude assets relating to securities lending
and dollar roll activities. At September 30, 2005 and December 31, 2004, the
Holding Company had $1.5 billion and $2.1 billion of liquid assets,
respectively.
Global Funding Sources. Liquidity is also provided by a variety of both
short-term 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. Other sources of the Holding
Company's liquidity include programs for short- and long-term borrowing, as
needed.
At September 30, 2005 and December 31, 2004, the Holding Company had $160
million and $0 million in short-term debt outstanding, respectively. At
September 30, 2005 and December 31, 2004, the Holding Company had $7.3 billion
and $5.7 billion of long-term debt outstanding, respectively.
On April 27, 2005, the Holding Company filed a shelf registration statement
(the "2005 Registration Statement") with the U.S. Securities and Exchange
Commission ("SEC"), covering $11 billion of securities. On May 27, 2005, the
2005 Registration Statement became effective, permitting the offer and sale,
from time to time, of a wide range of debt and equity securities. In addition to
the $11 billion of securities registered on
101
the 2005 Registration Statement, approximately $3.9 billion of registered but
unissued securities remained available for issuance by the Holding Company as of
such date, from the $5.0 billion shelf registration statement filed with the SEC
during the first quarter of 2004, permitting the Holding Company to issue an
aggregate of $14.9 billion of registered securities. The terms of any offering
will be established at the time of the offering.
During June 2005, in connection with the Company's acquisition of
Travelers, the Holding Company issued $2.0 billion of senior debt, $2.07 billion
of common equity units and $2.1 billion of preferred stock under the 2005
Registration Statement. In addition, $0.7 billion of senior notes were sold
outside the United States in reliance upon Regulation S under the Securities Act
of 1933, as amended, a portion of which may be resold in the United States under
the 2005 Registration Statement. Remaining capacity under the 2005 Registration
Statement after such issuances is $6.6 billion.
Debt Issuances. On June 23, 2005, the Holding Company issued in the
United States public market $1,000 million aggregate principal amount of
5.00% senior notes due June 15, 2015 at a discount of $2.7 million ($997.3
million), and $1,000 million aggregate principal amount of 5.70% senior
notes due June 15, 2035 at a discount of $2.4 million ($997.6 million).
On June 29, 2005, the Holding Company issued 400 million pounds
sterling ($729.2 million at issuance) aggregate principal amount of 5.25%
senior notes due June 29, 2020 at a discount of 4.5 million pounds sterling
($8.1 million at issuance), for aggregate proceeds of 395.5 million pounds
sterling ($721.1 million at issuance). The senior notes were initially
offered and sold outside the United States in reliance upon Regulation S
under the Securities Act of 1933, as amended.
The following table summarizes the Holding Company's outstanding
senior debt issuances:
<Table>
<Caption>
ISSUE DATE PRINCIPAL(3) INTEREST RATE MATURITY
- ---------------------------------------------------- ------------ ------------- --------
(IN MILLIONS)
June 2005........................................... $1,000 5.00% 2015
June 2005........................................... $1,000 5.70% 2035
June 2005(1)........................................ $ 708 5.25% 2020
December 2004(1).................................... $ 619 5.38% 2024
June 2004(2)........................................ $ 350 5.50% 2014
June 2004(2)........................................ $ 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
</Table>
- ---------------
(1) This amount represents the translation of pounds sterling into U.S.
Dollars using the noon buying rate on September 30, 2005 of $1.7696 as
announced by the Federal Reserve Bank of New York.
(2) 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.
(3) This table excludes any premium or discount on the senior debt
issuances.
See also "-- Liquidity and Capital Resources -- The Holding
Company -- Liquidity Sources -- Global Funding Sources -- Common Equity
Units" for junior subordinated debt securities of $2,134 million issued in
connection with issuance of common equity units.
102
Preferred Stock. On June 13, 2005, the Holding Company issued 24
million shares of Floating Rate Non-Cumulative Preferred Stock, Series A
(the "Series A preferred shares") with a $0.01 par value per share, and a
liquidation preference of $25 per share for aggregate proceeds of $600
million.
On June 16, 2005, the Holding Company issued 60 million shares of
6.50% Non-Cumulative Preferred Stock, Series B (the "Series B preferred
shares"), with a $0.01 par value per share, and a liquidation preference of
$25 per share, for aggregate proceeds of $1.5 billion.
The Series A and Series B preferred shares (the "Preferred Shares")
rank senior to the common stock with respect to dividends and liquidation
rights. Dividends on the preferred shares are not cumulative. Holders of
the Preferred Shares will be entitled to receive dividend payments only
when, as and if declared by the Holding Company's board of directors or a
duly authorized committee of the board. If dividends are declared on the
Series A preferred shares, they will be payable quarterly, in arrears, at
an annual rate of the greater of (i) 1.00% above three-month LIBOR on the
related LIBOR determination date, or (ii) 4.00%. Any dividends declared on
the Series B preferred shares will be payable quarterly, in arrears, at an
annual fixed rate of 6.50%. Accordingly, in the event that dividends are
not declared on the Preferred Shares for payment on any dividend payment
date, then those dividends will cease to accrue and be payable. If a
dividend is not declared before the dividend payment date, the Holding
Company has no obligation to pay dividends accrued for that dividend period
whether or not dividends are declared and paid in future periods. No
dividends may, however, be paid or declared on the Holding Company's common
stock -- or any other securities ranking junior to the Preferred Shares --
unless the full dividends for the latest completed dividend period on all
Preferred Shares, and any parity stock, have been declared and paid or
provided for.
The Holding Company is prohibited from declaring dividends on the
Preferred Shares if it fails to meet specified capital adequacy, net income
and shareholders' equity levels. In addition, under Federal Reserve Board
policy, the Holding Company may not be able to pay dividends if it does not
earn sufficient operating income.
The Preferred Shares do not have voting rights except in certain
circumstances where the dividends have not been paid for an equivalent of
six or more dividend payment periods whether or not those periods are
consecutive. Under such circumstances, the holders of the Preferred Shares
have certain voting rights with respect to members of the Board of
Directors of the Holding Company.
The Preferred Shares are not subject to any mandatory redemption,
sinking fund, retirement fund, purchase fund or similar provisions. The
Preferred Shares are redeemable but not prior to September 15, 2010. On and
after that date, subject to regulatory approval, the Preferred Shares will
be redeemable at the Holding Company's option in whole or in part, at a
redemption price of $25 per Preferred Share, plus declared and unpaid
dividends.
See "-- Liquidity and Capital Resources -- The Holding Company --
Liquidity Uses -- Dividends."
Common Equity Units. In connection with financing the acquisition of
Travelers on July 1, 2005, the Company distributed and sold 82.8 million
6.375% common equity units for $2,070 million in proceeds in a registered
public offering on June 21, 2005. Each common equity unit has an initial
stated amount of $25 per unit and consists of (i) a 1/80 or 1.25% ($12.50),
undivided beneficial ownership interest in a series A trust preferred
security of MetLife Capital Trust II ("Series A Trust"), with an initial
liquidation amount of $1,000, (ii) a 1/80 or 1.25% ($12.50), undivided
beneficial ownership interest in a series B trust preferred security of
MetLife Capital Trust III ("Series B Trust" and, together with the Series A
Trust, the "Trusts"), with an initial liquidation amount of $1,000 and
(iii) a stock purchase contract under which the holder of the common equity
unit will purchase and the Holding Company will sell, on each of the
initial stock purchase date and the subsequent stock purchase date, a
variable number of shares of the Holding Company's common stock, par value
$.01 per share, for a purchase price of $12.50.
103
The Holding Company issued $1,067 million 4.82% Series A and $1,067
million 4.91% Series B junior subordinated debt securities due no later
than February 15, 2039 and February 15, 2040, respectively, for a total of
$2,134 million, in exchange for $2,070 million in aggregate proceeds from
the sale of the trust preferred securities by the Series A and Series B
Trusts and $64 million in trust common securities issued equally by the
Series A and Series B Trusts. The common and preferred securities of the
Series A and Series B Trusts, totaling $2,134 million, represent undivided
beneficial ownership interests in the assets of the Series A and Series B
Trusts, have no stated maturity and must be redeemed upon maturity of the
corresponding series of junior subordinated debt securities -- the sole
assets of the respective Trusts. The Series A and Series B Trusts will make
quarterly distributions on the common and preferred securities at an annual
rate of 4.82% and 4.91%, respectively.
The Holding Company has directly guaranteed the repayment of the trust
preferred securities to the holders thereof to the extent that there are
funds available in the Trusts. The guarantee will remain in place until the
full redemption of the trust preferred securities. The trust preferred
securities held by the common equity unit holders are pledged to the
Holding Company to collateralize the obligation of the common equity unit
holders under the related stock purchase contracts. The common equity unit
holder may substitute certain zero coupon treasury securities in place of
the trust preferred securities as collateral under the stock purchase
contract.
The trust preferred securities have remarketing dates which correspond
with the initial and subsequent stock purchase dates to provide the holders
of the common equity units with the proceeds to exercise the stock purchase
contracts. The initial stock purchase date is expected to be August 15,
2008, but could be deferred for quarterly periods until February 15, 2009,
and the subsequent stock purchase date is expected to be February 15, 2009,
but could be deferred for quarterly periods until February 15, 2010. At the
remarketing date, the remarketing agent will have the ability to reset the
interest rate on the trust preferred securities to generate sufficient
remarketing proceeds to satisfy the common equity unit holder's obligation
under the stock purchase contract, subject to a reset cap for each of the
first two attempted remarketings of each series. The interest rate on the
supporting junior subordinated debt securities issued by the Holding
Company will be reset at a commensurate rate. If the initial remarketing is
unsuccessful, the remarketing agent will attempt to remarket the trust
preferred securities, as necessary, in subsequent quarters through February
15, 2009 for the Series A trust preferred securities and through February
15, 2010 for the Series B trust preferred securities. The final attempt at
remarketing will not be subject to the reset cap. If all remarketing
attempts are unsuccessful, the Holding Company has the right, as a secured
party, to apply the liquidation amount on the trust preferred securities to
the common equity unit holders obligation under the stock purchase contract
and to deliver to the common equity unit holder a junior subordinated debt
security payable on August 15, 2010 at an annual rate of 4.82% and 4.91%,
respectively, on the Series A and Series B trust preferred securities, in
payment of any accrued and unpaid distributions.
Each stock purchase contract requires (i) the Holding Company to pay
the holder of the common equity unit quarterly contract payments on the
stock purchase contracts at the annual rate of 1.510% on the stated amount
of $25 per stock purchase contract until the initial stock purchase date
and at the annual rate of 1.465% on the remaining stated amount of $12.50
per stock purchase contract thereafter, and (ii) the holder of the common
equity unit to purchase, and the Holding Company to sell, for $12.50, on
each of the initial stock purchase date and the subsequent stock purchase
date, a number of newly issued or treasury shares of the Holding Company's
common stock, par value $0.01 per share, equal to the applicable settlement
rate. The settlement rate at the respective stock purchase date will be
calculated based on the closing price of the common stock during a
specified twenty day period immediately preceding the applicable stock
purchase date. Upon settlement in the aggregate, the Holding Company will
receive proceeds of $2,070 million and issue between 39.0 million and 47.8
million common shares. The stock purchase contract may be exercised at the
option of the holder at any time prior to the settlement date. However,
upon early settlement, the holder will receive the minimum settlement rate.
