Reinvest investment proceeds in lower yielding assets and experience higher frequency prepayment or redemption of assets in our portfolio;
Increase our reserves or trigger loss recognition events related to policy liabilities, accelerate amortization of DAC and VOBA, and potentially impair intangible assets;
Change our product offerings, design features, crediting rates and sales mix; and
In the United States, our life insurance companies are regulated primarily at the state level, with some products and services 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. Regulations recently adopted or currently under review can potentially impact the statutory reserve and capital requirements of the industry. See “Risk Factors - Regulatory and Legal Risks - Our Businesses Are Highly Regulated, and Changes in Laws, Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability, Limit Our Growth, or Otherwise Adversely Affect Our Business, Results of Operations and Financial Condition.” Regulators have also undertaken market and sales practices reviews of several markets or products, including equity-indexed annuities, variable annuities and group products and, in some states, instituted a moratorium on new reserve financing transactions. See “Business - Regulation,” “Risk Factors - Economic Environment and Capital Markets Risks - Our Statutory Life Insurance Reserve Financings May Be Subject to Cost Increases, and New Financings May Be Subject to Limited Market Capacity,” “Risk Factors - Regulatory and Legal Risks - Our Businesses Are Highly Regulated, and Changes in Laws, Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability, Limit Our Growth, or Otherwise Adversely Affect Our Business, Results of Operations and Financial Condition” and “- Liquidity and Capital Resources - The Company - Capital - Affiliated Captive Reinsurance Transactions.”
Liabilities for unpaid claims are estimated based upon our 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.
We determine the expected rate of return on plan assets based upon an approach that considers inflation, real return, term premium, credit spreads, equity risk premium and capital appreciation, as well as expenses, expected asset manager performance, asset weights and the effect of rebalancing. Given the amount of plan assets as of December 31, 2018, the beginning of the measurement year, if we had assumed an expected rate of return for both our pension and other postretirement benefit plans that was 100 basis points higher or 100 basis points lower than the rates we assumed, the change in our net periodic benefit costs would have been a decrease of $100 million and an increase of $100 million, respectively, in 2019. This considers only changes in our assumed long-term rate of return given the level and mix of invested assets at the beginning of the year, without consideration of possible changes in any of the other assumptions described above that could ultimately accompany any changes in our assumed long-term rate of return.
The $31 million loss ($27 million, net of income tax) recognized in net derivative gains (losses) associated with our annual review of actuarial assumptions was included within the other risks in embedded derivatives line in the table above.
Overview. The primary drivers of the increase in adjusted earnings were benefits from certain tax settlements and higher net investment income due to growth in the investment portfolio, partially offset by higher interest credited expense, unfavorable underwriting and the unfavorable impact of our annual actuarial assumption review.
Market Factors. Market factors, including interest rate levels, variability in equity market returns and foreign currency exchange rate fluctuations, continued to impact our results; however, certain impacts were mitigated by derivatives used to hedge these risks. Investment yields decreased, primarily due to lower income from derivatives, lower yields on fixed income securities and real estate investments, lower returns on private equity funds and lower earnings from our securities lending program, primarily from lower margins and balances. These decreases were partially offset by higher prepayment fees and higher yields on mortgage loans. In addition, net investment income increased as a result of the impact of an increased crediting rate on interest on economic capital. The impact of interest rate fluctuations resulted in an increase in our average interest credited rates on deposit-type liabilities, partially offset by lower rates on our long-duration liabilities, which drove a net increase in interest credited expenses. The changes in market factors discussed above resulted in a $176 million decrease in adjusted earnings.
Market Factors. Market factors, including interest rate levels and variability in equity market returns, continued to impact our results; however, certain impacts were mitigated by derivatives used to hedge these risks. Investment results were favorably impacted by higher derivative income, earnings from our operating joint venture in China (mainly driven by a regulatory change), returns from hedge funds, private equities and real estate investments, as well as higher yields on mortgage loans. These increases were partially offset by lower yields on fixed income securities supporting U.S. dollar-denominated products sold in Japan, and fixed income securities in Bangladesh and Korea. In addition, lower interest credited rates improved adjusted earnings. The changes in market factors discussed above increased adjusted earnings by $102 million.
See Note 8 of the Notes to the Consolidated Financial Statements for information about the evaluation of fixed maturity securities AFS for OTTI and evaluation of temporarily impaired fixed maturity securities AFS.
We participate in a securities lending program whereby securities are loaned to third parties, primarily brokerage firms and commercial banks. We also participate in short-term repurchase agreement transactions with unaffiliated financial institutions. In addition, a subsidiary of the Company has entered into short-term advance agreements with the FHLB of Boston. See “- Liquidity and Capital Resources - The Company - Liquidity and Capital Uses - Securities Lending and Repurchase Agreements” and Notes 1 and 8 of the Notes to the Consolidated Financial Statements for further information.
