In December 2006, we signed a lease for approximately 410,000 rentable square feet in Manhattan, New York to be located on 12 floors. The term of the lease will commence after January 1, 2008 and will continue for approximately 21 years. We anticipate moving certain operations from Long Island City to Manhattan in late 2008, but we intend to continue to maintain an on-going presence in Long Island City after that date.
We continue to own 16 other buildings in the United States that we use in the operation of our business. These buildings contain approximately 3.8 million rentable square feet and are located in the following states: Florida, Illinois, Missouri, New Jersey, New York, Ohio, Oklahoma, Pennsylvania, Rhode Island and Texas. Our computer center in Rensselaer, New York is not owned in fee but rather is occupied pursuant to a long-term ground lease. We lease space in approximately 600 other locations throughout the United States, and these leased facilities consist of approximately 7.8 million rentable square feet. Approximately 58% of these leases are occupied as sales offices for the Individual segment, and we use the balance for our other business activities. We also own five buildings outside the United States, comprising more than 300,000 rentable square feet. We lease approximately 2.0 million rentable square feet in various locations outside the United States. Management believes that these properties are suitable and adequate for our current and anticipated business operations.
The following selected financial data has been derived from the Company’s audited consolidated financial statements. The statements of income data for the years ended December 31, 2006, 2005 and 2004 and the balance sheet data as of December 31, 2006 and 2005 have been derived from the Company’s audited financial statements included elsewhere herein. The statements of income data for the years ended December 31, 2003 and 2002 and the balance sheet data as of December 31, 2004, 2003 and 2002 have been derived from the Company’s audited 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 consolidated financial statements and related notes included elsewhere herein. Some previously reported amounts have been reclassified to conform with the presentation at and for the year ended December 31, 2006.
On July 1, 2005, the Holding Company acquired Travelers. The 2005 selected financial data includes total revenues and total expenses of $1,009 million and $618 million, respectively, from the date of the acquisition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Acquisitions and Dispositions.”
On September 29, 2005, the Company completed the sale of P.T. Sejahtera (“MetLife Indonesia”) to a third party. On January 31, 2005, the Company sold its wholly-owned subsidiary, SSRM Holdings, Inc. (“SSRM”), to a third party. In accordance with SFAS 144, the assets, liabilities and operations of MetLife Indonesia and SSRM have been reclassified into discontinued operations for all years presented. The following tables present these discontinued operations:
In June 2002, the Holding Company acquired Aseguadora Hidalgo S.A. The 2002 selected financial data includes total revenues and total expenses of $421 million and $358 million, respectively, from the date of the acquisition.
Policyholder liabilities include future policy benefits and other policyholder funds. The life and health policyholder liabilities also include PABs, policyholder dividends payable and the policyholder dividend obligation.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to trends in the operations and financial results and the business and the products of MetLife, Inc. and its subsidiaries, as well as other statements including words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend” and other similar expressions. Forward-looking statements are made based upon management’s current expectations and beliefs concerning future developments and their potential effects on the Company. Such forward-looking statements are not guarantees of future performance.
Actual results may differ materially from those included in the forward-looking statements as a result of risks and uncertainties including, but not limited to, the following: (i) changes in general economic conditions, including the performance of financial markets and interest rates; (ii) heightened competition, including with respect to pricing, entry of new competitors, the development of new products by new and existing competitors and for personnel; (iii) investment losses and defaults; (iv) unanticipated changes in industry trends; (v) catastrophe losses; (vi) ineffectiveness of risk management policies and procedures; (vii) changes in accounting standards, practices and/or policies; (viii) changes in assumptions related to deferred policy acquisition costs (“DAC”), value of business acquired (“VOBA”) or goodwill; (ix) discrepancies between actual claims experience and assumptions used in setting prices for the Company’s products and establishing the liabilities for the Company’s obligations for future policy benefits and claims; (x) discrepancies between actual experience and assumptions used in establishing liabilities related to other contingencies or obligations; (xi) adverse results or other consequences from litigation, arbitration or regulatory investigations; (xii) downgrades in the Company’s and its affiliates’ claims paying ability, financial strength or credit ratings; (xiii) regulatory, legislative or tax changes that may affect the cost of, or demand for, the Company’s products or services; (xiv) MetLife, Inc.’s primary reliance, as a holding company, on dividends from its subsidiaries to meet debt payment obligations and the applicable regulatory restrictions on the ability of the subsidiaries to pay such dividends; (xv) deterioration in the experience of the “closed block” established in connection with the reorganization of Metropolitan Life; (xvi) economic, political, currency and other risks relating to the Company’s international operations; (xvii) the effects of business disruption or economic contraction due to terrorism or other hostilities; (xviii) the Company’s ability to identify and consummate on successful terms any future acquisitions, and to successfully integrate acquired businesses with minimal disruption; and (xix) other risks and uncertainties described from time to time in MetLife, Inc.’s filings with the U.S. Securities and Exchange Commission (“SEC”).
MetLife is a leading provider of insurance and other financial services with operations throughout the United States and the regions of Latin America, Europe, and Asia Pacific. Through its domestic and international subsidiaries and affiliates, MetLife, Inc. offers life insurance, annuities, automobile and homeowners insurance, retail banking and other financial services to individuals, as well as group insurance, reinsurance and retirement & savings products and services to corporations and other institutions. MetLife is organized into five operating segments: Institutional, Individual, Auto & Home, International and Reinsurance, as well as Corporate & Other.
The management’s discussion and analysis which follows isolates, in order to be meaningful, the results of the Travelers acquisition in the period over period comparison as the Travelers acquisition was not included in the results of the Company until July 1, 2005. The Travelers’ amounts which have been isolated represent the results of the Travelers legal entities which have been acquired. These amounts represent the impact of the Travelers acquisition; however, as business currently transacted through the acquired Travelers legal entities is transitioned to legal entities already owned by the Company, some of which has already occurred, the identification of the Travelers legal entity business will not necessarily be indicative of the impact of the Travelers acquisition on the results of the Company.
The Company reported $6,159 million in net income available to common shareholders and diluted earnings per common share of $7.99 for the year ended December 31, 2006 compared to $4,651 million in net income available to common shareholders and diluted earnings per common share of $6.16 for the year ended December 31, 2005. Excluding the acquisition of Travelers, which contributed $317 million during the first six months of 2006 to the year over year increase, net income available to common shareholders increased by $1,191 million for the year ended December 31, 2006 compared to the 2005 period.
Income from discontinued operations consisted of net investment income and net investment gains related to real estate properties that the Company had classified as available-for-sale or had sold and, for the years ended December 31, 2006 and 2005, the operations and gain upon disposal from the sale of SSRM Holdings, Inc. (“SSRM”) on January 31, 2005 and for the year ended December 31, 2005, the operations of P.T. Sejahtera (“MetLife Indonesia”) which was sold on September 29, 2005. Income from discontinued operations, net of income tax, increased by $1,552 million, or 95%, to $3,188 million for the year ended December 31, 2006 from $1,636 million for the comparable 2005 period. This increase is primarily due to a gain of $3 billion, net of income tax, on the sale of the Peter Cooper Village and Stuyvesant Town properties in Manhattan, New York, as well as a gain of $32 million, net of income tax, related to the sale of SSRM during the year ended December 31, 2006. This increase was partially offset by gains during the year ended December 31, 2005 including $1,193 million, net of income tax, on the sales of the One Madison Avenue and 200 Park Avenue properties in Manhattan, New York, as well as gains on the sales of SSRM and MetLife Indonesia of $177 million and $10 million, respectively, both net of income tax. In addition, there was lower net investment income and net investment gains from discontinued operations related to other real estate properties sold or held-for-sale during the year ended December 31, 2006 compared to the year ended December 31, 2005.
Net investment losses increased by $817 million, net of income tax, to a loss of $877 million for the year ended December 31, 2006 from a loss of $60 million for the comparable 2005 period. Excluding the impact of the acquisition of Travelers, which contributed a loss of $177 million during the first six months of 2006 to the year over year increase, net investment losses increased by $640 million. The increase in net investment losses was due to a combination of losses from the mark-to-market on derivatives and foreign currency transaction losses during 2006,
Dividends on the Holding Company’s Series A and Series B preferred shares (“Preferred Shares”) issued in connection with financing the acquisition of Travelers increased by $71 million, to $134 million for the year ended December 31, 2006, from $63 million for the comparable 2005 period, as the preferred stock was issued in June 2005.
The Company reported $4,651 million in net income available to common shareholders and diluted earnings per common share of $6.16 for the year ended December 31, 2005 compared to $2,758 million in net income available to common shareholders and diluted earnings per common share of $3.65 for the year ended December 31, 2004. The acquisition of Travelers contributed $233 million to net income available to common shareholders for the year ended December 31, 2005. Excluding the impact of Travelers, net income available to common shareholders increased by $1,660 million in the 2005 period. The years ended December 31, 2005 and 2004 include the impact of certain transactions or events, the timing, nature and amount of which are generally unpredictable. These transactions are described in each applicable segment’s discussion below. These items contributed a benefit of $71 million, net of income tax, to the year ended December 31, 2005 and a benefit of $113 million, net of income tax, to the comparable 2004 period. Excluding the impact of these items, net income available to common shareholders increased by $1,702 million for the year ended December 31, 2005 compared to the prior 2004 period.
In 2005, the Company sold its One Madison Avenue and 200 Park Avenue properties in Manhattan, New York, which, combined, resulted in a gain of $1,193 million, net of income tax. In addition, during 2005, the Company completed the sales of SSRM and MetLife Indonesia and recognized gains of $177 million and $10 million, respectively, both net of income tax. In 2004, the Company completed the sale of the Sears Tower property resulting in a gain of $85 million, net of income tax. Accordingly, income from discontinued operations and, correspondingly, net income, increased by $1,370 million for the year ended December 31, 2005 compared to the 2004 period primarily as a result of the aforementioned sales.
These increases were partially offset by an increase in net investment losses of $170 million, net of income tax, for the year ended December 31, 2005 as compared to the corresponding period in 2004. The acquisition of Travelers contributed a loss of $132 million, net of income tax, to this decrease. Excluding the impact of Travelers, net investment gains (losses) decreased by $38 million, net of income tax, in the 2005 period. This decrease is primarily due to losses on fixed maturity security sales resulting from continued portfolio repositioning in the 2005 period. Significantly offsetting these reductions is an increase in gains from the mark-to-market on derivatives in 2005. The derivative gains resulted from changes in the value of the dollar versus major foreign currencies, including the euro and pound sterling, and changes in U.S. interest rates during the year ended December 31, 2005.
On July 1, 2005, the Holding Company completed the acquisition of The Travelers Insurance Company, excluding certain assets, most significantly, Primerica, from Citigroup Inc. (“Citigroup”), and substantially all of Citigroup’s international insurance businesses (collectively, “Travelers”) for $12.1 billion. The results of Travelers’ operations were included in the Company’s financial statements beginning July 1, 2005. As a result of the acquisition, management of the Company increased significantly the size and scale of the Company’s core insurance and annuity products and expanded the Company’s presence in both the retirement & savings’ domestic and international markets. The distribution agreements executed with Citigroup as part of the acquisition provide the Company with one of the broadest distribution networks in the industry. The initial consideration paid by the Holding Company for the acquisition consisted of $10.9 billion in cash and 22,436,617 shares of the Holding Company’s common stock with a market value of $1.0 billion to Citigroup and $100 million in other transaction costs. Additional consideration of $115 million was paid by the Holding Company to Citigroup in 2006 as a result of the finalization by both parties of their review of the June 30, 2005 financial statements and final resolution as to the interpretation of the provisions of the acquisition agreement. In addition to cash on-hand, the purchase price was financed through the issuance of common stock, debt securities, common equity units and preferred stock. See “- Liquidity and Capital Resources - The Holding Company - Liquidity Sources.”
On January 31, 2005, the Company completed the sale of SSRM to a third party for $328 million in cash and stock. As a result of the sale of SSRM, the Company recognized income from discontinued operations of $157 million, net of income tax, comprised of a realized gain of $165 million, net of income tax, and an operating expense related to a lease abandonment of $8 million, net of income tax. Under the terms of the sale agreement, MetLife will have an opportunity to receive additional payments based on, among other things, certain revenue retention and growth measures. The purchase price is also subject to reduction over five years, depending on retention of certain MetLife-related business. Also under the terms of such agreement, MetLife had the opportunity to receive additional consideration for the retention of certain customers for a specific period in 2005. Upon
Financial Environment. The level of long-term interest rates and the shape of the yield curve can have a negative impact on the demand for and the profitability of spread-based products such as fixed annuities, guaranteed interest contracts (“GICs”) and universal life insurance. A flat or inverted yield curve and low long-term interest rates will be a concern until new money rates on corporate bonds are higher than overall life insurer investment portfolio yields. Equity market performance can also impact the profitability of life insurers, as product demand and fee revenue from variable annuities and fee revenue from pension products tied to separate account balances often reflect equity market performance.
The application of purchase accounting requires the use of estimation techniques in determining the fair value of the assets acquired and liabilities assumed - the most significant of which relate to the aforementioned critical estimates. In applying these policies, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Company’s businesses and operations. Actual results could differ from these estimates.
categories of securities: (i) securities where the estimated fair value had declined and remained below cost or amortized cost by less than 20%; (ii) securities where the estimated fair value had declined and remained below cost or amortized cost by 20% or more for less than six months; and (iii) securities where the estimated fair value had declined and remained below cost or amortized cost by 20% or more for six months or greater. Additionally, management considers a wide range of factors about the security issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations used by the Company in the impairment evaluation process include, but are not limited to:
the potential for impairments of securities where the issuer, series of issuers or industry has suffered a catastrophic type of loss or has exhausted natural resources;
The recognition of income on certain investments (e.g. loan-backed securities including mortgage-backed and asset-backed securities, certain investment transactions, trading securities, etc.) is dependent upon market conditions, which could result in prepayments and changes in amounts to be earned.
The Company enters into freestanding derivative transactions including swaps, forwards, futures and option contracts. The Company uses derivatives primarily to manage various risks. The risks being managed are variability in cash flows or changes in fair values related to financial instruments and currency exposure associated with net investments in certain foreign operations. To a lesser extent, the Company also uses credit derivatives to synthetically replicate investment risks and returns which are not readily available in the cash market. The Company also purchases investment securities, issues certain insurance policies and engages in certain reinsurance contracts that have embedded derivatives.
Fair value of derivatives is determined by quoted market prices or through the use of pricing models. The determination of fair values, when quoted market values are not available, is based on valuation methodologies and assumptions deemed appropriate under the circumstances. Values can be affected by changes in interest rates, foreign exchange rates, financial indices, credit spreads, market volatility and liquidity. Values can also be affected by changes in estimates and assumptions used in pricing models. Such assumptions include estimates of volatility, interest rates, foreign exchange rates, other financial indices and credit ratings. Essential to the analysis of the fair value is a risk of counterparty default. The use of different assumptions may have a material effect on the estimated derivative fair value amounts, as well as the amount of reported net income. Also, fluctuations in the fair value of derivatives which have not been designated for hedge accounting may result in significant volatility in net income.
The accounting for derivatives is complex and interpretations of the primary accounting standards continue to evolve in practice. Judgment is applied in determining the availability and application of hedge accounting designations and the appropriate accounting treatment under these accounting standards. If it is determined that hedge accounting designations were not appropriately applied, reported net income could be materially affected. Differences in judgment as to the availability and application of hedge accounting designations and the appropriate accounting treatment may result in a differing impact on the consolidated financial statements of the Company from that previously reported. Measurements of ineffectiveness of hedging relationships are also subject to interpretations and estimations and different interpretations or estimates may have a material effect on the amount reported in net income.
Additionally, there is a risk that embedded derivatives requiring bifurcation have not been identified and reported at fair value in the consolidated financial statements and that their related changes in fair value could materially affect reported net income.
The Company amortizes DAC and VOBA related to participating, dividend-paying traditional contracts over the estimated lives of the contracts in proportion to actual and expected future gross margins. The amortization includes interest based on rates in effect at inception or acquisition of the contracts. The future gross margins are dependent principally on investment returns, policyholder dividend scales, mortality, persistency, expenses to administer the business, creditworthiness of reinsurance counterparties, and certain economic variables, such as inflation. For participating contracts (dividend paying traditional contracts within the closed block) future gross margins are also dependent upon changes in the policyholder dividend obligation. Of these factors, the Company anticipates that investment returns, expenses, persistency, and other factor changes and policyholder dividend scales are reasonably likely to impact significantly the rate of DAC and VOBA amortization. Each reporting period, the Company updates the estimated gross margins with the actual gross margins for that period. When the actual gross margins change from previously estimated gross margins, the cumulative DAC and VOBA amortization is re-estimated and adjusted by a cumulative charge or credit to current operations. When actual gross margins exceed those previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when the actual gross margins are below the previously estimated gross margins. Each reporting period, the Company also updates the actual amount of business in-force, which impacts expected future gross margins.
The Company also reviews periodically other long-term assumptions underlying the projections of estimated gross margins and profits. These include investment returns, policyholder dividend scales, interest crediting rates, mortality, persistency, and expenses to administer business. Management annually updates assumptions used in the
As of December 31, 2006 and 2005, DAC and VOBA for the Individual segment were $14.0 billion and $13.5 billion, respectively, and for the total Company were $20.8 billion and $19.7 billion, respectively.
Impairment testing is performed using the fair value approach, which requires the use of estimates and judgment, at the “reporting unit” level. A reporting unit is the operating segment or a business that is one level below the operating segment, if discrete financial information is prepared and regularly reviewed by management at that level. For purposes of goodwill impairment testing, goodwill within Corporate & Other is allocated to reporting units within the Company’s business segments. If the carrying value of a reporting unit’s goodwill exceeds its fair value, the excess is recognized as an impairment and recorded as a charge against net income. The fair values of the reporting units are determined using a market multiple, a discounted cash flow model, or a cost approach. The critical estimates necessary in determining fair value are projected earnings, comparative market multiples and the discount rate.
