As of December 31, 2018, we leased our headquarters building located at 200 Park Avenue, New York, New York. Including our headquarters, throughout the U.S. we own eight buildings and have approximately 112 leases used in support of all segments, as well as Corporate & Other.
Net income (loss) available to MetLife, Inc.’s common shareholders up $1.1 billion:
Favorable change in income (loss) from discontinued operations, net of income tax, of $986 million
Net tax-related benefit in 2017 of $1.3 billion due to U.S. Tax Reform
Net unfavorable change from our annual actuarial assumption reviews of $395 million ($297 million, net of income tax)
Our results for the year ended December 31, 2018 included the following:
a $60 million, net of income tax, increase in litigation reserves
expenses associated with our previously announced unit cost initiative of $102 million, net of income tax
a $73 million, net of income tax, charge for expenses incurred related to a guaranty fund assessment for Penn Treaty Network America Insurance Company (“Penn Treaty”)
Net income (loss) available to MetLife, Inc.’s common shareholders up $3.2 billion:
Lower losses from discontinued operations, net of income tax, of $1.7 billion
a benefit of $12 million, net of income tax, related to a refinement to prior period reinsurance receivables in Australia
a $44 million, net of income tax, charge related to an adjustment to reinsurance receivables in Australia
a $23 million, net of income tax, charge for an increase in litigation reserves
Our enterprise strategy is founded on the principle of One MetLife, where digital and simplified are the key enablers of our four strategic cornerstones: (i) optimizing value and risk by focusing on our businesses with higher internal rates of return, lower capital intensity, and maximum cash generation, (ii) driving operational excellence, by transforming into a high-performance operating company with a competitive cost structure, (iii) enabling our distribution channels to drive efficiency and productivity through digitalization and improved customer persistency, and (iv) undertaking a targeted approach to find the right solutions for the right customers through differentiated customer value propositions. This enterprise strategy has enhanced our ability to focus on the right markets, build clear differentiators, and continue to make the right investments to deliver shareholder value.
In light of the move away from a sustained low interest rate environment, compounding business growth and our expense initiative, we are targeting an adjusted return on equity, excluding accumulated other comprehensive income (“AOCI”) other than foreign currency translation adjustments (“FCTA”), of 12% to 14% over the near-term. This target reflects our unit cost improvement program and the related initiative to invest $1.0 billion by 2020 to generate a pre-tax profit margin improvement of $800 million, which represents an approximate 200 basis point decline in our direct expense ratio, excluding total notable items related to direct expenses and pension risk transfers, by 2020 from our 2015 baseline year.
Our business and results of operations are materially affected by conditions in the global capital markets and the economy generally. Stressed conditions, volatility and disruptions in global capital markets, particular markets, or financial asset classes can have an adverse effect on us, in part because we have a large investment portfolio and our insurance liabilities and derivatives are sensitive to changing market factors. See “Risk Factors - Economic Environment and Capital Markets Risks - Difficult Economic Conditions May Adversely Affect Our Business, Results of Operations and Financial Condition.”
We have market presence in numerous countries and, therefore, our business operations are exposed to risks posed by local and regional economic conditions. For example, MetLife is the largest provider of benefits to Mexican federal government personnel and public officials, however, the new administration of President López Obrador of Mexico is implementing an austerity plan which, among other measures, has eliminated benefits such as major medical insurance and contributions to additional savings benefit insurance for such individuals. See “Business - Regulation - Fiscal Measures” and “Risk Factors - Economic Environment and Capital Markets Risks - Difficult Economic Conditions May Adversely Affect Our Business, Results of Operations and Financial Condition - Currency Exchange Rate Risk.” See “- Executive Summary - Other Key Information - Argentina Highly Inflationary” for further information regarding the impact of Argentina’s highly inflationary economy on the Company’s consolidated financial statements.
Central banks around the world are using monetary policy to address regional economic conditions. For example, in the United States, citing a strengthening economy, the Federal Reserve Board has continued along its stated path of balance sheet tapering and the Federal Reserve Board’s Federal Open Market Committee has continued to increase the federal funds rate, most recently in December 2018. Similarly, recognizing the economic recovery, the European Central Bank ended quantitative easing in December 2018 and left interest rates unchanged. In Japan, however, the Japanese government and the Bank of Japan are maintaining stimulus measures in order to boost inflation expectations and achieve sustainable economic growth in Japan. Such measures include the imposition of a negative rate on commercial bank deposits, continued government bond purchases and tax reform, including the lowering of the Japanese corporate tax rate and the delay until October 2019 of an increase in the consumption tax to 10%. Going forward, Japan’s structural and demographic challenges may continue to limit its potential growth unless reforms that boost productivity are put into place. Japan’s high public sector debt levels are mitigated by low refinancing risks. Further actions by central banks in the future may affect interest rates and risk markets in the U.S., Europe, Japan and other developed and emerging economies, and may ultimately result in market volatility. We cannot predict with certainty the effect of these actions or the impact on our business operations, investment portfolio or derivatives. See “- Investments - Current Environment.”
The following summarizes the impact of the Low Interest Rate Scenario on our U.S. dollar and non-U.S. dollar denominated positions. In addition, we have included disclosure on the potential impact on 2019, 2020 and 2021 net income using the same Low Interest Rate Scenario on the mark-to-market of derivative positions that do not qualify as accounting hedges.
Based on the above assumptions, we estimate an unfavorable combined long-term and short-term interest rate impact on our consolidated adjusted earnings from the Low Interest Rate Scenario of approximately $15 million in 2019, $140 million in 2020 and $265 million in 2021. Under the Low Interest Rate Scenario, our long-term businesses are negatively impacted by the larger gap between new money yields and the yield on assets rolling off the portfolio. However, there are positive offsets under the Low Interest Rate Scenario as short-term rates are much lower than the base scenario rates and the yield curve steepens beyond 2018. For example, our securities lending business performs better than our base scenario because it is driven by the slope of the yield curve rather than by the level of interest rates. In addition, derivative income is higher primarily due to our receiver swaps where we receive a fixed rate and pay a floating rate. Further, the favorable derivative impact under the Low Interest Rate Scenario will decrease in 2020 and 2021 compared to 2019. This is driven by higher rates on forward derivative positions protection that begin in 2020.
In general, most of our group life insurance products in the U.S. segment are renewable term insurance and, therefore, have significant repricing flexibility. Interest rate risk arises mainly from minimum interest rate guarantees on retained asset accounts. These accounts have minimum interest crediting rate guarantees which range from 0.5% to 3.0%. Approximately half of these account balances are currently at their respective minimum interest crediting rates and we would expect to experience margin compression as we reinvest at lower interest rates. We have used interest rate derivatives to partially mitigate the risks of a sustained U.S. low interest rate environment. We also have exposure to interest rate risk in this business arising from our disability policy claim reserves. For these products, lower reinvestment rates cannot be offset by a reduction in liability crediting rates for established claim reserves. Group disability policies are generally renewable term policies. Rates may be adjusted on in-force policies at renewal based on the retrospective experience rating and current interest rate assumptions.
We estimate an unfavorable combined long-term and short-term interest rate impact on adjusted earnings on our Property & Casualty business from the Low Interest Rate Scenario of $0 million, $5 million and $10 million in 2019, 2020 and 2021, respectively.
Our Japan business offers traditional life insurance and accident & health products, many of which are denominated in U.S. dollars. To the extent the Japan life insurance portfolio is U.S. interest rate and LIBOR sensitive and we are unable to lower crediting rates to the customer, adjusted earnings will decline. We manage interest rate risk on our life products through a combination of product design features and ALM strategies.
We estimate an unfavorable combined long-term and short-term interest rate impact on the adjusted earnings of our MetLife Holdings segment from the Low Interest Rate Scenario of $10 million, $55 million and $100 million in 2019, 2020 and 2021, respectively.
We estimate an unfavorable combined long-term and short-term interest rate impact on the adjusted earnings of Corporate & Other from the Low Interest Rate Scenario of $5 million, $30 million and $55 million in 2019, 2020 and 2021, respectively.
The life insurance industry remains highly competitive. See “Business - Competition.” Product development is focused on differentiation leading to more intense competition with respect to product features and services. Several of the industry’s products can be quite homogeneous and subject to intense price competition. Cost reduction efforts are a priority for industry players, with benefits resulting in price adjustments to favor customers and reinvestment capacity. Larger companies have the ability to invest in brand equity, product development, technology optimization, risk management, and innovation, which are among the fundamentals for sustained profitable growth in the life insurance industry. Insurers are focused on their core businesses, specifically in markets where they can achieve scale. Insurers are increasingly seeking alternative sources of revenue; there is a focus on monetization of assets, fee-based services, and opportunities to offer comprehensive solutions, which include providing value-added services along with traditional products. Financial strength and flexibility and technology modernization are prerequisites for sustainable growth in the life insurance industry. Larger market participants tend to have the capacity to invest in analytics, distribution, and information technology and have the capability to engage with the new digital entrants. There is a shift in distribution from proprietary to third party models in mature markets, due to the lower cost structure. Evolving customer expectations are having a significant impact on the competitive environment as insurers strive to offer the superior customer service demanded by an increasingly sophisticated industry client base. We believe that the continued volatility of the financial markets and its impact on the capital position of many competitors will continue to strain the competitive environment. Legislative and other changes affecting the regulatory environment can also affect the competitive environment within the life insurance industry and within the broader financial services industry. See “Business - Regulation.” We believe that the aforementioned factors have highlighted financial strength, technology efficiency, and organizational agility as the most significant differentiators and, as a result, we believe the Company is well positioned to compete in this environment.
Separate account rates of return on variable universal life contracts and variable deferred annuity contracts affect in-force account balances on such contracts each reporting period, which can result in significant fluctuations in amortization of DAC and VOBA. Our practice to determine the impact of gross profits resulting from returns on separate accounts assumes that long-term appreciation in equity markets is not changed by short-term market fluctuations, but is only changed when sustained interim deviations are expected. We monitor these events and only change the assumption when our long-term expectation changes. The effect of an increase (decrease) by 100 basis points in the assumed future rate of return is reasonably likely to result in a decrease (increase) in the DAC and VOBA amortization with an offset to our unearned revenue liability which nets to approximately $40 million. We use a mean reversion approach to separate account returns where the mean reversion period is five years with a long-term separate account return after the five-year reversion period is over. The current long-term rate of return assumption for the variable universal life contracts and variable deferred annuity contracts is 7.0%.
Significant items contributing to the changes to DAC and VOBA amortization in 2018 consisted of the following:
Significant items contributing to the changes to DAC and VOBA amortization in 2017 consisted of the following:
A decrease in amortization of approximately $90 million from net derivative losses from freestanding derivatives hedging the variable annuity guarantees, largely offset by an increase in amortization of approximately $80 million from net derivative gains resulting from the decreases in variable annuity guarantee obligations.
Net decrease in amortization of $68 million related to policyholder dividends, expense and other primarily driven by the following:
A decrease in amortization of approximately $60 million from the annual actuarial assumption update of the closed block, partially offset by an increase in amortization of approximately $40 million from updating the dividend scales of the participating life contracts.
Net decrease in amortization of $270 million associated with net investment/net derivatives gains (losses) and GMIB, primarily driven by the following:
A decrease in amortization of approximate $40 million primarily associated with losses from GMIB hedges and the decreases in GMIB obligations.
An increase in amortization of approximately $70 million from updating the dividend scales of the participating life contracts.
Our DAC and VOBA balance is also impacted by unrealized investment gains (losses) and the amount of amortization which would have been recognized if such gains and losses had been realized. The decrease in unrealized investment gains (losses) increased the DAC and VOBA balance by $521 million, $529 million and $163 million in 2018, 2017 and 2016, respectively. See Notes 5 and 8 of the Notes to the Consolidated Financial Statements for information regarding the DAC and VOBA offset to unrealized investment gains (losses).
The impact of the range of reasonably likely variances in credit spreads increased significantly as compared to prior periods. However, these estimated effects do not take into account potential changes in other variables, such as equity price levels and market volatility, which can also contribute significantly to changes in carrying values. Therefore, the table does not necessarily reflect the ultimate impact on the consolidated financial statements under the credit spread variance scenarios presented below.
For purposes of goodwill impairment testing, if the carrying value of a reporting unit exceeds its estimated fair value, the implied fair value of the reporting unit goodwill is compared to the carrying value of that goodwill to measure the amount of impairment loss, if any. In such instances, the implied fair value of the goodwill is determined in the same manner as the amount of goodwill that would be determined in a business acquisition. The key inputs, judgments and assumptions necessary in determining estimated fair value of the reporting units include projected adjusted earnings, current book value, the level of economic capital required to support the mix of business, long-term growth rates, comparative market multiples, the account value of in-force business, projections of new and renewed business, as well as margins on such business, the level of interest rates, credit spreads, equity market levels, and the discount rate that we believe is appropriate for the respective reporting unit.
In the third quarter of 2018, the Company tested the MetLife Holdings life reporting unit for impairment using the actuarial based embedded value fair valuation approach. The estimated fair value of the reporting unit exceeded the carrying value by approximately 25% and, therefore, the reporting unit was not impaired. If we had assumed that the discount rate was 100 basis points higher than the discount rate used, the estimated fair value of the MetLife Holdings life reporting unit would have been higher than the carrying value by approximately 5%. The MetLife Holdings life reporting unit consists of operations relating to products and businesses no longer actively marketed by the Company. As of December 31, 2018, the amount of goodwill allocated to the MetLife Holdings life reporting unit was $887 million.
The Company also performed its annual goodwill impairment tests of all other reporting units during the third quarter of 2018 using a qualitative assessment and/or quantitative assessments under the market multiple and discounted cash flow valuation approaches based on best available data as of June 30, 2018 and concluded that the estimated fair values of all such reporting units were substantially in excess of their carrying values and, therefore, goodwill was not impaired.
Certain subsidiaries of MetLife, Inc. sponsor and/or administer various plans that provide defined benefit pension and other postretirement benefits covering eligible employees. See Note 17 of the Notes to the Consolidated Financial Statements for information on amendments to our U.S. benefit plans. The calculation of the obligations and expenses associated with these plans requires an extensive use of assumptions such as the discount rate, expected rate of return on plan assets, rate of future compensation increases and healthcare cost trend rates, as well as assumptions regarding participant demographics such as rate and age of retirement, withdrawal rates and mortality. In consultation with external actuarial firms, we determine these assumptions based upon a variety of factors such as historical experience of the plan and its assets, currently available market and industry data, and expected benefit payout streams.
We determine the expected rate of return on plan assets based upon an approach that considers inflation, real return, term premium, credit spreads, equity risk premium and capital appreciation, as well as expenses, expected asset manager performance, asset weights and the effect of rebalancing. Given the amount of plan assets as of December 31, 2017, the beginning of the measurement year, if we had assumed an expected rate of return for both our pension and other postretirement benefit plans that was 100 basis points higher or 100 basis points lower than the rates we assumed, the change in our net periodic benefit costs would have been a decrease of $109 million and an increase of $109 million, respectively, in 2018. This considers only changes in our assumed long-term rate of return given the level and mix of invested assets at the beginning of the year, without consideration of possible changes in any of the other assumptions described above that could ultimately accompany any changes in our assumed long-term rate of return.
In December 2017, U.S. Tax Reform was signed into law. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. As a result, the Company recognized the tax effects of U.S. Tax Reform for the year ended December 31, 2017. While the Company recorded a reasonable estimate of the tax effects of U.S. Tax Reform in the period of enactment, its income tax accounting was not complete due to uncertainties that existed at the time. Accordingly, certain U.S. Tax Reform amounts were revised in the Company’s consolidated financial statements for the year ended December 31, 2018.
See Note 20 of the Notes to the Consolidated Financial Statements for additional information regarding our assessment of litigation contingencies.
For information regarding the Separation, the Company’s 2018 sale of the FVO Brighthouse Common Stock, and ongoing transactions between MetLife and Brighthouse, see Notes 3 and 12 of the Notes to the Consolidated Financial Statements.
Management of Investment Portfolio and Hedging Market Risks with Derivatives. We manage our investment portfolio using disciplined ALM principles, focusing on cash flow and duration to support our current and future liabilities. Our intent is to match the timing and amount of liability cash outflows with invested assets that have cash inflows of comparable timing and amount, while optimizing risk-adjusted net investment income and risk-adjusted total return. Our investment portfolio is heavily weighted toward fixed income investments, with over 80% of our portfolio invested in fixed maturity securities AFS and mortgage loans. These securities and loans have varying maturities and other characteristics which cause them to be generally well suited for matching the cash flow and duration of insurance liabilities. In addition, our general account investment portfolio includes, within contractholder-directed equity securities and fair value option securities (collectively, “Unit-linked and FVO Securities”), contractholder-directed equity securities supporting unit-linked variable annuity type liabilities (“Unit-linked investments”), which do not qualify as separate account assets. The returns on these Unit-linked investments, which can vary significantly from period to period, include changes in estimated fair value subsequent to purchase, inure to contractholders and are offset in earnings by a corresponding change in policyholder account balances through interest credited to policyholder account balances.
Certain variable annuity products with guaranteed minimum benefits contain embedded derivatives that are measured at estimated fair value separately from the host variable annuity contract, with changes in estimated fair value recorded in net derivative gains (losses). We use freestanding derivatives to hedge the market risks inherent in these variable annuity guarantees. Ongoing refinement of the strategy may be required to take advantage of recently adopted NAIC rules related to a statutory accounting election for derivatives that mitigate interest rate sensitivity related to variable annuity guarantees. The restructured hedge strategy is classified as a macro hedge program, included in the non-VA program derivatives section of the table below, to protect our overall statutory capital from significant adverse economic conditions. The valuation of these embedded derivatives includes a nonperformance risk adjustment, which is unhedged, and can be a significant driver of net derivative gains (losses) and volatility in earnings, but does not have an economic impact on us.
The favorable change in net derivative gains (losses) on non-VA program derivatives was $1.1 billion ($890 million, net of income tax). This was primarily due to the U.S. dollar strengthening relative to other key currencies in 2018 versus mostly weakening in 2017, favorably impacting foreign currency swaps that primarily hedge foreign currency-denominated bonds. In addition, there was a favorable change in interest rate impact due to: (i) the impact of the 2017 restructuring of the hedge program to decrease volatility from nonqualified interest rate derivatives and to help meet prospective dividend and free cash flow objectives under varying interest rate scenarios; (ii) long-term U.S. interest rates increased in 2018 and mostly decreased in 2017, favorably impacting receive float interest rate swaps; (iii) mid-term rates increased more significantly in 2018 than 2017, positively impacting interest rate caps; and (iv) certain foreign interest rates decreased in 2018 and increased in 2017, favorably impacting receive fixed interest rate swaps indexed to those rates. Also, equity markets decreased in 2018 and increased in 2017, favorably impacting new equity options acquired primarily as part of our macro hedge program. There was also a change in the value of the underlying assets favorably impacting non-VA embedded derivatives related to funds withheld on a certain reinsurance agreement. These increases were partially offset by credit spreads widening in 2018 and narrowing in 2017, unfavorably impacting written credit default swaps used in replications. Because certain of these hedging strategies are not designated or do not qualify as accounting hedges, the changes in the estimated fair value of these freestanding derivatives are recognized in net derivative gains (losses) without an offsetting gain or loss recognized in earnings for the items being hedged.