104
Credit Facilities. The Holding Company maintains committed and unsecured
credit facilities aggregating $3.0 billion ($1.5 billion expiring in 2009, which
it shares with Metropolitan Life and MetLife Funding and $1.5 billion expiring
in 2010, which it shares with MetLife Funding). Borrowings 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,
2005, neither the Holding Company, Metropolitan Life nor MetLife Funding had
borrowed against these credit facilities. At September 30, 2005, $260 million of
the unsecured credit facilities were used in support of letters of credit issued
on behalf of the Company.
Letters of Credit. At September 30, 2005 and December 31, 2004, the
Holding Company had outstanding $86 million and $369 million, respectively, in
the 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 Holding
Company's actual future cash funding requirements.
On July 1, 2005, in connection with the closing of the acquisition of
Travelers, the $2.0 billion amended and restated L/C Agreement entered into by
TLARC and various institutional lenders on April 25, 2005 became effective.
Under the L/C Agreement, the Holding Company agreed to unconditionally guarantee
reimbursement obligations of TLARC with respect to reinsurance letters of credit
issued pursuant to the L/C Agreement. The L/C Agreement amends an agreement
under which Citigroup Insurance Holding Company, the former parent of TLARC, was
the guarantor of TLARC's reimbursement obligations. The Holding Company replaced
Citigroup Insurance Holding Company as guarantor upon closing of the Travelers
acquisition. The L/C Agreement expires five years after the closing of the
acquisition. Also during 2005, Exeter Reassurance Company Ltd. entered into
three ten-year Letter of Credit Reimbursement Agreements totaling $800 million.
The Holding Company is a guarantor under the agreements.
LIQUIDITY USES
The primary uses of liquidity of the Holding Company include service on
debt, cash dividends on common and preferred stock, capital contributions to
subsidiaries, payment of general operating expenses, acquisitions and the
repurchase of the Holding Company's common stock.
Dividends. On August 22, 2005, the Company's board of directors declared
dividends of $0.286569 per share, for a total of $7 million, on the Series A
preferred shares, and $0.4017361 per share, for a total of $24 million, on the
Series B preferred shares. Both dividends were paid on September 15, 2005 to
shareholders of record as of August 31, 2005.
On September 28, 2004, the Holding Company's Board of Directors approved an
annual dividend for 2004 of $0.46 per common share or $343 million, 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
common 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.
See "-- Subsequent Events."
Capital Contributions/Loans to Affiliates. During the nine months ended
September 30, 2005 and 2004, the Holding Company contributed an aggregate of
$855 million and $309 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. Under this
authorization, the Holding Company may purchase its common stock from the
MetLife Policyholder Trust, in the open market and in privately negotiated
transactions.
105
On December 16, 2004, the Holding Company repurchased 7,281,553 shares of
its outstanding common stock at an aggregate cost of $300 million under an
accelerated common stock repurchase agreement with a major bank. The bank
borrowed the stock sold to the Holding Company from third parties and purchased
the common shares in the open market to return to such third parties. In April
2005, the Holding Company received a cash adjustment of approximately $7 million
based on the actual amount paid by the bank to purchase the common stock, for a
final purchase price of $293 million. The Holding Company recorded the shares
initially repurchased as treasury stock and recorded the amount received as an
adjustment to the cost of the treasury stock.
The following table summarizes the common stock repurchase activity of the
Holding Company for the nine months ended September 30, 2005 and 2004:
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2005 2004
------ ------------
(DOLLARS IN MILLIONS)
Stock repurchased........................................... -- 13,931,885
Cost........................................................ $ -- $ 496
</Table>
At September 30, 2005, the Holding Company had approximately $716 million
remaining on the October 26, 2004 common stock repurchase program. As a result
of the Holding Company's acquisition of Travelers, the Holding Company has
currently suspended its common stock repurchase activity. Future common stock
repurchases will be dependent upon several factors, including the Company's
capital position, its financial strength and credit ratings, general market
conditions and the price of the Holding Company's common stock.
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, as
subsequently amended, 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, 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, 2005, 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, 2004.
In connection with the acquisition of Travelers, support agreements were
provided to various insurance regulators. The Holding Company committed to the
Delaware Department of Insurance, in the event that at December 31, 2005 the
total adjusted capital of Metropolitan Tower Life Insurance Company ("MTL"), a
Delaware subsidiary of the Holding Company, is below 250% of the company action
level RBC, the Holding Company would make a capital contribution to MTL in an
amount that would make up for such shortfall. The Holding Company also committed
to the South Carolina Department of Insurance to take necessary action to
maintain the minimum capital and surplus of Travelers Life and Annuity
Reinsurance Company, a South Carolina subsidiary of the Holding Company, at the
greater $250,000 or 10% of net loss reserves (loss reserves less deferred
acquisition costs).
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, its portfolio of liquid assets, anticipated securities
issuances 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.
106
SUBSEQUENT EVENTS
On November 1, 2005, the Company repaid a maturing 7% $250 million surplus
note.
On October 25, 2005, the Holding Company's Board of Directors approved an
annual dividend for 2005 of $0.52 per common share payable on December 15, 2005
to shareholders of record on November 7, 2005. The 2005 dividend represents a
13% increase from the 2004 annual dividend of $0.46 per common share. The
Company estimates the aggregate dividend payment to be approximately $400
million.
OFF-BALANCE SHEET ARRANGEMENTS
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 $2,780
million and $1,324 million at September 30, 2005 and December 31, 2004,
respectively. The Company anticipates that these amounts will be invested in
partnerships over the next five years.
Mortgage Loan Commitments
The Company commits to lend funds under mortgage loan commitments. The
amounts of these mortgage loan commitments were $2,195 million and $1,189
million, respectively, at September 30, 2005 and December 31, 2004.
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 $2 billion, while in
other cases such limitations are not specified or applicable. Since certain of
these obligations are not subject to limitations, the Company does not believe
that it is possible to determine the maximum potential amount 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.
In the first quarter of 2005, the Company recorded a liability of $4
million with respect to indemnities provided in a certain disposition. The
approximate term for this liability is 18 months. The maximum potential amount
of future payments the Company could be required to pay is approximately $500
million. Due to the uncertainty in assessing changes to the liability 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. In the third quarter of 2005, the Company released $6 million
of a liability due to the expiration of indemnities provided in a prior year
disposition. The Company's recorded liabilities at September 30, 2005 and
December 31, 2004 for indemnities, guarantees and commitments were $8 million
and $10 million, respectively.
107
In conjunction with RSATs, 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 becomes worthless, is $698 million at September 30, 2005. The credit
default swaps expire at various times during the next six years.
Other
TIC, a wholly-owned subsidiary of MetLife, Inc., is a member of the Federal
Home Loan Bank of Boston (the "Bank") and holds $70 million of common stock of
the Bank, which is included in equity securities in the unaudited interim
condensed consolidated balance sheet. TIC has also entered into several funding
agreements (the "funding agreements") with the Bank whereby TIC has issued such
funding agreements in exchange for cash and for which the Bank has been granted
a blanket lien on TIC's residential mortgages and mortgage-backed securities to
collateralize TIC's obligations under the funding agreements. TIC maintains
control over these pledged assets, and may use, commingle, encumber or dispose
of any portion of the collateral as long as there is no event of default and the
remaining qualified collateral is sufficient to satisfy the collateral
maintenance level. The funding agreements, the related security agreement
represented by this blanket lien, provide that upon any event of default by TIC,
the Bank's recovery is limited to the amount of TIC's liability under the
outstanding funding agreements. The amount of the Company's liability for
funding agreements with the Bank as of September 30, 2005 is $1 billion, which
is included in policyholder account balances.
Accelerated Share Repurchase
The Company has settled the accelerated common share repurchase agreement.
See "-- Liquidity and Capital Resources -- The Holding Company -- Liquidity
Uses -- Share Repurchase."
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 September 2005, the American Institute of Certified Public Accountants
("AICPA") issued SOP 05-1, Accounting by Insurance Enterprises for Deferred
Acquisition Costs in Connection with Modifications or Exchanges of Insurance
Contracts ("SOP 05-1"). SOP 05-1 provides guidance on accounting by insurance
enterprises for deferred acquisition costs on internal replacements of insurance
and investment contracts other than those specifically described in Statement of
Financial Accounting Standards ("SFAS") No. 97, Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and For Realized Gains
and Losses from the Sale of Investments. SOP 05-1 defines an internal
replacement as a modification in product benefits, features, rights, or
coverages that occurs by the exchange of a contract for a new contract, or by
amendment, endorsement, or rider to a contract, or by the election of a feature
or coverage within a contract. Under SOP 05-1, modifications that result in a
substantially unchanged contract will be accounted for as a continuation of the
replaced contract. A replacement contract that is substantially changed will be
accounted for as an extinguishment of the replaced contract resulting in a
release of unamortized deferred acquisition costs, unearned revenue and deferred
sales inducements associated with the replaced contract. The guidance in SOP
05-1 will be applied prospectively and is effective for internal replacements
occurring in fiscal years beginning after December 15, 2006. The Company is
currently evaluating the impact of SOP 05-1 and does not expect that the
pronouncement will have a material impact on the Company's unaudited interim
condensed consolidated financial statements.
In September 2005, the Emerging Issues Task Force ("EITF") reached
consensus on Issue No. 05-7, Accounting for Modifications to Conversion Options
Embedded in Debt Instruments and Related Issues ("EITF 05-7"). EITF 05-7
provides guidance on whether a modification of conversion options embedded in
108
debt results in an extinguishment of that debt. In certain situations, companies
may change the terms of an embedded conversion option as part of a debt
modification. The EITF concluded that the change in the fair value of an
embedded conversion option upon modification should be included in the analysis
of EITF Issue No. 96-19, Debtor's Accounting for a Modification or Exchange of
Debt Instruments, to determine whether a modification or extinguishment has
occurred and that a change in the fair value of a conversion option should be
recognized upon the modification as a discount (or premium) associated with the
debt, and an increase (or decrease) in additional paid-in capital. EITF 05-7
will be applied prospectively and is effective for all debt modifications
occurring in periods beginning after December 15, 2005. EITF 05-7 is not
expected to have a material impact on the Company's unaudited interim condensed
consolidated financial statements.
In September 2005, the EITF reached consensus on Issue No. 05-8, Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature
("EITF 05-8"). EITF 05-8 concludes that (i) the issuance of convertible debt
with a beneficial conversion feature results in a basis difference that should
be accounted for as a temporary difference and (ii) the establishment of the
deferred tax liability for the basis difference should result in an adjustment
to additional paid in capital. EITF 05-8 will be applied retrospectively for all
instruments with a beneficial conversion feature accounted for in accordance
with EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios, and EITF Issue
No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, and
is effective for periods beginning after December 15, 2005. EITF 05-8 is not
expected to have a material impact on the Company's unaudited interim condensed
consolidated financial statements.
Effective July 1, 2005, the Company adopted SFAS No. 153, Exchanges of
Nonmonetary Assets, an amendment of Accounting Principles Board ("APB") Opinion
No. 29 ("SFAS 153"). SFAS 153 amended prior guidance to eliminate the exception
for nonmonetary exchanges of similar productive assets and replaced it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of SFAS 153 were required to be applied
prospectively. SFAS 153 did not have a material impact on the Company's
unaudited interim condensed consolidated financial statements.