Liabilities for future policy benefits for disabled lives are estimated using the present value of benefits method and experience assumptions as to claim terminations, expenses and interest.
The Company may be required to change its provision for income taxes in certain circumstances. Examples of such circumstances include when the ultimate deductibility of certain items is challenged by taxing authorities or when estimates used in determining valuation allowances on deferred tax assets significantly change or when receipt of new information indicates the need for adjustment in valuation allowances. Additionally, future events such as changes in tax legislation could have an impact on the provision for income tax and the effective tax rate. Any such changes could significantly affect the amounts reported in the consolidated financial statements in the year these changes occur.
Certain subsidiaries of the Holding Company (the “Subsidiaries”) sponsor pension and other postretirement plans covering employees who meet specified eligibility requirements. The obligations and expenses associated with these plans require an extensive use of assumptions such as the discount rate, expected rate of return on plan assets, rate of future compensation increases, healthcare cost trend rates, as well as assumptions regarding participant demographics such as rate and age of retirements, withdrawal rates and mortality. Management, in consultation with its independent consulting actuarial firm, determines these assumptions based upon a variety of factors such as historical performance of the plan and its assets, currently available market and industry data and expected benefit payout streams. 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 effect on the Company’s consolidated financial statements and liquidity.
The Company is a party to a number of legal actions and is involved in a number of regulatory investigations. Given the inherent unpredictability of these matters, it is difficult to estimate the impact on the Company’s consolidated financial position. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Liabilities related to certain lawsuits, including the Company’s asbestos-related liability, are especially difficult to estimate due to the limitation of available data and uncertainty regarding numerous variables that can affect liability estimates. The data and variables that impact the assumptions used to estimate the Company’s asbestos-related liability include the number of future claims, the cost to resolve
Income from continuing operations increased by $27 million, or 1%, to $3,105 million for the year ended December 31, 2006 from $3,078 million for the comparable 2005 period. Excluding the acquisition of Travelers, which contributed $317 million during the first six months of 2006 to the year over year increase, income from continuing operations decreased by $290 million. Income from continuing operations for the years ended December 31, 2006 and 2005 included the impact of certain transactions or events, the timing, nature and amount of which are generally unpredictable. These transactions are described in each applicable segment’s discussion. These items contributed a charge of $23 million, net of income tax, to the year ended December 31, 2006. These items contributed a benefit of $48 million, net of income tax, to the year ended December 31, 2005. Excluding the impact of these items and the acquisition of Travelers, income from continuing operations decreased by $219 million for the year ended December 31, 2006 compared to the prior 2005 period.
The Individual segment’s income from continuing operations decreased as a result of an increase in net investment losses, a decline in interest margins, higher expenses and annuity benefits, as well as increases in interest credited to policyholder account balances (“PABs”) and policyholder dividends. These decreases were partially offset by increased fee income related to the growth in separate account products, favorable underwriting results in life products, lower DAC amortization and a decrease in the closed block-related policyholder dividend obligation.
Income from continuing operations in Corporate & Other decreased primarily due to higher investment losses, higher interest expense on debt, corporate support expenses, interest credited to bankholder deposits and legal-related costs, partially offset by an increase in tax benefits, an increase in net investment income, lower integration costs and an increase in other revenues.
contributions, the release of liabilities for pending claims that were determined to be invalid following a review, the favorable impact of foreign currency exchange rates and inflation rates on certain contingent liabilities, the utilization of net operating losses for which a valuation allowance had been previously established, and an increase in the prior year period of a deferred income tax valuation allowance, as well as business growth, increased income from continuing operations in Argentina. Changes in foreign currency exchange rates also contributed to the increase.
Partially offsetting the decreases in income from continuing operations was an increase in the Auto & Home segment primarily due to a loss in the third quarter of 2005 related to Hurricane Katrina, favorable development of prior year loss reserves, improvement in non-catastrophe loss experience and a reduction in loss adjustment expenses. These increases were partially offset by higher catastrophe losses, excluding Hurricanes Katrina and Wilma, in the current year period, and decreases in net earned premiums, other revenues, and net investment income, as well as an increase in other expenses.
Income from continuing operations in the Reinsurance segment increased primarily due to added business in-force from facultative and automatic treaties and renewal premiums on existing blocks of business in the U.S. and international operations, an increase in net investment income due to growth in the invested asset base and an increase in other revenues. These items were partially offset by unfavorable mortality experience, an increase in liabilities associated with Reinsurance Group of America, Incorporated’s (“RGA”) Argentine pension business in the prior period and an increase in other expenses, primarily related to expenses associated with DAC, interest expense, minority interest expense and equity compensation costs.
The growth in the Institutional segment was primarily due to growth in the dental, disability, accidental death & dismemberment (“AD&D”) products, as well as growth in the long-term care (“LTC”) and individual disability insurance (“IDI”) businesses, all within the non-medical health & other business. Additionally, growth in the group life business is attributable to the impact of sales and favorable persistency largely in the term life business. These increases in the non-medical health & other and group life businesses were partially offset by a decrease in the retirement & savings business. The decline in retirement & savings was primarily due to a decline in premiums from structured settlements predominantly due to lower sales, partially offset by an increase in master terminal funding premiums (“MTF”).
The growth in the Individual segment was primarily due to higher fee income from universal life and investment-type products and an increase in premiums from other life products, partially offset by a decrease in immediate annuity premiums and a decline in premiums associated with the Company’s closed block business as this business continues to run-off.
Net investment income increased by $2,375 million, or 16%, to $17,192 million for the year ended December 31, 2006 from $14,817 million for the comparable 2005 period. Excluding the impact of the acquisition of Travelers, which contributed $1,473 million during the first six months of 2006 to the year over year increase, net investment income increased by $902 million of which management attributes $666 million to growth in the average asset base and $236 million to an increase in yields. This increase was primarily due to an overall increase in the asset base, an increase in fixed maturity security yields, improved results on real estate and real estate joint ventures, mortgage loans, and other limited partnership interests, as well as higher short-term interest rates on cash equivalents and short-term investments. These increases were partially offset by a decline in investment income from securities lending results, and bond and commercial mortgage prepayment fees.
Net investment losses increased by $1,257 million to a loss of $1,350 million for the year ended December 31, 2006 from a loss of $93 million for the comparable 2005 period. Excluding the impact of the acquisition of Travelers, which contributed a loss of $272 million during the first six months of 2006 to the year over year increase, net investment losses increased by $985 million. The increase in net investment losses was due to a combination of losses from the mark-to-market on derivatives and foreign currency transaction losses during 2006, largely driven by increases in U.S. interest rates and the weakening of the dollar against the major currencies the Company hedges, notably the euro and pound sterling.
Underwriting results are generally the difference between the portion of premium and fee income intended to cover mortality, morbidity or other insurance costs, less claims incurred, and the change in insurance-related
liabilities. Underwriting results are significantly influenced by mortality, morbidity or other insurance-related experience trends and the reinsurance activity related to certain blocks of business and, as a result, can fluctuate from period to period. Underwriting results were favorable within the life products in the Individual segment, as well as in the Reinsurance segment, and in the group life and non-medical health & other products in the Institutional segment. Retirement & saving’s underwriting results were mixed across several products in the Institutional segment. Underwriting results, excluding catastrophes, in the Auto & Home segment were favorable for the year ended December 31, 2006, as the combined ratio, excluding catastrophes, decreased to 82.8% from 86.7% for the year ended December 31, 2005. Underwriting results in the International segment increased commensurate with the growth in the business for most countries with the exception of Brazil which experienced unfavorable claim experience and Argentina which experienced improved claim experience.
The following table provides the change in other expenses by segment, excluding Travelers, and certain transactions as mentioned above:
The International segment contributed to the year over year increase in other expenses primarily due to business growth commensurate with the increase in revenues discussed above and changes in foreign currency exchange rates. Taiwan’s other expenses increased due to an increase in amortization of DAC, due to a loss recognition adjustment, refinements associated with the implementation of a new valuation system and a restructuring charge. Mexico’s other expenses increased due to an increase in commissions commensurate with the revenue growth, higher DAC amortization, higher expenses related to growth initiatives and additional expenses associated with the Mexican pension business, partially offset by the unfavorable impact of contingent liabilities that were established in the prior year related to potential employment matters and which were eliminated in the current year. South Korea’s other expenses increased due to an increase in DAC amortization and general expenses, partially offset by a decrease in DAC amortization associated with the implementation of a more refined reserve valuation system. In addition, Brazil’s other expenses increased due to an increase in litigation liabilities. Other expenses associated with the home office increased due to an increase in expenditures for information technology projects, growth initiative projects and integration costs, as well as an increase in compensation expense. In addition, expenses were incurred related to the start-up of operations in Ireland.
Corporate & Other contributed to the year over year variance in other expenses primarily due to higher interest expense, corporate support expenses, interest credited to bankholder deposits at MetLife Bank, National Association (“MetLife Bank” or “MetLife Bank, N.A.”) and legal-related costs, partially offset by lower integration costs.
The Reinsurance segment also contributed to the increase in other expenses primarily due to an increase in expenses associated with DAC, interest expense and minority interest, as well as an increase in compensation, including equity compensation expense and overhead-related expenses.
Partially offsetting the increases in other expenses was a decrease in the Individual segment. This decrease is primarily due to lower DAC amortization, partially offset by higher general spending in the current year, despite higher corporate incentives. In addition, the impact of revisions to certain expenses, premium tax, policyholder liabilities and pension and postretirement liabilities, in both periods, increased other expenses in the current year period.
Income tax expense for the year ended December 31, 2006 was $1,116 million, or 26% of income from continuing operations before provision for income tax, compared with $1,228 million, or 29%, of such income, for the comparable 2005 period. Excluding the impact of the acquisition of Travelers, which contributed $126 million during the first six months of 2006, income tax expense was $990 million, or 26%, of income from continuing operations before provision for income tax, compared with $1,228 million, or 29%, of such income, for the comparable 2005 period. The 2006 and 2005 effective tax rates differ from the corporate tax rate of 35% primarily due to the impact of non-taxable investment income and tax credits for investments in low income housing. The 2006 effective tax rate also includes an adjustment of a benefit of $33 million consisting primarily of a revision in the estimate of income tax for 2005, and the 2005 effective tax rate also includes a tax benefit of $27 million related to the repatriation of foreign earnings pursuant to Internal Revenue Code Section 965 for which a U.S. deferred tax provision had previously been recorded and an adjustment of a benefit of $31 million consisting primarily of a revision in the estimate of income tax for 2004.
Income from discontinued operations consisted of net investment income and net investment gains related to real estate properties that the Company had classified as available-for-sale or had sold and, for the years ended December 31, 2006 and 2005, the operations and gain upon disposal from the sale of SSRM on January 31, 2005 and for the year ended December 31, 2005, the operations of MetLife Indonesia which was sold on September 29, 2005. Income from discontinued operations, net of income tax, increased by $1,552 million, or 95%, to $3,188 million for the year ended December 31, 2006 from $1,636 million for the comparable 2005 period. This increase is primarily due to a gain of $3 billion, net of income tax, on the sale of the Peter Cooper Village and Stuyvesant Town properties in Manhattan, New York, as well as a gain of $32 million, net of income tax, related to the sale of SSRM during the year ended December 31, 2006. This increase was partially offset by gains during the year ended December 31, 2005 including $1,193 million, net of income tax, on the sales of the One Madison Avenue and 200 Park Avenue properties in Manhattan, New York, as well as gains on the sales of SSRM and MetLife Indonesia of $177 million and $10 million, respectively, both net of income tax. In addition, there was lower net investment income and net investment gains from discontinued operations related to real estate properties sold or held-for-sale during the year ended December 31, 2006 compared to the year ended December 31, 2005.
Premiums, fees and other revenues increased by $3,694 million, or 14%, to $29,959 million for the year ended December 31, 2005 from $26,265 million for the comparable 2004 period. The current period includes $1,009 million of premium, fees and other revenues related to the acquisition of Travelers. Excluding the acquisition of
Interest margin, which represents the difference between interest earned and interest credited to PABs, increased in the Institutional and Individual segments for the year ended December 31, 2005 as compared to the prior year. Interest earned approximates net investment income on investable assets attributed to the segment with minor adjustments related to the consolidation of certain separate accounts and other minor non-policyholder elements. Interest credited is the amount attributed to insurance products, recorded in policyholder benefits, and the amount credited to PABs for investment-type products, recorded in interest credited to PABs. Interest credited on insurance products reflects the current period impact of the interest rate assumptions established at issuance or acquisition. Interest credited to PABs is subject to contractual terms, including some minimum guarantees. This tends to move gradually over time to reflect market interest rate movements and may reflect actions by management to respond to competitive pressures and, therefore, generally does not introduce volatility in expense.
$836 million, or 11%. The year ended December 31, 2005 includes a $28 million benefit associated with the reduction of a previously established real estate transfer tax liability related to Metropolitan Life’s demutualization in 2000. The year ended December 31, 2004 reflects a $49 million reduction of a premium tax liability and a $22 million reduction of a liability for interest associated with the resolution of all issues relating to the Internal Revenue Service’s audit of Metropolitan Life’s and its subsidiaries’ tax returns for the years 1997-1999. These decreases were partially offset by a $50 million contribution of appreciated stock to the MetLife Foundation. Excluding the impact of these transactions, other expenses increased by $843 million, or 11%, from the comparable 2004 period. Corporate & Other contributed $412 million, or 49%, to the year over year variance primarily due to higher interest expense, integration costs associated with the Travelers acquisition, growth in interest credited to bank holder deposits at MetLife Bank and legal-related liabilities, partially offset by a reduction in corporate support expenses. The Institutional segment contributed $178 million, or 21%, to the year over year variance primarily due to higher non-deferrable volume-related expenses associated with general business growth, corporate support expenses, higher expenses related to additional Travelers incentive accruals, as well as an adjustment recorded on DAC associated with certain LTC products in 2005. In addition, $174 million, or 21%, of this increase is primarily attributable to higher amortization of DAC, changes in foreign currency rates, business growth commensurate with the increase in revenues discussed above, a decrease in the payroll tax liability and an accrual for an early retirement program in the International segment. Other expenses in the International segment also increased due to higher consultant fees for growth initiative projects, an increase in compensation and incentive expenses, as well as higher costs for legal, marketing and other corporate allocated expenses. The Reinsurance segment also contributed $34 million, or 4%, to the increase in other expenses primarily due to an increase in the amortization of DAC. The Auto & Home segment contributed $33 million, or 4%, to this increase primarily due to increased information technology, advertising and incentive and other compensation costs. In addition, the Individual segment contributed $12 million, or 1%, to the year over year increase primarily due to higher corporate incentive expenses and general spending, partially offset by the revision of prior period estimates for certain expense, premium tax and policyholder liabilities, as well as certain asset write-offs in the prior year and lower DAC amortization.
Net investment gains (losses) decreased by $268 million, or 153%, to a loss of $93 million for the year ended December 31, 2005 from a net investment gain of $175 million for the comparable 2004 period. The current year includes $208 million of net investment losses related to the acquisition of Travelers. Excluding the acquisition of Travelers, net investment gains (losses) decreased by $60 million, or 34%. This decrease is primarily due to losses on fixed maturity security sales resulting from continued portfolio repositioning in the 2005 period. Significantly offsetting these reductions is an increase in gains from the mark-to-market on derivatives in 2005. The derivative gains resulted from changes in the value of the dollar versus major foreign currencies, including the euro and pound sterling, and changes in U.S. interest rates during the year ended December 31, 2005.
the 2004 effective tax rate reflects an adjustment for the resolution of all issues relating to the Internal Revenue Service’s audit of Metropolitan Life’s and its subsidiaries’ tax returns for the years 1997-1999 of $91 million and an adjustment of a benefit of $9 million consisting primarily of a revision in the estimate of income tax for 2003.
Income from discontinued operations is comprised of the operations and the gain upon disposal from the sale of MetLife Indonesia on September 29, 2005 and SSRM on January 31, 2005, as well as net investment income and net investment gains related to real estate properties that the Company has classified as available-for-sale or has sold. Income from discontinued operations, net of income tax, increased by $1,370 million to $1,636 million for the year ended December 31, 2005 from $266 million for the comparable 2004 period. This increase is primarily due to a gain of $1,193 million, net of income tax, on the sales of the One Madison Avenue and 200 Park Avenue properties in Manhattan, New York, and the gains on the sales of SSRM and MetLife Indonesia of $177 million and $10 million, respectively, both net of income tax, in the year ended December 31, 2005. Partially offsetting this increase is the gain on the sale of the Sears Tower property of $85 million, net of income tax, in the year ended December 31, 2004.
Retirement & savings’ underwriting results were favorable with mixed underwriting across several products. Underwriting results are generally the difference between the portion of premium and fee income intended to cover mortality, morbidity, or other insurance costs less claims incurred, and the change in insurance-related liabilities. Underwriting results are significantly influenced by mortality, morbidity, or other insurance-related experience trends and the reinsurance activity related to certain blocks of business.
The remaining increase in operating expenses more than offset the remaining increase in premiums, fees and other revenues.
The increase of $458 million in premiums, fees and other revenues was largely due to increases in the non-medical health & other business of $408 million, primarily due to growth in the dental, disability and AD&D products of $255 million. In addition, continued growth in the LTC and IDI businesses contributed $117 million and
$25 million, respectively. Group life increased by $296 million, which management primarily attributes to the impact of sales and favorable persistency largely in term life business, which includes a significant increase in premiums from two large customers. Partially offsetting these increases was a decline in retirement & savings’ premiums, fees and other revenues of $246 million, resulting primarily from a decline of $320 million in structured settlements, predominantly due to the impact of lower sales. This decline was partially offset by a $83 million increase in MTF premiums. Premiums, fees and other revenues from retirement & savings products are significantly influenced by large transactions and, as a result, can fluctuate from period to period.