The favorable change in net derivative gains (losses) on VA program derivatives was $314 million ($248 million, net of income tax). This was due to a favorable change of $369 million ($292 million, net of income tax) in market risks in embedded derivatives, net of the impact of freestanding derivatives hedging those risks, and a favorable change of $323 million ($255 million, net of income tax) in the nonperformance risk adjustment on embedded derivatives, partially offset by an unfavorable change of $378 million, ($299 million, net of income tax) in other risks in embedded derivatives. Other risks relate primarily to the impact of policyholder behavior and other non-market risks that generally cannot be hedged.
Changes in foreign currency exchange rates contributed to a favorable change in our freestanding derivatives and an unfavorable change in our embedded derivatives related to the assumed variable annuity guarantees from our former operating joint venture in Japan. For example, the Japanese yen strengthened against the euro by 7% in 2018 and weakened by 10% in 2017.
The aforementioned $378 million ($299 million, net of income tax) unfavorable change in other risks in embedded derivatives reflects:
A combination of other factors, which include fees being deducted from accounts, changes in the benefit base, premiums, lapses, withdrawals and deaths.
The aforementioned $323 million ($255 million, net of income tax) favorable change in the nonperformance risk adjustment on embedded derivatives resulted from a favorable change of $172 million, before income tax, as a result of model changes and changes in capital market inputs, such as long-term interest rates and key equity index levels, on variable annuity guarantees, in addition to a favorable change of $151 million, before income tax, related to changes in our own credit spread.
When the risk-free interest rate decreases in isolation, discounting the embedded derivative liability produces a higher valuation of the liability than if the risk-free interest rate had remained constant. Discounting this unfavorable change by the risk adjusted rate yields a smaller loss than by discounting at the risk-free interest rate, thus creating a gain from including an adjustment for nonperformance risk.
As a result of our annual review of actuarial assumptions, changes were made to economic, biometric, policyholder behavior, and operational assumptions. The most significant impacts were in the Asia and MetLife Holdings segments related to Japan variable annuities and the projection of closed block results, respectively, and are summarized as follows:
Results for 2017 include a $37 million ($25 million, net of 2017 income tax) gain associated with our annual review of actuarial assumptions related to reserves and DAC, of which a $21 million ($14 million, net of 2017 income tax) gain was recognized in net derivative gains (losses). Of the $37 million gain, a $96 million ($64 million, net of 2017 income tax) gain was associated with DAC and a loss of $59 million ($39 million, net of 2017 income tax) was related to reserves. The portion of the $37 million gain that is included in adjusted earnings is $100 million ($66 million, net of 2017 income tax).
Certain other insurance adjustments recorded in 2018 include a $79 million ($63 million, net of income tax) charge due to a 2018 increase in our IBNR life reserves, reflecting enhancements to our processes related to potential claims in our MetLife Holdings segment, and a favorable net insurance adjustment of $47 million ($37 million, net of income tax) resulting from reserve and DAC modeling improvements in our individual disability insurance business in our U.S. segment. These adjustments were included in adjusted earnings.
Discontinued Operations. Income (loss) from discontinued operations, net of income tax, increased $986 million for the year ended December 31, 2018 from a loss of $986 million, net of income tax, for the year ended December 31, 2017. Income (loss) from discontinued operations reflects the results of our former Brighthouse Financial segment. For further information, see Note 3 of the Notes to the Consolidated Financial Statements.
Taxes and Other Tax-Related Items. Income tax expense for the year ended December 31, 2018 was $1.2 billion, or 19% of income (loss) from continuing operations before provision for income tax, compared with an income tax benefit of $1.5 billion, or 42% of income (loss) from continuing operations before provision for income tax, for the year ended December 31, 2017. The Company’s effective tax rates differ from the U.S. statutory rate of 21% typically due to non-taxable investment income, tax credits for investments in low income housing, and foreign earnings taxed at different rates than the U.S. statutory rate. Our 2018 results include the following tax items: (i) a net tax-related benefit of $366 million related to the settlement of tax audits, which includes a $349 million benefit related to the tax treatment of a wholly-owned U.K. investment subsidiary of MLIC (comprised of a $168 million tax benefit and a $181 million interest benefit), (ii) an adjusted earnings charge of $124 million related to U.S. Tax Reform (comprised of a $78 million tax charge and a $46 million, net of income tax, reduction in net investment income), (iii) a benefit of $36 million related to a non-cash transfer of assets from a wholly-owned U.K. investment subsidiary to MLIC, (iv) a charge of $69 million related to the non-deductible loss incurred on the mark-to-market and disposition of FVO Brighthouse Common Stock, (v) a charge of $17 million related to a tax adjustment in Chile, and (vi) a charge of $5 million in Colombia to establish a deferred tax liability due to a change in tax status. Our 2017 results include the following tax items: (i) a net benefit of $1.3 billion related to the impact of U.S. Tax Reform, which includes a net benefit of $1.6 billion (comprised of a $1.8 billion tax benefit and a $222 million increase in other divested expenses reflective of a reduction in other receivables due to the revaluation of a tax receivable from Brighthouse) and an adjusted earnings charge of $298 million (comprised of a $254 million tax charge and a $44 million, net of income tax, reduction in net investment income), (ii) a tax-related benefit of $540 million related to the Separation, (iii) a $41 million benefit from the finalization of certain tax audits, (iv) a net charge of $180 million as a result of the repatriation of approximately $3.0 billion of cash following the post-Separation review of our capital needs, partially offset by a benefit associated with dividends from our non-U.S. operations, and (v) a benefit of $9 million related to the settlement of a tax audit in Argentina.
Adjusted Earnings. As more fully described in “- Non-GAAP and Other Financial Disclosures,” we use adjusted earnings, which does not equate to income (loss) from continuing operations, net of income tax, as determined in accordance with GAAP, to analyze our performance, evaluate segment performance and allocate resources. We believe that the presentation of adjusted earnings and adjusted earnings available to common shareholders, as we measure it for management purposes, enhances the understanding of our performance by highlighting the results of operations and the underlying profitability drivers of the business. Adjusted earnings and other financial measures based on adjusted earnings allow analysis of our performance relative to our business plan and facilitate comparisons to industry results. Adjusted earnings and adjusted earnings available to common shareholders should not be viewed as substitutes for net income (loss) and net income (loss) available to MetLife, Inc.’s common shareholders, respectively. Adjusted earnings available to common shareholders increased $1.2 billion, net of income tax, to $5.5 billion, net of income tax, for the year ended December 31, 2018 from $4.2 billion, net of income tax, for the year ended December 31, 2017.
A change in the risk margin adjustment measuring policyholder behavior risks, along with market and interest rate changes, and
Economic assumption updates resulted in reserve increases and DAC releases, resulting in a charge of $19 million ($13 million net of income tax).
Results for 2016 include a $648 million ($421 million, net of income tax) loss associated with our annual review of actuarial assumptions related to reserves and DAC, of which a $709 million ($461 million, net of income tax) loss was recognized in net derivative gains (losses) and a $103 million ($67 million, net of income tax) loss was recognized in updates to the closed block projection. Of the $648 million loss, a $729 million ($474 million, net of income tax) loss was related to reserves while an $81 million ($53 million, net of income tax) gain was associated with DAC.
Divested Businesses and Lag Elimination. Income (loss) before provision for income tax related to the divested businesses and lag elimination, excluding net investment gains (losses) and net derivative gains (losses), decreased $861 million ($618 million, net of income tax) to a loss of $1.1 billion ($747 million, net of income tax) in 2017 from a loss of $197 million ($129 million, net of income tax) in 2016. Included in this decline was a decrease in total revenues of $272 million, before income tax, and an increase in total expenses of $589 million, before income tax. Divested businesses include activity primarily related to the Separation. In addition, divested businesses for 2016 also include the financial impact of converting our Japan operations to calendar year-end reporting.
Adjusted Earnings. Adjusted earnings available to common shareholders increased $202 million, net of income tax, to $4.2 billion, net of income tax, for the year ended December 31, 2017 from $4.0 billion, net of income tax, for the year ended December 31, 2016.
See definitions and components of adjusted revenues and adjusted expenses under “- Non-GAAP and Other Financial Disclosures.” Further, see “- Reconciliation of revenues to adjusted revenues and expenses to adjusted expenses” for additional details on these adjustments by financial statement line item.
Foreign Currency. Changes in foreign currency exchange rates had a $7 million negative impact on adjusted earnings for 2018 compared to 2017. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. Foreign currency fluctuations can result in significant variances in the financial statement line items.
Business Growth. We benefited from positive net flows from many of our businesses, which increased our invested asset base. Growth in the investment portfolios of our U.S., Asia, and Latin America segments resulted in higher net investment income. However, this was partially offset by a corresponding increase in interest credited expenses on certain insurance-related liabilities. In our U.S. segment, an increase in average premium per policy in our auto business, partially offset by a decrease in exposures, improved adjusted earnings. Business growth also drove an increase in commissions and other variable expenses, which were partially offset by higher DAC capitalization. The combined impact of the items affecting our business growth resulted in a $153 million increase in adjusted earnings.
Underwriting, Actuarial Assumption Review and Other Insurance Adjustments. Favorable underwriting resulted in a $74 million increase in adjusted earnings primarily as a result of lower catastrophe losses, as well as favorable morbidity in our U.S. and MetLife Holdings segments, partially offset by unfavorable claims experience in our EMEA and Asia segments, as well as higher non-catastrophe losses in our Property & Casualty business. In addition, favorable mortality in our Latin America and U.S. segments was partially offset by unfavorable mortality in our MetLife Holdings segment. Our annual actuarial assumption review resulted in a decrease of $121 million in adjusted earnings when compared to 2017, primarily due to less favorable assumption changes in our MetLife Holdings and Asia segments. Refinements to DAC and certain insurance-related liabilities, which were recorded in both 2018 and 2017 across all of our segments, resulted in a $103 million increase in adjusted earnings, most notably in our U.S. segment.
Expenses. Our unit cost initiative improved expense margins and contributed to a $101 million decrease in expenses from lower (i) Separation-related expenses, (ii) employee-related costs, including expenses related to pension and postretirement benefits, and (iii) expenses for interest on certain tax positions, as well as expenses incurred in 2017 related to the guaranty fund assessment for Penn Treaty. These decreases were partially offset by higher expenses in 2018 associated with enterprise-wide initiatives, including the continued investment in our unit cost initiative.
Business Growth. An increase of $70 million in adjusted earnings was attributable to business growth. We benefited from positive net flows from many of our businesses. As a result, growth in the investment portfolios of our U.S., Asia and Latin America segments generated higher net investment income. However, this was partially offset by a corresponding increase in interest credited expense on certain insurance-related liabilities. In our U.S. segment, an increase in average premium per policy in our auto and homeowners business, partially offset by a decrease in exposures, improved adjusted earnings. Growth in our segments abroad also contributed to the increase in adjusted earnings. In our MetLife Holdings segment, negative net flows contributed to a decrease in average separate account balances and, consequently, asset-based fee income. Improved results from our start-up operations increased adjusted earnings.
Market Factors. Market factors, including interest rate levels, variability in equity market returns, and foreign currency exchange rate fluctuations, continued to impact our results; however, certain impacts were mitigated by derivatives used to hedge these risks. Excluding the impact of changes in foreign currency exchange rates on reported net investment income in our non-U.S. segments and changes in inflation rates on our inflation-indexed investments, investment yields decreased. Investment yields were negatively affected by lower prepayment fees, lower derivative income and lower returns on real estate joint ventures. In addition, earnings on our securities lending program decreased, which primarily resulted from lower margins due to a flatter yield curve, and lower returns on alternative investments (excluding the impact of U.S. Tax Reform). These decreases in net investment income were partially offset by higher returns on other limited partnership interests, driven by improvements in equity market performance. In addition, higher interest credited expenses, primarily driven by our U.S. segment as a result of a higher average interest credited rate, reduced adjusted earnings. These decreases were partially offset by higher asset-based fees in our MetLife Holdings segment as a result of favorable equity market performance in 2017. The changes in market factors discussed above resulted in a $69 million decrease in adjusted earnings.
Underwriting, Actuarial Assumption Review and Other Insurance Adjustments. Unfavorable underwriting resulted in a $13 million decrease in adjusted earnings primarily as a result of unfavorable claims experience, higher catastrophe losses and unfavorable mortality, largely offset by favorable morbidity and favorable development of prior year non-catastrophe losses in our Property & Casualty business. Favorable morbidity in our U.S. segment was partially offset by unfavorable morbidity in our MetLife Holdings segment. Higher lapses and claims in Japan, partially offset by favorable claims experience in other countries, drove unfavorable claims experience in our Asia segment. Unfavorable mortality in our Latin America and U.S. segments was partially offset by favorable mortality in our MetLife Holdings segment. The impact in both 2017 and 2016 of our annual actuarial assumption review resulted in a $166 million increase in adjusted earnings, primarily due to favorable DAC unlockings in 2017 compared to unfavorable DAC unlockings in 2016 in our MetLife Holdings segment. Refinements to DAC and certain insurance-related liabilities, which were recorded in both 2017 and 2016 across our segments, resulted in a $191 million increase in adjusted earnings. This includes favorable 2017 refinements of (i) a $36 million DAC adjustment related to certain participating whole life business assumed from Brighthouse; and (ii) a reserve adjustment resulting from modeling improvements in the reserving process of $55 million in our life business, as well as (iii) a 2017 unfavorable charge of $90 million to increase certain RIS policy reserves. This also includes an unfavorable 2016 refinement of $65 million resulting from modeling improvements in the reserving process.
Interest Expense on Debt. Interest expense on debt decreased by $35 million, mainly due to the maturity of $1.25 billion of our senior notes in June 2016.
Underwriting and Other Insurance Adjustments. In our Property & Casualty business, catastrophe-related losses decreased $88 million as compared to 2017. Losses from our commercial business increased $26 million. Non-catastrophe claim costs increased $21 million, as a result of higher auto and homeowner severities, as well as an increase in auto frequencies, partially offset by lower homeowner frequencies. As a result of overall lower claim activity, loss adjustment expenses decreased, increasing adjusted earnings by $15 million. In addition, less favorable development of prior period losses decreased adjusted earnings by $8 million. Favorable claims experience in our Group Benefits business resulted in a $47 million increase in adjusted earnings. This was primarily driven by favorable renewal results in our group disability business, as well as lower claim incidence and severity, coupled with growth and favorable claims experience in our accident & health business, partially offset by less favorable claims experience in our dental, vision and individual disability businesses. Mortality results were flat as less favorable claim experience in our term life business was offset by favorable mortality in our universal life and accidental death & dismemberment businesses. Favorable mortality in our specialized life insurance, pension risk transfer and structured settlement businesses increased adjusted earnings by $57 million. Refinements to certain insurance and other liabilities, which were recorded in both 2018 and 2017, resulted in a $131 million increase in adjusted earnings. Such refinements include favorable insurance adjustments resulting from reserve and DAC modeling improvements in our individual disability insurance business in 2018 and a charge in 2017 to increase certain RIS policy reserves.
Business Growth. The impact of deposits, net flows from funding agreements and increased premiums in 2017 resulted in higher average invested assets, improving net investment income. However, consistent with the growth in average invested assets from increased premiums, interest credited on long-duration contracts increased. An increase in average premium per policy in both our auto and homeowners businesses, partially offset by the decrease in exposures, improved adjusted earnings. The remaining increase in premiums, fees and other revenues, coupled with a decline in direct expenses, was partially offset by higher volume-related expenses. The 2017 abatement of the annual health insurer fee under PPACA was offset by a corresponding decrease in premiums, fees and other revenues. The combined impact of the items discussed above increased adjusted earnings by $198 million.
Foreign Currency. Changes in foreign currency exchange rates increased adjusted earnings by $6 million for 2018 compared to 2017, primarily due to the strengthening of the Korean won against the U.S. dollar. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. Foreign currency fluctuations can result in significant variances in the financial statement line items.
U.S. Tax Reform. The changes from U.S. Tax Reform resulted in an increase in adjusted earnings of $47 million for 2018 compared to 2017.
Market Factors. Market factors, including interest rate levels and variability in equity market returns, continued to impact our results; however, certain impacts were mitigated by derivatives used to hedge these risks. Investment results were favorably impacted by higher returns on real estate investments, derivative income, and yields on mortgage loans. In addition, higher earnings from our operating joint venture in China improved net investment income. An increase in higher-yielding fixed income securities supporting U.S. dollar-denominated products sold in Japan was partially offset by lower yields on fixed income securities in Korea. Investment yields were negatively impacted by increased investment expenses and lower returns on hedge funds. The net increase in investment yields was partially offset by an increase in interest credited expenses on certain insurance liabilities. The combined impact of the items discussed above increased adjusted earnings by $7 million.
Market Factors. Market factors, including interest rate levels and variability in equity market returns continued to impact our results; however, certain impacts were mitigated by derivatives used to hedge these risks. Investment results were favorably impacted by higher returns on other limited partnership interests, driven by improvements in equity market performance, and higher income on real estate investments, which included a lease termination fee. These increases were partially offset by the unfavorable impact of lower interest rates on fixed maturity securities AFS in Japan. The decrease in returns from lower interest rates in Japan was partially offset by the favorable impact of increased sales of foreign currency-denominated fixed annuities in Japan, primarily in its Australian dollar-denominated portfolio, which drove an increase in higher yielding foreign currency-denominated fixed maturity securities AFS. The combined impact of the items discussed above increased adjusted earnings by $45 million.
Expenses and Taxes. Higher expenses, primarily driven by project costs, reduced adjusted earnings by $11 million. Results for 2017 include a charge of $70 million related to a U.S. tax on dividends from our Japan operations. Results for 2016 include a $25 million tax benefit related to a change in the corporate tax rate in Japan (which includes a benefit of $20 million that pertains to prior periods).
Foreign Currency. Changes in foreign currency exchange rates decreased adjusted earnings by $13 million for 2018 compared to 2017 mainly due to the weakening of the Mexican and Argentine pesos against the U.S. dollar. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. Foreign currency fluctuations can result in significant variances in the financial statement line items.
