Life Insurance Company of North America ("Allianz Life"). The transaction added approximately $278 billion of life reinsurance in-force, $246 million of premiums and $11 million of income before income tax expense, excluding minority interest expense, in 2003. The effects of such transaction are included within the Reinsurance segment.
Total expenses increased by $2,497 million, or 18%, to $16,658 million for the year ended December 31, 2005 from $14,161 million for the comparable 2004 period. The acquisition of Travelers accounted for $658 million of this increase. Excluding the impact of the acquisition of Travelers, total expenses increased by $1,839 million, or 13%, from the comparable 2004 period. This increase is comprised of higher policyholder benefits and claims of $1,278 million, an increase in interest credited to policyholder account balances of $334 million and an increase in other expenses of $227 million. The increase in policyholder benefits and claims of $1,278 million is attributable to a $482 million, a $452 million, and a $344 million increase in the non-medical health & other, group life, and retirement & savings businesses, respectively. These increases are predominantly attributable to the business growth referenced in the revenue discussion above. The increase in policyholder benefits and claims in the non-medical health & other business include the impact of the acquisition of TIAA/CREF of $43 million. These increases include $2 million and $18 million of policyholder benefits and claims related to Hurricane Katrina in the group life and non-medical health & other business, respectively. The increase in interest credited to policyholder account balances of $334 million is primarily the result of the impact of growth in guaranteed interest contracts within the retirement & savings business. In addition, the impact of higher short-term interest rates in the current year, also contributed to the increase. The rise in other expenses of $227 million is primarily due to higher non-deferrable volume-related expenses of $61 million, which are largely associated with business growth, an increase of $39 million in corporate support expenses, and $43 million of Travelers-related integration costs, principally incentive accruals. In addition, expenses increased as a result of the impact of a $49 million benefit recorded in the second quarter of 2004, which is related to a reduction in a premium tax liability. Expenses also increased by $22 million related to an adjustment of DAC for certain long-term care products in 2005.
YEAR ENDED DECEMBER 31, 2004 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2003 -- INSTITUTIONAL
fluctuate from period to period. Fee income from separate account products increased by $126 million, net of income taxes, primarily related to growth in the business and favorable market conditions. Favorable underwriting results in life products contributed $37 million, net of income taxes, to the increase in income from continuing operations. Underwriting results are generally the difference between the portion of premium and fee income intended to cover mortality, morbidity or other insurance costs less claims incurred and the change in insurance-related liabilities. Underwriting results are significantly influenced by mortality, morbidity, or other insurance-related experience trends and the reinsurance activity related to certain blocks of business and, as a result, can fluctuate from period to period. The decrease in the closed-block related policyholder dividend obligation of $27 million, net of income taxes, lower annuity net guaranteed benefit costs of $12 million, net of income taxes, and lower DAC amortization of $6 million, net of income taxes, all contributed to the increase. These increases in income from continuing operations are partially offset by lower net investment income on blocks of business that are not driven by interest rate spreads of $19 million, net of income taxes. The increase in income from continuing operations is partially offset by higher expenses of $10 million, net of income taxes, primarily due to higher operating costs offset by the impact of revisions to certain expense, premium tax and policyholder liability estimates in the current year and certain asset write- offs in the prior year. Additionally, offsetting the increase in income from continuing operations, is a revision to the estimate for policyholder dividends of $9 million, net of income taxes, which occurred in the prior year. The changes in tax rates between years accounted for a decrease in income from continuing operations of $15 million.