Management attributes the increase of $621 million in interest credited to PABs to $433 million from an increase in average crediting rates, which was largely due to the impact of higher short-term rates in the current year period and $188 million solely from growth in the average PAB, primarily resulting from GICs within the retirement & savings business.
The increases in policyholder benefits and claims of $366 million included a $27 million increase related to net investment gains (losses). Excluding the increase related to net investment gains (losses), policyholder benefits and claims increased by $339 million. Non-medical health & other’s policyholder benefits and claims increased by $306 million, predominantly due to the aforementioned growth in business, as well as unfavorable morbidity in disability and unfavorable claim experience in AD&D. Partially offsetting these increases was favorable claim and morbidity experience in IDI, as well as the impact of an establishment of a $25 million liability for future losses in the prior year. In addition, favorable claim experience in the current year reduced dental policyholder benefits and claims. Additionally, disability business included a $22 million benefit which resulted from reserve refinements in the current year. The year over year variance in disability also includes the impact of an $18 million loss related to Hurricane Katrina in the prior year. Group life’s policyholder benefits and claims increased by $238 million, largely due to the aforementioned growth in the business, partially offset by favorable underwriting results, particularly in the term life business. Term life included a benefit of $16 million due to reserve refinements in the current year. Partially offsetting the increase was a retirement & savings’ policyholder benefits and claims decrease of $205 million, predominantly due to the aforementioned decrease in revenues, partially offset by higher FAS 60 interest credits recorded in policyholder benefits and claims due to growth in structured settlements and MTF.
Income from continuing operations increased by $89 million, or 7%, to $1,388 million for the year ended December 31, 2005 from $1,299 million for the comparable 2004 period. The acquisition of Travelers accounted for
An increase in interest margins of $124 million, net of income tax, compared to the prior year period contributed to the increase in income from continuing operations. Management attributed this increase primarily to the retirement & savings and the non-medical health & other businesses of $81 million and $44 million, both net of income tax, respectively. Interest margin is the difference between interest earned and interest credited to PABs. Interest earned approximates net investment income on investable assets attributed to the segment with minor adjustments related to the consolidation of certain separate accounts and other minor non-policyholder elements. Interest credited is the amount attributed to insurance products, recorded in policyholder benefits, and the amount credited to PABs for investment-type products recorded in interest credited to PABs. Interest credited on insurance products reflects the current period impact of the interest rate assumptions established at issuance or acquisition. Interest credited to PABs is subject to contractual terms, including some minimum guarantees. This tends to move gradually over time to reflect market interest rate movements and may reflect actions by management to respond to competitive pressures and therefore, generally does not introduce volatility in expense.
The increase in interest margins was partially offset by a decrease of $57 million, net of income tax, in net investment gains (losses), which was partially offset by a decrease of $10 million, net of income tax, in policyholder benefits and claims related to net investment gains (losses).
Underwriting results decreased by $7 million, net of income tax, compared to the prior year. This decline was primarily due to less favorable results of $27 million, net of income tax, in retirement & savings and a $24 million, net of income tax, decrease in non-medical health & other. These unfavorable results were partially offset by an improvement of $44 million, net of income tax, in group life’s underwriting results, primarily due to favorable claim experience. Underwriting results are generally the difference between the portion of premium and fee income intended to cover mortality, morbidity or other insurance costs less claims incurred and the change in insurance-related liabilities. Underwriting results are significantly influenced by mortality, morbidity, or other insurance-related experience trends and the reinsurance activity related to certain blocks of business and, as a result, can fluctuate from period to period.
In addition, increases in operating expenses, which included higher expenses related to the Travelers integration, had more than offset the remaining growth in premiums, fees and other revenues.
Total revenues, excluding net investment gains (losses), increased by $2,787 million, or 17%, to $18,755 million for the year ended December 31, 2005 from $15,968 million for the comparable 2004 period. The acquisition of Travelers accounted for $855 million of this increase. Excluding the impact of the Travelers acquisition, total revenues, excluding net investment gains (losses), increased by $1,932 million, or 12%, from the comparable 2004 period.
This increase was comprised of growth in premiums, fees and other revenues of $1,266 million and higher net investment income of $666 million. The increase of $1,266 million in premiums, fees, and other revenues was largely due to an increase in non-medical health & other of $520 million, primarily due to growth in the disability, dental and AD&D products of $360 million. In addition, continued growth in the LTC business contributed $138 million, of which $25 million was related to the 2004 acquisition of TIAA-CREF’s LTC business. Group life insurance premiums, fees and other revenues increased by $481 million, which management primarily attributed to improved sales and favorable persistency, as well as a significant increase in premiums from two large customers. Retirement & savings’ premiums, fees and other revenues increased by $265 million, which was largely due to growth in premiums, resulting primarily from an increase of $166 million in structured settlement sales and
The increase in net investment income of $666 million, management attributed to $439 million solely from growth in the average asset base, primarily driven by sales, particularly in GICs and the structured settlement business and $227 million from an increase in higher income from corporate and real estate joint ventures interest on the growth of allocated capital, and securities lending activities across the businesses and higher short-term interest rates.
Management attributed the increase in interest credited to PABs of $334 million to $229 million from an increase in average crediting rates, which was largely due to the impact of higher short-term rates in the current year period and $105 million solely from growth in the average PAB, primarily resulting from GICs within the retirement & savings business.
Income from continuing operations increased by $44 million, or 4%, to $1,246 million for the year ended December 31, 2006 from $1,202 million for the comparable 2005 period. The acquisition of Travelers contributed $112 million during the first six months of 2006 to income from continuing operations, which included $88 million, net of income tax, of net investment losses. Included in the Travelers results was a $21 million increase to the excess mortality liability on specific blocks of life insurance policies. Excluding the impact of Travelers, income from continuing operations decreased by $68 million, or 6%, to $1,134 million for the year ended December 31, 2006 from $1,202 million for the comparable 2005 period. Included in this decrease were net investment losses of $270 million, net of income tax. Excluding the impact of net investment gains (losses) and the acquisition of Travelers for the first six months of 2006, income from continuing operations increased by $202 million from the comparable 2005 period.
Favorable underwriting results in life products contributed $125 million, net of income tax, to the increase in income from continuing operations. Underwriting results are generally the difference between the portion of premium and fee income intended to cover mortality, morbidity or other insurance costs less claims incurred and the change in insurance-related liabilities. Underwriting results are significantly influenced by mortality, morbidity, or
Lower DAC amortization resulting from investment losses and adjustments for management’s update of assumptions used to determine estimated gross margins contributed $113 million, net of income tax, to the increase in income from continuing operations.
These aforementioned increases in income from continuing operations were partially offset by a decline in interest margins of $58 million, net of income tax. Interest margin relates primarily to the general account portion of investment-type products. Management attributed $40 million of this decrease to the deferred annuity business and the remaining $18 million to other investment-type products. Interest margin is the difference between interest earned and interest credited to PABs related to the general account on these businesses. Interest earned approximates net investment income on invested assets attributed to these businesses with net adjustments for other non-policyholder elements. Interest credited approximates the amount recorded in interest credited to PABs. Interest credited to PABs is subject to contractual terms, including some minimum guarantees, and may reflect actions by management to respond to competitive pressures. Interest credited to PABs tends to move gradually over time to reflect market interest rate movements, subject to any minimum guarantees, and therefore, generally does not introduce volatility in expense.
Also partially offsetting the increase in income from continuing operations were higher annuity benefits of $30 million, net of income tax, primarily due to higher costs of the guaranteed annuity benefit riders and the related hedging, and revisions to future policyholder benefits.
In addition, the increase in income from continuing operations was partially offset by an increase to interest credited to PABs due primarily to lower amortization of the excess interest reserves on annuity and universal life blocks of business of $26 million, net of income tax.
An increase in policyholder dividends of $18 million, net of income tax, due to growth in the business also partially offset the increase in income from continuing operations.
Partially offsetting these decreases in total expenses was a $27 million increase in policyholder dividends associated with growth in the business.
Lower other expenses of $94 million include lower DAC amortization of $174 million resulting from changes in investment gains and losses of $154 million and $20 million related to management’s update of assumptions used to determine estimated gross margins. Excluding DAC amortization, other expenses increased by $80 million. The current year period included higher general spending of $94 million primarily due to information technology and travel expenses while the prior year period had higher corporate incentives of $39 million related to the Travelers integration. In addition, the impact of revisions to certain expenses, premium tax, policyholder liabilities and pension and postretirement liabilities in both periods was a net increase to expenses of $25 million in the current period.
Income from continuing operations increased by $342 million, or 40%, to $1,202 million for the year ended December 31, 2005 from $860 million for the comparable 2004 period. The acquisition of Travelers accounted for $96 million of the increase which included $66 million, net of income tax, of net investment losses. Included in the Travelers results was a charge for the establishment of an excess mortality reserve related to group of specific policies. In connection with MetLife’s acquisition of Travelers, the Company had performed reviews of Travelers underwriting criteria in an effort to refine its estimated fair values for the purchase allocation. As a result of these reviews and actuarial analyses, and to be consistent with MetLife’s existing reserving methodologies, the Company
An increase in interest margins of $117 million, net of income tax, compared to the prior year period contributed to the increase in income from continuing operations. Interest margin relates primarily to the general account portion of investment-type products. Management attributed $92 million of this increase to the deferred annuity business and the remainder of $25 million to the other investment-type products. Interest margin is the difference between interest earned and interest credited to PABs related to the general account on these businesses. Interest earned approximates net investment income on invested assets attributed to these businesses with net adjustments for other non-policyholder elements. Interest credited approximates the amount recorded in interest credited to PABs. Interest credited to PABs is subject to contractual terms, including some minimum guarantees, and may reflect actions by management to respond to competitive pressures. Interest credited to PABs tends to move gradually over time to reflect market interest rate movements, subject to any minimum guarantees, and therefore, generally does not introduce volatility in expense.
Favorable underwriting results in life products contributed $37 million, net of income tax, to the increase in income from continuing operations. Underwriting results are generally the difference between the portion of premium and fee income intended to cover mortality, morbidity or other insurance costs less claims incurred and the change in insurance-related liabilities. Underwriting results are significantly influenced by mortality, morbidity, or other insurance-related experience trends and the reinsurance activity related to certain blocks of business and, as a result, can fluctuate from period to period.
The decrease in the closed block-related policyholder dividend obligation of $27 million, net of income tax, lower annuity net guaranteed benefit costs of $12 million, net of income tax, and lower DAC amortization of $6 million, net of income tax, all contributed to the increase.
The increase in income from continuing operations was partially offset by higher expenses of $10 million, net of income tax, primarily due to higher operating costs offset by the impact of revisions to certain expense, premium tax and policyholder liability estimates in the current year and certain asset write-offs in the prior year.
Total revenues, excluding net investment gains (losses), increased by $1,532 million, or 12%, to $13,972 million for the year ended December 31, 2005 from $12,440 million for the comparable 2004 period. The acquisition of Travelers accounted for $975 million of the increase. Excluding the impact of the acquisition of Travelers, total revenues, excluding net investment gains (losses) increased by $557 million, or 4%, to $12,997 million for the year ended December 31, 2005 from $12,440 million for the comparable 2004 period.
This increase included higher fee income primarily from variable annuity and universal life products of $239 million resulting from a combination of growth in the business and improved overall market performance. Policy fees from variable life and annuity and investment-type products are typically calculated as a percentage of the average assets in policyholder accounts. The value of these assets can fluctuate depending on equity performance.
Net investment income increased by $111 million. Net investment income from the general account portion of investment-type products increased by $136 million, which was partially offset by a decrease of $25 million on other businesses. Management attributed $75 million of this increase to corporate and real estate joint venture income and bond and commercial mortgage prepayment fees partially offset by a decline in bond yields, as well as $61 million due to growth in the average asset base.
Higher expenses were primarily the result of higher policyholder benefits primarily due to the increase in future policy benefits of $207 million, commensurate with the net increase in premium on annuity and life products discussed above, partially offset by $5 million due to better mortality in life products.
Interest credited to PABs decreased by $45 million due primarily to a $41 million decrease on the general account portion of investment-type products. Management attributed this decrease to lower crediting rates of $91 million partially offset by $50 million solely due to growth in the average PABs. In addition, total expenses increased by $13 million due to a revision in the estimate of policyholder dividends in the prior period.
Other expenses increased primarily due to higher corporate incentive expenses of $60 million and higher general spending of $28 million. The current year included revisions to prior period estimates for certain expense, premium tax and policyholder liabilities which reduced the current year expenses while the prior period included certain asset write-offs which increased the prior year expenses. The impact of these two items resulted in a decrease in other expenses of $73 million. Also offsetting the increase in other expenses was lower DAC amortization of $9 million resulting from net investment losses and adjustments for management’s update of assumptions used to determine estimated gross margins partially offset by growth in the business.
Favorable development of prior year loss reserves contributed $72 million, net of income tax, to the increase in net income. In addition, an improvement in non-catastrophe loss experience, primarily due to improved frequencies, contributed $16 million, net of income tax and a reduction in loss adjustment expenses, primarily due to improved claims handling practices, contributed $13 million, net of income tax, to the increase. The increase in net income was offset by higher catastrophe losses in the current year, excluding the impact of Katrina and Wilma, resulting in a decrease to net income of $49 million, net of income tax.
The change in effective tax rates between periods accounted for the remainder of the increase in net income.
Year ended December 31, 2005 compared with the year ended December 31, 2004 - Auto & Home
The increase was primarily the result of improvements in the development of prior years claims of $40 million, net of income tax, and an improvement in the non-catastrophe combined ratio resulting in $16 million, net of income tax, primarily due to lower automobile and homeowner claim frequencies.
Also contributing to this increase in net income was an improvement in losses from the involuntary Massachusetts automobile plan of $12 million, net of income tax, an increase in net investment income of $6 million, net of income tax, and an increase in earned premium of $4 million, net of income tax, as discussed below.
Offsetting these improved results, was an increase in catastrophes, including Hurricanes Katrina and Wilma of $63 million, net of income tax.
This decrease was partially offset by higher net investment income of $10 million, primarily due to a change in the allocation of economic capital, offset by a lower yield on a slightly higher invested asset base and an increase in earned premium of $6 million primarily due to rate increases, higher inflation guard endorsements and higher insurance-to-value programs, all in the homeowners business.
Total expenses decreased by $51 million, or 2%, to $2,825 million for the year ended December 31, 2005 from $2,876 million for the comparable 2004 period.
in the prior year. Mexico’s income from continuing operations decreased by $12 million, net of income tax, due to an increase in amortization of DAC resulting from management’s update of assumptions used to determine estimated gross margins in both years, higher operating expenses from the pension business, the net impact of an adjustment to the liability for experience refunds on a block of business, a decrease in various one-time other revenue items for which the prior year benefited by $13 million, net of income tax, and the current year benefited by $11 million, net of income tax, as well as an increase of $27 million in tax due to tax benefits realized in the prior year from the American Jobs Creation Act of 2004 (“AJCA”). These were partially offset by a decrease in certain policyholder liabilities caused by a decrease in unrealized investment gains on invested assets supporting those liabilities relative to the prior year, a decrease in policyholder benefits associated with a large group policy that was not renewed by the policyholder, a benefit in the current year from the elimination of liabilities for pending claims that were determined to be invalid following a review, the unfavorable impact in the prior year of contingent liabilities that were established related to potential employment matters in that year and which were eliminated in the current year as well as overall business growth. Income from continuing operations decreased in Brazil by $7 million, net of income tax, primarily due to a $10 million, net of income tax, increase in policyholder benefits and claims related to an increase in future policyholder benefit liabilities on specific blocks of business. This increase is due to significantly higher than expected mortality experience, of which a total of $20 million of additional liabilities were recorded, $10 million of which was associated with the acquired Travelers’ business, and $10 million of which was related to the existing MetLife entities. Brazil’s income from continuing operations was also impacted by an increase in litigation liabilities, as well as adverse claim experience in the current year. The results of the Company’s investment in Japan decreased by $4 million due to variability in the hedging program. The home office recorded higher infrastructure expenditures in support of segment growth of $39 million, net of income tax, as well as a $23 million contingent tax liability. In addition, expenses related to the Company’s start-up operation in Ireland reduced net income by $34 million in the current year. A valuation allowance was established against the deferred tax benefit resulting from the Ireland losses.
revenues increased by $159 million, primarily due to higher fees and growth in its universal life and institutional business, partially offset by an adjustment for experience refunds on a block of business and various one-time other revenue items for which the prior year benefited by $19 million and the current year benefited by $16 million. South Korea’s premiums, fees and other revenues increased by $156 million primarily due to business growth driven by strong sales of its variable universal life product, as well as the favorable impact of foreign currency exchange rates of $56 million. Premiums, fees and other revenues increased in Brazil by $49 million due to business growth and higher bancassurance business, as well as an increase in amounts retained under reinsurance arrangements. Chile’s premiums, fees and other revenues increased by $22 million primarily due to the favorable impact of foreign currency exchange rates of $14 million, as well as an increase in institutional premiums through its bank distribution channel, partially offset by lower annuity sales due in part from management’s decision not to match aggressive pricing in the marketplace. Premiums, fees and other revenues increased in the United Kingdom, Argentina, Australia, and Taiwan by $21 million, $16 million, $15 million, and $12 million respectively, primarily due to business growth. Increases in other countries accounted for the remainder of the change.