Business Growth. Latin America experienced growth across several lines of business primarily within Chile and Mexico. This growth resulted in increased premiums and policy fee income, which was largely offset by related changes in policyholder benefits. Positive net flows, primarily from Chile and Argentina, resulted in an increase in average invested assets and generated higher net investment income. This was partially offset by an increase in interest credited expenses on certain insurance liabilities. Business growth also drove an increase in commissions, which was partially offset by higher DAC capitalization. The combined impact of the items affecting our business growth increased adjusted earnings by $10 million.
Market Factors. Market factors, including interest rate levels and variability in equity market returns, continued to impact our results; however, certain impacts were mitigated by derivatives used to hedge these risks. Changes in market factors resulted in an $8 million decrease in adjusted earnings despite higher investment yields. This was primarily due to lower returns on FVO Securities in Chile and higher interest credited expenses, partially offset by improved yields on fixed income securities in Mexico and Chile, as well as higher derivative income in Chile.
Market Factors. Market factors, including interest rate levels and variability in equity market returns continued to impact our results; however, certain impacts were mitigated by derivatives used to hedge these risks. Changes in market factors resulted in a $19 million increase in adjusted earnings primarily due to higher investment yields. The increase in investment yields was primarily driven by higher returns from FVO Securities in Chile and mortgage loans in Mexico. These increases were largely offset by higher interest credited expenses and lower yields on fixed income securities in Chile and Argentina.
Foreign Currency. The impact of changes in foreign currency exchange rates resulted in a slight increase in adjusted earnings for 2018 compared to 2017, primarily driven by the weakening of the U.S. dollar against the euro, the British pound, and the Polish zloty, almost entirely offset by the strengthening of the U.S. dollar against the Turkish lira. Unless otherwise stated, all amounts discussed below are net of foreign currency fluctuations. Foreign currency fluctuations can result in significant variances in the financial statement line items.
U.S. Tax Reform. The changes from U.S. Tax Reform resulted in a decrease in adjusted earnings of $21 million for 2018 as compared to 2017.
Business Growth. Growth from our credit life and accident & health businesses in Turkey and across several European markets resulted in a $25 million increase in adjusted earnings.
Taxes and Other. A decrease in our invested asset base, primarily due to dividend payments, negatively impacted net investment income resulting in an $8 million decrease in adjusted earnings. In addition, adjusted earnings decreased by $5 million due to unfavorable revisions to tax assets in both 2018 and 2017 and a reinsurance profit share in 2017 resulted in a $2 million decrease in adjusted earnings.
Expenses. Adjusted earnings increased by $5 million primarily due to expense discipline across the region, as well as enterprise-wide initiatives, notably the closing of the wealth management product to new business in the U.K., partially offset by additional costs related to regulatory and compliance requirements.
Expenses. Adjusted earnings increased by $181 million as a result of lower expenses, primarily due to lower costs as a result of the U.S. Retail Advisor Force Divestiture, partially offset by Separation-related expenses.
Other Net Investment Income. Higher yields on fixed income securities, as well as higher returns on private equities and real estate investments, were partially offset by lower returns on the remainder of the portfolio, resulting in an increase of $33 million in other net investment income.
Interest Expense on Debt. Interest expense on debt decreased by $96 million, primarily due to: (i) the exchange of senior notes for FVO Brighthouse Common Stock; (ii) the redemption of senior notes for cash; (iii) the maturity of senior notes during 2018; (iv) lower interest rates on certain intercompany senior notes redenominated to Japanese yen; and (v) the maturity of $1.0 billion of senior notes in December 2017. These redenominated intercompany senior notes, which eliminate in consolidation, are held by our business segments.
Corporate Initiatives and Projects. Expenses associated with corporate initiatives and projects increased by $103 million, primarily due to higher costs associated with the continued investment in our unit cost initiative, partially offset by 2017 lease impairments and lower costs associated with certain other enterprise-wide initiatives.
Provision for Income Tax (Expense) Benefit and Other Tax-Related Items. In addition to the impact of U.S. Tax Reform, Corporate & Other’s effective tax rate differs from the U.S. statutory rate of 21% typically due to benefits from the impact of certain permanent tax-preferenced items, including non-taxable investment income, tax credits for investments in low income housing and foreign earnings taxed at different rates than the U.S. statutory rate. In 2018, the Company recognized net tax-related benefits of $364 million related to the settlement of tax audits. Of this amount, $349 million related to the tax treatment of a wholly-owned U.K. investment subsidiary of MLIC which was comprised of a $168 million tax benefit and a $181 million interest benefit. Our 2018 results also included a $36 million tax benefit related to a non-cash transfer of assets from a wholly-owned U.K. investment subsidiary to MLIC, as well as a $32 million tax charge for decreased utilization of tax-preferenced items. In 2017, the Company recognized a $180 million net tax charge related to the repatriation of approximately $3.0 billion of cash following the post-Separation review of our capital needs, partially offset by a tax benefit associated with dividends from our non-U.S. operations. Our 2017 results also included a $41 million net tax-related benefit from the finalization of certain tax audits.
Preferred Stock Dividends. Preferred stock dividends increased $38 million as a result of the issuance of Series D and Series E preferred stock in 2018.
Other Business Activities. Adjusted earnings from other business activities increased $23 million. This was primarily due to growth and improved results from our start-up operations predominantly from our investment management business.
Interest Expense on Debt. Interest expense on debt decreased by $35 million, mainly due to the maturity of $1.3 billion of our senior notes in June 2016.
Incremental Tax Benefit and Other Tax-Related Items. Corporate & Other benefits from the impact of certain permanent tax preferenced items, including non-taxable investment income and tax credits for investments in low income housing. As a result, our effective tax rate differs from the U.S. statutory rate of 35%. In 2017, we had a $180 million net tax charge related to the repatriation of approximately $3.0 billion of cash following the post-Separation review of our capital needs, partially offset by a tax benefit associated with dividends from our non-U.S. operations and a $41 million tax benefit from the finalization of certain tax audits. Results for 2016 include a $46 million tax benefit related to the finalization of certain tax audits. In addition, higher utilization of tax preferenced items increased adjusted earnings by $106 million over 2016.
market valuation risk, relating to the variability in the estimated fair value of investments associated with changes in market factors such as credit spreads and equity market levels. A widening of credit spreads will adversely impact the net unrealized gain (loss) position of the fixed income investment portfolio, will increase losses associated with credit-based non-qualifying derivatives where we assume credit exposure, and, if credit spreads widen significantly or for an extended period of time, will likely result in higher OTTI. Credit spread tightening will reduce net investment income associated with purchases of fixed maturity securities AFS and will favorably impact the net unrealized gain (loss) position of the fixed income investment portfolio;
currency risk, relating to the variability in currency exchange rates for foreign denominated investments including with respect to the U.K.’s planned withdrawal from the EU. This risk relates to potential decreases in estimated fair value and net investment income resulting from changes in currency exchange rates versus the U.S. dollar. In general, the weakening of foreign currencies versus the U.S. dollar will adversely affect the estimated fair value of our foreign denominated investments; and
We use purchased credit default swaps to mitigate credit risk in our investment portfolio. Generally, we purchase credit protection by entering into credit default swaps referencing the issuers of specific assets we own. In certain cases, basis risk exists between these credit default swaps and the specific assets we own. For example, we may purchase credit protection on a macro basis to reduce exposure to specific industries or other portfolio concentrations. In such instances, the referenced entities and obligations under the credit default swaps may not be identical to the individual obligors or securities in our investment portfolio. In addition, our purchased credit default swaps may have shorter tenors than the underlying investments they are hedging, which gives us more flexibility in managing our credit exposures. We believe that our purchased credit default swaps serve as effective economic hedges of our credit exposure.
We have country specific exposure to volatility, as we maintain general account investments in the selected countries as summarized below to support our insurance operations and related policyholder liabilities in these countries and we also have exposure through our global portfolio diversification. In addition, we have sector specific exposure to volatility, including the impact of lower oil prices and variability in oil prices, on the energy sector.
Selected Sector: Our exposure to energy sector fixed maturity securities AFS was $8.5 billion (comprised of fixed maturity securities AFS of $8.5 billion at estimated fair value and related net written credit default swaps of $55 million at notional value), of which 86% were investment grade, with unrealized losses of $15 million at December 31, 2018. We maintain a diversified energy sector fixed maturities securities portfolio across sub-sectors and issuers. This portfolio comprised less than 2% of total investments at December 31, 2018.
See “- Non-GAAP and Other Financial Disclosures - Adjusted earnings and related measures - Adjusted revenues and adjusted expenses - Net investment income” for a discussion of the adjustments made to net investment income under GAAP in calculating net investment income, as reported on an adjusted basis.
Investment income from fixed maturity securities AFS includes amounts from FVO Securities of $51 million, $68 million and $37 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Redeemable preferred stock with a stated maturity is included within fixed maturity securities AFS. These securities, which are commonly referred to as “capital securities,” primarily have cumulative interest deferral features and are primarily issued by U.S. financial institutions.
Valuation of Securities. We are responsible for the determination of the estimated fair value of our investments. We determine the estimated fair value of publicly-traded securities after considering one of three primary sources of information: quoted market prices in active markets, independent pricing services, or independent broker quotations. We determine the estimated fair value of privately-placed securities after considering one of three primary sources of information: market standard internal matrix pricing, market standard internal discounted cash flow techniques, or independent pricing services (after we determine the independent pricing services’ use of available observable market data). For publicly-traded securities, the number of quotations obtained varies by instrument and depends on the liquidity of the particular instrument. Generally, we obtain prices from multiple pricing services to cover all asset classes and obtain multiple prices for certain securities, but ultimately utilize the price with the highest placement in the fair value hierarchy. Independent pricing services that value these instruments use market standard valuation methodologies based on data about market transactions and inputs from multiple pricing sources that are market observable or can be derived principally from or corroborated by observable market data. See Note 10 of the Notes to the Consolidated Financial Statements for a discussion of the types of market standard valuation methodologies utilized and key assumptions and observable inputs used in applying these standard valuation methodologies. When a price is not available in the active market or through an independent pricing service, management values the security primarily using market standard internal matrix pricing or discounted cash flow techniques, and non-binding quotations from independent brokers who are knowledgeable about these securities. Independent non-binding broker quotations utilize inputs that may be difficult to corroborate with observable market data. As shown in the following section, less than 1% of our fixed maturity securities AFS were valued using non-binding quotations from independent brokers at December 31, 2018.
The majority of the Level 3 fixed maturity securities AFS and equity securities were concentrated in three sectors: U.S. and foreign corporate securities and RMBS at December 31, 2018. During the year ended December 31, 2018, Level 3 fixed maturity securities AFS decreased by $1.4 billion, or 9%. The decrease was driven by transfers out of Level 3 in excess of transfers into Level 3 and a decrease in estimated fair value recognized in OCI, partially offset by purchases in excess of sales.
We maintain a diversified portfolio of corporate fixed maturity securities AFS across industries and issuers. This portfolio does not have any exposure to any single issuer in excess of 1% of total investments and the top 10 holdings comprised 1% of total investments at both December 31, 2018 and 2017. The tables below present our U.S. and foreign corporate securities holdings by industry at:
We held $49.5 billion and $49.3 billion of Structured Securities, at estimated fair value, at December 31, 2018 and 2017, respectively, as presented in the RMBS, ABS and CMBS sections below.
The tables above reflect NRSRO ratings including Moody’s, S&P, Fitch and Morningstar. CMBS designated NAIC 1 were 98.3% and 98.0% of total CMBS at December 31, 2018 and 2017, respectively.
Credit-related impairments of fixed maturity securities AFS were $40 million, $10 million and $97 million for the years ended December 31, 2018, 2017 and 2016, respectively.
In 2018, we adopted new guidance under which equity securities are no longer evaluated for impairment, rather are measured at fair value through net income. Accordingly, there were no equity securities impairments for the year ended December 31, 2018. See Note 1 of the Notes to the Consolidated Financial Statements.
Overall OTTI losses recognized in earnings on fixed maturity securities AFS were $10 million for the year ended December 31, 2017, as compared to $107 million for the year ended December 31, 2016. The most significant decrease in OTTI losses was in U.S. and foreign corporate securities, which comprised $4 million for the year ended December 31, 2017, as compared to $87 million for the year ended December 31, 2016. A decrease of $83 million in OTTI losses was concentrated in industrial securities and was the result of lower oil prices impacting the energy sector in 2016.
The estimated fair value of these investments, which are primarily comprised of Unit-linked investments, was $12.6 billion and $16.7 billion, or 2.8% and 3.7% of cash and invested assets, at December 31, 2018 and 2017, respectively. See Notes 1 and 10 of the Notes to the Consolidated Financial Statements for a description of this portfolio, its fair value hierarchy and a rollforward of the fair value measurements for these investments measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs.
See “- Liquidity and Capital Resources - The Company - Liquidity and Capital Uses - Securities Lending,” “- Liquidity and Capital Resources - The Company - Liquidity and Capital Uses - Repurchase Agreements” and Notes 1 and 8 of the Notes to the Consolidated Financial Statements for information regarding our securities lending program and our repurchase agreement transactions.
We diversify our mortgage loan portfolio by both geographic region and property type to reduce the risk of concentration. Of our commercial and agricultural mortgage loan portfolios, 84% are collateralized by properties located in the United States, with the remaining 16% collateralized by properties located outside the United States, which includes 5% of properties located in the U.K., at December 31, 2018. The carrying values of our commercial and agricultural mortgage loans located in California, New York and Texas were 19%, 11% and 7%, respectively, of total commercial and agricultural mortgage loans at December 31, 2018. Additionally, we manage risk when originating commercial and agricultural mortgage loans by generally lending up to 75% of the estimated fair value of the underlying real estate collateral.
Loan-to-value ratios and debt service coverage ratios are common measures in the assessment of the quality of commercial mortgage loans. Loan-to-value ratios are a common measure in the assessment of the quality of agricultural mortgage loans. Loan-to-value ratios compare the amount of the loan to the estimated fair value of the underlying collateral. A loan-to-value ratio greater than 100% indicates that the loan amount is greater than the collateral value. A loan-to-value ratio of less than 100% indicates an excess of collateral value over the loan amount. Generally, the higher the loan-to-value ratio, the higher the risk of experiencing a credit loss. The debt service coverage ratio compares a property’s net operating income to amounts needed to service the principal and interest due under the loan. Generally, the lower the debt service coverage ratio, the higher the risk of experiencing a credit loss. For our commercial mortgage loans, our average loan-to-value ratio was 55% and 54% at December 31, 2018 and 2017, respectively, and our average debt service coverage ratio was 2.5x and 2.7x at December 31, 2018 and 2017, respectively. The debt service coverage ratio, as well as the values utilized in calculating the ratio, is updated annually on a rolling basis, with a portion of the portfolio updated each quarter. In addition, the loan-to-value ratio is routinely updated for all but the lowest risk loans as part of our ongoing review of our commercial mortgage loan portfolio. For our agricultural mortgage loans, our average loan-to-value ratio was 46% and 44% at December 31, 2018 and 2017, respectively. The values utilized in calculating the agricultural mortgage loan loan-to-value ratio are developed in connection with the ongoing review of the agricultural loan portfolio and are routinely updated.
Geographical diversification: Of our real estate investments, excluding funds, 63% were located in the United States, with the remaining 37% located outside the United States, at December 31, 2018. The carrying value of our real estate investments, excluding funds, located in Japan, California and DC were 33%, 13% and 10%, respectively, of total real estate investments, excluding funds, at December 31, 2018. Real estate funds were 20% of our real estate investments at December 31, 2018. The majority of these funds hold underlying real estate investments that are well diversified across the United States.
(2) See Note 8 of the Notes to the Consolidated Financial Statements.
Leveraged lease impairments were $105 million, $79 million and $77 million for the years ended December 31, 2018, 2017 and 2016, respectively.
See Notes 1, 8 and 9 of the Notes to the Consolidated Financial Statements for information regarding freestanding derivatives with positive estimated fair values, tax credit and renewable energy partnerships, leveraged and direct financing leases, annuities funding structured settlement claims, FHLB common stock, operating joint ventures and funds withheld.
The statement of operations effects of derivatives in net investments in foreign operations, cash flow, fair value, or nonqualifying hedge relationships for the years ended December 31, 2018, 2017 and 2016.
The gain (loss) on Level 3 derivatives primarily relates to foreign currency swaps and forwards that are valued using an unobservable portion of the swap yield curves and interest rate total return swaps with unobservable repurchase rates. Other significant inputs, which are observable, include equity index levels, equity volatility and the swap yield curves. We validate the reasonableness of these inputs by valuing the positions using internal models and comparing the results to broker quotations.
The favorable change in net gains (losses) on purchased credit default swaps of $30 million was due to certain credit spreads on credit default swaps hedging certain bonds widening in the current period as compared to narrowing in the prior period. The unfavorable change in net gains (losses) on written credit default swaps of ($277) million was due to certain credit spreads on certain credit default swaps used as replications widening in the current period as compared to narrowing the prior period.
Securities lending: Periodically we receive non-cash collateral for securities lending from counterparties, which cannot be sold or re-pledged, and which is not reflected on our consolidated balance sheets. The amount of this non-cash collateral was $78 million and $19 million at estimated fair value at December 31, 2018 and 2017, respectively.
As lessee, we have entered into various lease and sublease agreements for office space and equipment. Our commitments under such lease agreements are included within the contractual obligations table. See “- Liquidity and Capital Resources - The Company - Contractual Obligations” and Note 20 of the Notes to the Consolidated Financial Statements.
We have experienced, and will likely in the future experience, catastrophe losses and possibly acts of terrorism, as well as turbulent financial markets that may have an adverse impact on our business, results of operations and financial condition. Due to their nature, we cannot predict the incidence, timing, severity or amount of losses from catastrophes and acts of terrorism, but we make broad use of catastrophic and non-catastrophic reinsurance to manage risk from these perils. We also use hedging, reinsurance and other risk management activities to mitigate financial market volatility.
Future policy benefits for this segment are held primarily for traditional life, endowment, annuity and accident & health contracts. They are also held for total return pass-through provisions included in certain universal life and savings products. They include certain liabilities for variable annuity and variable life guarantees of minimum death benefits, and longevity guarantees. Factors impacting these liabilities include sustained periods of lower yields than rates established at policy issuance, lower than expected asset reinvestment rates, market volatility, actual lapses resulting in lower than expected income, and actual mortality or morbidity resulting in higher than expected benefit payments. We mitigate our risks by applying various ALM strategies.
Future policy benefits for this segment are held primarily for immediate annuities in Chile, Argentina and Mexico and traditional life contracts mainly in Mexico, Brazil and Colombia. There are also liabilities held for total return pass-through provisions included in certain universal life and savings products in Mexico. Factors impacting these liabilities include sustained periods of lower yields than rates established at policy issuance, lower than expected asset reinvestment rates, and mortality and lapses different than expected. We mitigate our risks by applying various ALM strategies.
