Also, as of December 31, 2018, we owned three properties and have approximately 169 leases in Japan, which are used primarily by our Asia segment. Excluding the U.S. and Japan, we own approximately 112 properties and have approximately 986 leases in various countries used primarily in support of our Asia, Latin America, and EMEA segments, as well as Corporate & Other.
We believe our properties are adequate and suitable for our business as currently conducted, and are adequately maintained. The above properties do not include properties we own for investment-only purposes.
The following selected financial data has been derived from the Company’s audited consolidated financial statements. The statement of operations data for the years ended December 31, 2018, 2017 and 2016, and the balance sheet data at December 31, 2018 and 2017 have been derived from the Company’s audited consolidated financial statements included elsewhere herein. The statement of operations data for the years ended December 31, 2015 and 2014, and the balance sheet data at December 31, 2016, 2015 and 2014 have been derived from the Company’s audited consolidated financial statements not included herein. The selected financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and related notes included elsewhere herein.
For purposes of this discussion, “MetLife,” the “Company,” “we,” “our” and “us” refer to MetLife, Inc., a Delaware corporation incorporated in 1999, its subsidiaries and affiliates. This discussion should be read in conjunction with “Note Regarding Forward-Looking Statements,” “Risk Factors,” “Selected Financial Data,” “Quantitative and Qualitative Disclosures About Market Risk” and the Company’s consolidated financial statements included elsewhere herein.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes references to our performance measures, adjusted earnings and adjusted earnings available to common shareholders, that are not based on GAAP. See “- Non-GAAP and Other Financial Disclosures” for definitions and a discussion of these measures, and “- Results of Operations” for reconciliations of historical non-GAAP financial measures to the most directly comparable GAAP measures.
In December 2017, U.S. Tax Reform was signed into law. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. As a result, the Company recognized the tax effects of U.S. Tax Reform for the year ended December 31, 2017. While the Company recorded a reasonable estimate of the tax effects of U.S. Tax Reform in the period of enactment, its income tax accounting was not complete due to uncertainties that existed at the time. Accordingly, certain U.S. Tax Reform amounts were revised in the Company’s consolidated financial statements for the year ended December 31, 2018. In addition, given the complexities of U.S. Tax Reform, there still remain uncertainties surrounding aspects of the new law that may impact results in the future. See Note 18 of the Notes to the Consolidated Financial Statements for a further discussion of U.S. Tax Reform.
In August 2017, MetLife, Inc. completed the separation of Brighthouse Financial, Inc. and its subsidiaries (“Brighthouse”) through a distribution of 96,776,670 shares of Brighthouse Financial, Inc. common stock to the MetLife, Inc. common shareholders (the “Separation”). For information regarding the Separation, the Company’s 2018 sale of the fair value option (“FVO”) Brighthouse Financial, Inc. common stock (“FVO Brighthouse Common Stock”), and ongoing transactions between MetLife and Brighthouse, see Notes 3 and 12 of the Notes to the Consolidated Financial Statements.
During the year ended December 31, 2018, overall sales increased compared to the year ended December 31, 2017 primarily from improved sales in our RIS business and in Japan. Positive net flows drove an increase in our investment portfolio and investment yields improved, however, interest credited rates were higher. A favorable change in net derivative gains (losses) was primarily the result of changes in foreign currency exchange rates and interest rates. While U.S. Tax Reform positively impacted net income in both 2018 and 2017, the impact in 2017 was significantly larger. In addition, our annual actuarial assumption review negatively impacted results when compared to 2017. Our results for 2017 included a loss from the operations of Brighthouse that is reflected in discontinued operations.
The following represents segment level results and percentage contributions to total segment level adjusted earnings available to common shareholders for the year ended December 31, 2018:
(1) Excludes Corporate & Other adjusted loss available to common shareholders of $704 million.
Favorable change in net derivative gains (losses) of $1.4 billion ($1.1 billion, net of income tax)
Favorable change in results from divested businesses of $936 million ($650 million, net of income tax) included in continuing operations
The primary drivers of the increase in adjusted earnings were higher net investment income due to a larger asset base and higher investment yields, the favorable impact of U.S. Tax Reform, other favorable tax items, favorable refinements to DAC and certain insurance-related liabilities, lower expenses and favorable underwriting, partially offset by higher interest credited expenses and the net unfavorable change from our annual actuarial assumption review.
a $349 million benefit from the IRS audit settlement related to the tax treatment of a wholly-owned U.K. investment subsidiary of MLIC, which was comprised of a $168 million tax benefit and a $181 million interest benefit
favorable impact from U.S. Tax Reform of $179 million, which includes a $78 million charge related to a revision in the estimate from the enactment of this reform
(“IBNR”) life reserves, reflecting enhancements to our processes related to potential claims
a favorable reserve adjustment of $55 million, net of income tax, resulting from modeling improvements in the reserving process for our life business
Results of operations positively impacted by annuities reinsurance activity with Brighthouse, the impact of 2017 and 2016 refinements made to DAC and certain insurance-related liabilities and the impact in both 2017 and 2016 of our annual actuarial assumption review, partially offset by the unfavorable impact of U.S. Tax Reform and other tax items
a $73 million, net of income tax, charge for expenses incurred related to a guaranty fund assessment for Penn Treaty and increases in asbestos and litigation reserves
a $90 million, net of income tax, charge to increase certain RIS policy reserves
a charge of $36 million, net of income tax, for lease impairments
unfavorable reserve adjustments of $65 million, net of income tax, resulting from modeling improvements in the reserving process
When making these and other projections, we must rely on the accuracy of our assumptions about future economic and business conditions, which can be affected by known and unknown risks and other uncertainties. Additional guidance from the U.S. Treasury, SEC or the FASB may require us to revise these projections in future periods.
Effective January 1, 2016, the Company converted its Japan operations from a fiscal year cutoff of November 30th to calendar year-end reporting. The Company reported the cumulative effect of the change in accounting principle in net income for the year ended December 31, 2016. See Notes 1 and 2 of the Notes to the Consolidated Financial Statements.
The results of Brighthouse are reflected in the Company’s consolidated financial statements as discontinued operations and, therefore, are presented as income (loss) from discontinued operations on the consolidated statements of operations. The reporting of discontinued operations had no impact on total consolidated net income (loss) for any of the years presented. See Note 3 of the Notes to the Consolidated Financial Statements for information on discontinued operations and ongoing transactions with Brighthouse.
In 2018, Hurricanes Michael and Florence made landfall in the Florida Panhandle and North and South Carolina, respectively, causing loss of life and extensive property damage. As of December 31, 2018, MetLife’s Property & Casualty business recognized losses from these hurricanes of $27 million ($21 million, net of income tax). Additional storm-related losses may be recorded in future periods as claims are received from insureds.
In 2017, Hurricanes Irma and Harvey made landfall in Florida and Texas, respectively, causing loss of life and extensive property damage. As of December 31, 2017, MetLife’s Property & Casualty business recognized losses from these hurricanes of $65 million ($42 million, net of income tax).
The inflation levels in Argentina have been elevated for several years. In the first half of 2018, Argentina’s reported inflation rates began to increase dramatically and the Argentine central bank significantly increased interest rates in an effort to combat inflation. Based on Argentina’s reported inflation rates and trends, as of July 1, 2018, we designated Argentina as a highly inflationary economy for accounting purposes. The change to highly inflationary accounting did not have a material impact on the Company’s consolidated financial statements for the year ended December 31, 2018.
We are closely monitoring political and economic conditions that might contribute to global market volatility and impact our business operations, investment portfolio and derivatives. For example, events following the U.K.’s referendum on June 23, 2016 and the uncertainties, including foreign currency exchange risks, associated with its planned withdrawal from the EU, have contributed to global market volatility. These factors could contribute to weakening Gross Domestic Product growth, primarily in the U.K. and, to a lesser degree, in continental Europe. The magnitude and longevity of the potential negative economic impacts would depend on the detailed agreements reached by the U.K. and the EU as a result of the negotiations regarding future trade and other arrangements. See “- Investments - Current Environment - Selected Country and Sector Investments.” We are also monitoring the imposition of tariffs or other barriers to international trade, changes to international trade agreements, and their potential impacts on our business, results of operations and financial condition. In addition, the possibility of additional government shutdowns or a failure to raise the debt ceiling, due to a policy impasse or otherwise, could adversely impact our business and liquidity. See “Business - Regulation - Cross-Border Trade” and “Business - Regulation - Fiscal Measures.” See also “Risk Factors - Economic Environment and Capital Markets Risks - Difficult Economic Conditions May Adversely Affect Our Business, Results of Operations and Financial Condition” and “Risk Factors - Business Risks - The Global Nature of Our Operations Exposes Us to a Variety of Political, Legal, Operational, Economic and Other Risks.”
During sustained periods of low interest rates, we may have to invest insurance cash flows and reinvest the cash flows we received as interest or return of principal on our investments in lower yielding instruments. Moreover, borrowers may prepay or redeem the fixed income securities, mortgage loans and mortgage-backed securities in our investment portfolio with greater frequency in order to borrow at lower market rates. Therefore, some of our products expose us to the risk that a reduction in interest rates will reduce the difference between the amounts that we are required to credit on contracts in our general account and the rate of return we are able to earn on investments intended to support obligations under these contracts. This difference between interest earned and interest credited, or margin, is a key metric for the management of, and reporting for, many of our businesses.
Our expectations regarding future margins are an important component impacting the amortization of certain intangible assets such as DAC and VOBA. Significantly lower margins may cause us to accelerate the amortization, thereby reducing net income in the affected reporting period. Additionally, lower margins may also impact the recoverability of intangible assets such as goodwill, require the establishment of additional liabilities or trigger loss recognition events on certain policyholder liabilities. We review this long-term margin assumption, along with other assumptions, as part of our annual actuarial assumption review. See “- Results of Operations - Consolidated Results - Year Ended December 31, 2018 Compared with the Year Ended December 31, 2017 - Actuarial Assumption Review and Certain Other Insurance Adjustments” for further information.
In formulating economic assumptions for its insurance contract assumptions, the Company uses projections that it makes regarding interest rates. Included in these assumptions is the projection that the 10-year Treasury rate will rise from 2.69% at December 31, 2018 to 4.25% in 8 years, by 2026 and remains level afterwards and that 10-year yields will reach 2.76%, 2.84% and 2.93% by December 31, 2019, 2020 and 2021, respectively. Also included is the projection that the three-month LIBOR rate will move from 2.81% at December 31, 2018 to 2.63%, 2.41% and 2.46% by December 31, 2019, 2020 and 2021, respectively. The low interest rate scenario reflects an assumed 100 basis point decline in all interest rate maturities compared to the base scenario from December 31, 2018 through December 31, 2021 (the “Low Interest Rate Scenario”).
The Low Interest Rate Scenario assumes the three-month LIBOR to be 1.81% and the 10-year U.S. Treasury rate to be 1.69% at December 31, 2018. We assume the low interest rate scenario to be 100 basis points lower than the base scenario until December 31, 2021 for all interest rate maturities. In addition, in the Low Interest Rate Scenario, we assume credit spreads to remain constant from December 31, 2018 through the end of 2021 as compared to our base scenario. Further, we also include the impact of low interest rates on our pension and postretirement plan expenses. We allocate this impact across our segments and it is included in the segment discussion below. The discount rate used to value these plans is tied to high quality corporate bond yields. Accordingly, an extended low interest rate environment will result in increased pension and other postretirement benefit liabilities. However, these liabilities are offset by corresponding returns on the fixed income portfolio of pension and other postretirement benefit plan assets resulting in an overall decrease in expense.
In addition to its impact on adjusted earnings, we estimated the effect of the Low Interest Rate Scenario on the mark-to-market of our derivative positions that do not qualify as accounting hedges. We applied the Low Interest Rate Scenario to these derivatives and compared the impact to that from interest rates in our base scenario. We hold a significant position in long-duration receive-fixed interest rate swaps to hedge reinvestment risk. These swaps are most sensitive to the 30-year and 10-year swap rates and we recognize gains as rates drop and recognize losses as rates rise. This estimated impact on the derivative mark-to-market does not include that of our VA program derivatives as the impact of low interest rates in the freestanding derivatives would be largely offset by the mark-to-market in net derivative gains (losses) for the related embedded derivative.
Based on these additional assumptions, we estimate the combined long-term and short-term interest rate impact of the Low Interest Rate Scenario on the mark-to-market of our derivative positions that do not qualify as accounting hedges to be an increase in net income of $719 million in 2019, and a decline in net income of $35 million in 2020 and $69 million in 2021. See “- Results of Operations - Consolidated Results” for information regarding our actual gains and losses on the Company’s non-VA program derivatives due to interest rate changes which are included in net income.
We estimate a favorable combined long-term and short-term interest rate impact on the adjusted earnings of our Group Benefits business from the Low Interest Rate Scenario of $35 million, $15 million and $5 million in 2019, 2020 and 2021, respectively.
We estimate an unfavorable combined long-term and short-term interest rate impact on adjusted earnings on our RIS business from the Low Interest Rate Scenario of $15 million, $20 million, and $20 million in 2019, 2020, and 2021, respectively.
The product portfolio within Property & Casualty is primarily made up of six-month and annual term renewable policies, which allow for significant re-pricing flexibility with no policyholder benefits tied to interest rates. As a result, the interest rate risk for the Property & Casualty business is minimal, tied only to our portfolio reinvestment rates and our ability to offset the change of those rates through re-pricing efforts.
We estimate an unfavorable combined long-term and short-term interest rate impact on the adjusted earnings of our Asia segment from the Low Interest Rate Scenario of $20 million, $45 million and $85 million in 2019, 2020 and 2021, respectively.
In annuities, the impact on adjusted earnings from margin compression is concentrated in our deferred annuities where there are minimum interest rate guarantees. Under the Low Interest Rate Scenario, we assume that a larger percentage of customers will maintain their funds with us to take advantage of the attractive minimum guaranteed crediting rates and we expect to experience margin compression as we reinvest cash flows at lower interest rates. Partially offsetting this margin compression, we assume we will lower crediting rates on contractual reset dates for the portion of business that is not currently at minimum crediting rates. Additionally, we have various interest rate derivative positions to partially mitigate this risk.
Reinvestment risk is defined for this purpose as the amount of reinvestment in 2019, 2020 and 2021 that would impact adjusted earnings due to reinvesting cash flows in the Low Interest Rate Scenario. For the life business, $3.4 billion, $4.5 billion and $4.0 billion in 2019, 2020 and 2021, respectively, of the asset base will be subject to reinvestment risk on an average asset base of $59.9 billion, $59.9 billion and $59.6 billion in 2019, 2020 and 2021, respectively. For our deferred annuities business, $1.1 billion, $0.8 billion, and $1.2 billion in 2019, 2020, and 2021, respectively, of the asset base will be subject to reinvestment risk on an average asset base of $16.2 billion, $15.4 billion and $14.7 billion in 2019, 2020 and 2021, respectively. For our long-term care portfolio, $1.6 billion, $1.6 billion and $1.6 billion of the asset base in 2019, 2020 and 2021, respectively, will be subject to reinvestment risk on an average asset base of $12.8 billion, $13.5 billion and $14.2 billion in 2019, 2020 and 2021, respectively.
At December 31, 2018, 2017 and 2016, DAC and VOBA for the Company was $18.9 billion, $18.4 billion and $17.6 billion, respectively. Amortization of DAC and VOBA associated with the variable and universal life and annuity contracts was significantly impacted by movements in equity markets. The following illustrates the effect on DAC and VOBA of changing each of the respective assumptions, as well as updating estimated gross margins or profits with actual gross margins or profits during the years ended December 31, 2018, 2017 and 2016. Increases (decreases) in DAC and VOBA balances, as presented below, resulted in a corresponding decrease (increase) in amortization.
Net increase in amortization of $215 million associated with net investment/net derivative gains (losses) and GMIB, primarily driven by the following:
Net increase in amortization of approximately $100 million from the annual actuarial assumption update and other investment activities.
Net decrease in amortization of $58 million associated with net investment/net derivative gains (losses) and GMIB, primarily driven by the following:
A decrease in amortization of approximately $55 million due to an adjustment related to certain participating whole life business assumed from Brighthouse.
A decrease in amortization of approximately $20 million from net derivative losses resulting from the increases in the variable annuity guarantee obligations.
Net decrease in amortization of approximately $30 million from the annual actuarial assumption update and other investment activities.
An increase in amortization of $187 million related to policyholder dividends, expense and other primarily driven by the following:
We determine the discount rates used to value the Company’s pension and postretirement obligations, based upon rates commensurate with current yields on high quality corporate bonds. Given our pension and postretirement obligations as of December 31, 2017, the beginning of the measurement year, if we had assumed a discount rate for both our pension and 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 $117 million and an increase of $113 million, respectively, in 2018. This considers only changes in our assumed discount rates without consideration of possible changes in any of the other assumptions described above that could ultimately accompany any changes in our assumed discount rate. The assumptions used may differ materially from actual results due to, among other factors, changing market and economic conditions and changes in participant demographics. These differences may have a significant impact on the Company’s consolidated financial statements and liquidity.
For information regarding the Company’s 2018 disposition of MetLife Afore, its pension fund management business in Mexico, see Note 3 of the Notes to the Consolidated Financial Statements.
In 2016, MetLife, Inc. completed the sale to Massachusetts Mutual Life Insurance Company of its U.S. retail advisor force and certain assets associated with the MetLife Premier Client Group, including all of the issued and outstanding shares of MetLife’s affiliated broker-dealer, MSI, a wholly-owned subsidiary of MetLife, Inc. (collectively, the “U.S. Retail Advisor Force Divestiture”) for $291 million. See Note 3 of the Notes to the Consolidated Financial Statements for further information.