South Korea’s income from continuing operations increased by $26 million, net of income tax, primarily due to growth in business, specifically higher sales of its variable universal life product and a larger in-force business. Chile’s income from continuing operations increased by $8 million primarily due to growth in business, specifically in the new bank distribution channel, as well as an increase in net investment income primarily due to higher
inflation rates. Mexico’s income from continuing operations increased by $8 million, primarily due to tax benefits of $27 million under the AJCA, higher net investment earnings, an adjustment to the amortization of DAC for management’s update of assumptions used to determine estimated gross margins and several other one-time revenue items. These increases in Mexico were substantially offset by an increase in certain policyholder liabilities caused by unrealized investment losses on the invested assets supporting those liabilities, as well as an increase in expenses for start up costs for the new Mexican Pension Business (“AFORE”) and contingency liabilities.
Other expenses increased by $174 million, or 28%, to $788 million for the year ended December 31, 2005 from $614 million for the comparable 2004 period. South Korea’s other expenses increased by $73 million primarily due to higher amortization of DAC driven by the rapid growth in the business, a decrease in a payroll tax liability in the prior year resulting from the resolution of the related tax matter, an accrual for an early retirement program in 2005, as well as additional overhead expenses in line with the growth in business. Mexico’s other expenses increased by $17 million primarily due to incurred start up costs during the current year associated with the AFORE operations, an increase in liabilities related to potential employment matters in 2005, an increase in consulting services and a decrease in the prior year of severance accruals. Partially offsetting these increases in Mexico is a decrease in the amortization of DAC due to an adjustment for management’s update of assumptions used to determine estimated gross margins. Brazil’s other expenses increased by $28 million, primarily due to growth in business discussed above including an increase in non-deferrable sales expenses. Chile’s other expenses increased by $24 million due primarily to increases in non-deferrable expenses for the bank distribution channel of business in 2005. Other expenses at home office also increased by $26 million primarily due to increased consultant fees for growth initiative projects, an increase in compensation resulting from increased headcount, higher incentive compensation, as well as higher costs for legal, marketing and other corporate support expenses. The remainder of the increase in total expenses can be attributed to business growth in other countries.
Additionally, a component of the growth in total expenses is due to changes in foreign currency exchange rates of $202 million.
The increase in net income was attributable to a 12% increase in premiums while policyholder benefits and claims increased by 9%, a 21% increase in net investment income while interest credited to PABs increased by 15%, and a 14% increase in other revenues. The increase in premiums, net of the increase in policyholder benefits and claims, added $127 million to net income which was primarily due to added business in-force from facultative and automatic treaties and renewal premiums on existing blocks of business in the U.S. and international operations. The increase in policyholder benefits and claims was partially offset by unfavorable mortality and an increase in the liabilities associated with RGA’s Argentine pension business, both in the prior-year period. The increase in net investment income and interest credited to PABs added $60 million to net income and was due to growth in the invested asset base. The increase in invested assets, and net investment income, substantially derived from the issuance of notes and a collateral financing facility, which increased interest expense within other expenses as described below. The increase in other revenues added $5 million to net income and was primarily related to an increase in investment product fees on asset-intensive business and financial reinsurance fees during 2006, partially offset by a decrease in foreign currency transaction gains in the prior-year period.
The increase in such revenues was primarily associated with growth in premiums of $479 million from new facultative and automatic treaties and renewal premiums on existing blocks of business in all RGA operating segments, including the U.S., which contributed $220 million; Asia Pacific, which contributed $138 million; Canada, which contributed $86 million; and Europe and South Africa, which contributed $35 million. Premium levels were significantly influenced by large transactions and reporting practices of ceding companies and, as a result, can fluctuate from period to period.
Net investment income increased by $126 million, primarily due to growth in the invested asset base from net proceeds of RGA’s $850 million 30-year notes offering in June 2006 and $400 million junior subordinated note offering in December 2005, positive operating cash inflows and additional deposits associated with the coinsurance of annuity products. Investment yields were up slightly compared to the prior-year period. The increase in net investment income was partially offset by a decrease related to a realignment of economic capital.
Additionally, a component of the increase in total revenues, excluding net investment gains (losses), was a $36 million increase associated with foreign currency exchange rate movements.
Total expenses increased by $554 million, or 13%, to $4,971 million for the year ended December 31, 2006 from $4,417 million for the comparable 2005 period.
The increase in total expenses was commensurate with the growth in revenues and was primarily attributable to an increase of $284 million in policyholder benefits and claims, primarily associated with growth in insurance in-force of $245 billion, and a $34 million increase in interest credited due to growth in PABs associated with the coinsurance of annuity products, which is generally offset by a corresponding increase in net investment income. The increase in policyholder benefits and claims of $284 million was partially offset by favorable underwriting results in RGA’s international operations in the current year period, unfavorable mortality experience in the U.S. and the United Kingdom in the prior-year period, and a $33 million increase in the liabilities associated with the Argentine pension business in the prior year period.
Total expenses increased by $553 million, or 14%, to $4,417 million for the year ended December 31, 2005 from $3,864 million for the comparable 2004 period.
This increase was commensurate with growth in revenues and was primarily attributable to an increase of $520 million in policyholder benefits and claims and interest credited to PABs, primarily associated with RGA’s growth in insurance in force of $270 billion, the aforementioned unfavorable mortality experience in the U.S. and the United Kingdom during the first six months of the 2005 period, and strengthening of reserves of $33 million for the Argentine pension business. The comparable 2004 period included a negotiated claim settlement in RGA’s accident and health business of $24 million and $18 million in policy benefits and claims as a result of the Indian Ocean tsunami on December 26, 2004 and claims development associated with the reinsurance of the Argentine pension business, respectively.
Income (loss) from continuing operations increased by $14 million, or 93%, to ($1) million for the year ended December 31, 2006 from ($15) million for the comparable 2005 period. The acquisition of Travelers, excluding Travelers financing and integration costs incurred by the Company, contributed $111 million during the first six months of 2006 to income (loss) from continuing operations, which included $3 million, net of income tax, of net investment losses. Excluding the impact of Travelers, income (loss) from continuing operations decreased by $97 million for the year ended December 31, 2006 from the comparable 2005 period. Included in this decrease were higher investment losses of $66 million, net of income tax. Excluding the impact of Travelers and the increase of net investment losses, income (loss) from continuing operations decreased by $31 million.
The 2006 period includes an expense related to a $23 million, net of income tax, contribution to the MetLife Foundation. The 2005 period included a $30 million benefit associated with the reduction of a previously established liability for settlement death benefits related to the Company’s sales practices class action settlement recorded in 1999, and an $18 million benefit, associated with the reduction of a previously established real estate transfer tax liability related to Metropolitan Life’s demutualization in 2000, both net of income tax. Excluding the impact of these items, income from continuing operations increased by $40 million for the year ended December 31, 2006 from the comparable 2005 period. The increase in income (loss) from continuing operations was primarily attributable to higher net investment income, lower integration costs and higher other revenues of $102 million,
continuing operations decreased by $21 million for the year ended December 31, 2005 from the comparable 2004 period. Included in this decrease were lower investment losses of $69 million, net of income tax. Excluding the impact of Travelers and the decrease of net investment losses, income (loss) from continuing operations decreased by $90 million.
Total revenues, excluding net investment gains (losses), increased by $376 million, or 97%, to $762 million for the year ended December 31, 2005 from $386 million for the comparable 2004 period. The acquisition of Travelers contributed $152 million to the period over period increase. Excluding the impact of Travelers, the increase of $224 million was primarily attributable to increases in income on fixed maturity securities due to improved yields from lengthening of the duration and a higher asset base, as well as increased income from other limited partnerships and mortgage loans on real estate. Also included as a component of total revenues were the intersegment eliminations which were offset within total expenses.
Total expenses increased by $330 million, or 54%, to $940 million for the year ended December 31, 2005 from $610 million for the comparable 2004 period. The acquisition of Travelers, excluding Travelers financing and integration costs, contributed $15 million to the period over period increase. Excluding the impact of Travelers, total expenses increased by $315 million for the year ended December 31, 2005 from the comparable 2004 period.
The 2005 period includes a $47 million benefit associated with a reduction of a previously established liability for settlement death benefits related to the Company’s sales practices class action settlement recorded in 1999, a $28 million benefit associated with the reduction of a previously established real estate transfer tax liability related to Metropolitan Life’s demutualization in 2000. The 2004 period includes a $50 million contribution to the MetLife Foundation, partially offset by a $22 million reduction of a liability associated with the resolution of all issues relating to the Internal Revenue Service’s audit of Metropolitan Life and its subsidiaries’ tax returns for the years 1997-1999. Excluding the impact of these items, total expenses increased by $418 million for the year ended December 31, 2005 from the comparable 2004 period. This increase was attributable to higher interest expense of $187 million as a result of the issuance of senior notes in 2004 and 2005, which included $129 million of expenses from the financing of the acquisition of Travelers. Integration costs associated with the acquisition of Travelers were $120 million. As a result of growth in the business, interest credited to bank holder deposits increased by $70 million at MetLife Bank. In addition, legal-related liabilities increased by $5 million. These increases were offset by a reduction in corporate support expenses of $16 million. Also included as a component of total expenses was the elimination of intersegment amounts which was offset within total revenues.
of its products, including general account institutional pension products (generally group annuities, including GICs, and certain deposit funds liabilities) sold to employee benefit plan sponsors. Certain of these provisions prevent the customer from making withdrawals prior to the maturity date of the product.
In the event of significant unanticipated cash requirements beyond normal liquidity, the Company has multiple alternatives available based on market conditions and the amount and timing of the liquidity need. These options include cash flows from operations, the sale of liquid assets, global funding sources and various credit facilities.
Liquid Assets. An integral part of the Company’s liquidity management is the amount of liquid assets it holds. Liquid assets include cash, cash equivalents, short-term investments, and marketable fixed maturity and equity securities. Liquid assets exclude assets relating to securities lending and dollar roll activities. At December 31, 2006 and 2005, the Company had $186.5 billion and $179.0 billion in liquid assets, respectively.
MetLife Bank has entered into several funding agreements with the Federal Home Loan Bank of New York (the “FHLB of NY”) whereby MetLife Bank has issued repurchase agreements in exchange for cash and for which the FHLB of NY has been granted a blanket lien on MetLife Bank’s residential mortgages and mortgage-backed securities to collateralize MetLife Bank’s obligations under the repurchase agreements. The repurchase agreements and the related security agreement represented by this blanket lien provide that upon any event of default by MetLife Bank, the FHLB of NY’s recovery is limited to the amount of MetLife Bank’s liability under the outstanding repurchase agreements. The amount of the Company’s liability for repurchase agreements with the FHLB of NY was $998 million and $855 million at December 31, 2006 and 2005, respectively, which is included in long-term debt.
Credit Facilities. The Company maintains committed and unsecured credit facilities aggregating $3.9 billion as of December 31, 2006. When drawn upon, these facilities bear interest at varying rates in accordance with the respective agreements. The facilities can be used for general corporate purposes and at December 31, 2006,
Metropolitan Life repaid a $250 million 7% surplus note which matured on November 1, 2005.
which may vary significantly from the liability or contractual obligation presented above especially as it relates to incurred but not reported liabilities. All estimated cash payments presented in the table above are undiscounted as to interest, net of estimated future premiums on policies currently in-force and gross of any reinsurance recoverable. The more than five years category displays estimated payments due for periods extending for more than 100 years from the present date.
The sum of the estimated cash flows shown for all years in the table of $176.1 billion exceeds the liability amount of $133.5 billion included on the consolidated balance sheet principally due to the time value of money, which accounts for at least 80% of the difference, as well as differences in assumptions between the date the liabilities were initially established and the current date.
The nature of the policyholder dividend obligation is described in Note 9 to the Consolidated Financial Statements. Because the exact timing and amount of the ultimate policyholder dividend obligation is subject to significant uncertainty and the amount of the policyholder dividend obligation is based upon a long-term projection of the performance of the closed block, management has reflected the obligation at the amount of the liability presented in the consolidated balance sheet in the more than five years category. This was done to reflect the long-duration of the liability and the uncertainty of the ultimate cash payment.
Amounts presented in the table above for short-term debt, long-term debt, junior subordinated debt securities and shares subject to mandatory redemption differ from the balances presented on the consolidated balance sheet as the amounts presented in the table above do not include premiums or discounts upon issuance or purchase accounting fair value adjustments. The amounts presented above also include interest on such obligations as described below.
Short-term debt consists principally of 90-day commercial paper, with a remaining maturity of approximately 17 days, and carries a variable rate of interest. The contractual obligation for short-term debt presented in the table above represents the amounts due upon maturity of the commercial paper plus the related variable interest which is calculated using the prevailing rates at December 31, 2006 through the date of maturity without consideration of any further issuances of commercial paper upon maturity of the amounts outstanding at December 31, 2006.
Long-term debt bears interest at fixed and variable interest rates through their respective maturity dates. Interest on fixed rate debt was computed using the stated rate on the obligations through maturity. Interest on variable rate debt is computed using prevailing rates at December 31, 2006 and, as such, does not consider the impact of future rate movements.
Shares subject to mandatory redemption bears interest at fixed interest rates through their respective mandatory redemptions dates. Interest on shares subject to mandatory redemption was computed using the stated fixed rate on the obligation through maturity.
The Company has accepted cash collateral in connection with securities lending and derivative transactions. As the securities lending transaction expire within the next year or the timing of the return of the collateral is
uncertain, the return of the collateral has been included in the less than one year category in the table above. The Company also holds non-cash collateral, which is not reflected as a liability in the consolidated balance sheet, of $453 million as of December 31, 2006.
As a lessee, the Company has various operating leases, primarily for office space. Contractual provisions exist that could increase or accelerate those leases obligations presented, including various leases with early buyouts and/or escalation clauses. However, the impact of any such transactions would not be material to the Company’s financial positions or results of operations. See “- Off-Balance Sheet Arrangements.”
Other includes those other liability balances which represent contractual obligations as well as other miscellaneous contractual obligations of $67 million not included elsewhere in the table above.
Additionally, the Company has agreements in place for services it conducts, generally at cost, between subsidiaries relating to insurance, reinsurance, loans, and capitalization. All material intercompany transactions
Support Agreements. Metropolitan Life entered into a net worth maintenance agreement with New England Life Insurance Company (“NELICO”) at the time Metropolitan Life merged with New England Mutual Life Insurance Company. Under the agreement, Metropolitan Life agreed, without limitation as to the amount, to cause NELICO to have a minimum capital and surplus of $10 million, total adjusted capital at a level not less than the company action level RBC (or not less than 125% of the company action level RBC, if NELICO has a negative trend), as defined by state insurance statutes, and liquidity necessary to enable it to meet its current obligations on a timely basis. As of the date of the most recent statutory financial statements filed with insurance regulators, the capital and surplus of NELICO was in excess of the minimum capital and surplus amount referenced above, and its total adjusted capital was in excess of the most recent referenced RBC-based amount calculated at December 31, 2006.
In connection with the acquisition of Travelers, MetLife International Holdings, Inc. (“MIH”), a subsidiary of the Holding Company, committed to the Australian Prudential Regulatory Authority that it will provide or procure the provision of additional capital to MetLife General Insurance Limited (“MGIL”), an Australian subsidiary of MIH, to the extent necessary to enable MGIL to meet insurance capital adequacy and solvency requirements. In addition, MetLife International Insurance, Ltd. (“MIIL”), a Bermuda insurance company, was acquired as part of the Travelers transaction. In connection with the assumption of a block of business by MIIL from a company in liquidation in 1995, Citicorp Life Insurance Company (“CLIC”), an affiliate of MIIL and a subsidiary of the Holding Company, agreed with MIIL and the liquidator to make capital contributions to MIIL to ensure that, for so long as any policies in such block remain outstanding, MIIL remains solvent and able to honor the liabilities under such policies. As a result of the merger of CLIC into Metropolitan Life that occurred in October 2006, this became an obligation of Metropolitan Life. In connection with the acquisition of Travelers, the Holding Company also committed to the South Carolina Department of Insurance to take necessary action to maintain the minimum capital and surplus of MetLife Reinsurance Company of South Carolina (“MRSC”), formerly The Travelers Life and Annuity Reinsurance Company, at the greater of $250,000 or 10% of net loss reserves (loss reserves less DAC).
It is not feasible to predict or determine the ultimate outcome of all pending investigations and legal proceedings or provide reasonable ranges of potential losses except as noted elsewhere herein in connection with specific matters. In some of the matters referred to herein, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Although in light of these considerations, it is possible that an adverse outcome in certain cases could have a material adverse effect upon the Company’s consolidated financial position, based on information currently known by the Company’s management, in its opinion, the outcome of such pending investigations and legal proceedings are not likely to have such an effect. However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company’s consolidated net income or cash flows in particular quarterly or annual periods.
Net cash provided by operating activities was $8.0 billion and $6.5 billion for the years ended December 31, 2005 and 2004, respectively. The $1.5 billion increase in operating cash flows in 2005 over the comparable 2004 period was primarily attributable to the acquisition of Travelers, growth in disability, dental, LTC business, group life and retirement & savings, as well as continued growth in the annuity business.
Net cash used in investing activities was $22.6 billion and $14.4 billion for the years ended December 31, 2005 and 2004, respectively. The $8.2 billion increase in net cash used in investing activities in 2005 over the comparable 2004 period was primarily due to the acquisition of Travelers and CitiStreet Associates, the increase in net purchases of fixed maturity securities and an increase in the origination of mortgage and consumer loans, primarily in commercial loans, as compared to the 2004 period. This was partially offset by an increase in repayments of mortgage and consumer loans, an increase in sales of equity real estate and a decrease in the cash used for short-term investments. In addition, the 2005 period includes proceeds associated with the sale of SSRM and MetLife Indonesia.
