Taxes and Other Tax-Related Items. Income tax expense for the year ended December 31, 2018 was $173 million, or 4% of income (loss) before provision for income tax, compared with an income tax benefit of $561 million, or 19% of income (loss) before provision for income tax, for the year ended December 31, 2017. The Company’s effective tax rates differ from the U.S. statutory rate of 21% typically due to nontaxable investment income and tax credits for investments in low income housing. Our 2018 results include the following tax items: (i) a net tax-related benefit of $359 million related to the settlement of tax audits, which includes a $349 million benefit related to the tax treatment of a wholly-owned U.K. investment subsidiary of Metropolitan Life Insurance Company (comprised of a $168 million tax benefit and a $181 million interest benefit), (ii) an adjusted earnings benefit of $93 million related to U.S. Tax Reform (comprised of a $139 million tax benefit and a $46 million, net of income tax, reduction in net investment income), and (iii) a benefit of $36 million related to a non-cash transfer of assets from a wholly-owned U.K. investment subsidiary to Metropolitan Life Insurance Company. Our 2017 results include the following tax items: (i) a net benefit of $1.0 billion related to the impact of U.S. Tax Reform which includes a $1.4 billion tax benefit and an adjusted earnings charge of $360 (comprised of a $316 million tax charge and a $44 million, net of income tax, reduction in net investment income), and (ii) a benefit of $36 million from the finalization of certain tax audits.
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 were positively impacted by higher yields on fixed income securities and mortgage loans, higher returns on fair value option securities (“FVO Securities”) and real estate investments, lower investment expenses and higher prepayment fees. The resulting increase in net investment income was partially offset by lower returns on private equities, driven by a decrease in partnership distributions, as well as lower earnings on our securities lending program, primarily resulting from lower margins due to the impact of a flatter yield curve. The net increase in investment yields was more than offset by higher average interest credited rates, which drove an increase in interest credited expenses, primarily in our U.S. segment. The changes in market factors discussed above resulted in a $70 million decrease in adjusted earnings.
Investment income from fixed maturity securities AFS and mortgage loans includes prepayment fees.
See Note 8 of the Notes to the Consolidated Financial Statements for information about how valuation allowances are established and monitored and activity in and balances of the valuation allowance as of and for the years ended December 31, 2018, 2017 and 2016.
There were $13 million of impairments recognized on real estate and real estate joint ventures for the year ended December 31, 2017. There were no such impairments for the years ended December 31, 2018 and 2016. Depreciation expense on real estate investments was $65 million, $76 million and $68 million for the years ended December 31, 2018, 2017 and 2016, respectively. Real estate investments were net of accumulated depreciation of $671 million and $668 million at December 31, 2018 and 2017, respectively.
We issue fixed and floating rate funding agreements which are denominated in either U.S. dollars or foreign currencies, to certain special purpose entities (“SPEs”) that have issued either debt securities or commercial paper for which payment of interest and principal is secured by such funding agreements. During the years ended December 31, 2018, 2017 and 2016, we issued $41.8 billion, $42.7 billion and $39.7 billion, respectively, and repaid $43.7 billion, $41.4 billion and $38.5 billion, respectively, under such funding agreements. At December 31, 2018 and 2017, total obligations outstanding under these funding agreements were $32.3 billion and $34.2 billion, respectively. See Note 4 of the Notes to the Consolidated Financial Statements.
To enhance the return on our investment portfolio, we commit to lend funds under mortgage loans, bank credit facilities, bridge loans and private corporate bond investments and we commit to fund partnership investments. In the table above, the timing of the funding of mortgage loans and private corporate bond investments is based on the expiration dates of the corresponding commitments. As it relates to commitments to fund partnerships and bank credit facilities, we anticipate that these amounts could be invested any time over the next five years; however, as the timing of the fulfillment of the obligation cannot be predicted, such obligations are generally presented in the one year or less category. Commitments to fund bridge loans are short-term obligations and, as a result, are presented in the one year or less category. See Note 16 of the Notes to the Consolidated Financial Statements and “- Off-Balance Sheet Arrangements.”
Our definitions of the various non-GAAP and other financial measures discussed in this report may differ from those used by other companies.
For prospective reinsurance of short-duration contracts that meet the criteria for reinsurance accounting, amounts paid (received) are recorded as ceded (assumed) premiums and ceded (assumed) unearned premiums. Unearned premiums are reflected as a component of premiums, reinsurance and other receivables (future policy benefits). Such amounts are amortized through earned premiums over the remaining contract period in proportion to the amount of insurance protection provided. For retroactive reinsurance of short-duration contracts that meet the criteria of reinsurance accounting, amounts paid (received) in excess of the related insurance liabilities ceded (assumed) are recognized immediately as a loss and are reported in the appropriate line item within the statement of operations. Any gain on such retroactive agreement is deferred and is amortized as part of DAC, primarily using the recovery method.
The Company tests goodwill for impairment by either performing a qualitative assessment or a quantitative test. The qualitative assessment is an assessment of historical information and relevant events and circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. The Company may elect not to perform the qualitative assessment for some or all of its reporting units and perform a quantitative impairment test. In performing the quantitative impairment test, the Company may determine the fair values of its reporting units by applying a market multiple, discounted cash flow, and/or an actuarial based valuation approach.
Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. The following tables provide a description of new ASUs issued by the FASB and the impact of the adoption on the Company’s consolidated financial statements.
The new guidance allows a reclassification of AOCI to retained earnings for stranded tax effects resulting from the U.S. Tax Reform. Due to the change in corporate tax rates resulting from the U.S. Tax Reform, the Company reported stranded tax effects in AOCI related to unrealized gains and losses on AFS securities, cumulative foreign translation adjustments and deferred costs on pension benefit plans.
The following table presents the effects of derivatives in cash flow hedging relationships on the consolidated statements of operations, consolidated statements of comprehensive income (loss) and the consolidated statements of equity:
At December 31, 2018, the Company expected to reclassify $109 million of deferred net gains (losses) on derivatives in AOCI, included in the table above, to earnings within the next 12 months.
MetLife Private Equity Holdings, LLC (“MPEH”), a wholly-owned indirect investment subsidiary, borrowed $350 million in December 2015 under a five-year credit agreement included within other notes in the table above. In November 2017, this agreement was amended to extend the maturity to November 2022, change the amount MPEH may borrow on a revolving basis to $75 million from $100 million, and change the interest rate to a variable rate of three-month London Interbank Offered Rate (“LIBOR”) plus 3.25%, payable quarterly, from a variable rate of three-month LIBOR plus 3.70%. In December 2018, this agreement was further amended to change the interest rate to a variable rate of three-month LIBOR plus 3.10%. In connection with the initial borrowing in 2015, $6 million of costs were incurred, and additional costs of $1 million were incurred in connection with the 2017 amendment, which have been capitalized and are being amortized over the term of the loans. MPEH has pledged invested assets to secure the loans; however, these loans are non-recourse to Metropolitan Life Insurance Company. In December 2018, MPEH repaid $50 million of the initial borrowing.
Voshall v. Metropolitan Life Insurance Company (Superior Court of the State of California, County of Los Angeles, April 8, 2015)
Roycroft v. MetLife, Inc., et al. (S.D.N.Y., filed June 18, 2018)