Effective July 1, 2005, the Company adopted EITF Issue No. 05-6,
Determining the Amortization Period for Leasehold Improvements ("EITF 05-6").
EITF 05-6 provides guidance on determining the amortization period for leasehold
improvements acquired in a business combination or acquired subsequent to lease
inception. As required by EITF 05-6, the Company adopted this guidance on a
prospective basis which had no material impact on the Company's unaudited
interim condensed consolidated financial statements.
In June 2005, the Financial Accounting Standards Board ("FASB") completed
its review of EITF 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.
EITF 03-1 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 ("SFAS 115"), that are impaired at the balance sheet date
but for which an other-than-temporary impairment has not been recognized. The
FASB decided not to provide additional guidance on the meaning of
other-than-temporary impairment but has issued FASB Staff Position ("FSP")
115-1, The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments ("FSP 115-1"), which nullifies the accounting guidance on
the determination of whether an investment is other-than-temporarily impaired as
set forth in EITF 03-1. FSP 115-1 is effective on a prospective basis for
other-than-temporary impairments on certain investments in periods beginning
after December 15, 2005. The Company has complied with the disclosure
requirements of EITF 03-1, which was effective December 31, 2003 and will remain
in effect until the adoption of FSP 115-1. The Company does not anticipate that
the adoption will have a material impact on its unaudited interim condensed
consolidated financial statements.
109
In June 2005, the EITF reached consensus on Issue No. 04-5, Determining
Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights ("EITF 04-5"). EITF 04-5 provides a framework for determining whether a
general partner controls and should consolidate a limited partnership or a
similar entity in light of certain rights held by the limited partners. The
consensus also provides additional guidance on substantive rights. EITF 04-5 was
effective after June 29, 2005 for all newly formed partnerships and for any
pre-existing limited partnerships that modified their partnership agreements
after that date. The adoption of this provision of EITF 04-5 did not have a
material impact on the Company's unaudited interim condensed consolidated
financial statements. EITF 04-5 must be adopted by January 1, 2006 for all other
limited partnerships through a cumulative effect of a change in accounting
principle recorded in opening equity or it may be applied retrospectively by
adjusting prior period financial statements. The adoption of this provision of
EITF 04-5 is not expected to have a material impact on the Company's unaudited
interim condensed consolidated financial statements.
In June 2005, the FASB cleared SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), Implementation Issue No. B38,
Embedded Derivatives: Evaluation of Net Settlement with Respect to the
Settlement of a Debt Instrument through Exercise of an Embedded Put Option or
Call Option ("Issue B38") and Implementation Issue No. B39, Embedded
Derivatives: Application of Paragraph 13(b) to Call Options That Are Exercisable
Only by the Debtor ("Issue B39"). Issue B38 clarifies that the potential
settlement of a debtor's obligation to a creditor that would occur upon exercise
of a put or call option meets the net settlement criteria of SFAS No. 133. Issue
B39 clarifies that an embedded call option, in which the underlying is an
interest rate or interest rate index, that can accelerate the settlement of a
debt host financial instrument should not be bifurcated and fair valued if the
right to accelerate the settlement can be exercised only by the debtor
(issuer/borrower) and the investor will recover substantially all of its initial
net investment. Issue Nos. B38 and B39, which must be adopted as of the first
day of the first fiscal quarter beginning after December 15, 2005, are not
expected to have a material impact on the Company's unaudited interim condensed
consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS
154"). The statement requires retrospective application to prior periods'
financial statements for a voluntary change in accounting principle unless it is
deemed impracticable. It also requires that a change in the method of
depreciation, amortization, or depletion for long-lived, non-financial assets be
accounted for as a change in accounting estimate rather than a change in
accounting principle. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
SFAS 154 is not expected to have a material impact on the Company's unaudited
interim condensed consolidated financial statements.
In December 2004, the FASB issued SFAS 123 (revised 2004), Share-Based
Payment ("SFAS 123(r)"), which revised SFAS No. 123, Accounting for Stock-Based
Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS 123(r) provides additional guidance on determining whether
certain financial instruments awarded in share-based payment transactions are
liabilities. SFAS 123(r) also requires that the cost of all share-based
transactions be measured at fair value and recognized over the period during
which an employee is required to provide service in exchange for an award. The
SEC issued a final ruling in April 2005 allowing a public company that is not a
small business issuer to implement SFAS 123(r) at the beginning of the next
fiscal year after June 15, 2005. Thus, the revised pronouncement must be adopted
by the Company by January 1, 2006. As permitted under SFAS 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure -- an amendment of FASB
Statement No. 123, the Company elected to use the prospective method of
accounting for stock options granted subsequent to December 31, 2002. Options
granted prior to January 1, 2003 will continue to be accounted for under the
intrinsic value method until the adoption of SFAS 123(r). In addition, the pro
forma impact of accounting for these options at fair value will continue to be
accounted for under the intrinsic value method until the last of those options
vest in 2005. As all stock options currently accounted for under the intrinsic
value method will vest prior to the effective date, implementation of SFAS
123(r) will not have a significant impact on the Company's unaudited interim
condensed consolidated financial statements.
110
In December 2004, the FASB issued FSP 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004 ("FSP 109-2"). The American Jobs Creation Act of 2004
("AJCA") introduced a one-time dividend received deduction on the repatriation
of certain earnings to a U.S. taxpayer. FSP 109-2 provides companies additional
time beyond the financial reporting period of enactment to evaluate the effects
of the AJCA on their plans to repatriate foreign earnings for purposes of
applying SFAS No. 109, Accounting for Income Taxes. The Company is currently
evaluating the repatriation provision of the AJCA. During the third quarter of
2005, the Company recorded a $15 million tax benefit related to the repatriation
of foreign earnings pursuant to Internal Revenue Code Section 965 for which a
U.S. deferred tax provision had previously been recorded. The Company does not
anticipate that further implementation of the repatriation provision will have a
material impact on the Company's income tax expense and deferred income tax
assets and liabilities.
Effective July 1, 2004, the Company prospectively adopted FSP No. 106-2,
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 ("FSP 106-2"). FSP 106-2
provides accounting guidance to employers that sponsor postretirement health
care plans that provide 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. 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. FSP 106-2 did not have a
material impact on the Company's unaudited interim condensed consolidated
financial statements.
Effective July 1, 2004, the Company adopted EITF 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 did not have a
material impact on the Company's unaudited interim condensed consolidated
financial statements.
Effective April 1, 2004, the Company adopted EITF Issue No. 03-6,
Participating Securities and the Two -- Class Method under FASB Statement No.
128 ("EITF 03-6"). EITF 03-6 provides guidance on determining whether a security
should be considered a participating security for purposes of computing earnings
per common share and how earnings should be allocated to the participating
security. EITF 03-6 did not have an impact on the Company's earnings per common
share calculations or amounts.
Effective January 1, 2004, the Company adopted SOP 03-1, Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts ("SOP 03-1"), as interpreted by a Technical
Practice Aid ("TPA"), issued by the AICPA. 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 FSP 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. As a result of the adoption of SOP 03-1, 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 liabilities 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,
including VOBA 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
111
Company. To the extent that such contracts are not accounted for as derivatives
under the provisions of SFAS No. 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 with the change in the
liability recorded as 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 changes 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.
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 changes in accounting. Due to the adoption of SOP 03-1, the Company
recorded a cumulative effect of a change in accounting of $86 million, net of
income taxes of $46 million, for the nine months ended September 30, 2004.
INVESTMENTS
The Company's primary investment objective is to optimize, net of income
taxes, risk-adjusted investment income and risk-adjusted total return while
ensuring that assets and liabilities are managed on a cash flow and duration
basis. The Company is exposed to three primary sources of investment risk:
- Credit risk, relating to the uncertainty associated with the continued
ability of a given obligor to make timely payments of principal and
interest;
- Interest rate risk, relating to the market price and cash flow
variability associated with changes in market interest rates; and
- Market valuation risk.
The Company manages risk through in-house fundamental analysis of the
underlying obligors, issuers, transaction structures and real estate properties.
The Company also manages credit risk and market valuation risk through industry
and issuer diversification and asset allocation. For real estate and
agricultural assets, the Company manages credit risk and valuation risk through
geographic, property type and product type diversification and asset allocation.
The Company manages interest rate risk as part of its asset and liability
management strategies, product design, such as the use of market value
adjustment features and surrender charges, and proactive monitoring and
management of certain non-guaranteed elements of its products, such as the
resetting of credited interest and dividend rates for policies that permit such
adjustments. The Company also uses certain derivative instruments in the
management of credit and interest rate risks.
COMPOSITION OF PORTFOLIO AND INVESTMENT RESULTS
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 at or for the three months and nine months ended September 30, 2005
and 2004:
<Table>
<Caption>
AT OR FOR THE AT OR FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2005 2004 2005 2004
-------- -------- -------- --------
(IN MILLIONS)
FIXED MATURITIES
Yield(1)......................................... 6.04% 6.44% 5.93% 6.58%
Investment income(2)............................. $ 2,865 $ 2,246 $ 7,448 $ 6,768
Net investment gains (losses).................... $ (98) $ 61 $ (301) $ 92
Ending assets(2)................................. $232,419 $176,075 $232,419 $176,075
</Table>
112
<Table>
<Caption>
AT OR FOR THE AT OR FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2005 2004 2005 2004
-------- -------- -------- --------
(IN MILLIONS)
MORTGAGE AND CONSUMER LOANS
Yield(1)......................................... 6.79% 7.02% 6.60% 6.87%
Investment income(3)............................. $ 611 $ 507 $ 1,685 $ 1,424
Net investment gains (losses).................... $ 13 $ (8) $ (6) $ (8)
Ending assets.................................... $ 36,094 $ 29,620 $ 36,094 $ 29,620
REAL ESTATE AND REAL ESTATE JOINT VENTURES(4)
Yield(1)......................................... 11.22% 10.55% 11.64% 11.92%
Investment income................................ $ 118 $ 111 $ 367 $ 398
Net investment gains (losses).................... $ 51 $ (5) $ 1,973 $ 149
Ending assets.................................... $ 4,505 $ 4,263 $ 4,505 $ 4,263
POLICY LOANS
Yield(1)......................................... 6.15% 6.14% 6.08% 6.13%
Investment income................................ $ 152 $ 135 $ 429 $ 403
Ending assets.................................... $ 9,841 $ 8,801 $ 9,841 $ 8,801
EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP
INTERESTS
Yield(1)......................................... 8.76% 7.42% 11.96% 6.96%
Investment income................................ $ 162 $ 75 $ 556 $ 205
Net investment gains (losses).................... $ 20 $ 96 $ 127 $ 183
Ending assets.................................... $ 7,504 $ 4,715 $ 7,504 $ 4,715
CASH AND SHORT-TERM INVESTMENTS
Yield(1)......................................... 3.29% 3.16% 3.47% 2.77%
Investment income................................ $ 116 $ 43 $ 273 $ 103
Net investment gains (losses).................... $ -- $ -- $ (1) $ --
Ending assets.................................... $ 11,431 $ 6,040 $ 11,431 $ 6,040
OTHER INVESTED ASSETS(5)
Yield(1)......................................... 9.93% 5.51% 8.59% 5.03%
Investment income................................ $ 175 $ 55 $ 364 $ 152
Net investment gains (losses).................... $ (9) $ 34 $ 389 $ 42
Ending assets.................................... $ 7,499 $ 4,394 $ 7,499 $ 4,394
TOTAL INVESTMENTS
Gross investment income yield(1)................. 6.26% 6.51% 6.25% 6.60%
Investment fees and expenses yield............... (0.13%) (0.13%) (0.13%) (0.13%)
-------- -------- -------- --------
NET INVESTMENT INCOME YIELD...................... 6.13% 6.38% 6.12% 6.47%
======== ======== ======== ========
Gross investment income.......................... $ 4,199 $ 3,172 $ 11,122 $ 9,453
Investment fees and expenses..................... $ (87) $ (65) $ (223) $ (190)
-------- -------- -------- --------
NET INVESTMENT INCOME(4)(5)...................... $ 4,112 $ 3,107 $ 10,899 $ 9,263
======== ======== ======== ========
Ending assets.................................... $309,293 $233,908 $309,293 $233,908
======== ======== ======== ========
Net investment gains (losses)(4)(5).............. $ (23) $ 178 $ 2,181 $ 458
======== ======== ======== ========
</Table>
- ---------------
(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) Fixed maturities includes $805 million in ending assets relating to trading
securities for both the three months and nine months ended September 30,
2005 and $14 million and $17 million in investment income relating to
trading securities for the three months and nine months ended September 30,
2005, respectively. The annualized yields on trading securities were 5.84%
and 4.12% for the three months and nine months ended September 30, 2005,
respectively. The Company did not have any trading securities during the
three months and nine months ended September 30, 2004.