Business Overview. Overall sales for the year ended December 31, 2018 increased over 2017 levels reflecting higher sales in the majority of our businesses. In our U.S. segment, improved sales in our RIS business were partially offset by slightly lower sales in our Group Benefits business as the impact of strong jumbo case sales in our core products in 2017 more than offset strong sales in our voluntary products in 2018. The improvement in RIS was the result of higher sales of pension risk transfers, most notably a large pension risk transfer transaction in the second quarter of 2018, stable value, specialized life insurance, and structured settlement products, partially offset by lower funding agreement issuances. An increase in sales in our Asia segment was primarily driven by growth in sales of foreign currency-denominated annuity and life products, as well as accident & health products, in Japan, partially offset by a decrease in sales in Korea and Hong Kong. In our Latin America segment, sales increased compared to 2017, driven by higher individual accident & health, credit life and retirement product sales in Chile, partially offset by lower pension and group medical sales in Mexico. Sales in EMEA decreased primarily due to the closure of the U.K. wealth management product to new business in the third quarter of 2017 and a decline in sales of our employee benefits product in the Gulf region. Revenues in our MetLife Holdings segment decreased as a result of the discontinuance of the marketing of life and annuity products in early 2017.
During the year ended December 31, 2018, net income (loss) increased $1.1 billion from 2017, primarily driven by favorable changes in net derivative gains (losses), adjusted earnings, income (loss) from discontinued operations, and results from our divested businesses, partially offset by 2017 tax-related benefits, primarily related to U.S. Tax Reform.
We also use derivatives as an integral part of our management of the investment portfolio and insurance liabilities to hedge certain risks, including changes in interest rates, foreign currency exchange rates, credit spreads and equity market levels. We use freestanding interest rate, equity, credit and currency derivatives to hedge certain invested assets and insurance liabilities. A portion of these hedges are designated and qualify as accounting hedges, which reduce volatility in earnings. For those hedges not designated as accounting hedges, changes in market factors lead to the recognition of fair value changes in net derivative gains (losses) generally without an offsetting gain or loss recognized in earnings for the item being hedged, which creates volatility in earnings. We actively evaluate market risk hedging needs and strategies to ensure our free cash flow and capital objectives are met under a range of market conditions. For example, during 2017, we restructured certain derivative hedges to decrease volatility from nonqualified interest rate derivatives and to help meet prospective dividend and free cash flow objectives under varying interest rate scenarios. As part of this restructuring, we replaced certain nonqualified derivatives with derivatives that qualify for hedge accounting treatment. In addition, we also entered into replication transactions using interest rate swaps, which are accounted for at amortized cost under statutory guidelines and are nonqualified derivatives under GAAP.
The aforementioned $369 million ($292 million, net of income tax) favorable change reflects a $1.5 billion ($1.2 billion, net of income tax) favorable change in freestanding derivatives hedging market risks in embedded derivatives, partially offset by a $1.1 billion ($871 million, net of income tax) unfavorable change in market risks in embedded derivatives.
Long-term U.S. interest rates increased in 2018 and mostly decreased in 2017, contributing to a favorable change in our embedded derivatives. Our freestanding interest rate derivatives were favorably impacted by the restructuring of the VA hedging strategy, partially offset by the increase in interest rates. For example, the 30-year U.S. swap rate increased 30 basis points in 2018 and decreased 5 basis points in 2017.
Updates to actuarial policyholder behavior assumptions within the valuation model, and
When our own credit spread increases in isolation, discounting the embedded derivative liability produces a lower valuation of the liability than if our own credit spread had remained constant. As a result, a gain is created from including an adjustment for nonperformance risk. For each of these primary market drivers, the opposite effect occurs when they move in the opposite direction.
Net Investment Gains (Losses). The favorable change in net investment gains (losses) of $10 million ($8 million, net of income tax) primarily reflects lower non-investment portfolio losses in 2018. In 2017, we recognized a mark-to-market loss on our retained investment in Brighthouse Financial, Inc. in connection with the Separation. In 2018, we recognized lower losses representing both the change in estimated fair value of FVO Brighthouse Common Stock we held through date of disposal and the loss upon disposal in June 2018. In addition, in 2018, we recognized mark-to-market losses on equity securities which are measured at fair value through net income and in 2018 compared to 2017, there were lower gains on sales of fixed maturity securities AFS and real estate joint ventures.
Actuarial Assumption Review and Certain Other Insurance Adjustments. Results for 2018 include a $358 million ($272 million, net of income tax) charge associated with our annual review of actuarial assumptions related to reserves and DAC, of which a $131 million loss ($94 million, net of income tax) was recognized in net derivative gains (losses).
Of the $358 million charge, $20 million ($20 million, net of income tax) was related to DAC and $338 million ($252 million, net of income tax) was associated with reserves. The portion of the $358 million charge that was included in adjusted earnings was $53 million ($42 million, net of income tax).
The $131 million loss recognized in net derivative gains (losses) associated with our annual review of actuarial assumptions was included within the other risks in embedded derivatives caption in the table above.
Changes to biometric assumptions resulted in net favorable changes in reserves and DAC of $55 million ($44 million, net of income tax).
Changes in policyholder behavior assumptions resulted in a net charge of $321 million ($241 million, net of income tax).
Changes in operational assumptions, most notably related to closed block projections, resulted in a net charge of $130 million ($104 million, net of income tax).
Divested Businesses. Income (loss) before provision for income tax related to the divested businesses, excluding net investment gains (losses) and net derivative gains (losses), increased $936 million ($650 million, net of income tax) to a loss of $122 million ($97 million, net of income tax) in 2018 from a loss of $1.1 billion ($747 million, net of income tax) in 2017. Included in this increase was an increase in total revenues of $570 million, before income tax, and a decrease in total expenses of $366 million, before income tax. Divested businesses primarily include activity related to the Separation.
The unfavorable change in net derivative gains (losses) on non-VA program derivatives was $394 million ($256 million, net of income tax). This was primarily due to the U.S. dollar, relative to other key currencies, weakening in 2017 versus mostly strengthening in 2016, unfavorably impacting foreign currency swaps that primarily hedge foreign currency-denominated bonds. Additionally, there was a change in the value of the underlying assets unfavorably impacting non-VA embedded derivatives related to funds withheld on a certain reinsurance agreement. These decreases were partially offset by long-term interest rates mostly decreasing in 2017 and mostly increasing in 2016, favorably impacting receive-fixed interest rate swaps and total rate of return swaps hedging long-duration liability portfolios. Because certain of these hedging strategies are not designated or do not qualify as accounting hedges, the changes in the estimated fair value of these freestanding derivatives are recognized in net derivative gains (losses) without an offsetting gain or loss recognized in earnings for the item being hedged.
Key equity index levels increased more in 2017 than in 2016, contributing to an unfavorable change in our freestanding derivatives and a favorable change in our embedded derivatives. For example, the S&P 500 Index increased 19% in 2017 and increased 10% in 2016.
Long-term interest rates in Japan increased in 2017 and decreased in 2016, contributing to a favorable change in our embedded derivatives and an unfavorable change in our freestanding derivatives related to the assumed variable annuity guarantees from our former operating joint venture in Japan. This was partially offset by long-term U.S. interest rates mostly decreasing in 2017 and mostly increasing in 2016. For example, the 30-year Japan swap rate increased five basis points in 2017 and decreased 41 basis points in 2016, and the 20-year U.S. swap rate decreased three basis points in 2017 and increased three basis points in 2016.
The foregoing $795 million ($517 million, net of income tax) favorable change in other risks in embedded derivatives reflects:
Actuarial Assumption Review. Results for 2017 include a $37 million ($25 million, net of income tax) gain associated with our annual review of actuarial assumptions related to reserves and DAC, of which a $21 million ($14 million, net of income tax) gain was recognized in net derivative gains (losses). Of the $37 million gain, a $96 million ($64 million, net of income tax) gain was associated with DAC, and a loss of $59 million ($39 million, net of income tax) was related to reserves. The $21 million gain recognized in net derivative gains (losses) associated with this review of actuarial assumptions was included within the other risks in embedded derivatives caption in the table above.
Changes in policyholder behavior assumptions resulted in reserve increases, partially offset by favorable DAC, resulting in a net charge of $47 million ($29 million, net of income tax).
Changes to biometric assumptions resulted in an increase in reserves, partially offset by favorable DAC, resulting in a charge of $11 million ($7 million, net of income tax).
Reconciliation of income (loss) from continuing operations, net of income tax, to adjusted earnings available to common shareholders
Overview. The primary drivers of the increase in adjusted earnings were higher net investment income due to a larger asset base and higher investment yields, the favorable impact of U.S. Tax Reform, other favorable tax items, favorable refinements to DAC and certain insurance-related liabilities, lower expenses and favorable underwriting, partially offset by higher interest credited expenses and the net unfavorable change from our annual actuarial assumption review.
U.S. Tax Reform. The changes from U.S. Tax Reform resulted in a net increase in adjusted earnings of $477 million for 2018 compared to 2017, which includes a slight reduction in net investment income related to tax credit partnership investments. Our 2018 results include a tax benefit of $303 million, primarily related to the lower tax rate. Our 2017 results include a tax charge of $254 million to reflect the enactment of U.S. Tax Reform. Our 2018 results also include an additional tax charge of $78 million to reflect a revision to the estimate of this enactment.
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. Excluding the impact of changes in foreign currency exchange rates on net investment income in our non-U.S. segments and changes in inflation rates on our inflation-indexed investments, investment yields increased. Investment yields were positively affected by higher yields on fixed income securities and mortgage loans, income on derivatives, returns on real estate investments and a reduction in investment expenses. These increases were partially offset by lower returns on private equities, driven by a decrease in partnership distributions, lower returns on hedge funds and lower returns on fair value option securities (“FVO Securities”). The improvement in yields was more than offset by the impact of 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 $79 million decrease in adjusted earnings.
Taxes and Other Tax-Related Items. Our effective tax rates differ from the U.S. statutory rate of 21% typically due to nontaxable investment income, tax credits for investments in low income housing and foreign earnings taxed at different rates than the U.S. statutory rate. This incremental tax benefit was lower in 2018 compared to 2017 which resulted in a $47 million decrease in adjusted earnings. Our results for 2018 include the following tax items: (i) a net tax-related benefit of $366 million related to the settlement of tax audits, which included a $349 million benefit related to the tax treatment of a wholly-owned U.K. investment subsidiary of MLIC (comprised of a $168 million tax benefit and a $181 million interest benefit), (ii) a benefit of $36 million related to a non-cash transfer of assets from a wholly-owned U.K. investment subsidiary to MLIC, (iii) a charge of $17 million related to a tax adjustment in Chile, and (iv) a $5 million charge in Colombia to establish a deferred tax liability due to a change in tax status. Our results for 2017 include the following tax items: (i) a benefit of $41 million related to the finalization of certain tax audits, (ii) charges of $180 million related to the repatriation of approximately $3.0 billion of cash following the post-Separation review of our capital needs, partially offset by a tax benefit associated with dividends from our non-U.S. operations, and (iii) a benefit of $9 million related to the settlement of a tax audit in Argentina. Other tax-related items in both 2018 and 2017, primarily due to the changes in the valuation of the peso in Argentina, resulted in a $45 million increase in adjusted earnings.
Overview. The primary drivers of the increase in adjusted earnings were annuities reinsurance activity with Brighthouse, the impact of 2017 and 2016 refinements made to DAC and certain insurance-related liabilities, and the impact in both 2017 and 2016 of our annual actuarial assumption review, partially offset by the negative impact of U.S. Tax Reform and other unfavorable tax items.
Expenses. A $46 million decrease in expenses was primarily driven by lower costs as a result of the U.S. Retail Advisor Force Divestiture, a decrease in certain corporate expenses, and favorable net adjustments to certain reinsurance assets and liabilities, partially offset by (i) Separation-related costs, (ii) higher employee-related expenses, (iii) higher costs associated with corporate initiatives and projects (including leasehold impairments and costs related to our unit cost initiative), (iv) an increase in asbestos and litigation reserves, and (v) an increase in expenses incurred related to the guaranty fund assessment for Penn Treaty.
Business Overview. Sales increased compared to 2017, primarily driven by our RIS business, as higher sales of pension risk transfers (driven by a large transaction in the second quarter of 2018), stable value, specialized life insurance and structured settlement products were partially offset by lower funding agreement issuances. Changes in premiums for the RIS business were almost entirely offset by the related changes in policyholder benefits and claims. Sales were slightly lower compared to 2017 in the Group Benefits business, as strong sales in our voluntary products were offset by the impact of strong jumbo case sales in our core products in 2017. The resulting increase in premiums, fees and other revenues was partially offset by the loss of a large dental contract in the second quarter of 2017. In our Property & Casualty business, sales increased over 2017. In addition, the number of exposures decreased from 2017, reflecting management actions to improve the quality of the business.
U.S. Tax Reform. The changes from U.S. Tax Reform resulted in an increase in adjusted earnings of $417 million for 2018 compared to 2017.
Business Growth. Net investment income improved as a result of higher average invested assets due to the impact of increased premiums and deposits, primarily due to pension risk transfer sales, partially offset by a decrease in net flows from funding agreements. However, consistent with the growth in average invested assets from increased premiums, interest credited expenses on long-duration and deposit-type liabilities increased. An increase in average premium per policy in our auto business, partially offset by the decrease in exposures, improved adjusted earnings. Higher volume-related, direct and premium tax expenses were partially offset by lower pension and postretirement expenses. This net increase in expenses, coupled with the increase due to the 2018 reinstatement of the annual health insurer fee under the PPACA, were more than offset by a corresponding increase in premiums, fees and other revenues. The combined impact of the items affecting our business growth increased adjusted earnings by $171 million.
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 increased, primarily due to higher yields on fixed income securities and mortgage loans, coupled with higher returns on real estate investments, partially offset by lower returns on private equities, as a result of a decrease in partnership distributions. The net increase in investment yields was more than offset by the impact of higher average interest credited rates on both our long-duration and deposit-type liabilities, which drove an increase in interest credited expenses. The changes in market factors discussed above resulted in an $86 million decrease in adjusted earnings.
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 prepayment fees, derivative income and lower returns on real estate and real estate joint ventures. In addition, lower investment earnings on our securities lending program resulted primarily from lower margins, due to a flatter yield curve. These decreases in investment yields were largely offset by higher returns on other limited partnership interests, primarily in private equities, driven by improvements in equity market performance. Higher average interest credited rates drove an increase in interest credited expenses; however, this was partially offset by an increase in adjusted earnings due to a decrease in the crediting rate on certain long-duration insurance contracts. The changes in market factors discussed above resulted in a $74 million decrease in adjusted earnings.
Business Overview. Sales increased compared to 2017 primarily driven by growth in foreign currency-denominated annuity and life products as well as accident & health product sales in Japan. This was partially offset by a decrease in sales in Korea, as a result of the continued negative impact of regulatory changes on sales of savings retirement products, as well as a decrease in life sales in Hong Kong.
Business Growth. Asia’s premiums, fees and other revenues remained flat compared to 2017 as growth in our foreign currency-denominated life and accident & health products was offset by the decline in yen-denominated life products in Japan. Changes in premiums from these products were partially offset by related changes in policyholder benefits. Positive net flows in Japan and Korea resulted in higher average invested assets, which improved net investment income. Business growth also drove an increase in commissions and other variable expenses, which were partially offset by higher DAC capitalization. The combined impact of the items affecting our business growth improved adjusted earnings by $109 million.
Underwriting, Actuarial Assumption Review and Other Insurance Adjustments. Higher lapses and claims in Japan decreased adjusted earnings by $48 million. Our annual actuarial assumption review resulted in a decrease of $63 million in adjusted earnings when compared to 2017. Refinements to certain insurance and other liabilities, which were recorded in both 2018 and 2017, resulted in a $31 million decrease in adjusted earnings. Our results for 2018 include favorable liability refinements of $11 million in Japan and $6 million in Australia, largely offset by an unfavorable liability refinement of $16 million in Bangladesh. Our 2017 results include a favorable refinement of $12 million related to reinsurance receivables in Australia.
Expenses and Taxes. Higher expenses, primarily driven by higher employee-related and project costs, as well as an increase in corporate overhead costs, reduced adjusted earnings by $24 million. Various tax items in both 2018 and 2017 resulted in a $5 million increase in adjusted earnings.
Foreign Currency. Changes in foreign currency exchange rates decreased adjusted earnings by $8 million for 2017 compared to 2016 primarily due to the weakening of the Japanese yen, partially offset by the strengthening of the Korean won, against the U.S. dollar. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. Foreign currency fluctuations can result in significant variances in the financial statement line items.
Business Overview. Total sales for Latin America increased compared to 2017, driven by higher individual accident & health, credit life and retirement product sales in Chile, partially offset by lower pension and group medical sales in Mexico.
Underwriting, Actuarial Assumption Review and Other Insurance Adjustments. Favorable underwriting resulted in a $57 million increase to adjusted earnings primarily driven by lower claims experience in Mexico. Our annual actuarial assumption review resulted in a $13 million increase to adjusted earnings when compared to 2017. In addition, refinements to certain insurance liabilities and other adjustments in both 2018 and 2017, primarily in Brazil, Mexico and Chile, resulted in an $18 million decrease to adjusted earnings.
Expenses and Taxes. A $17 million decrease in expenses was primarily the result of a 2018 reduction of a litigation reserve in Argentina. Our results for 2018 include a $17 million tax charge related to a tax adjustment in Chile, a $5 million tax charge in Colombia to establish a deferred tax liability due to a change in tax status, a $2 million tax charge as a result of tax reform legislation also in Colombia, partially offset by a $4 million tax benefit due to inflation in Argentina. Our results for 2017 include a $9 million tax benefit related to the settlement of a tax audit and a $4 million tax charge incurred as a result of tax reform legislation, both in Argentina. Other tax-related items in both 2018 and 2017, primarily due to the changes in the valuation of the peso in Argentina, resulted in a $14 million increase in adjusted earnings.
Expenses and Taxes. Higher expenses, primarily driven by employee-related and marketing costs, decreased adjusted earnings by $48 million as compared to 2016. Our results for 2017 include a $9 million tax benefit related to the settlement of a tax audit and a $4 million tax charge incurred as a result of tax reform legislation, both in Argentina. Our results for 2016 included a tax charge of $12 million as a result of tax reform legislation in Chile (including a charge of $10 million that pertains to periods prior to 2016). Also, our results for 2016 included a tax charge of $11 million related to the 2015 filing of local tax returns in Mexico and Chile. Other tax-related items in both 2017 and 2016 resulted in a $6 million decrease in adjusted earnings, primarily driven by a 2016 tax benefit due to inflation in Argentina.
