- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 MARCH 31, 2006
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 No.)
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 a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
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 May 1, 2006, 758,638,225 shares of the registrant's common stock, $0.01
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 March 31,
2006 (Unaudited) and December 31, 2005................. 4
Interim Condensed Consolidated Statements of Income for
the Three Months Ended March 31, 2006 and 2005
(Unaudited)............................................ 5
Interim Condensed Consolidated Statement of Stockholders'
Equity for the Three Months Ended March 31, 2006
(Unaudited)............................................ 6
Interim Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2006 and 2005
(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.................... 56
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................ 113
ITEM 4. CONTROLS AND PROCEDURES........................... 117
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................. 118
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS............................................... 123
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................ 123
ITEM 6. EXHIBITS.......................................... 125
SIGNATURES................................................ 126
EXHIBIT INDEX............................................. E-1
</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
MARCH 31, 2006 (UNAUDITED) AND DECEMBER 31, 2005
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2006 2005
------------ ---------------
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost: $238,140 and $223,926, respectively)... $239,828 $230,050
Trading securities, at fair value (cost: $886 and $830,
respectively)........................................... 883 825
Equity securities available-for-sale, at fair value (cost:
$3,012 and $3,084, respectively)........................ 3,356 3,338
Mortgage and consumer loans............................... 37,351 37,190
Policy loans.............................................. 9,987 9,981
Real estate and real estate joint ventures
held-for-investment..................................... 4,677 4,643
Real estate held-for-sale................................. 23 22
Other limited partnership interests....................... 4,514 4,276
Short-term investments.................................... 3,368 3,306
Other invested assets..................................... 8,386 8,078
-------- --------
Total investments....................................... 312,373 301,709
Cash and cash equivalents................................... 5,144 4,018
Accrued investment income................................... 3,145 3,036
Premiums and other receivables.............................. 12,731 12,186
Deferred policy acquisition costs and value of business
acquired.................................................. 20,245 19,641
Goodwill.................................................... 4,797 4,797
Other assets................................................ 8,145 8,389
Separate account assets..................................... 132,522 127,869
-------- --------
Total assets............................................ $499,102 $481,645
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Future policy benefits.................................... $122,748 $123,204
Policyholder account balances............................. 129,860 128,312
Other policyholder funds.................................. 8,620 8,331
Policyholder dividends payable............................ 918 917
Policyholder dividend obligation.......................... 814 1,607
Short-term debt........................................... 1,360 1,414
Long-term debt............................................ 9,932 9,888
Junior subordinated debt securities underlying common
equity units............................................ 2,134 2,134
Shares subject to mandatory redemption.................... 278 278
Current income taxes payable.............................. 88 69
Deferred income taxes payable............................. 1,199 1,706
Payables for collateral under securities loaned and other
transactions............................................ 47,059 34,515
Other liabilities......................................... 13,003 12,300
Separate account liabilities.............................. 132,522 127,869
-------- --------
Total liabilities....................................... 470,535 452,544
-------- --------
Stockholders' Equity:
Preferred stock, par value $0.01 per share; 200,000,000
shares authorized; 84,000,000 shares issued and
outstanding at March 31, 2006 and December 31, 2005;
$2,100 aggregate liquidation preference................... 1 1
Common stock, par value $0.01 per share; 3,000,000,000
shares authorized; 786,766,664 shares issued at March 31,
2006 and December 31, 2005; 758,157,941 shares outstanding
at March 31, 2006 and 757,537,064 shares outstanding at
December 31, 2005......................................... 8 8
Additional paid-in capital.................................. 17,327 17,274
Retained earnings........................................... 11,579 10,865
Treasury stock, at cost; 28,608,723 shares at March 31, 2006
and 29,229,600 shares at December 31, 2005................ (938) (959)
Accumulated other comprehensive income (loss)............... 590 1,912
-------- --------
Total stockholders' equity.............................. 28,567 29,101
-------- --------
Total liabilities and stockholders' equity.............. $499,102 $481,645
======== ========
</Table>
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
METLIFE, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-------------------
2006 2005
-------- -------
REVENUES
Premiums.................................................... $ 6,428 $5,966
Universal life and investment-type product policy fees...... 1,175 791
Net investment income....................................... 4,239 3,216
Other revenues.............................................. 328 299
Net investment gains (losses)............................... (585) (15)
------- ------
Total revenues......................................... 11,585 10,257
------- ------
EXPENSES
Policyholder benefits and claims............................ 6,405 5,926
Interest credited to policyholder account balances.......... 1,215 795
Policyholder dividends...................................... 421 415
Other expenses.............................................. 2,498 1,971
------- ------
Total expenses......................................... 10,539 9,107
------- ------
Income from continuing operations before provision for
income taxes.............................................. 1,046 1,150
Provision for income taxes.................................. 296 350
------- ------
Income from continuing operations........................... 750 800
Income (loss) from discontinued operations, net of income
taxes..................................................... (3) 187
------- ------
Net income.................................................. 747 987
Preferred stock dividends................................... 33 --
------- ------
Net income available to common shareholders................. $ 714 $ 987
======= ======
Income from continuing operations available to common
shareholders per common share
Basic.................................................. $ 0.94 $ 1.09
======= ======
Diluted................................................ $ 0.93 $ 1.08
======= ======
Net income available to common shareholders per common
share
Basic.................................................. $ 0.94 $ 1.34
======= ======
Diluted................................................ $ 0.93 $ 1.33
======= ======
</Table>
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
METLIFE, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2006 (UNAUDITED)
(IN MILLIONS)
<Table>
<Caption>
ADDITIONAL TREASURY
PREFERRED COMMON PAID-IN RETAINED STOCK AT
STOCK STOCK CAPITAL EARNINGS COST
--------- ------ ---------- -------- --------
Balance at January 1, 2006.............. $1 $8 $17,274 $10,865 $ (959)
Treasury stock transactions, net........ 53 21
Dividends on preferred stock............ (33)
Comprehensive income (loss):
Net income............................ 747
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..................
Other comprehensive income (loss)...
Comprehensive income (loss)...........
-- -- ------- ------- -------
Balance at March 31, 2006............... $1 $8 $17,327 $11,579 $ (938)
== == ======= ======= =======
<Caption>
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
-----------------------------------------
NET FOREIGN MINIMUM
UNREALIZED CURRENCY PENSION
INVESTMENT TRANSLATION LIABILITY
GAINS (LOSSES) ADJUSTMENT ADJUSTMENT TOTAL
-------------- ----------- ---------- -------
Balance at January 1, 2006.............. $ 1,942 $11 $(41) $29,101
Treasury stock transactions, net........ 74
Dividends on preferred stock............ (33)
Comprehensive income (loss):
Net income............................ 747
Other comprehensive income (loss):
Unrealized gains (losses) on
derivative instruments, net of
income taxes...................... 1 1
Unrealized investment gains
(losses), net of related offsets
and income taxes.................. (1,323) (1,323)
-------
Other comprehensive income (loss)... (1,322)
-------
Comprehensive income (loss)........... (575)
------- --- ---- -------
Balance at March 31, 2006............... $ 620 $11 $(41) $28,567
======= === ==== =======
</Table>
SEE ACCOMPANYING NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
METLIFE, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (UNAUDITED)
(IN MILLIONS)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
----------------------
2006 2005
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 2,306 $ 1,656
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales, maturities and repayments of:
Fixed maturities........................................ 36,090 35,075
Equity securities....................................... 511 231
Mortgage and consumer loans............................. 2,250 1,302
Real estate and real estate joint ventures.............. 155 126
Other limited partnership interests..................... 330 216
Purchases of:
Fixed maturities........................................ (50,229) (42,311)
Equity securities....................................... (300) (576)
Mortgage and consumer loans............................. (2,500) (997)
Real estate and real estate joint ventures.............. (450) (104)
Other limited partnership interests..................... (503) (318)
Net change in short-term investments...................... (63) 210
Proceeds from sales of businesses, net of cash disposed of
$0 and $33, respectively................................ -- 252
Net change in other invested assets....................... (312) (133)
Other, net................................................ (35) 10
-------- --------
Net cash used in investing activities....................... (15,056) (7,017)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits................................................ 14,072 11,215
Withdrawals............................................. (12,748) (8,785)
Net change in payables for collateral under securities
loaned and other transactions........................... 12,544 3,035
Net change in short-term debt............................. (54) (325)
Long-term debt issued..................................... 100 162
Long-term debt repaid..................................... (23) (134)
Dividends on preferred stock.............................. (33) --
Stock options exercised................................... 18 19
Other, net................................................ -- (7)
-------- --------
Net cash provided by financing activities................... 13,876 5,180
-------- --------
Change in cash and cash equivalents......................... 1,126 (181)
Cash and cash equivalents, beginning of period.............. 4,018 4,106
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 5,144 $ 3,925
======== ========
Cash and cash equivalents, subsidiaries held-for-sale,
beginning of period....................................... $ -- $ 58
======== ========
CASH AND CASH EQUIVALENTS, SUBSIDIARIES HELD-FOR-SALE, END
OF PERIOD................................................. $ -- $ 5
======== ========
Cash and cash equivalents, from continuing operations,
beginning of period....................................... $ 4,018 $ 4,048
======== ========
CASH AND CASH EQUIVALENTS, FROM CONTINUING OPERATIONS, END
OF PERIOD................................................. $ 5,144 $ 3,920
======== ========
Supplemental disclosures of cash flow information:
Net cash paid during the period for:
Interest................................................ $ 76 $ 38
======== ========
Income taxes............................................ $ 87 $ 154
======== ========
Non-cash transactions during the period:
Business Dispositions:
Assets disposed....................................... $ -- $ 331
Less: liabilities disposed............................ -- 236
-------- --------
Net assets disposed................................... $ -- $ 95
Plus: equity securities received...................... -- 43
Less: cash disposed................................... -- 33
-------- --------
Business disposition, net of cash disposed............ $ -- $ 105
======== ========
</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, 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, MetLife, Inc. offers life insurance, annuities,
automobile and homeowners 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.
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") and the establishment and amortization of value of
business acquired ("VOBA"); (vi) the measurement of goodwill and related
impairment, if any; (vii) the liability for future policyholder benefits; (viii)
accounting for reinsurance transactions; (ix) the liability for litigation and
regulatory matters; 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.
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. Intercompany accounts and transactions have been eliminated.
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 $1,378 million and $1,291 million at March 31, 2006 and December
31, 2005, respectively.
Certain amounts in the prior year periods' unaudited interim condensed
consolidated financial statements have been reclassified to conform with the
2006 presentation. Such reclassifications include $332 million relating to net
bank deposits reclassified from net cash provided by operating activities to
cash flows from financing activities for the three months ended March 31, 2005.
This reclassification resulted from the
8
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
reclassification of bank deposit balances from other liabilities to policyholder
account balances on the consolidated balance sheet during 2005. In addition,
$3,035 million relating to the net change in payables for collateral under
securities loaned and other transactions was reclassified from cash flows from
investing activities to cash flows from financing activities on the interim
condensed consolidated statements of cash flows for the three months ended March
31, 2005.
On July 1, 2005, the Holding Company completed the acquisition of The
Travelers Insurance Company, excluding certain assets, most significantly,
Primerica, from Citigroup Inc. ("Citigroup"), and substantially all of
Citigroup's international insurance businesses (collectively, "Travelers"),
which is more fully described in Note 2. The acquisition was 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. The
accounting policies of Travelers were conformed to those of MetLife upon the
acquisition.
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 March 31, 2006, its consolidated results of operations for the three months
ended March 31, 2006 and 2005, its consolidated cash flows for the three months
ended March 31, 2006 and 2005 and its consolidated statement of stockholders'
equity for the three months ended March 31, 2006, in conformity with GAAP.
Interim results are not necessarily indicative of full year performance. The
December 31, 2005 condensed balance sheet data was derived from audited
financial statements included in MetLife, Inc.'s 2005 Annual Report on Form 10-K
filed with the U.S. Securities and Exchange Commission ("SEC") ("2005 Annual
Report") and includes all disclosures required by GAAP. Therefore, these
unaudited interim condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements of the Company included
in the 2005 Annual Report.
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.
Stock-Based Compensation
Stock-based compensation grants prior to January 1, 2003 were accounted for
using the intrinsic value method prescribed by Accounting Principles Board
("APB") Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees, and
related interpretations. Compensation expense, if any, was recorded based upon
the excess of the quoted market price at grant date over the amount the employee
was required to pay to acquire the stock. Under the provisions of APB 25, there
was no compensation expense resulting from the issuance of stock options as the
exercise price was equivalent to the fair market value at the date of grant.
Compensation expense was recognized under the Long-Term Performance Compensation
Plan ("LTPCP"), as described more fully in Note 8.
Stock-based awards granted after December 31, 2002 but prior to January 1,
2006 were accounted for on a prospective basis using the fair value accounting
method prescribed by Statement of Financial Accounting Standard ("SFAS") No.
123, Accounting for Stock-Based Compensation ("SFAS 123"), as amended by SFAS
No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure
("SFAS 148"). The fair value method of SFAS 123 required compensation expense to
be measured based on the fair value of the equity instrument at the grant or
award date. Stock-based compensation was accrued over the vesting period of the
grant or award, including grants or awards to retirement-eligible employees. As
required by SFAS 148, the Company discloses the pro forma impact as if the stock
options granted prior to January 1, 2003 had been accounted for using the fair
value provisions of SFAS 123 rather than the intrinsic value method prescribed
by APB 25. See Note 8.
9
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Effective January 1, 2006, the Company adopted, using the modified
prospective transition method, SFAS No. 123 (revised 2004), Share-Based Payment
("SFAS 123(r)"), which replaces SFAS 123 and supersedes APB 25. The adoption of
SFAS 123(r) did not have a significant impact on the Company's financial
position or results of operations. SFAS 123(r) requires that the cost of all
stock-based transactions be measured at fair value and recognized over the
period during which a grantee is required to provide goods or services in
exchange for the award. Although the terms of the Company's stock-based plans do
not accelerate vesting upon retirement, or the attainment of retirement
eligibility, the requisite service period subsequent to attaining such
eligibility is considered nonsubstantive. Accordingly, the Company recognizes
compensation expense related to stock-based awards over the shorter of the
requisite service period or the period to attainment of retirement eligibility.
SFAS 123(r) also requires an estimation of future forfeitures of stock-based
awards to be incorporated into the determination of compensation expense when
recognizing expense over the requisite service period.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
As described previously, effective January 1, 2006, the Company adopted
SFAS 123(r) -- including supplemental application guidance issued by the
Securities and Exchange Commission in Staff Accounting Bulletin No. 107,
Share-Based Payment ("SAB 107") -- using the modified prospective transition
method. In accordance with the modified prospective transition method, results
for prior periods have not been restated. SFAS 123(r) requires that the cost of
all stock-based transactions be measured at fair value and recognized over the
period during which a grantee is required to provide goods or services in
exchange for the award. The Company had previously adopted the fair value method
of accounting for stock-based awards as prescribed by SFAS 123 on a prospective
basis effective January 1, 2003, and prior to January 1, 2003, accounted for its
stock-based awards to employees under the intrinsic value method prescribed by
APB 25. The Company did not modify the substantive terms of any existing awards
prior to adoption of SFAS 123(r).
Under the modified prospective transition method, compensation expense
recognized in the three months ended March 31, 2006 includes: (a) compensation
expense for all stock-based awards granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value estimated in accordance with
the original provisions of SFAS 123, and (b) compensation expense for all
stock-based awards granted beginning January 1, 2006, based on the grant date
fair value estimated in accordance with the provisions of SFAS 123(r).
The adoption of SFAS 123(r) did not have a significant impact on the
Company's financial position or results of operations as all stock-based awards
accounted for under the intrinsic value method prescribed by APB 25 had vested
prior to the adoption date and the Company had adopted the fair value
recognition provisions of SFAS 123 on January 1, 2003. As required by SFAS 148,
and carried forward in the provisions of SFAS 123(r), the Company discloses the
pro forma impact as if stock-based awards accounted for under APB 25 had been
accounted for under the fair value method in Note 8.
SFAS 123 allowed forfeitures of stock-based awards to be recognized as a
reduction of compensation expense in the period in which the forfeiture
occurred. Upon adoption of SFAS 123(r), the Company changed its policy and now
incorporates an estimate of future forfeitures into the determination of
compensation expense when recognizing expense over the requisite service period.
The impact of this change in accounting policy was not significant to the
Company's financial position or results of operations.
Additionally, for awards granted after adoption, the Company changed its
policy from recognizing expense for stock-based awards over the requisite
service period to recognizing such expense over the shorter of the requisite
service period or the period to attainment of retirement eligibility. The pro
forma impact of this change in expense recognition policy for stock-based
compensation is detailed in Note 8.
10
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Prior to the adoption of SFAS 123(r), the Company presented tax benefits of
deductions resulting from the exercise of stock options within operating cash
flows in the unaudited interim condensed consolidated statements of cash flow.
SFAS 123(r) requires tax benefits resulting from tax deductions in excess of the
compensation cost recognized for those options ("excess tax benefits") be
classified and reported as a financing cash inflow upon adoption of SFAS 123(r).
The Company has adopted guidance relating to derivative financial
instruments as follows:
- Effective January 1, 2006, the Company adopted prospectively SFAS No.
155, Accounting for Certain Hybrid Instruments ("SFAS 155"). SFAS 155
amends SFAS No. 133, Accounting for Derivative Instruments and Hedging
("SFAS 133") and SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities ("SFAS 140"). SFAS
155 allows financial instruments that have embedded derivatives to be
accounted for as a whole, eliminating the need to bifurcate the
derivative from its host, if the holder elects to account for the whole
instrument on a fair value basis. In addition, among other changes, SFAS
155 (i) clarifies which interest-only strips and principal-only strips
are not subject to the requirements of SFAS 133; (ii) establishes a
requirement to evaluate interests in securitized financial assets to
identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring
bifurcation; (iii) clarifies that concentrations of credit risk in the
form of subordination are not embedded derivatives; and (iv) eliminates
the prohibition on a qualifying special-purpose entity ("QSPE") from
holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial interest. The adoption
of SFAS 155 did not have a material impact on the Company's unaudited
interim condensed consolidated financial statements.
- Effective January 1, 2006, the Company adopted prospectively 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 SFAS
133 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 occurring 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. The adoption of Issues B38 and B39 did
not have a material impact on the Company's unaudited interim condensed
consolidated financial statements.
Effective January 1, 2006, the Company adopted prospectively Emerging
Issues Task Force ("EITF") 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 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. The adoption of EITF 05-7 did not have a material impact on the
Company's unaudited interim condensed consolidated financial statements.
Effective January 1, 2006, the Company adopted EITF 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
11
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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 was 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. The adoption of EITF 05-8 did not have a material impact on the
Company's unaudited interim condensed consolidated financial statements.
Effective January 1, 2006, the Company adopted 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. The adoption of SFAS 154 did not have a
material impact on the Company's 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. For all other limited partnerships, EITF 04-5 required adoption
by January 1, 2006 through a cumulative effect of a change in accounting
principle recorded in opening equity or applied retrospectively by adjusting
prior period financial statements. The adoption of the provisions of EITF 04-5
did not have a material impact on the Company's unaudited interim condensed
consolidated financial statements.
Effective November 9, 2005, the Company prospectively adopted the guidance
in Financial Accounting Standards Board ("FASB") Staff Position ("FSP") FAS
140-2, Clarification of the Application of Paragraphs 40(b) and 40(c) of FAS 140
("FSP 140-2"). FSP 140-2 clarified certain criteria relating to derivatives and
beneficial interests when considering whether an entity qualifies as a QSPE.
Under FSP 140-2, the criteria must only be met at the date the QSPE issues
beneficial interests or when a derivative financial instrument needs to be
replaced upon the occurrence of a specified event outside the control of the
transferor. The adoption of FSP 140-2 did not 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 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 for fiscal periods beginning
after June 15, 2005. The adoption of 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
12
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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 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 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 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. As required by FSP 115-1, the Company
adopted this guidance on a prospective basis, which had no material impact on
the Company's unaudited interim condensed consolidated financial statements, and
has provided the required disclosures.
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. As of March 31, 2005, the
Company was evaluating the impacts of the repatriation provision of the AJCA and
during the second half of 2005, the Company recorded a $27 million income tax
benefit related to the repatriation of foreign earnings pursuant to Internal
Revenue Code Section 965 for which a U.S. deferred income tax provision had
previously been recorded.
FUTURE ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets -- an amendment of FASB Statement No. 140 ("SFAS 156"). SFAS
156 amends the guidance in SFAS 140. Among other requirements, SFAS 156 requires
an entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a
servicing contract in certain situations. SFAS 156 will be applied prospectively
and is effective for fiscal years beginning after September 15, 2006. SFAS 156
is not expected to have a material impact on the Company's consolidated
financial statements.
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 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
13
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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 consolidated
financial statements.
2. ACQUISITIONS AND DISPOSITIONS
TRAVELERS
On July 1, 2005, the Holding Company completed the acquisition of Travelers
for $12.0 billion. The results of Travelers' operations were included in the
Company's unaudited interim condensed consolidated financial statements
beginning July 1, 2005. As a result of the acquisition, management of the
Company increased significantly the size and scale of the Company's core
insurance and annuity products and expanded the Company's presence in both the
retirement & savings domestic and international markets. 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 cash on-hand, the purchase price was financed through the
issuance of common stock, debt securities, common equity units and preferred
shares. The acquisition was 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.
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 resulted in goodwill of $4.2 billion as follows:
<Table>
<Caption>
AS OF JULY 1, 2005
------------------
(IN MILLIONS)
Total assets acquired.............................. $ 97,862
Total liabilities assumed.......................... (90,073)
--------
Net assets acquired................................ 7,789
Goodwill, resulting from acquisition............... 4,177
--------
Total purchase price............................. $ 11,966
========
</Table>
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 including certain future policy benefit
liabilities. In no case will these adjustments extend beyond one year from the
acquisition date or July 1, 2006.
As part of the integration of Travelers' operations, management approved
and initiated plans to reduce approximately 1,000 domestic and international
Travelers employees, which are expected to be completed by December 2006. At
March 31, 2006 and December 31, 2005, MetLife accrued restructuring costs of
approximately $21 million and $28 million, respectively, which included
severance, relocation and outplacement services for Travelers' employees. For
the three months ended March 31, 2006, cash payments of approximately $7 million
were made. The estimated total restructuring expenses may change as management
14
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
continues to execute the approved plan. Decreases to these estimates are
recorded as an adjustment to goodwill. 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.
OTHER ACQUISITIONS AND DISPOSITIONS
On September 1, 2005, the Company completed the acquisition of CitiStreet
Associates, a division of CitiStreet LLC, which 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 was integrated with MetLife Resources, a division of
MetLife dedicated to providing retirement plans and financial services to the
same markets.
See Note 12 for information on the dispositions of P.T. Sejahtera ("MetLife
Indonesia") and SSRM Holdings, Inc. ("SSRM").