Restrictions and Limitations on Bank Holding Companies and Financial Holding Companies - Capital. The Holding Company and its insured depository institution subsidiary, MetLife Bank, are subject to risk-based and leverage capital guidelines issued by the federal banking regulatory agencies for banks and financial holding companies. The federal banking regulatory agencies are required by law to take specific prompt corrective actions with respect to institutions that do not meet minimum capital standards. As of their most recently filed reports with the federal banking regulatory agencies, MetLife, Inc. and MetLife Bank met the minimum capital standards as per federal banking regulatory agencies with all of MetLife Bank’s risk-based and leverage capital ratios meeting the federal banking regulatory agencies’ “well capitalized” standards and all of MetLife, Inc.’s risk-based and leverage capital ratios meeting the “adequately capitalized” standards.
MetLife Mexico S.A. paid $116 million in dividends to the Holding Company for the year ended December 31, 2006. For the year ended December 31, 2006, there were returns of capital of $154 million to the Holding Company from other subsidiaries.
Global Funding Sources. Liquidity is also provided by a variety of both short-term and long-term instruments, commercial paper, medium- and long-term debt, capital securities and stockholders’ equity. The diversity of the Holding Company’s funding sources enhances funding flexibility and limits dependence on any one source of funds and generally lowers the cost of funds. Other sources of the Holding Company’s liquidity include programs for short-and long-term borrowing, as needed.
of unaffiliated long-term debt outstanding, respectively. At December 31, 2006 and 2005, the Holding Company had $500 million and $286 million of affiliated long-term debt outstanding, respectively.
On April 27, 2005, the Holding Company filed a shelf registration statement (the “2005 Registration Statement”) with the SEC, covering $11 billion of securities. On May 27, 2005, the 2005 Registration Statement became effective, permitting the offer and sale, from time to time, of a wide range of debt and equity securities. In addition to the $11 billion of securities registered on the 2005 Registration Statement, $3.9 billion of registered but unissued securities remained available for issuance by the Holding Company as of such date, from the $5.0 billion shelf registration statement filed with the SEC during the first quarter of 2004, permitting the Holding Company to issue an aggregate of $14.9 billion of registered securities. The terms of any offering will be established at the time of the offering.
During December 2006, the Holding Company issued $1.25 billion of junior subordinated debentures under the 2005 Registration Statement. During June 2005, in connection with the Holding Company’s acquisition of Travelers, the Holding Company issued $2.0 billion senior notes, $2.07 billion of common equity units and $2.1 billion of preferred stock under the 2005 Registration Statement. In addition, $0.7 billion of senior notes were sold outside the United States in reliance upon Regulation S under the Securities Act of 1933, as amended, a portion of which may be resold in the United States under the 2005 Registration Statement. Remaining capacity under the 2005 Registration Statement after such issuances is $5.4 billion.
Debt Issuances. On December 21, 2006, the Holding Company issued junior subordinated debentures with a face amount of $1.25 billion. See “- Liquidity and Capital Resources - The Company - Liquidity Sources - Debt Issuances” for further information.
On June 29, 2005, the Holding Company issued 400 million pounds sterling ($729.2 million at issuance) aggregate principal amount of 5.25% senior notes due June 29, 2020 at a discount of 4.5 million pounds sterling ($8.1 million at issuance), for aggregate proceeds of 395.5 million pounds sterling ($721.1 million at issuance). The senior notes were initially offered and sold outside the United States in reliance upon Regulation S under the Securities Act of 1933, as amended.
This amount represents the translation of pounds sterling into U.S. dollars using the noon buying rate on December 29, 2006 of $1.9586 as announced by the Federal Reserve Bank of New York.
Common Equity Units. In connection with financing the acquisition of Travelers on July 1, 2005, the Holding Company distributed and sold 82.8 million 6.375% common equity units for $2,070 million in proceeds in a registered public offering on June 21, 2005.
a 1/80, or 1.25% ($12.50), undivided beneficial ownership interest in a series B trust preferred security of MetLife Capital Trust III (“Series B Trust” and, together with the Series A Trust, the “Trusts”), with an initial liquidation amount of $1,000.
a stock purchase contract under which the holder of the common equity unit will purchase and the Holding Company will sell, on each of the initial stock purchase date and the subsequent stock purchase date, a variable number of shares of the Holding Company’s common stock, par value $0.01 per share, for a purchase price of $12.50.
The Holding Company has directly guaranteed the repayment of the trust preferred securities to the holders thereof to the extent that there are funds available in the Trusts. The guarantee will remain in place until the full redemption of the trust preferred securities. The trust preferred securities held by the common equity unit holders are pledged to the Holding Company to collateralize the obligation of the common equity unit holders under the related stock purchase contracts. The common equity unit holder may substitute certain zero coupon treasury securities in place of the trust preferred securities as collateral under the stock purchase contract.
The trust preferred securities have remarketing dates which correspond with the initial and subsequent stock purchase dates to provide the holders of the common equity units with the proceeds to exercise the stock purchase contracts. The initial stock purchase date is expected to be August 15, 2008, but could be deferred for quarterly periods until February 15, 2009, and the subsequent stock purchase date is expected to be February 15, 2009, but could be deferred for quarterly periods until February 15, 2010. At the remarketing date, the remarketing agent will have the ability to reset the interest rate on the trust preferred securities to generate sufficient remarketing proceeds to satisfy the common equity unit holder’s obligation under the stock purchase contract, subject to a reset cap for each of the first two attempted remarketings of each series. The interest rate on the supporting junior subordinated debt securities issued by the Holding Company will be reset at a commensurate rate. If the initial remarketing is unsuccessful, the remarketing agent will attempt to remarket the trust preferred securities, as necessary, in subsequent quarters through February 15, 2009 for the Series A trust preferred securities and through February 15, 2010 for the Series B trust preferred securities. The final attempt at remarketing will not be subject to the reset cap. If all remarketing attempts are unsuccessful, the Holding Company has the right, as a secured party, to apply the liquidation amount on the trust preferred securities to the common equity unit holders obligation under the stock purchase contract and to deliver to the common equity unit holder a junior subordinated debt security payable on
August 15, 2010 at an annual rate of 4.82% and 4.91% on the Series A and Series B trust preferred securities, respectively, in payment of any accrued and unpaid distributions.
Debt Repayments. The Holding Company repaid a $500 million 5.25% senior note which matured on December 1, 2006 and a $1,006 million 3.911% senior note which matured on May 15, 2005.
Share Repurchase. On October 26, 2004, the Holding Company’s Board of Directors authorized a $1 billion common stock repurchase program, of which $216 million remained as of December 31, 2006. On February 27, 2007, the Holding Company’s Board of Directors authorized an additional $1 billion common stock repurchase program. Upon the date of this authorization, the amount remaining under these repurchase programs is approximately $1.2 billion. Under these authorizations, the Holding Company may purchase its common stock from the MetLife Policyholder Trust, in the open market (including pursuant to the terms of a pre-set trading plan meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended) and in privately negotiated transactions. As a result of the acquisition of Travelers, the Holding Company had suspended its common stock repurchase activity. During the fourth quarter of 2006, as announced, the Holding Company resumed its share repurchase program.
On December 1, 2006, the Holding Company repurchased 3,993,024 shares of its outstanding common stock at an aggregate cost of $232 million under an accelerated common stock repurchase agreement with a major bank. The bank borrowed the common stock sold to the Holding Company from third parties and purchased the common stock in the open market to return to such third parties. In February 2007, the Holding Company paid a cash adjustment of $8 million for a final purchase price of $240 million. The Holding Company recorded the shares initially repurchased as treasury stock and recorded the amount paid as an adjustment to the cost of the treasury stock.
The Holding Company entered into a net worth maintenance agreement with MSMIC, an investment in Japan of which the Holding Company owns approximately 50% of the equity. Under the agreement, the Holding Company agreed, without limitation as to amount, to cause MSMIC to have the amount of capital and surplus necessary for MSMIC to maintain a solvency ratio of at least 400%, as calculated in accordance with the Insurance Business Law of Japan, and to make such loans to MSMIC as may be necessary to ensure that MSMIC has sufficient cash or other liquid assets to meet its payment obligations as they fall due. As of the date of the most recent calculation, the capital and surplus of MSMIC was in excess of the minimum capital and surplus amount referenced above.
On February 16, 2007, the Holding Company’s Board of Directors announced dividends of $0.3975000 per share, for a total of $10 million, on its Series A preferred shares, and $0.4062500 per share, for a total of $24 million, on its Series B preferred shares, subject to the final confirmation that it has met the financial tests specified in the Series A and Series B preferred shares, which the Holding Company anticipates will be made on or about March 5, 2007, the earliest date permitted in accordance with the terms of the securities. Both dividends will be payable March 15, 2007 to shareholders of record as of February 28, 2007.
The Company makes commitments to fund partnership investments in the normal course of business for the purpose of enhancing the Company’s total return on its investment portfolio. The amounts of these unfunded commitments were $3.0 billion and $2.7 billion at December 31, 2006 and 2005, respectively. The Company anticipates that these amounts will be invested in partnerships over the next five years. There are no other obligations or liabilities arising from such arrangements that are reasonably likely to become material.
The Company commits to lend funds under mortgage loan commitments. The amounts of these mortgage loan commitments were $4.0 billion and $3.0 billion at December 31, 2006 and 2005, respectively. The purpose of these
The Company, as lessee, has entered into various lease and sublease agreements for office space, data processing and other equipment. The Company’s commitments under such lease agreements are included within the contractual obligations table. See “- Liquidity and Capital Resources - The Company - Liquidity Uses - Investment and Other.”
The Company maintains committed and unsecured credit facilities and letters of credit with various financial institutions. See “- Liquidity and Capital Resources - The Company - Liquidity Sources - Credit Facilities” and “- Letters of Credit” for further descriptions of such arrangements.
The Company has also guaranteed minimum investment returns on certain international retirement funds in accordance with local laws. Since these guarantees are not subject to limitation with respect to duration or amount,
MetLife Insurance Company of Connecticut (“MICC”) is a member of the Federal Home Loan Bank of Boston (the “FHLB of Boston”) and holds $70 million of common stock of the FHLB of Boston, which is included in equity securities on the Company’s consolidated balance sheets. MICC has also entered into several funding agreements with the FHLB of Boston whereby MICC has issued such funding agreements in exchange for cash and for which the FHLB of Boston has been granted a blanket lien on MICC’s residential mortgages and mortgage-backed securities to collateralize MICC’s obligations under the funding agreements. MICC maintains control over these pledged assets, and may use, commingle, encumber or dispose of any portion of the collateral as long as there is no event of default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level. The funding agreements and the related security agreement represented by this blanket lien provide that upon any event of default by MICC, the FHLB of Boston’s recovery is limited to the amount of MICC’s liability under the outstanding funding agreements. The amount of the Company’s liability for funding agreements with the FHLB of Boston was $926 million and $1.1 billion at December 31, 2006 and 2005, respectively, which is included in PABs.
MetLife Bank is a member of the FHLB of NY and holds $54 million and $43 million of common stock of the FHLB of NY, at December 31, 2006 and 2005, respectively, which is included in equity securities on the Company’s consolidated balance sheet. MetLife Bank has also entered into repurchase agreements with the FHLB of NY whereby MetLife Bank has issued repurchase agreements in exchange for cash and for which the FHLB of NY has been granted a blanket lien on MetLife Bank’s residential mortgages and mortgage-backed securities to collateralize MetLife Bank’s obligations under the repurchase agreements. MetLife Bank maintains control over these pledged assets, and may use, commingle, encumber or dispose of any portion of the collateral as long as there is no event of default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level. The repurchase agreements and the related security agreement represented by this blanket lien provide that upon any event of default by MetLife Bank, the FHLB of NY’s recovery is limited to the amount of MetLife Bank’s liability under the outstanding repurchase agreements. The amount of the Company’s liability for repurchase agreements with the FHLB of NY was $998 million and $855 million at December 31, 2006 and 2005, respectively, which is included in long-term debt.
The Subsidiaries sponsor and/or administer various qualified and non-qualified defined benefit pension plans and other postretirement employee benefit plans covering employees and sales representatives who meet specified eligibility requirements. Pension benefits are provided utilizing either a traditional formula or cash balance formula. The traditional formula provides benefits 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 earnings credits, determined annually based upon the average annual rate of interest on 30-year U.S. Treasury securities, for each account balance. As of December 31, 2006, virtually all of the Subsidiaries’ obligations have been calculated using the traditional formula. The non-qualified pension plans provide supplemental benefits, in excess of amounts permitted by governmental agencies, to certain executive level employees.
value of plan assets and the benefit obligation, which is the PBO for pension plans and the APBO for other postretirement plans. The change to recognize funded status eliminated the additional minimum pension liability provisions of SFAS 87. In addition, the Company recognized as an adjustment to accumulated other comprehensive income, net of income tax, those amounts of actuarial gains and losses, prior service costs and credits, and the remaining net transition asset or obligation that have not yet been included in net periodic benefit cost as of the date of adoption. The adoption of SFAS 158 resulted in a reduction of $744 million, net of income tax, to accumulated other comprehensive income, which is included as a component of total consolidated stockholders’ equity. The following table summarizes the adjustments to the December 31, 2006 consolidated balance sheet in order to effect the adoption of SFAS 158.
A December 31 measurement date is used for all the Company’s defined benefit pension and other postretirement benefit plans.
As the benefits provided under the defined pension plans are calculated as a percentage of future earnings, an assumption of future compensation increases is required to determine the projected benefit obligation. These rates are derived through periodic analysis of historical demographic data conducted by an independent actuarial firm. The last review of such data was conducted using salary information through 2003 and the Company believes that no circumstances have subsequently occurred that would result in a material change to the compensation rate assumptions.
A decrease (increase) in the discount rate increases (decreases) the APBO. This increase (decrease) to the APBO is amortized into earnings as an actuarial loss (gain). Based on the December 31, 2006 APBO, a 25 basis point decrease (increase) in the discount rate would result in an increase (decrease) in the APBO of approximately $60 million.
The Subsidiaries recognized pension expense of $180 million in 2006 as compared to $146 million in 2005 and $129 million in 2004. The major components of net periodic pension cost described above were as follows:
The increase in expense was primarily a result of both increases in service and interest cost and amortization of net actuarial losses resulting largely from lower discount rates, partially offset by the impact of an increase in the expected return on plan assets due to a larger plan assets base.
The weighted average discount rate used to calculate the net periodic pension cost was 5.82%, 5.83% and 6.10% for the years ended December 31, 2006, 2005 and 2004, respectively.
Based on the December 31, 2006 asset balances, a 25 basis point increase (decrease) in the expected rate of return on plan assets would result in a decrease (increase) in net periodic benefit cost of $15 million for the pension plans.
The net periodic other postretirement benefit cost consists of the following:
Based on the December 31, 2006 asset balances, a 25 basis point increase (decrease) in the expected rate of return on plan assets would result in a decrease (increase) in net periodic benefit cost of $3 million for the other postretirement plans.
Substantially all assets of the pension plans are invested within group annuity and life insurance contracts issued by the Subsidiaries. The majority of assets are held in separate accounts established by the Subsidiaries. The account values of assets held with the Subsidiaries were $6,205 million and $5,432 million as of December 31, 2006
and 2005, respectively. The terms of these contracts are consistent in all material respects with those the Subsidiaries offer to unaffiliated parties that are similarly situated.
Target allocations of assets are determined with the objective of maximizing returns and minimizing volatility of net assets through adequate asset diversification. Adjustments are made to target allocations based on an assessment of the impact of economic factors and market conditions.
It is the Subsidiaries’ practice to make contributions to the qualified pension plans to comply with minimum funding requirements of the ERISA, as amended, and/or to maintain a fully funded ABO. In accordance with such practice, no contributions were required for the years ended December 31, 2006 or 2005. No contributions will be required for 2007. The Subsidiaries elected to make discretionary contributions to the qualified pension plans of $350 million for the year ended December 31, 2006. No contributions were made during the year ended December 31, 2005. The Subsidiaries expect to make additional discretionary contributions of $150 million in 2007.
Benefit payments due under the non-qualified pension plans are funded from the Subsidiaries’ general assets as they become due under the provision of the plans. These payments totaled $38 million and $35 million for the years ended December 31, 2006 and 2005, respectively. These benefit payments are expected to be at approximately the same level in 2007.
Other postretirement benefits represent a non-vested, non-guaranteed obligation of the Subsidiaries and current regulations do not require specific funding levels for these benefits. While the Subsidiaries have funded such plans in advance, it has been the Subsidiaries’ practice to use their general assets to pay claims as they come due in lieu of utilizing plan assets. These payments totaled $152 million and $160 million for the years ended December 31, 2006 and 2005, respectively.
Additionally, for awards granted after adoption, the Company changed its policy from recognizing expense for stock-based awards over the requisite service period to recognizing such expense over the shorter of the requisite service period or the period to attainment of retirement-eligibility.
In December 2004, the FASB issued FSP No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (“FSP 109-2”). The AJCA introduced a one-time dividend received deduction on the repatriation of certain earnings to a U.S. taxpayer. FSP 109-2 provides companies additional time beyond the financial reporting period of enactment to evaluate the effects of the AJCA on their plans to repatriate foreign earnings for purposes of applying SFAS No. 109, Accounting for Income Taxes. During 2005, the Company recorded a $27 million income tax benefit related to the repatriation of foreign earnings pursuant to Internal Revenue Code Section 965 for which a U.S. deferred income tax provision had previously been recorded. As of January 1, 2006, the repatriation provision of the AJCA no longer applies to the Company.