Total expenses increased by $876 million, or 8%, to $12,137 million for the year ended December 31, 2005 from $11,261 million for the comparable 2004 period. The acquisition of Travelers accounted for $761 million of the increase. Excluding the impact from the acquisition of Travelers, total expenses increased by $115 million, or 1%, to $11,376 million for the year ended December 31, 2005 from $11,261 million for the comparable 2004 period. Higher expenses are primarily the result of higher policyholder benefits primarily due to the increase in future policy benefits of $207 million, commensurate with the net increase in premium on annuity and life products discussed above, partially offset by $5 million due to better mortality in life products. Also partially offsetting the increase in policyholder benefits was a reduction in the closed block-related policyholder dividend obligation of $41 million and a benefit of $18 million associated with the hedging of guaranteed annuity benefit riders. The reduction in the closed block-related policyholder dividend obligation was driven by lower net investment income, offset by higher realized gains in the closed block. Interest credited to policyholder account balances decreased by $45 million due to lower crediting rates, partially offset by the growth in policyholder account balances. In addition, total expenses increased by $13 million due to a revision in the estimate of policyholder dividends in the prior period. Other expenses increased primarily due to higher corporate incentive expenses of $60 million and higher general spending of $28 million. The current year includes revisions to prior period estimates for certain expense, premium tax and policyholder liabilities which reduce the current year expenses while the prior period includes certain asset write-offs which increased
Total expenses increased by $1,029 million, or 43%, to $3,411 million for the year ended December 31, 2005 from $2,382 million for the comparable 2004 period. The acquisition of Travelers accounted for $404 million of this increase. Excluding the impact of the Travelers acquisition, total expenses increased by $625 million, or 26%, over the comparable 2004 period. Policyholder benefits and claims, policyholder dividends and interest credited to policyholder account balances increased by $451 million, or 26%, to $2,219 million for the year ended December 31, 2005 from $1,768 million for the comparable 2004 period. Policyholder benefits and claims and dividends in Mexico increased by $177 million primarily due to an increase in certain policyholder liabilities caused by unrealized investment gains (losses) on the invested assets supporting those liabilities of $110 million, as well as an increase in interest credited to policyholder accounts of $65 million in line with the net investment income increase in Mexico. South Korea, Taiwan and Brazil's policyholder benefits and claims, policyholder dividends and interest credited to policyholder accounts increased by $122 million, $41 million and $27 million, respectively, commensurate with the business growth discussed above. Chile's policyholder benefits and claims, policyholder dividends and interest credited to policyholder accounts increased by $86 million due to the business growth primarily in the bank distribution channel business, as well as to an increase in the liabilities for annuity benefits, which, like net investment income on related assets, are linked to the inflation rate. Hong Kong's policyholder benefits and claims and policyholder dividends increased by $3 million due to higher claims and the associated increase in liabilities in 2005. These increases were partially offset by a decrease of $10 million in Canada's policyholder benefits and claims, policyholder dividends and interest credited to policyholder account balances primarily due to the strengthening of the liability on its pension business related to changes in mortality assumptions in the prior year. Other expenses increased by $174 million, or 28%, to $788 million for the year ended December 31, 2005 from $614 million for the comparable 2004 period. South Korea's other expenses increased by $73 million primarily due to higher amortization of deferred acquisition costs driven by the rapid growth in the business, a decrease in a payroll tax liability in the prior year resulting from the resolution of the related tax matter, an accrual for an early retirement program in 2005, as well as additional overhead expenses in line with the
Total revenues, excluding net investment gains (losses), increased by $816 million, or 26%, to $3,942 million for the year ended December 31, 2004 from $3,126 million for the comparable 2003 period due primarily to a $700 million increase in premiums. The premium increase during the year ended December 31, 2004 is partially the result of RGA's coinsurance agreement with Allianz Life under which RGA assumed 100% of Allianz Life's United States traditional life reinsurance business. This transaction closed during 2003, with six months of reinsurance activity recorded in 2003, as compared to twelve months in 2004. New premiums from facultative and automatic treaties and renewal premiums on existing blocks of business in the United States and certain international operations also contributed to the premium growth. Premium levels are significantly influenced by large transactions, such as the Allianz Life transaction, and reporting practices of ceding companies, and as a result, can fluctuate from period to period. Net investment income also contributed to revenue growth, increasing $107 million, or 25%, to $538 million in 2004 from $431 million in 2003. The growth in net investment income is the result of the growth in RGA's operations and invested asset base, as well as the conversion of a large reinsurance treaty from a funds withheld to coinsurance basis which resulted in an increase of $12 million in net investment income. Additionally, a component of the total revenue increase is attributable to foreign currency exchange rate movements contributing an estimated $99 million.
The NAIC adopted the Codification of Statutory Accounting Principles ("Codification") in 2001 to standardize regulatory accounting and reporting to state insurance departments. However, statutory accounting principles continue to be established by individual state laws and permitted practices. The New York State Department of Insurance (the "Department") has adopted Codification with certain modifications for the preparation of statutory financial statements of insurance companies domiciled in New York. Modifications by the various state insurance departments may impact the effect of Codification on the statutory capital and surplus of the Holding Company's insurance subsidiaries.
Support Agreements. The Holding Company has net worth maintenance agreements with three of its insurance subsidiaries, MetLife Investors, First MetLife Investors Insurance Company and MetLife Investors Insurance Company of California. Under these agreements, as subsequently amended, the Holding Company agreed, without limitation as to the amount, to cause each of these subsidiaries to have a minimum capital and surplus of $10 million, total adjusted capital at a level not less than 150% of the company action level RBC, as defined by state insurance statutes, and liquidity necessary to enable it to meet its current obligations on a timely basis. At December 31, 2005, the capital and surplus of each of these subsidiaries was in excess of the minimum capital and surplus amounts referenced above, and their total adjusted capital was in excess of the most recent referenced RBC-based amount calculated at December 31, 2005.