(3) Investment income from mortgage and consumer loans includes prepayment fees.
113
(4) Real estate and real estate joint venture income includes amounts classified
as discontinued operations of $(2) million and $52 million for the three
months and nine months ended September 30, 2005, respectively, and $35
million and $139 million for the three months and nine months ended
September 30, 2004, respectively. Net investment gains (losses) include $46
million and $1,969 million of gains classified as discontinued operations
for the three months and nine months ended September 30, 2005, respectively,
and $(16) million and $136 million for the three months and nine months
ended September 30, 2004, 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 $26 million and $63 million for the three
months and nine months ended September 30, 2005, respectively, and $12
million and $48 million for the three months and nine months ended September
30, 2004, respectively. These amounts are excluded from net investment gains
(losses). Additionally, excluded from net investment gains (losses) for both
the three months and nine months ended September 30, 2005 is $(7) million
related to derivative revaluation losses on derivatives used to hedge
interest rate and currency risk on policyholder account balances that do not
qualify for hedge accounting.
FIXED MATURITIES BY SECTOR AND EQUITY SECURITIES AVAILABLE-FOR-SALE
Fixed maturities consist principally of publicly-traded and privately-
placed debt securities, and represented 74.9% and 73.9% of total cash and
invested assets at September 30, 2005 and December 31, 2004, respectively. Based
on estimated fair value, public fixed maturities represented $200,178 million,
or 86.4%, and $154,439 million, or 87.4%, of total fixed maturities at September
30, 2005 and December 31, 2004, respectively. Based on estimated fair value,
private fixed maturities represented $31,436 million, or 13.6%, and $22,307
million, or 12.6%, of total fixed maturities at September 30, 2005 and December
31, 2004, 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
counterparty. 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") and Fitch Ratings Insurance Group ("Fitch")), 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 and Fitch).
114
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:
<Table>
<Caption>
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------------------ ------------------------------
COST OR COST OR
NAIC AMORTIZED ESTIMATED % OF AMORTIZED ESTIMATED % OF
RATING RATING AGENCY DESIGNATION(1) COST FAIR VALUE TOTAL COST FAIR VALUE TOTAL
- ------ ------------------------------ --------- ---------- ----- --------- ---------- -----
(IN MILLIONS)
1 Aaa/Aa/A...................... $159,751 $164,341 70.9% $113,071 $118,779 67.2%
2 Baa........................... 49,602 51,438 22.2 42,165 45,311 25.6
3 Ba............................ 9,246 9,665 4.2 6,907 7,500 4.2
4 B............................. 5,411 5,532 2.4 4,081 4,397 2.5
5 Caa and lower................. 310 317 0.1 329 366 0.2
6 In or near default............ 122 128 0.1 101 90 0.1
--------- ---------- ----- --------- ---------- -----
Subtotal...................... 224,442 231,421 99.9 166,654 176,443 99.8
Redeemable preferred stock.... 191 193 0.1 326 303 0.2
--------- ---------- ----- --------- ---------- -----
Total fixed maturities........ $224,633 $231,614 100.0% $166,980 $176,746 100.0%
========= ========== ===== ========= ========== =====
</Table>
- ---------------
(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
midpoint of the applicable ratings among Moody's, S&P and Fitch at September
30, 2005 and the lower of the applicable ratings between Moody's and S&P at
December 31, 2004. Beginning in the third quarter of 2005, the Company
incorporated Fitch into its rating agency designations to be consistent with
the Lehman Brothers' ratings convention. If no rating is available from a
rating agency, then the MetLife rating will be used.
The following tables set forth the cost or amortized cost, gross unrealized
gain and loss, and estimated fair value of the Company's fixed maturities by
sector and equity securities, the percentage of the total fixed maturities
holdings that each sector represents and the percentage of the total equity
securities at:
<Table>
<Caption>
SEPTEMBER 30, 2005
--------------------------------------------------
COST OR GROSS UNREALIZED
AMORTIZED ----------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
--------- ------- ------- ---------- -----
(IN MILLIONS)
U.S. corporate securities.............. $ 76,106 $3,082 $ 716 $ 78,472 33.9%
Residential mortgage-backed
securities........................... 43,184 351 335 43,200 18.7
Foreign corporate securities........... 33,479 2,037 301 35,215 15.2
U.S. treasury/agency securities........ 25,238 1,364 134 26,468 11.4
Commercial mortgage-backed
securities........................... 17,299 260 170 17,389 7.5
Asset-backed securities................ 13,852 91 75 13,868 6.0
Foreign government securities.......... 9,665 1,403 19 11,049 4.8
State and political subdivision
securities........................... 4,564 201 43 4,722 2.0
Other fixed maturity securities........ 1,055 21 38 1,038 0.4
-------- ------ ------ -------- -----
Total bonds.......................... 224,442 8,810 1,831 231,421 99.9
Redeemable preferred stocks............ 191 4 2 193 0.1
-------- ------ ------ -------- -----
Total fixed maturities............... $224,633 $8,814 $1,833 $231,614 100.0%
======== ====== ====== ======== =====
Common stocks.......................... $ 1,942 $ 216 $ 34 $ 2,124 67.2%
Nonredeemable preferred stocks......... 1,002 40 7 1,035 32.8
-------- ------ ------ -------- -----
Total equity securities(1)........... $ 2,944 $ 256 $ 41 $ 3,159 100.0%
======== ====== ====== ======== =====
</Table>
115
<Table>
<Caption>
DECEMBER 31, 2004
-------------------------------------------------
COST OR GROSS UNREALIZED
AMORTIZED ---------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
--------- -------- ----- ---------- -----
(IN MILLIONS)
U.S. corporate securities............... $ 58,022 $ 3,870 $172 $ 61,720 34.9%
Residential mortgage-backed
securities............................ 31,683 612 65 32,230 18.2
Foreign corporate securities............ 25,341 2,582 85 27,838 15.7
U.S. treasury/agency securities......... 16,534 1,314 22 17,826 10.1
Commercial mortgage-backed securities... 12,099 440 38 12,501 7.1
Asset-backed securities................. 10,784 125 33 10,876 6.2
Foreign government securities........... 7,621 973 26 8,568 4.8
State and political subdivision
securities............................ 3,683 220 4 3,899 2.2
Other fixed maturity securities......... 887 131 33 985 0.6
-------- ------- ---- -------- -----
Total bonds........................... 166,654 10,267 478 176,443 99.8
Redeemable preferred stocks............. 326 -- 23 303 0.2
-------- ------- ---- -------- -----
Total fixed maturities................ $166,980 $10,267 $501 $176,746 100.0%
======== ======= ==== ======== =====
Common stocks........................... $ 1,412 $ 244 $ 5 $ 1,651 75.5%
Nonredeemable preferred stocks.......... 501 39 3 537 24.5
-------- ------- ---- -------- -----
Total equity securities(1)............ $ 1,913 $ 283 $ 8 $ 2,188 100.0%
======== ======= ==== ======== =====
</Table>
- ---------------
(1) Equity securities primarily consist of investments in common and preferred
stocks and mutual fund interests. Such securities include private equity
securities with an estimated fair value of $457 million and $332 million at
September 30, 2005 and December 31, 2004, respectively.
Fixed Maturity and Equity Security Impairment. The Company classifies all
of its fixed maturities and equity securities as available-for-sale and marks
them to market through other comprehensive income, except for non-marketable
private equities, which are generally carried at cost. 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 in "-- Summary of
Critical Accounting Estimates -- Investments," 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.
The Company's review of its fixed maturities and equity securities 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 cost or amortized cost by less than 20%; (ii)
securities where the estimated fair value had declined and remained below cost
or amortized cost by 20% or more for less than six months; and (iii) securities
where the estimated fair value had declined and remained below cost or 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 impairments as investment losses and adjusts the cost
basis of the fixed maturities and equity securities accordingly. The Company
does not change the revised cost basis for subsequent recoveries in value.
Impairments of fixed maturities and equity securities were $7 million and $55
million for the three months and nine months ended September 30, 2005,
respectively, and $27 million and $89 million
116
for the three months and nine months ended September 30, 2004, respectively. The
Company's three largest impairments totaled $3 million and $40 million for the
three months and nine months ended September 30, 2005, respectively, and $12
million and $33 million for the three months and nine months ended September 30,
2004, respectively. The circumstances that gave rise to these impairments were
either financial restructurings or bankruptcy filings. For the three months and
nine months ended September 30, 2005, the Company sold or disposed of fixed
maturities and equity securities at a loss that had a fair value of $22,804
million and $60,642 million, respectively, and $8,310 million and $17,276
million for the three months and nine months ended September 30, 2004,
respectively. Gross losses excluding impairments for fixed maturities and equity
securities were $281 million and $734 million for the three months and nine
months ended September 30, 2005, respectively, and $163 million and $355 million
for the three months and nine months ended September 30, 2004, respectively.
The following table presents the cost or amortized cost, gross unrealized
losses and number of securities for fixed maturities and equity securities, at
September 30, 2005, where the estimated fair value had declined and remained
below cost or amortized cost by less than 20%, or 20% or more for:
<Table>
<Caption>
SEPTEMBER 30, 2005
------------------------------------------------------------
COST OR AMORTIZED GROSS UNREALIZED NUMBER OF
COST LOSSES 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............ $ 97,743 $263 $1,358 $81 9,029 182
Six months or greater but less
than nine months.............. 8,015 -- 154 -- 736 3
Nine months or greater but less
than twelve months............ 4,560 -- 105 -- 613 --
Twelve months or greater........ 5,805 23 170 6 706 23
-------- ---- ------ --- ------ ---
Total......................... $116,123 $286 $1,787 $87 11,084 208
======== ==== ====== === ====== ===
</Table>
The gross unrealized loss related to the Company's fixed maturities and
equity securities at September 30, 2005 was $1,874 million. These securities are
concentrated by sector in U.S. corporates (38%); residential mortgage-backed
(18%); and foreign corporates (16%); and are concentrated by industry in
mortgage-backed (26%); consumer services (15%); and finance (14%) (calculated as
a percentage of gross unrealized loss). Non-investment grade securities
represent 4% of the $114,535 million fair value and 9% of the $1,874 million
gross unrealized loss.