3. INVESTMENTS
FIXED MATURITIES 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 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>
MARCH 31, 2006
--------------------------------------------------
COST OR GROSS UNREALIZED
AMORTIZED ----------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
--------- ------- ------- ---------- -----
(IN MILLIONS)
U.S. corporate securities.............. $ 73,621 $1,866 $1,590 $ 73,897 30.8%
Residential mortgage-backed
securities........................... 52,630 241 855 52,016 21.7
Foreign corporate securities........... 34,287 1,480 739 35,028 14.6
U.S. Treasury/agency securities........ 27,418 872 566 27,724 11.6
Commercial mortgage-backed
securities........................... 20,286 155 412 20,029 8.3
Asset-backed securities................ 13,656 74 100 13,630 5.7
Foreign government securities.......... 10,324 1,269 54 11,539 4.8
State and political subdivision
securities........................... 4,768 146 75 4,839 2.0
Other fixed maturity securities........ 955 18 39 934 0.4
-------- ------ ------ -------- -----
Total bonds.......................... 237,945 6,121 4,430 239,636 99.9
Redeemable preferred stock............. 195 2 5 192 0.1
-------- ------ ------ -------- -----
Total fixed maturities............... $238,140 $6,123 $4,435 $239,828 100.0%
======== ====== ====== ======== =====
Common stock........................... $ 1,983 $ 341 $ 23 $ 2,301 68.6%
Non-redeemable preferred stock......... 1,029 43 17 1,055 31.4
-------- ------ ------ -------- -----
Total equity securities.............. $ 3,012 $ 384 $ 40 $ 3,356 100.0%
======== ====== ====== ======== =====
</Table>
15
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
DECEMBER 31, 2005
--------------------------------------------------
COST OR GROSS UNREALIZED
AMORTIZED ----------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
--------- ------- ------- ---------- -----
(IN MILLIONS)
U.S. corporate securities.............. $ 72,339 $2,814 $ 835 $ 74,318 32.3%
Residential mortgage-backed
securities........................... 47,365 353 472 47,246 20.5
Foreign corporate securities........... 33,578 1,842 439 34,981 15.2
U.S. Treasury/agency securities........ 25,643 1,401 86 26,958 11.7
Commercial mortgage-backed
securities........................... 17,682 223 207 17,698 7.7
Asset-backed securities................ 11,533 91 51 11,573 5.0
Foreign government securities.......... 10,080 1,401 35 11,446 5.0
State and political subdivision
securities........................... 4,601 185 36 4,750 2.1
Other fixed maturity securities........ 912 17 41 888 0.4
-------- ------ ------ -------- -----
Total bonds.......................... 223,733 8,327 2,202 229,858 99.9
Redeemable preferred stock............. 193 2 3 192 0.1
-------- ------ ------ -------- -----
Total fixed maturities............... $223,926 $8,329 $2,205 $230,050 100.0%
======== ====== ====== ======== =====
Common stock........................... $ 2,004 $ 250 $ 30 $ 2,224 66.6%
Non-redeemable preferred stock......... 1,080 45 11 1,114 33.4
-------- ------ ------ -------- -----
Total equity securities.............. $ 3,084 $ 295 $ 41 $ 3,338 100.0%
======== ====== ====== ======== =====
</Table>
16
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 March 31, 2006
and December 31, 2005:
<Table>
<Caption>
MARCH 31, 2006
------------------------------------------------------------------------------------------
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
---------- --------------- ---------- --------------- ---------- ---------------
(IN MILLIONS, EXCEPT NUMBER OF SECURITIES)
U.S. corporate
securities............ $ 37,068 $1,442 $3,557 $148 $ 40,625 $1,590
Residential mortgage-
backed securities..... 40,934 763 2,381 92 43,315 855
Foreign corporate
securities............ 16,315 648 1,846 91 18,161 739
U.S. Treasury/agency
securities............ 19,063 560 285 6 19,348 566
Commercial mortgage-
backed securities..... 14,855 379 825 33 15,680 412
Asset-backed
securities............ 6,764 89 356 11 7,120 100
Foreign government
securities............ 1,951 42 290 12 2,241 54
State and political
subdivision
securities............ 1,638 75 23 -- 1,661 75
Other fixed maturity
securities............ 222 37 51 2 273 39
-------- ------ ------ ---- -------- ------
Total bonds........... 138,810 4,035 9,614 395 148,424 4,430
Redeemable preferred
stock................. 6 4 12 1 18 5
-------- ------ ------ ---- -------- ------
Total fixed
maturities......... $138,816 $4,039 $9,626 $396 $148,442 $4,435
======== ====== ====== ==== ======== ======
Equity securities....... $ 601 $ 29 $ 143 $ 11 $ 744 $ 40
======== ====== ====== ==== ======== ======
Total number of
securities in an
unrealized loss
position.............. 12,853 1,303 14,156
======== ====== ========
</Table>
17
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
DECEMBER 31, 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
---------- --------------- ---------- --------------- ---------- ---------------
(IN MILLIONS, EXCEPT NUMBER OF SECURITIES)
U.S. corporate
securities............ $29,018 $ 737 $2,685 $ 98 $ 31,703 $ 835
Residential mortgage-
backed securities..... 31,258 434 1,291 38 32,549 472
Foreign corporate
securities............ 13,185 378 1,728 61 14,913 439
U.S. Treasury/agency
securities............ 7,759 85 113 1 7,872 86
Commercial mortgage-
backed securities..... 10,190 185 685 22 10,875 207
Asset-backed
securities............ 4,709 42 305 9 5,014 51
Foreign government
securities............ 1,203 31 327 4 1,530 35
State and political
subdivision
securities............ 1,050 36 16 -- 1,066 36
Other fixed maturity
securities............ 319 36 52 5 371 41
------- ------ ------ ---- -------- ------
Total bonds........... 98,691 1,964 7,202 238 105,893 2,202
Redeemable preferred
stock................. 77 3 -- -- 77 3
------- ------ ------ ---- -------- ------
Total fixed
maturities......... $98,768 $1,967 $7,202 $238 $105,970 $2,205
======= ====== ====== ==== ======== ======
Equity securities....... $ 671 $ 34 $ 131 $ 7 $ 802 $ 41
======= ====== ====== ==== ======== ======
Total number of
securities in an
unrealized loss
position.............. 12,787 932 13,719
======= ====== ========
</Table>
18
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
AGING OF GROSS UNREALIZED LOSSES FOR FIXED MATURITIES AND EQUITY SECURITIES
AVAILABLE-FOR-SALE
The following tables present the cost or amortized cost, gross unrealized
losses and number of securities for fixed maturities and equity securities at
March 31, 2006 and December 31, 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>
MARCH 31, 2006
------------------------------------------------------------
COST OR GROSS NUMBER OF
AMORTIZED COST UNREALIZED LOSS SECURITIES
------------------ ------------------ ------------------
LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR
20% MORE 20% MORE 20% MORE
--------- ------ --------- ------ --------- ------
(IN MILLIONS, EXCEPT FOR NUMBER OF SECURITIES)
Less than six months............ $ 91,526 $231 $1,828 $57 7,887 119
Six months or greater but less
than nine months.............. 48,645 11 2,057 6 4,477 18
Nine months or greater but less
than twelve months............ 3,068 4 118 2 348 4
Twelve months or greater........ 10,171 5 406 1 1,295 8
-------- ---- ------ --- ------ ---
Total......................... $153,410 $251 $4,409 $66 14,007 149
======== ==== ====== === ====== ===
</Table>
<Table>
<Caption>
DECEMBER 31, 2005
------------------------------------------------------------
COST OR GROSS NUMBER OF
AMORTIZED COST UNREALIZED LOSS SECURITIES
------------------ ------------------ ------------------
LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR
20% MORE 20% MORE 20% MORE
--------- ------ --------- ------ --------- ------
(IN MILLIONS, EXCEPT FOR NUMBER OF SECURITIES)
Less than six months............ $ 92,512 $213 $1,707 $51 11,441 308
Six months or greater but less
than nine months.............. 3,704 5 108 2 456 7
Nine months or greater but less
than twelve months............ 5,006 -- 133 -- 573 2
Twelve months or greater........ 7,555 23 240 5 924 8
-------- ---- ------ --- ------ ---
Total......................... $108,777 $241 $2,188 $58 13,394 325
======== ==== ====== === ====== ===
</Table>
19
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
As of March 31, 2006 and December 31, 2005, the Company had $4,475 million
and $2,246 million, respectively, of gross unrealized losses related to its
fixed maturities and equity securities. These securities are concentrated,
calculated as a percentage of gross unrealized loss, as follows:
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2006 2005
--------- ------------
SECTOR:
U.S. corporates........................................... 36% 37%
Residential mortgage-backed............................... 19 21
Foreign corporates........................................ 17 20
Other..................................................... 28 22
--- ---
Total.................................................. 100% 100%
=== ===
INDUSTRY:
Mortgage-backed........................................... 27% 30%
Industrial................................................ 20 22
Finance................................................... 10 11
Other..................................................... 43 37
--- ---
Total.................................................. 100% 100%
=== ===
</Table>
As of March 31, 2006, $4,409 million of unrealized losses related to
securities with an unrealized loss position less than 20% of cost or amortized
cost, which represented 3% of the cost or amortized cost of such securities. As
of December 31, 2005, $2,188 million of unrealized losses related to securities
with an unrealized loss position less than 20% of cost or amortized cost, which
represented 2% of the cost or amortized cost of such securities.
As of March 31, 2006, $66 million of unrealized losses related to
securities with an unrealized loss position of 20% or more of cost or amortized
cost, which represented 26% of the cost or amortized cost of such securities. Of
such unrealized losses of $66 million, $57 million have been in an unrealized
loss position for a period of less than six months. As of December 31, 2005, $58
million of unrealized losses related to securities with an unrealized loss
position of 20% or more of cost or amortized cost, which represented 24% of the
cost or amortized cost of such securities. Of such unrealized losses of $58
million, $51 million have been in an unrealized loss position for a period of
less than six months.
The Company held 18 fixed maturities and equity securities with a gross
unrealized loss at March 31, 2006 each greater than $10 million. These
securities represented approximately 10% or $460 million in the aggregate of the
gross unrealized loss on fixed maturities and equity securities.
The Company performs a regular evaluation, on a security-by-security basis,
of its investment holdings in accordance with its impairment policy in order to
evaluate whether such securities are other-than-temporarily impaired. The
increase in the unrealized losses during the three months ended March 31, 2006
is principally driven by an increase in interest rates. Based upon the Company's
evaluation of the securities in accordance with its impairment policy, the cause
of the decline being principally attributable to the general rise in rates
during the period, and the Company's intent and ability to hold the fixed income
and equity securities with unrealized losses for a period of time sufficient for
them to recover, the Company has concluded that the aforementioned securities
are not other-than-temporarily impaired.
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 of Notes to
Consolidated Financial Statements included in the 2005 Annual Report.
20
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
NET INVESTMENT INCOME
The components of net investment income were as follows:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-------------------
2006 2005
------- -------
(IN MILLIONS)
Fixed maturities............................................ $3,401 $2,441
Equity securities........................................... 21 13
Mortgage and consumer loans................................. 609 529
Real estate and real estate joint ventures.................. 264 166
Policy loans................................................ 146 138
Other limited partnership interests......................... 208 105
Cash, cash equivalents and short-term investments........... 91 71
Other invested assets....................................... 131 82
------ ------
Total..................................................... 4,871 3,545
Less: Investment expenses................................... 632 329
------ ------
Net investment income..................................... $4,239 $3,216
====== ======
</Table>
NET INVESTMENT GAINS (LOSSES)
Net investment gains (losses) were as follows:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-------------------
2006 2005
------- -------
(IN MILLIONS)
Fixed maturities............................................ $(412) $(114)
Equity securities........................................... 33 93
Mortgage and consumer loans................................. 4 (11)
Real estate and real estate joint ventures.................. 21 --
Other limited partnership interests......................... (6) 2
Derivatives................................................. (212) 10
Other invested assets....................................... (13) 5
----- -----
Net investment gains (losses)............................. $(585) $ (15)
===== =====
</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
During 2005, the Company established a trading securities portfolio to
support investment strategies that involve the active and frequent purchase and
sale of securities and the execution of repurchase agreements. Trading
securities and repurchase agreement liabilities are recorded at fair value with
subsequent changes in fair value recognized in net investment income related to
fixed maturities.
21
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
At March 31, 2006 and December 31, 2005, trading securities are $883
million and $825 million, respectively. Repurchase agreements associated with
the trading securities portfolio, which are included within other liabilities,
are approximately $466 million and $460 million, respectively, at March 31, 2006
and December 31, 2005.
As part of the acquisition of Travelers on July 1, 2005, the Company
acquired Travelers' investment in Tribeca Citigroup Investments Ltd.
("Tribeca"). Tribeca 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 consolidated financial statements. At March 31,
2006 and December 31, 2005, approximately $470 million and $452 million,
respectively, of trading securities are related to Tribeca and approximately
$193 million and $190 million, respectively, of the repurchase agreements are
related to Tribeca. Net investment income associated with Tribeca for the three
months ended March 31, 2006 includes $11 million of interest and dividends
earned and net realized and unrealized gains (losses).
During the three months ended March 31, 2006 and 2005, excluding Tribeca,
interest and dividends earned on trading securities in addition to the net
realized and unrealized gains (losses) recognized on the trading securities and
the related repurchase agreement liabilities totaled $1 million and $2 million,
respectively. Changes in the fair value of such trading securities and
repurchase agreement liabilities, excluding Tribeca, held at March 31, 2006 and
2005 total $7 million and ($1) million for the three months ended March 31, 2006
and 2005, respectively.
Total net investment income (loss) on securities classified as trading and
repurchase agreement liabilities for the three months ended March 31, 2006 and
2005, including Tribeca, total $19 million and $1 million, respectively.
22
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>
MARCH 31, 2006 DECEMBER 31, 2005
------------------------------- -------------------------------
CURRENT MARKET CURRENT MARKET
OR FAIR VALUE OR FAIR VALUE
NOTIONAL -------------------- NOTIONAL --------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
-------- ------ ----------- -------- ------ -----------
(IN MILLIONS)
Interest rate swaps.................. $18,410 $ 663 $ 247 $20,444 $ 653 $ 69
Interest rate floors................. 10,975 81 -- 10,975 134 --
Interest rate caps................... 27,990 285 -- 27,990 242 --
Financial futures.................... 844 2 23 1,159 12 8
Foreign currency swaps............... 15,349 522 1,010 14,274 527 991
Foreign currency forwards............ 4,107 52 70 4,622 64 92
Options.............................. 872 355 5 815 356 6
Financial forwards................... 3,396 20 20 2,452 13 4
Credit default swaps................. 5,436 9 11 5,882 13 11
Synthetic GICs....................... 3,738 -- -- 5,477 -- --
Other................................ 250 26 -- 250 9 --
------- ------ ------ ------- ------ ------
Total.............................. $91,367 $2,015 $1,386 $94,340 $2,023 $1,181
======= ====== ====== ======= ====== ======
</Table>
The above table does not include notional values for equity futures, equity
financial forwards, and equity options. At March 31, 2006 and December 31, 2005,
the Company owned 1,466 and 3,305 equity futures contracts, respectively. Equity
futures market values are included in financial futures in the preceding table.
At both March 31, 2006 and December 31, 2005, the Company owned 213,000 equity
financial forwards. Equity financial forwards market values are included in
financial forwards in the preceding table. At March 31, 2006 and December 31,
2005, the Company owned 5,237,594 and 4,720,254 equity options, respectively.
Equity options market values are included in options in the preceding table.
This information should be read in conjunction with Note 4 of Notes to
Consolidated Financial Statements included in the 2005 Annual Report.
HEDGING
The table below provides a summary of the notional amount and fair value of
derivatives by type of hedge designation at:
<Table>
<Caption>
MARCH 31, 2006 DECEMBER 31, 2005
------------------------------- -------------------------------
FAIR VALUE FAIR VALUE
NOTIONAL -------------------- NOTIONAL --------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
-------- ------ ----------- -------- ------ -----------
(IN MILLIONS)
Fair value........................... $ 5,349 $ 75 $ 136 $ 4,506 $ 51 $ 104
Cash flow............................ 2,357 39 105 8,301 31 505
Foreign operations................... 2,070 17 59 2,005 13 70
Non-qualifying....................... 81,591 1,884 1,086 79,528 1,928 502
------- ------ ------ ------- ------ ------
Total.............................. $91,367 $2,015 $1,386 $94,340 $2,023 $1,181
======= ====== ====== ======= ====== ======
</Table>
23
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
The following table provides the settlement payments recorded in income for
the:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
----- -----
(IN MILLIONS)
Qualifying hedges:
Net investment income..................................... $23 $(5)
Interest credited to policyholder account balances........ (6) 7
Other expenses............................................ -- (1)
Non-qualifying hedges:
Net investment gains (losses)............................. 35 24
--- ---
Total.................................................. $52 $25
=== ===
</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) interest
rate futures to hedge against changes in value of fixed rate securities.
The Company recognized net investment gains (losses) representing the
ineffective portion of all fair value hedges as follows:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
----- -----
(IN MILLIONS)
Changes in the fair value of derivatives.................... $ (6) $ 22
Changes in the fair value of the items hedged............... (15) (21)
---- ----
Net ineffectiveness of fair value hedging activities........ $(21) $ 1
==== ====
</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; and (iv) financial
forwards to buy and sell securities.
For the three months ended March 31, 2006 and 2005, the Company recognized
net investment gains (losses) of $0 million and ($42) 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
ended
24
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
March 31, 2006 and 2005 related to such discontinued cash flow hedges were
losses of $1 million and $25 million, respectively. There were no hedged
forecasted transactions, other than the receipt or payment of variable interest
payments.
Presented below is a roll forward of the components of other comprehensive
income (loss), before income taxes, related to cash flow hedges:
<Table>
<Caption>
THREE MONTHS ENDED YEAR ENDED THREE MONTHS ENDED
MARCH 31, 2006 DECEMBER 31, 2005 MARCH 31, 2005
------------------ -------------------- ------------------
(IN MILLIONS)
Other comprehensive income (loss) balance
at the beginning of the period......... $(142) $(456) $(456)
Gains (losses) deferred in other
comprehensive income (loss) on the
effective portion of cash flow
hedges................................. (4) 270 91
Amounts reclassified to net investment
gains (losses)......................... 5 44 25
Amounts reclassified to net investment
income................................. 1 2 1
Amortization of transition adjustment.... (1) (2) (1)
----- ----- -----
Other comprehensive income (loss) balance
at the end of the period............... $(141) $(142) $(340)
===== ===== =====
</Table>
HEDGES OF NET INVESTMENTS IN FOREIGN OPERATIONS
The Company uses forward exchange contracts, foreign currency swaps and
options 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 ended March 31, 2006 and 2005.
The Company's consolidated statements of stockholders' equity for the three
months ended March 31, 2006 and the year ended December 31, 2005 include gains
(losses) of $12 million and ($115) million, respectively, related to foreign
currency contracts and non-derivative financial instruments used to hedge its
net investments in foreign operations. At March 31, 2006 and December 31, 2005,
the cumulative foreign currency translation loss recorded in accumulated other
comprehensive income related to these hedges was $160 million and $172 million,
respectively. When net investments in foreign operations are sold or
substantially liquidated, the amounts in accumulated other comprehensive income
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 interest rate 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) credit default swaps to diversify its credit risk exposure in
certain portfolios; (vi) equity futures, equity index options, interest rate
futures and equity variance swaps to economically hedge liabilities embedded in
certain variable annuity products; (vii) swap spread locks to hedge invested
assets against the risk of changes in credit spreads; (viii) financial forwards
to buy and sell securities; (ix) synthetic GICs to
25
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
synthetically create traditional GICs; (x) RSATs and TRRs to synthetically
create investments; and (xi) basis swaps to better match the cash flows from
assets and related liabilities.
For the three months ended March 31, 2006 and 2005, the Company recognized
as net investment gains (losses) changes in fair value of ($241) million and $40
million, respectively, related to derivatives that do not qualify for hedge
accounting. For the three months ended March 31, 2006 and 2005, the Company
recorded changes in fair value of ($20) million and $2 million, respectively, as
interest credited to policyholder account balances related to derivatives that
do not qualify for hedge accounting. For the three months ended March 31, 2006,
the Company recorded changes in fair value of ($17) million as net investment
income related to economic hedges of equity method investments in joint ventures
that do not qualify for hedge accounting. The Company had no economic hedges of
equity method investments in joint ventures for the three months ended March 31,
2005.
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 minimum withdrawal contracts, guaranteed minimum
accumulation contracts and modified coinsurance contracts. The fair value of the
Company's embedded derivative assets was $110 million and $50 million at March
31, 2006 and December 31, 2005, respectively. The fair value of the Company's
embedded derivative liabilities was $4 million and $45 million at March 31, 2006
and December 31, 2005, respectively. The amounts recorded in net investment
gains (losses) during the three months ended March 31, 2006 and 2005 were gains
of $101 million and $34 million, respectively.
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.
The Company manages its credit risk related to over-the-counter derivatives
by entering into transactions with creditworthy counterparties, maintaining
collateral arrangements and through the use of master agreements that provide
for a single net payment to be made by one counterparty to another at each due
date and upon termination. Because exchange traded futures 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 instruments.
The Company enters into various collateral arrangements, which require both
the pledging and accepting of collateral in connection with its derivative
instruments. As of March 31, 2006 and December 31, 2005, the Company was
obligated to return cash collateral under its control of $189 million and $195
million, respectively. This unrestricted cash collateral is included in cash and
cash equivalents and the obligation to return it is included in payables for
collateral under securities loaned and other transactions in the consolidated
balance sheets. As of March 31, 2006 and December 31, 2005, the Company had also
accepted collateral consisting of various securities with a fair market value of
$423 million and $427 million, respectively, which are held in separate
custodial accounts. The Company is permitted by contract to sell or repledge
this collateral, but as of March 31, 2006 and December 31, 2005, none of the
collateral had been sold or repledged.
As of March 31, 2006 and December 31, 2005, the Company provided collateral
of $6 million and $4 million, respectively, which is included in other assets in
the consolidated balance sheets. The counterparties are permitted by contract to
sell or repledge this collateral.
26
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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.
27
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Liabilities and assets designated to the closed block are as follows:
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2006 2005
------------ ---------------
(IN MILLIONS)
CLOSED BLOCK LIABILITIES
Future policy benefits...................................... $42,706 $42,759
Other policyholder funds.................................... 280 257
Policyholder dividends payable.............................. 718 693
Policyholder dividend obligation............................ 814 1,607
Payables for collateral under securities loaned and other
transactions.............................................. 5,160 4,289
Other liabilities........................................... 262 200
------- -------
Total closed block liabilities......................... 49,940 49,805
------- -------
ASSETS DESIGNATED TO THE CLOSED BLOCK
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost: $29,303 and $27,892, respectively).... 29,915 29,270
Trading securities, at fair value (cost: $2 and $3,
respectively).......................................... 2 3
Equity securities available-for-sale, at fair value (cost:
$1,188 and $1,180, respectively)....................... 1,410 1,341
Mortgage loans on real estate............................. 7,644 7,790
Policy loans.............................................. 4,131 4,148
Short-term investments.................................... 26 41
Other invested assets..................................... 382 477
------- -------
Total investments...................................... 43,510 43,070
Cash and cash equivalents................................... 450 512
Accrued investment income................................... 483 506
Deferred income taxes....................................... 735 902
Premiums and other receivables.............................. 259 270
------- -------
Total assets designated to the closed block............ 45,437 45,260
------- -------
Excess of closed block liabilities over assets designated to
the closed block.......................................... 4,503 4,545
------- -------
Amounts included in accumulated other comprehensive income
(loss):
Net unrealized investment gains, net of deferred income
taxes of $299 and $554, respectively................... 535 985
Unrealized derivative gains (losses), net of deferred
income tax benefit of $(17) and $(17), respectively.... (31) (31)
Allocated to policyholder dividend obligation, net of
deferred income tax benefit of $(283) and $(538),
respectively........................................... (504) (954)
------- -------
Total amounts included in accumulated other comprehensive
income (loss).......................................... -- --
------- -------
Maximum future earnings to be recognized from closed block
assets and liabilities.................................... $ 4,503 $ 4,545
======= =======
</Table>
28
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Information regarding the closed block policyholder dividend obligation is
as follows:
<Table>
<Caption>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2006 2005
------------------ ------------
(IN MILLIONS)
Balance at beginning of period......................... $1,607 $2,243
Impact on revenues, net of expenses and income taxes... (88) (9)
Change in unrealized investment and derivative gains
(losses)............................................. (705) (627)
------ ------
Balance at end of period............................... $ 814 $1,607
====== ======
</Table>
Closed block revenues and expenses are as follows:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
------- -------
(IN MILLIONS)
REVENUES
Premiums.................................................... $ 698 $ 719
Net investment income and other revenues.................... 594 599
Net investment gains (losses)............................... (64) (21)
------ ------
Total revenues......................................... 1,228 1,297
------ ------
EXPENSES
Policyholder benefits and claims............................ 821 812
Policyholder dividends...................................... 366 363
Change in policyholder dividend obligation.................. (88) (12)
Other expenses.............................................. 64 66
------ ------
Total expenses......................................... 1,163 1,229
------ ------
Revenues, net of expenses before income taxes............... 65 68
Income taxes................................................ 23 24
------ ------
Revenues, net of expenses and income taxes.................. $ 42 $ 44
====== ======
</Table>
The change in maximum future earnings of the closed block is as follows:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
------- -------
(IN MILLIONS)
Balance at end of period.................................... $4,503 $4,668
Balance at beginning of period.............................. 4,545 4,712
------ ------
Change during period........................................ $ (42) $ (44)
====== ======
</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.
29
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
6. CONTINGENCIES, COMMITMENTS AND GUARANTEES
CONTINGENCIES
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 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. Liabilities have been established for a
number of the matters noted below. It is possible that some of the matters could
require the Company to pay damages or make other expenditures or establish
accruals in amounts that could not be estimated as of March 31, 2006.
Sales Practices Claims
Over the past several years, Metropolitan Life, New England Mutual Life
Insurance Company, with which Metropolitan Life merged in 1996 ("New England
Mutual"), and General American Life Insurance Company, which was acquired in
2000 ("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 and
General American 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
30
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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 or other
proceedings relating to the sale of mutual funds and other products, have been
brought. As of March 31, 2006, there are approximately 332 sales practices
litigation matters pending against Metropolitan Life; approximately 46 sales
practices litigation matters pending against New England Mutual, New England
Life Insurance Company, and New England Securities Corporation (collectively,
"New England"); approximately 44 sales practices litigation matters pending
against General American; and approximately 28 sales practices litigation
matters pending against Walnut Street Securities, Inc. ("Walnut Street"). In
addition, similar litigation matters are pending against MetLife Securities,
Inc. ("MSI"). Metropolitan Life, New England, General American, MSI and Walnut
Street continue to defend themselves vigorously against these litigation
matters. Some individual sales practices claims have been resolved through
settlement, won by dispositive motions, or have gone to trial. The outcomes of
trials have varied, and appeals are pending in several matters. 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, MSI
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,
MSI'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 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
31
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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.
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.
As reported in the 2005 Annual Report, Metropolitan Life received
approximately 18,500 asbestos-related claims in 2005. During the three months
ended March 31, 2006 and 2005, Metropolitan Life received approximately 2,220
and 5,900 asbestos-related claims, respectively.
See Note 12 of Notes to Consolidated Financial Statements included in the
2005 Annual Report for historical information concerning asbestos claims and
MetLife's increase of its recorded liability at December 31, 2002.
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, management 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
32
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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, $15.1 million with respect to 2004 claims, $12.7 million
with respect to 2005 claims and estimated as of March 31, 2006, to be
approximately $60.7 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's ("MPC") 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 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. The court recently granted MPC's motion to dismiss the fraud claim in
the second suit.
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. The parties have reached an agreement to settle this suit. 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.
Ten lawsuits are pending against MPC (five in Louisiana and five in
Mississippi) relating to Hurricane Katrina, including two purported class
actions in Louisiana. It is reasonably possible other actions will be filed. The
Company intends to vigorously defend these matters.
33
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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 New York
Superintendent of Insurance (the "Superintendent") and the underwriters for
MetLife, Inc.'s initial public offering, Goldman Sachs & Company and Credit
Suisse First Boston. 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 May 2, 2006, the trial court issued a decision granting
plaintiffs' motion to certify a litigation class with respect to their claim
that defendants violated section 7312 of the New York Insurance Law, but finding
that plaintiffs had not met the requirements for certifying a class with respect
to a fraud claim. Defendants have a right to appeal this decision. 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 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 sought to vacate the Superintendent's Opinion and
Decision and enjoin him from granting final approval of the plan. On November
10, 2005, the trial court granted respondents' motions to dismiss this
proceeding. Petitioners have filed a notice of appeal. 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 filed a petition seeking permission
for an interlocutory appeal from this order; on or about March 29, 2006, the
United States Court of Appeals for the Second Circuit denied the petition.
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.
34
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Other
A putative class action which commenced in October 2000 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. In September
2005, Metropolitan Life's motion for summary judgment was granted. Plaintiffs
have moved for reconsideration.
In May 2003, the American Dental Association and three individual providers
sued MetLife and Cigna in a purported class action lawsuit brought in the United
States District Court for the Southern District of Florida. 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. The
court has issued a tag-along order, related to a medical managed care trial,
which will stay the lawsuit indefinitely.
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. General
American has responded to the Wells Notice. The Company is fully cooperating
with regard to regulatory requests and investigations. The Company at the
present time is not aware of any systemic problems with respect to such matters
that may have a material adverse effect on the Company's consolidated financial
position.
In April 2006, the SEC and Metropolitan Life Insurance Company resolved a
formal investigation of Metropolitan Life relating to certain sales by a former
MetLife sales representative to the Sheriff's Department of Fulton County,
Georgia. The settlement includes a payment to the SEC of a $250,000 fine.
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
35
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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 Ohio Department of Insurance has
requested documents regarding a broker and certain Ohio public entity groups.
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 is suing in California state court Metropolitan Life,
Paragon Life Insurance Company 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, 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. A motion for class certification
has been filed. 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 MSI, New England
Securities Corporation ("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
36
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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.
Following an inquiry commencing in March 2004, the staff of the NASD has
notified MSI that it has made a preliminary determination to recommend charging
MSI with the 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. This notification follows an industry-wide inquiry by the NASD examining
sales of 529 plans. Under the NASD's procedures, MSI submitted its written
explanation of why it believes charges should not be filed. The NASD staff has
not made a formal recommendation regarding whether any action alleging
violations of applicable rules should be filed. MSI continues to cooperate fully
with the NASD.
In February 2006, the SEC commenced a formal investigation of NES in
connection with the suitability of its sales of variable universal life
insurance policies. The Company believes that others in the insurance industry
are the subject of similar investigations by the SEC. NES is cooperating fully
with the SEC.
MSI received in 2005 a notice from the Illinois Department of Securities
asserting possible violations of the Illinois Securities Act in connection with
sales of a former affiliate's mutual funds. A response has been submitted and
MSI intends to cooperate fully with the Illinois Department of Securities.
