a $63 million, net of income tax, charge due to a current period increase in our incurred but not reported
net tax-related charges of $139 million consisting of (i) 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 (ii) a $41 million net tax-related benefit from the finalization of certain tax audits
A key element of our enterprise strategy is to return excess capital to common shareholders through dividends and stock repurchases. In 2018, we returned $5.7 billion of capital to common shareholders through common stock dividends and common stock repurchases. Common stock repurchases are subject to the discretion of our Board of Directors and will depend upon our capital position, liquidity, financial strength and credit ratings, general market conditions, the market price of MetLife, Inc.’s common stock compared to management’s assessment of the stock’s underlying value, applicable regulatory approvals, and other legal and accounting factors. Further, we plan to maintain a liquidity buffer of $3.0 to $4.0 billion of liquid assets at the holding companies.
The Company continues to be proactive in its investment and interest crediting rate strategies, as well as its product design and product mix. To mitigate the risk of unfavorable consequences from the low interest rate environment in the U.S., the Company applies disciplined asset/liability management (“ALM”) strategies, including the use of interest rate derivatives. In some cases, the Company has entered into offsetting positions as part of its overall ALM strategy and to reduce volatility in net income. Lowering interest crediting rates on some products, or adjusting the dividend scale on traditional products, can help offset decreases in investment margins on some products. Our ability to lower interest crediting rates could be limited by competition, requirements to obtain regulatory approval, or contractual guarantees of minimum rates and may not match the timing or magnitude of changes in asset yields. As a result, our margins could decrease or potentially become negative. We are able to limit or close certain products to new sales in order to manage exposures. Business actions, such as shifting the sales focus to less interest rate sensitive products, can also mitigate this risk. In addition, the Company is well diversified across product, distribution, and geography. Certain of our businesses reported within our Latin America, EMEA, and Asia (exclusive of our Japan business) segments are not significantly interest rate or market sensitive; in particular, they have limited sensitivity to U.S. interest rates. The Company’s primary exposure within these segments is insurance risk. We expect our non-U.S. businesses to grow faster than our U.S. businesses and, over time, to become a larger percentage of our total business. As a result of the foregoing, the Company expects to be able to substantially mitigate the negative impact of a sustained low interest rate environment in the U.S. on the Company’s profitability. Based on a near to intermediate term analysis of a sustained lower interest rate environment in the U.S., the Company anticipates adjusted earnings will continue to increase, although at a slower growth rate.
Below is a summary of the rates we used for the Low Interest Rate Scenario versus our base scenario through 2021. These rates represent the most relevant short-term and long-term rates for our base scenario which uses LIBOR as the benchmark rate. See “Risk Factors - Economic Environment and Capital Risks - Difficult Economic Conditions May Adversely Affect Our Business, Results of Operations and Financial Condition - Interest Rate Risk” for information regarding the potential change from LIBOR to SOFR.
RIS contains both short and long-duration products consisting of capital market products, pension risk transfers, structured settlements, and other benefit funding products. A significant portion of short-duration products are managed on a floating rate basis, which mitigates the impact of the low interest rate environment in the U.S. The sensitivities below do not include the impact of additional ALM actions that we may take in our capital markets business. The long-duration products have very predictable cash flows and our strategy is to match asset and liability durations consistent with our ALM policies. We also use interest rate swaps as part of our ALM strategy and to help protect income in this business. While we expect to experience margin compression as we reinvest at lower rates, the interest rate derivatives and the ALM strategy this portfolio follows should partially mitigate this risk. Also, based on cash flow estimates, only a small component of the invested asset base is subject to reinvestment risk. Reinvestment risk is defined for this purpose as the amount of reinvestment in 2019, 2020 and 2021 that would impact adjusted earnings due to reinvesting cash flows in the Low Interest Rate Scenario.
Net decrease in amortization of approximately $45 million from other investment activities.
In 2017, the Company completed the acquisition of Logan Circle Partners, L.P. (“Logan Circle Partners”), from Fortress Investment Group LLC, for approximately $250 million in cash. Logan Circle Partners was a fundamental research-based investment manager providing institutional clients actively managed investment solutions across a broad spectrum of fixed income strategies.
Actuarial assumption updates associated with variable annuity guarantees assumed from our former operating joint venture in Japan,
Expenses. Adjusted earnings increased by $62 million due to lower costs associated with enterprise-wide initiatives, notably the closing of the wealth management product to new business in the U.K. in the third quarter of 2017, declines in various other expenses and the release of provisions arising from finalization of historic corporate tax filings.