Effective July 1, 2004, the Company prospectively adopted FSP No. FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“FSP 106-2”). FSP 106-2 provides accounting guidance to employers that sponsor postretirement healthcare plans that provide prescription drug benefits. The Company began receiving subsidies on prescription drug benefits during 2006 under the Prescription Drug Act based on the Company’s determination that the prescription drug benefits offered under certain postretirement plans are actuarially equivalent to the benefits offered under Medicare Part D. The postretirement benefit plan assets and accumulated benefit obligation were remeasured to determine the effect of the expected subsidies on net periodic postretirement benefit cost. As a result, the accumulated postretirement benefit obligation was reduced by $213 million at July 1, 2004.
In December 2006, the FASB issued FSP EITF 00-19-2, Accounting for Registration Payment Arrangements (“FSP EITF 00-19-2”). FSP EITF 00-19-2 specifies that the contingent obligation to make future payments or
In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income tax recognized in a company’s financial statements. FIN 48 requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. Previously recorded income tax benefits that no longer meet this standard are required to be charged to earnings in the period that such determination is made. FIN 48 will also require significant additional disclosures. FIN 48 is effective for fiscal years beginning after December 15, 2006. Based upon the Company’s evaluation work completed to date, the Company expects to recognize a reduction to the January 1, 2007 balance of retained earnings of between $35 million and $60 million.
In September 2005, the AICPA issued SOP 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (“SOP 05-1”). SOP 05-1 provides guidance on accounting by insurance enterprises for DAC on internal replacements of insurance and investment contracts other than those specifically described in SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a
Yields are based on quarterly average asset carrying values, excluding recognized and unrealized investment gains (losses), and for yield calculation purposes, average assets exclude collateral associated with the Company’s securities lending program.
Included in investment income from real estate and real estate joint ventures is $84 million, $151 million and $261 million of gains related to discontinued operations for the years ended December 31, 2006, 2005 and 2004, respectively. Included in investment gains (losses) from real estate and real estate joint ventures is $4.8 billion, $2.1 billion and $146 million of gains related to discontinued operations for the years ended December 31, 2006, 2005 and 2004, respectively.
Included in investment gains (losses) from other invested assets for the year ended December 31, 2004 is a charge of $26 million related to a funds withheld reinsurance treaty that was converted to a coinsurance agreement. This amount is classified in investment income in the consolidated statements of income.
Equity securities primarily consist of investments in common and preferred stocks and mutual fund interests. Such securities include private equity securities with an estimated fair value of $238 million and $472 million at December 31, 2006 and 2005, respectively.
The Company records impairments as investment losses and adjusts the cost basis of the fixed maturity and equity securities accordingly. The Company does not change the revised cost basis for subsequent recoveries in value. Impairments of fixed maturity and equity securities were $82 million, $64 million and $102 million for the years ended December 31, 2006, 2005 and 2004, respectively. The Company’s three largest impairments totaled $33 million, $40 million and $53 million for the years ended December 31, 2006, 2005 and 2004, respectively. The circumstances that gave rise to these impairments were financial restructurings, bankruptcy filings or difficult
The Company’s mortgage and consumer loans are principally collateralized by commercial, agricultural and residential properties, as well as automobiles. Mortgage and consumer loans comprised 12.7% and 12.2% of the Company’s total cash and invested assets at December 31, 2006 and 2005, respectively. The carrying value of mortgage and consumer loans is stated at original cost net of repayments, amortization of premiums, accretion of
discounts and valuation allowances. The following table shows the carrying value of the Company’s mortgage and consumer loans by type at:
The following table presents the scheduled maturities for the Company’s commercial mortgage loans at:
Restructured, Potentially Delinquent, Delinquent or Under Foreclosure. The Company monitors its mortgage loan investments on an ongoing basis, including reviewing loans that are restructured, potentially delinquent, delinquent or under foreclosure. These loan classifications are consistent with those used in industry practice.
Approximately 60% of the $9.2 billion of agricultural mortgage loans outstanding at December 31, 2006 were subject to rate resets prior to maturity. A substantial portion of these loans has been successfully renegotiated and remains outstanding to maturity. The process and policies for monitoring the agricultural mortgage loans and classifying them by performance status are generally the same as those for the commercial loans.
Consumer Loans. Consumer loans consist of residential mortgages and auto loans.
The following table presents the amortized cost and valuation allowances for consumer loans distributed by loan classification at:
The Company’s real estate and real estate joint venture investments consist of commercial properties located primarily in the United States. At December 31, 2006 and 2005, the carrying value of the Company’s real estate, real estate joint ventures and real estate held-for-sale was $5.0 billion and $4.7 billion, respectively, or 1.5% and 1.5%, of total cash and invested assets, respectively. The carrying value of real estate is stated at depreciated cost net of impairments and valuation allowances. The carrying value of real estate joint ventures is stated at the Company’s equity in the real estate joint ventures net of impairments and valuation allowances. The following table presents the carrying value of the Company’s real estate, real estate joint ventures, real estate held-for-sale and real estate acquired upon foreclosure at:
income producing real estate and real estate joint ventures was $8 million and $37 million at December 31, 2006 and 2005, respectively. The Company owned real estate acquired in satisfaction of debt of $3 million and $4 million at December 31, 2006 and 2005, respectively.
The Company’s other invested assets consisted principally of leveraged leases of $1.3 billion and $1.1 billion, funds withheld at interest of $4.0 billion and $3.5 billion, and standalone derivatives with positive fair values and the fair value of embedded derivatives related to funds withheld and modified coinsurance contracts of $2.5 billion and $2.0 billion at December 31, 2006 and 2005, respectively. The leveraged leases are recorded net of non-recourse debt. The Company participates in lease transactions, which are diversified by industry, asset type and geographic area. The Company regularly reviews residual values and writes down residuals to expected values as needed. Funds withheld represent amounts contractually withheld by ceding companies in accordance with reinsurance agreements. For agreements written on a modified coinsurance basis and certain agreements written on a coinsurance basis, assets supporting the reinsured policies equal to the net statutory reserves are withheld and continue to be legally owned by the ceding company. Interest accrues to these funds withheld at rates defined by the treaty terms
The Company uses a variety of derivatives, including swaps, forwards, futures and option contracts, to manage its various risks. Additionally, the Company enters into income generation and synthetically created investment transactions as permitted by its insurance subsidiaries’ Derivatives Use Plans approved by the applicable state insurance departments.
The Company enters into various collateral arrangements, which require both the pledging and accepting of collateral in connection with its derivative instruments. As of December 31, 2006 and 2005, the Company was obligated to return cash collateral under its control of $428 million and $195 million, respectively. This unrestricted cash collateral is included in cash and cash equivalents and the obligation to return it is included in payables for
The following table presents the total assets of and maximum exposure to loss relating to VIEs for which the Company has concluded that: (i) it is the primary beneficiary and which are consolidated in the Company’s consolidated financial statements at December 31, 2006; and (ii) it holds significant variable interests but it is not the primary beneficiary and which have not been consolidated:
$44.1 billion and $33.0 billion were on loan under the program at December 31, 2006 and 2005, respectively. Securities loaned under such transactions may be sold or repledged by the transferee. The Company was liable for cash collateral under its control of $45.4 billion and $33.9 billion at December 31, 2006 and 2005, respectively. Security collateral of $100 million and $207 million, on deposit from customers in connection with the securities lending transactions at December 31, 2006 and 2005, respectively, may not be sold or repledged and is not reflected in the consolidated financial statements.
Schedule III - Consolidated Supplementary Insurance Information for the years ended December 31, 2006, 2005 and 2004
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of MetLife, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
Certain amounts in the prior year periods’ consolidated financial statements have been reclassified to conform with the 2006 presentation.
On July 1, 2005, the Holding Company completed the acquisition of The Travelers Insurance Company, excluding certain assets, most significantly, Primerica, from Citigroup Inc. (“Citigroup”), and substantially all of Citigroup’s international insurance businesses (collectively, “Travelers”), which is more fully described in Note 2. The acquisition was accounted for using the purchase method of accounting. Travelers’ assets, liabilities and results of operations were included in the Company’s results beginning July 1, 2005. The accounting policies of Travelers were conformed to those of MetLife upon acquisition.
The Company’s principal investments are in fixed maturity and equity securities, mortgage and consumer loans, policy loans, real estate, real estate joint ventures and other limited partnerships, short-term investments, and other invested assets. The accounting policies related to each are as follows:
Securities Lending. Securities loaned transactions are treated as financing arrangements and are recorded at the amount of cash received. The Company obtains collateral in an amount equal to 102% of the fair value of the securities loaned. The Company monitors the market value of the securities loaned on a daily basis with additional collateral obtained as necessary. Substantially all of the Company’s securities loaned transactions are with large brokerage firms. Income and expenses associated with securities loaned transactions are reported as investment income and investment expense, respectively, within net investment income.
partnership’s operations. In addition to the investees performing regular evaluations for the impairment of underlying investments, the Company routinely evaluates its investments in real estate joint ventures and limited partnerships for impairments. For its cost method investments it follows an impairment analysis which is similar to the process followed for its fixed maturity and equity securities as described previously. For equity method investees, the Company considers financial and other information provided by the investee, other known information and inherent risks in the underlying investments, as well as future capital commitments, in determining whether an impairment has occurred. When an other-than-temporary impairment is deemed to have occurred, the Company records a realized capital loss within net investment gains (losses) to record the investment at its fair value.
Other Invested Assets. Other invested assets consist principally of leveraged leases and funds withheld at interest. The leveraged leases are recorded net of non-recourse debt. The Company participates in lease transactions which are diversified by industry, asset type and geographic area. The Company recognizes income on the leveraged leases by applying the leveraged lease’s estimated rate of return to the net investment in the lease. The Company regularly reviews residual values and impairs them to expected values as needed.
The determination of the amount of allowances and impairments, as applicable, are described above by investment type. The determination of such allowances and impairments is highly subjective and is based upon the Company’s periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates it evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations are revised.
The use of different methodologies and assumptions as to the timing and amount of impairments, recognition of income and the determination of the fair value of investments may have a material effect on the amounts presented within the consolidated financial statements.
Derivatives are financial instruments whose values are derived from interest rates, foreign currency exchange rates, or other financial indices. Derivatives may be exchange-traded or contracted in the over-the-counter market. The Company uses a variety of derivatives, including swaps, forwards, futures and option contracts, to manage the risk associated with variability in cash flows or changes in fair values related to the Company’s financial instruments. The Company also uses derivative instruments to hedge its currency exposure associated with net investments in certain foreign operations. To a lesser extent, the Company uses credit derivatives to synthetically replicate investment risks and returns which are not readily available in the cash market. The Company also purchases certain securities, issues certain insurance policies and investment contracts and engages in certain reinsurance contracts that have embedded derivatives.
If a derivative is not designated as an accounting hedge or its use in managing risk does not qualify for hedge accounting pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), as amended, changes in the fair value of the derivative are reported in net investment gains (losses), in policyholder benefits and claims for economic hedges of liabilities embedded in certain variable annuity products offered by the Company or in net investment income for economic hedges of equity method investments in joint ventures. The fluctuations in fair value of derivatives which have not been designated for hedge accounting can result in significant volatility in net income.
To qualify for hedge accounting, at the inception of the hedging relationship, the Company formally documents its risk management objective and strategy for undertaking the hedging transaction, as well as its designation of the hedge as either (i) a hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment (“fair value hedge”); (ii) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”); or (iii) a hedge of a net investment in a foreign operation. In this documentation, the Company sets forth how the hedging instrument is expected to hedge the designated risks related to the hedged item and sets forth the method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness and the method which will be used to measure ineffectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and periodically throughout the life of the designated hedging relationship. Assessments and measurement of hedge effectiveness are also subject to interpretation and estimation and different interpretations or estimates may have a material effect on the amount reported in net income.
The Company is also a party to financial instruments that contain terms which are deemed to be embedded derivatives. The Company assesses each identified embedded derivative to determine whether it is required to be bifurcated under SFAS 133. If the instrument would not be accounted for in its entirety at fair value and it is determined that the terms of the embedded derivative are not clearly and closely related to the economic characteristics of the host contract, and that a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host contract and accounted for as a freestanding derivative. Such embedded derivatives are carried on the consolidated balance sheet at fair value with the host contract and changes in their fair value are reported currently in net investment gains (losses). If the Company is unable to properly identify and measure an embedded derivative for separation from its host contract, the entire contract is carried on the balance sheet at fair value, with changes in fair value recognized in the current period in net investment gains (losses). Additionally, the Company may elect to carry an entire contract on the balance sheet at fair value, with changes in fair value recognized in the current period in net investment gains (losses) if that contract contains an embedded derivative that requires bifurcation. There is a risk that embedded derivatives requiring bifurcation may not be identified and reported at fair value in the consolidated financial statements and that their related changes in fair value could materially affect reported net income.
The Company also reviews periodically other long-term assumptions underlying the projections of estimated gross margins and profits. These include investment returns, policyholder dividend scales, interest crediting rates, mortality, persistency, and expenses to administer business. Management annually updates assumptions used in the calculation of estimated gross margins and profits which may have significantly changed. If the update of assumptions causes expected future gross margins and profits to increase, DAC and VOBA amortization will decrease, resulting in a current period increase to earnings. The opposite result occurs when the assumption update causes expected future gross margins and profits to decrease.
Goodwill is the excess of cost over the fair value of net assets acquired. Goodwill is not amortized but is tested for impairment at least annually or more frequently if events or circumstances, such as adverse changes in the
Participating business represented approximately 10% and 11% of the Company’s life insurance in-force, and 38% and 41% of the number of life insurance policies in-force, at December 31, 2006 and 2005, respectively. Participating policies represented approximately 30% and 29%, 31% and 30%, and 35% and 34% of gross and net life insurance premiums for the years ended December 31, 2006, 2005 and 2004, respectively. The percentages indicated are calculated excluding the business of the reinsurance segment.
Future policy benefit liabilities for individual and group traditional fixed annuities after annuitization are equal to the present value of expected future payments. Interest rates used in establishing such liabilities range from 3% to 11% for domestic business and 2% to 10% for international business.
Liabilities for unpaid claims and claim expenses for property and casualty insurance are included in future policyholder benefits and represent the amount estimated for claims that have been reported but not settled and claims incurred but not reported. Liabilities for unpaid claims are estimated based upon the Company’s historical experience and other actuarial assumptions that consider the effects of current developments, anticipated trends and risk management programs, reduced for anticipated salvage and subrogation. With respect to property and casualty insurance, such unpaid claims are reduced for anticipated salvage and subrogation. The effects of changes in such estimated liabilities are included in the results of operations in the period in which the changes occur.
Annuity guaranteed death benefit (“GMDB”) liabilities are determined by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. The assumptions used in estimating the GMDB liabilities are consistent with those used for amortizing DAC, and are thus subject to the same variability and risk. The assumptions of investment performance and volatility are consistent with the historical experience of the Standard & Poor’s 500 Index (“S&P”). The benefits used in calculating the liabilities are based on the average benefits payable over a range of scenarios.
Guaranteed minimum withdrawal benefit riders (“GMWB”) guarantee the contractholder a return of their purchase payment via partial withdrawals, even if the account value is reduced to zero, provided that the contractholder’s cumulative withdrawals in a contract year do not exceed a certain limit. The initial guaranteed withdrawal amount is equal to the initial benefit base as defined in the contract (typically, the initial purchase payments plus applicable bonus amounts). The GMWB is an embedded derivative, which is measured at fair value separately from the host variable annuity product.
Guaranteed minimum accumulation benefit riders (“GMAB”) provide the contractholder, after a specified period of time determined at the time of issuance of the variable annuity contract, with a minimum accumulation of their purchase payments even if the account value is reduced to zero. The initial guaranteed accumulation amount is equal to the initial benefit base as defined in the contract (typically, the initial purchase payments plus applicable bonus amounts). The GMAB is also an embedded derivative, which is measured at fair value separately from the host variable annuity product.
PABs relate to investment-type contracts and universal life-type policies. Investment-type contracts principally include traditional individual fixed annuities in the accumulation phase and non-variable group annuity contracts. PABs are equal to (i) policy account values, which consist of an accumulation of gross premium payments; (ii) credited interest, ranging from 0.3% to 14% for domestic business and 1% to 18% for international business, less expenses, mortality charges, and withdrawals; and (iii) fair value adjustments relating to business combinations. Bank deposits are also included in PABs.
The liability for policy and contract claims generally relates to incurred but not reported death, disability, long-term care and dental claims as well as claims which have been reported but not yet settled. The liability for these claims is based on the Company’s estimated ultimate cost of settling all claims. The Company derives estimates for the development of incurred but not reported claims principally from actuarial analyses of historical patterns of claims and claims development for each line of business. The methods used to determine these estimates are continually reviewed. Adjustments resulting from this continuous review process and differences between estimates and payments for claims are recognized in policyholder benefits and claims expense in the period in which the estimates are changed or payments are made.
For U.S. federal income tax purposes, the Company made an election in 2005 under the Code’s Section 338 as it relates to the Travelers acquisition. As a result of this election, the tax basis in the acquired assets and liabilities was adjusted as of the acquisition date resulting in a change to the related deferred income tax.
The Company may be required to change its provision for income taxes in certain circumstances. Examples of such circumstances include when the ultimate deductibility of certain items is challenged by taxing authorities (See also Note 14) or when estimates used in determining valuation allowances on deferred tax assets significantly change or when receipt of new information indicates the need for adjustment in valuation allowances. Additionally, future events such as changes in tax legislation could have an impact on the provision for income tax and the effective tax rate. Any such changes could significantly affect the amounts reported in the consolidated financial statements in the year these changes occur.
Premiums, fees and policyholder benefits and claims include amounts assumed under reinsurance contracts and are net of reinsurance ceded.