In August 1999, an amended putative class action complaint was filed in
Connecticut state court against MetLife Life and Annuity Company of Connecticut
("MLAC"), formerly The Travelers Life and Annuity Company, Travelers Equity
Sales, Inc. and certain former affiliates. The amended complaint alleges
Travelers Property Casualty Corporation, a former MLAC affiliate, purchased
structured settlement annuities from MLAC 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 MLAC, 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 MLAC: violation
of the Connecticut Unfair Trade Practice Statute, unjust enrichment, and civil
conspiracy. On June 15, 2004, the defendants appealed the class certification
order. In March 2006, the Connecticut Supreme Court reversed the trial court's
certification of a class. Plaintiff may seek upon remand to the trial court to
file another motion for class certification. MLAC and Travelers Equity Sales,
Inc. intend to continue to vigorously defend the matter.
A former registered representative of Tower Square Securities, Inc. ("Tower
Square"), a broker-dealer subsidiary of MetLife Insurance Company of
Connecticut, formerly The Travelers Insurance Company, 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. On April 18, 2006, the Connecticut Department of Banking
issued a notice to Tower Square asking it to demonstrate its prior compliance
with applicable Connecticut securities laws and regulations. In the context of
the above, two arbitration matters were commenced in 2005 against Tower Square.
In one of the matters, defendants include other unaffiliated broker-dealers with
whom the registered representative was formerly registered. In May 2006, Tower
Square received a lawsuit filed by two claimants in Connecticut state court. It
is reasonably possible that other actions will be brought regarding this matter.
Tower Square intends to defend itself vigorously in all such cases. In another
matter, the NASD has made a preliminary determination that Tower Square violated
certain NASD rules relating to supervisory procedures, documentation and
compliance with the firm's anti-money laundering program. Tower Square intends
to fully cooperate with the SEC, the NASD and the Connecticut Department of
Banking.
37
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
Metropolitan Life also has been named as a defendant in numerous silicosis,
welding and mixed dust cases in various states. The Company intends to defend
itself vigorously against these cases.
Various litigation, including purported or certified class actions, and
various 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.
IMPACT OF HURRICANES
On August 29, 2005, Hurricane Katrina made landfall in the states of
Louisiana, Mississippi and Alabama causing catastrophic damage to these coastal
regions. During the three months ended March 31, 2006, the Company reduced its
total net losses recognized related to the catastrophe by $2 million, to $132
million, net of income taxes and reinsurance recoverables, and including
reinstatement premiums and other reinsurance-related premium adjustments at
March 31, 2006. The Auto & Home segment reduced its total net losses recognized
related to the catastrophe by $2 million to $118 million, net of income taxes
and reinsurance recoverables, and including reinstatement premiums and other
reinsurance-related premium adjustments at March 31, 2006. There was no change
in the Institutional segment's total net losses recognized related to the
catastrophe of $14 million, net of income taxes and reinsurance recoverables and
including reinstatement premiums and other reinsurance-related premium
adjustments at March 31, 2006. During the first quarter of 2006, MetLife's gross
losses from Katrina were reduced by $1 million to approximately $334 million at
March 31, 2006, primarily arising from the Company's homeowners business.
On October 24, 2005, Hurricane Wilma made landfall across the state of
Florida. During the three months ended March 31, 2006, the Company's Auto & Home
segment reduced its recognized total losses related to the catastrophe by $2
million to $30 million, net of income taxes and reinsurance recoverables.
MetLife's gross losses from Hurricane Wilma were increased by $2 million during
the three months ended March 31, 2006 to approximately $59 million at March 31,
2006 arising from the Company's homeowners and automobile businesses.
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 Hurricanes Katrina and Wilma and otherwise. In addition, as discussed
above, lawsuits, including purported class actions, have been filed in
Mississippi and Louisiana challenging denial of claims for damages caused to
38
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
property during Hurricane Katrina. Metropolitan Property and Casualty Insurance
Company ("MPC") is a named party in some of these lawsuits. In addition, rulings
in cases in which MPC is not a party may affect interpretation of its policies.
MPC intends to vigorously defend these matters. However, any adverse rulings
could result in an increase in the Company's hurricane-related claim exposure
and losses. Based on information known by management as of March 31, 2006, it
does not believe that additional claim losses resulting from Hurricane Katrina
will have a material adverse impact on the Company's unaudited interim condensed
consolidated financial statements.
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.
COMMITMENTS
COMMITMENTS TO FUND PARTNERSHIP INVESTMENTS
The Company makes commitments to fund partnership investments in the normal
course of business. The amounts of these unfunded commitments were $2,704
million and $2,684 million at March 31, 2006 and December 31, 2005,
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 $2,533 million and $2,974
million at March 31, 2006 and December 31, 2005, respectively.
OTHER COMMITMENTS
MetLife Insurance Company of Connecticut ("MICC"), formerly The Travelers
Insurance Company, is a member of the Federal Home Loan Bank of Boston (the
"FHLB of Boston") and holds $70 million of common stock of the FHLB of Boston,
which is included in equity securities on the Company's consolidated balance
sheets. MICC has also entered into several funding agreements with the FHLB of
Boston whereby MICC has issued such funding agreements in exchange for cash and
for which the FHLB of Boston has been granted a blanket lien on MICC's
residential mortgages and mortgage-backed securities to collateralize MICC's
obligations under the funding agreements. MICC 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 and the related security agreement represented by this
blanket lien provide that upon any event of default by MICC the FHLB of Boston's
recovery is limited to the amount of MICC's liability under the outstanding
funding agreements. The amount of the Company's liability for funding agreements
with the FHLB of Boston as of March 31, 2006 and December 31, 2005 is $926
million and $1.1 billion, respectively, which is included in policyholder
account balances.
39
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
MetLife Bank, National Association ("MetLife Bank" or "MetLife Bank, N.A.")
is a member of the Federal Home Loan Bank of New York (the "FHLB of NY") and
holds $46 million and $43 million of common stock of the FHLB of NY, at March
31, 2006 and December 31, 2005, respectively, which is included in equity
securities on the Company's consolidated balance sheets. MetLife Bank has also
entered into repurchase agreements with the FHLB of NY whereby MetLife Bank has
issued repurchase agreements in exchange for cash and for which the FHLB of NY
has been granted a blanket lien on MetLife Bank's residential mortgages and
mortgage-backed securities to collateralize MetLife Bank's obligations under the
repurchase agreements. MetLife Bank 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 repurchase
agreements and the related security agreement represented by this blanket lien
provide that upon any event of default by MetLife Bank the FHLB of NY's recovery
is limited to the amount of MetLife Bank's liability under the outstanding
repurchase agreements. The amount of the Company's liability for repurchase
agreements with the FHLB of NY as of March 31, 2006 and December 31, 2005 are
$938 million and $855 million, respectively, which is included in long-term
debt.
On December 12, 2005, Reinsurance Group of America, Incorporated ("RGA")
repurchased 1.6 million shares of its outstanding common stock at an aggregate
price of approximately $76 million under an accelerated share repurchase
agreement with a major bank. The bank borrowed the stock sold to RGA from third
parties and purchased the shares in the open market over the subsequent few
months to return to the lenders. RGA would either pay or receive an amount based
on the actual amount paid by the bank to purchase the shares. These repurchases
resulted in an increase in the Company's ownership percentage of RGA to
approximately to 53% at December 31, 2005 from approximately 52% at December 31,
2004. In February 2006, the final purchase price was determined resulting in a
cash settlement substantially equal to the aggregate cost. RGA recorded the
initial repurchase of shares as treasury stock and recorded the amount received
as an adjustment to the cost of the treasury stock. At March 31, 2006, the
Company's ownership percentage of RGA remains at approximately 53%.
GUARANTEES
In the normal 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, with a cumulative
maximum of $3.5 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 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.
40
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
The Company has also guaranteed minimum investment returns on certain
international retirement funds in accordance with local laws. Since these
guarantees are 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 guarantees in the future.
In the first quarter of 2006, the Company did not record any additional
liabilities for indemnities, guarantees and commitments. In the first quarter of
2005, the Company recorded a liability of $4 million with respect to indemnities
provided in connection with 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 under these indemnities is approximately $500
million. Due to the uncertainty in assessing changes to the liability over the
term, the liability on the Company's consolidated balance sheet will remain
until either expiration or settlement of the guarantee unless evidence clearly
indicates that the estimates should be revised. The Company's recorded
liabilities at both March 31, 2006 and December 31, 2005 for indemnities,
guarantees and commitments were $9 million.
In connection 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 $491 million at March 31, 2006. The credit default
swaps expire at various times during the next ten years.
7. EMPLOYEE BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Certain subsidiaries of the Holding Company (the "Subsidiaries") are
sponsors and/or administrators of 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.
The Subsidiaries also provide certain postemployment benefits and certain
postretirement health care and life insurance benefits for retired employees.
Employees of the Subsidiaries 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 subsidiary, may become eligible for these postretirement
benefits, at various levels, in accordance with the applicable plans.
The Subsidiaries have issued group annuity and life insurance contracts
supporting approximately 98% of all pension and postretirement employee benefit
plans assets sponsored by the Subsidiaries.
A December 31 measurement date is used for all of the Subsidiaries' defined
benefit pension and other postretirement benefit plans.
The components of net periodic benefit cost were as follows:
<Table>
<Caption>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------ -----------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ -----------------------
2006 2005 2006 2005
------ ------ ------- -------
(IN MILLIONS)
Service cost............................. $ 40 $ 36 $ 9 $ 9
Interest cost............................ 85 79 30 30
Expected return on plan assets........... (115) (112) (21) (20)
Amortization of prior service cost....... 2 4 (9) (5)
Amortization of prior actuarial losses... 33 29 6 4
----- ----- ---- ----
Net periodic benefit cost................ $ 45 $ 36 $ 15 $ 18
===== ===== ==== ====
</Table>
41
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
The Company disclosed in Note 13 of Notes to Consolidated Financial
Statements included in the 2005 Annual Report, that those subsidiaries which
participate in the pension and other postretirement benefit plans discussed
above expected to contribute to such plans $187 million and $128 million,
respectively, in 2006. During the three months ended March 31, 2006,
contributions of $158 million have been made to the pension plans and it is
anticipated that certain subsidiaries will contribute an additional $30 million
to fund such pension plans in 2006, for a total of $188 million. As of March 31,
2006, contributions of $25 million have been made to the other postretirement
benefit plans.
8. EQUITY
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.
Effective March 6, 2006, the Holding Company's board of directors declared
dividends of $0.3432031 per share, for a total of $9 million, on its Series A
preferred shares, and $0.4062500 per share, for a total of $24 million, on its
Series B preferred shares. Both dividends were paid on March 15, 2006 to
shareholders of record as of February 28, 2006.
See Note 14 of Notes to Consolidated Financial Statements included in the
2005 Annual Report for further information.
COMMON STOCK
The Company did not acquire any shares of the Holding Company's common
stock during the three months ended March 31, 2006 and 2005. During the three
months ended March 31, 2006 and 2005, 620,877 and 643,332 shares of common stock
were issued from treasury stock for $21 million in both periods. At March 31,
2006, the Holding Company had approximately $716 million remaining on the
October 26, 2004 common stock repurchase program. As a result of the acquisition
of Travelers, the Holding Company has 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 stock 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 approximately $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.
42
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
STOCK-BASED COMPENSATION
Overview
As described more fully in Note 1, effective January 1, 2006, the Company
adopted SFAS 123(r) using the modified prospective transition method. The
adoption of SFAS 123(r) did not have a significant impact on the Company's
consolidated financial position or consolidated results of operations.
Description of Plans
The MetLife, Inc. 2000 Stock Incentive Plan, as amended (the "Stock
Incentive Plan"), authorized the granting of awards in the form of options to
buy shares of Holding Company common stock ("Stock Options") that either qualify
as incentive Stock Options under Section 422A of the Internal Revenue Code or
are non-qualified. The MetLife, Inc. 2000 Directors Stock Plan, as amended (the
"Directors Stock Plan"), authorized the granting of awards in the form of Share
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 Stock Options, 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 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 and the LTPCP 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. Additional
shares carried forward from the Stock Incentive Plan and available for issuance
under the 2005 Stock Plan were 12,285,419 as of March 31, 2006. There were no
shares carried forward from the Directors Stock Plan. 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 are 2,000,000.
As of March 31, 2006, the aggregate number of shares remaining available for
issuance pursuant to the 2005 Stock Plan and the 2005 Directors Stock Plan were
67,419,164 and 1,970,919, respectively.
Stock Option exercises and other stock-based awards to employees settled in
shares are satisfied through the issuance of shares held in treasury by the
Company. Although the Company has suspended the currently authorized share
repurchase program, as described previously, sufficient treasury shares exist to
satisfy foreseeable obligations under the Incentive Plans.
Compensation expense related to awards under the Incentive Plans is
recognized based on the number of awards expected to vest, which represents the
awards granted less expected forfeitures over the life of the award, as
estimated at the date of grant. Unless a material deviation from the assumed
rate is observed during the term in which the awards are expensed, any
adjustment necessary to reflect differences in actual experience is recognized
in the period the award becomes payable or exercisable. Compensation expense of
$50 million and $23 million, and income tax benefits of $17 million and $8
million, related to the Incentive Plans was recognized for the three months
ended March 31, 2006 and 2005, respectively. Compensation
43
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
expense is principally related to the issuance of Stock Options, Performance
Shares and LTPCP arrangements.
As described in Note 1, the Company changed its policy prospectively for
recognizing expense for stock-based awards to retirement eligible employees. Had
the Company continued to recognize expense over the stated requisite service
period, compensation expense related to the Incentive Plans would have been $26
million, rather than $50 million, for the three-months ended March 31, 2006. Had
the Company applied the policy of recognizing expense related to stock-based
compensation over the shorter of the requisite service period or the period to
attainment of retirement eligibility for awards granted prior to January 1,
2006, proforma compensation expense would have been $40 million for the three
months ended March 31, 2006. Proforma compensation expense for the three months
ended March 31, 2005 under the revised policy would not have been materially
different from the actual expense recognized.
Stock Options
All Stock Options granted had an exercise price equal to the closing price
of the Holding Company's stock as reported on the New York Stock Exchange on the
date of grant, and have a maximum term of ten years. Certain Stock Options
granted under the Stock Incentive Plan and the 2005 Stock Plan have or will
become exercisable over a three year period commencing with the date of grant,
while other Stock Options have or will become exercisable three years after the
date of grant. Stock Options issued under the Directors Stock Plan were
exercisable immediately. The date at which a Stock Option issued under the 2005
Directors Stock Plan becomes exercisable is determined at the time such Stock
Option is granted.
A summary of the activity related to Stock Options for the three months
ended March 31, 2006 is presented. The aggregate intrinsic value was computed
using the closing share price on March 31, 2006 of $48.37 and $49.00 on December
30, 2005, as applicable.
<Table>
<Caption>
WEIGHTED
AVERAGE
WEIGHTED REMAINING
SHARES UNDER AVERAGE CONTRACTUAL AGGREGATE
OPTION EXERCISE PRICE TERM INTRINSIC VALUE
------------ -------------- ------------ ---------------
(YEARS) (IN MILLIONS)
Outstanding at January 1, 2006.... 24,381,783 $31.83 6.92 $419
====== ==== ====
Granted......................... 3,636,850
Exercised....................... (616,588)
Canceled/Expired................ (39,450)
Forfeited....................... (68,444)
----------
Outstanding at March 31, 2006..... 27,294,151 $34.30 7.24 $384
========== ====== ==== ====
Aggregate number of stock options
expected to vest at March 31,
2006............................ 26,525,376 $34.03 7.16 $380
========== ====== ==== ====
Exercisable, March 31, 2006....... 17,802,042 $29.97 6.21 $327
========== ====== ==== ====
</Table>
Prior to January 1, 2005, the Black-Scholes model was used to determine the
fair value of Stock Options granted and recognized in the financial statements
or as reported in the pro forma disclosure which follows. The fair value of
Stock Options issued on or after January 1, 2005 was estimated on the date of
grant using a binomial lattice model. The Company made this change because
lattice models produce more accurate option values due to the ability to
incorporate assumptions about grantee exercise behavior resulting from changes
in the price of the underlying shares. In addition, lattice models allow for
changes in critical assumptions over the
44
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
life of the option in comparison to closed-form models like Black-Scholes, which
require single-value assumptions at the time of grant.
The Company used daily historical volatility since the inception of trading
when calculating Stock Option values using the Black-Scholes model. In
conjunction with the change to the binomial lattice model, the Company began
estimating expected future volatility based on an analysis of historical prices
of the Holding Company's common stock and call options on that common stock
traded on the open market. The Company uses a weighted-average of the implied
volatility for publicly traded call options with the longest remaining maturity
nearest to the money as of each valuation date and the historical volatility,
calculated using monthly closing prices of the Holding Company's common stock.
The Company chose a monthly measurement interval for historical volatility as it
believes this better depicts the nature of employee option exercise decisions
being based on longer-term trends in the price of the underlying shares rather
than on daily price movements.
The risk-free rate is based on observed interest rates for instruments with
maturities similar to the expected term of the Stock Options. Whereas the
Black-Scholes model requires a single spot rate for instruments with a term
matching the expected life of the option at the valuation date, the binomial
lattice model allows for the use of different rates for each year over the
contractual term of the option. The table below presents the full range of
imputed forward rates for U.S. Treasury Strips that was used in the binomial
lattice model over the contractual term of all Stock Options granted in the
period.
Dividend yield is determined based on historical dividend distributions
compared to the price of the underlying common stock as of the valuation date
and held constant over the life of the Stock Option.
Use of the Black-Scholes model requires an input of the expected life of
the Stock Options, or the average number of years before Stock Options will be
exercised or expired. The Company estimated expected life using the historical
average years to exercise or cancellation and average remaining years
outstanding for vested Stock Options. Alternatively, the binomial model used by
the Company incorporates the contractual term of the Stock Options and then
considers expected exercise behavior and a post-vesting termination rate, or the
rate at which vested options are exercised or expire prematurely due to
termination of employment, to derive an expected life. The post-vesting
termination rate is determined from actual historical exercise and expiration
activity under the Incentive Plans. Exercise behavior in the binomial lattice
model used by the Company is expressed using an exercise multiple, which
reflects the ratio of exercise price to the strike price of Stock Options
granted at which holders of the Stock Options are expected to exercise. The
exercise multiple is derived from actual historical exercise activity.
No significant Stock Option grants were made during the three months ending
March 31, 2005. The following weighted-average assumptions, with the exception
of risk-free rate, which is expressed as a range, were used to determine the
fair value of Stock Options issued during the three months ended March 31, 2006:
<Table>
Dividend yield.............................................. 1.04%
Risk-free rate of return.................................... 4.16%-4.94%
Expected volatility......................................... 22.08%
Exercise multiple........................................... 1.52
Post-vesting termination rate............................... 4.11%
Contractual term (years).................................... 10
Weighted average exercise price of stock options granted.... $50.12
Weighted average fair value of stock options granted........ $13.82
</Table>
Compensation expense related to Stock Option awards expected to vest and
granted prior to January 1, 2006 is recognized ratably over the requisite
service period, which equals the vesting term. Compensation
45
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
expense related to Stock Option awards expected to vest and granted on or after
January 1, 2006 is recognized ratably over the requisite service period or the
period to retirement eligibility, if shorter. Compensation expense of $23
million and $10 million, related to Stock Options was recognized for the three
months ended March 31, 2006 and 2005, respectively.
Had compensation expense for grants awarded prior to January 1, 2003 been
determined based on the fair value at the date of grant, the Company's earnings
and earnings per common share amounts would have been reduced to the following
pro forma amounts for the three months ended March 31, 2005:
<Table>
<Caption>
(IN MILLIONS, EXCEPT
PER SHARE DATA)
Net income available to common shareholders................. $ 987
Add: Stock-option based employee compensation expense
included in reported net income, net of income
taxes.................................................. 7
Deduct: Total stock-option based employee compensation
determined under fair value based method for all
awards, net of income taxes............................ (8)
-----
Pro forma net income available to common shareholders....... $ 986
=====
BASIC EARNINGS PER COMMON SHARE
As reported................................................. $1.34
=====
Pro forma................................................... $1.34
=====
DILUTED EARNINGS PER COMMON SHARE
As reported................................................. $1.33
=====
Pro forma................................................... $1.33
=====
</Table>
As of March 31, 2006, there was $80 million of total unrecognized
compensation costs related to Stock Options. It is expected that these costs
will be recognized over a weighted average period of 2.13 years.
The following is a summary of Stock Option exercise activity for the:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-------------------
2006 2005
----- -----
(IN MILLIONS)
Total intrinsic value of stock options exercised............ $13 $ 7
Cash received from exercise of stock options................ $18 $19
Tax benefit realized from stock options exercised........... $ 4 $ 2
</Table>
Performance Shares
Beginning in 2005, certain members of management were awarded Performance
Shares under (and as defined in) 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: (i) the
change in annual net operating earnings per share, as defined; and (ii) the
proportionate total shareholder return, as defined, with reference to the
three-year performance period relative to other companies in the Standard &
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
46
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
(subject to certain contingencies) and will be payable entirely in shares of the
Holding Company common stock.
No Performance Shares were granted during the three months ended March 31,
2005. The following is a summary of Performance Share activity for the three
months ended March 31, 2006:
<Table>
Outstanding at January 1, 2006.............................. 1,029,700
Granted................................................... 875,975
Forfeited................................................. (6,250)
---------
Outstanding at March 31, 2006............................... 1,899,425
=========
Performance Shares expected to vest at March 31, 2006....... 1,812,360
=========
</Table>
Performance Share amounts above represent aggregate initial target awards
and do not reflect potential increases or decreases resulting from the final
performance factor to be determined at the end of the respective performance
period. None of the Performance Shares vested during the three months ended
March 31, 2006.
Performance Share awards are accounted for as equity awards but are not
credited with dividend-equivalents for actual dividends paid on the Holding
Company common stock during the performance period. Accordingly, the fair value
of Performance Shares is based upon the closing price of the Holding Company
common stock on the date of grant, reduced by the present value of estimated
dividends to be paid on that stock during the performance period. The grant date
fair value of Performance Shares issued during the three months ended March 31,
2006 was $48.40.
Compensation expense related to initial Performance Shares expected to vest
and granted prior to January 1, 2006 is recognized ratably during the
performance period. Compensation expense related to initial Performance Shares
expected to vest and granted on or after January 1, 2006 is recognized ratably
over the performance period or the period to retirement eligibility, if shorter.
Performance Shares expected to vest and the related compensation expenses may be
further adjusted by the performance factor most likely to be achieved, as
estimated by management, at the end of the performance period. Compensation
expense of $24 million and $3 million, related to Performance Shares was
recognized for the three months ended March 31, 2006 and 2005, respectively.
As of March 31, 2006, there was $68 million of total unrecognized
compensation costs related to Performance Share awards. It is expected that
these costs will be recognized over a weighted average period of 2.08 years.
Long-Term Performance Compensation Plan
Prior to January 1, 2005, the Company granted stock-based compensation to
certain members of management under LTPCP. Each participant was assigned a
target compensation amount (an "Opportunity Award") at the inception of the
performance period with the final compensation amount determined based on the
total shareholder return on the Holding Company's common stock over the
three-year performance period, subject to limited further adjustment approved by
the Holding Company's Board of Directors. Payments on the Opportunity Awards are
normally payable in their entirety (subject to certain contingencies) at the end
of the three-year performance period, and may be paid in whole or in part with
shares of the Holding Company's common stock, as approved by the Holding
Company's Board of Directors. There were no new grants under the LTPCP during
the three months ended March 31, 2006 or 2005.
A portion of each Opportunity Award under the LTPCP is expected to be
settled in shares of the Holding Company's common stock while the remainder will
be settled in cash. The portion of the Opportunity Award expected to be settled
in shares of the Holding Company's common stock is accounted for as an equity
award
47
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
with the fair value of the award determined based upon the closing price of the
Holding Company's common stock on the date of grant. The compensation expense
associated with the equity award, based upon the grant date fair value, is
recognized into expense ratably over the respective three-year performance
period. The portion of the Opportunity Award expected to be settled in cash is
accounted for as a liability and is remeasured using the closing price of the
Holding Company's common stock on the final day of each subsequent reporting
period during the three-year performance period.
Compensation expense of $3 million and $10 million, related to LTPCP
Opportunity Awards was recognized for the three months ended March 31, 2006 and
2005, respectively.
The aggregate fair value of LTPCP Opportunity Awards outstanding at March
31, 2006 was $104 million, of which $10 million was not yet recognized. It is
expected that these remaining costs will be recognized during 2006. LTPCP
Opportunity Awards with an aggregate fair value of $65 million vested during the
three months ended March 31, 2006. Payment in the form of 906,989 shares and $16
million in cash was made in the following quarter. It is expected that
approximately 760,000 additional shares and $12 million in cash will be issued
in future settlement of LTPCP Opportunity Awards expected to become payable in
the second quarter of 2007.
COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-------------------
2006 2005
-------- ------
(IN MILLIONS)
Net income.................................................. $ 747 $ 987
Other comprehensive income (loss):
Unrealized gains (losses) on derivative instruments, net
of income taxes........................................ 1 100
Unrealized investment gains (losses), net of related
offsets and income taxes............................... (1,323) (884)
Foreign currency translation adjustment................... -- (63)
Minimum pension liability adjustment...................... -- 47
------- -----
Other comprehensive income (loss):.......................... (1,322) (800)
------- -----
Comprehensive income (loss)............................ $ (575) $ 187
======= =====
</Table>
48
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
9. OTHER EXPENSES
Other expenses were comprised of the following:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
------ ------
(IN MILLIONS)
Compensation................................................ $ 800 $ 675
Commissions................................................. 846 690
Interest and debt issue cost................................ 211 131
Amortization of DAC and VOBA................................ 602 543
Capitalization of DAC....................................... (883) (767)
Rent, net of sublease income................................ 70 94
Minority interest........................................... 59 50
Insurance taxes............................................. 160 119
Other....................................................... 633 436
------ ------
Total other expenses...................................... $2,498 $1,971
====== ======
</Table>
10. EARNINGS PER COMMON SHARE
The following presents the weighted average 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
MARCH 31,
-----------------------------------
2006 2005
--------------- ---------------
(IN MILLIONS, EXCEPT SHARE AND PER
SHARE DATA)
Weighted average common stock outstanding for basic earnings
per common share.......................................... 762,043,823 733,997,727
Incremental common shares from assumed:
Exercise or issuance of stock-based awards............. 6,760,812 5,575,712
------------ ------------
Weighted average common stock outstanding for diluted
earnings per common share................................. 768,804,635 739,573,439
============ ============
EARNINGS PER COMMON SHARE BEFORE PREFERRED STOCK DIVIDENDS:
INCOME FROM CONTINUING OPERATIONS......................... $ 750 $ 800
============ ============
Basic.................................................. $ 0.98 $ 1.09
============ ============
Diluted................................................ $ 0.98 $ 1.08
============ ============
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME
TAXES.................................................. $ (3) $ 187
============ ============
Basic.................................................. $ -- $ 0.25
============ ============
Diluted................................................ $ -- $ 0.25
============ ============
NET INCOME................................................ $ 747 $ 987
============ ============
Basic.................................................. $ 0.98 $ 1.34
============ ============
Diluted................................................ $ 0.97 $ 1.33
============ ============
</Table>
49
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2006 2005
--------------- ---------------
(IN MILLIONS, EXCEPT SHARE AND PER
SHARE DATA)
EARNINGS PER COMMON SHARE AFTER PREFERRED STOCK DIVIDENDS:
INCOME FROM CONTINUING OPERATIONS......................... $ 750 $ 800
Preferred stock dividends................................. 33 --
------------ ------------
INCOME FROM CONTINUING OPERATIONS AVAILABLE TO COMMON
SHAREHOLDERS........................................... $ 717 $ 800
============ ============
Basic.................................................. $ 0.94 $ 1.09
============ ============
Diluted................................................ $ 0.93 $ 1.08
============ ============
NET INCOME................................................ $ 747 $ 987
Preferred stock dividends................................. 33 --
------------ ------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS............... $ 714 $ 987
============ ============
Basic.................................................. $ 0.94 $ 1.34
============ ============
Diluted................................................ $ 0.93 $ 1.33
============ ============
</Table>
In connection with the acquisition of Travelers, 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. These common equity units
consist of stock purchase contracts issued by the Holding Company. 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 of $53.10. During the period from the date of issuance
through March 31, 2006, 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 per common share.