Future policy benefits for the life business are comprised mainly of liabilities for traditional life insurance contracts. In order to manage risk, we have often reinsured a portion of the mortality risk on life insurance policies. We routinely evaluate our reinsurance programs, which may result in increases or decreases to existing coverage. We have entered into various interest rate derivative positions to mitigate the risk that investment of premiums received and reinvestment of maturing assets over the life of the policy will be at rates below those assumed in the original pricing of these contracts. For the annuities business, future policy benefits are comprised mainly of liabilities for life-contingent income annuities and liabilities for the variable annuity guaranteed minimum benefits that are accounted for as insurance. Other future policyholder benefits are comprised mainly of liabilities for disabled lives under disability waiver of premium policy provisions, and active life policies. In addition, for our other products, future policyholder benefits related to the reinsurance of our former Japan joint venture are comprised of liabilities for the variable annuity guaranteed minimum benefits that are accounted for as insurance.
Policyholder account balances in this business are held for retained asset accounts, universal life policies, the fixed account of variable life insurance policies and specialized life insurance products for benefit programs. Policyholder account balances are credited interest at a rate we determine, which is influenced by current market rates. A sustained low interest rate environment could adversely impact liabilities and earnings as a result of the minimum credited rate guarantees present in most of these policyholder account balances. We have various interest rate derivative positions to partially mitigate the risks associated with such a scenario.
The table below presents the breakdown of account value subject to minimum guaranteed crediting rates for RIS:
Policyholder account balances in this segment are held largely for investment-type products and universal life products in Mexico and Chile, and deferred annuities in Brazil. Some of the deferred annuities in Brazil are Unit-linked investments that do not meet the GAAP definition of separate accounts. The rest of the deferred annuities have minimum credited rate guarantees, which could adversely impact liabilities and earnings in a sustained low interest rate environment. Liabilities for Unit-linked investments are impacted by changes in the fair value of the associated investments, as the return on assets is generally passed directly to the policyholder.
Life policyholder account balances are held for retained asset accounts, universal life policies, the fixed account of variable life insurance policies, and funding agreements. For annuities, policyholder account balances are held for fixed deferred annuities, the fixed account portion of variable annuities, non-life contingent income annuities, and embedded derivatives related to variable annuity guarantees. Interest is credited to the policyholder’s account at interest rates we determine which are influenced by current market rates, subject to specified minimums. A sustained low interest rate environment could adversely impact liabilities and earnings as a result of the minimum credited rate guarantees present in most of these policyholder account balances. We have various interest rate derivative positions to partially mitigate the risks associated with such a scenario. Additionally, for our other products, policyholder account balances are held for variable annuity guarantees assumed from a former operating joint venture in Japan that are accounted for as embedded derivatives.
The carrying amounts for guarantees included in policyholder account balances above include nonperformance risk adjustments of $263 million and $130 million at December 31, 2018 and 2017, respectively. These nonperformance risk adjustments represent the impact of including a credit spread when discounting the underlying risk neutral cash flows to determine the estimated fair values. The nonperformance risk adjustment does not have an economic impact on us as it cannot be monetized given the nature of these policyholder liabilities. The change in valuation arising from the nonperformance risk adjustment is not hedged.
The sections below provide further detail by total account value for certain of our most popular guarantees. Total account values include amounts not reported on the consolidated balance sheets from assumed business, Unit-linked investments that do not qualify for presentation as separate account assets, and amounts included in our general account. The total account values and the net amounts at risk include direct and assumed business, but exclude offsets from hedging or ceded reinsurance, if any.
The table below presents our living benefit guarantees based on total account values at December 31, 2018:
Total account value excludes $22.0 billion for contracts with no living benefit guarantees. The Company’s annuity contracts with guarantees may offer more than one type of guarantee in each contract. Therefore, the amounts listed for GMDBs and for living benefit guarantee amounts are not mutually exclusive.
The Asia and EMEA segments include the non-life contingent portion of the GMWB total account value of $936 million with a guarantee at annuitization.
The table below presents our GMIB associated total account values, by their guaranteed payout basis, at December 31, 2018:
Once eligible for annuitization, contractholders would be expected to annuitize only if their contracts were in-the-money. We calculate in-the-moneyness with respect to GMIBs consistent with net amount at risk as discussed in Note 4 of the Notes to the Consolidated Financial Statements, by comparing the contractholders’ income benefits based on total account values and current annuity rates versus the guaranteed income benefits. The net amount at risk was $483 million at December 31, 2018, of which $418 million was related to GMIBs. For those contracts with GMIB, the table below presents details of contracts that are in-the-money and out-of-the-money at December 31, 2018:
An integral part of our liquidity management includes managing our level of liquid assets, which was $202.7 billion and $209.1 billion at December 31, 2018 and 2017, respectively. Liquid assets include cash and cash equivalents, short-term investments and publicly-traded securities, excluding assets that are pledged or otherwise committed. Assets pledged or otherwise committed include amounts received in connection with securities lending, repurchase agreements, derivatives, regulatory deposits, the collateral financing arrangement, funding agreements and secured borrowings, as well as amounts held in the closed block.
We have established several senior management committees as part of our capital management process. These committees, including the Capital Management Committee and the Enterprise Risk Committee (“ERC”), regularly review actual and projected capital levels (under a variety of scenarios including stress scenarios) and our annual capital plan in accordance with our capital policy. The Capital Management Committee is comprised of members of senior management, including MetLife, Inc.’s Chief Financial Officer (“CFO”), Treasurer, and Chief Risk Officer (“CRO”). The ERC is also comprised of members of senior management, including MetLife, Inc.’s CFO, CRO and Chief Investment Officer.
Our Board of Directors and senior management are directly involved in the development and maintenance of our capital policy. The capital policy sets forth, among other things, minimum and target capital levels and the governance of the capital management process. All capital actions, including proposed changes to the annual capital plan, capital targets or capital policy, are reviewed by the Finance and Risk Committee of the Board of Directors prior to obtaining full Board of Directors approval. The Board of Directors approves the capital policy and the annual capital plan and authorizes capital actions, as required.
See “Risk Factors - Capital Risks - Legal and Regulatory Restrictions May Prevent Us from Paying Dividends and Repurchasing Our Stock at the Level We Wish” and Note 15 of the Notes to the Consolidated Financial Statements for information regarding restrictions on payment of dividends and stock repurchases. See also “- The Company - Liquidity and Capital Uses - Common Stock Repurchases” for information regarding MetLife, Inc.’s common stock repurchase authorizations.
All general account assets within a particular legal entity - other than those which may have been pledged to a specific purpose - are generally available to fund obligations of the general account of that legal entity.
Rating agencies assign insurer financial strength ratings to MetLife, Inc.’s U.S. life insurance subsidiaries and credit ratings to MetLife, Inc. and certain of its subsidiaries. Financial strength ratings represent the opinion of rating agencies regarding the ability of an insurance company to pay obligations under insurance policies and contracts in accordance with their terms. Credit ratings indicate the rating agency’s opinion regarding a debt issuer’s ability to meet the terms of debt obligations in a timely manner. They are important factors in our overall funding profile and ability to access certain types of liquidity. The level and composition of regulatory capital at the subsidiary level and our equity capital are among the many factors considered in determining our insurer financial strength ratings and credit ratings. Each agency has its own capital adequacy evaluation methodology, and assessments are generally based on a combination of factors. In addition to heightening the level of scrutiny that they apply to insurance companies, rating agencies have increased and may continue to increase the frequency and scope of their credit reviews, may request additional information from the companies that they rate and may adjust upward the capital and other requirements employed in the rating agency models for maintenance of certain ratings levels.
Downgrades in our insurer financial strength ratings could have a material adverse effect on our financial condition and results of operations in many ways. See “Risk Factors - Economic Environment and Capital Markets Risks - A Downgrade or a Potential Downgrade in Our Financial Strength or Credit Ratings Could Result in a Loss of Business and Materially Adversely Affect Our Financial Condition and Results of Operations.”
MLIC cedes specific policy classes, including term and universal life insurance, participating whole life insurance, LTD insurance, group life insurance and other business to various wholly-owned captive reinsurers. The reinsurance activities among these affiliated companies are eliminated within our consolidated results of operations. The statutory reserves of such affiliated captive reinsurers are supported by a combination of funds withheld assets, investment assets and letters of credit issued by unaffiliated financial institutions. MetLife, Inc. has entered into various support agreements in connection with the activities of these captive reinsurers. See “- MetLife, Inc. - Liquidity and Capital Uses - Support Agreements” for further details on certain of these guarantees. MLIC has entered into reinsurance agreements with affiliated captive reinsurers for risk and capital management purposes, as well as to manage statutory reserve requirements related to universal life and term life insurance policies and other business.
The principal cash inflows from our financing activities come from issuances of debt and other securities, deposits of funds associated with policyholder account balances and lending of securities. The principal cash outflows come from repayments of debt and collateral financing arrangements, payments of dividends on and repurchases of MetLife, Inc.’s securities, withdrawals associated with policyholder account balances, cash disposed of in the distribution of Brighthouse and the return of securities on loan. The primary liquidity concerns with respect to these cash flows are market disruption and the risk of early contractholder and policyholder withdrawal. The cash flows from discontinued operations are not separately classified, but generally arise from the same activities described above.
Certain of our U.S. insurance subsidiaries are members of a regional FHLB. During the years ended December 31, 2018, 2017 and 2016, we issued $27.3 billion, $22.4 billion and $17.0 billion, respectively, and repaid $27.5 billion, $22.4 billion and $15.2 billion, respectively, under funding agreements with certain regional FHLBs. At December 31, 2018 and 2017, total obligations outstanding under these funding agreements were $15.1 billion and $15.3 billion, respectively. See Note 4 of the Notes to the Consolidated Financial Statements.
Federal Home Loan Bank Advance Agreements, Reported in Payables for Collateral Under Securities Loaned and Other Transactions
The unsecured revolving credit facility is used for general corporate purposes, to support the borrowers’ commercial paper programs and for the issuance of letters of credit. At December 31, 2018, we had outstanding $446 million in letters of credit and no drawdowns against this facility. Remaining availability was $2.6 billion at December 31, 2018.
The committed facilities are used as collateral for certain of our affiliated reinsurance liabilities. At December 31, 2018, we had outstanding $2.8 billion in letters of credit and no drawdowns against these facilities. Remaining availability was $491 million at December 31, 2018. As of December 31, 2018, Brighthouse was a beneficiary of $2.4 billion of letters of credit issued under these committed facilities. See Note 3 of the Notes to the Consolidated Financial Statements.
We have no reason to believe that our lending counterparties will be unable to fulfill their respective contractual obligations under these facilities. As commitments under our credit and committed facilities may expire unused, these amounts do not necessarily reflect our actual future cash funding requirements.
In June 2017, Brighthouse Holdings, LLC issued 50,000 units of 6.50% fixed rate cumulative preferred units to MetLife, Inc. and, in turn, MetLife, Inc. sold the preferred units to third-party investors for net proceeds of $49 million. See Note 3 of the Notes to the Consolidated Financial Statements.
Cash proceeds from dispositions during the years ended December 31, 2018, 2017 and 2016 were $0, $0, and $291 million, respectively. See Note 3 of the Notes to the Consolidated Financial Statements.
During the years ended December 31, 2018, 2017 and 2016, MetLife, Inc. paid dividends on its preferred stock of $141 million, $103 million and $103 million, respectively. During each of the years ended December 31, 2018, 2017 and 2016, MetLife, Inc. paid $1.7 billion of dividends on its common stock. See Note 15 of the Notes to the Consolidated Financial Statements for information regarding the calculation and timing of these dividend payments.
Once a Trigger Event occurs for a Final Quarter End Test Date, the suspension of payments of dividends and interest (in the absence of sufficient net proceeds from the issuance of certain securities during specified periods) would continue until there is no Trigger Event at a subsequent Final Quarter End Test Date, and, if the test in the second paragraph above caused the Trigger Event, the adjusted stockholders’ equity amount is no longer 10% or more below its level at the Benchmark Quarter End Test Date that is associated with the Trigger Event. In the case of successive Trigger Events, the suspension would continue until MetLife satisfies these conditions for each of the Trigger Events.
The junior subordinated debentures further provide that MetLife, Inc. may, at its option and provided that certain conditions are met, elect to defer payment of interest. See Note 14 of the Notes to the Consolidated Financial Statements. Any such elective deferral would trigger the dividend stopper provisions.
In August 2018, MetLife, Inc. repaid at maturity the remaining $533 million of its 6.817% senior notes;
In December 2017, MetLife, Inc. repaid at maturity its $500 million 1.756% senior notes;
MetLife, Inc. and several of its subsidiaries (each, an “Obligor”) are parties to various capital support commitments and guarantees with subsidiaries. Under these arrangements, each Obligor has agreed to cause the applicable entity to meet specified capital and surplus levels or has guaranteed certain contractual obligations. We anticipate that in the event these arrangements place demands upon us, there will be sufficient liquidity and capital to enable us to meet such demands. See “- MetLife, Inc. - Liquidity and Capital Uses - Support Agreements.”
We pledge collateral and have had collateral pledged to us, and may be required from time to time to pledge additional collateral or be entitled to have additional collateral pledged to us, in connection with the collateral financing arrangement related to the reinsurance of closed block liabilities. See Note 13 of the Notes to the Consolidated Financial Statements.
We participate in a securities lending program whereby securities are loaned to third parties, primarily brokerage firms and commercial banks. We obtain collateral, usually cash, from the borrower, which must be returned to the borrower when the loaned securities are returned to us. Under our securities lending program, we were liable for cash collateral under our control of $18.0 billion and $19.4 billion at December 31, 2018 and 2017, respectively. Of these amounts, $2.7 billion and $3.8 billion at December 31, 2018 and 2017, respectively, were on open, meaning that the related loaned security could be returned to us on the next business day requiring the immediate return of cash collateral we hold. The estimated fair value of the securities on loan related to the cash collateral on open at December 31, 2018 was $2.7 billion, all of which were U.S. government and agency securities which, if put to us, could be immediately sold to satisfy the cash requirement. See Note 8 of the Notes to the Consolidated Financial Statements.
We participate in short-term repurchase agreements whereby securities are loaned to unaffiliated financial institutions. We obtain collateral, usually cash, from the borrower, which must be returned to the borrower when the loaned securities are returned to us. Under these repurchase agreements, we were liable for cash collateral under our control of $1.1 billion at both December 31, 2018 and 2017. The estimated fair value of the securities on loan at December 31, 2018 was $1.1 billion which were primarily U.S. government and agency securities which, if put to us, could be immediately sold to satisfy the cash requirement. See Note 8 of the Notes to the Consolidated Financial Statements.
The sum of the estimated cash flows of $318.1 billion exceeds the liability amounts of $204.4 billion included on the consolidated balance sheet principally due to (i) the time value of money, which accounts for a substantial portion of the difference; (ii) differences in assumptions, most significantly mortality, between the date the liabilities were initially established and the current date; and (iii) liabilities related to accounting conventions, or which are not contractually due, which are excluded.
Other obligations presented are principally comprised of amounts due under reinsurance agreements, payables related to securities purchased but not yet settled, securities sold short, accrued interest on debt obligations, estimated fair value of derivative obligations, deferred compensation arrangements, guaranty liabilities, and accruals and accounts payable due under contractual obligations, which are all reported in other liabilities on the consolidated balance sheet. If the timing of any of these other obligations is sufficiently uncertain, the amounts are included within the one year or less category. Items reported in other liabilities on the consolidated balance sheet that were excluded from the table represent accounting conventions or are not liabilities due under contractual obligations. Unrecognized tax benefits and related accrued interest totaling $1.3 billion were excluded as the timing of payment could not be reliably determined at December 31, 2018.
Liquid assets held in non-U.S. holding companies are generated in part through dividends from non-U.S. insurance operations. Such dividends are subject to local insurance regulatory requirements, as discussed in “- Liquidity and Capital Sources - Dividends from Subsidiaries.” The cumulative earnings of certain active non-U.S. operations have historically been reinvested indefinitely in such non-U.S. operations. Following a post-Separation review of our capital needs in the third quarter of 2017, we disclosed our intent to repatriate approximately $3.0 billion of pre-2017 earnings. The Company repatriated $2.6 billion in the fourth quarter of 2017 and the remaining $400 million in the second quarter of 2018. As a result of U.S. Tax Reform, we expect to repatriate future foreign earnings back to the U.S. with minimal or no additional U.S. tax. See Note 18 of the Notes to the Consolidated Financial Statements and “- Risk Factors - Regulatory and Legal Risks - Changes in Tax Laws or Interpretations of Such Laws Could Reduce Our Earnings and Materially Impact Our Operations by Increasing Our Corporate Taxes and Making Some of Our Products Less Attractive to Consumers.”
Dividends and returns of capital to MetLife, Inc. included $4.3 billion, $5.2 billion and $4.6 billion from operating subsidiaries and $3.2 billion, $2.2 billion and $0 from other MetLife holding companies during the years ended December 31, 2018, 2017 and 2016, respectively. Included in dividends and returns of capital to MetLife, Inc. are the following which increased MetLife, Inc. liquid assets and free cash flow: dividends from Brighthouse subsidiaries of $0, $1.8 billion and $556 million, and returns of capital from Brighthouse subsidiaries of $0, $590 million and $0, during the years ended December 31, 2018, 2017 and 2016, respectively. Also, dividends and returns of capital to MetLife, Inc. includes $49 million from the June 2017 issuance by Brighthouse Holdings, LLC of 50,000 units of 6.50% fixed rate cumulative preferred units to MetLife, Inc. which MetLife, Inc. sold to third-party investors.
Amounts to fund business acquisitions were $0, $215 million and $0 (included in capital contributions to subsidiaries) during the years ended December 31, 2018, 2017 and 2016, respectively.
The primary sources of MetLife, Inc.’s liquid assets are dividends and returns of capital from subsidiaries, issuances of long-term debt, issuances of common and preferred stock, and net receipts from subsidiaries under a tax sharing agreement. MetLife, Inc.’s insurance subsidiaries are subject to regulatory restrictions on the payment of dividends imposed by the regulators of their respective domiciles. See “- Liquidity and Capital Sources - Dividends from Subsidiaries.”
MetLife, Inc. relies, in part, on dividends from its subsidiaries to meet its cash requirements. MetLife, Inc.’s insurance subsidiaries are subject to regulatory restrictions on the payment of dividends imposed by the regulators of their respective domiciles. See Note 15 of the Notes to the Consolidated Financial Statements. The dividend limitation for U.S. insurance subsidiaries is generally based on the surplus to policyholders at the end of the immediately preceding calendar year and statutory net gain from operations for the immediately preceding calendar year. Statutory accounting practices, as prescribed by insurance regulators of various states in which we conduct business, differ in certain respects from accounting principles used in financial statements prepared in conformity with GAAP. The significant differences relate to the treatment of DAC, certain deferred income tax, required investment liabilities, statutory reserve calculation assumptions, goodwill and surplus notes.