If the Company determines that a reinsurance contract does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company records the contract as a deposit, net of related expenses. Deposits received are included in other liabilities and deposits made are included within other assets. As amounts are paid or received, consistent with the underlying contracts, the deposit assets or liabilities are adjusted. Interest on such deposits is recorded as other revenue or other expenses, as appropriate. Periodically, the Company evaluates the adequacy of the expected payments or recoveries and adjusts the deposit asset or liability through other revenue or other expenses, as appropriate.
Prior to December 31, 2006, the funded status of the pension and other postretirement plans, which is the difference between the fair value of plan assets and the PBO for pension plans and the APBO for other postretirement plans (collectively, the “Benefit Obligations”), were offset by the unrecognized actuarial gains or losses, prior service cost and transition obligations to determine prepaid or accrued benefit cost, as applicable. The net amount was recorded as a prepaid or accrued benefit cost, as applicable. Further, for pension plans, if the ABO exceeded the fair value of the plan assets, that excess was recorded as an additional minimum pension liability with a corresponding intangible asset. Recognition of the intangible asset was limited to the amount of any unrecognized prior service cost. Any additional minimum pension liability in excess of the allowable intangible asset was charged, net of income tax, to accumulated other comprehensive income.
and the remaining net transition asset or obligation that had not yet been included in net periodic benefit costs as of December 31, 2006 are now charged, net of income tax, to accumulated other comprehensive income. Additionally, these changes eliminated the additional minimum pension liability provisions of SFAS 87.
Stock-based compensation grants prior to January 1, 2003 were accounted for using the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations. Compensation expense, if any, was recorded based upon the excess of the quoted market price at grant date over the amount the employee was required to pay to acquire the stock. Under the provisions of APB 25, there was no compensation expense resulting from the issuance of stock options as the exercise price was equivalent to the fair market value at the date of grant. Compensation expense was recognized under the Long-Term Performance Compensation Plan (“LTPCP”), as described more fully in Note 17.
Balance sheet accounts of foreign operations are translated at the exchange rates in effect at each year-end and income and expense accounts are translated at the average rates of exchange prevailing during the year. The local currencies of foreign operations are the functional currencies unless the local economy is highly inflationary. Translation adjustments are charged or credited directly to other comprehensive income or loss. Gains and losses from foreign currency transactions are reported as net investment gains (losses) in the period in which they occur.
Basic earnings per common share are computed based on the weighted average number of common shares outstanding during the period. The difference between the number of shares assumed issued and number of shares assumed purchased represents the dilutive shares. Diluted earnings per common share include the dilutive effect of the assumed: (i) exercise or issuance of stock-based awards using the treasury stock method; (ii) settlement of stock purchase contracts underlying common equity units using the treasury stock method; and (iii) settlement of accelerated common stock repurchase contract. Under the treasury stock method, exercise or issuance of stock-based awards and settlement of the stock purchase contracts underlying common equity units is assumed to occur with the proceeds used to purchase common stock at the average market price for the period. See Notes 12, 17 and 19.
As described previously, effective January 1, 2006, the Company adopted SFAS 123(r) including supplemental application guidance issued by the SEC in Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment (“SAB 107”) - using the modified prospective transition method. In accordance with the modified prospective transition method, results for prior periods have not been restated. SFAS 123(r) requires that the cost of all stock-based transactions be measured at fair value and recognized over the period during which a grantee is required to provide goods or services in exchange for the award. The Company had previously adopted the fair value method of accounting for stock-based awards as prescribed by SFAS 123 on a prospective basis effective January 1, 2003, and prior to January 1, 2003, accounted for its stock-based awards to employees under the intrinsic value method prescribed by APB 25. The Company did not modify the substantive terms of any existing awards prior to adoption of SFAS 123(r).
The adoption of SFAS 123(r) did not have a significant impact on the Company’s financial position or results of operations as all stock-based awards accounted for under the intrinsic value method prescribed by APB 25 had vested prior to the adoption date and the Company had adopted the fair value recognition provisions of SFAS 123 on January 1, 2003. As required by SFAS 148, and carried forward in the provisions of SFAS 123(r), the Company
discloses the pro forma impact as if stock-based awards accounted for under APB 25 had been accounted for under the fair value method in Note 17.
SFAS 123 allowed forfeitures of stock-based awards to be recognized as a reduction of compensation expense in the period in which the forfeiture occurred. Upon adoption of SFAS 123(r), the Company changed its policy and now incorporates an estimate of future forfeitures into the determination of compensation expense when recognizing expense over the requisite service period. The impact of this change in accounting policy was not significant to the Company’s consolidated financial position or results of operations for the year ended December 31, 2006.
Effective January 1, 2006, the Company adopted prospectively SFAS No. 155, Accounting for Certain Hybrid Instruments (“SFAS 155”). SFAS 155 amends SFAS 133 and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”). SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole, eliminating the need to bifurcate the derivative from its host, if the holder elects to account for the whole instrument on a fair value basis. In addition, among other changes, SFAS 155:
Effective January 1, 2004, the Company adopted Statement of Position (“SOP”) 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (“SOP 03-1”), as interpreted by a Technical Practice Aid (“TPA”), issued by the American Institute of Certified Public Accountants (“AICPA”) and FSP No. FAS 97-1, Situations in Which Paragraphs 17(b) and 20 of FASB Statement No 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, Permit or Require Accrual of an Unearned Revenue Liability. SOP 03-1 provides guidance on: (i) the classification and valuation of long-duration contract liabilities; (ii) the accounting for sales inducements; and (iii) separate account presentation and valuation. As a result of the adoption of SOP 03-1, effective January 1, 2004, the Company decreased the liability for future policyholder benefits for changes in the methodology relating to various guaranteed death and annuitization benefits and for determining liabilities for certain universal life insurance contracts by $4 million, which was reported as a cumulative effect of a change in accounting. This amount is net of corresponding changes in DAC, including VOBA and unearned revenue liability, under certain variable annuity and life contracts and income tax. Certain other contracts sold by the Company provide for a return through periodic crediting rates, surrender adjustments or termination adjustments based on the total return of a contractually referenced pool of assets owned by the Company. To the extent that such contracts are not accounted for as derivatives under the provisions of SFAS 133 and not already credited to the contract account balance, under SOP 03-1 the change relating to the fair value of the referenced pool of assets is recorded as a liability with the change in the liability recorded as policyholder benefits
and claims. Prior to the adoption of SOP 03-1, the Company recorded the change in such liability as other comprehensive income. At adoption, this change decreased net income and increased other comprehensive income by $63 million, net of income tax, which were recorded as cumulative effects of changes in accounting. Effective with the adoption of SOP 03-1, costs associated with enhanced or bonus crediting rates to contractholders must be deferred and amortized over the life of the related contract using assumptions consistent with the amortization of DAC. Since the Company followed a similar approach prior to adoption of SOP 03-1, the provisions of SOP 03-1 relating to sales inducements had no significant impact on the Company’s consolidated financial statements. In accordance with SOP 03-1’s guidance for the reporting of certain separate accounts, at adoption, the Company also reclassified $1.7 billion of separate account assets to general account investments and $1.7 billion of separate account liabilities to future policy benefits and PABs. This reclassification decreased net income and increased other comprehensive income by $27 million, net of income tax, which were reported as cumulative effects of changes in accounting. As a result of the adoption of SOP 03-1, the Company recorded a cumulative effect of a change in accounting of $86 million, net of income tax of $46 million, for the year ended December 31, 2004.
In February 2007, the FASB issued SFAS No. 159, the Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits all entities the option to measure most financial instruments and certain other items at fair value at specified election dates and to report related unrealized gains and losses in earnings. The fair value option will generally be applied on an instrument-by-instrument basis and is generally an irrevocable election. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is evaluating which eligible financial instruments, if any, it will elect to account for at fair value under SFAS 159 and the related impact on the Company’s consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140 (“SFAS 156”). Among other requirements, SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations. SFAS 156 will be applied prospectively and is effective for fiscal years beginning after September 15, 2006. The Company does not expect SFAS 156 to have a material impact on the Company’s consolidated financial statements.
On July 1, 2005, the Holding Company completed the acquisition of Travelers for $12.1 billion. The results of Travelers’ operations were included in the Company’s financial statements beginning July 1, 2005. As a result of the acquisition, management of the Company increased significantly the size and scale of the Company’s core insurance and annuity products and expanded the Company’s presence in both the retirement & savings’ domestic and international markets. The distribution agreements executed with Citigroup as part of the acquisition provide the Company with one of the broadest distribution networks in the industry. The initial consideration paid by the Holding Company for the acquisition consisted of $10.9 billion in cash and 22,436,617 shares of the Holding
The Company revised the purchase price as a result of the finalization by both parties of their review of the June 30, 2005 financial statements and final resolution as to the interpretation of the provisions of the acquisition agreement which resulted in a payment of additional consideration of $115 million by the Company to Citigroup. Further consideration paid to Citigroup of $115 million, as well as additional transaction costs of $3 million, offset by a $4 million reduction in restructuring costs, resulted in a total increase in the purchase price of $114 million.
Of the goodwill of $4.3 billion, $1.6 billion is estimated to be deductible for income tax purposes.
The condensed statement of net assets acquired reflects the fair value of Travelers net assets as follows:
The value of the other identifiable intangibles reflects the estimated fair value of Citigroup/Travelers distribution agreement and customer relationships acquired at July 1, 2005 and will be amortized in relation to the expected economic benefits of the agreement. If actual experience under the distribution agreements or with customer relationships differs from expectations, the amortization of these intangibles will be adjusted to reflect actual experience.
As part of the integration of Travelers’ operations, management approved and initiated plans to reduce approximately 1,000 domestic and international Travelers positions, which was completed in December 2006. MetLife initially recorded restructuring costs, including severance, relocation and outplacement services of Travelers’ employees, as liabilities assumed in the purchase business combination of $49 million. For the years ended December 31, 2006 and 2005, the liability for restructuring costs was reduced by $4 million and $1 million, respectively, due to a reduction in the estimate of severance benefits to be paid to Travelers employees. The restructuring costs associated with the Travelers acquisition were as follows:
Excluding investments in U.S. Treasury securities and obligations of U.S. government corporations and agencies, the Company is not exposed to any significant concentration of credit risk in its fixed maturity securities portfolio.
The Company participates in a securities lending program whereby blocks of securities, which are included in fixed maturity and equity securities, are loaned to third parties, primarily major brokerage firms. The Company
The average investment in impaired loans was $202 million, $187 million and $404 million for the years ended December 31, 2006, 2005 and 2004, respectively. Interest income on impaired loans was $2 million, $12 million and $29 million for the years ended December 31, 2006, 2005 and 2004, respectively.
The investment in restructured loans was $9 million and $37 million at December 31, 2006 and 2005, respectively. Interest income of $1 million, $2 million and $9 million was recognized on restructured loans for the years ended December 31, 2006, 2005 and 2004, respectively. Gross interest income that would have been recorded in accordance with the original terms of such loans amounted to $1 million, $3 million and $12 million for the years ended December 31, 2006, 2005 and 2004, respectively.
The components of real estate and real estate joint ventures are as follows:
Related depreciation expense was $158 million, $185 million and $286 million for the years ended December 31, 2006, 2005 and 2004, respectively. These amounts include $26 million, $50 million and $107 million of
depreciation expense related to discontinued operations for the years ended December 31, 2006, 2005 and 2004, respectively.
The Company’s real estate holdings are primarily located in the United States. At December 31, 2006, 26%, 15% and 15% of the Company’s real estate holdings were located in New York, Texas and California, respectively.
The components of net income from investment in leveraged leases are as follows:
Funds withheld at interest, included in other invested assets, were $4.0 billion and $3.5 billion at December 31, 2006 and 2005, respectively.
Losses from fixed maturity and equity securities deemed other-than-temporarily impaired, included within net investment gains (losses), were $82 million, $64 million and $102 million for the years ended December 31, 2006, 2005 and 2004, respectively.
During 2005, the Company established a trading securities portfolio to support investment strategies that involve the active and frequent purchase and sale of securities, the execution of short sale agreements and asset and liability matching strategies for certain insurance products. Trading securities and short sale agreement liabilities
The Company invests in structured notes and similar type instruments, which generally provide equity-based returns on debt securities. The carrying value of such investments, included in fixed maturity securities, was $354 million and $362 million at December 31, 2006 and 2005, respectively. The related net investment income recognized was $43 million, $28 million and $45 million for the years ended December 31, 2006, 2005 and 2004, respectively.
The following table presents the total assets of and maximum exposure to loss relating to VIEs for which the Company has concluded that: (i) it is the primary beneficiary and which are consolidated in the Company’s
The following table presents the notional amounts and current market or fair value of derivative financial instruments held at:
The following table presents the notional amounts of derivative financial instruments by maturity at December 31, 2006:
The Company enters into financial forwards to buy and sell securities. The price is agreed upon at the time of the contract and payment for such a contract is made at a specified future date.
Credit default swaps are also used to synthetically create investments that are either more expensive to acquire or otherwise unavailable in the cash markets. These transactions are a combination of a derivative and usually a U.S. Treasury or Agency security.
A synthetic guaranteed interest contract (“GIC”) is a contract that simulates the performance of a traditional GIC through the use of financial instruments. Under a synthetic GIC, the policyholder owns the underlying assets. The Company guarantees a rate return on those assets for a premium.
The Company uses forward exchange contracts, foreign currency swaps, options and non-derivative financial instruments to hedge portions of its net investments in foreign operations against adverse movements in exchange rates. The Company measures ineffectiveness on the forward exchange contracts based upon the change in forward rates. There was no ineffectiveness recorded for the years ended December 31, 2006, 2005 and 2004.
The Company’s consolidated statements of stockholders’ equity for the years ended December 31, 2006, 2005 and 2004 include gains (losses) of ($17) million, ($115) million and ($47) million, respectively, related to foreign currency contracts and non-derivative financial instruments used to hedge its net investments in foreign operations. At December 31, 2006 and 2005, the cumulative foreign currency translation loss recorded in accumulated other comprehensive income related to these hedges was $189 million and $172 million, respectively. When net investments in foreign operations are sold or substantially liquidated, the amounts in accumulated other comprehensive income are reclassified to the consolidated statements of income, while a pro rata portion will be reclassified upon partial sale of the net investments in foreign operations.
For the years ended December 31, 2006, 2005 and 2004, the Company recognized as net investment gains (losses), excluding embedded derivatives, changes in fair value of ($685) million, $299 million and ($194) million, respectively, related to derivatives that do not qualify for hedge accounting. For the years ended December 31, 2006 and 2005, the Company recorded changes in fair value of ($33) million and $2 million, respectively, as policyholder benefits and claims related to derivatives that do not qualify for hedge accounting. The Company did not have policyholder benefits and claims related to such derivatives for the year ended December 31, 2004. For the years ended December 31, 2006 and 2005, the Company recorded changes in fair value of ($40) million and ($38) million, respectively, as net investment income related to economic hedges of equity method investments in joint ventures that do not qualify for hedge accounting. The Company had no economic hedges of equity method investment in joint ventures for the year ended December 31, 2004.
The Company has certain embedded derivatives which are required to be separated from their host contracts and accounted for as derivatives. These host contracts include guaranteed minimum withdrawal contracts, guaranteed minimum accumulation contracts and modified coinsurance contracts. The fair value of the Company’s embedded derivative assets was $184 million and $50 million at December 31, 2006 and 2005, respectively. The fair value of the Company’s embedded derivative liabilities was $84 million and $45 million at December 31, 2006 and 2005, respectively. The amounts recorded and included in net investment gains (losses) during the years ended December 31, 2006, 2005 and 2004 were gains (losses) of $209 million, $69 million and $37 million, respectively.
The estimated future amortization expense allocated to other expenses for the next five years for VOBA is $524 million in 2007, $490 million in 2008, $458 million in 2009, $393 million in 2010, and $359 million in 2011.
Amortization of VOBA and DAC is related to (i) investment gains and losses and the impact of such gains and losses on the amount of the amortization; (ii) unrealized investment gains and losses to provide information regarding the amount that would have been amortized if such gains and losses had been recognized; and (iii) other
Information regarding the value of distribution agreements (“VODA”) and the value of customer relationships acquired (“VOCRA”), which are reported in other assets, is as follows:
The estimated future amortization expense allocated to other expenses for the next five years for VODA and VOCRA is $15 million in 2007, $21 million in 2008, $27 million in 2009, $32 million in 2010 and $27 million in 2011.
The Company issues fixed and floating rate obligations under its GIC program which are denominated in either U.S. dollars or foreign currencies. During the years ended December 31, 2006, 2005 and 2004, the Company issued $5.2 billion, $4.0 billion and $4.0 billion, respectively, and repaid $2.6 billion, $1.1 billion and $150 million, respectively, of GICs under this program. In addition, the acquisition of Travelers increased the balance by $5.3 billion in GICs as of December 31, 2005. Accordingly, at December 31, 2006 and 2005, GICs outstanding, which are included in policyholder account balances, were $21.5 billion and $17.4 billion, respectively. During the years ended December 31, 2006, 2005 and 2004, interest credited on the contracts, which are included in interest credited to policyholder account balances, was $835 million, $464 million and $142 million, respectively.
The net amount at risk for guarantees of amounts in the event of death is defined as the current guaranteed minimum death benefit in excess of the current account balance at the balance sheet date.
In addition to reinsuring mortality risk as described above, the Company reinsures other risks, as well as specific coverages. The Company routinely reinsures certain classes of risks in order to limit its exposure to particular travel, avocation and lifestyle hazards. The Company has exposure to catastrophes, which could contribute to significant fluctuations in the Company’s results of operations. The Company uses excess of retention and quota share reinsurance arrangements to provide greater diversification of risk and minimize exposure to larger risks.