See Note 9 of Notes to Consolidated Financial Statements included in the
2005 Annual Report.
11. 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 the Company's segments to better conform
to the way it manages and assesses its business. 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.
Economic Capital is an internally developed risk capital model, the purpose
of which is to measure the risk in the business and to provide a basis upon
which capital is deployed. The Economic Capital model accounts for the unique
and specific nature of the risks inherent in MetLife's businesses. As a part of
the
50
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
economic capital process, a portion of net investment income is credited to the
segments based on the level of allocated equity.
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,
homeowners 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, RGA, 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 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 12 for disclosures regarding
discontinued operations, including real estate.
51
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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
ended March 31, 2006 and 2005. 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 the
economic capital model that allows the Company to effectively manage its
capital. The Company evaluates the performance of each operating segment based
upon net income excluding net investment gains (losses), net of income taxes,
adjustments related to net investment gains (losses), net of income taxes, the
impact from discontinued operations, other than discontinued real estate, net of
income taxes, less preferred stock dividends. 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>
AUTO &
FOR THE THREE MONTHS ENDED MARCH 31, 2006 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE
- ----------------------------------------- ------------- ---------- --------- ------------- -----------
(IN MILLIONS)
Premiums.......... $2,989 $1,082 $724 $631 $993
Universal life and investment-type
product policy fees... 201 790 -- 184 --
Net investment income... 1,764 1,741 45 235 175
Other revenues.... 170 125 7 4 15
Net investment gains (losses)... (321) (263) 1 20 7
Policyholder benefits and claims... 3,364 1,265 452 503 813
Interest credited to policyholder account
balances........ 589 476 -- 87 63
Policyholder dividends... -- 419 1 2 --
Other expenses.... 533 851 201 327 275
Income (loss) from continuing operations
before provision (benefit) for income
taxes........... 317 464 123 155 39
Income (loss) from discontinued
operations, net of income taxes... -- (1) -- -- --
Net income........ 213 304 91 104 26
<Caption>
CORPORATE &
FOR THE THREE MONTHS ENDED MARCH 31, 2006 OTHER TOTAL
- ----------------------------------------- -------------- ------
(IN MILLIONS)
Premiums.......... $ 9 $6,428
Universal life and investment-type
product policy fees... -- 1,175
Net investment income... 279 4,239
Other revenues.... 7 328
Net investment gains (losses)... (29) (585)
Policyholder benefits and claims... 8 6,405
Interest credited to policyholder account
balances........ -- 1,215
Policyholder dividends... (1) 421
Other expenses.... 311 2,498
Income (loss) from continuing operations
before provision (benefit) for income
taxes........... (52) 1,046
Income (loss) from discontinued
operations, net of income taxes... (2) (3)
Net income........ 9 747
</Table>
52
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
AUTO &
FOR THE THREE MONTHS ENDED MARCH 31, 2005 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE
- ----------------------------------------- ------------- ---------- --------- ------------- -----------
(IN MILLIONS)
Premiums.......... $2,844 $1,028 $728 $466 $903
Universal life and investment-type
product policy fees... 193 479 -- 119 --
Net investment income... 1,219 1,526 43 149 150
Other revenues.... 161 112 9 3 11
Net investment gains (losses)... 22 52 -- -- 28
Policyholder benefits and claims... 3,111 1,206 478 394 739
Interest credited to policyholder account
balances........ 301 392 -- 47 56
Policyholder dividends... -- 409 -- 2 --
Other expenses.... 510 650 199 175 253
Income (loss) from continuing operations
before provision (benefit) for income
taxes........... 517 540 103 119 44
Income (loss) from discontinued
operations, net of income taxes... 7 12 -- (1) --
Net income........ 349 368 76 76 29
<Caption>
CORPORATE &
FOR THE THREE MONTHS ENDED MARCH 31, 2005 OTHER TOTAL
- ----------------------------------------- -------------- ------
(IN MILLIONS)
Premiums.......... $ (3) $5,966
Universal life and investment-type
product policy fees... -- 791
Net investment income... 129 3,216
Other revenues.... 3 299
Net investment gains (losses)... (117) (15)
Policyholder benefits and claims... (2) 5,926
Interest credited to policyholder account
balances........ (1) 795
Policyholder dividends... 4 415
Other expenses.... 184 1,971
Income (loss) from continuing operations
before provision (benefit) for income
taxes........... (173) 1,150
Income (loss) from discontinued
operations, net of income taxes... 169 187
Net income........ 89 987
</Table>
The following table presents assets with respect to the Company's segments,
as well as Corporate & Other, at:
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2006 2005
------------ ---------------
(IN MILLIONS)
Institutional............................................... $183,885 $176,401
Individual.................................................. 235,058 228,325
Auto & Home................................................. 5,407 5,397
International............................................... 19,285 18,624
Reinsurance................................................. 16,398 16,049
Corporate & Other........................................... 39,069 36,849
-------- --------
Total..................................................... $499,102 $481,645
======== ========
</Table>
Net investment income and net investment gains (losses) are based upon the
actual results of each segment's specifically identifiable asset portfolio
adjusted for allocated capital. Other costs are allocated to each of the
segments based upon: (i) a review of the nature of such costs; (ii) time studies
analyzing the amount of employee compensation costs incurred by each segment;
and (iii) cost estimates included in the Company's product pricing.
Revenues derived from any customer did not exceed 10% of consolidated
revenues. Revenues from U.S. operations were $10,105 million and $9,155 million
for the three months ended March 31, 2006 and 2005, respectively, which
represented 87% and 89%, respectively, of consolidated revenues.
12. 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
53
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
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 ENDED
MARCH 31,
-------------------
2006 2005
------ ------
(IN MILLIONS)
Investment income........................................... $ 1 $ 82
Investment expense.......................................... (1) (43)
Net investment gains (losses)............................... (5) 18
--- ----
Total revenues............................................ (5) 57
Provision (benefit) for income taxes........................ (2) 20
--- ----
Income (loss) from discontinued operations, net of income
taxes.................................................. $(3) $ 37
=== ====
</Table>
The carrying value of real estate related to discontinued operations was
$23 million and $22 million at March 31, 2006 and December 31, 2005,
respectively.
The following table shows the discontinued real estate operations by
segment:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
----- -----
(IN MILLIONS)
Net investment income
Institutional............................................. $-- $10
Individual................................................ -- 7
Corporate & Other......................................... -- 22
--- ---
Total net investment income............................ $-- $39
=== ===
Net investment gains (losses)
Institutional............................................. $-- $ 2
Individual................................................ (2) 12
Corporate & Other......................................... (3) 4
--- ---
Total net investment gains (losses).................... $(5) $18
=== ===
</Table>
In May 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 second quarter 2005 gains, net of income taxes, of
$431 million and $762 million, respectively. Net investment income on One
Madison Avenue and 200 Park Avenue was $11 million and $16 million,
respectively, for the three months ended March 31, 2005 and is included in
income from discontinued operations in the accompanying 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 is
leasing space for associates in the property for 20 years with optional renewal
periods through 2205.
OPERATIONS
On September 29, 2005, the Company completed the sale of 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
54
METLIFE, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
income (loss) from discontinued operations of ($1) million, net of income taxes,
for the three months ended March 31, 2005. The Company reclassified the
operations of MetLife Indonesia into discontinued operations for all periods
presented.
The following table presents the amounts related to the operations of
MetLife Indonesia that has been combined with the discontinued real estate
operations in the interim condensed consolidated income statement:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
2005
------------------
(IN MILLIONS)
Revenues.................................................... $ 2
Expenses.................................................... 3
-----
Income (loss) before provision for income taxes............. (1)
Provision for income taxes.................................. --
-----
Income (loss) from discontinued operations, net of income
taxes.................................................. $ (1)
=====
</Table>
On January 31, 2005, the Company completed the sale of 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 sale 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. Also under the terms of such
agreement, MetLife had the opportunity to receive additional consideration for
the retention of certain customers for a specific period in 2005. In the fourth
quarter of 2005, upon finalization of the computation, the Company received a
payment of $12 million, net of income taxes, due to the retention of these
specific customer accounts. The Company reclassified the operations of SSRM into
discontinued operations for all 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 three months ended March 31, 2005 also includes expenses of approximately $6
million, net of income taxes, related to the sale of SSRM.
The operations of SSRM include affiliated revenue of $5 million for the
three months ended March 31, 2005 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
table presents the amounts related to operations of SSRM that have been combined
with the discontinued real estate operations in the interim condensed
consolidated income statement:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
2005
------------------
(IN MILLIONS)
Revenues.................................................... $ 19
Expenses.................................................... 38
----
Income (loss) before provision for income taxes............. (19)
Provision (benefit) for income taxes........................ (5)
----
Income (loss) from discontinued operations, net of income
taxes.................................................. (14)
Net investment gain, net of income taxes.................... 165
----
Income (loss) from discontinued operations, net of income
taxes.................................................. $151
====
</Table>
55
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"
refers 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 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 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.
ECONOMIC CAPITAL
Economic Capital is an internally developed risk capital model, the purpose
of which is to measure the risk in the business and to provide a basis upon
which capital is deployed. The Economic Capital model accounts for the unique
and specific nature of the risks inherent in MetLife's businesses. As part of
the economic capital process, a portion of net investment income is credited to
the segments based on the level of allocated equity. This is in contrast to the
standardized regulatory risk-based capital ("RBC") formula, which is not as
refined in its risk calculations with respect to the nuances of the Company's
businesses.
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 (loss) from discontinued operations of ($1) million, net of income taxes,
for the
56
three months ended March 31, 2005. The Company reclassified the operations of
MetLife Indonesia into discontinued operations for all periods presented.
On September 1, 2005, the Company completed the acquisition of CitiStreet
Associates, a division of CitiStreet LLC, which 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 was integrated with MetLife Resources, a division of
MetLife dedicated to providing retirement plans and financial services to the
same markets.
On July 1, 2005, the Holding Company completed the acquisition of The
Travelers Insurance Company, excluding certain assets, most significantly,
Primerica, from Citigroup Inc. ("Citigroup"), and substantially all of
Citigroup's international insurance businesses (collectively, "Travelers") for
$12.0 billion. The results of Travelers' operations were included in the
Company's unaudited interim condensed consolidated financial statements
beginning July 1, 2005. As a result of the acquisition, management of the
Company increased significantly the size and scale of the Company's core
insurance and annuity products and expanded the Company's presence in both the
retirement & savings domestic and international markets. 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 cash on-hand, the purchase price was financed through the
issuance of common stock, debt securities, common equity units and preferred
shares. See "-- Liquidity and Capital Resources -- The Holding
Company -- Liquidity Sources."
On January 31, 2005, the 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 sale
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. Also under
the terms of such agreement, MetLife had the opportunity to receive additional
consideration for the retention of certain customers for a specific period in
2005. In the fourth quarter of 2005, upon finalization of the computation, the
Company received a payment of $12 million, net of income taxes, due to the
retention of these specific customer accounts. The Company reclassified the
operations of SSRM into discontinued operations for all 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 three months ended March 31, 2005 also includes
expenses of approximately $6 million, net of income taxes, related to the sale
of SSRM.
IMPACT OF HURRICANES
On August 29, 2005, Hurricane Katrina made landfall in the states of
Louisiana, Mississippi and Alabama causing catastrophic damage to these coastal
regions. During the three months ended March 31, 2006, the Company reduced its
total net losses recognized related to the catastrophe by $2 million, to $132
million, net of income taxes and reinsurance recoverables, and including
reinstatement premiums and other reinsurance-related premium adjustments at
March 31, 2006. The Auto & Home segment reduced its total net losses recognized
related to the catastrophe by $2 million to $118 million, net of income taxes
and reinsurance recoverables, and including reinstatement premiums and other
reinsurance-related premium adjustments at March 31, 2006. There was no change
in the Institutional segment's total net losses recognized related to the
catastrophe of $14 million, net of income taxes and reinsurance recoverables and
including
57
reinstatement premiums and other reinsurance-related premium adjustments at
March 31, 2006. During the first quarter of 2006, MetLife's gross losses from
Katrina were reduced by $1 million to approximately $334 million at March 31,
2006, primarily arising from the Company's homeowners business.
On October 24, 2005, Hurricane Wilma made landfall across the state of
Florida. During the three months ended March 31, 2006, the Company's Auto & Home
segment reduced its recognized total losses related to the catastrophe by $2
million to $30 million, net of income taxes and reinsurance recoverables.
MetLife's gross losses from Hurricane Wilma were increased by $2 million during
the three months ended March 31, 2006 to approximately $59 million at March 31,
2006 arising from the Company's homeowners and automobile businesses.
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 Hurricanes Katrina and Wilma and otherwise. In addition, as discussed
above, lawsuits, including purported class actions, have been filed in
Mississippi and Louisiana challenging denial of claims for damages caused to
property during Hurricane Katrina. Metropolitan Property and Casualty Insurance
Company ("MPC") is a named party in some of these lawsuits. In addition, rulings
in cases in which MPC is not a party may affect interpretation of its policies.
MPC intends to vigorously defend these matters. However, any adverse rulings
could result in an increase in the Company's hurricane-related claim exposure
and losses. Based on information known by management as of March 31, 2006, it
does not believe that additional claim losses resulting from Hurricane Katrina
will have a material adverse impact on the Company's unaudited interim condensed
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") and the establishment and amortization of value of
business acquired ("VOBA"); (vi) the measurement of goodwill and related
impairment, if any; (vii) the liability for future policyholder benefits; (viii)
accounting for reinsurance transactions; (ix) the liability for litigation and
regulatory matters; 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, other limited partnerships, and real estate and real estate
joint ventures, 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
58
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.
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 AND VALUE OF BUSINESS ACQUIRED
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 DAC
and VOBA 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. VOBA reflects the estimated fair
value of in-force contracts in a life insurance company acquisition and
represents the portion of the purchase price that is allocated to the value of
the right to receive future cash flows from the 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
59
returns and other factors. Actual experience on the purchased business may vary
from these projections. 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 and VOBA. This
practice assumes that the expectation for long-term appreciation in equity
markets is not changed by minor short-term market fluctuations, but that it does
change when large interim deviations have occurred.
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 that is one level below the
operating segment if discrete financial information is prepared and regularly
reviewed by management at that level. For purposes of goodwill impairment
testing, 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 a market multiple or a discounted cash flow
model. The critical estimates necessary in determining fair value are projected
earnings, comparative market multiples and the discount rate.
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. Utilizing these assumptions, liabilities are established on a block
of business basis.
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
liabilities 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
60
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 is involved in a
number of regulatory investigations. Given the inherent unpredictability of
these matters, it is difficult to estimate the impact on the Company's
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.
EMPLOYEE BENEFIT PLANS
Certain subsidiaries of the Holding Company sponsor pension and other
postretirement plans in various forms covering employees who meet specified
eligibility requirements. The reported expense and liability associated with
these plans require 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.
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, MetLife, Inc. offers
life insurance, annuities, automobile and homeowners 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.
The 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. These amounts represent the impact of the Travelers acquisition;
however, as business currently transacted through the acquired Travelers 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.
61
As a part of the Travelers acquisition, management realigned certain
products and services within several of the Company's segments to better conform
to the way it manages and assesses its business. 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.
THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2005
The Company reported $714 million in net income available to common
shareholders and diluted earnings per common share of $0.93 for the three months
ended March 31, 2006 compared to $987 million in net income available to common
shareholders and diluted earnings per common share of $1.33 for the three months
ended March 31, 2005. The acquisition of Travelers contributed $147 million to
net income available to common shareholders for the three months ended March 31,
2006. Excluding the impact of the Travelers acquisition, net income available to
common shareholders decreased by $420 million for the three months ended March
31, 2006 compared to the 2005 period.
In 2005, the Company completed the sale of SSRM and recognized a gain of
$177 million, net of income taxes, of which $165 million, net of income taxes,
was recorded during the three months ended March 31, 2005. Accordingly, income
from discontinued operations and, correspondingly, net income, decreased by $190
million for the three months ended March 31, 2006 compared to the 2005 period
primarily as a result of the aforementioned sale.
In addition, net investment losses increased by $362 million, net of income
taxes, for the three months ended March 31, 2006 as compared to the
corresponding period in 2005. The acquisition of Travelers contributed a loss of
$109 million, net of income taxes, to this increase. Excluding the impact of
Travelers, net investment losses increased by $253 million, net of income taxes,
for the three months ended March 31, 2006 compared to the 2005 period. This
increase is primarily due to losses on fixed maturity sales resulting from
continued portfolio repositioning in a rising interest rate environment. Also
contributing to the increase are losses from the mark-to-market on derivatives
in 2006 primarily resulting from changes in U.S. interest rates.
In addition, during the three months ended March 31, 2006, the Company paid
$33 million in dividends on its preferred shares issued in connection with
financing the acquisition of Travelers.
The remainder, an increase of $56 million in net income available to common
shareholders for the three months ended March 31, 2006 compared to the 2005
period, was primarily due to an increase in premiums, fees and other revenues
attributable to continued sales growth across most of the Company's business
segments, as well as the positive impact of the U.S. financial markets on policy
fees. Policy fees from variable life and annuity and investment-type products
are typically calculated as a percentage of the average assets in policyholder
accounts. The value of these assets can fluctuate depending on equity
performance. In addition, contributing to the increase was higher than expected
levels of corporate and real estate joint venture income as well as commercial
mortgage prepayment fees. Partially offsetting these increases is a rise in
expenses primarily due to higher interest expense, integration costs,
stock-based compensation expense, corporate support expenses and DAC
amortization.
INDUSTRY TRENDS
The Company's segments continue to be influenced by a variety of trends
that affect the industry.
Financial Environment. The current financial environment presents a
challenge for the life insurance industry. A low general level of long-term
interest rates and the relatively flat yield curve can have a negative impact on
the demand for and the profitability of spread-based products such as fixed
annuities, guaranteed interest contracts ("GICs") and universal life insurance.
In addition, a reversion to lower short-term 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 from a flattening yield curve and low
longer-term interest rates will be a concern until new money rates on corporate
bonds are higher than overall life insurer investment portfolio yields. Recent
volatile equity market
62
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, with respect
to life and disability products, for example, is 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 life insurance 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 to
accumulate assets for retirement and subsequently to convert these assets into
retirement income represents a tremendous 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, guarantees are 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. One of the challenges for the life insurance industry will be
the delivering of tailored advice in a cost effective manner.
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, technology 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. Sufficient scale,
financial strength and financial 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.
63
DISCUSSION OF RESULTS
The following table presents consolidated financial information for the
Company for the periods indicated:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-------------------
2006 2005
-------- --------
(IN MILLIONS)
REVENUES
Premiums.................................................... $ 6,428 $ 5,966
Universal life and investment-type product policy fees...... 1,175 791
Net investment income....................................... 4,239 3,216
Other revenues.............................................. 328 299
Net investment gains (losses)............................... (585) (15)
------- -------
Total revenues............................................ 11,585 10,257
------- -------
EXPENSES
Policyholder benefits and claims............................ 6,405 5,926
Interest credited to policyholder account balances.......... 1,215 795
Policyholder dividends...................................... 421 415
Other expenses.............................................. 2,498 1,971
------- -------
Total expenses............................................ 10,539 9,107
------- -------
Income from continuing operations before provision for
income taxes.............................................. 1,046 1,150
Provision for income taxes.................................. 296 350
------- -------
Income from continuing operations........................... 750 800
Income (loss) from discontinued operations, net of income
taxes..................................................... (3) 187
------- -------
Net income.................................................. 747 987
Preferred stock dividends................................... 33 --
------- -------
Net income available to common shareholders................. $ 714 $ 987
======= =======
</Table>
THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2005 -- THE COMPANY
Income from Continuing Operations
Income from continuing operations decreased by $50 million, or 6%, to $750
million for the three months ended March 31, 2006 from $800 million in the
comparable 2005 period. The current period includes $147 million of income from
continuing operations related to the acquisition of Travelers. Excluding the
acquisition of Travelers, income from continuing operations decreased by $197
million, or 25%. The Institutional segment contributed $140 million, net of
income taxes, to this decrease primarily due to net investment losses and
unfavorable underwriting, partially offset by favorable interest margins. The
Individual segment contributed $120 million, net of income taxes, to the
decrease, as a result of net investment losses, higher annuity net guaranteed
benefit costs, higher expenses, lower net investment income and higher DAC
amortization. These decreases were partially offset by increased fee income
related to the growth in separate account products, a decrease in the closed
block-related policyholder dividend obligation, favorable underwriting and
improved interest rate spreads in the Individual segment. Partially offsetting
the decreases in income from continuing operations is an increase in Corporate &
Other of $47 million. This increase is primarily due to higher net investment
income and lower net investment losses, partially offset by higher interest
expense on debt, growth in interest credited to bankholder deposits and
integration costs associated with the Travelers acquisition. The Auto & Home
segment increased $15 million primarily due to an improved combined ratio
64
which resulted from reduced non-catastrophe claims, favorable development of
prior year claims, and a reduction in loss adjustment expenses. These increases
in the Auto & Home segment were partially offset by higher catastrophe losses in
the first quarter of 2006 and a decrease in net earned premium. In addition, the
International segment increased $4 million, net of income taxes, primarily due
to business growth in Mexico and South Korea, partially offset by a decrease in
Canada due to the realignment of economic capital and higher home office and
infrastructure expenditures in support of segment growth.
Revenues
Premiums, fees and other revenues increased by $875 million, or 12%, to
$7,931 million for the three months ended March 31, 2006 from $7,056 million
from the comparable 2005 period. The current period includes $484 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 $391 million, or 6%. The Institutional segment contributed $119
million, or 30%, to the period over period increase. The Institutional segment
increase is primarily due to improved sales and favorable persistency in group
life, as well as sales growth in the non-medical health & other business,
partially offset by a decrease in premiums from pension close-outs and
structured settlement sales and an increase in master terminal funding in
retirement & savings. The Reinsurance segment contributed $94 million, or 24%,
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 in
the U.S. and international operations. The International segment contributed $91
million, or 23%, to the period over period increase primarily due to business
growth through increased sales and renewal business in Mexico, South Korea,
Brazil, and Taiwan, as well as changes in foreign currency rates, partially
offset by a decrease in Chile's premiums, fees and other revenues due to lower
annuity sales which was partially offset by an increase in institutional
premiums through its bank distribution channel. The Individual segment
contributed $82 million, or 21%, to the period over period increase primarily
due to higher fee income from variable annuity 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.
Interest rate margins, which generally represent the difference between net
investment income and interest credited to policyholder account balances,
increased in the Individual segment and the non-medical health and other and
retirement and savings businesses in the Institutional segment and decreased in
the group life business in the Institutional segment for the three months ended
March 31, 2006 as compared to the prior period. 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,
the timing and amount of which 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.
Net investment losses increased by $570 million to $585 million for the
three months ended March 31, 2006 from $15 million for the comparable 2005
period. The current period includes $172 million of net investment losses
related to the acquisition of Travelers. Excluding the acquisition of Travelers,
net investment losses increased by $398 million. This increase is primarily due
to losses on fixed maturity sales resulting from continued portfolio
repositioning in a rising interest rate environment. Also contributing to the
increase are losses from the mark-to-market on derivatives in 2006 primarily
resulting from changes in U.S. interest rates.
Expenses
Underwriting results were favorable within the life products in the
Individual segment and in the retirement & savings products in the Institutional
segment, while underwriting results were unfavorable in group life and
non-medical health and 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
65
trends and the reinsurance activity related to certain blocks of business and,
as a result, can fluctuate from period to period. Underwriting results,
excluding catastrophes, in the Auto & Home segment were favorable for the three
months ended March 31, 2006, as the combined ratio, excluding catastrophes,
decreased to 86.6% from 90.9% in the three months ended March 31, 2005.
Underwriting results in the International segment increased commensurate with
the growth in the business as discussed above.
Other expenses increased by $527 million, or 27%, to $2,498 million for the
three months ended March 31, 2006 from $1,971 million for the comparable 2005
period. The current period includes $290 million of other expenses related to
the acquisition of Travelers. Excluding the acquisition of Travelers, other
expenses increased by $237 million, or 12%. Corporate & Other contributed $117
million, or 49%, to the period over period variance primarily due to higher
interest expense, growth in interest credited to bank holder deposits at MetLife
Bank, National Association ("MetLife Bank" or "MetLife Bank, N.A."), integration
costs associated with the Travelers acquisition and corporate support expenses.
In addition, $55 million, or 23%, of this increase in the International segment
is primarily attributable to business growth commensurate with the increase in
revenues discussed above and changes in foreign currency rates. Other expenses
in the International segment also increased due to information technology
projects, growth initiative projects, and an increase in integration costs, as
well as an increase in compensation expense at the home office. The Reinsurance
segment also contributed $22 million, or 9%, to the increase in other expenses
primarily due to an increase in interest expense, amortization of the value of
business acquired and stock-based compensation expense. The Individual segment
contributed $24 million, or 10%, to the period over period increase primarily
due to related stock-based compensation and the impact of revisions to
policyholder liabilities in the current period, partially offset by the
revisions to certain commission and expense liabilities in the prior period. In
addition, the increase in the Individual segment is due to higher DAC
amortization. The Institutional segment contributed $17 million, or 7%, to the
period over period increase primarily due to higher non-deferrable
volume-related expenses, partially offset by a decrease in corporate support
expenses, which includes an increase in stock-based compensation.
Net Income
Income tax expense for the three months ended March 31, 2006 is $296
million, or 28% of income from continuing operations before provision for income
taxes, compared with $350 million, or 30%, for the comparable 2005 period. The
current period includes $61 million of income tax expense related to the
acquisition of Travelers. Excluding the acquisition of Travelers, income tax
expense for the three months ended March 31, 2006 is $235 million, or 28% of
income from continuing operations before provision for income taxes, compared
with $350 million, or 30%, for the comparable 2005 period. The 2006 and 2005
effective tax rates differ 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.