Reflects dividend amounts that may be paid during the relevant year without prior regulatory approval (“ordinary dividends”). However, because dividend tests may be based on dividends previously paid over rolling 12-month periods, if paid before a specified date during such year, some or all of such dividends may require regulatory approval.
In April 2017, in connection with the Separation, MetLife, Inc. contributed all of the issued and outstanding shares of common stock of each of Brighthouse Insurance and NELICO to Brighthouse Holdings, LLC. As a result of the Separation, Brighthouse Insurance and NELICO ceased to be subsidiaries of MetLife, Inc. See Note 3 of the Notes to the Consolidated Financial Statements for information regarding the Separation.
In addition to the amounts presented in the table above, in August 2017, Brighthouse Financial, Inc. paid a cash dividend to MetLife, Inc. of $1.8 billion in connection with the Separation. For the years ended December 31, 2018, 2017 and 2016, MetLife, Inc. also received cash payments of $7 million, $39 million and $26 million, respectively, representing dividends from non-Brighthouse subsidiaries. Additionally, for the year ended December 31, 2018, MetLife, Inc. received cash returns of capital of $87 million. For the year ended December 31, 2017, MetLife, Inc. received cash returns of capital of $610 million from certain subsidiaries, including $590 million from MetLife Reinsurance Company of South Carolina (“MRSC”), in connection with the Separation. For the year ended December 31, 2016, MetLife, Inc. received cash of $80 million, representing returns of capital from certain subsidiaries. See Note 3 of the Notes to the Consolidated Financial Statements.
For information on MetLife, Inc.’s preferred stock, see “- The Company - Liquidity and Capital Sources - Global Funding Sources - Preferred Stock.”
In March 2018, three senior notes previously issued by MetLife, Inc. to MLIC were redenominated to Japanese yen. A $500 million senior note was redenominated to a new 53.3 billion Japanese yen senior note. The 53.3 billion Japanese yen senior note matures in June 2019 and bears interest at a rate per annum of 1.45%, payable semi-annually. A $250 million senior note was redenominated to a new 26.5 billion Japanese yen senior note. The 26.5 billion Japanese yen senior note matures in October 2019 and bears interest at a rate per annum of 1.72%, payable semi-annually. A $250 million senior note was also redenominated to a new 26.5 billion Japanese yen senior note. The 26.5 billion Japanese yen senior note matures in September 2020 and bears interest at a rate per annum of 0.82%, payable semi-annually.
In September 2016, a $250 million senior note issued to MLIC matured and, subsequently, in September 2016 MetLife, Inc. issued a new $250 million senior note to MLIC. The senior note matures in September 2020 and bears interest at a rate per annum of 3.03%, payable semi-annually.
Certain of MetLife, Inc.’s debt instruments and committed facilities, as well as its unsecured revolving credit facility, contain various administrative, reporting, legal and financial covenants. MetLife, Inc. believes it was in compliance with all applicable financial covenants at December 31, 2018.
Cash proceeds from dispositions during the years ended December 31, 2018, 2017 and 2016 were $0, $0 and $291 million, respectively. See Note 3 of the Notes to the Consolidated Financial Statements.
The primary uses of liquidity of MetLife, Inc. include debt service, cash dividends on common and preferred stock, capital contributions to subsidiaries, common stock, preferred stock and debt repurchases, payment of general operating expenses and acquisitions. Based on our analysis and comparison of our current and future cash inflows from the dividends we receive from subsidiaries that are permitted to be paid without prior insurance regulatory approval, our investment portfolio and other cash flows and anticipated access to the capital markets, we believe there will be sufficient liquidity and capital to enable MetLife, Inc. to make payments on debt, pay cash dividends on its common and preferred stock, contribute capital to its subsidiaries, repurchase its common stock, pay all general operating expenses and meet its cash needs.
During the years ended December 31, 2018 and 2017, MetLife, Inc. invested a net amount of $778 million and $729 million, respectively, in various non-Brighthouse subsidiaries. During the year ended December 31, 2016, MetLife, Inc. invested a net amount of $1.5 billion, in various subsidiaries, which included a cash capital contribution of $1.5 billion to Brighthouse Insurance in connection with the Separation.
MetLife, Inc. lends funds, as necessary, through credit agreements or otherwise to its subsidiaries and affiliates, some of which are regulated, to meet their capital requirements or to provide liquidity. MetLife, Inc. had loans to subsidiaries outstanding of $100 million at both December 31, 2018 and 2017.
In February 2017, in connection with the Separation, MetLife, Inc. exchanged $750 million aggregate principal amount of its 9.250% Fixed-to-Floating Rate Junior Subordinated Debentures due 2068 for $750 million aggregate liquidation preference of the 9.250% Fixed-to- Floating Rate Exchangeable Surplus Trust Securities of MetLife Capital Trust X (the “Trust”). As a result of the exchange, MetLife, Inc. became the sole beneficial owner of the Trust, a special purpose entity which issued the exchangeable surplus trust securities to third-party investors. In March 2017, MetLife, Inc. dissolved the Trust and became the direct holder of $750 million 8.595% surplus notes previously held by the Trust that were issued by Brighthouse Insurance. See Note 14 of the Notes to the Consolidated Financial Statements. In June 2017, MetLife, Inc. forgave Brighthouse Insurance’s obligation to pay the principal amount of such surplus notes. This transaction, which was a non-cash capital contribution to Brighthouse Holdings, LLC, and a corresponding non-cash capital contribution to Brighthouse Insurance, had no impact on the consolidated financial statements of MetLife, Inc. as of the date of the transaction.
For information on MetLife, Inc.’s debt repayments, see “- The Company - Liquidity and Capital Uses - Debt Repayments.” MetLife, Inc. intends to repay or refinance, in whole or in part, all the debt that is due in 2019. See Note 3 of the Notes to the Consolidated Financial Statements for discussion of a $2.8 billion repayment on the MRSC collateral financing agreement liability in April 2017 in connection with the Separation, utilizing assets held in trust.
The following table summarizes MetLife, Inc.’s outstanding senior notes by year of maturity through 2023 and 2024 to 2046, excluding any premium or discount and unamortized issuance costs, at December 31, 2018:
Cash outflows for acquisitions during the years ended December 31, 2018, 2017 and 2016 were $0, $211 million and $0, respectively.
Net investment income: (i) includes earned income on derivatives and amortization of premium on derivatives that are hedges of investments or that are used to replicate certain investments, but do not qualify for hedge accounting treatment (“Investment hedge adjustments”), (ii) excludes post-tax adjusted earnings adjustments relating to insurance joint ventures accounted for under the equity method, (iii) excludes certain amounts related to contractholder-directed equity securities (“Unit-linked contract income”), (iv) excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP and (v) includes distributions of profits from certain other limited partnership interests that were previously accounted for under the cost method, but are now accounted for at estimated fair value, where the change in estimated fair value is recognized in net investment gains (losses) under GAAP; and
Policyholder benefits and claims and policyholder dividends excludes: (i) changes in the policyholder dividend obligation related to net investment gains (losses) and net derivative gains (losses), (ii) inflation-indexed benefit adjustments associated with contracts backed by inflation-indexed investments and amounts associated with periodic crediting rate adjustments based on the total return of a contractually referenced pool of assets and other pass through adjustments, (iii) benefits and hedging costs related to GMIBs (“GMIB costs”) and (iv) market value adjustments associated with surrenders or terminations of contracts (“Market value adjustments”);
Other expenses excludes costs related to: (i) noncontrolling interests, (ii) implementation of new insurance regulatory requirements and (iii) acquisition, integration and other costs. Other expenses includes TSA fees.
Direct expense ratio: direct expenses, on an adjusted basis, divided by adjusted premiums, fees and other revenues. Direct expenses are comprised of employee-related costs, third party staffing costs, and general and administrative expenses.
The impact of changes in our foreign currency exchange rates is calculated using the average foreign currency exchange rates for the most recent year being compared and applied to the comparable prior year (“Constant Currency Basis”).
The Company uses a measure of free cash flow to facilitate an understanding of its ability to generate cash for reinvestment into its businesses or use in non-mandatory capital actions. The Company defines free cash flow as the sum of cash available at MetLife’s holding companies from dividends from operating subsidiaries, expenses and other net flows of the holding companies (including capital contributions to subsidiaries), and net contributions from debt to be at or below target leverage ratios. This measure of free cash flow is prior to capital actions, such as common stock dividends and repurchases, debt reduction and mergers and acquisitions. Free cash flow should not be viewed as a substitute for net cash provided by (used in) operating activities calculated in accordance with GAAP. The free cash flow ratio is typically expressed as a percentage of annual adjusted earnings available to common shareholders. A reconciliation of net cash provided by operating activities of MetLife, Inc. (parent company only) to free cash flow of all holding companies for the years ended December 31, 2018, 2017 and 2016 is provided below.
Including the free cash flow of other MetLife, Inc. holding companies of ($1.0) billion, ($501) million and $1.0 billion for the years ended December 31, 2018, 2017 and 2016, respectively, in the numerator of the ratio, this ratio, as adjusted, would be 90%, 153% and 636%, respectively. Including the free cash flow of other MetLife, Inc. holding companies in the numerator of the ratio and excluding the Separation-related costs and uncertain tax position non-cash charge from the denominator of the ratio, this ratio, as adjusted, would be 88%, 141% and 579% for the years ended December 31, 2018, 2017 and 2016, respectively.
iii) In 2016, we incurred $2.3 billion of Separation-related items (comprised of certain Separation-related outflows, net of inflows related to dividends from Brighthouse subsidiaries) which reduced our holding companies’ liquid assets, as well as our free cash flow and free cash flow ratio. Excluding these Separation-related items, adjusted free cash flow would be $4.7 billion for the year ended December 31, 2016. Consolidated adjusted earnings available to common shareholders for 2016 was negatively impacted by notable items, primarily related to the actuarial assumption review and other insurance adjustments, of $709 million, net of income tax, and Separation-related costs of $15 million, net of income tax. Excluding the Separation-related items, which reduced free cash flow, from the numerator of the ratio and excluding such notable items and Separation-related costs negatively impacting consolidated adjusted earnings available to common shareholders from the denominator of the ratio, the adjusted free cash flow ratio for 2016 would be 98%.
We have audited the accompanying consolidated balance sheets of MetLife, Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and the schedules listed in the Index to Consolidated Financial Statements, Notes and Schedules (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Effective January 1, 2016, the Company converted its Japan operations from a fiscal year cutoff of November 30th to calendar year-end reporting. The elimination of a one-month reporting lag of a subsidiary is considered a change in accounting principle and requires retrospective application. While the Company believes that eliminating the lag in the reporting of its Japan operations was preferable in order to consistently reflect events, economic conditions and global trends on the financial statements, the Company determined that it was impracticable to apply the effects of the lag elimination to financial reporting periods prior to January 1, 2015. The effect of not retroactively applying this change in accounting, however, was not material to the 2016 consolidated financial statements. Therefore, the Company reported the cumulative effect of the change in accounting principle in net income for the year ended December 31, 2016.
The Company establishes liabilities for amounts payable under insurance policies. Generally, amounts are payable over an extended period of time and related liabilities are calculated as the present value of future expected benefits to be paid, reduced by the present value of future expected premiums. Such liabilities are established based on methods and underlying assumptions in accordance with GAAP and applicable actuarial standards. Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, morbidity, policy lapse, renewal, retirement, disability incidence, disability terminations, investment returns, inflation, expenses and other contingent events as appropriate to the respective product type and geographical area. These assumptions are established at the time the policy is issued and are intended to estimate the experience for the period the policy benefits are payable. Utilizing these assumptions, liabilities are established on a block of business basis. For long duration insurance contracts, assumptions such as mortality, morbidity and interest rates are “locked in” upon the issuance of new business. However, significant adverse changes in experience on such contracts may require the establishment of premium deficiency reserves. Such reserves are determined based on the then current assumptions and do not include a provision for adverse deviation.
The liability for policy and contract claims generally relates to incurred but not reported (“IBNR”) 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 IBNR claims principally from analyses of historical patterns of claims by business line. 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.
Premiums related to traditional life, annuity contracts with life contingencies, long-duration accident & health, and credit insurance policies are recognized as revenues when due from policyholders. Policyholder benefits and expenses are provided to recognize profits over the estimated lives of the insurance policies. When premiums are due over a significantly shorter period than the period over which benefits are provided, any excess profit is deferred and recognized into earnings in a constant relationship to insurance in-force or, for annuities, the amount of expected future policy benefit payments.
Premiums, fees and policyholder benefits and claims include amounts assumed under reinsurance agreements and are net of reinsurance ceded. Amounts received from reinsurers for policy administration are reported in other revenues. With respect to GMIBs, a portion of the directly written GMIBs are accounted for as insurance liabilities, but the associated reinsurance agreements contain embedded derivatives. These embedded derivatives are included in premiums, reinsurance and other receivables with changes in estimated fair value reported in policyholder benefits and claims.
The Company periodically evaluates these securities for impairment. The assessment of whether impairments have occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in estimated fair value, as well as an analysis of the gross unrealized losses by severity and/or age as described in Note 8 “- Evaluation of Fixed Maturity Securities AFS for OTTI and Evaluating Temporarily Impaired Fixed Maturity Securities AFS.”
Policy loans are stated at unpaid principal balances. Interest income is recorded as earned using the contractual interest rate. Generally, accrued interest is capitalized on the policy’s anniversary date. Valuation allowances are not established for policy loans, as they are fully collateralized by the cash surrender value of the underlying insurance policies. Any unpaid principal and accrued interest is deducted from the cash surrender value or the death benefit prior to settlement of the insurance policy.
The Company accounts for its interest in real estate joint ventures and other limited partnership interests in which it has virtually no influence over the investee’s operations at fair value. Changes in estimated fair value of these investments are included in net investment gains (losses). Because of the nature and structure of these investments, they do not meet the characteristics of an equity security in accordance with applicable accounting standards.
The Company accounts for securities lending transactions and repurchase agreements as financing arrangements and the associated liability is recorded at the amount of cash received. Income and expenses associated with securities lending transactions and repurchase agreements are reported as investment income and investment expense, respectively, within net investment income.
The Company enters into securities lending transactions, whereby blocks of securities are loaned to third parties, primarily brokerage firms and commercial banks. The Company obtains collateral at the inception of the loan, usually cash, in an amount generally equal to 102% of the estimated fair value of the securities loaned, and maintains it at a level greater than or equal to 100% for the duration of the loan. Securities loaned under such transactions may be sold or re-pledged by the transferee. The Company is liable to return to the counterparties the cash collateral received. Security collateral on deposit from counterparties in connection with securities lending transactions may not be sold or re-pledged, unless the counterparty is in default, and is not reflected on the Company’s financial statements. The Company monitors the estimated fair value of the securities loaned on a daily basis and additional collateral is obtained as necessary throughout the duration of the loan.
Property, equipment and leasehold improvements, which are included in other assets, are stated at cost, less accumulated depreciation and amortization. Depreciation is determined using the straight-line method over the estimated useful lives of the assets, as appropriate. The estimated life is generally 40 years for company occupied real estate property, from one to 25 years for leasehold improvements, and from three to seven years for all other property and equipment. The cost basis of the property, equipment and leasehold improvements was $2.6 billion and $2.5 billion at December 31, 2018 and 2017, respectively. Accumulated depreciation and amortization of property, equipment and leasehold improvements was $1.2 billion and $1.1 billion at December 31, 2018 and 2017, respectively. Related depreciation and amortization expense was $191 million, $207 million and $206 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Computer software, which is included in other assets, is stated at cost, less accumulated amortization. Purchased software costs, as well as certain internal and external costs incurred to develop internal-use computer software during the application development stage, are capitalized. Such costs are amortized generally over a four-year period using the straight-line method. The cost basis of computer software was $3.1 billion and $2.8 billion at December 31, 2018 and 2017, respectively. Accumulated amortization of capitalized software was $2.2 billion and $2.0 billion at December 31, 2018 and 2017, respectively. Related amortization expense was $276 million, $250 million and $208 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The adoption of this guidance resulted in the release of stranded tax effects in AOCI resulting from the U.S. Tax Reform by decreasing retained earnings as of January 1, 2018 by $1.2 billion with a corresponding increase to AOCI. The Company’s accounting policy for the release of stranded tax effects in AOCI is on an aggregate portfolio basis.
ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, as clarified and amended by ASU 2018-03, Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
The adoption of the guidance did not have a material impact on the Company’s consolidated financial statements other than expanded disclosures in Note 16.
Effective January 16, 2018, the London Clearing House (“LCH”) amended its rulebook, resulting in the characterization of variation margin transfers as settlement payments, as opposed to adjustments to collateral. These amendments impacted the accounting treatment of the Company’s centrally cleared derivatives, for which the LCH serves as the central clearing party. As of the effective date, the application of the amended rulebook reduced gross derivative assets by $369 million, gross derivative liabilities by $203 million, accrued investment income by $14 million, collateral receivables recorded within premiums, reinsurance and other receivables by $184 million, and collateral payables recorded within payables for collateral under securities loaned and other transactions by $365 million. The application of the amended rulebook increased accrued investment expense recorded within other liabilities by $1 million.
ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities
The new guidance provides that indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decisionmakers and service providers are variable interests.
December 31, 2020, to be applied on a retrospective basis to all periods presented (with early adoption permitted).
ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts
January 1, 2021, to be applied retrospectively to January 1, 2019 (with early adoption permitted).
The Company has started its implementation efforts and is currently evaluating the impact of the new guidance. Given the nature and extent of the required changes to a significant portion of the Company’s operations, the adoption of this standard is expected to have a material impact on its consolidated financial statements.
January 1, 2019, to be applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings.
ASU 2017-08, Receivables -Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities
The adoption of the new guidance will not have a material impact on the Company’s consolidated financial statements.
The Property & Casualty business offers personal and commercial lines of property and casualty insurance, including private passenger automobile, homeowners’ and personal excess liability insurance. In addition, Property & Casualty offers to small business owners property, liability and business interruption insurance.
The Asia segment offers a broad range of products to both individuals and corporations, as well as to other institutions, and their respective employees, which include whole and term life, endowments, universal and variable life, accident & health insurance and fixed and variable annuities.
The MetLife Holdings segment consists of operations relating to products and businesses that the Company no longer actively markets in the United States, such as variable, universal, term and whole life insurance, variable, fixed and index-linked annuities, and long-term care insurance, as well as the assumed variable annuity guarantees from the Company’s former operating joint venture in Japan.