Business Overview. Sales decreased in 2018 primarily due to the closure of the U.K. wealth management product to new business in the third quarter of 2017 and a decline in sales of our employee benefits product in the Gulf region.
Underwriting, Actuarial Assumption Review and Other Insurance Adjustments. Less favorable underwriting, primarily in our accident & health business in Greece and our employee benefits business in the U.K., as well as unfavorable underwriting in the Gulf region and in our life insurance business in France, decreased adjusted earnings by $55 million. Our annual actuarial assumption review resulted in a decrease in adjusted earnings of $15 million when compared to 2017. In addition, adjusted earnings decreased by $2 million due to refinements recorded in 2017 in our employee benefits business in the U.K. and the Gulf region and, in 2018, in our life insurance business in the Gulf region.
Foreign Currency. Changes in foreign currency exchange rates reduced adjusted earnings by $12 million for 2017 as compared to 2016, primarily driven by the strengthening of the U.S. dollar against the Egyptian pound and Turkish lira, partially offset by the weakening of the U.S. dollar against the Russian ruble and the Euro. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. Foreign currency fluctuations can result in significant variances in the financial statement line items.
Underwriting, Actuarial Assumption Review and Other Insurance Adjustments. Underwriting experience was essentially unchanged as unfavorable underwriting, primarily in our credit life business in Turkey and across several European markets, was offset by favorable underwriting in our accident & health business in Greece. The impact in both 2017 and 2016 of our annual actuarial assumption review resulted in an $8 million increase in net adjusted earnings. Refinements to certain insurance liabilities and other adjustments in both 2017 and 2016 resulted in a $4 million decrease in adjusted earnings.
U.S. Tax Reform. The changes from U.S. Tax Reform resulted in an increase in adjusted earnings of $213 million for 2018 compared to 2017.
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. Higher DAC amortization from annuities, driven by lower equity market returns, resulted in a decrease in adjusted earnings. Investment yields were favorably impacted by a reduction in investment expenses in addition to higher returns on both real estate investments and FVO Securities. These improvements in investment yields were partially offset by a decline in mortgage loan yields and lower returns on private equities. The changes in market factors discussed above resulted in a $31 million decrease in adjusted earnings.
Expenses. Adjusted earnings increased by $145 million as a result of lower expenses, primarily due to declines in Separation-related expenses, as well as lower employee-related costs, including expenses related to pension and postretirement benefits.
The table below presents adjusted earnings available to common shareholders by source:
U.S. Tax Reform. The changes from U.S. Tax Reform resulted in a decrease in adjusted earnings of $139 million for 2018 compared to 2017. Our 2018 results included a decrease in adjusted earnings of $315 million, primarily related to the lower tax rate along with a slight reduction in net investment income. Our 2017 results included a tax charge of $254 million to reflect the enactment of U.S. Tax Reform. Our 2018 results also include an additional tax charge of $78 million to reflect a revision to the estimate of this enactment.
Other. Adjusted earnings increased $13 million, primarily as a result of a $45 million decrease in expenses for interest on certain tax positions and $18 million of expenses incurred in 2017 and taxed at the 2017 rate related to the guaranty fund assessment for Penn Treaty. These favorable items are partially offset by a $39 million increase in certain corporate-related expenses and a $20 million increase in litigation accruals.
Other Net Investment Income. Other net investment income decreased by $76 million primarily driven by a lower invested asset base and lower returns on alternative investments (excluding the impact of U.S. Tax Reform) and real estate joint ventures. These decreases were partially offset by a decrease in the amount credited to the segments due to both a reduction in the crediting rate and the amount of economic capital managed by Corporate & Other on their behalf.
Corporate Initiatives and Projects. Expenses associated with corporate initiatives and projects increased by $50 million, primarily due to higher costs associated with enterprise-wide initiatives, primarily related to lease impairments and costs related to our unit cost initiative.
Other. Adjusted earnings decreased from 2016 as a result of a $32 million increase in asbestos and litigation reserves, a $25 million increase in employee-related expenses, $18 million of expenses incurred in 2017 related to the guaranty fund assessment for Penn Treaty, and a $13 million increase in expenses for interest on uncertain tax positions. These decreases in adjusted earnings were partially offset by a $31 million decrease in certain corporate expenses and $26 million of favorable net adjustments to certain reinsurance assets and liabilities in both 2017 and 2016.
U.S. Tax Reform resulted in a $298 million charge in 2017, which includes a $44 million reduction in net investment income and a $254 million tax charge.
We manage investment risk through in-house fundamental credit analysis of the underlying obligors, issuers, transaction structures and real estate properties. We also manage credit, market and liquidity risk through industry and issuer diversification and asset allocation. These risk limits, approved annually by a committee of directors that oversees our investment portfolio, promote diversification by asset sector, avoid concentrations in any single issuer and limit overall aggregate credit and equity risk exposure, as measured by our economic capital framework. For real estate assets, we manage credit and market risk through asset allocation and by diversifying by geography, property and product type. We manage interest rate risk as part of our ALM strategies. These strategies include maintaining an investment portfolio with diversified maturities that has a weighted average duration that reflects the duration of our estimated liability cash flow profile, and utilizing product design, such as the use of market value adjustment features and surrender charges, to manage interest rate risk. We also manage interest rate risk through proactive monitoring and management of certain NGEs of our products, such as the resetting of credited interest and dividend rates for policies that permit such adjustments. In addition to hedging with foreign currency derivatives, we manage currency risk by matching much of our foreign currency liabilities in our foreign subsidiaries with their respective foreign currency assets, thereby reducing our risk to foreign currency exchange rate fluctuation. We also use certain derivatives in the management of credit, interest rate, and market valuation risk.
As a global insurance company, we continue to be impacted by the changing global financial and economic environment, as well as the monetary policy of central banks around the world. See “- Industry Trends - Financial and Economic Environment.” Measures taken by central banks, including with respect to the level of interest rates, may have an impact on the pricing levels of risk-bearing investments and may adversely impact our business operations, investment portfolio and derivatives. The current environment continues to impact our net investment income, net investment gains (losses), net derivative gains (losses), level of unrealized gains (losses) within the various asset classes in our investment portfolio, and our level of investment in lower yielding cash equivalents, short-term investments and government securities. See “Risk Factors - Economic Environment and Capital Markets Risks - Difficult Economic Conditions May Adversely Affect Our Business, Results of Operations and Financial Condition.”
We maintain general account investments in Europe to support our insurance operations and related policyholder liabilities in these countries and certain of our non-European operations invest in Europe for diversification. In Europe, we have proactively mitigated risk in both direct and indirect exposures by investing in a diversified portfolio of high quality investments with a focus on the higher-rated countries, including the U.K., France, Germany, the Netherlands, Poland, Switzerland and Belgium. The sovereign and agency debt of these countries continues to maintain investment grade credit ratings from all major rating agencies. European sovereign and agency fixed maturity securities AFS, at estimated fair value, were $8.4 billion at December 31, 2018. Our European corporate securities (fixed maturity and perpetual hybrid securities classified as non-redeemable preferred stock) are invested in a diversified portfolio of primarily non-financial services securities, which comprised $21.3 billion, or 68%, of European corporate securities, at estimated fair value, at December 31, 2018. Of these European fixed maturity securities AFS, 96% were investment grade and, for the 4% that were below investment grade, the majority were non-financial services corporate securities at December 31, 2018. European financial services corporate securities, at estimated fair value, were $10.0 billion (including $6.3 billion within the banking sector) with 99% investment grade, at December 31, 2018. Total European fixed maturity securities AFS, at estimated fair value, were $40.0 billion at December 31, 2018, including $348 million of Structured Securities (see “- Fixed Maturity Securities AFS and Equity Securities”).
The par value and amortized cost of these selected country fixed maturity securities AFS were $14.4 billion and $15.4 billion, respectively, at December 31, 2018.
We manage direct and indirect investment exposure in the selected countries and the energy sector through fundamental credit analysis and we continually monitor and adjust our level of investment exposure. We do not expect that our general account investments in these countries or the energy sector will have a material adverse effect on our results of operations or financial condition.
Yields are calculated as investment income as a percent of average quarterly asset carrying values. Investment income excludes recognized gains and losses. Asset carrying values exclude unrealized gains (losses), collateral received in connection with our securities lending program, annuities funding structured settlement claims, freestanding derivative assets, collateral received from derivative counterparties, the effects of consolidating certain variable interest entities (“VIEs”) under GAAP that are treated as consolidated securitization entities (“CSEs”), Unit-linked investments and FVO Brighthouse Common Stock. A yield is not presented for other invested assets as it is not considered a meaningful measure of performance for this asset class.
See “- Non-GAAP and Other Financial Disclosures” for discussion of divested businesses and lag elimination.
See Note 10 of the Notes to the Consolidated Financial Statements for the fixed maturity securities AFS and equity securities fair value hierarchy.
The NAIC has adopted revised methodologies for certain Structured Securities comprised of non-agency RMBS, CMBS and ABS. The NAIC’s objective with the revised methodologies for these Structured Securities was to increase the accuracy in assessing expected losses, and to use the improved assessment to determine a more appropriate capital requirement for such Structured Securities. The revised methodologies reduce regulatory reliance on rating agencies and allow for greater regulatory input into the assumptions used to estimate expected losses from Structured Securities. We apply the revised NAIC methodologies to Structured Securities held by MetLife, Inc.’s insurance subsidiaries that maintain the NAIC statutory basis of accounting. The NAIC’s present methodology is to evaluate Structured Securities held by insurers using the revised NAIC methodologies on an annual basis. If MetLife, Inc.’s insurance subsidiaries acquire Structured Securities that have not been previously evaluated by the NAIC, but are expected to be evaluated by the NAIC in the upcoming annual review, an internally developed designation is used until a NAIC designation becomes available. NAIC designations may not correspond to NRSRO ratings.
The following table presents total fixed maturity securities AFS by NRSRO rating and the applicable NAIC designation from the NAIC published comparison of NRSRO ratings to NAIC designations, except for certain Structured Securities, which are presented using the revised NAIC methodologies as described above, as well as the percentage, based on estimated fair value that each NAIC designation is comprised of at:
The following tables present total fixed maturity securities AFS, based on estimated fair value, by sector classification and by NRSRO rating and the applicable NAIC designations from the NAIC published comparison of NRSRO ratings to NAIC designations, except for certain Structured Securities, which are presented using the revised NAIC methodologies as described above:
Historically, we have managed our exposure to sub-prime RMBS holdings by focusing primarily on senior tranche securities, stress testing the portfolio with severe loss assumptions and closely monitoring the performance of the portfolio. Our sub-prime RMBS portfolio consists predominantly of securities that were purchased after 2012 at significant discounts to par value and discounts to the expected principal recovery value of these securities. The vast majority of these securities are investment grade under the NAIC designations (e.g., NAIC 1 and NAIC 2). The estimated fair value of our sub-prime RMBS holdings purchased since 2012 was $3.4 billion and $3.1 billion at December 31, 2018 and 2017, respectively, with unrealized gains (losses) of $201 million and $200 million at December 31, 2018 and 2017, respectively.
Our ABS holdings are diversified both by collateral type and by issuer. The following table presents our ABS holdings by collateral type and ratings profile at:
Overall OTTI losses recognized in earnings on fixed maturity securities AFS were $40 million for the year ended December 31, 2018, as compared to $10 million for the year ended December 31, 2017. The most significant increase in OTTI losses was in U.S. and foreign corporate securities and foreign government securities, which comprised $40 million for the year ended December 31, 2018, as compared to $4 million for the year ended December 31, 2017. An increase of $36 million in OTTI losses was mainly concentrated in consumer and Argentine foreign government securities and was a result of issuer specific factors and from weakening of the Argentine peso.
Future OTTI on fixed maturity securities AFS will depend primarily on economic fundamentals, issuer performance (including changes in the present value of future cash flows expected to be collected), and changes in credit ratings, collateral valuation and foreign currency exchange rates. If economic fundamentals deteriorate or if there are adverse changes in the above factors, OTTI may be incurred in upcoming periods. See Note 1 of the Notes to the Consolidated Financial Statements for a description of new guidance to be adopted in 2020 regarding the measurement of credit losses on financial instruments.
See Note 8 of the Notes to the Consolidated Financial Statements for information regarding our FHLB of Boston advance agreement transactions.
The information presented in the tables herein exclude mortgage loans where we elected the FVO. Such amounts are presented in Note 8 of the Notes to the Consolidated Financial Statements. The carrying value of all mortgage loans, net of valuation allowance was 16.8% and 15.0% of cash and invested assets at December 31, 2018 and 2017, respectively.
We manage our residential mortgage loan portfolio in a similar manner to reduce risk of concentration, with 92% collateralized by properties located in the United States, and the remaining 8% collateralized by properties located outside the United States, at December 31, 2018. The carrying values of our residential mortgage loans located in California, Florida, and New York were 31%, 9%, and 6%, respectively, of total residential mortgage loans at December 31, 2018.
Mortgage Loan Credit Quality - Monitoring Process. We monitor our mortgage loan investments on an ongoing basis, including a review of loans that are current, past due, restructured and under foreclosure. See Note 8 of the Notes to the Consolidated Financial Statements for tables that present mortgage loans by credit quality indicator, past due and nonaccrual mortgage loans, impaired loans, as well as the carrying value of foreclosed mortgage loans included in real estate and real estate joint ventures.
The determination of the amount of valuation allowances is based upon our periodic evaluation and assessment of known and inherent risks associated with our loan portfolios. Such evaluations and assessments are based upon several factors, including our experience for loan losses, defaults and loss severity, and loss expectations for loans with similar risk characteristics. These evaluations and assessments are revised as conditions change and new information becomes available, which can cause the valuation allowances to increase or decrease over time as such evaluations are revised. Negative credit migration, including an actual or expected increase in the level of problem loans, will result in an increase in the valuation allowance. Positive credit migration, including an actual or expected decrease in the level of problem loans, will result in a decrease in the valuation allowance.
Real estate and real estate joint ventures is comprised of wholly-owned real estate and joint ventures with interests in single property income-producing real estate, and to a lesser extent joint ventures with interests in multi-property projects with varying strategies ranging from the development of properties to the operation of income-producing properties, as well as a runoff portfolio. The carrying values of real estate and real estate joint ventures was $9.7 billion and $9.6 billion, or 2.1% and 2.1% of cash and invested assets, at December 31, 2018 and 2017, respectively. The estimated fair value of our real estate investments was $15.4 billion and $14.9 billion at December 31, 2018 and 2017, respectively. The total gross market value of such real estate investments was $20.1 billion and $19.1 billion at December 31, 2018 and 2017, respectively. Gross market value is the total estimated fair value of these investments regardless of encumbering debt.
Other limited partnership interests are comprised of investments in private funds, including private equity funds and hedge funds. At December 31, 2018 and 2017, the carrying value of other limited partnership interests was $6.6 billion and $5.7 billion, or 1.5% and 1.3% of cash and invested assets, which included $634 million and $643 million of hedge funds, respectively. Cash distributions on these investments are generated from investment gains, operating income from the underlying investments of the funds and liquidation of the underlying investments of the funds.
(1) See Note 3 of the Notes to the Consolidated Financial Statements.
Derivatives categorized as Level 3 at December 31, 2018 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, 2018, less than 1% of the estimated fair value of our derivatives was priced through independent broker quotations.
We participate in a securities lending program and third-party custodian administered repurchase programs in the normal course of business for the purpose of enhancing the total return on our investment portfolio. See Notes 1 and 8 of the Notes to the Consolidated Financial Statements for further discussion of our securities lending program and repurchase agreement transactions, the classification of revenues and expenses, and the nature of the secured financing arrangements and associated liabilities.
Third-party custodian administered repurchase programs: We loan certain of our fixed maturity securities AFS to unaffiliated financial institutions and, in exchange, non-cash collateral is put on deposit by the unaffiliated financial institutions on our behalf with third-party custodians. The estimated fair value of securities loaned in connection with these transactions was $78 million and $182 million at December 31, 2018 and December 31, 2017, respectively. Non-cash collateral on deposit with third-party custodians on our behalf was $84 million and $194 million, at estimated fair value, at December 31, 2018 and December 31, 2017, respectively, which cannot be sold or re-pledged, and which is not reflected on our consolidated balance sheets.
Derivatives: We enter into derivatives to manage various risks relating to our ongoing business operations. We receive non-cash collateral from counterparties for derivatives, which can be sold or re-pledged subject to certain constraints, and which is not reflected on our consolidated balance sheets. The amount of this non-cash collateral was $1.3 billion and $1.1 billion, at estimated fair value, at December 31, 2018 and 2017, respectively. See “- Liquidity and Capital Resources - The Company - Liquidity and Capital Uses - Pledged Collateral” and Note 9 of the Notes to the Consolidated Financial Statements for information regarding the earned income on and the gross notional amount, estimated fair value of assets and liabilities and primary underlying risk exposure of our derivatives.
We enter into the following additional commitments in the normal course of business for the purpose of enhancing the total return on our investment portfolio: mortgage loan commitments and commitments to fund partnerships, bank credit facilities, bridge loans and private corporate bond investments. See “Net Investment Income” and “Net Investment Gains (Losses)” in Note 8 of the Notes to the Consolidated Financial Statements for information on the investment income, investment expense, and gains and losses from such investments. See also “- Investments - Fixed Maturity Securities AFS and Equity Securities” and “- Investments - Mortgage Loans” for information on our investments in fixed maturity securities AFS and mortgage loans. See “- Investments - Real Estate and Real Estate Joint Ventures” and “- Investments - Other Limited Partnership Interests” for information on our partnership investments.