Reinsurance recoverables, included in premiums and other receivables, were $10.2 billion and $8.5 billion at December 31, 2006 and 2005, respectively, including $1.2 billion and $1.3 billion, respectively, relating to reinsurance of long-term GICs and structured settlement lump sum contracts accounted for as a financing transaction; $3.0 billion and $2.8 billion at December 31, 2006 and 2005, respectively, relating to reinsurance on the run-off of long-term care business written by Travelers; and $1.3 billion and $1.4 billion at December 31, 2006 and 2005, respectively, relating to reinsurance on the run-off of workers compensation business written by Travelers. Reinsurance and ceded commissions payables, included in other liabilities, were $275 million and $276 million at December 31, 2006 and 2005, respectively.
For the years ended December 31, 2006, 2005 and 2004, reinsurance ceded and assumed include affiliated transactions of $624 million, $670 million, and $579 million, respectively, and $1.4 billion at December 31, 2006, relating to the reinsurance of investment-type contracts held by small market defined contribution plans.
On April 7, 2000 (the “Demutualization Date”), Metropolitan Life converted from a mutual life insurance company to a stock life insurance company and became a wholly-owned subsidiary of MetLife, Inc. The conversion was pursuant to an order by the New York Superintendent of Insurance (the “Superintendent”) approving Metropolitan Life’s plan of reorganization, as amended (the “Plan”). On the Demutualization Date, Metropolitan Life established a closed block for the benefit of holders of certain individual life insurance policies of Metropolitan Life. Assets have been allocated to the closed block in an amount that has been determined to produce cash flows which, together with anticipated revenues from the policies included in the closed block, are reasonably expected to be sufficient to support obligations and liabilities relating to these policies, including, but not limited to, provisions for the payment of claims and certain expenses and taxes, and to provide for the continuation of policyholder dividend scales in effect for 1999, if the experience underlying such dividend scales continues, and for appropriate adjustments in such scales if the experience changes. At least annually, the Company compares actual and projected experience against the experience assumed in the then-current dividend scales. Dividend scales are adjusted periodically to give effect to changes in experience.
The Company uses the same accounting principles to account for the participating policies included in the closed block as it used prior to the Demutualization Date. However, the Company establishes a policyholder dividend obligation for earnings that will be paid to policyholders as additional dividends as described below. The excess of closed block liabilities over closed block assets at the effective date of the demutualization (adjusted to eliminate the impact of related amounts in accumulated other comprehensive income) represents the estimated maximum future earnings from the closed block expected to result from operations attributed to the closed block after income taxes. Earnings of the closed block are recognized in income over the period the policies and contracts in the closed block remain in-force. Management believes that over time the actual cumulative earnings of the closed block will approximately equal the expected cumulative earnings due to the effect of dividend changes. If, over the period the closed block remains in existence, the actual cumulative earnings of the closed block is greater than the expected cumulative earnings of the closed block, the Company will pay the excess of the actual cumulative earnings of the closed block over the expected cumulative earnings to closed block policyholders as additional policyholder dividends unless offset by future unfavorable experience of the closed block and, accordingly, will recognize only the expected cumulative earnings in income with the excess recorded as a policyholder dividend obligation. If over such period, the actual cumulative earnings of the closed block is less than the expected cumulative earnings of the closed block, the Company will recognize only the actual earnings in income. However, the Company may change policyholder dividend scales in the future, which would be intended to increase future actual earnings until the actual cumulative earnings equal the expected cumulative earnings.
Information regarding the closed block revenues and expenses is as follows:
Metropolitan Life charges the closed block with federal income taxes, state and local premium taxes, and other additive state or local taxes, as well as investment management expenses relating to the closed block as provided in the Plan. Metropolitan Life also charges the closed block for expenses of maintaining the policies included in the closed block.
The aggregate maturities of long-term debt as of December 31, 2006 for the next five years are $116 million in 2007, $383 million in 2008, $398 million in 2009, $194 million in 2010, $992 million in 2011 and $7,896 million thereafter.
Collateralized debt, which consists of repurchase agreements and capital lease obligations, ranks highest in priority, followed by unsecured senior debt which consists of senior notes, fixed rate notes and other notes with varying interest rates, followed by subordinated debt which consists of junior subordinated debentures. Payments of interest and principal on the Company’s surplus notes, which are subordinate to all other obligations at the operating company level and senior to obligations at the Holding Company, may be made only with the prior approval of the insurance department of the state of domicile.
The Holding Company repaid a $500 million 5.25% senior note which matured on December 1, 2006 and a $1,006 million 3.911% senior note which matured on May 15, 2005. RGA repaid a $100 million 7.25% senior note which matured on April 1, 2006.
On June 23, 2005, the Holding Company issued in the United States public market $1,000 million aggregate principal amount of 5.00% senior notes due June 15, 2015 at a discount of $2.7 million ($997.3 million) and $1,000 million aggregate principal amount of 5.70% senior notes due June 15, 2035 at a discount of
MetLife Bank, National Association (“MetLife Bank” or “MetLife Bank, N.A.”) is a member of the Federal Home Loan Bank of New York (the “FHLB of NY”). See Note 15 for a description of the Company’s liability for repurchase agreements with the FHLB of NY as of December 31, 2006 and 2005, which is included in long-term debt.
During the years ended December 31, 2006 and 2005, the Company’s short-term debt consisted of commercial paper with a weighted average interest rate of 5.2% and 3.4%, respectively. The average daily balance of commercial paper outstanding was $1.9 billion and $1.0 billion during the years ended December 31, 2006 and 2005, respectively. The commercial paper was outstanding for an average of 39 days and 53 days during the years ended December 31, 2006 and 2005, respectively.
Interest expense related to the Company’s indebtedness included in other expenses was $703 million, $542 million and $428 million for the years ended December 31, 2006, 2005 and 2004, respectively, and does not include interest expense on junior subordinated debt securities. See Note 11.
On June 1, 2006, the letter of credit issuer elected to extend the initial stated termination date of each respective letter of credit to the respective dates indicated.
February 15, 2039 and February 15, 2040, respectively, for a total of $2,134 million in connection with the common equity units more fully described in Note 12.
On December 8, 2005, RGA issued junior subordinated debentures with a face amount of $400 million. Interest is payable semi-annually at a fixed rate of 6.75% up to but not including the scheduled redemption date. The securities may be redeemed (i) in whole or in part, at any time on or after December 15, 2015 at their principal amount plus accrued and unpaid interest to the date of redemption, or (ii) in whole or in part, prior to December 15, 2015 at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, a make-whole price. In the event the junior subordinated debentures are not redeemed on or before the scheduled redemption date of December 15, 2015, interest on these junior subordinated debentures will accrue at an annual rate of three-month LIBOR plus a margin equal to 2.665%, payable quarterly in arrears. The final maturity of the debentures is December 15, 2065. RGA has the right to, and in certain circumstances the requirement to, defer interest payments on the debentures for a period up to ten years. Interest compounds during periods of deferral. Issuance costs associated with the offering of the junior subordinated debentures of $6 million have been capitalized, are included in other assets, and will be amortized using the effective interest method over the period from the issuance date of the junior subordinated debentures until their scheduled redemption.
Interest expense on the junior subordinated debentures was $27 million and $2 million for the years ended December 31, 2006 and 2005, respectively.
The trust preferred securities have remarketing dates which correspond with the initial and subsequent stock purchase dates to provide the holders of the common equity units with the proceeds to exercise the stock purchase contracts. The initial stock purchase date is expected to be August 15, 2008, but could be deferred for quarterly periods until February 15, 2009, and the subsequent stock purchase date is expected to be February 15, 2009, but could be deferred for quarterly periods until February 15, 2010. At the remarketing date, the remarketing agent will have the ability to reset the interest rate on the trust preferred securities to generate sufficient remarketing proceeds to satisfy the common equity unit holder’s obligation under the stock purchase contract, subject to a reset cap for each of the first two attempted remarketings of each series. The interest rate on the supporting junior subordinated
debt securities issued by the Holding Company will be reset at a commensurate rate. If the initial remarketing is unsuccessful, the remarketing agent will attempt to remarket the trust preferred securities, as necessary, in subsequent quarters through February 15, 2009 for the Series A trust preferred securities and through February 15, 2010 for the Series B trust preferred securities. The final attempt at remarketing will not be subject to the reset cap. If all remarketing attempts are unsuccessful, the Holding Company has the right, as a secured party, to apply the liquidation amount on the trust preferred securities to the common equity unit holders obligation under the stock purchase contract and to deliver to the common equity unit holder a junior subordinated debt security payable on August 15, 2010 at an annual rate of 4.82% and 4.91% on the Series A and Series B trust preferred securities, respectively, in payment of any accrued and unpaid distributions.
In connection with the offering of common equity units, the Holding Company incurred $55.3 million of issuance costs of which $5.8 million relate to the issuance of the junior subordinated debt securities underlying common equity units which fund the Series A and Series B trust preferred securities and $49.5 million relate to the expected issuance of the common stock under the stock purchase contracts. The $5.8 million in debt issuance costs have been capitalized, are included in other assets, and will be amortized using the effective interest method over the period from issuance date of the common equity units to the initial and subsequent stock purchase date. The remaining $49.5 million of costs relate to the common stock issuance under the stock purchase contracts and have been recorded as a reduction of additional paid-in capital.
Shares Subject to Mandatory Redemption and Company-Obligated Mandatorily Redeemable Securities of Subsidiary Trusts
The Company has recorded a valuation allowance related to tax benefits of certain foreign net operating loss carryforwards. 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 foreign 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. In 2006, the Company recorded $40 million of additional deferred income tax valuation allowance related to certain foreign net operating loss carryforwards.
Fiala, et al. v. Metropolitan Life Ins. Co., et al. (Sup. Ct., N.Y. County, filed March 17, 2000). Another putative class action filed in New York State court in Kings County has been consolidated with this action. The plaintiffs in the consolidated state court class actions seek compensatory relief and punitive damages. In 2003, the trial court granted the defendants’ motions to dismiss these two putative class actions. In 2004, the appellate court modified the trial court’s order by reinstating certain claims against Metropolitan Life, the Holding Company and the individual directors. Plaintiffs in these actions have filed a consolidated amended complaint. On January 30, 2007, the trial court signed an order certifying a litigation class for plaintiffs’ claim that defendants violated section 7312 of the New York Insurance Law, but denying plaintiffs’ motion to certify a litigation class with respect
In re MetLife Demutualization Litig. (E.D.N.Y., filed April 18, 2000). In this class action against Metropolitan Life and the Holding Company, plaintiffs served a second consolidated amended complaint in 2004. Plaintiffs assert violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 in connection with the Plan, claiming that the Policyholder Information Booklets failed to disclose certain material facts and contained certain material misstatements. They seek rescission and compensatory damages. On June 22, 2004, the court denied the defendants’ motion to dismiss the claim of violation of the Securities Exchange Act of 1934. The court had previously denied defendants’ motion to dismiss the claim for violation of the Securities Act of 1933. In 2004, the court reaffirmed its earlier decision denying defendants’ motion for summary judgment as premature. On July 19, 2005, this federal trial court certified this lawsuit as a class action against Metropolitan Life and the Holding Company.
Fotia, et al. v. MetLife, Inc., et al. (Ont. Super. Ct., filed April 3, 2001). This lawsuit was filed in Ontario, Canada on behalf of a proposed class of certain former Canadian policyholders against the Holding Company, Metropolitan Life, and Metropolitan Life Insurance Company of Canada. Plaintiffs’ allegations concern the way that their policies were treated in connection with the demutualization of Metropolitan Life; they seek damages, declarations, and other non-pecuniary relief.
courts have denied Metropolitan Life’s motions to dismiss. There can be no assurance that Metropolitan Life will receive favorable decisions on motions in the future. While most cases brought to date have settled, Metropolitan Life intends to continue to defend aggressively against claims based on asbestos exposure.
The approximate total number of asbestos personal injury claims pending against Metropolitan Life as of the dates indicated, the approximate number of new claims during the years ended on those dates and the approximate total settlement payments made to resolve asbestos personal injury claims during those years are set forth in the following table:
The ability of Metropolitan Life 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 with any certainty 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 Metropolitan Life 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.
The ability to make estimates regarding ultimate asbestos exposure declines significantly as the estimates relate to years further in the future. In the Company’s judgment, there is a future point after which losses cease to be reasonably probable and estimable. It is reasonably possible that the Company’s total exposure to asbestos claims may be materially greater than the asbestos liability currently accrued and that future charges to income may be necessary. While the potential future charges could be material in the particular quarterly or annual periods in which they are recorded, based on information currently known by management, management does not believe any such charges are likely to have a material adverse effect on the Company’s consolidated financial position.
During 1998, Metropolitan Life paid $878 million in premiums for excess insurance policies for asbestos-related claims. The excess insurance policies for asbestos-related claims provide for recovery of losses up to $1.5 billion, which is in excess of a $400 million self-insured retention. The asbestos-related policies are also subject to annual and per-claim sublimits. Amounts are recoverable under the policies annually with respect to claims paid during the prior calendar year. Although amounts paid by Metropolitan Life in any given year that may be recoverable in the next calendar year under the policies will be reflected as a reduction in the Company’s operating cash flows for the year in which they are paid, management believes that the payments will not have a material adverse effect on the Company’s liquidity.
Over the past several years, Metropolitan Life, New England Mutual Life Insurance Company (“New England Mutual”), New England Life Insurance Company and General American Life Insurance Company (“General American”), have faced numerous claims, including class action lawsuits, alleging improper marketing and sales of individual life insurance policies or annuities. In addition, claims have been brought relating to the sale of mutual funds and other products.
Two putative class action lawsuits involving sales practices claims were filed against Metropolitan Life in Canada. In Jacynthe Evoy-Larouche v. Metropolitan Life Ins. Co. (Que. Super. Ct., filed March 1998), plaintiff alleges misrepresentations regarding dividends and future payments for life insurance policies and seeks unspecified damages. In Ace Quan v. Metropolitan Life Ins. Co. (Ont. Gen. Div., filed April 1997), plaintiff alleges breach of contract and negligent misrepresentations relating to, among other things, life insurance premium payments and seeks damages, including punitive damages. By agreement of the parties, Metropolitan Life has not yet filed a response in this action.
Shipley v. St. Paul Fire and Marine Ins. Co. and Metropolitan Property and Casualty Ins. Co. (Ill. Cir. Ct., Madison County, filed February 26 and July 2, 2003). Two putative nationwide class actions have been filed against MPC in Illinois. One suit claims breach of contract and fraud due to the alleged underpayment of medical claims arising from the use of a purportedly biased provider fee pricing system. A motion for class certification has been filed and briefed. The second suit originally alleged breach of contract and fraud arising from the alleged use of preferred provider organizations to reduce medical provider fees covered by the medical claims portion of the insurance policy. The court granted MPC’s motion to dismiss the fraud claim in the second suit. A motion for class certification has been filed and briefed. The Company is vigorously defending against the claims in these matters.
Regulatory bodies have contacted the Company and have requested information relating to market timing and late trading of mutual funds and variable insurance products and, generally, the marketing of products. The
Company believes that many of these inquiries are similar to those made to many financial services companies as part of industry-wide investigations by various regulatory agencies. The SEC has commenced an investigation with respect to market timing and late trading in a limited number of privately-placed variable insurance contracts that were sold through General American. As previously reported, in May 2004, General American received a Wells Notice stating that the SEC staff is considering recommending that the SEC bring a civil action alleging violations of the U.S. securities laws against General American. Under the SEC procedures, General American can avail itself of the opportunity to respond to the SEC staff before it makes a formal recommendation regarding whether any action alleging violations of the U.S. securities laws should be considered. General American has responded to the Wells Notice. The Company is fully cooperating with regard to these information requests and investigations. The Company at the present time is not aware of any systemic problems with respect to such matters that may have a material adverse effect on the Company’s consolidated financial position.
The People of the State of California, by and through John Garamendi, Ins. Commissioner of the State of California v. MetLife, Inc., et al. (Cal. Super. Ct., County of San Diego, filed November 18, 2004). The California Insurance Commissioner filed suit against Metropolitan Life and other non-affiliated companies alleging that the defendants violated certain provisions of the California Insurance Code. This action seeks injunctive relief relating to compensation disclosures.
In Re Ins. Brokerage Antitrust Litig. (D. N.J., filed February 24, 2005). In this multi-district proceeding, plaintiffs have filed an amended class action complaint consolidating the claims from separate actions that had been filed in or transferred to the District of New Jersey in 2004 and 2005. The consolidated amended complaint alleges that the Holding Company, Metropolitan Life, several non-affiliated insurance companies and several insurance brokers violated RICO, ERISA, and antitrust laws and committed other misconduct in the context of providing insurance to employee benefit plans and to persons who participate in such employee benefit plans. Plaintiffs seek to represent classes of employers that established employee benefit plans and persons who participated in such employee benefit plans. A motion for class certification has been filed. A motion to dismiss has not been fully decided. Plaintiffs in several other actions have voluntarily dismissed their claims. The Company is vigorously defending against the claims in these matters.
procedures reasonably designed to achieve compliance with suitability requirements regarding the sale of college savings plans, also known as 529 plans. This notification followed an industry-wide inquiry by NASD examining sales of 529 plans. In November 2006, MSI and NASD reached a settlement resolving the matter, which includes payment of a penalty and customer remediation. MSI neither admitted nor denied NASD’s findings.
In February 2006, the Company learned that the SEC commenced a formal investigation of New England Securities (“NES”) in connection with the suitability of its sales of variable universal life insurance policies. The Company believes that others in the insurance industry are the subject of similar investigations by the SEC. NES is cooperating fully with the SEC.
In 2005, MSI received a notice from the Illinois Department of Securities asserting possible violations of the Illinois Securities Act in connection with sales of a former affiliate’s mutual funds. A response has been submitted and MSI intends to cooperate fully with the Illinois Department of Securities.