Net investment income: (i) includes earned income on derivatives and amortization of premium on derivatives that are hedges of investments or that are used to replicate certain investments, but do not qualify for hedge accounting treatment, (ii) excludes post-tax adjusted earnings adjustments relating to insurance joint ventures accounted for under the equity method, (iii) excludes certain amounts related to contractholder-directed equity securities, (iv) excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP and (v) includes distributions of profits from certain other limited partnership interests that were previously accounted for under the cost method, but are now accounted for at estimated fair value, where the change in estimated fair value is recognized in net investment gains (losses) under GAAP; and
Other expenses excludes costs related to: (i) noncontrolling interests, (ii) implementation of new insurance regulatory requirements, and (iii) acquisition, integration and other costs. Other expenses includes TSA fees.
Segment net investment income is credited or charged based on the level of allocated equity; however, changes in allocated equity do not impact the Company’s consolidated net investment income, income (loss) from continuing operations, net of income tax, or adjusted earnings.
Total assets includes $111.0 billion of assets from the Japan operations which represents 15% of total consolidated assets.
Revenues derived from one U.S. segment customer were $6.0 billion for the year ended December 31, 2018, which represented 12% of consolidated premiums, universal life and investment-type product policy fees and other revenues. The revenue was from a single premium received for a pension risk transfer. Revenues derived from any other customer did not exceed 10% of consolidated premiums, universal life and investment-type product policy fees and other revenues for the years ended December 31, 2018, 2017 and 2016.
In October 2017, the Company entered into a definitive agreement to sell MetLife Afore, S.A. de C.V. (“MetLife Afore”), its pension fund management business in Mexico. As a result of the agreement, a loss of $98 million ($73 million, net of income tax), which includes a reduction to goodwill of $16 million, was recorded for the year ended December 31, 2017 and is reflected within net investment gains (losses).
In June 2018, the Company sold FVO Brighthouse Common Stock in exchange for $944 million aggregate principal amount of MetLife, Inc. senior notes, which MetLife, Inc. canceled. The Company recorded $327 million of mark-to-market and disposition losses on the FVO Brighthouse Common Stock to net investment gains (losses) for the year ended December 31, 2018. At December 31, 2018, the Company no longer held any shares of Brighthouse Financial, Inc. for its own account; however, certain insurance company separate accounts managed by the Company held shares of Brighthouse Financial, Inc. See Note 12 for further information on this transaction.
On August 4, 2017, MetLife, Inc. completed the Separation. MetLife, Inc. common shareholders received a distribution of one share of Brighthouse Financial, Inc. common stock for every 11 shares of MetLife, Inc. common stock they owned as of 5:00 p.m., New York City time, on the July 19, 2017 record date. Shareholders of MetLife, Inc. who owned less than 11 shares of common stock, or others who would have otherwise received fractional shares, received cash. MetLife, Inc. distributed 96,776,670 of the 119,773,106 shares of Brighthouse Financial, Inc. common stock outstanding, representing approximately 80.8% of those shares. Certain MetLife affiliates hold MetLife, Inc. common stock and, as a result, participated in the distribution.
The loss recognized in 2017 in connection with the Separation was $1,302 million, net of income tax, which included: (i) a $1,016 million loss on MetLife’s retained investment in Brighthouse Financial, Inc., (ii) a $42 million net tax charge and (iii) a $306 million charge, net of income tax, for transaction costs, partially offset by a $61 million gain, net of income tax, for previously deferred intercompany gains realized upon Separation. The $42 million net tax charge is comprised of a $1,093 million tax separation agreement charge offset by $1,051 million of Separation tax benefits. Of the $1,302 million total loss, net of income tax, a $131 million loss, net of income tax, was reported within continuing operations as (i) a $693 million net investment loss, (ii) a $147 million charge within policyholder benefits and claims, (iii) a $218 million charge within other expenses, and (iv) a $927 million income tax benefit. The remaining $1,171 million loss was reported within discontinued operations, which primarily includes a tax-related charge.
Additionally, MetLife, Inc. has the right to receive future payments from Brighthouse for a tax asset that Brighthouse received as a result of restructuring prior to the Separation. Included in other assets is a receivable from Brighthouse of $330 million and $333 million, at December 31, 2018 and 2017, respectively, related to these future payments, after a reduction in 2017 of $222 million as a result of U.S. Tax Reform.
Prior to the Separation, the Company completed the following transactions in 2017.
See Note 14 for information on the junior subordinated debentures in connection with the Separation.
In June 2017, subsequent to the issuance of the Senior Notes, the borrowing capacity under Brighthouse Financial, Inc.’s three-year senior unsecured delayed draw term loan agreement (the “2016 Term Loan Agreement”) was decreased from $3.0 billion to $536 million. On July 21, 2017, concurrently with entering into a new term loan agreement described below, Brighthouse Financial, Inc. terminated the 2016 Term Loan Agreement without penalty.
In July 2017, Brighthouse Financial, Inc. entered into a new $600 million senior unsecured delayed draw term loan agreement (the “2017 Term Loan Agreement”). Under the 2017 Term Loan Agreement, Brighthouse Financial, Inc. may borrow up to a maximum of $600 million which may be used for general corporate purposes, including in connection with the Separation, of which $500 million was available prior to the Separation. The 2017 Term Loan Agreement contains certain covenants that could restrict the operations and use of funds of Brighthouse. On August 2, 2017, Brighthouse Financial, Inc. borrowed $500 million under the 2017 Term Loan Agreement in connection with the Separation.
See “- Transactions Prior to the Separation - Termination of Financing Arrangements” for additional transactions with Brighthouse.
The Company provides services necessary for Brighthouse to conduct its business, which primarily include contract administrative services for certain Brighthouse investment-type products. After the Separation, for the years ended December 31, 2018 and 2017, the Company recognized related party revenue of $63 million and $54 million for administrative services provided to Brighthouse. Prior to the Separation, during the year ended December 31, 2017, the Company provided administrative services to Brighthouse for $73 million which were intercompany transactions and eliminated and excluded from the consolidated statements of operations. The Company entered into these transactions with Brighthouse in the normal course of business and such transactions will continue based upon business needs.
In connection with the Separation, the Company entered into an employee matters agreement with Brighthouse to allocate obligations and responsibilities relating to employee compensation and benefit plans and other related matters. The employee matters agreement provides that MetLife will reimburse Brighthouse for certain pension benefit payments, retiree health and life benefit payments and deferred compensation payments. Included in other liabilities at December 31, 2017, is a related party payable to Brighthouse of $186 million related to these future payments.
The following table presents the amounts related to the operations and loss on disposal of Brighthouse that have been reflected in discontinued operations:
In the consolidated statements of cash flows, the cash flows from discontinued operations are not separately classified. The following table presents selected financial information regarding cash flows of the discontinued operations.
Aggregate of (i) net level premium reserves for death and endowment policy benefits (calculated based upon the non-forfeiture interest rate, ranging from 3% to 7% for U.S. business and less than 1% to 14% for non-U.S. business and mortality rates guaranteed in calculating the cash surrender values described in such contracts); and (ii) the liability for terminal dividends for U.S. business.
Present value of future expected payments. Interest rate assumptions used in establishing such liabilities range from 1% to 11% for U.S. business and less than 1% to 11% for non-U.S. business.
Participating business represented 3% of the Company’s life insurance in-force at both December 31, 2018 and 2017. Participating policies represented 14%, 15% and 16% of gross traditional life insurance premiums for the years ended December 31, 2018, 2017 and 2016, respectively.
Secondary guarantees include the effects of foreign currency translation of $62 million, $78 million and $119 million at December 31, 2018, 2017 and 2016, respectively.
Certain of the Company’s subsidiaries are members of FHLBanks. Holdings of common stock of FHLBanks, included in other invested assets, were as follows at:
The liabilities for Group Long-Term Disability unpaid claims and claim adjustment expenses were $6.0 billion at both December 31, 2018 and 2017. Using interest rates ranging from 3% to 8%, based on the incurral year, the total discount applied to these liabilities was $1.3 billion at both December 31, 2018 and 2017. The amount of interest accretion recognized was $509 million, $510 million and $565 million for the years ended December 31, 2018, 2017 and 2016, respectively. These amounts were reflected in policyholder benefits and claims.
The liability for unpaid claim and claim adjustment expenses for the Property & Casualty business is determined by examining the historical claims and allocated claim adjustment expenses data. This data, which is gross of salvage and subrogation, is classified by incurral year and coverage and includes paid claims data and reported liabilities. For homeowners and auto liability injury claims, the reported liabilities are set by the Company’s claims adjusters based on the individual case, and a supplemental liability is added based on the historical development of reported claims. These supplemental liabilities are estimated by coverage based on adjusted report year data triangles to determine the estimated ultimate claim liability. Adjustments are made for settlement rates and average case liabilities. For auto non-injury claims, the Company holds an average statistical liability for every reported claim. This statistical liability is based on an estimated average payment that varies by coverage, report year and state. These average estimated payments are updated monthly.
There were no significant changes in methodologies or assumptions during 2018. The assumptions used in calculating the unpaid claims and claim adjustment expenses for Property & Casualty - Auto Liability and Property & Casualty - Home are updated annually to reflect emerging trends in claim experience.
An expense liability is held for the future expenses associated with the payment of incurred but not yet paid claims. This is expressed as a percentage of the underlying claims liability and is based on past experience and the future expense structure.
The liabilities for unpaid claims and claim adjustment expenses were $733 million and $756 million at December 31, 2018 and 2017, respectively. These amounts were discounted using interest rates ranging from 3% to 7%, based on the incurral year. The total discount applied to these liabilities was $61 million and $57 million at December 31, 2018 and 2017, respectively. The amount of interest accretion recognized was $19 million, $26 million and $22 million for the years ended December 31, 2018, 2017 and 2016, respectively. These amounts were reflected in policyholder benefits and claims.
For Protection Life and Protection Health products, claim counts initially include claims that do not ultimately result in a liability. These claims are omitted from the claim counts once it is determined that there is no liability.
During 2018 and 2017, claims and claim adjustment expenses associated with prior years increased due to events incurred in prior years but reported during current year. During 2016, claims and claim adjustment expenses associated with prior years increased due to the implementation of guidance related to short-duration contracts.
For the years ended December 31, 2018, 2017 and 2016, there were no investment gains (losses) on transfers of assets from the general account to the separate accounts.
The Company’s RIS business has periodically engaged in reinsurance activities on an opportunistic basis. There were no such transactions during the periods presented.
For certain of its life insurance products, the Company currently reinsures risks in excess of $5 million to external reinsurers on a yearly renewable term basis. For selected large corporate clients, the Company reinsures group employee benefits or credit insurance business with various client-affiliated reinsurance companies, covering policies issued to the employees or customers of the clients. Additionally, the Company cedes and assumes risk with other insurance companies when either company requires a business partner with the appropriate local licensing to issue certain types of policies in certain jurisdictions. In these cases, the assuming company typically underwrites the risks, develops the products and assumes most or all of the risk. The Company also has reinsurance agreements in-force that reinsure a portion of the living and death benefit guarantees issued in connection with variable annuity products. Under these agreements, the Company pays reinsurance fees associated with the guarantees collected from policyholders, and receives reimbursement for benefits paid or accrued in excess of account values, subject to certain limitations. The Company may also reinsure certain risks with external reinsurers depending upon the nature of the risk and local regulatory requirements.
For its life products, the Company has historically reinsured the mortality risk primarily on an excess of retention basis or on a quota share basis. In addition to reinsuring mortality risk as described above, the Company reinsures other risks, as well as specific coverages. Placement of reinsurance is done primarily on an automatic basis and also on a facultative basis for risks with specified characteristics. The Company also assumes portions of the risk associated with certain whole life policies issued by a former affiliate and reinsures certain term life policies and universal life policies with secondary death benefit guarantees to such former affiliate.
The Company reinsures its business through a diversified group of well-capitalized reinsurers. The Company analyzes recent trends in arbitration and litigation outcomes in disputes, if any, with its reinsurers. The Company monitors ratings and evaluates the financial strength of its reinsurers by analyzing their financial statements. In addition, the reinsurance recoverable balance due from each reinsurer is evaluated as part of the overall monitoring process. Recoverability of reinsurance recoverable balances is evaluated based on these analyses. The Company generally secures large reinsurance recoverable balances with various forms of collateral, including secured trusts, funds withheld accounts and irrevocable letters of credit. These reinsurance recoverable balances are stated net of allowances for uncollectible reinsurance, which at December 31, 2018 and 2017, were not significant.
The Company has secured certain reinsurance recoverable balances with various forms of collateral, including secured trusts, funds withheld accounts and irrevocable letters of credit. The Company had $3.4 billion and $3.5 billion of unsecured reinsurance recoverable balances at December 31, 2018 and 2017, respectively.
At December 31, 2018, the Company had $7.5 billion of net ceded reinsurance recoverables. Of this total, $4.5 billion, or 60%, were with the Company’s five largest ceded reinsurers, including $1.1 billion of net ceded reinsurance recoverables which were unsecured. At December 31, 2017, the Company had $7.2 billion of net ceded reinsurance recoverables. Of this total, $4.4 billion, or 61%, were with the Company’s five largest ceded reinsurers, including $1.5 billion of net ceded reinsurance recoverables which were unsecured.
Reinsurance agreements that do not expose the Company to a reasonable possibility of a significant loss from insurance risk are recorded using the deposit method of accounting. The deposit assets on reinsurance were $2.7 billion and $2.8 billion at December 31, 2018 and 2017, respectively. The deposit liabilities on reinsurance were $1.4 billion at both December 31, 2018 and 2017.
On April 7, 2000 (the “Demutualization Date”), Metropolitan Life Insurance Company (“MLIC”) 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 approving MLIC’s plan of reorganization, as amended (the “Plan of Reorganization”). On the Demutualization Date, MLIC established a closed block for the benefit of holders of certain individual life insurance policies of MLIC. 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.
See Note 1 for discussion of new accounting guidance related to U.S. Tax Reform.
Investments are exposed to the following primary sources of risk: credit, interest rate, liquidity, market valuation, currency and real estate risk. The financial statement risks, stemming from such investment risks, are those associated with the determination of estimated fair values, the diminished ability to sell certain investments in times of strained market conditions, the recognition of impairments, the recognition of income on certain investments and the potential consolidation of VIEs. The use of different methodologies, assumptions and inputs relating to these financial statement risks may have a material effect on the amounts presented within the consolidated financial statements.
The Company held non-income producing fixed maturity securities AFS with an estimated fair value of $15 million and $6 million with unrealized gains (losses) of ($1) million and ($4) million at December 31, 2018 and 2017, respectively.
Actual maturities may differ from contractual maturities due to the exercise of call or prepayment options. Fixed maturity securities AFS not due at a single maturity date have been presented in the year of final contractual maturity. Structured Securities are shown separately, as they are not due at a single maturity.
Based on the Company’s current evaluation of its securities in an unrealized loss position in accordance with its impairment policy, and the Company’s current intentions and assessments (as applicable to the type of security) about holding, selling and any requirements to sell these securities, the Company concluded that these securities were not other-than-temporarily impaired at December 31, 2018. Future OTTI will depend primarily on economic fundamentals, issuer performance (including changes in the present value of future cash flows expected to be collected), and changes in credit ratings, collateral valuation and foreign currency exchange rates. If economic fundamentals deteriorate or if there are adverse changes in the above factors, OTTI may be incurred in upcoming periods.
Gross unrealized losses on fixed maturity securities AFS increased $4.1 billion during the year ended December 31, 2018 to $6.0 billion. The increase in gross unrealized losses for the year ended December 31, 2018 was primarily attributable to increases in interest rates, widening credit spreads and, to a lesser extent, the impact of weakening of certain foreign currencies on non-functional currency denominated fixed maturity securities AFS.
Of the $155 million of gross unrealized losses on fixed maturity securities AFS with an unrealized loss of 20% or more of amortized cost for six months or greater, $91 million, or 59%, were related to gross unrealized losses on 20 investment grade fixed maturity securities AFS. Unrealized losses on investment grade fixed maturity securities AFS are principally related to widening credit spreads since purchase and, with respect to fixed-rate fixed maturity securities AFS, rising interest rates since purchase.
Information on commercial, agricultural and residential mortgage loans is presented in the tables below. Information on residential mortgage loans - FVO is presented in Note 10. The Company elects the FVO for certain residential mortgage loans that are managed on a total return basis.
The amount of net discounts, included within total recorded investment, is primarily attributable to residential mortgage loans, and at December 31, 2018 and 2017 was $944 million and $1.1 billion, respectively.
In connection with an acquisition in 2010, certain impaired commercial mortgage loans were acquired and accordingly, were not originated by the Company. Such commercial mortgage loans have been accounted for as purchased credit impaired (“PCI”) commercial mortgage loans. Decreases in cash flows expected to be collected on PCI commercial mortgage loans can result in provisions for losses on mortgage loans. For the year ended December 31, 2016, in connection with the maturity of an acquired PCI commercial mortgage loan, an increase to the commercial mortgage loan valuation allowance of $143 million was recorded and charged-off upon maturity. The Company has recovered a substantial portion of the loss on the loan incurred through an indemnification agreement entered into in connection with the acquisition in 2010.
The estimated fair value of agricultural mortgage loans was $14.9 billion and $13.1 billion at December 31, 2018 and 2017, respectively.
The estimated fair value of residential mortgage loans was $12.7 billion and $11.6 billion at December 31, 2018 and 2017, respectively.
The carrying value of tax credit partnerships was $1.7 billion and $1.8 billion at December 31, 2018 and 2017, respectively. Losses from tax credit partnerships included within net investment income were $257 million, $259 million, and $167 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Unrealized investment gains (losses) on fixed maturity securities AFS, equity securities and derivatives and the effect on DAC, VOBA, DSI, future policy benefits and the policyholder dividend obligation that would result from the realization of the unrealized gains (losses) are included in net unrealized investment gains (losses) in AOCI.
The components of net unrealized investment gains (losses) included in AOCI were as follows:
The cash advance liability by loaned security type and remaining contractual maturities of the agreements was as follows at:
The Company’s PCI investments had an outstanding principal balance of $4.0 billion and $4.8 billion at December 31, 2018 and 2017, respectively, which represents the contractually required principal and accrued interest payments whether or not currently due and a carrying value (estimated fair value of the investments plus accrued interest) of $3.3 billion and $4.0 billion at December 31, 2018 and 2017, respectively. Accretion of accretable yield on PCI investments recognized in earnings in net investment income was $275 million and $281 million for the years ended December 31, 2018 and 2017, respectively. Purchases of PCI investments were insignificant in both of the years ended December 31, 2018 and 2017.