Business Growth. Lower net investment income, resulting from a reduced invested asset base, primarily in fixed income securities, decreased adjusted earnings. The reduced invested asset base is primarily the result of negative net flows in our deferred annuities and life businesses. This decline was partially offset by invested asset growth in our long-term care business. The negative net flows in our annuities business and a decrease in universal life deposits resulted in lower fee income and lower interest credited expenses. The continued maturing of the existing long-term care block of business resulted in higher interest credited expenses. The combined impact of the items affecting our business growth, partially offset by lower DAC amortization, resulted in a $192 million decrease in adjusted earnings.
Overall OTTI losses recognized in earnings on equity securities were $25 million for the year ended December 31, 2017, as compared to $75 million for the year ended December 31, 2016, a decrease of $50 million, reflecting the impact of lower oil prices impacting the energy sector in 2016.
A subsidiary of the Company has entered into short-term advance agreements with the FHLB of Boston.
There were no impairments recognized on real estate and real estate joint ventures for the year ended December 31, 2018, however impairments were $13 million and less than $1 million for the years ended December 31, 2017 and 2016, respectively. Depreciation expense on real estate investments was $92 million, $103 million and $92 million for the years ended December 31, 2018, 2017 and 2016, respectively. Real estate investments were net of accumulated depreciation of $931 million and $898 million at December 31, 2018 and 2017, respectively.
We maintain an unsecured revolving credit facility, as well as committed facilities, with various financial institutions. See “- Liquidity and Capital Resources - The Company - Liquidity and Capital Sources - Global Funding Sources - Credit and Committed Facilities” for further descriptions of such arrangements. For the classification of expenses on such credit and committed facilities and the nature of the associated liability for letters of credit issued and drawdowns on these credit and committed facilities, see Note 12 of the Notes to the Consolidated Financial Statements.
Additionally, 42% of the $20.7 billion of GMIB total account value has been invested in managed volatility funds as of December 31, 2018. These funds seek to manage volatility by adjusting the fund holdings within certain guidelines based on capital market movements. Such activity reduces the overall risk of the underlying funds while maintaining their growth opportunities. These risk mitigation techniques reduce or eliminate the need for us to manage the funds’ volatility through hedging or reinsurance.
Our GMIB products typically have a waiting period of 10 years to be eligible for annuitization. As of December 31, 2018, only 19% of our contracts with GMIBs were eligible for annuitization. The remaining contracts are not eligible for annuitization for an average of five years.
We maintain a substantial short-term liquidity position, which was $11.1 billion and $10.0 billion at December 31, 2018 and 2017, respectively. Short-term liquidity includes cash and cash equivalents and short-term investments, excluding assets that are pledged or otherwise committed, including amounts received in connection with securities lending, repurchase agreements, derivatives, and secured borrowings, as well as amounts held in the closed block.
Dividends are paid quarterly on MetLife, Inc.’s Floating Rate Non-Cumulative Preferred Stock, Series A. Dividends are paid semi-annually on MetLife, Inc.’s 5.25% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C, until June 15, 2020 and, thereafter, will be paid quarterly. Dividends are paid semi-annually on MetLife, Inc.’s 5.875% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series D, in September and March until March 15, 2028 and, thereafter, will be paid quarterly. Dividends are paid quarterly on MetLife, Inc.’s 5.625% Non-Cumulative Preferred Stock, Series E.
During 2018, 2017 and 2016, following regulatory approval, MetLife Reinsurance Company of Charleston (“MRC”), a wholly-owned subsidiary of MetLife, Inc., repurchased and canceled $61 million, $153 million and $68 million, respectively, in aggregate principal amount of its surplus notes, which were reported in collateral financing arrangement on the consolidated balance sheets;
In June 2018, MetLife, Inc. sold FVO Brighthouse Common Stock in exchange for $944 million in aggregate principal amount of its senior notes. In December, August and June 2018, MetLife, Inc. purchased for cash $500 million, $566 million and $160 million, respectively, in aggregate principal amount of its senior notes. See Note 12 of the Notes to the Consolidated Financial Statements for further information on long-term and short-term debt.