The Company held four fixed maturities and equity securities each with a
gross unrealized loss at September 30, 2005 greater than $10 million. These
securities represent 3% of the gross unrealized loss on fixed maturities and
equity securities.
117
Corporate Fixed Maturities. The table below shows the major industry types
that comprise the corporate fixed maturity holdings at:
<Table>
<Caption>
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ ------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(IN MILLIONS)
Industrial....................................... $ 43,484 38.2% $35,785 39.9%
Foreign(1)....................................... 35,215 31.0 27,838 31.1
Finance.......................................... 20,378 17.9 14,481 16.2
Utility.......................................... 13,037 11.5 10,800 12.1
Other............................................ 1,573 1.4 654 0.7
-------- ----- ------- -----
Total............................................ $113,687 100.0% $89,558 100.0%
======== ===== ======= =====
</Table>
- ---------------
(1) Includes U.S. dollar-denominated debt obligations of foreign obligors, and
other foreign investments.
The Company maintains a diversified corporate fixed maturity 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, 2005 and December 31, 2004, the Company's combined holdings in the
ten issuers to which it had the greatest exposure totaled $5,711 million and
$4,967 million, respectively, which were less than 2% and less than 3%,
respectively, of the Company's total invested assets at such dates. The exposure
to the largest single issuer of corporate fixed maturities held at September 30,
2005 and December 31, 2004 was $700 million and $631 million, respectively.
The Company has hedged all of its material exposure to foreign currency
risk in its corporate fixed maturity portfolio. 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:
<Table>
<Caption>
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ ------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(IN MILLIONS)
Residential mortgage-backed securities:
Collateralized mortgage obligations............ $27,486 36.9% $19,752 35.5%
Pass-through securities........................ 15,714 21.1 12,478 22.4
------- ----- ------- -----
Total residential mortgage-backed
securities................................ 43,200 58.0 32,230 57.9
Commercial mortgage-backed securities............ 17,389 23.4 12,501 22.5
Asset-backed securities.......................... 13,868 18.6 10,876 19.6
------- ----- ------- -----
Total....................................... $74,457 100.0% $55,607 100.0%
======= ===== ======= =====
</Table>
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, 2005, $42,817 million, or 99.1%, of the residential mortgage-
backed securities were rated Aaa/AAA by Moody's, S&P or Fitch. At December 31,
2004, $31,768 million, or 98.6%, of the residential mortgage-backed securities
were rated Aaa/AAA by Moody's or S&P.
At September 30, 2005, $12,921 million, or 74.3%, of the commercial
mortgage-backed securities were rated Aaa/AAA by Moody's, S&P or Fitch. At
December 31, 2004, $8,750 million, or 70.0%, of the commercial mortgage-backed
securities were rated Aaa/AAA by Moody's or S&P.
The Company's asset-backed securities are diversified both by sector and by
issuer. Home equity loan and credit card receivables, accounting for about 28%
and 27% of the total holdings, respectively, constitute the largest exposures in
the Company's asset-backed securities portfolio. At September 30, 2005, $8,045
million, or 58%, of total asset-backed securities were rated Aaa/AAA by Moody's,
S&P or Fitch. At
118
December 31, 2004, $6,775 million, or 62.3%, of the total asset-backed
securities were rated Aaa /AAA by Moody's or S&P.
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 special purpose entities
("SPEs") 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. 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.
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. These beneficial interests are generally
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).
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 $356 million and $666 million at September
30, 2005 and December 31, 2004, respectively. The related net investment income
recognized was $15 million and $19 million for the three months and nine months
ended September 30, 2005, respectively, and $(8) million and $25 million for the
three months and nine months ended September 30, 2004, respectively.
TRADING SECURITIES
During the first quarter of 2005, the Company established a trading
securities portfolio to support investment strategies that involve the active
and frequent purchase and sale of securities. Trading securities are recorded at
fair value with subsequent changes in fair value recognized in net investment
income. Net investment income for the three months and nine months ended
September 30, 2005 includes $13 million and $15 million, respectively, of gains
(losses) on securities classified as trading. Of these amounts, $0.4 million and
$0.8 million, respectively, relate to net gains (losses) recognized on trading
securities sold during the three months and nine months ended September 30,
2005. The remaining $13 million and $14 million, respectively, for the three
months and nine months ended September 30, 2005, relate to changes in fair value
on trading securities held at September 30, 2005. The Company did not have any
trading securities during the three months and nine months ended September 30,
2004.
As part of the acquisition of Travelers on July 1, 2005, the Company
acquired Travelers' investment in Tribeca Citigroup Investments Ltd.
("Tribeca"). This is a feeder fund investment structure whereby the feeder fund
invests substantially all of its assets in the master fund, Tribeca Global
Convertible Instruments Ltd. The primary investment objective of the master fund
is to achieve enhanced risk-adjusted return by investing in domestic and foreign
equities and equity-related securities utilizing such strategies as convertible
securities arbitrage. MetLife is the majority owner of the feeder fund and
consolidates the fund within its unaudited interim condensed consolidated
financial statements. Approximately $509 million of Tribeca's
119
investments are reported as trading securities in the accompanying unaudited
interim condensed consolidated financial statements with changes in fair value
recognized in net investment income.
MORTGAGE AND CONSUMER LOANS
The Company's mortgage and consumer loans are principally collateralized by
commercial, agricultural and residential properties, as well as automobiles.
Mortgage and consumer loans comprised 11.7% and 13.6% of the Company's total
cash and invested assets at September 30, 2005 and December 31, 2004,
respectively. The carrying value of mortgage and consumer loans is stated at
original cost net of repayments, amortization of premiums, accretion of
discounts and valuation allowances. The following table shows the carrying value
of the Company's mortgage and consumer loans by type at:
<Table>
<Caption>
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ ------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
--------- ------ --------- ------
(IN MILLIONS)
Commercial mortgage loans.......................... $27,250 75.5% $24,990 77.1%
Agricultural mortgage loans........................ 7,474 20.7 5,907 18.2
Consumer loans..................................... 1,370 3.8 1,509 4.7
------- ----- ------- -----
Total............................................ $36,094 100.0% $32,406 100.0%
======= ===== ======= =====
</Table>
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:
<Table>
<Caption>
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ ------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
--------- ------ --------- ------
(IN MILLIONS)
REGION
Pacific............................................ $ 6,664 24.5% $ 6,075 24.3%
South Atlantic..................................... 6,168 22.6 5,696 22.8
Middle Atlantic.................................... 4,273 15.7 4,057 16.2
East North Central................................. 2,894 10.6 2,550 10.2
West South Central................................. 2,131 7.8 2,024 8.1
New England........................................ 1,536 5.6 1,412 5.6
International...................................... 1,455 5.3 1,364 5.5
Mountain........................................... 938 3.5 778 3.1
West North Central................................. 710 2.6 667 2.7
East South Central................................. 384 1.4 268 1.1
Other.............................................. 97 0.4 99 0.4
------- ----- ------- -----
Total............................................ $27,250 100.0% $24,990 100.0%
======= ===== ======= =====
PROPERTY TYPE
Office............................................. $12,873 47.2% $11,500 46.0%
Retail............................................. 6,078 22.3 5,698 22.8
Apartments......................................... 3,435 12.7 3,264 13.1
Industrial......................................... 2,701 9.9 2,499 10.0
Hotel.............................................. 1,419 5.2 1,245 5.0
Other.............................................. 744 2.7 784 3.1
------- ----- ------- -----
Total............................................ $27,250 100.0% $24,990 100.0%
======= ===== ======= =====
</Table>
120
Restructured, Potentially Delinquent, Delinquent or Under Foreclosure. The
Company monitors its mortgage loan investments on an ongoing basis, including
reviewing loans that are restructured, potentially delinquent, delinquent or
under foreclosure. These loan classifications are consistent with those used in
industry practice.
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 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 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 records valuation allowances for loans that it deems impaired.
The Company's valuation allowances are 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. Such valuation allowances are established for the excess
carrying value of the mortgage loan over the present value of expected future
cash flows discounted at the loan's original effective interest rate, the value
of the loan's collateral or the loan's market value if the loan is being sold.
The Company records valuation allowances as investment losses. The Company
records subsequent adjustments to allowances as investment gains (losses).
The following table presents the amortized cost and valuation allowance for
commercial mortgage loans distributed by loan classification at:
<Table>
<Caption>
SEPTEMBER 30, 2005 DECEMBER 31, 2004
----------------------------------------- -----------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST(1) TOTAL ALLOWANCE COST COST(1) TOTAL ALLOWANCE COST
--------- ----- --------- --------- --------- ----- --------- ---------
(IN MILLIONS)
Performing............. $27,403 100% $161 0.6% $25,077 99.8% $128 0.5%
Restructured........... -- -- -- --% 55 0.2 18 32.7%
Potentially
delinquent........... -- -- -- --% 7 -- 3 42.9%
Delinquent or under
foreclosure.......... 8 -- -- --% -- -- -- --%
------- ----- ---- ------- ----- ----
Total................ $27,411 100.0% $161 0.6% $25,139 100.0% $149 0.6%
======= ===== ==== ======= ===== ====
</Table>
- ---------------
(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:
<Table>
<Caption>
NINE MONTHS
ENDED
SEPTEMBER 30, 2005
------------------
(IN MILLIONS)
Balance, beginning of period................................ $149
Additions................................................... 40
Deductions.................................................. (28)
----
Balance, end of period...................................... $161
====
</Table>
Agricultural Mortgage Loans. The Company diversifies its agricultural
mortgage loans by both geographic region and product type.
Approximately 66.3% of the $7,474 million of agricultural mortgage loans
outstanding at September 30, 2005 were subject to rate resets prior to maturity.
A substantial portion of these loans is successfully
121
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:
<Table>
<Caption>
SEPTEMBER 30, 2005 DECEMBER 31, 2004
----------------------------------------- -----------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST(1) TOTAL ALLOWANCE COST COST (1) TOTAL ALLOWANCE COST
--------- ----- --------- --------- --------- ----- --------- ---------
(IN MILLIONS)
Performing............. $7,382 98.6% $ 8 0.1% $5,803 98.1% $4 0.1%
Restructured........... 41 0.6 -- --% 67 1.1 -- --%
Potentially
delinquent........... 3 -- 1 33.3% 4 0.1 1 25.0%
Delinquent or under
foreclosure.......... 59 0.8 2 3.4% 40 0.7 2 5.0%
------ ----- --- ------ ----- --
Total................ $7,485 100.0% $11 0.1% $5,914 100.0% $7 0.1%
====== ===== === ====== ===== ==
</Table>
- ---------------
(1) Amortized cost is equal to carrying value before valuation allowances.
The following table presents the changes in valuation allowances for
agricultural mortgage loans for the:
<Table>
<Caption>
NINE MONTHS
ENDED
SEPTEMBER 30, 2005
------------------
(IN MILLIONS)
Balance, beginning of period................................ $ 7
Additions................................................... 4
Deductions.................................................. --
---
Balance, end of period...................................... $11
===
</Table>
Consumer Loans. Consumer loans consist of residential mortgages and auto
loans.