Other than the commitments disclosed in Note 20 of the Notes to the Consolidated Financial Statements, there are no other material obligations or liabilities arising from the commitments to fund mortgage loans, partnerships, bank credit facilities, bridge loans, and private corporate bond investments. For further information on commitments to fund partnership investments, mortgage loans, bank credit facilities, bridge loans and private corporate bond investments, see “- Liquidity and Capital Resources - The Company - Contractual Obligations.”
We periodically review our estimates of actuarial liabilities for future benefits and compare them with our actual experience. We revise estimates, to the extent permitted or required under GAAP, if we determine that future expected experience differs from assumptions used in the development of actuarial liabilities. We charge or credit changes in our liabilities to expenses in the period the liabilities are established or re-estimated. If the liabilities originally established for future benefit payments prove inadequate, we must increase them. Such an increase could adversely affect our earnings and have a material adverse effect on our business, results of operations and financial condition.
Policyholder account balances in this segment are held mostly for universal life, deferred annuity, pension products, and Unit-linked investments that do not meet the GAAP definition of separate accounts. They are also held for endowment products without significant mortality risk. A sustained low interest rate environment could adversely impact liabilities and earnings as a result of the minimum credited rate guarantees present in many of these policyholder account balances. We mitigate our risks by applying various ALM strategies. Liabilities for Unit-linked investments are impacted by changes in the fair value of the associated investments, as the return on assets is generally passed directly to the policyholder.
Total account value excludes $230 million for contracts with no GMDBs. The Company’s annuity contracts with guarantees may offer more than one type of guarantee in each contract. Therefore, the amounts listed for GMDBs and for living benefit guarantees are not mutually exclusive.
We remain liable for the guaranteed benefits in the event that reinsurers or derivative counterparties are unable or unwilling to pay. Certain of our reinsurance agreements and substantially all derivative positions are collateralized and derivatives positions are subject to master netting agreements, both of which significantly reduce the exposure to counterparty risk. In addition, we are subject to the risk that hedging and other risk management actions prove ineffective or that unanticipated policyholder behavior or mortality, combined with adverse market events, produces economic losses beyond the scope of the risk management techniques employed.
Based upon the strength of our franchise, diversification of our businesses, strong financial fundamentals and the substantial funding sources available to us as described herein, we continue to believe we have access to ample liquidity to meet business requirements under current market conditions and reasonably possible stress scenarios. We continuously monitor and adjust our liquidity and capital plans for MetLife, Inc. and its subsidiaries in light of market conditions, as well as changing needs and opportunities.
impact our ability to generate cash flows from the sale of funding agreements and other capital market products offered by our RIS business;
The amount of dividends that our insurance subsidiaries can pay to MetLife, Inc. or to other parent entities is constrained by the amount of surplus we hold to maintain our ratings and provides an additional margin for risk protection and investment in our businesses. We proactively take actions to maintain capital consistent with these ratings objectives, which may include adjusting dividend amounts and deploying financial resources from internal or external sources of capital. Certain of these activities may require regulatory approval. Furthermore, the payment of dividends and other distributions to MetLife, Inc. and other parent entities by their respective insurance subsidiaries is governed by insurance laws and regulations. See “Business - Regulation - Insurance Regulation,” “- MetLife, Inc. - Liquidity and Capital Sources - Dividends from Subsidiaries” and Note 15 of the Notes to the Consolidated Financial Statements.
The NYDFS continues to have a moratorium on new reserve financing transactions involving captive insurers. We are not aware of any states other than New York and California implementing such a moratorium. While such a moratorium would not impact our existing reinsurance agreements with captive reinsurers, a moratorium placed on the use of captives for new reserve financing transactions could impact our ability to write certain products and/or impact our RBC ratios and ability to deploy excess capital in the future. This could result in our need to increase prices, modify product features or limit the availability of those products to our customers. While this affects insurers across the industry, it could adversely impact our competitive position and our results of operations in the future. We continue to evaluate product modifications, pricing structure and alternative means of managing risks, capital and statutory reserves and we expect the discontinued use of captive reinsurance on new reserve financing transactions would not have a material impact on our future consolidated financial results. See Note 6 of the Notes to the Consolidated Financial Statements for further information on our reinsurance activities.
The principal cash inflows from our insurance activities come from insurance premiums, net investment income, annuity considerations and deposit funds. The principal cash outflows are the result of various life insurance, property and casualty, annuity and pension products, operating expenses and income tax, as well as interest expense. A primary liquidity concern with respect to these cash flows is the risk of early contractholder and policyholder withdrawal. The cash flows from discontinued operations are not separately classified, but generally arise from the same activities described above.
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 3 of the Notes to the Consolidated Financial Statements for information regarding financing transactions related to the Separation.
In June 2018, MetLife, Inc. issued 32,200 shares of 5.625% Non-Cumulative Preferred Stock, Series E (the “Series E preferred stock”) with a $0.01 par value per share and a liquidation preference of $25,000 per share, for aggregate net proceeds of $780 million.
In March 2018, MetLife, Inc. issued 500,000 shares of 5.875% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series D (the “Series D preferred stock”) with a $0.01 par value per share and a liquidation preference of $1,000 per share, for aggregate net proceeds of $494 million.
During the years ended December 31, 2018 and 2017, we issued $3.1 billion and $301 million, respectively, and repaid $2.6 billion and $1 million, respectively, under advance agreements with a regional FHLB. At December 31, 2018 and 2017, total obligations outstanding under these advance agreements were $800 million and $300 million, respectively. There were no such transactions during the year ended December 31, 2016. See Note 8 of the Notes to the Consolidated Financial Statements.
At December 31, 2018, we maintained a $3.0 billion unsecured revolving credit facility and certain committed facilities aggregating $3.3 billion, of which MetLife, Inc. is a party and/or guarantor. When drawn upon, these facilities bear interest at varying rates in accordance with the respective agreements. See Note 12 of the Notes to the Consolidated Financial Statements.
Includes $168 million and $377 million of debt that is non-recourse to MetLife, Inc. and MLIC, subject to customary exceptions, at December 31, 2018 and 2017, respectively. Certain subsidiaries have pledged assets to secure this debt.
For information regarding the junior subordinated debt securities, see Note 14 of the Notes to the Consolidated Financial Statements and Note 5 of the Notes to the MetLife, Inc. (Parent Company Only) Condensed Financial Information in Schedule II.
Certain of our debt instruments and committed facilities, as well as our unsecured revolving credit facility, contain various administrative, reporting, legal and financial covenants. We believe we were in compliance with all applicable financial covenants at December 31, 2018.
See Note 15 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 during the years ended December 31, 2018, 2017 and 2016, and the amount remaining under such authorizations at December 31, 2018. See Note 22 of the Notes to the Consolidated Financial Statements for information regarding shares of common stock repurchased subsequent to December 31, 2018.
Common stock repurchases are subject to the discretion of our Board of Directors and will depend upon our capital position, liquidity, financial strength and credit ratings, general market conditions, the market price of MetLife, Inc.’s common stock compared to management’s assessment of the stock’s underlying value, applicable regulatory approvals, and other legal and accounting factors. Restrictions on the payment of dividends that may arise under so-called “Dividend Stopper” provisions would also restrict MetLife, Inc.’s ability to repurchase common stock. See “- Dividends” for information about these restrictions. See also “Risk Factors - Capital Risks - Legal and Regulatory Restrictions May Prevent Us from Paying Dividends and Repurchasing Our Stock at the Level We Wish.”
The declaration and payment of common stock dividends are subject to the discretion of our Board of Directors, and will depend on MetLife, Inc.’s financial condition, results of operations, cash requirements, future prospects, regulatory restrictions on the payment of dividends by MetLife, Inc.’s insurance subsidiaries and other factors deemed relevant by the Board. See Note 22 of the Notes to the Consolidated Financial Statements for information regarding a common stock dividend declared subsequent to December 31, 2018.
Further, MetLife, Inc. is a party to certain replacement capital covenants which limit its ability to eliminate these restrictions through the repayment, redemption or purchase of the junior subordinated debentures by requiring MetLife, Inc., with some limitations, to receive cash proceeds during a specified period from the sale of specified replacement securities prior to any repayment, redemption or purchase. See Note 14 of the Notes to the Consolidated Financial Statements for a description of such covenants.
See Notes 12 and 13 of the Notes to the Consolidated Financial Statements for further information on long-term and short-term debt and the collateral financing arrangement, respectively, including:
In December 2017, MetLife, Inc. repaid at maturity its $500 million 1.903% senior notes; and
In June 2016, MetLife, Inc. repaid at maturity its $1.3 billion 6.750% senior notes.
Liabilities arising from our insurance activities primarily relate to benefit payments under various life insurance, property and casualty, annuity and group pension products, as well as payments for policy surrenders, withdrawals and loans. For annuity or deposit type products, surrender or lapse behavior differs somewhat by segment. In the MetLife Holdings segment, which includes individual annuities, lapses and surrenders tend to occur in the normal course of business. During the years ended December 31, 2018 and 2017, general account surrenders and withdrawals from annuity products were $1.8 billion and $1.6 billion, respectively. In the RIS business within the U.S. segment, which includes pension risk transfers, bank-owned life insurance and other fixed annuity contracts, as well as funding agreements and other capital market products, most of the products offered have fixed maturities or fairly predictable surrenders or withdrawals. With regard to the RIS business products that provide customers with limited rights to accelerate payments, at December 31, 2018, there were funding agreements totaling $148 million that could be put back to the Company.
We pledge collateral to, and have collateral pledged to us by, counterparties in connection with our derivatives. At both December 31, 2018 and 2017, we had received pledged cash collateral from counterparties of $5.0 billion. At December 31, 2018 and 2017, we had pledged cash collateral to counterparties of $283 million and $456 million, respectively. With respect to OTC-bilateral derivatives in a net liability position and have credit contingent provisions, a one-notch downgrade in the Company’s credit or financial strength rating, as applicable, would have required $10 million of additional collateral be provided to our counterparties as of December 31, 2018. See Note 9 of the Notes to the Consolidated Financial Statements for additional information about collateral pledged to us, collateral we pledge and derivatives subject to credit contingent provisions.
We establish liabilities for litigation and regulatory loss contingencies when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. For material matters where a loss is believed to be reasonably possible but not probable, no accrual is made but we disclose the nature of the contingency and an aggregate estimate of the reasonably possible range of loss in excess of amounts accrued, when such an estimate can be made. It is not possible to predict the ultimate outcome of all pending investigations and legal proceedings. In some of the matters referred to herein, very large and/or indeterminate amounts, including punitive and treble damages, are sought. 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 our consolidated net income or cash flows in particular quarterly or annual periods. See Note 20 of the Notes to the Consolidated Financial Statements.
Cash outflows for acquisitions and investments in strategic partnerships during the years ended December 31, 2018, 2017 and 2016 were $0, $211 million and $0, respectively.
The following table summarizes our major contractual obligations at December 31, 2018:
The sum of the estimated cash flows of $235.0 billion exceeds the liability amount of $183.7 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, 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.
We have accepted cash collateral in connection with securities lending and derivatives. As the securities lending transactions expire within the next year and the timing of the return of the derivatives collateral is uncertain, the return of the collateral has been included in the one year or less category in the table above. We also held non-cash collateral, which is not reflected as a liability on the consolidated balance sheet, of $1.4 billion at December 31, 2018.
At December 31, 2018 and 2017, MetLife, Inc. and other MetLife holding companies had $3.0 billion and $5.7 billion, respectively, in liquid assets. Of these amounts, $2.4 billion and $4.1 billion were held by MetLife, Inc. and $607 million and $1.6 billion were held by other MetLife holding companies at December 31, 2018 and 2017, respectively. Liquid assets include cash and cash equivalents, short-term investments and publicly-traded securities, excluding assets that are pledged or otherwise committed. Assets pledged or otherwise committed include amounts received in connection with derivatives and a collateral financing arrangement.
Other, net includes ($877) million, $860 million and $433 million of net receipts (payments) by MetLife, Inc. to and from subsidiaries under a tax sharing agreement and tax payments to tax agencies during the years ended December 31, 2018, 2017 and 2016, respectively.
In 2018, $268 million of Separation-related items (comprised of certain Separation-related inflows primarily related to reinsurance benefit from Brighthouse) were included in free cash flow, which increased our holding companies’ liquid assets, as well as our free cash flow ratio. Excluding these Separation-related items, adjusted free cash flow would be $3.1 billion for the year ended December 31, 2018. In 2017, $2.1 billion of Separation-related items (comprised of certain Separation-related inflows primarily related to dividends from Brighthouse, net of outflows) were included in the free cash flow, which increased our holding companies’ liquid assets, as well as our free cash flow ratio. Excluding these Separation-related items, adjusted free cash flow would be $3.6 billion for the year ended December 31, 2017. In 2016, we incurred $2.3 billion of Separation-related items (comprised of certain Separation-related outflows, net of inflows related to dividends from Brighthouse subsidiaries) which reduced our holding companies’ liquid assets, as well as our free cash flow and free cash flow ratio. Excluding these Separation-related items, adjusted free cash flow would be $4.7 billion for the year ended December 31, 2016.
In addition, MetLife, Inc. issues loans to subsidiaries or subsidiaries issue loans to MetLife, Inc. Accordingly, changes in MetLife, Inc. liquid assets include issuances of loans to subsidiaries, proceeds of loans from subsidiaries and the related repayment of principal and payment of interest on such loans. See “- Liquidity and Capital Sources - Affiliated Long-term Debt” and “- Liquidity and Capital Uses - Affiliated Capital and Debt Transactions.”
The primary uses of liquid assets of other MetLife holding companies are capital contributions paid to their subsidiaries and branches, principally non-U.S. insurance companies; loans to subsidiaries and affiliates; principal and interest paid on loans from subsidiaries and affiliates; dividends and returns of capital to MetLife, Inc. and the following items, which are reported within other, net: business acquisitions; and operating expenses. There were no uses of liquid assets of other MetLife holding companies to fund business acquisitions during the years ended December 31, 2018, 2017, or 2016.
Represents ordinary dividends of $3.0 billion and an extraordinary dividend of $705 million. The extraordinary dividend was paid in cash with proceeds from the sale to an affiliate of certain property, equipment, leasehold improvements and computer software that were non-admitted by MLIC for statutory accounting purposes. The affiliate received a capital contribution in cash from MetLife, Inc. to fund the purchase.
In 2016, MLIC paid an ordinary cash dividend to MetLife, Inc. in the amount of $3.6 billion. In addition, in December 2016, MLIC distributed all of the issued and outstanding shares of common stock of each of New England Life Insurance Company (“NELICO”) and GALIC to MetLife, Inc. in the form of a non-cash extraordinary dividend in the amount of $981 million and $1.2 billion, respectively, as calculated on a statutory basis.
We proactively manage target and excess capital levels and dividend flows and forecast local capital positions as part of the financial planning cycle. The dividend capacity of certain U.S. and non-U.S. subsidiaries is also subject to business targets in excess of the minimum capital necessary to maintain the desired rating or level of financial strength in the relevant market. See “Risk Factors - Capital Risks - As a Holding Company, MetLife, Inc. Depends on the Ability of Its Subsidiaries to Pay Dividends, a Major Component of Holding Company Free Cash Flow” and Note 15 of the Notes to the Consolidated Financial Statements.
For information on MetLife, Inc.’s collateral financing arrangement and junior subordinated debt securities, see Notes 13 and 14 of the Notes to the Consolidated Financial Statements, respectively, and Note 5 of the Notes to the MetLife, Inc. (Parent Company Only) Condensed Financial Information in Schedule II.
In April 2017, in connection with the Separation, MetLife Reinsurance Company of Delaware (“MRD”) repaid $750 million and $350 million of surplus notes to MetLife, Inc., in an exchange transaction. The $750 million surplus note bore interest at a fixed rate of 5.13% and the $350 million surplus note bore interest at a fixed rate of 6.00%, both payable semi-annually. Simultaneously, MetLife, Inc. repaid $750 million and $350 million senior notes to MRD.
In June 2016 and March 2016, MetLife, Inc. repaid $204 million and $10 million, respectively, of affiliated long-term debt to MetLife Exchange Trust I, at maturity, in exchange for returns of capital. The long-term notes bore interest at three-month LIBOR plus 0.70%.
MetLife, Inc., in connection with MetLife Reinsurance Company of Vermont’s (“MRV”) reinsurance of certain universal life and term life insurance risks, committed to the Vermont Department of Banking, Insurance, Securities and Health Care Administration to take necessary action to cause the two protected cells of MRV to maintain total adjusted capital in an amount that is equal to or greater than 200% of each such protected cell’s authorized control level RBC, as defined in Vermont state insurance statutes. See Note 12 of the Notes to the Consolidated Financial Statements.
MetLife, Inc. guarantees obligations arising from OTC-bilateral derivatives of the following subsidiaries: MrB, MetLife International Holdings, LLC and MetLife Worldwide Holdings, LLC. These subsidiaries are exposed to various risks relating to their ongoing business operations, including interest rate, foreign currency exchange rate, credit and equity market. These subsidiaries use a variety of strategies to manage these risks, including the use of derivatives. Further, all of the subsidiaries’ derivatives are subject to industry standard netting agreements and collateral agreements that limit the unsecured portion of any open derivative position. On a net counterparty basis at December 31, 2018 and 2017, derivative transactions with positive mark-to-market values (in-the-money) were $302 million and $515 million, respectively, and derivative transactions with negative mark-to-market values (out-of-the-money) were $84 million and $126 million, respectively. To secure the obligations represented by the out of-the-money transactions, the subsidiaries had provided collateral to their counterparties with an estimated fair value of $84 million and $114 million at December 31, 2018 and 2017, respectively. Accordingly, unsecured derivative liabilities guaranteed by MetLife, Inc. were $0 and $12 million at December 31, 2018 and 2017, respectively.
Reconciliations of these non-GAAP measures to the most directly comparable historical GAAP measures are included in this section and the results of operations, see “- Results of Operations.” Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are not accessible on a forward-looking basis because we believe it is not possible without unreasonable effort to provide other than a range of net investment gains and losses and net derivative gains and losses, which can fluctuate significantly within or outside the range and from period to period and may have a material impact on net income.