Amounts presented for debt include short-term debt, long-term debt, the collateral financing arrangement and junior subordinated debt securities, the total of which differs from the total of the corresponding amounts presented on the consolidated balance sheet as the amounts presented herein (i) do not include premiums or discounts upon issuance or purchase accounting fair value adjustments; (ii) include future interest on such obligations for the period from January 1, 2019 through maturity; and (iii) do not include long-term debt relating to CSEs at December 31, 2018 as such debt does not represent our contractual obligation. Future interest on variable rate debt was computed using prevailing rates at December 31, 2018 and, as such, does not consider the impact of future rate movements. Future interest on fixed rate debt was computed using the stated rate on the obligations for the period from January 1, 2019 through maturity, except with respect to junior subordinated debt which was computed using the stated rates through the scheduled redemption dates as it is our expectation that such obligations will be redeemed as scheduled. Inclusion of interest payments on junior subordinated debt securities through the final maturity dates would increase the contractual obligation by $7.7 billion. Pursuant to the collateral financing arrangement, MetLife, Inc. may be required to deliver cash or pledge collateral to the unaffiliated financial institution. See Note 13 of the Notes to the Consolidated Financial Statements.
As a lessee, we have various operating leases, primarily for office space. Contractual provisions exist that could increase or accelerate those lease obligations presented, including various leases with early buyouts and/or escalation clauses. However, the impact of any such transactions would not be material to our financial position or results of operations. See Note 20 of the Notes to the Consolidated Financial Statements.
See “- The Company - Liquidity and Capital Sources - Global Funding Sources - Credit and Committed Facilities,” as well as Note 12 of the Notes to the Consolidated Financial Statements, for further information regarding the unsecured revolving credit facility and these committed facilities.
In addition to the description of liquidity and capital uses in “- The Company - Liquidity and Capital Uses” and “- The Company - Contractual Obligations,” MetLife, Inc.’s primary uses of liquidity and capital are set forth below.
Guarantees accounted for as embedded derivatives in policyholder account balances include guaranteed minimum accumulation benefits (“GMABs”), the non-life contingent portion of GMWBs and certain non-life contingent portions of GMIBs. At inception, the Company attributes to the embedded derivative a portion of the projected future guarantee fees to be collected from the policyholder equal to the present value of projected future guaranteed benefits. Any additional fees represent “excess” fees and are reported in universal life and investment-type product policy fees.
The Company uses the equity method of accounting for real estate joint ventures and other limited partnership interests (“investee”) when it has more than a minor ownership interest or more than a minor influence over the investee’s operations. The Company generally recognizes its share of the investee’s earnings in net investment income on a three-month lag in instances where the investee’s financial information is not sufficiently timely or when the investee’s reporting period differs from the Company’s reporting period.
On December 22, 2017, President Trump signed into law H.R.1, commonly referred to as the Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”). See Note 18 for additional information on U.S. Tax Reform and related Staff Accounting Bulletin (“SAB”) 118 provisional amounts.
Assets, liabilities and operations of foreign affiliates and subsidiaries are recorded based on the functional currency of each entity. The determination of the functional currency is made based on the appropriate economic and management indicators. For most of the Company’s foreign operations, the local currency is the functional currency. For certain other foreign operations, such as Japan, the local currency and one or more other currencies qualify as functional currencies. Assets and liabilities of foreign affiliates and subsidiaries are translated from the functional currency to U.S. dollars at the exchange rates in effect at each year-end and revenues and expenses are translated at the average exchange rates during the year. The resulting translation adjustments are charged or credited directly to OCI, net of applicable taxes. Gains and losses from foreign currency transactions, including the effect of re-measurement of monetary assets and liabilities to the appropriate functional currency, are reported as part of net investment gains (losses) in the period in which they occur.
The adoption of this guidance resulted in a $328 million, net of income tax, increase to retained earnings largely offset by a decrease to AOCI that was primarily attributable to $1.7 billion of equity securities previously classified and measured as equity securities AFS. At December 31, 2017, equity securities of $16.0 billion primarily associated with Unit-linked investments were accounted for using the FVO and therefore were unaffected by the new guidance. The Company has included the required disclosures related to equity securities AFS within Note 8.
Policyholder account balances are equal to: (i) policy account values, which consist of an accumulation of gross premium payments and investment performance; (ii) credited interest, ranging from less than 1% to 13% for U.S. business and less than 1% to 15% for non-U.S. business, less expenses, mortality charges and withdrawals; and (iii) fair value adjustments relating to business combinations.
For Group Life - Term and Group Long-Term Disability, first year incurred claims and allocated loss adjustment expenses increased in 2018 compared to the 2017 incurral year due to the growth in the size of the business.
There were no significant changes in methodologies or assumptions during 2018. The assumptions used in calculating the unpaid claims and claim adjustment expenses for Protection Life and Protection Health are updated annually to reflect emerging trends in claim experience.