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 United States. At
September 30, 2005 and December 31, 2004, the carrying value of the Company's
real estate, real estate joint ventures and real estate held-for-sale was $4,505
million and $4,233 million, respectively, or 1.5% and 1.8% 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
122
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:
<Table>
<Caption>
SEPTEMBER 30, 2005 DECEMBER 31, 2004
--------------------- ---------------------
CARRYING CARRYING
TYPE VALUE % OF TOTAL VALUE % OF TOTAL
- --------------------------------------------------------- -------- ---------- -------- ----------
(IN MILLIONS)
Real estate held-for-investment.......................... $3,734 82.9% $2,687 63.5%
Real estate joint ventures held-for-investment........... 581 12.9 386 9.1
Foreclosed real estate held-for-investment............... 3 0.1 3 0.1
------ ----- ------ -----
4,318 95.9 3,076 72.7
------ ----- ------ -----
Real estate held-for-sale................................ 187 4.1 1,156 27.3
Foreclosed real estate held-for-sale..................... -- -- 1 --
------ ----- ------ -----
187 4.1 1,157 27.3
------ ----- ------ -----
Total real estate, real estate joint ventures and real
estate held-for-sale................................... $4,505 100.0% $4,233 100.0%
====== ===== ====== =====
</Table>
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 $187 million and $1,157 million at September 30, 2005 and
December 31, 2004, respectively, are net of valuation allowances of $0 million
and $4 million, respectively, and net of prior year impairments of $0 million
and $12 million at September 30, 2005 and December 31, 2004, 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."
In the second quarter of 2005, the Company sold its One Madison Avenue and
200 Park Avenue properties in Manhattan, New York for $918 million and $1.72
billion, respectively, resulting in gains, net of income taxes, of $431 million
and $762 million, respectively. The gains are included in income from
discontinued operations in the accompanying unaudited interim condensed
consolidated statements of income. In connection with the sale of the 200 Park
Avenue property, the Company has retained rights to existing signage and related
equipment and is leasing space in the property for 20 years with optional
renewal periods through 2205.
OTHER LIMITED PARTNERSHIP INTERESTS
The carrying value of other limited partnership interests (which primarily
represent ownership interests in pooled investment funds that make private
equity investments in companies in the United States and overseas) was $4,345
million and $2,907 million at September 30, 2005 and December 31, 2004,
respectively. 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 and is not the primary beneficiary. 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 other limited partnerships represented 1.4% and 1.2% of cash and
invested assets at September 30, 2005 and December 31, 2004, 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."
123
OTHER INVESTED ASSETS
The Company's other invested assets consist principally of leveraged leases
and funds withheld at interest of $4,393 million and $3,916 million at September
30, 2005 and December 31, 2004, 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 includes derivative revaluation gains and 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 2.4% and
2.1% of cash and invested assets at September 30, 2005 and December 31, 2004,
respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses a variety of derivatives, including swaps, forwards,
future and option contracts, to manage its various risks. 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 table below provides a summary of the notional amount and current
market or fair value of derivative financial instruments held at:
<Table>
<Caption>
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------------------- -------------------------------
CURRENT MARKET OR CURRENT MARKET OR
FAIR VALUE FAIR VALUE
NOTIONAL -------------------- NOTIONAL --------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
-------- ------ ----------- -------- ------ -----------
(IN MILLIONS)
Interest rate swaps........... $22,074 $ 436 $ 76 $12,681 $284 $ 22
Interest rate floors.......... 9,725 121 -- 3,325 38 --
Interest rate caps............ 22,541 185 -- 7,045 12 --
Financial futures............. 1,691 33 16 611 -- 13
Foreign currency swaps........ 13,556 611 1,024 8,214 150 1,302
Foreign currency forwards..... 3,615 40 85 1,013 5 57
Options....................... 525 271 3 825 37 7
Financial forwards............ 2,122 11 3 326 -- --
Credit default swaps.......... 2,732 11 8 1,897 11 5
Synthetic GICs................ 5,497 -- -- 5,869 -- --
Other......................... -- -- -- 450 1 1
------- ------ ------ ------- ---- ------
Total....................... $84,078 $1,719 $1,215 $42,256 $538 $1,407
======= ====== ====== ======= ==== ======
</Table>
Credit Risk. The Company may be exposed to credit related losses in the
event of nonperformance by counterparties to derivative financial instruments.
Generally, the current credit exposure of the Company's derivative contracts is
limited to the fair value at the reporting date. The credit exposure of the
Company's derivative transactions is represented by the fair value of contracts
with a net positive fair value at the reporting date. Because exchange traded
futures and options are effected through regulated exchanges, and positions are
marked to market on a daily basis, the Company has minimal exposure to credit
related losses in the event of nonperformance by counterparties to such
derivative financial instruments.
The Company manages its credit risk by entering into derivative
transactions with creditworthy counterparties. In addition, the Company enters
into over-the-counter derivatives pursuant to master
124
agreements that provide for a single net payment to be made by one counterparty
to another at each due date and upon termination. Likewise, the Company effects
exchange traded futures and options through regulated exchanges and these
positions are marked to market and margined on a daily basis.
VARIABLE INTEREST ENTITIES
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, 2005, and
(ii) it holds significant variable interests but it is not the primary
beneficiary and which have not been consolidated:
<Table>
<Caption>
SEPTEMBER 30, 2005
-------------------------------------------------
PRIMARY BENEFICIARY NOT PRIMARY BENEFICIARY
----------------------- -----------------------
MAXIMUM MAXIMUM
TOTAL EXPOSURE TO TOTAL EXPOSURE TO
ASSETS(1) LOSS(2) ASSETS(1) LOSS(2)
--------- ----------- --------- -----------
(IN MILLIONS)
Asset-backed securitizations and
collateralized debt obligations.......... $ -- $-- $4,114 $ 528
Real estate joint ventures(3).............. 14 12 246 19
Other limited partnerships(4).............. 94 66 3,471 473
Other investments(5)....................... -- -- 1,178 264
---- --- ------ ------
Total.................................... $108 $78 $9,009 $1,284
==== === ====== ======
</Table>
- ---------------
(1) The assets of the asset-backed securitizations and collateralized debt
obligations are reflected at fair value at September 30, 2005. The assets of
the real estate joint ventures, other limited partnerships and other
structured investments 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, other
limited partnerships and other structured investments 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.
(5) Other investments include securities that are not asset-backed
securitizations or collateralized debt obligations.
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 $37,871 million and
$26,564 million and an estimated fair value of $38,912 million and $27,974
million were on loan under the program at September 30, 2005 and December 31,
2004, respectively. The Company is liable for cash collateral under its control
of $40,127 million and $28,678 million at September 30, 2005 and December 31,
2004, respectively. Securities loaned transactions are accounted for as
financing arrangements on the Company's unaudited interim condensed
125
balance sheets and statements of cash flow and the income and expenses
associated with the program are reported in net investment income since such
transactions are entered into for income generation purposes, not funding
purposes. Security collateral on deposit from customers may not be sold or
repledged and is not reflected in the unaudited interim condensed consolidated
financial statements.
SEPARATE ACCOUNTS
The Company had $124.0 billion and $86.8 billion held in its separate
accounts, for which the Company generally does not bear investment risk, at
September 30, 2005 and December 31, 2004, respectively. 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 compliance with
insurance laws. Effective with the adoption of SOP 03-1, on January 1, 2004, the
Company reports separately, as assets and liabilities, investments held in
separate accounts and liabilities of the separate accounts if (i) such separate
accounts are legally recognized; (ii) assets supporting the contract liabilities
are legally insulated from the Company's general account liabilities; (iii)
investments are directed by the contractholder; and (iv) all investment
performance, net of contract fees and assessments, is passed through to the
contractholder. The Company reports separate account assets meeting such
criteria at their fair value. Investment performance (including investment
income, net investment gains (losses) and changes in unrealized gains (losses))
and the corresponding amounts credited to contractholders of such separate
accounts are offset within the same line in the consolidated statements of
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company regularly analyzes its exposure to interest rate, equity market
and foreign currency exchange risk. As a result of that analysis, the Company
has determined that the fair value of its interest rate sensitive invested
assets is materially exposed to changes in interest rates, and that the amount
of that risk has changed from that reported on December 31, 2004. The equity and
foreign currency portfolios do not expose the Company to material market risk,
nor has the Company's exposure to those risks materially changed from that
reported on December 31, 2004.
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.
As disclosed in the 2004 Annual Report on Form 10-K, the Company uses a variety
of strategies to manage interest rate, equity market, and foreign currency
exchange risk, including the use of derivative instruments.
The Travelers acquisition has increased the Company's exposure to market
risk. See Note 2 of Notes to Interim Condensed Consolidated Financial
Statements. Management processes for measuring, managing and monitoring market
risk remain as described in MetLife Inc.'s 2004 Annual Report on Form 10-K;
however, some of those processes will utilize interim manual reporting and
estimation techniques while the Company integrates the operations acquired.
During the third quarter of 2005, management restructured the portfolio of
assets which was acquired, generally reducing the amount of market risk
associated with the acquired block, in line with the Company's overall
investment strategy.
The acquisition also changed the profile of the Company's foreign currency
exchange rate risk, although management still deems the aggregate sensitivity to
foreign currency exchange rate risk to be immaterial. Post-acquisition, the
principal currencies which create foreign currency exchange rate risk in the
Company's investment portfolios are the Euro, the Canadian dollar and the
British pound. The Company mitigates the majority of its fixed maturities
foreign currency exchange rate risk though the utilization of foreign currency
swaps and forward contracts. Through its investments in foreign subsidiaries,
the Company is primarily
126
exposed to the Mexican Peso, the Japanese Yen, the Australian dollar, the
Chilean Peso and the Argentinean Peso. The Company has matched substantially all
of its foreign currency liabilities in its foreign subsidiaries with their
respective foreign currency assets, thereby reducing its risk to currency
exchange rate fluctuation. In some countries, local surplus is held entirely or
in part in U.S. dollar assets which further minimizes exposure to exchange rate
fluctuation risk. Selectively, the Company uses U.S. dollar assets to support
certain long duration foreign currency liabilities.
RISK MEASUREMENT; SENSITIVITY ANALYSIS
The Company measures market risk related to its holdings of invested assets
and other financial instruments, including certain market risk sensitive
insurance contracts, based on changes in interest rates, equity prices and
currency exchange rates, utilizing a sensitivity analysis. This analysis
estimates the potential changes in fair value, cash flows and earnings based on
a hypothetical 10% change (increase or decrease) in interest rates, equity
prices and currency exchange rates. The Company believes that a 10% change
(increase or decrease) in these market rates and prices is reasonably possible
in the near-term. In performing this analysis, the Company used market rates at
September 30, 2005 to re-price its invested assets and other financial
instruments. The sensitivity analysis separately calculated each of MetLife's
market risk exposures (interest rate, equity price and foreign currency exchange
rate) related to its trading and non-trading invested assets and other financial
instruments. The sensitivity analysis performed included the market risk
sensitive holdings described above. The Company modeled the impact of changes in
market rates and prices on the fair values of its invested assets, earnings and
cash flows as follows:
Fair values. The Company bases its potential change in fair values on an
immediate change (increase or decrease) in:
- the net present values of its interest rate sensitive exposures resulting
from a 10% change (increase or decrease) in interest rates;
- the U.S. dollar equivalent balances of the Company's currency exposures
due to a 10% change (increase or decrease) in currency exchange rates;
and
- the market value of its equity positions due to a 10% change (increase or
decrease) in equity prices.