Adjusted earnings is defined as adjusted revenues less adjusted expenses, net of income tax. Adjusted loss is defined as negative adjusted earnings. Adjusted earnings available to common shareholders is defined as adjusted earnings less preferred stock dividends.
The financial measures of adjusted revenues and adjusted expenses focus on our primary businesses principally by excluding the impact of market volatility, which could distort trends, and revenues and costs related to non-core products and certain entities required to be consolidated under GAAP. Also, these measures exclude results of discontinued operations under GAAP and other businesses that have been or will be sold or exited by MetLife but do not meet the discontinued operations criteria under GAAP and are referred to as divested businesses. Divested businesses also includes the net impact of transactions with exited businesses that have been eliminated in consolidation under GAAP and costs relating to businesses that have been or will be sold or exited by MetLife that do not meet the criteria to be included in results of discontinued operations under GAAP. In addition, for the year ended December 31, 2016, adjusted revenues and adjusted expenses exclude the financial impact of converting the Company’s Japan operations to calendar year-end reporting without retrospective application of this change to prior periods and is referred to as lag elimination. Adjusted revenues also excludes net investment gains (losses) and net derivative gains (losses). Adjusted expenses also excludes goodwill impairments.
Amortization of DAC and VOBA excludes amounts related to: (i) net investment gains (losses) and net derivative gains (losses), (ii) GMIB fees and GMIB costs and (iii) Market value adjustments;
Amortization of negative VOBA excludes amounts related to Market value adjustments;
Adjusted return on MetLife, Inc.’s common stockholders’ equity, excluding AOCI other than FCTA is defined as adjusted earnings available to common shareholders divided by MetLife, Inc.’s average common stockholders’ equity, excluding AOCI other than FCTA.
Direct expense ratio, excluding total notable items related to direct expenses and pension risk transfers: direct expenses, on an adjusted basis, excluding total notable items related to direct expenses, divided by adjusted premiums, fees and other revenues, excluding pension risk transfers.
Asymmetrical and non-economic accounting refers to: (i) the portion of net derivative gains (losses) on embedded derivatives attributable to the inclusion of our credit spreads in the liability valuations, (ii) hedging activity that generates net derivative gains (losses) and creates fluctuations in net income because hedge accounting cannot be achieved and the item being hedged does not a have an offsetting gain or loss recognized in earnings, (iii) inflation-indexed benefit adjustments associated with contracts backed by inflation-indexed investments and amounts associated with periodic crediting rate adjustments based on the total return of a contractually referenced pool of assets and other pass through adjustments, and (iv) impact of changes in foreign currency exchange rates on the re-measurement of foreign denominated unhedged funding agreements and financing transactions to the U.S. dollar and the re-measurement of certain liabilities from non-functional currencies to functional currencies. We believe that excluding the impact of asymmetrical and non-economic accounting from total GAAP results enhances investor understanding of our performance by disclosing how these accounting practices affect reported GAAP results.
Notable items represent a positive (negative) impact to adjusted earnings available to common shareholders. Notable items reflect the unexpected impact of events that affect MetLife’s results, but that were unknown and that MetLife could not anticipate when it devised its Business Plan. Notable items also include certain items regardless of the extent anticipated in the Business Plan, to help investors have a better understanding of MetLife’s results and to evaluate and forecast those results.
Consolidated net income (loss) available to MetLife, Inc.’s common shareholders for 2018 includes Separation-related costs of $80 million, net of income tax. Excluding this amount from the denominator of the ratio, this ratio, as adjusted, would be 109%. Consolidated net income (loss) available to MetLife, Inc.’s common shareholders for 2017 includes Separation-related costs of $312 million, net of income tax. Excluding this amount from the denominator of the ratio, this ratio, as adjusted, would be 153%. Consolidated net income (loss) available to MetLife, Inc.'s common shareholders for 2016 includes Separation-related costs of $73 million, net of income tax. Excluding this amount from the denominator of the ratio, this ratio, as adjusted, would be 457%. See “- Liquidity and Capital Resources - MetLife, Inc. - Liquid Assets - MetLife, Inc. and Other MetLife Holding Companies Sources and Uses of Liquid Assets and Sources and Uses of Liquid Assets included in Free Cash Flow.”
i) In 2018, $268 million of Separation-related items (comprised of certain Separation-related inflows primarily related to reinsurance benefit from Brighthouse) were included in free cash flow, which increased our holding companies’ liquid assets, as well as our free cash flow ratio. Excluding these Separation-related items, adjusted free cash flow would be $3.1 billion for the year ended December 31, 2018. Consolidated adjusted earnings available to common shareholders for 2018 was negatively impacted by notable items, primarily related to expense initiative costs of $284 million, net of income tax, partially offset by tax adjustments of $247 million, net of income tax. Excluding the Separation-related items, which increased free cash flow, from the numerator of the ratio and excluding such notable items negatively impacting consolidated adjusted earnings available to common shareholders from the denominator of the ratio, the adjusted free cash flow ratio for 2018 would be 56%.
ii) In 2017, $2.1 billion of Separation-related items (comprised of certain Separation-related inflows primarily related to dividends from Brighthouse, net of outflows) were included in the free cash flow, which increased our holding companies’ liquid assets, as well as our free cash flow ratio. Excluding these Separation-related items, adjusted free cash flow would be $3.6 billion for the year ended December 31, 2017. Consolidated adjusted earnings available to common shareholders for 2017 was negatively impacted by notable items, primarily related to tax adjustments, of $622 million, net of income tax. Excluding the Separation-related items, which increased free cash flow, from the numerator of the ratio and excluding such notable items negatively impacting consolidated adjusted earnings available to common shareholders from the denominator of the ratio, the adjusted free cash flow ratio for 2017 would be 75%.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2019, expressed an unqualified opinion on the Company’s internal control over financial reporting.
VOBA is an intangible asset resulting from a business combination that represents the excess of book value over the estimated fair value of acquired insurance, annuity, and investment-type contracts in-force at the acquisition date. The estimated fair value of the acquired liabilities is based on projections, by each block of business, of future policy and contract charges, premiums, mortality and morbidity, separate account performance, surrenders, operating expenses, investment returns, nonperformance risk adjustment and other factors. Actual experience on the purchased business may vary from these projections.
For certain acquired blocks of business, the estimated fair value of the in-force contract obligations exceeded the book value of assumed in-force insurance policy liabilities, resulting in negative VOBA, which is presented separately from VOBA as an additional insurance liability. The fair value of the in-force contract obligations is based on projections by each block of business. Negative VOBA is amortized over the policy period in proportion to the approximate consumption of losses included in the liability usually expressed in terms of insurance in-force or account value. Such amortization is recorded as an offset in other expenses.
At December 31, 2017, Unit-linked and FVO Securities also included the estimated fair value of the Brighthouse Financial, Inc. common stock held by the Company (“FVO Brighthouse Common Stock”). See Note 3.
Mortgage loans are stated at unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or expenses, and are net of valuation allowances. Interest income and prepayment fees are recognized when earned. Interest income is recognized using an effective yield method giving effect to amortization of premium and accretion of discount.
Real estate held-for-investment is stated at cost less accumulated depreciation. Depreciation is recorded on a straight-line basis over the estimated useful life of the asset (typically 20 to 55 years). Rental income is recognized on a straight-line basis over the term of the respective leases. The Company periodically reviews its real estate held-for-investment for impairment and tests for recoverability whenever events or changes in circumstances indicate the carrying value may not be recoverable. Properties whose carrying values are greater than their undiscounted cash flows are written down to their estimated fair value, which is generally computed using the present value of expected future cash flows discounted at a rate commensurate with the underlying risks.
Short-term investments include highly liquid securities and other investments with remaining maturities of one year or less, but greater than three months, at the time of purchase. Securities included within short-term investments are stated at estimated fair value, while other investments included within short-term investments are stated at amortized cost, which approximates estimated fair value.
Investments in Federal Home Loan Bank (“FHLB”) common stock are carried at redemption value and are considered restricted investments until redeemed by the respective FHLB regional banks (“FHLBanks”).
The Company participates in short-term repurchase agreements with unaffiliated financial institutions. Under these agreements, the Company lends fixed maturity securities and receives cash as collateral in an amount generally equal to 85% to 100% of the estimated fair value of the securities loaned at the inception of the transaction. The Company monitors the estimated fair value of the collateral and the securities loaned throughout the duration of the transaction and additional collateral is obtained as necessary. Securities loaned under such transactions may be sold or re-pledged by the transferee.
A subsidiary of the Company has entered into short-term advance agreements with the FHLB of Boston. Under these advance agreements, the subsidiary pledges fixed maturity securities AFS as collateral and receives cash, which is segregated and reinvested, primarily into fixed maturity securities AFS and cash equivalents. While the collateral management practices are unique to this program, these transactions are accounted for, have collateral maintenance requirements and have restrictions on securities pledged similar to securities lending transactions, as described above. Securities pledged as collateral may not be sold or re-pledged by the transferee.
The Company is a defendant in a large number of litigation matters and is involved in a number of regulatory investigations. 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 effect on the Company’s consolidated net income or cash flows in particular quarterly or annual periods. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Except as otherwise disclosed in Note 20, legal costs are recognized as incurred. 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 on the Company’s financial statements.
The Company grants certain employees and directors stock-based compensation awards under various plans that are subject to specific vesting conditions. With the exception of performance shares granted in 2013 through 2018, and cash-payable awards, each of which are re-measured quarterly, the Company measures the cost of all stock-based transactions at fair value at grant date and recognizes it over the period during which a grantee must provide services in exchange for the award. Employees who meet certain age-and-service criteria receive payment or may exercise their awards regardless of ending employment. However, the award’s payment or exercisability takes place at the originally-scheduled time, i.e., is not accelerated. As a result, the award does not require the employee to provide any substantive service after attaining those age-and-service criteria. Accordingly, the Company recognizes compensation expense related to stock-based awards from the beginning of the vesting to the earlier of the end of the vesting period or the date the employee attains the age-and-service criteria. The Company incorporates an estimation of future forfeitures of stock-based awards into the determination of compensation expense when recognizing expense over the requisite service period.
Other revenues primarily include fees related to service contracts from customers related to prepaid legal plans, administrative services-only (“ASO”) contracts, and investment management services. Substantially all of the revenue from the services is recognized over time as the applicable services are provided or are made available to the customers. The revenue recognized includes variable consideration to the extent it is probable that a significant reversal will not occur. In addition to the service fees, other revenues also include certain stable value fee and other miscellaneous revenues. These fees and miscellaneous revenues are recognized as earned.
January 1, 2020, to be applied retrospectively with a cumulative effect adjustment to retained earnings at the beginning of the earliest period presented.
The Company does not expect the adoption to have a material impact on its consolidated financial statements.
The new guidance permits the use of the overnight index swap rate based on the Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815.
The new guidance requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance to determine which implementation costs to capitalize as an asset and which costs to expense as incurred. Implementation costs that are capitalized under the new guidance are required to be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use.
The new guidance removes certain disclosures that no longer are considered cost beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant for employers that sponsor defined benefit pension or other postretirement plans.
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement
The new guidance (i) prescribes the discount rate to be used in measuring the liability for future policy benefits for traditional and limited payment long-duration contracts, and requires assumptions for those liability valuations to be updated after contract inception, (ii) requires more market-based product guarantees on certain separate account and other account balance long-duration contracts to be accounted for at fair value, (iii) simplifies the amortization of DAC for virtually all long-duration contracts, and (iv) introduces certain financial statement presentation requirements, as well as significant additional quantitative and qualitative disclosures.
This new guidance replaces the incurred loss impairment methodology with one that reflects expected credit losses. The measurement of expected credit losses should be based on historical loss information, current conditions, and reasonable and supportable forecasts. The new guidance requires that an OTTI on a debt security will be recognized as an allowance going forward, such that improvements in expected future cash flows after an impairment will no longer be reflected as a prospective yield adjustment through net investment income, but rather a reversal of the previous impairment and recognized through realized investment gains and losses. The guidance also requires enhanced disclosures. In November 2018, the FASB issued ASU 2018-19, clarifying that receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The Company has assessed the asset classes impacted by the new guidance and is currently assessing the accounting and reporting system changes that will be required to comply with the new guidance.
The new guidance requires a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. Leases would be classified as finance or operating leases and both types of leases will be recognized on the balance sheet. Lessor accounting will remain largely unchanged from current guidance except for certain targeted changes. The new guidance will also require new qualitative and quantitative disclosures. In July 2018, two amendments to the new guidance were issued. The amendments provide the option to adopt the new guidance prospectively without adjusting comparative periods. Also, the amendments provide lessors with a practical expedient not to separate lease and non-lease components for certain operating leases. In December 2018, an amendment was issued to clarify lessor accounting relating to taxes, certain lessor’s costs and variable payments related to both lease and non-lease components. The Company will adopt the new guidance and related amendments on January 1, 2019 and expects to elect certain practical expedients permitted under the transition guidance. In addition, the Company will elect the prospective transition option and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has been executing an integrated implementation plan which includes a multi-functional working group with a project governance structure to address any resource, system, data and process gaps related to the implementation of the new standard. The Company is currently integrating a lease accounting technology solution and finalizing updated reporting processes and additional internal controls to facilitate compliance with the new guidance.
January 1, 2019, to be applied on a modified retrospective basis using the optional transition method with a cumulative effect adjustment recorded at January 1, 2019.
Corporate & Other contains the excess capital, as well as certain charges and activities, not allocated to the segments, including external integration and disposition costs, internal resource costs for associates committed to acquisitions and dispositions, enterprise-wide strategic initiative restructuring charges and various start-up and developing businesses (including the investment management business through which the Company, as a manager of assets such as global fixed income and real estate, provides differentiated investment solutions to institutional investors worldwide). Additionally, Corporate & Other includes run-off businesses. Corporate & Other also includes interest expense related to the majority of the Company’s outstanding debt, as well as expenses associated with certain legal proceedings and income tax audit issues. In addition, Corporate & Other includes the elimination of intersegment amounts, which generally relate to affiliated reinsurance, investment expenses and intersegment loans, which bear interest rates commensurate with related borrowings. As a result of the Separation, for the year ended 2016, Corporate & Other includes corporate overhead costs previously allocated to the former Brighthouse Financial segment.
Adjusted earnings is used by management to evaluate performance and allocate resources. Consistent with GAAP guidance for segment reporting, adjusted earnings is also the Company’s GAAP measure of segment performance and is reported below. Adjusted earnings should not be viewed as a substitute for income (loss) from continuing operations, net of income tax. The Company believes the presentation of adjusted earnings, as the Company measures it for management purposes, enhances the understanding of its performance by highlighting the results of operations and the underlying profitability drivers of the business.
Policyholder benefits and claims and policyholder dividends excludes: (i) changes in the policyholder dividend obligation related to net investment gains (losses) and net derivative gains (losses), (ii) inflation-indexed benefit adjustments associated with contracts backed by inflation-indexed investments and amounts associated with periodic crediting rate adjustments based on the total return of a contractually referenced pool of assets and other pass through adjustments, (iii) benefits and hedging costs related to GMIBs (“GMIB costs”), and (iv) market value adjustments associated with surrenders or terminations of contracts (“Market value adjustments”);
In January 2016, MetLife, Inc. announced its plan to separate a substantial portion of its former Retail segment, as well as certain portions of its former Corporate Benefit Funding segment and Corporate & Other. MetLife, Inc. subsequently re-segmented the business to be separated and rebranded it as “Brighthouse Financial.” On July 6, 2017, MetLife, Inc. announced that the U.S. Securities and Exchange Commission (“SEC”) declared Brighthouse Financial, Inc.’s registration statement on Form 10 effective. Additionally, all required state regulatory approvals were granted.
MetLife, Inc. retained the remaining ownership interest of 22,996,436 shares, or 19.2%, of Brighthouse Financial, Inc. common stock outstanding and recognized its investment in Brighthouse Financial, Inc. common stock based on the NASDAQ reported market price. The Company elected to record the investment under the FVO as an observable measure of estimated fair value that was aligned with the Company’s intent to divest of the retained shares as soon as practicable. Subsequent changes in estimated fair value of the investment were recorded to net investment gains (losses). FVO Brighthouse Common Stock at December 31, 2017 was $1.3 billion reported within FVO Securities. The Company recorded a $1,016 million mark-to-market loss on its retained investment in Brighthouse Financial, Inc. to net investment gains (losses) at the Separation date and an additional $95 million loss to net investment gains (losses) for the change in Brighthouse Financial, Inc.’s common stock share price from the Separation date to December 31, 2017.
The Company incurred pre-tax Separation-related transaction costs of $470 million for the year ended December 31, 2017, primarily related to fees for the terminations of financing arrangements and professional services. The Company incurred pre-tax Separation-related transaction costs of $212 million for the year ended December 31, 2016 primarily related to professional services. For the year ended December 31, 2017, the Company reported $333 million within discontinued operations for fees for the terminations of financing arrangements and costs required to complete the Separation. All other Separation-related transaction costs are recorded in other expenses and reported within continuing operations.
Immediately prior to the Separation, MetLife entered into a tax separation agreement with Brighthouse. Among other things, the tax separation agreement governs the allocation between MetLife and Brighthouse of the responsibility for the taxes of the MetLife group. The tax separation agreement also allocates rights, obligations and responsibilities in connection with certain administrative matters relating to the preparation of tax returns and control of tax audits and other proceedings relating to taxes. For the taxable periods prior to Separation, MetLife and Brighthouse have joint and several liability for the MetLife consolidated U.S. federal income tax returns’ current taxes (and the benefits of tax attributes such as losses) allocated to Brighthouse. The tax separation agreement provides that the Brighthouse allocation of taxes could vary depending upon the outcome of Internal Revenue Service (“IRS”) examinations. Upon Separation, MetLife, Inc. recorded a current income tax receivable of $1.4 billion and a corresponding payable to Brighthouse reported in other liabilities. In October 2017, in accordance with the tax separation agreement, $729 million of this amount was paid by MetLife, Inc. to Brighthouse. Accordingly, at December 31, 2017, the Company’s current income tax receivable and corresponding payable to Brighthouse, reported in other liabilities, was $726 million. In 2018, as a result of filing its U.S. tax return, the Company increased its current income tax receivable and corresponding payable to Brighthouse by $183 million. The adjusted payable of $909 million was settled in 2018 in accordance with the tax separation agreement. In addition, at December 31, 2018, the Company also reported a receivable from Brighthouse of $111 million in other assets, offset by a tax payable of $111 million, of which $68 million was reported in current income tax payable and $43 million was reported in other liabilities. These amounts represent Brighthouse uncertain tax items and audit adjustments while it was a member of the Company’s U.S. consolidated tax return.