Income from discontinued operations consists of net investment income and
net investment gains related to real estate properties that the Company has
classified as available-for-sale or has sold and for the three months ended
March 31, 2005, the operations and gain upon disposal from the sale of SSRM on
January 31, 2005 and the operations of MetLife Indonesia which was sold on
September 29, 2005. Income from discontinued operations, net of income taxes,
decreased by $190 million, or 102% to ($3) million for the three months ended
March 31, 2006 from $187 million for the comparable 2005 period. This decrease
is primarily due to the gain of $165 million, net of income taxes, on the sale
of SSRM in the three months ended March 31, 2005.
In addition, during the three months ended March 31, 2006, the Company paid
$33 million in dividends on its preferred shares issued in connection with
financing the acquisition of Travelers.
66
INSTITUTIONAL
The following table presents consolidated financial information for the
Institutional segment for the periods indicated:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
------- -------
(IN MILLIONS)
REVENUES
Premiums.................................................... $2,989 $2,844
Universal life and investment-type product policy fees...... 201 193
Net investment income....................................... 1,764 1,219
Other revenues.............................................. 170 161
Net investment gains (losses)............................... (321) 22
------ ------
Total revenues............................................ 4,803 4,439
------ ------
EXPENSES
Policyholder benefits and claims............................ 3,364 3,111
Interest credited to policyholder account balances.......... 589 301
Other expenses.............................................. 533 510
------ ------
Total expenses............................................ 4,486 3,922
------ ------
Income from continuing operations before provision for
income taxes.............................................. 317 517
Provision for income taxes.................................. 104 175
------ ------
Income from continuing operations........................... 213 342
Income from discontinued operations, net of income taxes.... -- 7
------ ------
Net income.................................................. $ 213 $ 349
====== ======
</Table>
The Company's Institutional segment offers a broad range of group insurance
and retirement & savings products and services to corporations and other
institutions and their respective employees. Group insurance products are
offered as 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, guaranteed interest
products and other stable value products, accumulation and income annuities, and
separate account contracts for the investment of defined benefit and defined
contribution plan assets.
THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2005 -- INSTITUTIONAL
Income from Continuing Operations
Income from continuing operations decreased by $129 million, or 38%, to
$213 million for the three months ended March 31, 2006 from $342 million for the
comparable 2005 period. The acquisition of Travelers contributed $11 million to
income from continuing operations, which includes $64 million, net of income
taxes, of net investment losses. Excluding the impact of Travelers, income from
continuing operations decreased $140 million, or 41%, from the comparable 2005
period.
Included in this decrease is a decline of $159 million, net of income
taxes, in net investment gains (losses), as well as $5 million charge, net of
income taxes, resulting from an increase in policyholder benefits and claims
related to net investment gains (losses). Excluding the impact of Travelers and
the decline in net investment gains (losses), income from continuing operations
increased by $24 million, net of income taxes, from the comparable 2005 period.
67
Interest margins increased by $19 million, net of income taxes, compared to
the prior period. Management attributes this increase primarily to improvements
in interest margins for the retirement & savings and the non-medical health &
other business of $16 million and $13 million, both net of income taxes,
respectively. Higher earnings from growth in the asset base and corporate and
real estate joint venture income across the majority of the businesses are the
primary drivers of the period over period increase. Interest margins in group
life decreased by $10 million, net of income taxes. The interest margins in the
retirement & savings and the group life business include the impact of a
reduction in interest spreads compared to the prior year period. 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 for the three months ended March 31, 2006 decreased to
1.50% and 1.74% from 1.65% and 2.03%, in the prior year period for the
retirement & savings and the group life business, respectively. Management
generally expects these spreads to be in the range of 1.35% to 1.50%, and 1.70%
to 1.90% for the retirement & savings and the group life business, respectively.
Interest rate spreads for the non-medical health & other business are not a
significant driver of interest margins. 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.
Partially offsetting the increase in interest margins, is a decline in
underwriting results of $3 million, net of income taxes, compared to the prior
period. This decline is primarily due to less favorable results of $15 million,
net of income taxes, in the non-medical health & other business and a $4
million, net of income taxes, decrease in the group life business. The
unfavorable results in non-medical health & other business are primarily due to
reserve refinements in the long term care business ("LTC"). These unfavorable
results were partially offset by an improvement of $16 million, net of income
taxes, in retirement & savings' underwriting results, largely 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.
Also contributing to the period over period increase is an increase in
premiums, fees, and other revenue, which, have more than offset increases in
operating expenses.
Revenues
Total revenues, excluding net investment gains (losses), increased by $707
million, or 16%, to $5,124 million for the three months ended March 31, 2006
from $4,417 million for the comparable 2005 period. The acquisition of Travelers
contributed $408 million to the period over period increase. Excluding the
impact of the Travelers acquisition and the change in net investment gains
(losses), total revenues increased by $299 million, or 7%, from the comparable
2005 period. This increase is comprised of growth in premiums, fees and other
revenues of $119 million and higher net investment income of $180 million.
The increase of $119 million in premiums, fees, and other revenues is
largely due to an increase in group life's insurance premiums, fees and other
revenues of $192 million, which management primarily attributes to improved
sales and favorable persistency, as well as a significant increase in premiums
from two large customers. Non-medical health & other business premiums, fees,
and other revenues, contributed $121 million, primarily due to growth in the
disability, dental and accidental death and dismemberment products of $75
million. In addition, continued growth in the LTC business contributed $40
million. Retirement & savings' premiums, fees and other revenues decreased by
$194 million, which is largely due to a decrease in premiums, resulting
primarily from declines of $198 million in pension close-outs and $44 million in
structured settlements, predominately due to the impact of a decline in sales,
partially offset by a $46 million increase in the master terminal funding
product, largely due to the impact of an increase in sales. Premiums,
68
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 by $180 million primarily due
to higher income from growth in the asset base driven by sales throughout 2005
and 2006, particularly in GICs and the structured settlement business. In
addition, increases in corporate and real estate joint venture income and the
impact of higher short-term interest rates contributed to the growth compared to
the prior year period. These increases are partially offset by a decline in net
investment income resulting from lower average yields on fixed corporate
maturities, primarily due to investment turnover.
Expenses
Total expenses increased by $564 million, or 14%, to $4,486 million for the
three months ended March 31, 2006 from $3,922 million for the comparable 2005
period. The acquisition of Travelers contributed $293 million to the period over
period increase. Excluding the impact of the Travelers acquisition, total
expenses increased $271 million, or 7%, from the comparable 2005 period.
This increase is comprised of higher policyholder benefits and claims of
$130 million, an increase in interest credited to policyholder account balances
of $124 million and an increase in other expenses of $17 million. The increase
in policyholder benefits and claims is attributable to increases in both group
life and non-medical health & other business of $193 million and $119 million,
respectively. Offsetting these increases is a decrease in retirement & savings
of $182 million. Overall, these increases are predominantly attributable to the
business growth referenced in the revenue discussion above, as well as less
favorable claim experience in the group life business. In addition, the increase
in the non-medical health & other business includes a charge for disabled life
and active life reserve refinements in LTC. Claim experience was mixed across
the various businesses within the non-medical health & other business. These
increases to policyholder benefits and claims are partially offset by favorable
claim experience in the retirement & savings business. The increase in interest
credited to policyholder account balances of $124 million is primarily the
result of increases in the retirement & savings business of $99 million and the
group life business of $25 million. The increase in the retirement & savings
business is primarily attributable to a combination of growth in policyholder
deposits, predominately as a result of growth in GICs, and an increase in
short-term interest rates. The increase in the group life business is largely
due to growth in the business as well as the increase in the short-tem interest
rates.
The rise in other expenses of $17 million is primarily due to higher
non-deferrable volume-related expenses of $28 million, which are largely
associated with business growth, partially offset by a net decrease of $11
million in corporate support expenses, which is net of an $11 million increase
in expense related to stock-based compensation.
69
INDIVIDUAL
The following table presents consolidated financial information for the
Individual segment for the periods indicated:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
------- -------
(IN MILLIONS)
REVENUES
Premiums.................................................... $1,082 $1,028
Universal life and investment-type product policy fees...... 790 479
Net investment income....................................... 1,741 1,526
Other revenues.............................................. 125 112
Net investment gains (losses)............................... (263) 52
------ ------
Total revenues............................................ 3,475 3,197
------ ------
EXPENSES
Policyholder benefits and claims............................ 1,265 1,206
Interest credited to policyholder account balances.......... 476 392
Policyholder dividends...................................... 419 409
Other expenses.............................................. 851 650
------ ------
Total expenses............................................ 3,011 2,657
------ ------
Income from continuing operations before provision for
income taxes.............................................. 464 540
Provision for income taxes.................................. 159 184
------ ------
Income from continuing operations........................... 305 356
Income (loss) from discontinued operations, net of income
taxes..................................................... (1) 12
------ ------
Net income.................................................. $ 304 $ 368
====== ======
</Table>
The Company'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 MARCH 31, 2006 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2005 -- INDIVIDUAL
Income from Continuing Operations
Income from continuing operations decreased by $51 million, or 14%, to $305
million for the three months ended March 31, 2006 from $356 million for the
comparable 2005 period. The acquisition of Travelers contributed $69 million to
income from continuing operations, which includes $46 million, net of income
taxes, of net investment losses. Excluding the impact of Travelers, income from
continuing operations decreased by $120 million, or 34%, to $236 million for the
three months ended March 31, 2006 from $356 million for the comparable 2005
period. Included in this decrease are net investment losses of $162 million, net
of income taxes. Excluding the impact of net investment losses and Travelers,
income from continuing operations increased by $42 million from the comparable
2005 period.
Fee income from separate account products increased income from continuing
operations by $36 million, net of income taxes, primarily related to growth in
the business and favorable market conditions.
70
The decrease in the closed-block related policyholder dividend obligation
of $30 million, net of income taxes, also contributed to the increase in income
from continuing operations.
Favorable underwriting results in life products contributed $15 million,
net of income taxes, 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.
Improvements in interest rate spreads contributed $5 million, net of income
taxes, to the period over period increase. 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 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.
These aforementioned increases in income from continuing operations are
partially offset by higher annuity benefits of $23 million, net of income taxes,
primarily due to the costs of the guaranteed annuity benefit riders and the
related hedging.
Also offsetting the increase in income from continuing operations, is an
increase in policyholder dividends of $7 million, net of income taxes, due to
growth in the business.
The increase in income from continuing operations is partially offset by
higher expenses of $13 million, net of income taxes, which includes $7 million,
net of income taxes, related to stock-based compensation, and $6 million , net
of income taxes, due to the impact of revisions to policyholder liabilities in
the current period partially offset by the revisions to certain commission and
expense liabilities in the prior period.
In addition, offsetting the increase in income from continuing operations,
is lower net investment income on blocks of business that are not driven by
interest rate spreads of $4 million, net of income taxes, and higher DAC
amortization of $3 million, net of income taxes.
Revenues
Total revenues, excluding net investment gains (losses), increased by $593
million, or 19%, to $3,738 million for the three months ended March 31, 2006
from $3,145 million for the comparable 2005 period. The acquisition of Travelers
contributed $509 million to the period over period increase. Excluding the
impact of Travelers and the change in net investment gains (losses), total
revenues increased by $84 million, or 3%, from the comparable 2005 period.
This increase includes higher fee income primarily from variable annuity
and universal life products of $68 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 $14 million in 2006
to the active marketing of income annuity products. Although premiums associated
with the Company's closed block of business continue to decline as expected by
$21 million, this decline was offset by a $21 million increase in premiums of
other life products due to growth in the business.
Net investment income increased by $2 million resulting from higher joint
venture income and bond and commercial mortgage prepayment fees partially offset
by a decline in fixed maturity yields on a larger asset base.
71
Expenses
Total expenses increased by $354 million, or 13%, to $3,011 million for the
three months ended March 31, 2006 from $2,657 million for the comparable 2005
period. The acquisition of Travelers contributed $333 million to the period over
period increase. Excluding the impact of Travelers, total expenses increased by
$21 million, or less than 1%, from the comparable 2005 period.
Higher other expenses of $20 million including $10 million related to
stock-based compensation and $10 million related to the impact of revisions to
policyholder liabilities in the current period, partially offset by revisions to
certain commission and expense liabilities in the prior period contributed to
the increase in other expenses. Also contributing to the increase in other
expenses is higher DAC amortization of $4 million resulting from growth in the
business and adjustments for management's update of assumptions used to
determine estimated gross margins, which were partially offset by investment
losses.
In addition, total expenses increased by $10 million due policyholder
dividends associated with growth in the business.
Partially offsetting these increases in total expenses is a decrease in
policyholder benefits due to a reduction in the closed block-related
policyholder dividend obligation of $46 million driven by higher realized
losses, and lower net investment income, all in the closed block. Also
decreasing policyholder benefits is $10 million due to a revision to the
estimates of certain claim liabilities in the life products. Partially
offsetting these decreases in policyholder benefits is an increase in annuity
benefits of $49 million primarily due to the costs of the guaranteed annuity
benefit riders and the related hedging and the increase in future policyholder
benefits associated with income annuity premium growth discussed above.
AUTO & HOME
The following table presents consolidated financial information for the
Auto & Home segment for the periods indicated:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
----- -----
(IN MILLIONS)
REVENUES
Premiums.................................................... $724 $728
Net investment income....................................... 45 43
Other revenues.............................................. 7 9
Net investment gains (losses)............................... 1 --
---- ----
Total revenues............................................ 777 780
---- ----
EXPENSES
Policyholder benefits and claims............................ 452 478
Policyholder dividends...................................... 1 --
Other expenses.............................................. 201 199
---- ----
Total expenses............................................ 654 677
---- ----
Income before provision for income taxes.................... 123 103
Provision for income taxes.................................. 32 27
---- ----
Net income.................................................. $ 91 $ 76
==== ====
</Table>
Auto & Home, operating through MPC and its subsidiaries, offers personal
lines property and casualty insurance directly to employees at their employer's
worksite, as well as through a variety of retail distribution channels. Auto &
Home primarily sells auto insurance and homeowners insurance.
72
THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2005 -- AUTO & HOME
Net Income
Net income increased by $15 million, or 20%, to $91 million for the three
months ended March 31, 2006 from $76 million for the comparable 2005 period.
This increase is primarily attributable to an improved combined ratio which
contributed $14 million, net of income taxes, to net income as a result of
reduced non-catastrophe claims. Favorable development of prior year loss
reserves, resulting in $6 million, net of income taxes, and a reduction in loss
adjustment expenses of $4 million, net of income taxes, also contributed to the
increase in net income. These increases were somewhat offset by higher
catastrophe losses in the first quarter of 2006, resulting in a decrease to net
income of $6 million, net of income taxes.
Also impacting net income was a decrease in net earned premiums of $3
million, net of income taxes, an increase in other expenses of $1 million, net
of income taxes, a reduction in other income of $1 million, net of income taxes
and an increase in investment income of $1 million, net of income taxes.
Revenues
Total revenues, excluding net investment gains (losses), decreased by $4
million, or less than 1%, to $776 million for the three months ended March 31,
2006 from $780 million for the comparable 2005 period.
The decrease was primarily due to an increase in catastrophe reinsurance
costs of $3 million and a number of small increases in voluntary and involuntary
programs totaling $1 million, offset by a decrease of $2 million in the
Massachusetts involuntary market.
The change in investment income remained essentially flat over the
comparable 2005 period. This is a result of an increase in investment yields on
a relatively flat asset base offset by a decrease in investment income related
to a realignment of economic capital.
Expenses
Total expenses decreased by $23 million, or 3%, to $654 million for the
three months ended March 31, 2006 from $677 million for the comparable 2005
period.
The decrease was due to a $19 million reduction in non-catastrophe losses,
due primarily to favorable claims frequency trends, particularly in the
automobile line of business, partially offset by an increase in claims severity
in the homeowners line of business. Also contributing to the decrease in
expenses was additional favorable prior year loss development of $14 million in
the first quarter of 2006 compared to $5 million for the comparable 2005 period
and a $5 million reduction in unallocated loss adjusting expenses resulting from
the related favorable loss experience.
Offsetting these improvements were catastrophe losses of $19 million in the
first quarter of 2006 compared to $11 million in the first quarter of 2005 and
an increase of $2 million in other expenses.
Underwriting results, excluding catastrophes, in the Auto & Home segment
were favorable for the three months ended March 31, 2006, as the combined ratio,
excluding catastrophes, decreased to 86.6% from 90.9% in the prior period.
73
INTERNATIONAL
The following table presents consolidated financial information for the
International segment for the periods indicated:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
------- -----
(IN MILLIONS)
REVENUES
Premiums.................................................... $ 631 $466
Universal life and investment-type product policy fees...... 184 119
Net investment income....................................... 235 149
Other revenues.............................................. 4 3
Net investment gains (losses)............................... 20 --
------ ----
Total revenues............................................ 1,074 737
------ ----
EXPENSES
Policyholder benefits and claims............................ 503 394
Interest credited to policyholder account balances.......... 87 47
Policyholder dividends...................................... 2 2
Other expenses.............................................. 327 175
------ ----
Total expenses............................................ 919 618
------ ----
Income from continuing operations before provision for
income taxes.............................................. 155 119
Provision for income taxes.................................. 51 42
------ ----
Income from continuing operations........................... 104 77
Income (loss) from discontinued operations, net of income
taxes..................................................... -- (1)
------ ----
Net income.................................................. $ 104 $ 76
====== ====
</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 America region, the Asia Pacific region and Europe.
THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2005 -- INTERNATIONAL
Income from Continuing Operations
Income from continuing operations increased by $27 million, or 35%, to $104
million for the three months ended March 31, 2006 from $77 million for the
comparable 2005 period. The acquisition of Travelers contributed $23 million to
income from continuing operations, which includes $7 million, net of income
taxes, of net investment gains. Excluding the impact of Travelers, income from
operations increased by $4 million, or 5%, over the comparable 2005 period.
Included in this increase are net investment gains (losses) of $6 million, net
of income taxes. Excluding the impact of Travelers and the increase in net
investment gains, income from continuing operations decreased $2 million from
the comparable 2005 period.
Mexico's income from continuing operations increased by $13 million,
primarily due to increased earnings on its institutional business as well as
growth and better mortality in its traditional life business. Mexico also
benefited from a decrease in certain policyholder liabilities caused by a
decrease in the unrealized investment gains on invested assets supporting those
liabilities. South Korea's income from continuing operations increased by $12
million, net of income taxes, primarily due to higher sales of its variable
universal life product and a larger in-force business, partially offset by
higher expenses due to the business growth.
74
Partially offsetting these increases in income from continuing operations was a
decrease in Canada of $13 million, net of income taxes, primarily due to the
realignment of economic capital. Higher home office and infrastructure
expenditures in support of segment growth of $14 million, net of income taxes,
also decreased income from continuing operations. Changes in foreign currency
rates account for $3 million of the increase in income from continuing
operations.
Revenues
Total revenues, excluding net investment gains (losses), increased by $317
million, or 43%, to $1,054 million for the three months ended March 31, 2006
from $737 million for the comparable 2005 period. The acquisition of Travelers
contributed $206 million to the period over period increase. Excluding the
impact of Travelers and the change in net investment gains (losses), total
revenues increased by $111 million, or 15%, over the comparable 2005 period.
Premiums, fees, and other revenues increased by $91 million, or 15%, to
$679 million for the three months ended March 31, 2006 from $588 million for the
comparable 2005 period. This increase is primarily the result of continued
growth in the business through increased sales and renewal business within South
Korea, Brazil and Taiwan of $38 million, $14 million, and $8 million,
respectively. Mexico's premiums, fees, and other revenues increased by $44
million, primarily due to increased earnings on its institutional and
traditional life businesses as well as higher fees and growth in its universal
life and pension businesses. Chile's premiums, fees, and other revenues
decreased by $11 million, primarily due to lower sales in its annuity business
resulting from management's decision not to match aggressive pricing in the
market place, partially offset by an increase in institutional premiums through
its bank distribution channel.
Net investment income increased by $20 million, or 13%, to $169 million for
the three months ended March 31, 2006 from $149 million for the comparable 2005
period. Mexico and Chile's net investment income increased by $16 million and
$10 million, respectively, due to higher inflation rates and increases in total
invested assets. The investment valuations and returns on these invested assets
are linked to the inflation rates. South Korea, Brazil, and Taiwan's net
investment income increased by $5 million, $2 million, and $2 million,
respectively, primarily due to increases in invested assets. These increases in
net investment income were partially offset by a decrease of $20 million in
Canada due to the realignment of economic capital.
The remainder of the increase in total revenues, excluding net investment
gains (losses), can be attributed to business growth and net investment income
in the other countries. Changes in foreign currency exchange rates account for
$29 million of the increase in total revenues, excluding net investment
gains(losses).
Expenses
Total expenses increased by $301 million, or 49%, to $919 million for the
three months ended March 31, 2006 from $618 million for the comparable 2005
period. The acquisition of Travelers contributed $185 million to the period over
period increase. Excluding the impact of Travelers, total expenses increased by
$116 million, or 19%, over the comparable 2005 period.
Policyholder benefit and claims, policyholder dividends and interest
credited to policyholder account balances increased by $61 million, or 14%, to
$504 million for the three months ended March 31, 2006 from $443 million for the
comparable 2005 period. Policyholder benefits and claims, policyholder dividends
and interest credited to policyholders accounts in Mexico increased by $30
million, primarily due to an increase in policyholder benefits and claims of $22
million commensurate with growth in the traditional life business discussed
above, as well as an increase in interest credited to policyholders account of
$16 million in line with the net investment income increase in Mexico. Partially
offsetting these increases in Mexico is a decrease in certain policyholder
liabilities caused by a decrease in the unrealized investment gains on the
invested assets supporting those liabilities of $8 million. South Korea, Brazil,
and Taiwan's policyholder benefits and claims, policyholder dividends and
interest credited to policyholders accounts increased by $15 million, $12
million, and $11 million, respectively, commensurate with the business growth
discussed above. These increases in policyholder benefits and claims,
policyholder dividends and interest credited to policyholders accounts are
75
partially offset by a decrease of $4 million in Chile, which is primarily due to
a decrease in its annuity business offset partially by an increase in its
interest credited to policyholders in line with the net investment income
increase in Chile.
Other expenses increased by $55 million, or 31%, to $230 million for the
three months ended March 31, 2006 from $175 million for the comparable 2005
period. South Korea's other expenses increased by $12 million, primarily due to
an increase in the amortization of DAC and additional overhead expenses, both of
which are due to the growth in business. Mexico's other expenses increased by
$11 million, primarily due to an increase in commissions commensurate to the
business growth discussed above as well as an increase in its litigation
liabilities and additional expenses associated with the start of the Mexican
Pension Business ("AFORE"). Brazil's other expenses increased by $6 million,
primarily due to the growth in business discussed above. Chile's other expenses
increased by $4 million, primarily due to increased commissions associated with
its institutional business, this was partially offset by a decrease in the
commissions of its annuity business. Other expenses associated with the home
office increased by $22 million primarily due to an increase in expenses for
information technology projects, growth initiatives projects, and integration
costs as well as an increase in compensation resulting from an increase in
headcount from the comparable 2005 period.
The remainder of the increase in total expenses can be attributed to
business growth in the other countries. Changes in foreign currency exchange
rates account for $25 million of the increase in total expenses.
REINSURANCE
The following table presents consolidated financial information for the
Reinsurance segment for the periods indicated:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
------- -------
(IN MILLIONS)
REVENUES
Premiums.................................................... $ 993 $ 903
Universal life and investment-type product policy fees...... -- --
Net investment income....................................... 175 150
Other revenues.............................................. 15 11
Net investment gains (losses)............................... 7 28
------ ------
Total revenues............................................ 1,190 1,092
------ ------
EXPENSES
Policyholder benefits and claims............................ 813 739
Interest credited to policyholder account balances.......... 63 56
Policyholder dividends...................................... -- --
Other expenses.............................................. 275 253
------ ------
Total expenses............................................ 1,151 1,048
------ ------
Income before provision for income taxes.................... 39 44
Provision for income taxes.................................. 13 15
------ ------
Net income.................................................. $ 26 $ 29
====== ======
</Table>
The Company's Reinsurance segment is comprised of the life reinsurance
business of Reinsurance Group of America, Incorporated ("RGA"), a publicly
traded company. RGA's operations in North America are its largest and include
operations of its Canadian and U.S. subsidiaries. In addition to these
operations, RGA has subsidiary companies, branch offices, or representative
offices in Australia, Barbados, China, Hong Kong, India, Ireland, Japan, Mexico,
South Africa, South Korea, Spain, Taiwan and the United Kingdom.
76
THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2005 -- REINSURANCE
Net Income
Net income decreased by $3 million, or 10%, to $26 million for the three
months ended March 31, 2006 from $29 million for the comparable 2005 period.
This decrease in net income is attributable to a reduction in net
investment gains of $14 million, net of income taxes, primarily as a result of a
decrease in the fair value of embedded derivatives related to funds withheld and
modified coinsurance contracts, and an increase in other expenses of $12
million, net of income taxes, primarily related to interest expense, the
amortization of acquired business, and equity compensation expense.
This decrease in net income is partially offset by a 10% increase in
premiums and related policyholder benefits and claims, adding $10 million to net
income, an increase in investment income net of interest credited of $11
million, net of income taxes, and an increase of $2 million in other revenues,
net of income taxes. The increases in premiums and policyholder benefits and
claims are primarily due to added in force from facultative and automatic
treaties and renewals of existing blocks of business in the U.S. and
international operations. Investment income growth, net of interest credited, is
due to growth in the invested asset base. Other revenue growth is related to an
increase in surrender charges and financial reinsurance fees.
Revenues
Total revenues, excluding net investment gains (losses), increased by $119
million, or 11%, to $1,183 million for the three months ended March 31, 2006
from $1,064 million for the comparable 2005 period.
The increase in revenues is primarily associated with growth in new
premiums from facultative and automatic treaties and renewal premiums on
existing blocks of business in all RGA operating segments, including the U.S.,
which contributed $45 million; Canada, which contributed $21 million; and Asia
Pacific, which contributed $21 million. Growth in RGA's Europe and South Africa
operating segment accounted for the remainder of the increase. Premium levels
are significantly influenced by large transactions and reporting practices of
ceding companies and, as a result, can fluctuate from period to period.
Net investment income increased $25 million, primarily due to growth in the
invested asset base from positive operating cash inflows, additional deposits
associated with the coinsurance of annuity products, and net proceeds of RGA's
$400 million junior subordinated note offering in December 2005, partially
offset by a decrease in net investment income related to a realignment of
economic capital. Investment yields were relatively flat as compared to the
prior period.
Other revenues increased $4 million primarily due to an increase in
surrender charges on asset-intensive business and an increase in fees associated
with financial reinsurance.
Additionally, included within the total revenue increase is a reduction in
revenue associated with foreign currency exchange rate movements of $9 million.
Expenses
Total expenses increased by $103 million, or 10%, to $1,151 million for the
three months ended March 31, 2006 from $1,048 million for the comparable 2005
period.
This increase is commensurate with the growth in revenues and is primarily
attributable to an increase of $74 million in policyholder benefits and claims,
primarily associated with a growth in insurance in force of approximately $280
billion and $7 million in interest credited, which is generally offset by a
corresponding increase in investment income.