Earnings and cash flows. MetLife calculates the potential change in
earnings and cash flows on the change in its earnings and cash flows over a
one-year period based on an immediate 10% change (increase or decrease) in
market rates and equity prices. The following factors were incorporated into the
earnings and cash flows sensitivity analyses:
- the reinvestment of fixed maturity securities;
- the reinvestment of payments and prepayments of principal related to
mortgage-backed securities;
- the re-estimation of prepayment rates on mortgage-backed securities for
each 10% change (increase or decrease) in the interest rates; and
- the expected turnover (sales) of fixed maturities and equity securities,
including the reinvestment of the resulting proceeds.
The sensitivity analysis is an estimate and should not be viewed as
predictive of the Company's future financial performance. The Company cannot
assure that its actual losses in any particular year will not exceed the amounts
indicated in the table below. Limitations related to this sensitivity analysis
include:
- the market risk information is limited by the assumptions and parameters
established in creating the related sensitivity analysis, including the
impact of prepayment rates on mortgages;
- for derivatives which qualify as hedges, the impact on reported earnings
may be materially different from the change in market values;
127
- the analysis excludes other significant real estate holdings and
liabilities pursuant to insurance contracts; and
- the model assumes that the composition of assets and liabilities remains
unchanged throughout the year.
Accordingly, the Company uses such models as tools and not substitutes for
the experience and judgment of its corporate risk and asset/liability management
personnel. Based on its analysis of the impact of a 10% change (increase or
decrease) in market rates and prices, MetLife has determined that such a change
could have a material adverse effect on the fair value of its interest rate
sensitive invested assets. The equity and foreign currency portfolios do not
expose the Company to material market risk.
The table below illustrates the potential loss in fair value of the
Company's interest rate sensitive financial instruments at September 30, 2005.
In addition, the potential loss with respect to the fair value of currency
exchange rates and the Company's equity price sensitive positions at September
30, 2005 is set forth in the table below.
The potential loss in fair value for each market risk exposure of the
Company's portfolio as of the period indicated was:
<Table>
<Caption>
SEPTEMBER 30, 2005
------------------
(IN MILLIONS)
Interest rate risk -- non-trading instruments............... $5,424
Interest rate risk -- trading instruments................... $ 16
Equity price risk........................................... $ 456
Foreign currency exchange rate risk......................... $ 957
</Table>
128
The table below provides additional detail regarding the potential loss in
fair value of the Company's non-trading interest sensitive financial instruments
at September 30, 2005 by type of asset or liability.
<Table>
<Caption>
AS OF SEPTEMBER 30, 2005
------------------------------------
ASSUMING A
10% INCREASE
NOTIONAL IN THE YIELD
AMOUNT FAIR VALUE CURVE
-------- ---------- ------------
(IN MILLIONS)
ASSETS
Fixed maturities available-for-sale......................... $231,614 $(5,452)
Mortgage loans on real estate............................... 37,056 (593)
Equity securities........................................... 3,159 --
Short-term investments...................................... 4,481 (8)
Cash and cash equivalents................................... 6,950 --
Policy loans................................................ 9,841 (288)
Mortgage loan commitments................................... $ 2,195 (7) (16)
-------
Total assets........................................... $(6,357)
LIABILITIES
Policyholder account balances............................... $ 84,502 $ 704
Long-term debt.............................................. 9,866 365
Short-term debt............................................. 1,303 --
Junior subordinated debt securities underlying common equity
units..................................................... 2,108 23
Shares subject to mandatory redemption...................... 336 --
Payable under securities loaned transactions................ 40,127 --
-------
Total liabilities...................................... $ 1,092
OTHER
Derivative instruments (designated hedges or otherwise)
Swaps.................................................. $35,630 $ (53) $ (243)
Futures................................................ 1,691 17 33
Forwards............................................... 5,737 (37) --
Options................................................ 32,791 574 51
Synthetic GICs......................................... 5,497 -- --
Credit default swaps................................... 2,732 3 --
-------
Total other.......................................... $ (159)
-------
NET CHANGE.................................................. $(5,424)
=======
</Table>
This quantitative measure of risk has increased 49%, or $1,774 million at
September 30, 2005, from $(3,650) million at December 31, 2004. The primary
reasons for the increase is due to growth in assets exposed to interest rate
risk in increasing interest scenarios including fixed maturity instruments and
interest rate floors and the increase in the yield curve since December 31,
2004. The largest single component of the increase in assets are those acquired
in the Travelers acquisition, which have increased this quantitative measure of
risk by $(785). Since our test is based on a hypothetical 10% increase to the
current yield curve, the reshaping of the curve since December 31, 2004 has an
impact on the magnitude of the interest rate change tested. This change in the
yield curve contributed approximately $(883) to the change since December 31,
2004.
In addition to the analysis above, the Company also performs an analysis of
the sensitivity to changes in interest rates, including both insurance
liabilities and financial instruments, as part of its asset liability
129
management program. As of September 30, 2005, a hypothetical instantaneous 10%
decrease in interest rates applied to the Company's liabilities, both insurance
and financial instruments, and associated asset portfolios would reduce the fair
value of equity by $219 million. Management does not expect that this
sensitivity would produce a liquidity strain on the Company.
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.
On July 1, 2005, the Holding Company completed the acquisition of
Travelers. The Company is in the process of completing its post-merger
integration plan. As part of its plan, the Company has extended its 2005
Sarbanes-Oxley Act Section 404 compliance program to include Travelers, which is
intended to integrate Travelers' internal control over financial reporting with
that of the Company. Such integration has resulted in changes that materially
affected or are reasonably likely to materially affect the Company's internal
control over financial reporting during the three months ended September 30,
2005. Except as set forth above, there were no changes to the Holding Company's
internal control over financial reporting as defined in Exchange Act Rules
13a-15(f) during the quarter ended September 30, 2005 that have materially
affected, or are reasonably likely to materially affect, the Holding Company's
internal control over financial reporting.
130
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following should be read in conjunction with Note 8 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 not to specify the monetary damages
sought or may permit claimants to state only that the amount sought is
sufficient to invoke the jurisdiction of the trial court. In addition,
jurisdictions may permit plaintiffs to allege monetary damages in amounts well
exceeding reasonably possible verdicts in the jurisdiction for similar matters.
This variability in pleadings, together with the actual experience of the
Company in litigating or resolving through settlement numerous claims over an
extended period of time, 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, 2005.
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 generally are 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.
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, including lawsuits relating to the
sale of mutual funds and other products, have been brought. As of September 30,
2005, there are approximately 318 sales practices lawsuits pending against
Metropolitan Life; approximately 45 sales practices lawsuits pending against New
England Mutual, New England Life Insurance Company ("NELICO"), and New England
Securities Corporation ("NES," together with New England Mutual and NELICO,
collectively, "New England"); approximately 34 sales practices lawsuits pending
against General American and approximately 34 sales practices lawsuits pending
against Walnut Street Securities, Inc. ("Walnut Street"). Metropolitan Life, New
England, General American and Walnut Street continue to
131
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, mutual funds and other products may be
commenced in the future.
The Company believes adequate provision has been made in its consolidated
financial statements for all probable and reasonably estimable losses for sales
practices claims against Metropolitan Life, New England, General American and
Walnut Street.
Regulatory authorities in a small number of states have had investigations
or inquiries relating to Metropolitan Life's, New England's, General American's
or Walnut Street's sales of individual life insurance policies or annuities or
other products. 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 previously reported that it had received approximately
23,500 asbestos-related claims in 2004 and approximately 19,100 such claims in
the first nine months of 2004. In the context of reviewing in the third quarter
of 2005 certain pleadings received in 2004, it was determined that there was a
small undercount of Metropolitan Life's asbestos-related claims in 2004.
Accordingly, Metropolitan Life now reports that it received approximately 23,900
asbestos-related claims in 2004 and approximately 12,100 and 19,500
asbestos-related claims during the first nine months of 2005 and 2004,
respectively.
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 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
132
tied to performance of the Standard & Poor's 500 Index and the Lehman Brothers
Aggregate Bond Index. A claim with respect to the prior year was made under the
excess insurance policies in 2003, 2004 and 2005 for the amounts paid with
respect to asbestos litigation in excess of the retention. As the performance of
the indices impacts 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. The
foregone loss reimbursements were approximately $8.3 million with respect to
2002 claims, $15.5 million with respect to 2003 claims and $15.1 million with
respect to 2004 claims and estimated as of September 30, 2005, to be
approximately $59 million in the aggregate, including future years.
Property and Casualty Actions
A purported class action has been filed against Metropolitan Property and
Casualty Insurance Company ("MPC") 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. A recent decision by the Montana Supreme Court
in a suit involving another insurer determined that aggregation is required. MPC
has recorded a liability in an amount the Company believes is adequate to
resolve the claims underlying this matter. The amount to be paid will not be
material to MPC. Certain plaintiffs' lawyers in another action have alleged that
the use of certain automated databases to provide total loss vehicle valuation
methods was improper. MPC, along with a number of other insurers, agreed in July
2005 to resolve this issue in a class action format. Management believes that
the amount to be paid in resolution of this matter will not be material to MPC.
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, the Holding Company, the individual directors, the
Superintendent and the underwriters for MetLife, Inc.'s initial public offering,
Goldman Sachs & Company and Credit Suisse First Boston. In 2003, a trial court
within the commercial part of the New York State court granted the defendants'
motions to dismiss two purported class actions. In 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. On October 11,
2005, the trial court granted in part and denied in part defendants' motion to
dismiss or strike portions of the consolidated amended complaint. Plaintiffs'
motion to certify a litigation class is pending. 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 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 in 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 and contained
certain material misstatements. 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. In 2004, the court reaffirmed its earlier decision denying
defendants' motion for summary judgment as premature. On July 19, 2005, this
federal trial court certified a class action
133
against Metropolitan Life and the Holding Company. Metropolitan Life and the
Holding Company have filed a petition seeking permission for an interlocutory
appeal from this order. 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.
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. In September 2005, Metropolitan
Life's motion for summary judgment was granted. Plaintiffs have moved for
reconsideration.
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 subpoenas, including sets of
interrogatories, from the Office of the Attorney General of the State of
Connecticut seeking information and documents including contingent commission
payments to brokers and MetLife's awareness of any "sham" bids for business.
MetLife also has received a Civil Investigative Demand from the Office of the
Attorney General for the State of Massachusetts seeking information and
documents concerning bids and quotes that the Company submitted to potential
customers in Massachusetts, the identity of agents, brokers, and producers to
whom the Company submitted such bids or quotes, and communications with a
certain broker. The Company has received two subpoenas from the District
Attorney of the County of San Diego, California. The subpoenas seek numerous
documents including incentive agreements entered into with brokers. The Florida
Department of Financial Services and the Florida Office of Insurance Regulation
also have served subpoenas on the Company asking for answers to interrogatories
and document requests concerning topics that include compensation paid to
intermediaries. The Office of the Attorney General for the State of Florida has
also served a subpoena on the Company seeking, among other things, copies of
materials produced in response to the subpoenas discussed above. The Company has
received a subpoena from the Office of the U.S. Attorney for the Southern
District of California asking for documents regarding the insurance broker,
Universal Life Resources. The Insurance Commissioner of Oklahoma has served a
subpoena, including a set of interrogatories, on the Company seeking, among
other things, documents and information concerning the compensation of insurance
producers for insurance covering Oklahoma entities and persons. The Company
continues to cooperate fully with these inquiries and is responding to the
subpoenas and other requests. MetLife is continuing to conduct an internal
review of its commission payment practices.