In April 2017, MetLife, Inc. and MetLife Reinsurance Company of South Carolina (“MRSC”) terminated the MRSC collateral financing arrangement associated with secondary guarantees. As a result, the $2.8 billion collateral financing arrangement liability outstanding was extinguished utilizing $2.8 billion of assets held in trust, with the remaining $590 million of assets held in trust returned to MetLife, Inc. as a cash return of capital from a subsidiary. Total fees associated with the termination were $37 million and were reported in discontinued operations.
In April 2017, MetLife, Inc. and MetLife Reinsurance Company of Vermont (“MRV”) terminated the $4.3 billion committed facility, and MetLife, Inc. and MRSC terminated the $3.5 billion committed facility. Total fees associated with the terminations were $257 million and were reported in discontinued operations.
In June 2017, Brighthouse Holdings, LLC issued 50,000 units of 6.50% fixed rate cumulative preferred units to MetLife, Inc. and in turn MetLife, Inc. sold the preferred units to third-party investors, for net proceeds of $49 million.
In June 2017, Brighthouse Financial, Inc. issued $1.5 billion of senior notes due in June 2027 (the “2027 Senior Notes”) which bear interest at a fixed rate of 3.70%, payable semi-annually. Also in June 2017, Brighthouse Financial, Inc. issued $1.5 billion of senior notes due in June 2047 (the “2047 Senior Notes,” and together with the 2027 Senior Notes, the “Senior Notes”) which bear interest at a fixed rate of 4.70%, payable semi-annually. In connection with the issuance of the Senior Notes, MetLife, Inc. had initially guaranteed the Senior Notes on a senior unsecured basis. The guarantee was released, in accordance with its terms, upon Separation.
The Company entered into reinsurance, committed facility, structured settlement, and contract administrative services transactions with Brighthouse in the normal course of business and such transactions will continue based upon business needs. In addition, prior to and in connection with the Separation, the Company entered into various other agreements, including investment management, transition services and employee matters agreements, with Brighthouse for services necessary for both the Company and Brighthouse to conduct their activities. Intercompany transactions prior to the Separation between the Company and Brighthouse are eliminated and excluded from the consolidated statements of operations and consolidated balance sheets. Transactions between the Company and Brighthouse that continue after the Separation are included on the Company’s consolidated statements of operations and consolidated balance sheets.
In June 2018, the Company sold FVO Brighthouse Common Stock and as a result the Company no longer considers Brighthouse to be a related party. Therefore, the following discussion of the ongoing transactions with Brighthouse only includes disclosures of related party amounts through June 30, 2018 and at December 31, 2017. However, since the Company considers the reinsurance transactions and the transition service agreement discussed below to have a significant impact on its consolidated statements of operations, it has updated these disclosures through December 31, 2018.
Information regarding the related party effects of reinsurance transactions with Brighthouse included on the consolidated balance sheets was as follows at:
In connection with the Separation, the Company entered into a transition services agreement with Brighthouse for services necessary for Brighthouse to conduct its activities. The services are expected to continue up to 36 months after the date of Separation, with certain services potentially to be made available for several years thereafter. For the year ended December 31, 2018, the Company recognized $305 million in other revenues for services provided under such transition services agreement. After the Separation, for the year ended December 31, 2017, the Company recognized $140 million as a reduction to other expenses for transitional services provided under the agreement. Prior to the Separation, for the year ended December 31, 2017, the Company charged Brighthouse $191 million for services provided under the agreement, which were intercompany transactions and eliminated and excluded from the consolidated statements of operations.
In connection with the Separation, the Company entered into investment management services agreements with Brighthouse. Each agreement had an initial term of 18 months after the date of Separation, after which period either party to the agreements was permitted to terminate upon notice to the other party. On February 5, 2019, the Company entered into a new investment management services agreement with Brighthouse that remains in effect until terminated by either party upon notice. After the Separation, for the years ended December 31, 2018 and 2017, the Company recognized related party revenue of $61 million and $48 million in other revenues for services provided under the agreements. Prior to the Separation, for the year ended December 31, 2017, the Company charged Brighthouse $57 million for services provided under the agreements, which were intercompany transactions and eliminated and excluded from the consolidated statements of operations.
MRV and MetLife, Inc. have a $2.9 billion committed facility which is used as collateral for certain affiliated reinsurance liabilities. At December 31, 2017, Brighthouse was a related party beneficiary of $2.4 billion of letters of credit issued under this committed facility and in consideration Brighthouse reimbursed MetLife, Inc. for a portion of the letter of credit fees. Prior to the Separation, the Company entered into the committed facility with Brighthouse in the normal course of business and such transactions will continue based upon business needs.
The Company has existing assumed structured settlement claim obligations as an assignment company for Brighthouse. These liabilities are measured at the present value of the periodic claims to be provided and reported as other policy-related balances. The Company receives a fee for assuming these claim obligations and, as the assignee of the claim, is legally obligated to ensure periodic payments are made to the claimant. The Company purchased annuities from Brighthouse to fund these obligations and designates payments to be made directly to the claimant by Brighthouse as the annuity writer. The aggregate contract values of annuities funding structured settlement claims are recorded as an asset for which the Company has also recorded an unpaid claim obligation reported in other policy-related balances. Such aggregated related party contract values were $1.3 billion at December 31, 2017. The Company entered into these transactions with Brighthouse in the normal course of business and such transactions will continue based upon business needs.
At December 31, 2017, the Company had a related party receivable from Brighthouse of $97 million related to services provided and a related party payable to Brighthouse of $50 million related to services received.
In July 2016, MetLife, Inc. completed the sale to Massachusetts Mutual Life Insurance Company (“MassMutual”) of its U.S. retail advisor force and certain assets associated with the MetLife Premier Client Group, including all of the issued and outstanding shares of MetLife’s affiliated broker-dealer, MetLife Securities, Inc., a wholly-owned subsidiary of MetLife, Inc. (collectively, the “U.S. Retail Advisor Force Divestiture”) for $291 million. MassMutual assumed all of the liabilities related to such assets that arise or occur after the closing of the sale. The Company recorded a gain of $103 million ($58 million, net of income tax), in net investment gains (losses) for the year ended December 31, 2016. See Notes 10 and 17 for discussion of certain charges related to the sale.
Aggregate of the present value of future expected benefit payments and related expenses less the present value of future expected net premiums. Assumptions as to mortality and persistency are based upon the Company’s experience when the basis of the liability is established. Interest rate assumptions for the aggregate future policy benefit liabilities range from 2% to 11% for U.S. business and less than 1% to 13% for non-U.S. business.
The net level premium method and assumptions as to future morbidity, withdrawals and interest, which provide a margin for adverse deviation. Interest rate assumptions used in establishing such liabilities range from 1% to 7% (primarily related to U.S. business).
Present value of benefits method and experience assumptions as to claim terminations, expenses and interest. Interest rate assumptions used in establishing such liabilities range from 2% to 8% for U.S. business and less than 1% to 9% for non-U.S. business.
The following is information about incurred and paid claims development by segment as of December 31, 2018. Such amounts are presented net of reinsurance, and are not discounted. The tables present claims development and cumulative claim payments by incurral year. The development tables are only presented for significant short-duration product liabilities within each segment. Where practical, up to 10 years of history has been provided. In order to eliminate potential fluctuations related to foreign exchange rates, liabilities and payments denominated in a foreign currency have been translated using the 2018 year end spot rates for all periods presented. The information about incurred and paid claims development prior to 2016 is presented as supplementary information.
For all property and casualty coverages, many actuarial methods such as adjusted loss development (adjusted for settlement rates and average case liabilities) and loss ratio methods are employed to develop a best estimate of the IBNR for each coverage type. Similar actuarial methods are used to determine the best estimate of the expected salvage and subrogation; methods that look at recoveries by age and ratios of recoveries to paid loss are compared for each coverage. A liability for unpaid allocated claim adjustment expenses is held for the future claim adjustment costs associated with the payment of incurred but not yet paid claims. This liability is calculated as a percentage of the underlying unpaid claims liability. The percentage is based on historical ratios of essential claim department expenses compared with paid losses.
There were no significant changes in methodologies during 2018. The assumptions used in calculating the unpaid claims and claim adjustment expenses for Group Disability and Group Life are updated annually to reflect emerging trends in claim experience.
The reconciliation of the net incurred and paid claims development tables to the liability for unpaid claims and claims adjustment expenses on the consolidated balance sheet was as follows at:
Separate account assets and liabilities include two categories of account types: pass-through separate accounts totaling $129.2 billion and $148.2 billion at December 31, 2018 and 2017, respectively, for which the policyholder assumes all investment risk, and separate accounts for which the Company contractually guarantees either a minimum return or account value to the policyholder which totaled $46.4 billion and $56.8 billion at December 31, 2018 and 2017, respectively. The latter category consisted primarily of guaranteed interest contracts (“GICs”). The average interest rate credited on these contracts was 2.60% and 2.34% at December 31, 2018 and 2017, respectively.
The Company amortizes DAC and VOBA related to these contracts (term insurance, nonparticipating whole life insurance, traditional group life insurance, non-medical health insurance, and accident & health insurance) over the appropriate premium paying period in proportion to the actual and expected future gross premiums that were set at contract issue. The expected premiums are based upon the premium requirement of each policy and assumptions for mortality, morbidity, persistency and investment returns at policy issuance, or policy acquisition (as it relates to VOBA), include provisions for adverse deviation, and are consistent with the assumptions used to calculate future policyholder benefit liabilities. These assumptions are not revised after policy issuance or acquisition unless the DAC or VOBA balance is deemed to be unrecoverable from future expected profits. Absent a premium deficiency, variability in amortization after policy issuance or acquisition is caused only by variability in premium volumes.
For its other products, the Company has a reinsurance agreement in-force to reinsure the living and death benefit guarantees issued in connection with certain variable annuity guarantees from the Company’s former operating joint venture in Japan. Under this agreement, the Company receives reinsurance fees associated with the guarantees collected from policyholders, and provides reimbursement for benefits paid or accrued in excess of account values, subject to certain limitations.
The Company has reinsured with an unaffiliated third-party reinsurer, 59.25% of the closed block through a modified coinsurance agreement. The Company accounts for this agreement under the deposit method of accounting. The Company, having the right of offset, has offset the modified coinsurance deposit with the deposit recoverable.
The amortized cost and estimated fair value of fixed maturity securities AFS, by contractual maturity date, were as follows at December 31, 2018:
At December 31, 2018, $155 million of the total $6.0 billion of gross unrealized losses were from 42 fixed maturity securities AFS with an unrealized loss position of 20% or more of amortized cost for six months or greater.
Of the $155 million of gross unrealized losses on fixed maturity securities AFS with an unrealized loss of 20% or more of amortized cost for six months or greater, $64 million, or 41%, were related to gross unrealized losses on 22 below investment grade fixed maturity securities AFS. Unrealized losses on below investment grade fixed maturity securities AFS are principally related to U.S. and foreign corporate securities (primarily industrial and utility securities) and CMBS and are the result of significantly wider credit spreads resulting from higher risk premiums since purchase, largely due to economic and market uncertainty. Management evaluates U.S. and foreign corporate securities based on factors such as expected cash flows and the financial condition and near-term and long-term prospects of the issuers and evaluates CMBS based on actual and projected cash flows after considering the quality of underlying collateral, expected prepayment speeds, current and forecasted loss severity, the payment terms of the underlying assets backing a particular security and the payment priority within the tranche structure of the security.
The carrying value of foreclosed mortgage loans included in real estate and real estate joint ventures was $45 million and $48 million at December 31, 2018 and 2017, respectively.
Purchases of mortgage loans, primarily residential, were $3.5 billion, $3.1 billion and $2.9 billion for the years ended December 31, 2018, 2017 and 2016, respectively.
The average recorded investment for impaired commercial, agricultural and residential mortgage loans was $90 million, $49 million and $188 million, respectively, for the year ended December 31, 2016.
Includes residential mortgage loans in process of foreclosure of $140 million and $133 million at December 31, 2018 and 2017, respectively.
The Company has a high quality, well performing mortgage loan portfolio, with 99% of all mortgage loans classified as performing at both December 31, 2018 and 2017. The Company defines delinquency consistent with industry practice, when mortgage loans are past due as follows: commercial and residential mortgage loans - 60 days and agricultural mortgage loans - 90 days. The past due and nonaccrual mortgage loans at recorded investment, prior to valuation allowances, by portfolio segment, were as follows at:
For both the years ended December 31, 2018 and 2017, the Company did not have a significant amount of mortgage loans modified in a troubled debt restructuring with subsequent payment default.
Rental receivables are generally due in periodic installments. The payment periods for leveraged leases generally range from one to 15 years but in certain circumstances can be over 25 years, while the payment periods for direct financing leases generally range from one to 25 years but in certain circumstances can be over 25 years. For rental receivables, the primary credit quality indicator is whether the rental receivable is performing or nonperforming, which is assessed monthly. The Company generally defines nonperforming rental receivables as those that are 90 days or more past due. At both December 31, 2018 and 2017, all leveraged lease receivables were performing and over 99% of direct financing rental receivables were performing.
The Company’s deferred income tax liability related to leveraged leases was $519 million and $934 million at December 31, 2018 and 2017, respectively.
The carrying value of cash equivalents, which includes securities and other investments with an original or remaining maturity of three months or less at the time of purchase, was $9.0 billion and $6.2 billion at December 31, 2018 and 2017, respectively.
Net unrealized investment gains (losses) attributable to MetLife, Inc. in the above table include, on a net of income tax basis, $1,250 million for the year ended December 31, 2016, related to assets and liabilities of a disposed subsidiary.
Net unrealized investment gains (losses) attributable to MetLife, Inc. in the above table include, on a net of income tax basis, ($304) million for the year ended December 31, 2016, related to assets and liabilities of a disposed subsidiary.
Investments in any counterparty that were greater than 10% of the Company’s equity, other than the U.S. government and its agencies, were in fixed income securities of the Japanese government and its agencies with an estimated fair value of $30.2 billion and $27.5 billion at December 31, 2018 and 2017, respectively, and in fixed income securities of the South Korean government and its agencies with an estimated fair value of $7.1 billion and $6.5 billion at December 31, 2018 and 2017, respectively.
The securities lending liability for cash collateral is included within payables for collateral under securities loaned and other transactions, and the repurchase agreements liability for cash collateral is included within payables for collateral under securities loaned and other transactions and other liabilities.
If the Company is required to return significant amounts of cash collateral on short notice and is forced to sell securities to meet the return obligation, it may have difficulty selling such collateral that is invested in securities in a timely manner, be forced to sell securities in a volatile or illiquid market for less than what otherwise would have been realized under normal market conditions, or both. The estimated fair value of the securities on loan related to the cash collateral on open at December 31, 2018 was $2.7 billion, all of which were U.S. government and agency securities which, if put back to the Company, could be immediately sold to satisfy the cash requirement.
The securities lending and repurchase agreements reinvestment portfolios acquired with the cash collateral consisted principally of high quality, liquid, publicly-traded fixed maturity securities AFS, short-term investments, cash equivalents or held in cash. If the securities on loan or the reinvestment portfolio become less liquid, the Company has the liquidity resources of most of its general account available to meet any potential cash demands when securities on loan are put back to the Company.
At December 31, 2018 and 2017, a subsidiary of the Company had pledged municipals with an estimated fair value of $1.2 billion and $564 million, respectively, as collateral and received $800 million and $300 million, respectively, in cash advances under short-term advance agreements with the FHLB of Boston. The liability to return the cash advances is included within payables for collateral under securities loaned and other transactions. The estimated fair value of the reinvestment portfolio acquired with the cash advances was $799 million and $300 million at December 31, 2018 and 2017, respectively, and consisted primarily of U.S. government and agency securities and Structured Securities. At December 31, 2018 and 2017, the reinvestment portfolio also included a $33 million and $12 million, at redemption value, required investment in FHLB of Boston common stock. The subsidiary is permitted to withdraw any portion of the pledged collateral over the minimum collateral requirement at any time, other than in the event of a default by the subsidiary.
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 12), and a collateral financing arrangement (see Note 13).
See “- Securities Lending and Repurchase Agreements” for information regarding securities supporting securities lending and repurchase agreement transactions and Note 7 for information regarding investments designated to the closed block. In addition, the restricted investment in FHLB common stock was $793 million and $792 million, at redemption value, at December 31, 2018 and 2017, respectively (see Note 1).
Assets of the renewable energy partnership and other investments primarily consisted of other invested assets.
Assets of the investment funds primarily consisted of cash and cash equivalents.
The Company invests in real estate joint ventures, other limited partnership interests and tax credit and renewable energy partnerships, and also does business through certain operating joint ventures, the majority of which are accounted for under the equity method. Net investment income from other limited partnership interests and operating joint ventures, accounted for under the equity method; and real estate joint ventures and tax credit and renewable energy partnerships, primarily accounted for under the equity method, totaled $592 million, $495 million and $337 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Gains (losses) from foreign currency transactions included within net investment gains (losses) were ($16) million, ($6) million and $225 million for the years ended December 31, 2018, 2017 and 2016, respectively.
In a foreign currency forward transaction, the Company agrees with another party to deliver a specified amount of an identified currency at a specified future date. The price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. The Company utilizes foreign currency forwards in fair value, net investment in foreign operations and nonqualifying hedging relationships.
Changes in estimated fair value related to economic hedges of variable annuity guarantees included in future policy benefits.