The aggregated summarized financial data presented below reflects the latest available financial information and is as of, and for, the years ended December 31, 2018, 2017 and 2016. Aggregate total assets of these entities totaled $529.1 billion and $505.6 billion at December 31, 2018 and 2017, respectively. Aggregate total liabilities of these entities totaled $65.5 billion and $68.9 billion at December 31, 2018 and 2017, respectively. Aggregate net income (loss) of these entities totaled $52.5 billion, $37.9 billion and $26.8 billion for the years ended December 31, 2018, 2017 and 2016, respectively, with $270 million related to Brighthouse for the year ended December 31, 2016. Aggregate net income (loss) from the underlying entities in which the Company invests is primarily comprised of investment income, including recurring investment income and realized and unrealized investment gains (losses).
The maximum exposure to loss relating to fixed maturity securities AFS is equal to their carrying amounts or the carrying amounts of retained interests. The maximum exposure to loss relating to other limited partnership interests is equal to the carrying amounts plus any unfunded commitments. For certain of its investments in other invested assets, the Company’s return is in the form of income tax credits which are guaranteed by creditworthy third parties. For such investments, the maximum exposure to loss is equal to the carrying amounts plus any unfunded commitments, reduced by income tax credits guaranteed by third parties of $94 million and $117 million at December 31, 2018 and 2017, respectively. Such a maximum loss would be expected to occur only upon bankruptcy of the issuer or investee.
As described in Note 20, the Company makes commitments to fund partnership investments in the normal course of business. Excluding these commitments, the Company did not provide financial or other support to investees designated as VIEs during each of the years ended December 31, 2018, 2017 and 2016.
Changes in estimated fair value subsequent to purchase for equity securities still held as of the end of the period included in net investment gains (losses) were ($81) million for the year ended December 31, 2018. See Note 1.
Non-investment portfolio gains (losses) for the year ended December 31, 2018 includes a loss of $327 million which represents both the change in estimated fair value of FVO Brighthouse Common Stock held by the Company through the date of disposal and the loss on disposal in June 2018. Non-investment portfolio gains (losses) for the year ended December 31, 2017 included (i) a loss of $1,016 million which represents a mark-to-market loss on the Company’s retained investment in Brighthouse Financial, Inc. at Separation and (ii) a loss of $95 million which represents the change in estimated fair value of FVO Brighthouse Common Stock held by the Company from the date of Separation to December 31, 2017. See Note 3.
The table below presents a rollforward of the cumulative credit loss component of OTTI loss recognized in earnings on fixed maturity securities AFS still held for which a portion of the OTTI loss was recognized in OCI:
In exchange-traded interest rate (Treasury and swap) futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which is determined by the different classes of interest rate securities to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts and to pledge initial margin based on futures exchange requirements. The Company enters into exchange-traded futures with regulated futures commission merchants that are members of the exchange. Exchange-traded interest rate (Treasury and swap) futures are used primarily to hedge mismatches between the duration of assets in a portfolio and the duration of liabilities supported by those assets, to hedge against changes in value of securities the Company owns or anticipates acquiring, to hedge against changes in interest rates on anticipated liability issuances by replicating Treasury or swap curve performance, and to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. The Company utilizes exchange-traded interest rate futures in nonqualifying hedging relationships.
A synthetic GIC is a contract that simulates the performance of a traditional GIC through the use of financial instruments. Under a synthetic GIC, the contractholder owns the underlying assets. The Company guarantees a rate of return on those assets for a premium. Synthetic GICs are not designated as hedging instruments.
The Company enters into currency options that give it the right, but not the obligation, to sell the foreign currency amount in exchange for a functional currency amount within a limited time at a contracted price. The contracts may also be net settled in cash, based on differentials in the foreign currency exchange rate and the strike price. The Company uses currency options to hedge against the foreign currency exposure inherent in certain of its variable annuity products. The Company also uses currency options as an economic hedge of foreign currency exposure related to the Company’s non-U.S. subsidiaries. The Company utilizes currency options in net investment in foreign operations and nonqualifying hedging relationships.
Based on gross notional amounts, a substantial portion of the Company’s derivatives was not designated or did not qualify as part of a hedging relationship at both December 31, 2018 and 2017. The Company’s use of derivatives includes (i) derivatives that serve as macro hedges of the Company’s exposure to various risks and that generally do not qualify for hedge accounting due to the criteria required under the portfolio hedging rules; (ii) derivatives that economically hedge insurance liabilities that contain mortality or morbidity risk and that generally do not qualify for hedge accounting because the lack of these risks in the derivatives cannot support an expectation of a highly effective hedging relationship; (iii) derivatives that economically hedge embedded derivatives that do not qualify for hedge accounting because the changes in estimated fair value of the embedded derivatives are already recorded in net income; and (iv) written credit default swaps and interest rate swaps that are used to synthetically create investments and that do not qualify for hedge accounting because they do not involve a hedging relationship. For these nonqualified derivatives, changes in market factors can lead to the recognition of fair value changes on the statement of operations without an offsetting gain or loss recognized in earnings for the item being hedged.
Changes in estimated fair value related to economic hedges of equity method investments in joint ventures, derivatives held in relation to trading portfolios and derivatives held within Unit-linked investments. As of December 31, 2016, the Company no longer maintained a trading portfolio for derivatives.
At December 31, 2018 and 2017, the balance in AOCI associated with cash flow hedges was $2.1 billion and $1.5 billion, respectively. Upon the Separation, the Company recorded a reduction of $414 million of deferred gains within AOCI.
For the years ended December 31, 2017 and 2016, the amounts of deferred gains (losses) in AOCI related to Brighthouse derivatives were ($92) million and $71 million, respectively. For the years ended December 31, 2017 and 2016, the amounts of income reclassified from AOCI into income (loss) from discontinued operations were $16 million and $45 million, respectively.
The Company manages its credit risk related to derivatives by entering into transactions with creditworthy counterparties and establishing and monitoring exposure limits. The Company’s OTC-bilateral derivative transactions are governed by ISDA Master Agreements which provide for legally enforceable set-off and close-out netting of exposures to specific counterparties in the event of early termination of a transaction, which includes, but is not limited to, events of default and bankruptcy. In the event of an early termination, the Company is permitted to set off receivables from the counterparty against payables to the same counterparty arising out of all included transactions. Substantially all of the Company’s ISDA Master Agreements also include Credit Support Annex provisions which require both the pledging and accepting of collateral in connection with its OTC-bilateral derivatives.
Cash collateral received by the Company for OTC-bilateral and OTC-cleared derivatives is included in cash and cash equivalents, short-term investments or in fixed maturity securities AFS, and the obligation to return it is included in payables for collateral under securities loaned and other transactions on the balance sheet.
The receivable for the return of cash collateral provided by the Company is inclusive of initial margin on exchange-traded and OTC-cleared derivatives and is included in premiums, reinsurance and other receivables on the balance sheet. The amount of cash collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements. At December 31, 2018 and 2017, the Company received excess cash collateral of $135 million and $253 million, respectively, and provided excess cash collateral of $226 million and $272 million, respectively, which is not included in the table above due to the foregoing limitation.
Securities collateral received by the Company is held in separate custodial accounts and is not recorded on the balance sheet. Subject to certain constraints, the Company is permitted by contract to sell or re-pledge this collateral, but at December 31, 2018, none of the collateral had been sold or re-pledged. Securities collateral pledged by the Company is reported in fixed maturity securities AFS on the balance sheet. Subject to certain constraints, the counterparties are permitted by contract to sell or re-pledge this collateral. The amount of securities collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements and cash collateral. At December 31, 2018 and 2017, the Company received excess securities collateral with an estimated fair value of $70 million and $108 million, respectively, for its OTC-bilateral derivatives, which are not included in the table above due to the foregoing limitation. At December 31, 2018 and 2017, the Company provided excess securities collateral with an estimated fair value of $212 million and $305 million, respectively, for its OTC-bilateral derivatives, $601 million and $522 million, respectively, for its OTC-cleared derivatives, and $90 million and $89 million, respectively, for its exchange-traded derivatives, which are not included in the table above due to the foregoing limitation.
Embedded derivatives within asset host contracts are presented within premiums, reinsurance and other receivables and other invested assets on the consolidated balance sheets. Embedded derivatives within liability host contracts are presented within policyholder account balances and other liabilities on the consolidated balance sheets. At December 31, 2018 and 2017, debt and equity securities also included embedded derivatives of $0 and ($132) million, respectively.
The valuation of these guarantee liabilities includes nonperformance risk adjustments and adjustments for a risk margin related to non-capital market inputs. The nonperformance adjustment is determined by taking into consideration publicly available information relating to spreads in the secondary market for MetLife, Inc.’s debt, including related credit default swaps. These observable spreads are then adjusted, as necessary, to reflect the priority of these liabilities and the claims paying ability of the issuing insurance subsidiaries as compared to MetLife, Inc.
Significant increases (decreases) in expected default rates in isolation would have resulted in substantially lower (higher) valuations.
Ranges represent different repurchase rates utilized as components within the valuation methodology and are presented in basis points.
Amortization of premium/accretion of discount is included within net investment income. Impairments charged to net income (loss) on securities are included in net investment gains (losses), while changes in estimated fair value of residential mortgage loans - FVO are included in net investment income. Lapses associated with net embedded derivatives are included in net derivative gains (losses). Substantially all realized/unrealized gains (losses) included in net income (loss) for net derivatives and net embedded derivatives are reported in net derivative gains (losses).
Items transferred into and then out of Level 3 in the same period are excluded from the rollforward.
In connection with the adoption of new guidance related to the recognition and measurement of financial instruments (see Note 1), other limited partnership interests are measured at estimated fair value on a recurring basis effective January 1, 2018.
Includes goodwill of $4.5 billion, $4.5 billion and $4.4 billion from the Japan operations at December 31, 2018, 2017 and 2016, respectively.
Range of interest rates and weighted average interest rates are for the year ended December 31, 2018.
During 2017, an affiliate issued $139 million of long-term debt to a third party.
The aggregate maturities of long-term debt at December 31, 2018 for the next five years and thereafter are $2 million in 2019, $512 million in 2020, $368 million in 2021, $797 million in 2022, $1.0 billion in 2023 and $10.1 billion thereafter.
Certain of the Company’s debt instruments and committed facilities, as well as its unsecured revolving credit facility, contain various administrative, reporting, legal and financial covenants. The Company believes it was in compliance with all applicable financial covenants at December 31, 2018.
In June 2018, MetLife, Inc. sold FVO Brighthouse Common Stock in exchange for $944 million aggregate principal amount of MetLife Inc.’s senior notes. MetLife, Inc. purchased and canceled $343 million of its $1,035 million aggregate principal amount 6.817% senior notes due August 2018; $469 million of its $1,035 million aggregate principal amount 7.717% senior notes due February 2019 and $132 million of its $1,000 million aggregate principal amount 4.750% senior notes due February 2021. In June 2018, MetLife, Inc. additionally purchased for cash and canceled $160 million of its $1,035 million aggregate principal amount 6.817% senior notes due August 2018. The Company recorded a premium of $30 million paid in excess of the debt principal and incurred $37 million of advisory and other fees related to the exchange transaction to other expenses for the year ended December 31, 2018. See Note 3 for additional information on the FVO Brighthouse Common Stock exchange transaction.
MetLife Private Equity Holdings, LLC (“MPEH”), a wholly-owned indirect investment subsidiary of MLIC, borrowed $350 million in December 2015 under a five-year credit agreement included within other notes in the table above. In November 2017, this agreement was amended to extend the maturity to November 2022, change the amount MPEH may borrow on a revolving basis to $75 million from $100 million, and change the interest rate to a variable rate of three-month London Interbank Offered Rate (“LIBOR”) plus 3.25%, payable quarterly, from a variable rate of three-month LIBOR plus 3.70%. In December 2018, this agreement was further amended to change the interest rate to a variable rate of three-month LIBOR plus 3.10%. In connection with the initial borrowing in 2015, $6 million of costs were incurred, and additional costs of $1 million were incurred in connection with the 2017 amendment, which have been capitalized and are being amortized over the term of the loans. MPEH has pledged invested assets to secure the loans; however, these loans are non-recourse to MLIC and MetLife, Inc. In December 2018, MPEH repaid $50 million of the initial borrowing.
During the years ended December 31, 2018, 2017 and 2016, the weighted average interest rate on short-term debt was 3.02%, 2.41% and 1.32%, respectively.
At December 31, 2018, the Company maintained a $3.0 billion unsecured revolving credit facility (the “Credit Facility”) and certain committed facilities (the “Committed Facilities”) aggregating $3.3 billion. When drawn upon, these facilities bear interest at varying rates in accordance with the respective agreements.
Letters of credit issued under the Committed Facilities are used for collateral for certain of the Company’s affiliated reinsurance liabilities. Total fees associated with the Committed Facilities, included in other expenses, were $15 million, $21 million and $27 million for the years ended December 31, 2018, 2017 and 2016, respectively. Total fees associated with the Committed Facilities, included in income (loss) from discontinued operations, net of income tax, were $305 million and $69 million for the years ended December 31, 2017 and 2016, respectively. See Note 3 for fees associated with termination of financing arrangements included within 2017 amounts. Information on the Committed Facilities at December 31, 2018 was as follows:
Interest expense on the collateral financing arrangement was $37 million, $30 million and $24 million for the years ended December 31, 2018, 2017 and 2016, respectively, which is included in other expenses.
MetLife Capital Trust IV is a VIE which is consolidated on the financial statements of the Company. The securities issued by this entity are exchangeable surplus trust securities, which are exchangeable for a like amount of MetLife, Inc.’s junior subordinated debt securities on the scheduled redemption date, mandatorily under certain circumstances, and at any time upon MetLife, Inc. exercising its option to redeem the securities.
Interest expense on outstanding junior subordinated debt securities was $258 million for each of the years ended December 31, 2018, 2017 and 2016, which is included in other expenses.
In June 2018, MetLife, Inc. issued 32,200 shares of 5.625% Non-Cumulative Preferred Stock, Series E (the “Series E preferred stock”) with a $0.01 par value per share and a liquidation preference of $25,000 per share, for aggregate net proceeds of $780 million. MetLife, Inc. deposited the Series E preferred stock under a deposit agreement with a depositary, which issued interests in fractional shares of the Series E preferred stock in the form of depositary shares (“Depositary Shares”) evidenced by depositary receipts; each Depositary Share representing 1/1,000th interest in a share of the Series E preferred stock. In connection with the offering of the Depositary Shares, MetLife, Inc. incurred approximately $25 million of issuance costs which have been recorded as a reduction of additional paid-in capital.
In the table above, dividends on each series of preferred stock are payable in arrears for the periods specified, if declared.
MetLife, Inc. is prohibited from declaring dividends on the Floating Rate Non-Cumulative Preferred Stock, Series A (the “Series A preferred stock”) if it fails to meet specified capital adequacy, net income and stockholders’ equity levels. See “- Dividend Restrictions - MetLife, Inc.”
The preferred stock is not subject to any mandatory redemption, sinking fund, retirement fund, purchase fund or similar provisions. The Series A preferred stock is redeemable at MetLife, Inc.’s option in whole or in part, at a redemption price of $25 per share of preferred stock, plus declared and unpaid dividends.
MetLife, Inc. may, at its option, redeem the Series D preferred stock, (i) in whole but not in part at any time prior to March 15, 2028, within 90 days after the occurrence of a “rating agency event,” at a redemption price equal to $1,020 per share of Series D preferred stock, plus an amount equal to any dividends per share that have accrued but have not been declared and paid for the then-current dividend period to, but excluding, the redemption date; (ii) in whole but not in part, at any time prior to March 15, 2028, within 90 days after the occurrence of a “regulatory capital event”; and (iii) in whole or in part, from time to time, on or after March 15, 2028, in the case of (ii) or (iii), at a redemption price equal to $1,000 per share of Series D preferred stock, plus an amount equal to any dividends per share that have accrued but not been declared and paid for the then-current dividend period to, but excluding, such redemption date. MetLife, Inc. may, at its option, redeem the Series E preferred stock, (i) in whole but not in part at any time prior to June 15, 2023, within 90 days after the occurrence of a “rating agency event,” at a redemption price equal to $25,500 per share of Series E preferred stock, plus an amount equal to any dividends per share that have accrued but have not been declared and paid for the then-current dividend period to, but excluding, the redemption date; (ii) in whole but not in part, at any time prior to June 15, 2023, within 90 days after the occurrence of a “regulatory capital event”; and (iii) in whole or in part, from time to time, on or after June 15, 2023, in the case of (ii) or (iii), at a redemption price equal to $25,000 per share of Series E preferred stock, plus an amount equal to any dividends per share that have accrued but not been declared and paid for the then-current dividend period to, but excluding, such redemption date. A “rating agency event” means that any nationally recognized statistical rating organization that then publishes a rating for MetLife, Inc. amends, clarifies or changes the criteria used to assign equity credit to securities like the Series D preferred stock or Series E preferred stock, which results in the lowering of the equity credit assigned to the Series D preferred stock or Series E preferred stock, as applicable, or shortens the length of time that the Series D preferred stock or Series E preferred stock, as applicable, is assigned a particular level of equity credit. A “regulatory capital event” could occur as a result of a change or proposed change in capital adequacy rules (or the interpretation or application thereof) of any capital regulator, including but not limited to the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), the Federal Insurance Office, the National Association of Insurance Commissioners (“NAIC”) or any state insurance regulator as may then have group-wide oversight of MetLife, Inc.’s regulatory capital, from rules (or the interpretation or application thereof) in effect as of March 22, 2018, in the case of the Series D preferred stock, or June 4, 2018, in the case of the Series E preferred stock, that would create a more than insubstantial risk, as determined by MetLife, Inc., that the Series D preferred stock or the Series E preferred stock, as applicable, would not be treated as “Tier 1 capital” or as capital with attributes similar to those of Tier 1 capital, except that a “regulatory capital event” will not include a change or proposed change (or the interpretation or application thereof) that would result in the adoption of any criteria substantially the same as the criteria in the capital adequacy rules of the Federal Reserve Board applicable to bank holding companies as of March 22, 2018, in the case of the Series D preferred stock, or June 4, 2018, in the case of the Series E preferred stock.
On December 31, 2018, RCCs related to the Series A preferred stock and the Series C preferred stock expired.
The declaration, record and payment dates, as well as per share and aggregate dividend amounts, for MetLife, Inc.’s preferred stock were as follows for the years ended December 31, 2018, 2017 and 2016:
During the years ended December 31, 2018, 2017 and 2016, MetLife, Inc. issued 3,114,141 shares, 4,680,116 shares and 4,439,219 shares of its common stock for $108 million, $158 million and $166 million, respectively, in connection with stock option exercises and other stock-based awards. There were no shares of common stock issued from treasury stock for each of the years ended December 31, 2018, 2017 and 2016.
In November 2016, MetLife, Inc. announced that its Board of Directors authorized $3.0 billion of common stock repurchases in addition to previously authorized repurchases. In November 2017, MetLife, Inc. announced that its Board of Directors authorized $2.0 billion of common stock repurchases. In May 2018 and November 2018, MetLife, Inc. announced that its Board of Directors authorized $1.5 billion and $2.0 billion of common stock repurchases, respectively.