Approximately sixteen broker-related lawsuits in which the Company was
named as a defendant were filed. Voluntary dismissals and consolidations have
reduced the number of pending actions to four. In one of these, the California
Insurance Commissioner has brought an action in California state court against
MetLife, Inc., and other companies alleging that the defendants violated certain
provisions of the California Insurance Code. Another of these actions is pending
in a multi-district proceeding established in the federal district court in the
District of New Jersey. In this proceeding, plaintiffs have filed an amended
class action complaint consolidating the claims from separate actions that had
been filed in or transferred to the District of New Jersey. The consolidated
amended complaint alleges that the Holding Company, Metropolitan Life Insurance
134
Company, several other insurance companies and several insurance brokers
violated RICO, ERISA, and antitrust laws and committed other misconduct in the
context of providing insurance to employee benefit plans and to persons who
participate in such employee benefit plans. Plaintiffs seek to represent classes
of employers that established employee benefit plans and persons who
participated in such employee benefit plans. Plaintiffs in several other actions
have voluntarily dismissed their claims. The Company intends to vigorously
defend these cases.
In addition to those discussed above, regulators and others have made a
number of inquiries of the insurance industry regarding industry brokerage
practices and related matters and other inquiries 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 intends to vigorously defend all lawsuits.
As previously disclosed, the NASD staff notified MetLife Securities, Inc.
("MSI"), NES and Walnut Street, all direct or indirect subsidiaries of MetLife,
Inc., that it has made a preliminary determination to file charges of violations
of the NASD's and the SEC's rules against the firms. The pending investigation
was initiated after the firms reported to the NASD that a limited number of
mutual fund transactions processed by firm representatives and at the firms'
consolidated trading desk, during the period April through December 2003, had
been received from customers after 4:00 p.m., Eastern time, and received the
same day's net asset value. The potential charges of violations of the NASD's
and the SEC's rules relate to the processing of transactions received after 4:00
p.m., the firms' maintenance of books and records, supervisory procedures and
responses to the NASD's information requests. Under the NASD's procedures, the
firms have submitted a response to the NASD staff. The NASD staff has not made a
formal recommendation regarding whether any action alleging violations of the
rules should be filed. MetLife continues to cooperate fully with the NASD in its
investigation.
The staff of the NASD has notified MSI that it has made a preliminary
determination to recommend charging MSI with the (i) failure to adopt, maintain
and enforce written supervisory procedures reasonably designed to achieve
compliance with suitability requirements regarding the sale of college savings
plans, also known as 529 plans, and (ii) failure to enforce its written
supervisory procedures with respect to disclosure obligations in the sale of 529
plans. This notification follows an industry-wide inquiry by the NASD examining
sales of 529 plans. Under the NASD's procedures, MSI intends to respond to the
NASD staff before the NASD staff makes a formal recommendation regarding whether
any action alleging violations of applicable rules should be filed. MSI
continues to cooperate fully with the NASD.
In August 1999, an amended putative class action complaint was filed in
Connecticut state court against Travelers Life and Annuity Company ("TLAC"),
Travelers Equity Sales, Inc. and certain former affiliates. The amended
complaint alleges Travelers Property Casualty Corporation, a former TLAC
affiliate, purchased structured settlement annuities from TLAC and spent less on
the purchase of those structured settlement annuities than agreed with
claimants, and that commissions paid to brokers for the structured settlement
annuities, including an affiliate of TLAC, were paid in part to Travelers
Property Casualty Corporation. On May 26, 2004, the Connecticut Superior Court
certified a nationwide class action involving the following claims against TLAC:
violation of the Connecticut Unfair Trade Practice Statute, unjust enrichment,
and civil conspiracy. On June 15, 2004, the defendants appealed the class
certification order and the appeal is now pending before the Connecticut Supreme
Court.
A former registered representative of Tower Square Securities, Inc. ("Tower
Square"), a broker-dealer subsidiary of The Travelers Insurance Company ("TIC"),
is alleged to have defrauded individuals by diverting funds for his personal
use. In June 2005, the SEC issued a formal order of investigation with respect
to Tower Square and served Tower Square with a subpoena. The Securities and
Business Investments Division of the Connecticut Department of Banking and the
NASD are also reviewing this matter. Tower Square intends to fully cooperate
with the SEC, the NASD and the Connecticut Department of Banking. One
arbitration matter was commenced in June 2005 against Tower Square and the other
unaffiliated broker-dealers with whom the registered representative was formerly
registered. It is reasonably possible that other matters will be brought
regarding this matter. Tower Square intends to defend itself vigorously in all
such cases.
135
Metropolitan Life also has been named as a defendant in a number of
silicosis, welding and mixed dust cases in various states. The Company intends
to defend itself vigorously against these cases.
Various litigation, claims and assessments against the Company, in addition
to those discussed above and those otherwise provided for in the Company's
consolidated financial statements, have arisen in the course of the Company's
business, including, but not limited to, in connection with its activities as an
insurer, employer, investor, investment advisor and taxpayer. Further, state
insurance regulatory authorities and other federal and state authorities
regularly make inquiries and conduct investigations concerning the Company's
compliance with applicable insurance and other laws and regulations.
Summary
It is not feasible to predict or determine the ultimate outcome of all
pending investigations and legal proceedings or provide reasonable ranges of
potential losses, except as noted above in connection with specific matters. In
some of the matters referred to above, very large and/or indeterminate amounts,
including punitive and treble damages, are sought. Although in light of these
considerations it is possible that an adverse outcome in certain cases could
have a material adverse effect upon the Company's consolidated financial
position, based on information currently known by the Company's management, in
its opinion, the outcomes of such pending investigations and legal proceedings
are not likely to have such an effect. However, given the large and/or
indeterminate amounts sought in certain of these matters and the inherent
unpredictability of litigation, it is possible that an adverse outcome in
certain matters could, from time to time, have a material adverse effect on the
Company's consolidated net income or cash flows in particular quarterly or
annual periods.
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, 2005 are set forth below:
<Table>
<Caption>
(D) MAXIMUM NUMBER
(C) TOTAL NUMBER OF (OR APPROXIMATE DOLLAR
COMMON SHARES VALUE) OF COMMON SHARES
(A) TOTAL NUMBER OF (B) AVERAGE PRICE PURCHASED AS PART OF THAT MAY YET BE
COMMON SHARES PAID PER PUBLICLY ANNOUNCED PURCHASED UNDER THE PLANS
PERIOD PURCHASED(1) COMMON SHARE PLANS OR PROGRAMS(2) OR PROGRAMS
- ---------------------- ------------------- ----------------- -------------------- -------------------------
July 1 -- July 31,
2005................ 528 $45.76 -- $716,206,611
August 1 -- August 31,
2005................ 604 $47.66 -- $716,206,611
September 1 --
September 30,
2005................ 15,918 $50.19 -- $716,206,611
Total................. 17,050 $49.96 -- $716,206,611
</Table>
- ---------------
(1) During the periods July 1 -- July 31, 2005, August 1 -- August 31, 2005 and
September 1 -- September 30, 2005, separate account affiliates of the
Holding Company purchased 528 shares, 604 shares and 15,918 shares,
respectively, 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 October 26, 2004, the Holding Company's Board of Directors authorized a
$1 billion common stock repurchase program. Under this authorization, the
Holding Company may purchase its common stock from the MetLife Policyholder
Trust, in the open market and in privately negotiated transactions. As a
result of the Holding Company's agreement to acquire The Travelers Insurance
Company, excluding certain assets, most significantly, Primerica, from
Citigroup Inc, and substantially all of Citigroup Inc.'s international
insurance businesses, (collectively, "Travelers"), the Holding Company has
currently suspended its common stock repurchase activity. Future common
stock repurchases will be dependent upon several factors, including the
Company's capital position, its financial strength and credit ratings,
general market conditions and the price of the Holding Company's common
stock.
136
On December 16, 2004, the Holding Company repurchased 7,281,553 shares of
its outstanding common stock at an aggregate cost of $300 million under an
accelerated common stock repurchase agreement with a major bank. The bank
borrowed the stock sold to the Holding Company from third parties and
purchased the common shares in the open market to return to such third
parties. In April 2005, the Holding Company received a cash adjustment of
approximately $7 million based on the actual amount paid by the bank to
purchase the common stock, for a final purchase price of $293 million. The
Holding Company recorded the shares initially repurchased as treasury stock
and recorded the amount received as an adjustment to the cost of the
treasury stock.
137
ITEM 6. EXHIBITS
<Table>
3.1 Amended and Restated Certificate of Incorporation of
MetLife, Inc. (Incorporated by reference to Exhibit 3.1 to
MetLife, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 2000)
3.2 MetLife, Inc. Amended and Restated By-Laws effective July
27, 2004 (Incorporated by reference to Exhibit 3.2 to
MetLife, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004)
10.1 International Distribution Agreement dated as of July 1,
2005 between MetLife, Inc. and Citigroup Inc. (Incorporated
by reference to Exhibit 10.1 to Form 8-K of MetLife, Inc.
filed on July 8, 2005 (the "July 2005 Form 8-K"))
10.2 Domestic Distribution Agreement dated as of July 1, 2005
between MetLife, Inc. and Citigroup Inc. (Incorporated by
reference to Exhibit 10.2 to the July 2005 Form 8-K)
10.3 Investor Rights Agreement dated as of July 1, 2005 by and
among Citigroup Inc., MetLife, Inc. and Citigroup Insurance
Holding Corporation (Incorporated by reference to Exhibit
10.3 to the July 2005 Form 8-K)
10.4 Transition Services Agreement dated as of July 1, 2005 by
and between Citigroup Inc. and MetLife, Inc. (Incorporated
by reference to Exhibit 10.4 to the July 2005 Form 8-K)
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
</Table>
138
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 9, 2005
139
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT NAME
- ------- ------------
3.1 Amended and Restated Certificate of Incorporation of
MetLife, Inc. (Incorporated by reference to Exhibit 3.1 to
MetLife, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 2000)
3.2 MetLife, Inc. Amended and Restated By-Laws effective July
27, 2004 (Incorporated by reference to Exhibit 3.2 to
MetLife, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004)
10.1 International Distribution Agreement dated as of July 1,
2005 between MetLife, Inc. and Citigroup Inc. (Incorporated
by reference to Exhibit 10.1 to Form 8-K of MetLife, Inc.
filed on July 8, 2005 (the "July 2005 Form 8-K"))
10.2 Domestic Distribution Agreement dated as of July 1, 2005
between MetLife, Inc. and Citigroup Inc. (Incorporated by
reference to Exhibit 10.2 to the July 2005 Form 8-K)
10.3 Investor Rights Agreement dated as of July 1, 2005 by and
among Citigroup Inc., MetLife, Inc. and Citigroup Insurance
Holding Corporation (Incorporated by reference to Exhibit
10.3 to the July 2005 Form 8-K)
10.4 Transition Services Agreement dated as of July 1, 2005 by
and between Citigroup Inc. and MetLife, Inc. (Incorporated
by reference to Exhibit 10.4 to the July 2005 Form 8-K)
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
</Table>
140