For the Company’s foreign currency forwards, the change in the estimated fair value of the derivative related to the changes in the difference between the spot price and the forward price is excluded from the assessment of hedge effectiveness. For all other derivatives, all components of each derivative’s gain or loss were included in the assessment of hedge effectiveness. For the years ended December 31, 2018, 2017 and 2016, the component of the change in estimated fair value of derivatives that was excluded from the assessment of hedge effectiveness was ($58) million, ($40) million and ($23) million, respectively.
In certain instances, the Company discontinued cash flow hedge accounting because the forecasted transactions were no longer probable of occurring. Because certain of the forecasted transactions also were not probable of occurring within two months of the anticipated date, the Company reclassified amounts from AOCI into net derivative gains (losses). These amounts were $5 million, $13 million and $12 million for the years ended December 31, 2018, 2017 and 2016, respectively.
At December 31, 2018 and 2017, the maximum length of time over which the Company was hedging its exposure to variability in future cash flows for forecasted transactions did not exceed four years and five years, respectively.
The following table presents the effects of derivatives in cash flow hedging relationships on the consolidated statements of operations and the consolidated statements of equity. The table excludes the effects of Brighthouse derivatives prior to the Separation.
At December 31, 2018, the Company expected to reclassify ($63) million of deferred net gains (losses) on derivatives in AOCI, included in the table above, to earnings within the next 12 months.
In connection with synthetically created credit investment transactions, the Company writes credit default swaps for which it receives a premium to insure credit risk. Such credit derivatives are included within the nonqualifying derivatives and derivatives for purposes other than hedging table. If a credit event occurs, as defined by the contract, the contract may be cash settled or it may be settled gross by the Company paying the counterparty the specified swap notional amount in exchange for the delivery of par quantities of the referenced credit obligation. The Company’s maximum amount at risk, assuming the value of all referenced credit obligations is zero, was $11.4 billion at both December 31, 2018 and 2017. The Company can terminate these contracts at any time through cash settlement with the counterparty at an amount equal to the then current estimated fair value of the credit default swaps. At December 31, 2018 and 2017, the Company would have received $82 million and $271 million, respectively, to terminate all of these contracts.
The Company has also entered into credit default swaps to purchase credit protection on certain of the referenced credit obligations in the table above. As a result, the maximum amounts of potential future recoveries available to offset the $11.4 billion of future payments under credit default provisions at both December 31, 2018 and 2017 set forth in the table above were $16 million and $27 million at December 31, 2018 and 2017, respectively.
At December 31, 2018 and 2017, derivative assets included income or (expense) accruals reported in accrued investment income or in other liabilities of $99 million and $75 million, respectively, and derivative liabilities included (income) or expense accruals reported in accrued investment income or in other liabilities of ($59) million and ($49) million, respectively.
The Company issues certain products or purchases certain investments that contain embedded derivatives that are required to be separated from their host contracts and accounted for as freestanding derivatives. These host contracts principally include: variable annuities with guaranteed minimum benefits, including GMWBs, GMABs and certain GMIBs; ceded reinsurance of guaranteed minimum benefits related to certain GMIBs; assumed reinsurance of guaranteed minimum benefits related to GMWBs and GMABs; funding agreements with equity or bond indexed crediting rates; funds withheld on ceded reinsurance; fixed annuities with equity-indexed returns; and certain debt and equity securities.
Unit-linked and FVO Securities were primarily comprised of Unit-linked investments at both December 31, 2018 and 2017.
In connection with the adoption of new guidance related to the recognition and measurement of financial instruments (see Note 1), other limited partnership interests are measured at estimated fair value on a recurring basis, effective January 1, 2018. This represents the former cost method investments held as of January 1, 2018 that were measured at estimated fair value on a recurring basis upon adoption of this guidance. Total assets included in the fair value hierarchy exclude these other limited partnership interests that are measured at estimated fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient. At December 31, 2018, the estimated fair value of such investments was $145 million.
The estimated fair value of derivatives is determined through the use of quoted market prices for exchange-traded derivatives, or through the use of pricing models for OTC-bilateral and OTC-cleared derivatives. The determination of estimated fair value, when quoted market values are not available, is based on market standard valuation methodologies and inputs that management believes are consistent with what other market participants would use when pricing such instruments. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, default risk, nonperformance risk, volatility, liquidity and changes in estimates and assumptions used in the pricing models.
The weighted average for fixed maturity securities AFS is determined based on the estimated fair value of the securities.
Includes $169 million and $374 million at December 31, 2018 and 2017, respectively, of short-term debt related to repurchase agreements, secured by assets of subsidiaries.
Interest expense included in other expenses was $827 million, $841 million and $874 million for the years ended December 31, 2018, 2017 and 2016, respectively. Such amounts do not include interest expense on long-term debt related to CSEs, the collateral financing arrangement, or junior subordinated debt securities. See Notes 13 and 14.
Capacity at December 31, 2018 of $2.6 billion increases periodically to a maximum of $2.9 billion in 2024, decreases periodically commencing in 2025 to $2.0 billion in 2037, and decreases to $0 at expiration in December 2037. Unused commitment of $476 million is based on maximum capacity. At December 31, 2018, Brighthouse is a beneficiary of $2.4 billion of letters of credit issued under this facility and, in consideration, Brighthouse reimburses MetLife, Inc. for a portion of the letter of credit fees. See Note 3.
During 2018, 2017 and 2016 following regulatory approval, MRC repurchased $61 million, $153 million and $68 million, respectively, in aggregate principal amount of the surplus notes. Cumulatively, since December 2007, MRC repurchased $1.4 billion in aggregate principal amount of the surplus notes as of December 31, 2018. Payments made by the Company in 2018, 2017 and 2016 associated with the repurchases were exclusive of accrued interest on the surplus notes. In connection with the repurchases during 2018, 2017 and 2016, the Company received payments in the aggregate amount of $7 million, $20 million and $8 million, respectively, from the unaffiliated financial institution, which reduced the amount receivable from the unaffiliated financial institution by the same amounts. No other payments related to an increase or decrease in the estimated fair value of the surplus notes were made by MetLife, Inc. or received from the unaffiliated financial institution during 2018, 2017 or 2016.
On February 10, 2017, in connection with the Separation, MetLife, Inc. exchanged $750 million aggregate principal amount of its 9.250% Fixed-to-Floating Rate Junior Subordinated Debentures due 2068 for $750 million aggregate liquidation preference of the 9.250% Fixed-to-Floating Rate Exchangeable Surplus Trust Securities of MetLife Capital Trust X (the “Trust”). As a result of the exchange, MetLife, Inc. became the sole beneficial owner of the Trust, an SPE, which issued the exchangeable surplus trust securities to third-party investors. On March 23, 2017, MetLife, Inc. dissolved the Trust.
In connection with each of the securities described above, MetLife, Inc. may redeem or may cause the redemption of the securities (i) in whole or in part, at any time on or after the date five years prior to the scheduled redemption date at their principal amount plus accrued and unpaid interest to, but excluding, the date of redemption, or (ii) in certain circumstances, in whole or in part, prior to the date five years prior to the scheduled redemption date at their principal amount plus accrued and unpaid interest to, but excluding, the date of redemption or, if greater, a make-whole price. MetLife, Inc. also has the right to, and in certain circumstances the requirement to, defer interest payments on the securities for a period up to 10 years. Interest compounds during such periods of deferral. If interest is deferred for more than five consecutive years, MetLife, Inc. is required to use proceeds from the sale of its common stock or warrants on common stock to satisfy this interest payment obligation. In connection with each of the securities described above, MetLife, Inc. entered into a separate replacement capital covenant (“RCC”). As part of each RCC, MetLife, Inc. agreed that it will not repay, redeem, or purchase the securities on or before a date 10 years prior to the final maturity date of each issuance, unless, subject to certain limitations, it has received cash proceeds during a specified period from the sale of specified replacement securities. Each RCC will terminate upon the occurrence of certain events, including an acceleration of the applicable securities due to the occurrence of an event of default. The RCCs are not intended for the benefit of holders of the securities and may not be enforced by them. Rather, each RCC is for the benefit of the holders of a designated series of MetLife, Inc.’s other indebtedness (the “Covered Debt”). Initially, the Covered Debt for each of the securities described above was MetLife, Inc.’s 5.700% senior notes due 2035 (the “5.700% Senior Notes”). As a result of the issuance of MetLife, Inc.’s 10.750% Fixed-to-Floating Rate Junior Subordinated Debentures due 2069 (the “10.750% JSDs”), the 10.750% JSDs became the Covered Debt with respect to, and in accordance with, the terms of the RCC relating to MetLife, Inc.’s 6.40% Fixed-to-Floating Rate Junior Subordinated Debentures due 2066. The 5.700% Senior Notes continue to be the Covered Debt with respect to, and in accordance with, the terms of the RCCs relating to each of MetLife Capital Trust IV’s 7.875% Fixed-to-Floating Rate Exchangeable Surplus Trust Securities, MetLife, Inc.’s 9.250% Fixed-to-Floating Rate Junior Subordinated Debentures and the 10.750% JSDs. MetLife, Inc. also entered into a replacement capital obligation which will commence during the six-month period prior to the scheduled redemption date of each of the securities described above and under which MetLife, Inc. must use reasonable commercial efforts to raise replacement capital to permit repayment of the securities through the issuance of certain qualifying capital securities.
In March 2018, MetLife, Inc. issued 500,000 shares of 5.875% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series D (the “Series D preferred stock”) with a $0.01 par value per share and a liquidation preference of $1,000 per share, for aggregate net proceeds of $494 million. In connection with the offering of the Series D preferred stock, MetLife, Inc. incurred $6 million of issuance costs which have been recorded as a reduction of additional paid-in capital.
The table below presents the dividend rates of MetLife, Inc.’s preferred stock outstanding at December 31, 2018:
MetLife, Inc. may, at its option, redeem the 5.25% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C (the “Series C preferred stock”), (i) in whole but not in part, at any time prior to June 15, 2020, within 90 days after the occurrence of a “regulatory capital event,” and (ii) in whole or in part, from time to time, on or after June 15, 2020, in each case, at a redemption price equal to $1,000 per Series C preferred share, plus an amount equal to any dividends per share that have accrued but not been declared and paid for the then-current dividend period to, but excluding, such redemption date. A “regulatory capital event” could occur as a result of a change or proposed change in capital adequacy rules (or the interpretation or application thereof) that would apply to MetLife, Inc. from rules (or the interpretation or application thereof) in effect with respect to bank holding companies as of June 1, 2015 that would create a more than insubstantial risk, as determined by MetLife, Inc., that the Series C preferred stock would not be treated as “Tier 1 Capital” or as capital with attributes similar to those of Tier 1 Capital.
The declaration, record and payment dates, as well as per share and aggregate dividend amounts, for MetLife, Inc.’s common stock were as follows for the years ended December 31, 2018, 2017 and 2016:
Under the MetLife, Inc. 2015 Stock and Incentive Compensation Plan (the “2015 Stock Plan”), MetLife, Inc. may grant awards to employees and agents in the form of Stock Options, Stock Appreciation Rights, Performance Shares or Performance Share Units, Restricted Stock or Restricted Stock Units, Cash-Based Awards and Stock-Based Awards (each, as applicable, as defined in the 2015 Stock Plan with reference to shares of MetLife, Inc. common stock (“Shares”)). Awards under the 2015 Stock Plan and its predecessor plan, the MetLife, Inc. 2005 Stock and Incentive Compensation Plan (the “2005 Stock Plan”) were outstanding at December 31, 2018. MetLife, Inc. granted all awards to employees and agents in 2018 under the 2015 Stock Plan.
Awards that have become payable in Shares but the issuance of which has been deferred (“Deferred Shares”), payable to employees or agents related to awards under all plans equaled 1,188,792 Shares at December 31, 2018.
MetLife recognizes compensation expense related to awards under the 2015 Director Stock Plan based on the number of Shares awarded. MetLife, Inc. granted the majority of the awards in 2015 and 2016 under the 2015 Director Stock Plan in the second quarter of each year.
Deferred Shares payable to Directors related to awards under the 2005 Director Stock Plan, 2015 Director Stock Plan, or earlier applicable plans equaled 246,391 Shares at December 31, 2018.
The Company may further adjust the number of Performance Shares it expects to vest, and the related compensation expense, if management changes its estimate of the most likely final performance factor.
Stock Options are the contingent right of award holders to purchase Shares at a stated price for a limited time. All Stock Options have an exercise price equal to the closing price of a Share reported on the New York Stock Exchange (“NYSE”) on the date of grant, and have a maximum term of 10 years. The majority of Stock Options MetLife, Inc. has granted have become or will become exercisable at a rate of one-third of each award on each of the first three anniversaries of the grant date. Other Stock Options have become or will become exercisable on the third anniversary of the grant date. Vesting is subject to continued service, except for employees who meet specified age and service criteria and in certain other limited circumstances.
Unit Options are the contingent right of award holders to receive a cash payment equal to the closing price of a Share on the exercise date, less the closing price on the grant date, if the difference is greater than zero, for a limited time. All Unit Options have an exercise price equal to the closing price of a Share reported on the NYSE on the date of grant, and have a maximum term of 10 years. The majority of Unit Options have become or will become eligible for exercise at a rate of one-third of each award on each of the first three anniversaries of the grant date. Other Unit Options have become or will become eligible for exercise on the third anniversary of the grant date. Vesting is subject to continued service, except for employees who meet specified age and service criteria and in certain other limited circumstances.
Performance Units amounts above represent aggregate awards at target, and do not reflect potential increases or decreases that may result from the performance factor. At December 31, 2018, the performance period for the 2016 - 2018 Performance Unit grants was completed, but the performance factor had not yet been determined. Included in the immediately preceding table are 212,464 outstanding Performance Units to which the 2016 - 2018 performance factor will be applied.
MetLife, Inc.’s foreign insurance operations are regulated by applicable authorities of the jurisdictions in which each entity operates and are subject to minimum capital and solvency requirements in those jurisdictions before corrective action commences. At December 31, 2018 and 2017, the adjusted capital of American Life’s insurance subsidiary in Japan, the Company’s largest foreign insurance operation, was in excess of four times the 200% solvency margin ratio that would require corrective action. Excluding Japan, the aggregate required capital and surplus of the Company’s other foreign insurance operations was $4.1 billion and the aggregate actual regulatory capital and surplus of such operations was $11.1 billion as of the date of the most recent required capital adequacy calculation for each jurisdiction. The Company’s foreign insurance operations exceeded the minimum capital and solvency requirements as of the date of the most recent fiscal year-end capital adequacy calculation for each jurisdiction, with immaterial exceptions.
In April 2018, Metropolitan Tower Life Insurance Company (“MTL”) merged with GALIC (“MTL Merger”). The surviving entity of the merger was MTL, which re-domesticated from Delaware to Nebraska immediately prior to the merger. For the year ended December 31, 2016, MTL’s statutory net income (loss) is as filed with the Delaware Department of Insurance and accordingly, does not include GALIC’s statutory net income (loss) of ($2) million.
The Company’s U.S. captive life reinsurance subsidiaries, which reinsure risks including the closed block, level premium term life and ULSG assumed from other MetLife subsidiaries, have no state prescribed accounting practices, except for MRV.
Under the Delaware Insurance Code, American Life is permitted, without prior insurance regulatory clearance, to pay a stockholder dividend to MetLife, Inc. as long as the amount of the dividend, when aggregated with all other dividends in the preceding 12 months, does not exceed the greater of: (i) 10% of its surplus to policyholders as of the end of the immediately preceding calendar year, or (ii) its net statutory gain from operations for the immediately preceding calendar year (excluding realized capital gains), not including pro rata distributions of American Life’s own securities. American Life will be permitted to pay a dividend to MetLife, Inc. in excess of the greater of such two amounts only if it files notice of the declaration of such a dividend and the amount thereof with the Delaware Commissioner of Insurance (the “Delaware Commissioner”) and the Delaware Commissioner either approves the distribution of the dividend or does not disapprove the distribution within 30 days of its filing. In addition, any dividend that exceeds earned surplus (defined as “unassigned funds (surplus)”) as of the immediately preceding calendar year requires insurance regulatory approval. Under the Delaware Insurance Code, the Delaware Commissioner has broad discretion in determining whether the financial condition of a stock life insurance company would support the payment of such dividends to its stockholders.
Under the Nebraska Insurance Code, MTL is permitted, without prior insurance regulatory clearance, to pay a stockholder dividend to MetLife, Inc. as long as the amount of the dividend, when aggregated with all other dividends in the preceding 12 months, does not exceed the greater of: (i) 10% of its surplus to policyholders as of the end of the immediately preceding calendar year, or (ii) its net statutory gain from operations for the immediately preceding calendar year (excluding realized capital gains), not including pro rata distributions of MTL’s own securities. MTL will be permitted to pay a dividend to MetLife, Inc. in excess of the greater of such two amounts only if it files notice of the declaration of such a dividend and the amount thereof with the Director of the Nebraska Department of Insurance (the “Nebraska Director”) and the Nebraska Director either approves the distribution of the dividend or does not disapprove the distribution within 30 days of its filing. In addition, any dividend that exceeds earned surplus (defined as “unassigned funds (surplus)”), excluding unrealized capital gains) as of the immediately preceding calendar year requires insurance regulatory approval. Under the Nebraska Insurance Code, the Nebraska Director has broad discretion in determining whether the financial condition of a stock life insurance company would support the payment of such dividends to its stockholders.
Information regarding changes in the balances of each component of AOCI attributable to MetLife, Inc., was as follows:
See Notes 12, 13, and 14 for attribution of interest expense by debt issuance and other expenses related to debt transactions.
The Company commenced in 2016 a unit cost improvement program related to the Company’s refreshed enterprise strategy. This global strategy focuses on transforming the Company to become more digital, driving efficiencies and innovation to achieve competitive advantage, and simplified, decreasing the costs and risks associated with the Company’s highly complex industry to customers and shareholders. Restructuring charges related to this program are included in other expenses. As the expenses relate to an enterprise-wide initiative, they are reported in Corporate & Other. Such restructuring charges were as follows:
Management anticipates further restructuring charges through the year ending December 31, 2019. However, such restructuring plans were not sufficiently developed to enable management to make an estimate of such restructuring charges at December 31, 2018.