Other expenses were up $22 million due to a $7 million increase in interest
expense associated with the aforementioned junior subordinated note offering in
December 2005, $5 million in amortization expense
77
associated with the value of business acquired, and $4 million in an increase in
stock-based compensation expense. The remaining increase of $6 million is
primarily compensation and overhead related expenses associated with RGA's
international expansion and general growth in operations.
Additionally, included within the total expense increase is a reduction in
expenses associated with foreign currency exchange rate movements of $8 million.
CORPORATE & OTHER
The following table presents consolidated financial information for
Corporate & Other for the periods indicated:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-------------------
2006 2005
------ -------
(IN MILLIONS)
REVENUES
Premiums.................................................... $ 9 $ (3)
Net investment income....................................... 279 129
Other revenues.............................................. 7 3
Net investment gains (losses)............................... (29) (117)
---- -----
Total revenues............................................ 266 12
---- -----
EXPENSES
Policyholder benefits and claims............................ 8 (2)
Interest credited to policyholder account balances.......... -- (1)
Policyholder dividends...................................... (1) 4
Other expenses.............................................. 311 184
---- -----
Total expenses............................................ 318 185
---- -----
Income (loss) from continuing operations before income tax
benefit................................................... (52) (173)
Income tax benefit.......................................... (63) (93)
---- -----
Income (loss) from continuing operations.................... 11 (80)
Income (loss) from discontinued operations, net of income
taxes..................................................... (2) 169
---- -----
Net income.................................................. 9 89
Preferred stock dividends................................... 33 --
---- -----
Net income (loss) available to common shareholders.......... $(24) $ 89
==== =====
</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.
THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2005 -- CORPORATE & OTHER
Income (loss) from Continuing Operations
Income (loss) from continuing operations increased by $91 million, or 114%,
to $11 million for the three months ended March 31, 2006 from a loss of $80
million for the comparable 2005 period. The acquisition of Travelers, excluding
Travelers financing and integration costs incurred by the Company, contributed
78
$44 million to income from continuing operations, which includes $10 million,
net of income taxes, of net investment losses. Excluding the impact of
Travelers, income (loss) from continuing operations increased by $47 million, or
59%, from the comparable 2005 period. Included in this increase are lower net
investment losses of $66 million, net of income taxes. Excluding the impact of
Travelers and the decrease in net investment losses, income from continuing
operations decreased by $19 million.
The decrease in income from continuing operations is primarily attributable
to higher interest expense on debt (principally associated with the issuance of
debt to finance the Travelers acquisition), interest credited to bankholder
deposits, corporate support expenses and integration costs associated with the
acquisition of Travelers of $43 million, $16 million, $7 million and $6 million,
respectively, all of which are net of income taxes, partially offset by higher
net investment income of $47 million, net of income taxes.
Revenues
Total revenues, excluding net investment gains (losses), increased by $166
million, or 129%, to $295 million for the three months ended March 31, 2006 from
$129 million for the comparable 2005 period. The acquisition of Travelers
contributed $85 million to the period over period increase. Excluding the impact
of Travelers and the change in net investment gains (losses), total revenues
increased by $81 million, or 63%, from the comparable 2005 period. This increase
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. Also included as a component of total revenues are the elimination of
intersegment amounts which are offset within total expenses.
Expenses
Total expenses increased by $133 million, or 72%, to $318 million for the
three months ended March 31, 2006 from $185 million for the comparable 2005
period. The acquisition of Travelers contributed $17 million to the period over
period increase. Excluding the impact of Travelers, total expenses increased by
$116 million, or 63%, from the comparable 2005 period. This increase is
attributable to higher interest expense of $69 million as a result of the
issuance of senior notes in 2004 and 2005, which includes $62 million of
expenses from the financing of the acquisition of Travelers. Integration costs
associated with the acquisition of Travelers were higher by $10 million and
corporate support expenses increased by $11 million. As a result of growth in
the business, interest credited to bank holder deposits increased by $26 million
at MetLife Bank. The remainder of the increase is attributable to the
eliminations of intersegment amounts.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
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, 2005, each of the Holding Company's 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 accounting 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
79
the various state insurance departments may impact the effect of Codification on
the statutory capital and surplus of the Holding Company's 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 ("ALM Committees").
The ALM 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 ALM 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 reevaluates 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 $7.0
billion at March 31, 2006 and $6.7 billion at December 31, 2005, respectively.
Liquidity needs are determined from a rolling 12-month forecast by portfolio and
are monitored daily. Asset mix and maturities are adjusted based on forecast.
Cash flow testing and stress testing provide additional perspectives on
liquidity. 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 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 flow 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.
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.
80
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 March 31, 2006 and December 31, 2005, the Company had
$177 billion and $179 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-term 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 both March 31, 2006 and December 31, 2005, the Company had outstanding
$1.4 billion in short-term debt and $9.9 billion in long-term debt.
Debt Issuances. During the three months ended March 31, 2006, the Company
did not issue any debt except for the repurchase agreements as described below.
MetLife Bank has entered into several repurchase agreements with the
Federal Home Loan Bank of New York (the "FHLB of NY") whereby MetLife Bank has
issued such repurchase agreements in exchange for cash and for which the FHLB of
NY has been granted a blanket lien on MetLife Bank's residential mortgages and
mortgage-backed securities to collateralize MetLife Bank's obligations under the
repurchase agreements. The repurchase agreements and the related security
agreement represented by this blanket lien provide that upon any event of
default by MetLife Bank the FHLB of NY's recovery is limited to the amount of
MetLife Bank's liability under the outstanding repurchase agreements. As of
March 31, 2006 and December 31, 2005, the Company's total liability was $938
million and $855 million, respectively, which is included in long-term debt.
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 March 31, 2006 and December
31, 2005, MetLife Funding had a tangible net worth of $11 million. MetLife
Funding raises cash 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 March 31, 2006 and
December 31, 2005, MetLife Funding had total outstanding liabilities, including
accrued interest payable, of $390 million and $456 million, respectively,
consisting primarily of commercial paper.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- The
Company -- Liquidity Sources -- Debt Issuances" included in MetLife Inc.'s 2005
Annual Report on Form 10-K filed with the SEC ("2005 Annual Report") for further
information.
81
Credit Facilities. The Company maintains committed and unsecured credit
facilities aggregating $3.9 billion as of March 31, 2006. When drawn upon, these
facilities bear interest at varying rates in accordance with the respective
agreements. The facilities can be used for general corporate purposes and at
March 31, 2006, $3.0 billion of the facilities also serve as back-up lines of
credit for the Company's commercial paper programs. The following table provides
details on these facilities as of March 31, 2006:
<Table>
<Caption>
LETTER OF
CREDIT UNUSED
BORROWER(S) EXPIRATION CAPACITY ISSUANCES DRAWDOWNS COMMITMENTS
- ------------------------ -------------- -------- --------- --------- -----------
(IN MILLIONS)
MetLife, Inc., MetLife
Funding, Inc. and
Metropolitan Life
Insurance Company..... April 2009 $1,500(1) $243 $ -- $1,257
MetLife, Inc. and
MetLife Funding,
Inc. ................. April 2010 1,500(1) 215 -- 1,285
MetLife Bank, N.A. ..... July 2006 200 -- -- 200
Reinsurance Group of
America,
Incorporated.......... March 2011 25 -- 25 --
Reinsurance Group of
America,
Incorporated.......... May 2007 26 -- 26 --
Reinsurance Group of
America,
Incorporated.......... September 2010 600 240 50 310
------ ---- ---- ------
Total.............. $3,851 $698 $101 $3,052
====== ==== ==== ======
</Table>
- ---------------
(1) These facilities serve as back up lines of credit for the Company's
commercial paper programs.
Letters of Credit. 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 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 expires five years after the closing of the
acquisition. The following table provides details on the capacity and
outstanding balances of all committed facilities as of March 31, 2006:
<Table>
<Caption>
LETTER OF
CREDIT UNUSED
ACCOUNT PARTY EXPIRATION CAPACITY ISSUANCES COMMITMENTS
- ------------------------------------- -------------- -------- --------- -----------
(IN MILLIONS)
The Travelers Life and Annuity
Reinsurance Company................ July 2010 $2,000 $2,000 $ --
Exeter Reassurance Company Ltd. ..... March 2015 225 225 --
Exeter Reassurance Company Ltd. ..... June 2015 250 250 --
Exeter Reassurance Company Ltd. ..... September 2015 325 19 306
Exeter Reassurance Company Ltd. and
MetLife, Inc. ..................... March 2016 500 290 210
------ ------ ----
Total........................... $3,300 $2,784 $516
====== ====== ====
</Table>
- ---------------
Note: The Holding Company is a guarantor under the first four agreements above.
At March 31, 2006 and December 31, 2005, the Company had outstanding $3.7
billion and $3.6 billion, respectively, in letters of credit from various banks,
of which $3.5 billion and $3.4 billion, respectively, were part of committed
facilities. As of March 31, 2006, these letters of credit automatically renew
for one year
82
periods except for $774 million which expire in nine years and $10 million which
expire 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.
LIQUIDITY USES
Insurance Liabilities. The Company's principal cash outflows primarily
relate to the liabilities associated with its various life insurance, property
and casualty, annuity and group pension products, operating expenses and income
taxes, as well as principal and interest on its outstanding debt obligations.
Liabilities arising from its insurance activities primarily relate to benefit
payments under the aforementioned products, as well as payments for policy
surrenders, withdrawals and loans.
Investment and Other. Additional cash outflows include those related to
obligations of securities lending and dollar roll activities, investments in
real estate, limited partnerships and joint ventures, as well as
litigation-related liabilities.
The following table summarizes the Company's major contractual obligations
as of March 31, 2006:
<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)....... $109,321 $19,508 $ 8,069 $81,744
Payables for collateral under securities
loaned and other transactions......... 47,059 47,059 -- --
Long-term debt(3)....................... 19,465 2,883 1,600 14,982
Mortgage commitments.................... 2,533 1,940 258 335
Partnership investments(4).............. 2,704 2,704 -- --
Junior subordinated debt securities
underlying common equity units(5)..... 2,407 2,407 -- --
Operating leases........................ 1,300 571 241 488
Shares subject to mandatory
redemption(3)......................... 350 -- -- 350
Capital leases.......................... 69 34 9 26
Contracts to purchase real estate....... 6 6 -- --
-------- ------- ------- -------
Total................................... $185,214 $77,112 $10,177 $97,925
======== ======= ======= =======
</Table>
- ---------------
(1) Other long-term liabilities include various investment-type products with
contractually scheduled maturities, including GICs, 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 $82.9 billion and policyholder
account balances of $114.5 billion, at March 31, 2006, 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 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 $63.8 billion relating to traditional life, health and
disability insurance products and policyholder account balances of
approximately $41.2 billion relating to deferred annuities, $28.0 billion
for group and universal life products and approximately $27.8 billion for
funding agreements
83
without fixed maturity dates. Significant uncertainties relating to these
liabilities include mortality, morbidity, expenses, persistency, investment
returns, inflation and the timing of payments. See "-- The
Company -- Asset/Liability Management."
Amounts included in other long-term liabilities reflect estimated cash
payments to be made to policyholders. Such cash outflows reflect
adjustments for the estimated timing of mortality, retirement, and other
appropriate factors, but are undiscounted with respect to interest. The
amount shown in the More than Five Years column represents the sum of cash
flows, also adjusted for the estimated timing of mortality, retirement and
other appropriate factors and undiscounted with respect to interest,
extending for more than 100 years from the present date. As a result, the
sum of the cash outflows shown for all years in the table of $109.3 billion
exceeds the corresponding liability amounts of $51.2 billion included in
the unaudited interim condensed consolidated financial statements at March
31, 2006. The liability amount in the unaudited interim condensed
consolidated financial statements reflects the discounting for interest, as
well as adjustments for the timing of other factors as described above.
(3) Amounts differ from the balances presented on the consolidated balance
sheets. The amounts above do not include any fair value adjustments, related
premiums and discounts or capital leases which are presented separately.
Amounts include interest to be paid on fixed-rate debt only.
(4) The Company anticipates that these amounts could be invested in these
partnerships any time over the next five years, but are presented in the
current period, as the timing of the fulfillment of the obligation cannot be
predicted.
(5) Amounts include interest to be paid on junior subordinated debt.
As of March 31, 2006, 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 March 31, 2006, 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, 2005.
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, as subsequently amended, 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 250% 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
March 31, 2006, 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, 2005.
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.
84
General American has agreed to guarantee certain contractual obligations of
its former subsidiaries, Paragon Life Insurance Company (which merged into
Metropolitan Life on May 1, 2006), 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 March 31, 2006, 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, 2005.
The Holding Company has net worth maintenance agreements with three of its
insurance subsidiaries, MetLife Investors, First MetLife Investors Insurance
Company and MetLife Investors Insurance Company of California. Under these
agreements, as subsequently amended, the 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 March 31, 2006, the capital and surplus of each of these subsidiaries
was 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, 2005.
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. In connection with the acquisition of Travelers, the Holding
Company also committed to the South Carolina Department of Insurance to take
necessary action to maintain the minimum capital and surplus of The Travelers
Life and Annuity Reinsurance Company, a South Carolina subsidiary of the Holding
Company, at the greater of $250,000 or 10% of net loss reserves (loss reserves
less deferred acquisition costs).
Management does not anticipate that these arrangements will place any
significant demands upon the Company's liquidity resources.
Litigation. Various litigation, including purported or certified class
actions, and various 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
consolidated financial position, based on information currently known by the
Company's management, in its opinion, the outcome of such pending investigations
and legal proceedings are not likely to have such an effect. However,
85
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 and
preferred 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
$2,306 million and $1,656 million for the three months ended March 31, 2006 and
2005, respectively. The $650 million increase in operating cash flows in 2006
over the comparable 2005 period is primarily attributable to continued growth in
the annuity business, as well as growth in disability, dental, long-term care
business and group life, offset by a reduction in retirement & savings.
Net cash used in investing activities was $15,056 million and $7,017
million for the three months ended March 31, 2006 and 2005, respectively. The
$8,039 million increase in net cash used in investing activities in 2006 over
the comparable 2005 period is primarily due to the increase in net purchases of
fixed maturities, the increase in the net origination of mortgage and consumer
loans and the increase in the net purchase of real estate and real estate joint
ventures as well as other limited partnerships. An increase in net purchases of
short-term investments and other invested assets also resulted in an increase in
net cash used in investing activities. This was partially offset by the increase
in net purchases of equity securities and the decrease in net cash provided by
short-term investments. In addition, the 2005 period includes proceeds
associated with the sale of SSRM. Overall, the increase in net cash used in
investing activities results from an increase in operating cash flows as well as
an increase in financing cash flows resulting from increased securities.
Net cash provided by financing activities was $13,876 million and $5,180
million for the three months ended March 31, 2006 and 2005, respectively. The
$8,696 million increase in net cash provided by financing activities in 2006
over the comparable 2005 period is primarily attributable to an increase in the
amount of securities lending cash collateral invested in connection with the
program and a decrease in short-term debt repayments as compared to 2005. This
increase was partially offset by a decrease in net cash provided by policyholder
account balances.
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, 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. As of their most
recently filed reports with the federal banking regulatory agencies, 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.
86
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 high 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 its insurance subsidiaries. The Holding Company's
insurance subsidiaries are subject to regulatory restrictions on the payment of
dividends imposed by the regulators of their respective domiciles. The dividend
limitation for U.S. insurance subsidiaries is based on the surplus to
policyholders as of the immediately preceding calendar year and statutory net
gain from operations for the immediately preceding calendar year. 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 dividends which can be paid to the Holding Company by
Metropolitan Life, MetLife Insurance Company of Connecticut ("MICC"), formerly
The Travelers Insurance Company, MPC and Metropolitan Tower Life Insurance
Company ("MTL"), in 2006, without prior regulatory approval, is $863 million, $0
million, $178 million and $85 million, respectively. If paid before a specified
date in 2006, some or all of an otherwise ordinary dividend may be deemed
special by the relevant regulatory authority and require approval. During the
three months ended March 31, 2006, no subsidiaries paid dividends to the Holding
Company.
Liquid Assets. An integral part of the Holding Company's liquidity
management is the amount of liquid assets it holds. Liquid assets include cash,
cash equivalents, short-term investments and marketable fixed maturity
securities. At March 31, 2006 and December 31, 2005, the Holding Company had
$662 million and $668 million in liquid assets, respectively.
Global Funding Sources. Liquidity is also provided by a variety of both
short-term and long-term instruments, commercial paper, medium- and long-term
debt, capital securities and stockholders' equity. The diversity 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 March 31, 2006 and December 31, 2005, the Holding Company had $971
million and $961 million in short-term debt outstanding, respectively. At both
March 31, 2006 and December 31, 2005, the Holding Company had $7.3 billion of
unaffiliated long-term debt outstanding. At March 31, 2006 and December 31,
2005, the Holding Company had $296 million and $286 million of affiliated
long-term debt outstanding, respectively.
87
On April 27, 2005, the Holding Company filed a shelf registration statement
(the "2005 Registration Statement") with the 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
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 notes, $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. During the three months ended March 31, 2006, the Holding
Company had no new debt issuances. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- The Holding Company -- Liquidity Sources -- Debt Issuances" and
"-- Common Equity Units" included in the 2005 Annual Report for further
information.
Debt Repayments. The Holding Company made no debt repayments for the three
months ended March 31, 2006 and 2005. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- The Holding Company -- Liquidity Sources -- Debt Repayments"
included in the 2005 Annual Report for further information.
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.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- The Holding
Company -- Liquidity Sources -- Preferred Stock" included in the 2005 Annual
Report for further information.
See also "-- Liquidity Uses -- Dividends."
Common Equity Units. In connection with financing the acquisition of
Travelers on July 1, 2005, 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 Trusts and $64 million in
trust common securities issued equally by the Trusts. The common and preferred
securities of the Trusts, totaling $2,134 million, represent undivided
beneficial ownership interests in the assets of the 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.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- The Holding
Company -- Liquidity Sources -- Common Equity Units" included in the 2005 Annual
Report for further information.
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,
88
and $1.5 billion expiring in 2010, which it shares with MetLife Funding) as of
March 31, 2006. Borrowings under these facilities bear interest at varying rates
as 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 March 31, 2006, there were no borrowings against these credit
facilities. At March 31, 2006, $458 million of the unsecured credit facilities
support the letters of credit issued on behalf of the Company, of which $215
million is in support of letters of credit issued on behalf of the Holding
Company.
Letters of Credit. On July 1, 2005, in connection with the closing of the
acquisition of Travelers, the L/C Agreement entered into by TLARC and various
institutional lenders 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 expires five years after the closing of the
acquisition. The following table provides details on the capacity and
outstanding balances of all committed facilities as of March 31, 2006:
<Table>
<Caption>
LETTER OF
CREDIT UNUSED
ACCOUNT PARTY EXPIRATION CAPACITY ISSUANCES COMMITMENTS
- ---------------------------------- -------------- -------- ------------- -----------
(IN MILLIONS)
The Travelers Life and Annuity
Reinsurance Company............. July 2010 $2,000 $2,000 $ --
Exeter Reassurance Company
Ltd. ........................... March 2015 225 225 --
Exeter Reassurance Company
Ltd. ........................... June 2015 250 250 --
Exeter Reassurance Company
Ltd. ........................... September 2015 325 19 306
Exeter Reassurance Company Ltd.
and MetLife, Inc. .............. March 2016 500 290 210
------ ------ ----
Total...................... $3,300 $2,784 $516
====== ====== ====
</Table>
- ---------------
Note: The Holding Company is a guarantor under the first four agreements above.
At March 31, 2006 and December 31, 2005, the Holding Company had $215
million and $190 million, respectively, in outstanding letters of credit from
various banks, all of which automatically renew for one year periods. 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.
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. Effective March 6, 2006, the Holding Company's board of
directors declared dividends of $0.3432031 per share, for a total of $9 million,
on its Series A preferred shares, and $0.4062500 per share, for a total of $24
million, on its Series B preferred shares. Both dividends were paid on March 15,
2006 to shareholders of record as of February 28, 2006.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- The Holding Company
-- Liquidity Uses -- Dividends" included in the 2005 Annual Report for further
information.
Affiliated Transactions. During the three months ended March 31, 2006, the
Holding Company invested an aggregate of $89 million in various subsidiaries.
On December 12, 2005, RGA repurchased 1.6 million shares of its outstanding
common stock at an aggregate price of approximately $76 million under an
accelerated share repurchase agreement with a major bank. The bank borrowed the
stock sold to RGA from third parties and purchased the shares in the open market
over the subsequent few months to return to the lenders. RGA would either pay or
receive an amount based on the actual amount paid by the bank to purchase the
shares. These repurchases resulted in an increase
89
in the Company's ownership percentage of RGA to approximately to 53% at December
31, 2005 from approximately 52% at December 31, 2004. In February 2006, the
final purchase price was determined resulting in a cash settlement substantially
equal to the aggregate cost. RGA recorded the initial repurchase of shares as
treasury stock and recorded the amount received as an adjustment to the cost of
the treasury stock. At March 31, 2006, the Company's ownership percentage of RGA
remains at approximately 53%.
Share Repurchase. On October 26, 2004, the Holding Company's Board of
Directors authorized a $1 billion common stock repurchase program, of which $716
million is remaining on this 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, the Holding Company has 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 stock 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 approximately $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.
Support Agreements. The Holding Company has net worth maintenance
agreements with three of its insurance subsidiaries, MetLife Investors, First
MetLife Investors Insurance Company and MetLife Investors Insurance Company of
California. Under these 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 March 31, 2006, the capital and surplus of
each of these subsidiaries was 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, 2005.
In connection with the acquisition of Travelers, the Holding Company
committed to the South Carolina Department of Insurance to take necessary action
to maintain the minimum capital and surplus of The Travelers Life and Annuity
Reinsurance Company, a South Carolina subsidiary of the Holding Company, at the
greater of $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 and preferred stock, contribute
capital to its subsidiaries, pay all operating expenses, and meet its cash
needs.
OFF-BALANCE SHEET ARRANGEMENTS
COMMITMENTS TO FUND PARTNERSHIP INVESTMENTS
The Company makes commitments to fund partnership investments in the normal
course of business for the purpose of enhancing the Company's total return on
its investment portfolio. The amounts of these unfunded commitments were $2,704
million and $2,684 million at March 31, 2006 and December 31, 2005,
respectively. The Company anticipates that these amounts will be invested in
partnerships over the next five years. There are no other obligations or
liabilities arising from such arrangements that are reasonably likely to become
material.
90
MORTGAGE LOAN COMMITMENTS
The Company commits to lend funds under mortgage loan commitments. The
amounts of these mortgage loan commitments were $2,533 million and $2,974
million at March 31, 2006 and December 31, 2005, respectively. The purpose of
these loans is to enhance the Company's total return on its investment
portfolio. There are no other obligations or liabilities arising from such
arrangements that are reasonably likely to become material.
LEASE COMMITMENTS
The Company, as lessee, has entered into various lease and sublease
agreements for office space, data processing and other equipment. The Company's
commitments under such lease agreements are included within the contractual
obligations table. See "-- Liquidity and Capital Resources -- The Company --
Liquidity Uses -- Investment and Other."
CREDIT FACILITIES AND LETTER OF CREDIT
The Company maintains committed and unsecured credit facilities and letters
of credit with various financial institutions. See "-- Liquidity and Capital
Resources -- The Company -- Liquidity Sources -- Credit Facilities" and
"-- Letters of Credit" for further description of such arrangements.
SHARE-BASED ARRANGEMENTS
In connection with the issuance of the common equity units, the Holding
Company has issued forward stock purchase contracts under which the Company will
issue, in 2008 and 2009, between 39.0 and 47.8 million shares, depending upon
whether the share price is greater than $43.45 and less than $53.10. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations --Liquidity and Capital Resources -- The Holding Company -- Liquidity
Sources -- Common Equity Units" included in the 2005 Annual Report for further
information.
GUARANTEES
In the normal 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, with a cumulative
maximum of $3.5 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 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.
The Company has also guaranteed minimum investment returns on certain
international retirement funds in accordance with local laws. Since these
guarantees are 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 guarantees in the future.
91
In the first quarter of 2006, the Company did not record any additional
liabilities for indemnities, guarantees and commitments. In the first quarter of
2005, the Company recorded a liability of $4 million with respect to indemnities
provided in connection with 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 under these indemnities is approximately $500
million. Due to the uncertainty in assessing changes to the liability over the
term, the liability on the Company's consolidated balance sheet will remain
until either expiration or settlement of the guarantee unless evidence clearly
indicates that the estimates should be revised. The Company's recorded
liabilities at both March 31, 2006 and December 31, 2005 for indemnities,
guarantees and commitments were $9 million.
In connection 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 $491 million and $593 million at March 31, 2006
and December 31, 2005, respectively. The credit default swaps expire at various
times during the next ten years.
OTHER COMMITMENTS
MICC is a member of the Federal Home Loan Bank of Boston (the "FHLB of
Boston") and holds $70 million of common stock of the FHLB of Boston, which is
included in equity securities on the Company's consolidated balance sheets. MICC
has also entered into several funding agreements with the FHLB of Boston whereby
MICC has issued such funding agreements in exchange for cash and for which the
FHLB of Boston has been granted a blanket lien on MICC's residential mortgages
and mortgage-backed securities to collateralize MICC's obligations under the
funding agreements. MICC 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
and the related security agreement represented by this blanket lien provide that
upon any event of default by MICC the FHLB of Boston's recovery is limited to
the amount of MICC's liability under the outstanding funding agreements. The
amount of the Company's liability for funding agreements with the FHLB of Boston
as of March 31, 2006 and December 31, 2005 is $926 million, and $1.1 billion,
respectively, which is included in policyholder account balances.
MetLife Bank is a member of the FHLB of NY and holds $46 million and $43
million of common stock of the FHLB of NY, at March 31, 2006 and December 31,
2005, respectively, which is included in equity securities on the Company's
consolidated balance sheets. MetLife Bank has also entered into repurchase
agreements with the FHLB of NY whereby MetLife Bank has issued repurchase
agreements in exchange for cash and for which the FHLB of NY has been granted a
blanket lien on MetLife Bank's residential mortgages and mortgage-backed
securities to collateralize MetLife Bank's obligations under the repurchase
agreements. MetLife Bank 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 repurchase
agreements and the related security agreement represented by this blanket lien
provide that upon any event of default by MetLife Bank the FHLB of NY's recovery
is limited to the amount of MetLife Bank's liability under the outstanding
repurchase agreements. The amount of the Company's liability for repurchase
agreements with the FHLB of NY as of March 31, 2006 and December 31, 2005 are
$938 million and $855 million, respectively, which is included in long-term
debt.
COLLATERAL FOR SECURITIES LENDING
The Company has noncash collateral for securities lending on deposits from
customers, which cannot be sold or re-pledged, and which has not been recorded
on its consolidated balance sheets. The amount of this collateral was $150
million and $207 million at March 31, 2006 and December 31, 2005, respectively.