Derivatives categorized as Level 3 at December 31, 2019 include: interest rate forwards with maturities which extend beyond the observable portion of the yield curve; interest rate total return swaps with unobservable repurchase rates; foreign currency swaps and forwards with certain unobservable inputs, including the unobservable portion of the yield curve; credit default swaps priced using unobservable credit spreads, or that are priced through independent broker quotations; equity variance swaps with unobservable volatility inputs; and equity index options with unobservable correlation inputs. At December 31, 2019, less than 1% of the estimated fair value of our derivatives was priced through independent broker quotations.
The table below presents our living benefit guarantees based on total account values at December 31, 2019:
See also “Risk Factors - Economic Environment and Capital Markets Risks - A Downgrade or a Potential Downgrade in Our Financial Strength or Credit Ratings Could Result in a Loss of Business and Harm Our Financial Condition or Results of Operations.”
In addition to the general description of liquidity and capital sources in “- Summary of the Company’s Primary Sources and Uses of Liquidity and Capital,” the Company’s primary sources of liquidity and capital are set forth below.
See Note 16 of the Notes to the Consolidated Financial Statements for information relating to authorizations by the Board of Directors to repurchase MetLife, Inc. common stock, amounts of common stock repurchased pursuant to such authorizations for the years ended December 31, 2019 and 2018, and the amount remaining under such authorizations at December 31, 2019. See Note 23 of the Notes to the Consolidated Financial Statements for information regarding shares of common stock repurchased subsequent to December 31, 2019.
MetLife, Inc. and several of its subsidiaries (each, an “Obligor”) are parties to various capital support commitments and guarantees with subsidiaries. Under these arrangements, each Obligor has agreed to cause the applicable entity to meet specified capital and surplus levels or has guaranteed certain contractual obligations. We anticipate that in the event these arrangements place demands upon us, there will be sufficient liquidity and capital to enable us to meet such demands. See Note 5 of the Notes to the MetLife, Inc. (Parent Company Only) Condensed Financial Information included in Schedule II of the Financial Statement Schedules.
The sum of the estimated cash flows of $340.3 billion exceeds the liability amounts of $214.8 billion included on the consolidated balance sheet principally due to (i) the time value of money, which accounts for a substantial portion of the difference; (ii) differences in assumptions, most significantly mortality, between the date the liabilities were initially established and the current date; and (iii) liabilities related to accounting conventions, or which are not contractually due, which are excluded.
Liquid assets held in non-U.S. holding companies are generated in part through dividends from non-U.S. insurance operations. Such dividends are subject to local insurance regulatory requirements, as discussed in “- Liquidity and Capital Sources - Dividends from Subsidiaries.” The cumulative earnings of certain active non-U.S. operations have historically been reinvested indefinitely in such non-U.S. operations. Following a post-Separation review of our capital needs, the Company repatriated $400 million of pre-2017 earnings in the second quarter of 2018. As a result of U.S. Tax Reform, we expect to repatriate future foreign earnings back to the U.S. with minimal or no additional U.S. tax. See Note 19 of the Notes to the Consolidated Financial Statements and “- Risk Factors - Regulatory and Legal Risks - Changes in Tax Laws or Interpretations of Such Laws Could Reduce Our Earnings and Materially Impact Our Operations by Increasing Our Corporate Taxes and Making Some of Our Products Less Attractive to Consumers.”
Amounts to fund business acquisitions were $0 (included in capital contributions to subsidiaries) at both years ended December 31, 2019 and 2018.
In addition to the amounts presented in the table above, for the years ended December 31, 2019 and 2018, MetLife, Inc. also received cash payments of $195 million and $7 million, respectively, representing dividends from certain other subsidiaries. Additionally, for the years ended December 31, 2019 and 2018, MetLife, Inc. received cash returns of capital of $10 million and $87 million.
We evaluated management’s ability to accurately estimate fair value by comparing management’s historical estimates to subsequent transactions, taking into account changes in market conditions subsequent to December 31, 2019.
Also included in mortgage loans held-for-investment are residential mortgage loans for which the FVO was elected, and which are stated at estimated fair value. Changes in estimated fair value are recognized in net investment income.
Policyholder account balances are equal to: (i) policy account values, which consist of an accumulation of gross premium payments and investment performance; (ii) credited interest, ranging from less than 1% to 8% for U.S. businesses and less than 1% to 17% for non-U.S. businesses, less expenses, mortality charges and withdrawals; and (iii) fair value adjustments relating to business combinations.