The Company amortizes DAC for these contracts, which is primarily composed of commissions and certain underwriting expenses, in proportion to actual and future earned premium over the applicable contract term.
The following table presents the estimated fair value and gross unrealized losses of fixed maturity securities AFS in an unrealized loss position, aggregated by sector and by length of time that the securities have been in a continuous unrealized loss position at:
In connection with the adoption of new guidance related to the recognition and measurement of financial instruments (see Note 1), effective January 1, 2018, the Company has reclassified its investment in common stock in FHLB from equity securities to other invested assets. These investments are carried at redemption value and are considered restricted investments until redeemed by the respective FHLBanks. The carrying value of these investments at December 31, 2017 was $792 million.
In connection with securities lending, in addition to cash collateral received, the Company received from counterparties security collateral of $78 million and $19 million at December 31, 2018 and 2017, respectively, which may not be sold or re-pledged, unless the counterparty is in default, and is not reflected on the consolidated financial statements.
A summary of the remaining contractual maturities of securities lending agreements and repurchase agreements is as follow:
The Company holds investments in real estate joint ventures, real estate funds and other limited partnership interests consisting of leveraged buy-out funds, hedge funds, private equity funds, joint ventures and other funds. The portion of these investments accounted for under the equity method had a carrying value of $14.7 billion at December 31, 2018. The Company’s maximum exposure to loss related to these equity method investments is limited to the carrying value of these investments plus unfunded commitments of $5.3 billion at December 31, 2018. Except for certain real estate joint ventures and certain funds, the Company’s investments in its remaining real estate funds and other limited partnership interests are generally of a passive nature in that the Company does not participate in the management of the entities.
At December 31, 2018 and 2017, the cumulative foreign currency translation gain (loss) recorded in AOCI related to hedges of net investments in foreign operations was $184 million and $309 million, respectively.
The valuation of guaranteed minimum benefits includes a nonperformance risk adjustment. The amounts included in net derivative gains (losses) in connection with this adjustment were $133 million, ($190) million and $156 million for the years ended December 31, 2018, 2017 and 2016, respectively.
A majority of the proceeds from the offering of the surplus notes was placed in a trust, which is consolidated by the Company, to support MRC’s statutory obligations associated with the assumed closed block liabilities. During the year ended December 31, 2018, MRC transferred $97 million to the trust out of its general account. During the years ended December 31, 2017 and 2016, MRC transferred $3 million and $1 million, respectively, out of the trust to its general account. The assets are principally invested in fixed maturity securities AFS and are presented as such within the Company’s consolidated balance sheets, with the related income included within net investment income on the Company’s consolidated statements of operations.
The intrinsic value of each Stock Option is the closing price on a particular date less the exercise price of the Stock Option, so long as the difference is greater than zero. The aggregate intrinsic value of all outstanding Stock Options is computed using the closing Share price on December 31, 2018 of $41.06 and December 31, 2017 of $50.56, as applicable.
New York has adopted certain prescribed accounting practices, primarily consisting of the continuous Commissioners’ Annuity Reserve Valuation Method, which impacts deferred annuities, and the New York Special Consideration Letter, which mandates certain assumptions in asset adequacy testing. The collective impact of these prescribed accounting practices decreased the statutory capital and surplus of MLIC for the years ended December 31, 2018 and 2017 by $1.2 billion and $1.1 billion, respectively, compared to what capital and surplus would have been had it been measured under NAIC guidance.
The decrease in 2018 is primarily related to the tax audit settlement, of which $168 million was recorded in other expenses and $273 million was reclassified to the current income tax payable account.
A shareholder seeking to sue derivatively on behalf of MetLife, Inc. commenced an action in federal court against members of the MetLife, Inc. Board of Directors. Plaintiff asserts claims for breach of fiduciary duty, gross mismanagement, waste of corporate assets, as well as securities fraud claims. Plaintiff alleges that the defendants disseminated or approved public statements that failed to disclose that MetLife’s practices and procedures for estimating reserves for certain group annuity benefits were inadequate, and that MetLife had inadequate internal control over financial reporting. Plaintiffs allege that because of the defendants’ breaches of duty, MetLife, Inc. has incurred damage to its reputation and has suffered other unspecified damages. The defendants intend to defend this action vigorously.
In June 2016 and March 2016, MetLife, Inc. repaid $204 million and $10 million, respectively, of affiliated long-term debt to MetLife Exchange Trust I at maturity in exchange for a return of capital. The long-term notes bore interest at three-month LIBOR plus 0.7%.