During the years ended December 31, 2018, 2017 and 2016, MetLife, Inc. repurchased 88,029,138 shares, 56,599,540 shares and 6,948,739 shares under these repurchase authorizations for $4.0 billion, $2.9 billion, and $372 million, respectively. At December 31, 2018, MetLife, Inc. had $1.3 billion remaining under its common stock repurchase authorization. See Note 22 for information on subsequent common stock repurchases.
The aggregate number of Shares authorized for issuance under the 2015 Stock Plan at December 31, 2018 was 37,344,024.
With the exception of Performance Shares MetLife, Inc. granted in 2013 through 2018, which are re-measured quarterly, MetLife recognizes compensation expense related to awards under the 2005 Stock Plan or 2015 Stock Plan based on the number of awards it expects to vest, which represents the awards granted less expected forfeitures over the life of the award, as estimated at the date of grant. Unless MetLife observes a material deviation from the assumed forfeiture rate during the term in which the awards are expensed, MetLife recognizes any adjustment necessary to reflect differences in actual experience in the period the award becomes payable or exercisable.
Expired options were exercisable, but unexercised, as of their expiration date.
For awards granted for the 2016 - 2018 and later performance periods in progress through December 31, 2018, the vested Performance Shares will be multiplied by a performance factor of 0% to 175% that the MetLife, Inc. Compensation Committee will determine in its discretion (subject to MetLife, Inc. meeting threshold performance goals related to its adjusted income or total shareholder return). In doing so, the Compensation Committee may consider MetLife, Inc.’s total shareholder return relative to the performance of its competitors and adjusted return on MetLife, Inc.’s common stockholders’ equity relative to its financial plan. MetLife estimates the fair value of Performance Shares each quarter until they become payable. The performance factor for the 2015 - 2017 performance period was 46.3%.
Values for awards outstanding at January 1, 2018, represent weighted average number of awards multiplied by the fair value per Share at December 31, 2017. Otherwise, all values represent weighted average of number of awards multiplied by the fair value per Share at December 31, 2018. Fair value of Restricted Stock Units on December 31, 2018 was equal to Grant Date fair value.
Performance Share amounts above represent aggregate awards at target, and do not reflect potential increases or decreases that may result from the performance factor. At December 31, 2018, the performance period for the 2016 - 2018 Performance Share grants was completed, but the performance factor had not yet been determined. Included in the immediately preceding table are 1,594,846 outstanding Performance Shares to which the 2016 - 2018 performance factor will be applied.
Performance Units are units that, if they vest, are multiplied by a performance factor to produce a number of final Performance Units which are payable in cash equal to the closing price of a Share on a date following the last day of the three-year performance period. Performance Units are accounted for as liability awards. MetLife, Inc. does not credit them with dividend-equivalents for dividends paid on Shares. Accordingly, the estimated fair value of Performance Units is based upon the closing price of a Share on the date of grant, reduced by the present value of estimated dividends to be paid on that stock during the performance period.
See “- Equity Awards - Performance Shares” for a discussion of the Performance Shares vesting period and performance factor calculation, which are also used for Performance Units.
The states of domicile of MetLife, Inc.’s U.S. insurance subsidiaries each impose risk-based capital (“RBC”) requirements that were developed by the NAIC. American Life does not write business in Delaware or any other U.S. state and, as such, is exempt from RBC requirements by Delaware law. Regulatory compliance is determined by a ratio of a company’s total adjusted capital, calculated in the manner prescribed by the NAIC (“TAC”) to its authorized control level RBC, calculated in the manner prescribed by the NAIC (“ACL RBC”), based on the statutory-based filed financial statements. Companies below specific trigger levels or ratios are classified by their respective levels, each of which requires specified corrective action. The minimum level of TAC before corrective action commences is twice ACL RBC (“Company Action Level RBC”). While not required by or filed with insurance regulators, the Company also calculates an internally defined combined RBC ratio (“Statement-Based Combined RBC Ratio”), which is determined by dividing the sum of TAC for MetLife, Inc.’s principal U.S. insurance subsidiaries, excluding American Life, by the sum of Company Action Level RBC for such subsidiaries. The Company’s Statement-Based Combined RBC Ratio was in excess of 360% and in excess of 390% at December 31, 2018 and 2017, respectively. In addition, all non-exempted U.S. insurance subsidiaries individually exceeded Company Action Level RBC for all periods presented.
American Life calculates its policyholder reserves on insurance written in each foreign jurisdiction in accordance with the reserve standards required by such jurisdiction. Additionally, American Life’s insurance subsidiaries are valued based on each respective subsidiary’s underlying local statutory equity, adjusted in a manner consistent with the reporting prescribed for its branch operations. The prescribed practice exempts American Life from calculating and disclosing the impact to its statutory capital and surplus. The tables below present amounts from MetLife, Inc.’s U.S. insurance subsidiaries, which are derived from the statutory-basis financial statements as filed with the insurance regulators.
In April 2017, in connection with the Separation, MetLife, Inc. contributed all of the issued and outstanding shares of common stock of each of Brighthouse Insurance and NELICO to Brighthouse Holdings, LLC. As a result of the Separation, Brighthouse Insurance and NELICO ceased to be subsidiaries of MetLife, Inc.
In April 2017, in connection with the Separation, MetLife, Inc. contributed all of the issued and outstanding shares of Brighthouse Life Insurance Company of NY (“Brighthouse NY”) to Brighthouse Holdings, LLC. As a result of the Separation, Brighthouse NY ceased to be a subsidiary of MetLife, Inc. For the year ended December 31, 2016, statutory net income (loss) of Brighthouse NY was ($87) million.
MRV, with the explicit permission of the Commissioner of Insurance of the State of Vermont, has included, as admitted assets, the value of letters of credit serving as collateral for reinsurance credit taken by various affiliated cedants, in connection with reinsurance agreements entered into between MRV and the various affiliated cedants, which resulted in higher statutory capital and surplus of $2.8 billion and $2.7 billion for the years ended December 31, 2018 and 2017, respectively. MRV’s RBC would have triggered a regulatory event without the use of the state prescribed practice.
The combined statutory net income (loss) of MetLife, Inc.’s U.S. captive life reinsurance subsidiaries was ($59) million, $2.1 billion and ($344) million for the years ended December 2018, 2017 and 2016, respectively, and the combined statutory capital and surplus, including the aforementioned prescribed practice, was $1.7 billion at both December 31, 2018 and 2017.
Under the New York State Insurance Law, MLIC is permitted, without prior insurance regulatory clearance, to pay stockholder dividends to MetLife, Inc. in any calendar year based on either of two standards. Under one standard, MLIC is permitted, without prior insurance regulatory clearance, to pay dividends out of earned surplus (defined as positive unassigned funds (surplus), excluding 85% of the change in net unrealized capital gains or losses (less capital gains tax), for the immediately preceding calendar year), in an amount up to the greater of: (i) 10% of its surplus to policyholders as of the end of the immediately preceding calendar year, or (ii) its statutory net gain from operations for the immediately preceding calendar year (excluding realized capital gains), not to exceed 30% of surplus to policyholders as of the end of the immediately preceding calendar year. In addition, under this standard, MLIC may not, without prior insurance regulatory clearance, pay any dividends in any calendar year immediately following a calendar year for which its net gain from operations, excluding realized capital gains, was negative. Under the second standard, if dividends are paid out of other than earned surplus, MLIC may, without prior insurance regulatory clearance, pay an amount up to the lesser of: (i) 10% of its surplus to policyholders as of the end of the immediately preceding calendar year, or (ii) its statutory net gain from operations for the immediately preceding calendar year (excluding realized capital gains). In addition, MLIC will be permitted to pay a dividend to MetLife, Inc. in excess of the amounts allowed under both standards only if it files notice of its intention to declare such a dividend and the amount thereof with the New York Superintendent of Financial Services (the “Superintendent”) and the Superintendent either approves the distribution of the dividend or does not disapprove the dividend within 30 days of its filing. Under the New York State Insurance Law, the Superintendent has broad discretion in determining whether the financial condition of a stock life insurance company would support the payment of such dividends to its stockholder.
In addition to regulatory restrictions on the payment of dividends by its insurance subsidiaries to MetLife, Inc., the payment of dividends by MetLife, Inc. to its stockholders is also subject to other restrictions. The declaration and payment of dividends are subject to the discretion of MetLife, Inc.’s Board of Directors and will depend on its financial condition, results of operations, cash requirements, future prospects and other factors deemed relevant by the Board of Directors. In addition, the payment of dividends on MetLife, Inc.’s common stock, and MetLife, Inc.’s ability to repurchase its common stock, may be subject to restrictions described below arising under the terms of MetLife, Inc.’s Series A preferred stock and its junior subordinated debentures in situations where MetLife, Inc. may be experiencing financial stress, as described below. For purposes of this discussion, “junior subordinated debentures” are deemed to include MetLife, Inc.’s Fixed-to-Floating Rate Exchangeable Surplus Trust Securities, as discussed in Note 14.
“Dividend Stopper” Provisions in the Preferred Stock and Junior Subordinated Debentures. If MetLife, Inc. has not paid the full dividends on its preferred stock for the latest completed dividend period, MetLife, Inc. may not repurchase or pay dividends on its common stock during a dividend period under so-called “dividend stopper” provisions. Further, MetLife, Inc.’s Series A preferred stock and its junior subordinated debentures contain provisions that would suspend the payment of preferred stock dividends and interest on junior subordinated debentures if MetLife, Inc. fails to meet certain risk-based capital ratio, net income and stockholders’ equity tests at specified times, except to the extent of the net proceeds from the issuance of certain securities during specified periods. If Series A preferred stock dividends or interest on junior subordinated debentures are not paid, certain provisions in those instruments (including under “dividend stopper” provisions) may restrict MetLife, Inc. from repurchasing its common or preferred stock or paying dividends on its common or preferred stock and interest on its junior subordinated debentures.
MetLife, Inc. is a party to certain RCCs which limit its ability to eliminate these restrictions through the repayment, redemption or purchase of junior subordinated debentures by requiring MetLife, Inc., with some limitations, to receive cash proceeds during a specified period from the sale of specified replacement securities prior to any repayment, redemption or purchase. See Note 14 for a description of such covenants.
See Note 8 for information on offsets to investments related to future policy benefits, DAC, VOBA and DSI, and the policyholder dividend obligation.
These subsidiaries also provide certain postemployment benefits and certain postretirement medical and life insurance benefits for U.S. and non-U.S. retired employees. Employees of these subsidiaries who were hired prior to 2003 (or, in certain cases, rehired during or after 2003) and meet age and service criteria while working for one of the subsidiaries may become eligible for these other postretirement benefits, at various levels, in accordance with the applicable plans. Virtually all retirees, or their beneficiaries, contribute a portion of the total costs of postretirement medical benefits. Employees hired after 2003 are not eligible for any employer subsidy for postretirement medical benefits. In September 2018, the U.S. postretirement medical and life insurance benefit plans were amended, effective January 1, 2023, to discontinue the accrual of the employer subsidy credits for eligible employees.
The benefit obligations, funded status and net periodic benefit costs related to these pension and other postretirement benefits were comprised of the following:
The table below summarizes the actual weighted average allocation of the estimated fair value of total plan assets by asset class at December 31 for the years indicated and the approved target allocation by major asset class at December 31, 2018 for the Invested Plans:
It is the subsidiaries’ practice to make contributions to the U.S. qualified pension plan to comply with minimum funding requirements of ERISA. In accordance with such practice, no contributions are required for 2019. The subsidiaries expect to make discretionary contributions to the qualified pension plan of $150 million in 2019. For information on employer contributions, see “- Obligations and Funded Status.”
Postretirement benefits are either: (i) not vested under law; (ii) a non-funded obligation of the subsidiaries; or (iii) both. Current regulations do not require funding for these benefits. The subsidiaries use their general assets, net of participant’s contributions, to pay postretirement medical claims as they come due. As permitted under the terms of the governing trust document, the subsidiaries may be reimbursed from plan assets for postretirement medical claims paid from their general assets. The U.S. subsidiaries expect to make contributions of $50 million towards benefit obligations in 2019 to pay postretirement medical claims.
Certain subsidiaries sponsor defined contribution plans under which a portion of employee contributions are matched. These subsidiaries contributed $63 million, $72 million and $81 million for the years ended December 31, 2018, 2017 and 2016, respectively.
As discussed further below, for the year ended December 31, 2018, prior year tax includes a $168 million non-cash benefit related to an uncertain tax position.
On December 22, 2017, President Trump signed into law U.S. Tax Reform. U.S. Tax Reform includes numerous changes in tax law, including a permanent reduction in the U.S. federal corporate income tax rate from 35% to 21%, which took effect for taxable years beginning on or after January 1, 2018. U.S. Tax Reform moves the United States from a worldwide tax system
As of December 31, 2017, the following items were considered provisional estimates due to complexities and ambiguities in U.S. Tax Reform which resulted in incomplete accounting for the tax effects of these provisions. Further guidance, either legislative or interpretive, and analysis were completed during the measurement period. As a result, the following updates were made to complete the accounting for these items as of December 31, 2018:
Deemed Repatriation Transition Tax - The Company recorded a $170 million charge for this item for the year ended December 31, 2017. This charge was in addition to the $180 million charge recorded in the third quarter of 2017 resulting from the post-Separation review of the Company’s capital needs. The total transition tax liability recorded for the year ended December 31, 2017 was $350 million. In 2018, the IRS issued proposed regulations related to the transition tax. As a result, for the year ended December 31, 2018, the Company recorded a $468 million charge.
GILTI - U.S. Tax Reform imposes a minimum tax on GILTI, which is generally the excess income of foreign subsidiaries over a 10% rate of routine return on tangible business assets. For the year ended December 31, 2017, the Company did not record a tax charge for this item. In 2018, the Company established an accounting policy in which it treats taxes due on GILTI as a current-period expense when incurred. Accordingly, for the year ended December 31, 2018, the Company recorded a $45 million tax charge related to this income.
Tax Credit Partnerships - The reduction in the federal corporate income tax rate due to U.S. Tax Reform required adjustments for multiple investment portfolios, including tax credit partnerships and tax-advantaged leverage leases. Certain tax credit partnership investments derive returns in part from income tax credits. The Company recognizes changes in tax attributes at the partnership level when reported by the investee in its financial information. The Company did not receive the necessary investee financial information to determine the impact of U.S. Tax Reform on the tax attributes of its tax credit partnership investments until the third quarter of 2018. Accordingly, prior to the third quarter of 2018, the Company applied prior law to these equity method investments in accordance with SAB 118. For the year ended December 31, 2018, after receiving additional investee information, a reduction in tax credit partnerships’ equity method income of $46 million, net of income tax, was included in net investment income. The tax-advantaged leveraged lease portfolio is valued on an after-tax yield-basis. In 2018, the Company received third party data that was used to complete a comprehensive review of its portfolio to determine the full and complete impact of U.S. Tax Reform on these investments. As a result of this review, a tax benefit of $125 million was recorded for the year ended December 31, 2018.
U.S. Tax Reform required the Company to recognize a transition tax on all previously unremitted non-U.S. earnings at December 31, 2017. However, the Company has not provided for U.S. deferred taxes on the remaining excess of book bases over tax bases of certain investments in non-U.S. subsidiaries that are essentially permanent in duration. The amount of deferred tax liability related to the Company’s remaining basis difference in these non-U.S. subsidiaries is $181 million at December 31, 2018.
The Company files income tax returns with the U.S. federal government and various U.S. state and local jurisdictions, as well as non-U.S. jurisdictions. The Company is under continuous examination by the IRS and other tax authorities in jurisdictions in which the Company has significant business operations. The income tax years under examination vary by jurisdiction and subsidiary. The Company is no longer subject to U.S. federal, state, or local income tax examinations for years prior to 2007, except for refund claims filed in 2017 with the IRS for 2000 through 2002 to recover tax and interest predominantly related to the disallowance of certain foreign tax credits for which the Company received a statutory notice of deficiency in 2015 and paid the tax thereon. The disallowed foreign tax credits relate to certain non-U.S. investments held by MLIC in support of its life insurance business through a United Kingdom investment subsidiary that was structured as a joint venture until early 2009.
The Company’s overall liability for unrecognized tax benefits may increase or decrease in the next 12 months. For example, federal tax legislation and regulation could impact unrecognized tax benefits. A reasonable estimate of the increase or decrease cannot be made at this time. However, the Company continues to believe that the ultimate resolution of the pending issues will not result in a material change to its consolidated financial statements, although the resolution of income tax matters could impact the Company’s effective tax rate for a particular future period.
The Company had insignificant penalties for the years ended December 31, 2018, 2017 and 2016.
It is not possible to predict the ultimate outcome of all pending investigations and legal proceedings. The Company establishes liabilities for litigation and regulatory loss contingencies when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Liabilities have been established for a number of the matters noted below. It is possible that some of the matters could require the Company to pay damages or make other expenditures or establish accruals in amounts that could not be reasonably estimated at December 31, 2018. 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 to management, management does not believe any such charges are likely to have a material effect on the Company’s financial position. Given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material effect on the Company’s consolidated net income or cash flows in particular quarterly or annual periods.
MLIC reevaluates on a quarterly and annual basis its exposure from asbestos litigation, including studying its claims experience, reviewing external literature regarding asbestos claims experience in the United States, assessing relevant trends impacting asbestos liability and considering numerous variables that can affect its asbestos liability exposure on an overall or per claim basis. These variables include bankruptcies of other companies involved in asbestos litigation, legislative and judicial developments, the number of pending claims involving serious disease, the number of new claims filed against it and other defendants and the jurisdictions in which claims are pending. Based upon its regular reevaluation of its exposure from asbestos litigation, MLIC has updated its recorded liability for asbestos-related claims to $502 million at December 31, 2018.
In July 2010, the Environmental Protection Agency (“EPA”) advised MLIC that it believed payments were due under two settlement agreements, known as “Administrative Orders on Consent,” that New England Mutual Life Insurance Company (“New England Mutual”) signed in 1989 and 1992 with respect to the cleanup of a Superfund site in Florida (the “Chemform Site”). The EPA originally contacted MLIC (as successor to New England Mutual) and a third party in 2001, and advised that they owed additional clean-up costs for the Chemform Site. The matter was not resolved at that time. In September 2012, the EPA, MLIC and the third party executed an Administrative Order on Consent under which MLIC and the third party agreed to be responsible for certain environmental testing at the Chemform Site. The EPA may seek additional costs if the environmental testing identifies issues. The EPA and MLIC have reached a settlement in principle on the EPA’s claim for past costs. The Company estimates that the aggregate cost to resolve this matter, including the settlement for claims of past costs and the costs of environmental testing, will not exceed $300 thousand.