For Group Life - Term, claims were based upon individual death claims. For Group Long-Term Disability, claim frequency was determined by the number of reported claims as identified by a unique claim number assigned to individual claimants. Claim counts initially include claims that do not ultimately result in a liability. These claims are omitted from the claim counts once it is determined that there is no liability.
For the years ended December 31, 2019, 2018 and 2017, claims and claim adjustment expenses associated with prior years increased due to events incurred in prior years but reported in the current year.
Lease receivables are generally due in periodic installments. The remaining life of the payment periods for leveraged leases generally range from one to 15 years but in certain circumstances can be over 25 years, while the remaining life of the payment periods for direct financing leases generally range from one to 25 years but in certain circumstances can be over 25 years. For lease receivables, the primary credit quality indicator is whether the lease receivable is performing or nonperforming, which is assessed monthly. The Company generally defines nonperforming lease receivables as those that are 90 days or more past due. At both December 31, 2019 and 2018, all leveraged lease receivables were performing and 94% of direct financing lease receivables were performing.
Unrealized investment gains (losses) on fixed maturity securities AFS, equity securities and derivatives and the effect on DAC, VOBA, DSI, future policy benefits and the policyholder dividend obligation, that would result from the realization of the unrealized gains (losses), are included in net unrealized investment gains (losses) in AOCI.
The Company has pledged invested assets in connection with various agreements and transactions, including funding agreements (see Note 4), derivative transactions (see Note 9), secured debt (see Note 13), and a collateral financing arrangement (see Note 14).
The Company securitizes certain residential mortgage loans and acquires an interest in the related RMBS issued. While the Company has a variable interest in the issuer of the securities, it is not the primary beneficiary of the issuer of the securities since it does not have any rights to remove the servicer or veto rights over the servicer’s actions. The resulting gain (loss) from the securitization is included within net investment gains (losses). The estimated fair value of the related RMBS acquired in connection with the securitizations is included in the carrying amount and maximum exposure to loss for Structured Products presented in the table above.
Fixed maturity securities AFS - net gains (losses) on sales and disposals and mortgage loans for the year ended December 31, 2017, included $276 million and $47 million, respectively, in previously deferred gains on prior period transfers of such investments to Brighthouse. Such gains are no longer eliminated in consolidation after the Separation. See Note 3.
The following table presents the balance sheet classification, carrying amount and cumulative fair value hedging adjustments for items designated and qualifying as hedged items in fair value hedges:
¥10.7 billion ($98 million at issuance) due May 2031 which bear interest annually at 0.898%;
In connection with the issuances, MetLife, Inc. incurred $9 million of related costs which are amortized over the applicable term of each series of the Senior Notes. MetLife, Inc. may redeem each series of the Senior Notes at its option, in whole, but not in part, at a redemption price equal to 100% of the principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest thereon, if certain events occur affecting the U.S. tax treatment of the Senior Notes.
See Note 23 for information on MetLife, Inc.’s issuance of preferred stock subsequent to December 31, 2019.
Forfeited awards were either (a) unvested or unexercisable at the end of the awardholder’s employment, where the awardholder did not meet the criteria for post-employment award continuation; or (b) held by awardholders the Company terminated from employment for cause as defined in the terms of the awards.
Values for awards outstanding at January 1, 2019, represent weighted average number of awards multiplied by the fair value per Share at December 31, 2018. Otherwise, all values represent weighted average of number of awards multiplied by the fair value per Share at December 31, 2019. Fair value of Restricted Stock Units on December 31, 2019 was equal to Grant Date fair value.
Information regarding changes in the balances of each component of AOCI attributable to MetLife, Inc. was as follows:
Significant sources of actuarial (gains) losses for pension and other postretirement benefits during 2019 include the impact of changes to the financial assumptions of $1.2 billion and $66 million, respectively, and plan experience of $103 million and ($97) million, respectively. Significant sources of actuarial (gains) losses for pension and other postretirement benefits during 2018 include the impact of changes to the financial assumptions of ($796) million and ($192) million, respectively, demographic assumptions of $23 million and ($48) million, respectively, and plan experience of $60 million and ($108) million, respectively.
The table below summarizes the actual weighted average allocation of the estimated fair value of total plan assets by asset class at December 31 for the years indicated and the approved target allocation by major asset class at December 31, 2019 for the Invested Plans:
Certain subsidiaries sponsor defined contribution plans under which a portion of employee contributions are matched. These subsidiaries contributed $96 million, $63 million and $72 million for the years ended December 31, 2019, 2018 and 2017, respectively.
As discussed further below, prior year tax includes a non-cash benefit related to an uncertain tax position of $158 million and $168 million for the years ended December 31, 2019 and 2018, respectively.
The Company commits to lend funds under mortgage loan commitments. The amounts of these mortgage loan commitments were $4.1 billion and $4.0 billion at December 31, 2019 and 2018, respectively.