92
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.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 123 (revised 2004), Share-Based Payment ("SFAS
123(r)"), which revises SFAS No. 123, Accounting for Stock-Based
Compensation("SFAS 123"), as amended by SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure ("SFAS 148") and supersedes Accounting
Principles Board ("APB") Opinion No. 25 ("APB 25"). SFAS 123(r) includes
supplemental application guidance issued by the Securities and Exchange
Commission in Staff Accounting Bulletin No. 107, Share-Based Payment, ("SAB
107") -- using the modified prospective transition method. In accordance with
the modified prospective transition method, results for prior periods have not
been restated. SFAS 123(r) requires that the cost of all stock-based
transactions be measured at fair value and recognized over the period during
which a grantee is required to provide goods or services in exchange for the
award. The Company had previously adopted the fair value method of accounting
for stock-based awards as prescribed by SFAS 123 on a prospective basis
effective January 1, 2003, and prior to January 1, 2003, accounted for its
stock-based awards to employees under the intrinsic value method prescribed by
APB 25. The Company did not modify the substantive terms of any existing awards
prior to adoption of SFAS 123(r).
Under the modified prospective transition method, compensation expense
recognized in the three months ended March 31, 2006 includes: (a) compensation
expense for all stock-based awards granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value estimated in accordance with
the original provisions of SFAS 123, and (b) compensation expense for all
stock-based awards granted beginning January 1, 2006, based on the grant date
fair value estimated in accordance with the provisions of SFAS 123(r).
The adoption of SFAS 123(r) did not have a significant impact on the
Company's financial position or results of operations as all stock-based awards
accounted for under the intrinsic value method prescribed by APB 25 had vested
prior to the adoption date and the Company had adopted the fair value
recognition provisions of SFAS 123 on January 1, 2003. As required by SFAS 148,
and carried forward in the provisions of SFAS 123(r), the Company discloses the
pro forma impact as if stock-based awards accounted for under APB 25 had been
accounted for under the fair value method.
SFAS 123 allowed forfeitures of stock-based awards to be recognized as a
reduction of compensation expense in the period in which the forfeiture
occurred. Upon adoption of SFAS 123(r), the Company changed its policy and now
incorporates an estimate of future forfeitures into the determination of
compensation expense when recognizing expense over the requisite service period.
The impact of this change in accounting policy was not significant to the
Company's financial position or results of operations.
Additionally, for awards granted after adoption, the Company changed its
policy from recognizing expense for stock-based awards over the requisite
service period to recognizing such expense over the shorter of the requisite
service period or the period to attainment of retirement-eligibility.
Prior to the adoption of SFAS 123(r), the Company presented tax benefits of
deductions resulting from the exercise of stock options within operating cash
flows in the unaudited interim condensed consolidated statements of cash flow.
SFAS 123(r) requires tax benefits resulting from tax deductions in excess of the
compensation cost recognized for those options ("excess tax benefits") be
classified and reported as a financing cash inflow upon adoption of SFAS 123(r).
The Company has adopted guidance relating to derivative financial
instruments as follows:
- Effective January 1, 2006, the Company adopted prospectively SFAS No.
155, Accounting for Certain Hybrid Instruments ("SFAS 155"). SFAS 155
amends SFAS No. 133, Accounting for Derivative Instruments and Hedging
("SFAS 133") and SFAS No. 140, Accounting for Transfers and Servicing
93
of Financial, Assets and Extinguishments of Liabilities ("SFAS 140").
SFAS 155 allows financial instruments that have embedded derivatives to
be accounted for as a whole, eliminating the need to bifurcate the
derivative from its host, if the holder elects to account for the whole
instrument on a fair value basis. In addition, among other changes, SFAS
155 (i) clarifies which interest-only strips and principal-only strips
are not subject to the requirements of SFAS 133; (ii) establishes a
requirement to evaluate interests in securitized financial assets to
identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring
bifurcation; (iii) clarifies that concentrations of credit risk in the
form of subordination are not embedded derivatives; and (iv) eliminates
the prohibition on a qualifying special-purpose entity ("QSPE") from
holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial interest. The adoption
of SFAS 155 did not have a material impact on the Company's unaudited
interim condensed consolidated financial statements.
- Effective January 1, 2006, the Company adopted prospectively 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 SFAS
133 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 occurring 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. The adoption of Issues B38 and B39 did
not have a material impact on the Company's unaudited interim condensed
consolidated financial statements.
Effective January 1, 2006, the Company adopted prospectively Emerging
Issues Task Force ("EITF") 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 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. The adoption of EITF 05-7 did not have a material impact on the
Company's unaudited interim condensed consolidated financial statements.
Effective January 1, 2006, the Company adopted EITF 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 was 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. The adoption of EITF 05-8 did not have a material impact on the
Company's unaudited interim condensed consolidated financial statements.
Effective January 1, 2006, the Company adopted 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
94
estimate rather than a change in accounting principle. The adoption of SFAS 154
did not have a material impact on the Company's 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. For all other limited partnerships, EITF 04-5 required adoption
by January 1, 2006 through a cumulative effect of a change in accounting
principle recorded in opening equity or applied retrospectively by adjusting
prior period financial statements. The adoption of the provisions of EITF 04-5
did not have a material impact on the Company's unaudited interim condensed
consolidated financial statements.
Effective November 9, 2005, the Company prospectively adopted the guidance
in Financial Accounting Standards Board ("FASB") Staff Position ("FSP") FAS
140-2, Clarification of the Application of Paragraphs 40(b) and 40(c) of FAS 140
("FSP 140-2"). FSP 140-2 clarified certain criteria relating to derivatives and
beneficial interests when considering whether an entity qualifies as a QSPE.
Under FSP 140-2, the criteria must only be met at the date the QSPE issues
beneficial interests or when a derivative financial instrument needs to be
replaced upon the occurrence of a specified event outside the control of the
transferor. The adoption of FSP 140-2 did not 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 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 for fiscal periods beginning
after June 15, 2005. The adoption of 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 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 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 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. As required by FSP 115-1, the Company
adopted this guidance on a prospective basis, which had no material impact on
the Company's unaudited interim condensed consolidated financial statements, and
has provided the required disclosures.
95
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. As of March 31, 2005, the
Company was evaluating the impacts of the repatriation provision of the AJCA and
during the second half of 2005, the Company recorded a $27 million income tax
benefit related to the repatriation of foreign earnings pursuant to Internal
Revenue Code Section 965 for which a U.S. deferred income tax provision had
previously been recorded.
FUTURE ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets -- an amendment of FASB Statement No. 140 ("SFAS 156"). SFAS
156 amends the guidance in SFAS 140. Among other requirements, SFAS 156 requires
an entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a
servicing contract in certain situations. SFAS 156 will be applied prospectively
and is effective for fiscal years beginning after September 15, 2006. SFAS 156
is not expected to have a material impact on the Company's consolidated
financial statements.
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 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 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 consolidated financial statements.
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
96
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.
97
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 for the three months ended March 31, 2006 and 2005:
<Table>
<Caption>
AT OR FOR THE
THREE MONTHS ENDED
MARCH 31,
-------------------
2006 2005
-------- --------
(IN MILLIONS)
FIXED MATURITIES
Yield(1).................................................... 6.15% 6.34%
Investment income(2)........................................ $ 3,002 $ 2,279
Net investment gains (losses)............................... $ (412) $ (114)
Ending assets(2)............................................ $240,711 $182,267
MORTGAGE AND CONSUMER LOANS
Yield(1).................................................... 6.68% 6.76%
Investment income(3)........................................ $ 585 $ 517
Net investment gains (losses)............................... $ 4 $ (11)
Ending assets............................................... $ 37,351 $ 31,977
REAL ESTATE AND REAL ESTATE JOINT VENTURES(4)
Yield(1).................................................... 12.50% 11.02%
Investment income........................................... $ 146 $ 119
Net investment gains (losses)............................... $ 17 $ 18
Ending assets............................................... $ 4,700 $ 4,377
POLICY LOANS
Yield(1).................................................... 5.84% 6.17%
Investment income........................................... $ 146 $ 138
Ending assets............................................... $ 9,987 $ 8,953
EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS
Yield(1).................................................... 12.53% 9.90%
Investment income........................................... $ 229 $ 118
Net investment gains (losses)............................... $ 27 $ 95
Ending assets............................................... $ 7,870 $ 5,514
CASH AND SHORT-TERM INVESTMENTS
Yield(1).................................................... 4.63% 4.77%
Investment income........................................... $ 80 $ 64
Net investment gains (losses)............................... $ (1) $ (1)
Ending assets............................................... $ 8,512 $ 6,470
OTHER INVESTED ASSETS(5)
Yield(1).................................................... 8.92% 9.09%
Investment income........................................... $ 171 $ 104
Net investment gains (losses)............................... $ (259) $ (8)
Ending assets............................................... $ 8,386 $ 5,331
TOTAL INVESTMENTS
Gross investment income yield(1)............................ 6.54% 6.60%
Investment fees and expenses yield.......................... (0.12%) (0.12%)
-------- --------
NET INVESTMENT INCOME YIELD................................. 6.42% 6.48%
======== ========
Gross investment income..................................... $ 4,359 $ 3,339
Investment fees and expenses................................ $ (81) $ (60)
-------- --------
NET INVESTMENT INCOME(4)(5)................................. $ 4,278 $ 3,279
======== ========
Ending assets............................................... $317,517 $244,889
======== ========
Net investment gains (losses)(4)(5)......................... $ (624) $ (21)
======== ========
</Table>
98
- ---------------
(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 include $883 million and $134 million in ending assets
relating to trading securities at March 31, 2006 and 2005, respectively.
Fixed maturities include $19 million and $1 million in investment income
relating to trading securities for the three months ended March 31, 2006 and
2005, respectively. The annualized yield on trading securities was 9.09% and
4.65% for the three months ended March 31, 2006 and 2005, respectively.
(3) Investment income from mortgage and consumer loans includes prepayment fees.
(4) Real estate and real estate joint venture investment income includes amounts
classified as discontinued operations of $0 million and $39 million for the
three months ended March 31, 2006 and 2005, respectively. Net investment
gains (losses) includes $5 million of losses and $18 million of gains
classified as discontinued operations for the three months ended March 31,
2006 and 2005, 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 $39 million and $24 million for the three
months ended March 31, 2006 and 2005, respectively. These amounts are
excluded from net investment gains (losses). Additionally, excluded from net
investment gains (losses) is ($4) million for three months ended March 31,
2006 related to settlement payments on derivatives used to hedge interest
rate and currency risk on policyholder account balances that do not qualify
for hedge accounting.
FIXED MATURITIES AND EQUITY SECURITIES AVAILABLE-FOR-SALE
Fixed maturities consist principally of publicly traded and privately
placed debt securities, and represented 75.5% and 75.2% of total cash and
invested assets at March 31, 2006 and December 31, 2005, respectively. Based on
estimated fair value, public fixed maturities represented $210,093 million, or
87.6%, and $200,177 million, or 87.0%, of total fixed maturities at March 31,
2006 and December 31, 2005, respectively. Based on estimated fair value, private
fixed maturities represented $29,735 million, or 12.4%, and $29,873 million, or
13.0%, of total fixed maturities at March 31, 2006 and December 31, 2005,
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).
99
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>
MARCH 31, 2006 DECEMBER 31, 2005
------------------------------ ------------------------------
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...................... $175,045 $176,017 73.4% $161,256 $165,577 72.0%
2 Baa........................... 47,518 47,852 20.0 47,712 49,124 21.3
3 Ba............................ 9,145 9,456 3.9 8,794 9,142 4.0
4 B............................. 5,924 5,997 2.5 5,666 5,710 2.5
5 Caa and lower................. 289 291 0.1 287 290 0.1
6 In or near default............ 24 23 -- 18 15 --
-------- -------- ----- -------- -------- -----
Subtotal...................... 237,945 239,636 99.9 223,733 229,858 99.9
Redeemable preferred stock.... 195 192 0.1 193 192 0.1
-------- -------- ----- -------- -------- -----
Total fixed maturities........ $238,140 $239,828 100.0% $223,926 $230,050 100.0%
======== ======== ===== ======== ======== =====
</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 March 31,
2006 and the lower of the applicable ratings between Moody's and S&P at
December 31, 2005. 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 is used.
100
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 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>
MARCH 31, 2006
--------------------------------------------------
COST OR GROSS UNREALIZED
AMORTIZED ----------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
--------- ------- ------- ---------- -----
(IN MILLIONS)
U.S. corporate securities.............. $ 73,621 $1,866 $1,590 $ 73,897 30.8%
Residential mortgage-backed
securities........................... 52,630 241 855 52,016 21.7
Foreign corporate securities........... 34,287 1,480 739 35,028 14.6
U.S. Treasury/agency securities........ 27,418 872 566 27,724 11.6
Commercial mortgage-backed
securities........................... 20,286 155 412 20,029 8.3
Asset-backed securities................ 13,656 74 100 13,630 5.7
Foreign government securities.......... 10,324 1,269 54 11,539 4.8
State and political subdivision
securities........................... 4,768 146 75 4,839 2.0
Other fixed maturity securities........ 955 18 39 934 0.4
-------- ------ ------ -------- -----
Total bonds.......................... 237,945 6,121 4,430 239,636 99.9
Redeemable preferred stock............. 195 2 5 192 0.1
-------- ------ ------ -------- -----
Total fixed maturities............... $238,140 $6,123 $4,435 $239,828 100.0%
======== ====== ====== ======== =====
Common stock........................... $ 1,983 $ 341 $ 23 $ 2,301 68.6%
Non-redeemable preferred stock......... 1,029 43 17 1,055 31.4
-------- ------ ------ -------- -----
Total equity securities(1)........... $ 3,012 $ 384 $ 40 $ 3,356 100.0%
======== ====== ====== ======== =====
</Table>
<Table>
<Caption>
DECEMBER 31, 2005
--------------------------------------------------
COST OR GROSS UNREALIZED
AMORTIZED ----------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
--------- ------- ------- ---------- -----
(IN MILLIONS)
U.S. corporate securities.............. $ 72,339 $2,814 $ 835 $ 74,318 32.3%
Residential mortgage-backed
securities........................... 47,365 353 472 47,246 20.5
Foreign corporate securities........... 33,578 1,842 439 34,981 15.2
U.S. Treasury/agency securities........ 25,643 1,401 86 26,958 11.7
Commercial mortgage-backed
securities........................... 17,682 223 207 17,698 7.7
Asset-backed securities................ 11,533 91 51 11,573 5.0
Foreign government securities.......... 10,080 1,401 35 11,446 5.0
State and political subdivision
securities........................... 4,601 185 36 4,750 2.1
Other fixed maturity securities........ 912 17 41 888 0.4
-------- ------ ------ -------- -----
Total bonds.......................... 223,733 8,327 2,202 229,858 99.9
Redeemable preferred stock............. 193 2 3 192 0.1
-------- ------ ------ -------- -----
Total fixed maturities............... $223,926 $8,329 $2,205 $230,050 100.0%
======== ====== ====== ======== =====
Common stock........................... $ 2,004 $ 250 $ 30 $ 2,224 66.6%
Non-redeemable preferred stock......... 1,080 45 11 1,114 33.4
-------- ------ ------ -------- -----
Total equity securities(1)........... $ 3,084 $ 295 $ 41 $ 3,338 100.0%
======== ====== ====== ======== =====
</Table>
101
- ---------------
(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 $403 million and $472 million at
March 31, 2006 and December 31, 2005, 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 $9 million and $19
million for the three months ended March 31, 2006 and 2005, respectively. The
Company's three largest impairments totaled $5 million and $18 million for the
three months ended March 31, 2006 and 2005, respectively. The circumstances that
gave rise to these impairments were financial restructurings, bankruptcy filings
or difficult underlying operating environments for the entities concerned. For
the three months ended March 31, 2006 and 2005, the Company sold or disposed of
fixed maturities and equity securities at a loss that had a fair value of
$27,503 million and $21,428 million, respectively. Gross losses excluding
impairments for fixed maturities and equity securities were $524 million and
$229 million for the three months ended March 31, 2006 and 2005, respectively.
The following tables present the cost or amortized cost, gross unrealized
losses and number of securities for fixed maturities and equity securities at
March 31, 2006 and December 31, 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>
MARCH 31, 2006
------------------------------------------------------------
COST OR AMORTIZED GROSS UNREALIZED NUMBER OF
COST LOSS SECURITIES
------------------ ------------------ ------------------
LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR
20% MORE 20% MORE 20% MORE
--------- ------ --------- ------ --------- ------
(IN MILLIONS, EXCEPT NUMBER OF SECURITIES)
Less than six months............ $ 91,526 $231 $1,828 $57 7,887 119
Six months or greater but less
than nine months.............. 48,645 11 2,057 6 4,477 18
Nine months or greater but less
than twelve months............ 3,068 4 118 2 348 4
Twelve months or greater........ 10,171 5 406 1 1,295 8
-------- ---- ------ --- ------ ---
Total......................... $153,410 $251 $4,409 $66 14,007 149
======== ==== ====== === ====== ===
</Table>
102
<Table>
<Caption>
DECEMBER 31, 2005
------------------------------------------------------------
COST OR AMORTIZED GROSS UNREALIZED NUMBER OF
COST LOSS SECURITIES
------------------ ------------------ ------------------
LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR
20% MORE 20% MORE 20% MORE
--------- ------ --------- ------ --------- ------
(IN MILLIONS, EXCEPT NUMBER OF SECURITIES)
Less than six months............ $ 92,512 $213 $1,707 $51 11,441 308
Six months or greater but less
than nine months.............. 3,704 5 108 2 456 7
Nine months or greater but less
than twelve months............ 5,006 -- 133 -- 573 2
Twelve months or greater........ 7,555 23 240 5 924 8
-------- ---- ------ --- ------ ---
Total......................... $108,777 $241 $2,188 $58 13,394 325
======== ==== ====== === ====== ===
</Table>
As of March 31, 2006 and December 31, 2005, the Company had $4,475 million
and $2,246 million, respectively, of gross unrealized losses related to its
fixed maturities and equity securities. These securities are concentrated,
calculated as a percentage of gross unrealized loss, as follows:
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2006 2005
--------- ------------
SECTOR:
U.S. corporates........................................... 36% 37%
Residential mortgage-backed............................... 19 21
Foreign corporates........................................ 17 20
Other..................................................... 28 22
--- ---
Total.................................................. 100% 100%
=== ===
INDUSTRY:
Mortgage-backed........................................... 27% 30%
Industrial................................................ 20 22
Finance................................................... 10 11
Other..................................................... 43 37
--- ---
Total.................................................. 100% 100%
=== ===
</Table>
As of March 31, 2006, $4,409 million of unrealized losses related to
securities with an unrealized loss position less than 20% of cost or amortized
cost, which represented 3% of the cost or amortized cost of such securities. As
of December 31, 2005, $2,188 million of unrealized losses related to securities
with an unrealized loss position less than 20% of cost or amortized cost, which
represented 2% of the cost or amortized cost of such securities.
As of March 31, 2006, $66 million of unrealized losses related to
securities with an unrealized loss position of 20% or more of cost or amortized
cost, which represented 26% of the cost or amortized cost of such securities. Of
such unrealized losses of $66 million, $57 million have been in an unrealized
loss position for a period of less than six months. As of December 31, 2005, $58
million of unrealized losses related to securities with an unrealized loss
position of 20% or more of cost or amortized cost, which represented 24% of the
cost or amortized cost of such securities. Of such unrealized losses of $58
million, $51 million have been in an unrealized loss position for a period of
less than six months.
The Company held 18 fixed maturities and equity securities with a gross
unrealized loss at March 31, 2006 each greater than $10 million. These
securities represented approximately 10% or $460 million of the gross unrealized
loss on fixed maturities and equity securities.
The Company performs a regular evaluation, on a security-by-security basis,
of its investment holdings in accordance with its impairment policy in order to
evaluate whether such securities are other-than-temporarily
103
impaired. The increase in the unrealized losses during the period ended March
31, 2006 is principally driven by an increase in interest rates. Based upon the
Company's evaluation of the securities in accordance with its impairment policy,
the cause of the decline being principally attributable to the general rise in
rates during the period, and the Company's intent and ability to hold the fixed
income and equity securities with unrealized losses for a period of time
sufficient for them to recover, the Company has concluded that the
aforementioned securities are not other-than-temporarily impaired.
Corporate Fixed Maturities. The table below shows the major industry types
that comprise the corporate fixed maturity holdings at:
<Table>
<Caption>
MARCH 31, 2006 DECEMBER 31, 2005
------------------ ------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(IN MILLIONS)
Industrial....................................... $ 40,222 36.9% $ 41,322 37.8%
Foreign(1)....................................... 35,028 32.2 34,981 32.0
Finance.......................................... 19,859 18.2 19,189 17.5
Utility.......................................... 12,741 11.7 12,633 11.6
Other............................................ 1,075 1.0 1,174 1.1
-------- ----- -------- -----
Total....................................... $108,925 100.0% $109,299 100.0%
======== ===== ======== =====
</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
March 31, 2006 and December 31, 2005, the Company's combined holdings in the ten
issuers to which it had the greatest exposure totaled $6,324 million and $6,215
million, respectively, each less than 2% and 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 March 31, 2006 and December 31, 2005 was
$910 million and $943 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>
MARCH 31, 2006 DECEMBER 31, 2005
------------------ ------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(IN MILLIONS)
Residential mortgage-backed securities:
Collateralized mortgage obligations............ $31,823 37.1% $29,679 38.8%
Pass-through securities........................ 20,193 23.6 17,567 23.0
------- ----- ------- -----
Total residential mortgage-backed securities..... 52,016 60.7 47,246 61.8
Commercial mortgage-backed securities............ 20,029 23.4 17,698 23.1
Asset-backed securites........................... 13,630 15.9 11,573 15.1
------- ----- ------- -----
Total....................................... $85,675 100.0% $76,517 100.0%
======= ===== ======= =====
</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 March 31, 2006, $51,429 million, or 98.9%, of the residential mortgage-
backed securities were rated Aaa/AAA by Moody's, S&P or Fitch. At December 31,
2005, $46,304 million, or 98.0%, of the residential mortgage-backed securities
were rated Aaa/AAA by Moody's, S&P or Fitch.
104
At March 31, 2006, $16,231 million, or 81%, of the commercial
mortgage-backed securities were rated Aaa/AAA by Moody's, S&P or Fitch. At
December 31, 2005, $13,272 million, or 75%, of the commercial mortgage-backed
securities were rated Aaa/AAA by Moody's, S&P or Fitch.
The Company's asset-backed securities are diversified both by sector and by
issuer. Home equity loan and credit card receivables, accounting for about 32%
and 26% of the total holdings, respectively, constitute the largest exposures in
the Company's asset-backed securities portfolio. At March 31, 2006, $7,599
million, or 55.8%, of total asset-backed securities were rated Aaa/AAA by
Moody's, S&P or Fitch. At December 31, 2005, $6,084 million, or 52.6%, of total
asset-backed securities were rated Aaa/AAA by Moody's, S&P or Fitch.
Structured Investment Transactions. The Company participates in structured
investment transactions, primarily asset securitizations and structured notes.
These transactions enhance the Company's total return on its 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 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 $373 million and $362 million at March 31,
2006 and December 31, 2005, respectively. The related net investment income
recognized was $19 million and $4 million for the three months ended March 31,
2006 and 2005, respectively.
TRADING SECURITIES
During 2005, the Company established a trading securities portfolio to
support investment strategies that involve the active and frequent purchase and
sale of securities and the execution of repurchase agreements. Trading
securities and repurchase agreement liabilities are recorded at fair value with
subsequent changes in fair value recognized in net investment income related to
fixed maturities.
At March 31, 2006 and December 31, 2005, trading securities are $883
million and $825 million, respectively. Repurchase agreements associated with
the trading securities portfolio, which are included within other liabilities,
are approximately $466 million and $460 million, respectively at March 31, 2006
and December 31, 2005.
As part of the acquisition of Travelers on July 1, 2005, the Company
acquired Travelers' investment in Tribeca Citigroup Investments Ltd.
("Tribeca"). Tribeca is a feeder fund investment structure whereby the
105
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 consolidated financial statements. At
March 31, 2006 and December 31, 2005, approximately $470 million and $452
million, respectively, of trading securities are related to Tribeca and
approximately $193 million and $190 million, respectively, of the repurchase
agreements are related to Tribeca. Net investment income associated with Tribeca
for the three months ended March 31, 2006 includes $11 million of interest and
dividends earned and net realized and unrealized gains (losses).
During the three months ended March 31, 2006 and 2005, excluding Tribeca,
interest and dividends earned on trading securities in addition to the net
realized and unrealized gains (losses) recognized on the trading securities and
the related repurchase agreement liabilities totaled $1 million and $2 million,
respectively. Changes in the fair value of such trading securities and
repurchase agreement liabilities, excluding Tribeca, held at March 31, 2006 and
2005 total $7 million and ($1) million for the three months ended March 31, 2006
and 2005, respectively.
Total net investment income (loss) on securities classified as trading and
repurchase agreement liabilities for the three months ended March 31, 2006 and
2005, including Tribeca, total $19 million and $1 million, respectively.
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 11.8% and 12.2% of the Company's total
cash and invested assets at March 31, 2006 and December 31, 2005, 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>
MARCH 31, 2006 DECEMBER 31, 2005
---------------- ------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- --------- ------
(IN MILLIONS)
Commercial mortgage loans.......................... $28,278 75.7% $28,022 75.4%
Agricultural mortgage loans........................ 7,689 20.6 7,700 20.7
Consumer loans..................................... 1,384 3.7 1,468 3.9
------- ----- ------- -----
Total............................................ $37,351 100.0% $37,190 100.0%
======= ===== ======= =====
</Table>
106
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>
MARCH 31, 2006 DECEMBER 31, 2005
---------------- ------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- --------- ------
(IN MILLIONS)
REGION
Pacific............................................ $ 7,038 24.9% $ 6,818 24.3%
South Atlantic..................................... 6,343 22.4 6,093 21.8
Middle Atlantic.................................... 4,177 14.8 4,689 16.7
East North Central................................. 3,161 11.2 3,078 11.0
West South Central................................. 2,288 8.1 2,069 7.4
New England........................................ 1,261 4.5 1,295 4.6
International...................................... 1,896 6.7 1,817 6.5
Mountain........................................... 821 2.9 861 3.1
West North Central................................. 817 2.9 825 2.9
East South Central................................. 380 1.3 381 1.4
Other.............................................. 96 0.3 96 0.3
------- ----- ------- -----
Total............................................ $28,278 100.0% $28,022 100.0%
======= ===== ======= =====
PROPERTY TYPE
Office............................................. $13,636 48.2% $13,453 48.0%
Retail............................................. 6,270 22.2 6,398 22.8
Apartments......................................... 3,283 11.6 3,102 11.1
Industrial......................................... 2,763 9.8 2,656 9.5
Hotel.............................................. 1,490 5.3 1,355 4.8
Other.............................................. 836 2.9 1,058 3.8
------- ----- ------- -----
Total............................................ $28,278 100.0% $28,022 100.0%
======= ===== ======= =====
</Table>
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 certain of the 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.
107
Loan specific 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.