Certain subsidiaries of MetLife, Inc. sponsor and/or administer a U.S. qualified and various U.S. and non-U.S. nonqualified defined benefit pension plans and other postretirement employee benefit plans covering employees who meet specified eligibility requirements. U.S. pension benefits are provided utilizing either a traditional formula or cash balance formula. The traditional formula provides benefits that are primarily based upon years of credited service and either final average or career average earnings. The cash balance formula utilizes hypothetical or notional accounts which credit participants with benefits equal to a percentage of eligible pay, as well as interest credits, determined annually based upon the annual rate of interest on 30-year U.S. Treasury securities, for each account balance. In September 2018, the U.S. qualified and nonqualified defined benefit pension plans were amended, effective January 1, 2023, to provide benefits accruals for all active participants under the cash balance formula and to cease future accruals under the traditional formula. The U.S. nonqualified pension plans provide supplemental benefits in excess of limits applicable to a qualified plan. The non-U.S. pension plans generally provide benefits based upon either years of credited service and earnings preceding retirement or points earned on job grades and other factors in years of service.
The estimated net actuarial (gains) losses and prior service costs (credit) for the defined benefit pension plans and other postretirement benefit plans that will be amortized from AOCI into net periodic benefit costs over the next year are $184 million and ($17) million, and ($34) million and ($11) million, respectively.
Assumed healthcare costs trend rates may have a significant effect on the amounts reported for healthcare plans. A 1% change in assumed healthcare costs trend rates would have the following effects on the U.S. plans as of December 31, 2018:
Certain U.S. subsidiaries provide employees with benefits under various Employee Retirement Income Security Act of 1974 (“ERISA”) benefit plans. These include qualified pension plans, postretirement medical plans and certain retiree life insurance coverage. The assets of these U.S. subsidiaries’ qualified pension plans are held in an insurance group annuity contract, and the vast majority of the assets of the postretirement medical plan and backing the retiree life coverage are held in a trust which largely utilizes insurance contracts to hold the assets. All of these contracts are issued by the Company’s insurance affiliates, and the assets under the contracts are held in insurance separate accounts that have been established by the Company. The underlying assets of the separate accounts are principally comprised of cash and cash equivalents, short-term investments, fixed maturity securities AFS, equity securities, derivatives, real estate, private equity investments and hedge fund investments.
Benefit payments due under the U.S. nonqualified pension plans are primarily funded from the subsidiaries’ general assets as they become due under the provisions of the plans, and therefore benefit payments equal employer contributions. The U.S. subsidiaries expect to make contributions of $70 million to fund the benefit payments in 2019.
As previously discussed, most of the assets of the U.S. pension benefit plans are held in group annuity contracts issued by the subsidiaries while some of the assets of the U.S. postretirement benefit plans are held in a trust which largely utilizes life insurance contracts issued by the subsidiaries to hold such assets. Total revenues from these contracts recognized on the consolidated statements of operations were $56 million, $56 million and $58 million for the years ended December 31, 2018, 2017 and 2016, respectively, and included policy charges and net investment income from investments backing the contracts and administrative fees. Total investment income (loss), including realized and unrealized gains (losses), credited (debited) to the account balances was ($448) million, $1.1 billion and $660 million for the years ended December 31, 2018, 2017 and 2016, respectively. The terms of these contracts are consistent in all material respects with those the subsidiaries offer to unaffiliated parties that are similarly situated.
The Company’s income (loss) from continuing operations before income tax expense (benefit) was as follows:
The reconciliation of the income tax provision at the U.S. statutory rate (21% in 2018; 35% in 2017 and 2016) to the provision for income tax as reported for continuing operations was as follows:
For the year ended December 31, 2018, foreign tax rate differential includes tax charges of $45 million related to Global Intangible Low-Taxed Income (“GILTI”), $17 million related to a tax adjustment in Chile and $13 million from changes in the valuation of the peso in Argentina.
For the year ended December 31, 2017, U.S. Tax Reform impact of ($1.5) billion excludes ($101) million of tax provision at the U.S. statutory rate for a total tax reform benefit of ($1.6) billion.
to a participation exemption system by providing corporations a 100% dividends received deduction for dividends distributed by a controlled foreign corporation. To transition to that new system, U.S. Tax Reform imposed a one-time deemed repatriation tax on unremitted earnings and profits at a rate of 8.0% for illiquid assets and 15.5% for cash and cash equivalents.
In accordance with SAB 118 issued by the SEC in December 2017, the Company recorded provisional amounts for certain items for which the income tax accounting is not complete. For these items, the Company recorded a reasonable estimate of the tax effects of U.S. Tax Reform. The estimates were reported as provisional amounts during the measurement period, which did not exceed one year from the date of enactment of U.S. Tax Reform. The Company reflected adjustments to its provisional amounts upon obtaining, preparing, or analyzing additional information about facts and circumstances that existed as of the enactment date that, if known, would have affected the income tax effects initially reported as provisional amounts.
Compensation and Fringe Benefits - U.S. Tax Reform limits certain employer deductions for fringe benefit and related expenses and also repeals the exception allowing the deduction of certain performance-based compensation paid to certain senior executives. The Company recorded an $8 million tax charge, included within the deferred tax revaluation as of December 31, 2017. The Company determined that no additional adjustment was required for the year ended December 31, 2018.
Alternative Minimum Tax Credits - U.S. Tax Reform eliminates the corporate alternative minimum tax and allows for minimum tax credit carryforwards to be used to offset future regular tax or to be refunded 50% each tax year beginning in 2018, with any remaining balance fully refunded in 2021. However, pursuant to the requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, refund payments issued for corporations claiming refundable prior year alternative minimum tax credits are subject to a sequestration rate of 6.2%. The application of this fee to refunds in future years is subject to further guidance. Additionally, the sequestration reduction rate in effect at the time is subject to uncertainty. For the year ended December 31, 2017, the Company recorded a $9 million tax charge, included within the deferred tax revaluation. For the year ended December 31, 2018, the Company determined that no additional adjustment was required. In early 2019, the IRS issued guidance indicating that for years beginning after December 31, 2017, refund payments and credit elect and refund offset transactions due to refundable minimum tax credits will not be subject to sequestration. The Company will incorporate the impacts of this IRS announcement in 2019.
The Company also has recorded a valuation allowance benefit of $12 million related to certain U.S. state and non-U.S. net operating loss carryforwards for the year ended December 31, 2018. In addition, an $8 million decrease was related to foreign currency exchange rate movement for the year ended December 31, 2018. The valuation allowance reflects management’s assessment, based on available information, that it is more likely than not that the deferred income tax asset for certain U.S. state and non-U.S. net operating loss carryforwards will not be realized. The tax benefit will be recognized when management believes that it is more likely than not that these deferred income tax assets are realizable.
The following table sets forth the net operating loss carryforwards for tax return purposes at December 31, 2018.
The following table sets forth the general business credits, foreign tax credits, and other credit carryforwards for tax return purposes at December 31, 2018.
For tax years 2003 through 2006, the Company entered into binding agreements with the IRS under which all remaining issues, including the foreign tax credit matter noted above, for these years were resolved. Accordingly, in the fourth quarter of 2018, the Company recorded a non-cash benefit to net income of $349 million, net of tax, comprised of a $168 million tax benefit recorded in provision for income tax expense (benefit) and a $229 million interest benefit ($181 million, net of tax) included in other expenses. For tax years 2000 through 2002 (which are closed to IRS examination except for the refund claim described above) and 2007 through 2009 (which are the subject of the current IRS examination), the Company has established adequate reserves for tax liabilities. The Company continues to pursue final resolution of disallowed foreign tax credits, as well as related issues, for the open tax years in a manner consistent with the final resolution of such issues for 2003 through 2006. Although the final timing and details of any such resolution remain uncertain, and could be affected by many factors, closure with the IRS for tax years 2000 through 2002, and 2007 through 2009, may occur in 2019. In material non-U.S. jurisdictions, the Company is no longer subject to income tax examinations for years prior to 2011.
The increase in 2018 is primarily related to the deemed repatriation transition tax and the IRS issued proposed regulations.
For some of the matters disclosed below, the Company is able to estimate a reasonably possible range of loss. For matters where a loss is believed to be reasonably possible, but not probable, the Company has not made an accrual. As of December 31, 2018, the Company estimates the aggregate range of reasonably possible losses in excess of amounts accrued for these matters to be $0 to $550 million.
Claims asserted against MLIC have included negligence, intentional tort and conspiracy concerning the health risks associated with asbestos. MLIC’s defenses (beyond denial of certain factual allegations) include that: (i) MLIC owed no duty to the plaintiffs - it had no special relationship with the plaintiffs and did not manufacture, produce, distribute or sell the asbestos products that allegedly injured plaintiffs; (ii) plaintiffs did not rely on any actions of MLIC; (iii) MLIC’s conduct was not the cause of the plaintiffs’ injuries; (iv) plaintiffs’ exposure occurred after the dangers of asbestos were known; and (v) the applicable time with respect to filing suit has expired. During the course of the litigation, certain trial courts have granted motions dismissing claims against MLIC, while other trial courts have denied MLIC’s motions. There can be no assurance that MLIC will receive favorable decisions on motions in the future. While most cases brought to date have settled, MLIC intends to continue to defend aggressively against claims based on asbestos exposure, including defending claims at trials.
The ability of MLIC to estimate its ultimate asbestos exposure is subject to considerable uncertainty, and the conditions impacting its liability can be dynamic and subject to change. The availability of reliable data is limited and it is difficult to predict the 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 in pending and future claims, the impact of the number of new claims filed in a particular jurisdiction and variations in the law in the jurisdictions in which claims are filed, the possible impact of tort reform efforts, the willingness of courts to allow plaintiffs to pursue claims against MLIC when exposure to asbestos took place after the dangers of asbestos exposure were well known, and the impact of any possible future adverse verdicts and their amounts.
City of Westland Police and Fire Retirement System v. MetLife, Inc., et. al. (S.D.N.Y., filed January 12, 2012)
Plaintiff filed this putative class action lawsuit on behalf of himself and all persons covered under a long-term group disability income insurance policy issued by MLIC to public entities in California between April 8, 2011 and April 8, 2015. Plaintiff alleges that MLIC improperly reduced benefits by including cost of living adjustments and employee paid contributions in the employer retirement benefits and other income that reduces the benefit payable under such policies. Plaintiff asserts causes of action for declaratory relief, violation of the California Business & Professions Code, breach of contract and breach of the implied covenant of good faith and fair dealing. The parties reached a settlement, which the court approved on January 3, 2019.
Plaintiffs filed this putative class action lawsuit on behalf of themselves and all California persons who have been charged compound interest by MLIC in life insurance policy and/or premium loan balances within the last four years. Plaintiffs allege that MLIC has engaged in a pattern and practice of charging compound interest on life insurance policy and premium loans without the borrower authorizing such compounding, and that this constitutes an unlawful business practice under California law. Plaintiffs assert causes of action for declaratory relief, violation of California’s Unfair Competition Law and Usury Law, and unjust enrichment. Plaintiffs seek declaratory and injunctive relief, restitution of interest, and damages in an unspecified amount. On April 12, 2016, the court granted MLIC’s motion to dismiss. Plaintiffs appealed this ruling to the United States Court of Appeals for the Ninth Circuit. The Company intends to defend this action vigorously.
Plaintiff filed this putative class action alleging causes of action for breach of contract, fraud, and violations of the Illinois Consumer Fraud and Deceptive Business Practices Act, on behalf of herself and all persons over age 65 who selected a Reduced Pay at Age 65 payment feature on their long-term care insurance policies and whose premium rates were increased after age 65. Plaintiff seeks unspecified compensatory, statutory and punitive damages, as well as recessionary and injunctive relief. On April 12, 2017, the court granted MLIC’s motion to dismiss the action. Plaintiff appealed this ruling and the United States Court of Appeals for the Seventh Circuit reversed and remanded the case to the district court for further proceedings. The Company intends to defend this action vigorously.
Total Asset Recovery Services (“The Relator”) brought an action under the qui tam provision of the New York False Claims Act (the “Act”) on behalf of itself and the State of New York. The Relator originally filed this action under seal in 2010, and the complaint was unsealed on December 19, 2017. The Relator alleges that MetLife, Inc., MLIC, and several other insurance companies violated the Act by filing false unclaimed property reports with the State of New York from 1986 to 2017, to avoid having to escheat the proceeds of more than 25,000 life insurance policies, including policies for which the defendants escheated funds as part of their demutualizations in the late 1990s. The Relator seeks treble damages and other relief. The Company intends to defend this action vigorously.
The Enforcement Section of the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth (the “MSD”) filed an administrative complaint in order to commence an adjudicatory proceeding against the Company for alleged violations of Section 101 of the Massachusetts Uniform Securities Act and regulations promulgated thereunder, alleging that the Company made materially misleading statements regarding the sufficiency of its reserves related to group annuity contracts and the effectiveness of its internal control over financial reporting. The Company settled this matter with the MSD on December 18, 2018.
Plaintiff filed this putative class action on behalf of all persons due benefits under group annuity contracts but who did not receive the entire amount to which they were entitled. Plaintiff asserts claims for unjust enrichment, accounting, and restitution based on allegations that the Company failed to timely pay annuity benefits to certain group annuitants. Plaintiff seeks declaratory and injunctive relief, as well as unspecified compensatory and punitive damages, and other relief. The court dismissed this matter as to all defendants on January 15, 2019.
Many jurisdictions in which the Company is admitted to transact business require insurers doing business within the jurisdiction to participate in guaranty associations, which are organized to pay contractual benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers or those that may become impaired, insolvent or fail. These associations levy assessments, up to prescribed limits, on all member insurers in a particular jurisdiction on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer engaged. In addition, certain jurisdictions have government owned or controlled organizations providing life, health and property and casualty insurance to their citizens, whose activities could place additional stress on the adequacy of guaranty fund assessments. Many of these organizations have the power to levy assessments similar to those of the guaranty associations. Some jurisdictions permit member insurers to recover assessments paid through full or partial premium tax offsets.
The Company, as lessee, has entered into various lease and sublease agreements for office space and equipment. Future minimum gross rental payments relating to these lease arrangements are as follows:
Operating lease expense was $342 million, $374 million and $383 million for the years ended December 31, 2018, 2017 and 2016, respectively. Total minimum rental payments to be received in the future under non-cancelable subleases were $645 million as of December 31, 2018. Non-cancelable sublease income was $72 million, $46 million and $21 million for the years ended December 31, 2018, 2017 and 2016, respectively.
In the normal course of its business, the Company has provided certain indemnities, guarantees and commitments to third parties such that 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 $329 million, with a cumulative maximum of $778 million, while in other cases such limitations are not specified or applicable. Since certain of these obligations are not subject to limitations, the Company does not believe that it is possible to determine the maximum potential amount that could become due under these guarantees in the future. Management believes that it is unlikely the Company will have to make any material payments under these indemnities, guarantees, or commitments.
The Company also has minimum fund yield requirements on certain pension funds. 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 that could become due under these guarantees in the future.
The Company’s recorded liabilities were $7 million and $5 million at December 31, 2018 and 2017, respectively, for indemnities, guarantees and commitments.
On February 15, 2019, MetLife, Inc. announced a first quarter 2019 dividend of $29.375 per share, for a total of $15 million, on its Series D preferred stock, and $351.563 per share, for a total of $11 million, on its Series E preferred stock. Both dividends will be payable on March 15, 2019 to shareholders of record as of February 28, 2019.
On January 7, 2019, the MetLife, Inc. Board of Directors declared a first quarter 2019 common stock dividend of $0.42 per share payable on March 13, 2019 to shareholders of record as of February 5, 2019. The Company estimates that the aggregate dividend payment will be $404 million.
In December 2015, MetLife, Inc. accrued $50 million, $45 million and $25 million in capital contributions payable to the following captive reinsurers: MRV, MetLife Reinsurance Company of Delaware (“MRD”) and MRSC, respectively, which were included in payables to subsidiaries at December 31, 2015. The payables were settled for cash in February 2016.
In April 2017, in connection with the Separation, MetLife, Inc. repaid $750 million and $350 million senior notes to MRD due September 2032 and December 2033, respectively, in an exchange transaction. The $750 million senior note bore interest at a fixed rate of 4.21% and the $350 million senior note bore interest at a fixed rate of 5.10%. Simultaneously, MRD repaid $750 million and $350 million surplus notes to MetLife, Inc. The $750 million surplus note bore interest at a fixed rate of 5.13% and the $350 million surplus note bore interest at a fixed rate of 6.00% (the “MRD Notes Exchange”).
Net of $79 million and $86 million of unamortized issuance costs and net premiums and discounts at December 31, 2018 and 2017, respectively.
The aggregate maturities of long-term debt at December 31, 2018 for the next five years and thereafter are $728 million in 2019, $750 million in 2020, $1.4 billion in 2021, $500 million in 2022, $1.0 billion in 2023 and $9.5 billion thereafter.
In June 2016, MetLife, Inc. entered into a five-year agreement with an indirect wholly-owned subsidiary, MetLife Ireland Treasury d.a.c. (formerly known as MetLife Ireland Treasury Limited) (“MIT”), to borrow up to $1.3 billion on a revolving basis, at interest rates based on the IRS safe harbor interest rate in effect at the time of the borrowing. MetLife, Inc. may borrow funds under the agreement at MIT’s discretion and subject to the availability of funds. There were no outstanding borrowings at December 31, 2018.
See Note 3 for information on the MRD Notes Exchange in 2017.
MetLife, Inc. guarantees the obligations of MrB in an aggregate amount up to $1.0 billion, under a reinsurance agreement with MetLife Europe d.a.c. (“MEL”) (formerly known as MetLife Europe Limited), under which MrB reinsured the guaranteed living benefits and guaranteed death benefits associated with certain unit-linked variable annuity type liability contracts issued by MEL.