Valuation allowances for pools of loans are established based on property types
and loan to value risk factors. 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>
MARCH 31, 2006 DECEMBER 31, 2005
----------------------------------------- -----------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST(1) TOTAL ALLOWANCE COST COST(1) TOTAL ALLOWANCE COST
--------- ----- --------- --------- --------- ----- --------- ---------
(IN MILLIONS)
Performing................... $28,414 100% $139 0.5% $28,158 100% $147 0.5%
Restructured................. -- -- -- --% -- -- -- --%
Potentially delinquent....... 2 -- -- --% 3 -- -- --%
Delinquent or under
foreclosure................ 1 -- -- --% 8 -- -- --%
------- ----- ---- ------- ----- ----
Total...................... $28,417 100.0% $139 0.5% $28,169 100.0% $147 0.5%
======= ===== ==== ======= ===== ====
</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>
THREE MONTHS ENDED
MARCH 31,
2006
------------------
(IN MILLIONS)
Balance, beginning of period................................ $147
Additions................................................... 2
Deductions.................................................. (10)
----
Balance, end of period...................................... $139
====
</Table>
Agricultural Mortgage Loans. The Company diversifies its agricultural
mortgage loans by both geographic region and product type.
Approximately 63% of the $7,689 million of agricultural mortgage loans
outstanding at March 31, 2006 were subject to rate resets prior to maturity. A
substantial portion of these loans is successfully renegotiated and remains
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.
108
The following table presents the amortized cost and valuation allowances
for agricultural mortgage loans distributed by loan classification at:
<Table>
<Caption>
MARCH 31, 2006 DECEMBER 31, 2005
----------------------------------------- -----------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST(1) TOTAL ALLOWANCE COST COST(1) TOTAL ALLOWANCE COST
--------- ----- --------- --------- --------- ----- --------- ---------
(IN MILLIONS)
Performing................... $7,594 98.5% $ 8 0.1% $7,635 99.0% $ 8 0.1%
Restructured................. 14 0.2 -- --% 36 0.5 -- --%
Potentially delinquent....... 32 0.4 9 28.1% 3 -- 1 33.3%
Delinquent or under
foreclosure................ 67 0.9 1 1.5% 37 0.5 2 5.4%
------ ----- --- ------ ----- ---
Total...................... $7,707 100.0% $18 0.2% $7,711 100.0% $11 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>
THREE MONTHS ENDED
MARCH 31,
------------------
2006
------------------
(IN MILLIONS)
Balance, beginning of period................................ $11
Additions................................................... 8
Deductions.................................................. (1)
---
Balance, end of period...................................... $18
===
</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 in the United States. At March 31,
2006 and December 31, 2005, the carrying value of the Company's real estate,
real estate joint ventures and real estate held-for-sale was $4,700 million and
$4,665 million, respectively. The Company's real estate and real estate joint
venture investments represent 1.5% of total cash and invested assets at both
March 31, 2006 and December 31, 2005. The carrying value of real estate is
stated at depreciated cost net of impairments and valuation allowances. The
carrying value of real estate joint ventures is stated at the Company's equity
in the real estate joint ventures net of impairments and valuation allowances.
The following table presents the carrying value of the Company's real estate,
real estate joint ventures, real estate held-for-sale and real estate acquired
upon foreclosure at:
<Table>
<Caption>
MARCH 31, 2006 DECEMBER 31, 2005
--------------------- ---------------------
CARRYING CARRYING
TYPE VALUE % OF TOTAL VALUE % OF TOTAL
- ------------------------------------------------------ -------- ---------- -------- ----------
(IN MILLIONS)
Real estate held-for-investment....................... $3,879 82.5% $3,713 79.6%
Real estate joint ventures held-for-investment........ 794 16.9 926 19.8
Foreclosed real estate held-for-investment............ 4 0.1 4 0.1
------ ----- ------ -----
4,677 99.5 4,643 99.5
------ ----- ------ -----
Real estate held-for-sale............................. 23 0.5 22 0.5
Foreclosed real estate held-for-sale.................. -- -- -- --
------ ----- ------ -----
23 0.5 22 0.5
------ ----- ------ -----
Total real estate, real estate joint ventures and real
estate held-for-sale................................ $4,700 100.0% $4,665 100.0%
====== ===== ====== =====
</Table>
109
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 $23 million and $22 million at March 31, 2006 and December 31,
2005, respectively, are net of valuation allowances of $0 million and net of
impairments of $0 million at both March 31, 2006 and December 31, 2005.
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 May 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 second quarter 2005 gains, net of income taxes, of
$431 million and $762 million, respectively. Net investment income on One
Madison Avenue and 200 Park Avenue was $11 million and $16 million,
respectively, for the three months ended March 31, 2005 and is included in
income from discontinued operations. In connection with the sale of the 200 Park
Avenue property, the Company has retained rights to existing signage and is
leasing space for associates 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 $4,514
million and $4,276 million at March 31, 2006 and December 31, 2005,
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, 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% of cash and invested
assets at both March 31, 2006 and December 31, 2005.
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."
OTHER INVESTED ASSETS
The Company's other invested assets consist principally of leveraged leases
and funds withheld at interest of $4,701 million and $4,573 million at March 31,
2006 and December 31, 2005, 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 2.6% of cash and
invested assets at both March 31, 2006 and December 31, 2005.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses a variety of derivatives, including swaps, forwards,
futures 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.
110
The table below provides a summary of the notional amount and current
market or fair value of derivative financial instruments held at:
<Table>
<Caption>
MARCH 31, 2006 DECEMBER 31, 2005
------------------------------- -------------------------------
CURRENT MARKET OR CURRENT MARKET OR
FAIR VALUE FAIR VALUE
NOTIONAL -------------------- NOTIONAL --------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
-------- ------ ----------- -------- ------ -----------
(IN MILLIONS)
Interest rate swaps.......... $18,410 $ 663 $ 247 $20,444 $ 653 $ 69
Interest rate floors......... 10,975 81 -- 10,975 134 --
Interest rate caps........... 27,990 285 -- 27,990 242 --
Financial futures............ 844 2 23 1,159 12 8
Foreign currency swaps....... 15,349 522 1,010 14,274 527 991
Foreign currency forwards.... 4,107 52 70 4,622 64 92
Options...................... 872 355 5 815 356 6
Financial forwards........... 3,396 20 20 2,452 13 4
Credit default swaps......... 5,436 9 11 5,882 13 11
Synthetic GICs............... 3,738 -- -- 5,477 -- --
Other........................ 250 26 -- 250 9 --
------- ------ ------ ------- ------ ------
Total...................... $91,367 $2,015 $1,386 $94,340 $2,023 $1,181
======= ====== ====== ======= ====== ======
</Table>
The above table does not include notional values for equity futures, equity
financial forwards, and equity options. At March 31, 2006 and December 31, 2005,
the Company owned 1,466 and 3,305 equity futures contracts, respectively. Equity
futures market values are included in financial futures in the preceding table.
At both March 31, 2006 and December 31, 2005, the Company owned 213,000 equity
financial forwards. Equity financial forwards market values are included in
financial forwards in the preceding table. At March 31, 2006 and December 31,
2005, the Company owned 5,237,594 and 4,720,254 equity options, respectively.
Equity options market values are included in options in the preceding 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.
The Company manages its credit risk related to over-the-counter derivatives
by entering into transactions with creditworthy counterparties, maintaining
collateral arrangements and through the use of master agreements that provide
for a single net payment to be made by one counterparty to another at each due
date and upon termination. Because exchange traded futures 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 instruments.
The Company enters into various collateral arrangements, which require both
the pledging and accepting of collateral in connection with its derivative
instruments. As of March 31, 2006 and December 31, 2005, the Company was
obligated to return cash collateral under its control of $189 million and $195
million, respectively. This unrestricted cash collateral is included in cash and
cash equivalents and the obligation to return it is included in payables for
collateral under securities loaned and other transactions in the consolidated
balance sheets. As of March 31, 2006 and December 31, 2005, the Company had also
accepted collateral consisting of various securities with a fair market value of
$423 million and $427 million, respectively, which are held in separate
custodial accounts. The Company is permitted by contract to sell or repledge
this collateral, but as of March 31, 2006 and December 31, 2005, none of the
collateral had been sold or repledged.
111
As of March 31, 2006 and December 31, 2005, the Company provided collateral
of $6 million and $4 million, respectively, which is included in other assets in
the consolidated balance sheets. The counterparties are permitted by contract to
sell or repledge this collateral.
VARIABLE INTEREST ENTITIES
The following table presents the total assets of and maximum exposure to
loss relating to variable interest entities ("VIEs") for which the Company has
concluded that (i) it is the primary beneficiary and which are consolidated in
the Company's consolidated financial statements at March 31, 2006; and (ii) it
holds significant variable interests but it is not the primary beneficiary and
which have not been consolidated:
<Table>
<Caption>
MARCH 31, 2006
---------------------------------------------------
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......... $ -- $ -- $ 3,351 $ 406
Real estate joint ventures(3)............. 305 122 187 16
Other limited partnerships(4)............. 91 57 12,606 1,601
Other investments(5)...................... -- -- 3,738 242
---- ---- ------- ------
Total................................... $396 $179 $19,882 $2,265
==== ==== ======= ======
</Table>
- ---------------
(1) The assets of the asset-backed securitizations and collateralized debt
obligations are reflected at fair value at March 31, 2006. The assets of the
real estate joint ventures, other limited partnerships and other 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 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 fixed maturity securities, 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 $45,405
million and $32,068 million and an estimated fair value of $45,477 million and
$32,954 million were on loan under the program at March 31, 2006 and December
31, 2005, respectively. Securities loaned under such transactions may be sold or
repledged by the transferee. The Company was liable for cash collateral under
its control of $46,870 million and $33,893 million at March 31, 2006 and
December 31, 2005, respectively. Securities loaned transactions are
112
accounted for as financing arrangements on the Company's consolidated balance
sheets and consolidated statements of cash flows and the income and expenses
associated with the program are reported in net investment income as investment
income and investment expenses, respectively. Security collateral of $150
million and $207 million, respectively, at March 31, 2006 and December 31, 2005
on deposit from customers in connection with the securities lending transactions
may not be sold or repledged and is not reflected in the consolidated financial
statements.
SEPARATE ACCOUNTS
The Company had $132.5 billion and $127.9 billion held in its separate
accounts, for which the Company generally does not bear investment risk, as of
March 31, 2006 and December 31, 2005, 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 not changed significantly from that reported on December 31,
2005. 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, 2005.
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 MetLife Inc.'s 2005 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 Company's management processes for measuring, managing and monitoring
market risk remain as described in MetLife Inc.'s 2005 Annual Report on Form
10-K. Some of those processes utilize interim manual reporting and estimation
techniques when the Company integrates newly acquired operations.
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 market 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
market 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
113
performing this analysis, the Company used market rates at March 31, 2006 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 market 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 market value of its equity positions due to a 10% change (increase or
decrease) in equity prices; and
- the U.S. dollar equivalent balances of the Company's currency exposures
due to a 10% change (increase or decrease) in currency exchange rates.
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
interest 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 that qualify as hedges, the impact on reported earnings
may be materially different from the change in market values;
- 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.
114
The table below illustrates the potential loss in fair value of the
Company's interest rate sensitive financial instruments at March 31, 2006. In
addition, the potential loss with respect to the fair value of currency exchange
rates and the Company's equity price sensitive positions at March 31, 2006 is
set forth in the table below.
The potential loss in fair value for each market risk exposure of the
Company's portfolio, at March 31, 2006 was:
<Table>
<Caption>
MARCH 31, 2006
-----------------
(IN MILLIONS)
Non-trading:
Interest rate risk........................................ $6,207
Equity price risk......................................... $ 699
Foreign currency exchange rate risk....................... $ 488
Trading:
Interest rate risk........................................ $ 14
</Table>
115
The table below provides additional detail regarding the potential loss in
fair value of the Company's non-trading interest sensitive financial instruments
at March 31, 2006 by type of asset or liability.
<Table>
<Caption>
AS OF MARCH 31, 2006
------------------------------------
ASSUMING A
10% INCREASE
NOTIONAL IN THE YIELD
AMOUNT FAIR VALUE CURVE
-------- ---------- ------------
(IN MILLIONS)
ASSETS
Fixed maturities.......................................... $239,828 $(6,454)
Equity securities......................................... 3,356 --
Mortgage and consumer loans............................... 37,370 (705)
Policy loans.............................................. 9,987 (326)
Short-term investments.................................... 3,368 (13)
Cash and cash equivalents................................. 5,144 --
Mortgage loan commitments................................. $ 2,533 (15) (10)
-------
Total assets........................................... $(7,508)
-------
LIABILITIES
Policyholder account balances............................. $126,807 $ 1,044
Short-term debt........................................... 1,360 --
Long-term debt............................................ 10,057 440
Junior subordinated debt securities underlying common
equity units........................................... 2,088 25
Shares subject to mandatory redemption.................... 226 --
Payables for collateral under securities loaned and other
transactions........................................... 47,059 --
-------
Total liabilities...................................... $ 1,509
-------
OTHER
Derivative instruments (designated hedges or otherwise)
Interest rate swaps.................................... $18,410 $ 416 $ (16)
Interest rate floors................................... 10,975 81 (27)
Interest rate caps..................................... 27,990 285 94
Financial futures...................................... 844 (21) (28)
Foreign currency swaps................................. 15,349 (488) (231)
Foreign currency forwards.............................. 4,107 (18) --
Options................................................ 872 350 --
Financial forwards..................................... 3,396 -- --
Credit default swaps................................... 5,436 (2) --
Synthetic GICs......................................... 3,738 -- --
Other.................................................. 250 26 --
-------
Total other....................................... $ (208)
-------
NET CHANGE.................................................. $(6,207)
=======
</Table>
116
This quantitative measure of risk has increased by $684 million, or 12%, at
March 31, 2006, from $5,523 million at December 31, 2005. The primary reason for
the increase is an overall increase in the yield curve of approximately $600
million, an increase in asset growth of approximately $250 million, partially
offset by a decrease in the asset duration and other of approximately $166
million.
ITEM 4. CONTROLS AND PROCEDURES
The Holding Company's management, with the participation of the Holding
Company's Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the design and operation of the Holding Company's disclosure
controls and procedures as defined in Exchange Act Rule 13a-15(e) as of the end
of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that these
disclosure controls and procedures are effective.
There were no changes to the Holding Company's internal control over
financial reporting as defined in Exchange Act Rules 13a-15(f) during the
quarter ended March 31, 2006 that have materially affected, or are reasonably
likely to materially affect, the Holding Company's internal control over
financial reporting.
117
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following should be read in conjunction with Note 6 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. Liabilities have been established for a
number of the matters noted below. It is possible that some of the matters could
require the Company to pay damages or make other expenditures or establish
accruals in amounts that could not be estimated as of March 31, 2006.
Sales Practices Claims
Over the past several years, Metropolitan Life, New England Mutual Life
Insurance Company, with which Metropolitan Life merged in 1996 ("New England
Mutual"), and General American Life Insurance Company, which was acquired in
2000 ("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."
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 or other
proceedings relating to the sale of mutual funds and other products, have been
brought. As of March 31, 2006, there are approximately 332 sales practices
litigation matters pending against Metropolitan Life; approximately 46 sales
practices litigation matters pending against New England Mutual, New England
Life Insurance Company, and New England Securities Corporation (collectively,
"New England"); approximately 44 sales practices litigation matters pending
against General American; and approximately 28 sales practices litigation
matters pending against Walnut Street Securities, Inc. ("Walnut Street"). In
addition, similar litigation matters are pending against MetLife Securities,
Inc. ("MSI"). Metropolitan Life, New England, General American, MSI and Walnut
Street continue to defend themselves vigorously against these litigation
matters. Some individual sales practices claims have been resolved through
settlement, won by dispositive motions, or have gone to trial. The outcomes of
trials have varied, and appeals are pending in several matters. 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.
118
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, MSI
and Walnut Street.
Asbestos-Related Claims
Metropolitan Life received approximately 18,500 asbestos-related claims in
2005. During the three months ended March 31, 2006 and 2005, Metropolitan Life
received approximately 2,220 and 5,900 asbestos-related claims, 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.
See Note 12 of Notes to Consolidated Financial Statements included in the
2005 Annual Report for historical information concerning asbestos claims and
MetLife's increase of its recorded liability at December 31, 2002.
The Company believes adequate provision has been made in its interim
condensed consolidated financial statements for all probable and reasonably
estimable losses for asbestos-related claims. The ability of Metropolitan Life
to estimate its ultimate asbestos exposure is subject to considerable
uncertainty due to numerous factors. The availability of data is limited and it
is difficult to predict with any certainty numerous variables that can affect
liability estimates, including the number of future claims, the cost to resolve
claims, the disease mix and severity of disease, the jurisdiction of claims
filed, tort reform efforts and the impact of any possible future adverse
verdicts and their amounts.
The number of asbestos cases that may be brought or the aggregate amount of
any liability that Metropolitan Life may ultimately incur is uncertain.
Accordingly, it is reasonably possible that the Company's total exposure to
asbestos claims may be greater than the liability recorded by the Company in its
unaudited interim condensed consolidated financial statements and that future
charges to income may be necessary. While the potential future charges could be
material in particular quarterly or annual periods in which they are recorded,
based on information currently known by management, management 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
119
loss reimbursements were approximately $8.3 million with respect to 2002 claims,
$15.5 million with respect to 2003 claims, $15.1 million with respect to 2004
claims, $12.7 million with respect to 2005 claims and estimated as of March 31,
2006, to be approximately $60.7 million in the aggregate, including future
years.
Property and Casualty Actions
Ten lawsuits are pending against MPC (five in Louisiana and five in
Missouri) relating to Hurricane Katrina including two purported class actions in
Louisiana. It is reasonably possible other actions will be filed. The Company
intends to vigorously defend these matters.
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 New York
Superintendent of Insurance (the "Superintendent") and the underwriters for
MetLife, Inc.'s initial public offering, Goldman Sachs & Company and Credit
Suisse First Boston. 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 May 2, 2006, the trial court issued a decision granting
plaintiffs' motion to certify a litigation class with respect to their claim
that defendants violated section 7312 of the New York Insurance Law, but finding
that plaintiffs had not met the requirements for certifying a class with respect
to a fraud claim. Defendants have a right to appeal this decision. 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 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 sought to vacate the Superintendent's Opinion and
Decision and enjoin him from granting final approval of the plan. On November
10, 2005, the trial court granted respondents' motions to dismiss this
proceeding. Petitioners have filed a notice of appeal. 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 filed a petition seeking permission
for an interlocutory appeal from this order; on or about March 29, 2006, the
United States Court of Appeals for the Second Circuit denied the petition.
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 which commenced in October 2000 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
120
receiving deferred vested annuity payments under the retirement plan and who
were allegedly eligible to receive the ad hoc pension increases. In September
2005, Metropolitan Life's motion for summary judgment was granted. Plaintiffs
have moved for reconsideration.
In May 2003, the American Dental Association and three individual providers
sued MetLife and Cigna in a purported class action lawsuit brought in the United
States District Court for the Southern District of Florida. 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. The
court has issued a tag-along order, related to a medical managed care trial,
which will stay the lawsuit indefinitely.
In April 2006, the SEC and Metropolitan Life Insurance Company resolved a
formal investigation of Metropolitan Life relating to certain sales by a former
MetLife sales representative to the Sheriff's Department of Fulton County,
Georgia. The settlement includes a payment to the SEC of a $250,000 fine.
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 Ohio
Department of Insurance has requested documents regarding a broker and certain
Ohio public entity groups. 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 is suing in California state court Metropolitan Life,
Paragon Life Insurance Company 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, several other insurance companies and several insurance
brokers violated RICO, ERISA,
121
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. A motion for class certification has been filed. 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.
In February 2006, the SEC commenced a formal investigation of NES in
connection with the suitability of its sales of variable universal life
insurance policies. The Company believes that others in the insurance industry
are the subject of similar investigations by the SEC. NES is cooperating fully
with the SEC.
In August 1999, an amended putative class action complaint was filed in
Connecticut state court against MetLife Life and Annuity Company of Connecticut
("MLAC"), formerly The Travelers Life and Annuity Company, Travelers Equity
Sales, Inc. and certain former affiliates. The amended complaint alleges
Travelers Property Casualty Corporation, a former MLAC affiliate, purchased
structured settlement annuities from MLAC 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 MLAC, 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 MLAC: violation
of the Connecticut Unfair Trade Practice Statute, unjust enrichment, and civil
conspiracy. On June 15, 2004, the defendants appealed the class certification
order. In March 2006, the Connecticut Supreme Court reversed the trial court's
certification of a class. Plaintiff may seek upon remand to the trial court to
file another motion for class certification. MLAC and Travelers Equity Sales,
Inc. intend to continue to vigorously defend the matter.
A former registered representative of Tower Square Securities, Inc. ("Tower
Square"), a broker-dealer subsidiary of MetLife Insurance Company of
Connecticut, formerly The Travelers Insurance Company, 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. On April 18, 2006, the Connecticut Department of Banking
issued a notice to Tower Square asking it to demonstrate its prior compliance
with applicable Connecticut securities laws and regulations. In the context of
the above, two arbitration matters were commenced in 2005 against Tower Square.
In one of the matters, defendants include other unaffiliated broker-dealers with
whom the registered representative was formerly registered. In May 2006, Tower
Square received a lawsuit filed by two claimants in Connecticut state court. It
is reasonably possible that other actions will be brought regarding this matter.
Tower Square intends to defend itself vigorously in all such cases. In another
matter, the NASD has made a preliminary determination that Tower Square violated
certain NASD rules relating to supervisory procedures, documentation and
compliance with the firm's anti-money laundering program. Tower Square intends
to fully cooperate with the SEC, the NASD and the Connecticut Department of
Banking.
Metropolitan Life also has been named as a defendant in numerous silicosis,
welding and mixed dust cases in various states. The Company intends to defend
itself vigorously against these cases.
122
Various litigation, including purported or certified class actions, and
various 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 or
its affiliates during the three months ended March 31, 2006 are set forth below:
<Table>
<Caption>
(D) MAXIMUM NUMBER
(C) TOTAL NUMBER OF (OR APPROXIMATE DOLLAR
SHARES PURCHASED AS VALUE) OF SHARES
(A) TOTAL NUMBER (B) AVERAGE PART OF PUBLICLY THAT MAY YET BE
OF SHARES PRICE PAID ANNOUNCED PURCHASED UNDER THE PLANS
PERIOD PURCHASED(1) PER SHARE PLANS OR PROGRAMS(2) OR PROGRAMS
- ---------------------------- ---------------- ----------- -------------------- -------------------------
January 1 --
January 31, 2006.......... 2,636 $50.70 -- $716,206,611
February 1 --
February 28, 2006......... 531 $50.31 -- $716,206,611
March 1 --
March 31, 2006............ 1,677 $50.71 -- $716,206,611
-----
Total....................... 4,844 $50.66 -- $716,206,611
===== ==
</Table>
- ---------------
(1) During the periods January 1- January 31, 2006, February 1- February 28,
2006 and March 1- March 31, 2006, separate account affiliates of the Holding
Company purchased 2,636 shares, 531 shares and 1,677 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 acquisition of Travelers, the Holding Company has 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
123
purchased the common stock 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 approximately $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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Holding Company's Annual Meeting of stockholders was held on April 25,
2006 (the "2006 Annual Meeting"). The matters that were voted upon at the 2006
Annual Meeting, and the number of votes cast for, against or withheld, as well
as the number of abstentions as to each such matter, as applicable, are set
forth below:
(1) Election of Directors -- The stockholders elected four Class I Directors,
each for a term expiring at the Holding Company's 2009 Annual Meeting.
<Table>
<Caption>
NOMINEE NAME VOTES FOR VOTES WITHHELD
- ------------ ----------- --------------
C. Robert Henrikson....................................... 656,058,997 12,045,305
John M. Keane............................................. 659,685,370 8,418,932
Hugh B. Price............................................. 640,929,021 27,175,281
Kenton J. Sicchitano...................................... 660,551,335 7,552,967
</Table>
<Table>
<Caption>
VOTES FOR VOTES AGAINST ABSTAINED
----------- ------------- ---------
(2) Ratification of Appointment of Deloitte &
Touche LLP as Independent Auditor (APPROVED).... 661,887,411 2,569,984 3,646,907
</Table>
The Directors whose terms continued after the 2006 Annual Meeting and the
years their terms expire are as follows:
Class II Directors -- Term Expires in 2007
Curtis H. Barnette
Burton A. Dole, Jr.
Harry P. Kamen
James M. Kilts
Charles M. Leighton
Class III Directors -- Term Expires in 2008
Cheryl W. Grise
James R. Houghton
Helene L. Kaplan
Sylvia M. Mathews
William C. Steere, Jr.
124
ITEM 6. EXHIBITS
<Table>
3.1 MetLife, Inc. Amended and Restated By-Laws effective March
20, 2006
10.1 Summary of Non-Management Director Compensation
(Incorporated by reference to Exhibit 10.1 to Form 8-K of
MetLife, Inc. filed on January 20, 2006)
10.2 Amendment to Management Performance Share Agreement
(effective December 31, 2005) under the MetLife, Inc. 2005
Stock and Incentive Compensation Plan (the "2005 Incentive
Plan")(Incorporated by reference to Exhibit 10.1 to Form 8-K
of MetLife, Inc. filed on January 10, 2006 (the "January 10,
2006 Form 8-K"))
10.3 Amendment to Management Restricted Stock Unit Agreement
(effective December 31, 2005) under the 2005 Incentive Plan
(Incorporated by reference to Exhibit 10.2 to the January
10, 2006 Form 8-K)
10.4 Form of Management Performance Share Agreement under the
2005 Incentive Plan (Incorporated by reference to Exhibit
10.3 to the January 10, 2006 Form 8-K)
10.5 Form of Management Restricted Stock Unit Agreement under the
2005 Incentive Plan (Incorporated by reference to Exhibit
10.4 to the January 10, 2006 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>
125
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
METLIFE, INC.
By: /s/ Joseph J. Prochaska, Jr.
-------------------------------------
Name: Joseph J. Prochaska, Jr.
Title: Executive Vice-President,
Finance Operations and Chief
Accounting Officer (Authorized
Signatory and Chief Accounting
Officer)
Date: May 8, 2006
126
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT NAME
- ------- ------------
3.1 MetLife, Inc. Amended and Restated By-Laws effective March
20, 2006
10.1 Summary of Non-Management Director Compensation
(Incorporated by reference to Exhibit 10.1 to Form 8-K of
MetLife, Inc. filed on January 20, 2006)
10.2 Amendment to Management Performance Share Agreement
(effective December 31, 2005) under the MetLife, Inc. 2005
Stock and Incentive Compensation Plan (the "2005 Incentive
Plan")(Incorporated by reference to Exhibit 10.1 to Form 8-K
of MetLife, Inc. filed on January 10, 2006 (the "January 10,
2006 Form 8-K"))
10.3 Amendment to Management Restricted Stock Unit Agreement
(effective December 31, 2005) under the 2005 Incentive Plan
(Incorporated by reference to Exhibit 10.2 to the January
10, 2006 Form 8-K)
10.4 Form of Management Performance Share Agreement under the
2005 Incentive Plan (Incorporated by reference to Exhibit
10.3 to the January 10, 2006 Form 8-K)
10.5 Form of Management Restricted Stock Unit Agreement under the
2005 Incentive Plan (Incorporated by reference to Exhibit
10.4 to the January 10, 2006 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>
E-1