The Company commits to lend funds under mortgage loan commitments. The amounts of these mortgage loan commitments were $2,974 million and $1,189 million at December 31, 2005 and 2004, respectively. The purpose of these loans is to enhance the Company's total return on its investment portfolio. There are no other obligations or liabilities arising from such arrangements that are reasonably likely to become material.
SFAS 87 also requires the recognition of an additional minimum liability and an intangible asset (limited to unrecognized prior service cost) if the market value of pension plan assets is less than the ABO at the measurement date. The Subsidiaries' additional minimum liability was $78 million, and the intangible asset was $12 million, at December 31, 2005. The excess of the additional minimum liability over the intangible asset, of $66 million is recorded, net of income taxes, as a reduction of accumulated other comprehensive income.
The weighted average discount rate used to calculate the net periodic pension cost was 5.83%, 6.10% and 6.74% for the years ended December 31, 2005, 2004 and 2003, respectively.
The Subsidiaries recognized postretirement benefit expense of $77 million in 2005 as compared to $62 million in 2004 and $81 million in 2003. The major components of net periodic postretirement benefit cost described above are as follows:
It is the Subsidiaries' practice to make contributions to the qualified pension plan to comply with minimum funding requirements of Employee Retirement Income Security Act of 1974, as amended, and/or to maintain a fully funded accumulated benefit obligation. In accordance with such practice, no contributions were required for the year ended December 31, 2005 and no contributions are anticipated to be required for 2006. The non-qualified pension plans are funded as benefit payments become due under the provision of the plans. The Subsidiaries expect to make discretionary contributions of $187 million towards the pension plans in 2006. Gross pension benefit payments for the next ten years, which reflect expected future service as appropriate, are expected to be as follows:
Effective January 1, 2003, the Company adopted SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). In addition to amending or rescinding other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions, SFAS 145 generally precludes companies from recording gains and losses from the extinguishment of debt as an extraordinary item. SFAS 145 also requires sale-leaseback treatment for certain modifications of a capital lease that result in the
(7) Included in net investment gains (losses) from other invested assets for the year ended December 31, 2004 is a charge of $26 million related to a funds withheld reinsurance treaty that was converted to a coinsurance agreement. This amount is classified in net investment income in the consolidated statements of income.
The following table presents the scheduled maturities for the Company's commercial mortgage loans at:
(1) Amortized cost is equal to carrying value before valuation allowances.
The following table presents the total assets of and maximum exposure to loss relating to VIEs for which the Company has concluded that (i) it is the primary beneficiary and which are consolidated in the Company's consolidated financial statements at December 31, 2005; and (ii) it holds significant variable interests but it is not the primary beneficiary and which have not been consolidated:
(5) Other investments include securities that are not asset-backed securitizations or collateralized debt obligations.
On July 1, 2005, the Holding Company completed the acquisition of The Travelers Insurance Company ("TIC"), excluding certain assets, most significantly, Primerica, from Citigroup Inc. ("Citigroup"), and substantially all of Citigroup's international insurance businesses (collectively, "Travelers"), which is more fully described in Note 2. The acquisition is being accounted for using the purchase method of accounting. Travelers' assets, liabilities and results of operations are included in the Company's results beginning July 1, 2005. The accounting policies of Travelers were conformed to MetLife upon acquisition.
The Company participates in structured investment transactions, primarily asset securitizations and structured notes. These transactions enhance the Company's total return on its investment portfolio principally by generating management fee income on asset securitizations and by providing equity-based returns on debt securities through structured notes and similar instruments.
In June 2005, the EITF reached consensus on Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights ("EITF 04-5"). EITF 04-5 provides a framework for determining whether a general partner controls and should consolidate a limited partnership or a similar entity in light of certain rights held by the limited partners. The consensus also provides additional guidance on substantive rights. EITF 04-5 was effective after June 29, 2005 for all newly formed partnerships and for any pre-existing limited partnerships that modified their partnership agreements after that date. EITF 04-5 must be adopted by January 1, 2006 for all other limited partnerships through a cumulative effect of a change in accounting principle recorded in opening equity or it may be applied retrospectively by adjusting prior period financial statements. The adoption of this provision of EITF 04-5 did not have a material impact on the Company's consolidated financial statements.
December 31, 2005 and 2004. Income from continuing operations available to common shareholders per common share would have been $4.68 and $4.00 for the years ended December 31, 2005 and 2004, respectively, deducting the impact of the preferred stock dividend.
The Company held foreign currency derivatives with notional amounts of $5,695 million and $4,720 million to hedge the exchange rate risk associated with foreign bonds and loans at December 31, 2005 and 2004, respectively.
Mortgage and consumer loans with scheduled payments of 60 days (90 days for agricultural mortgages) or more past due or in foreclosure had an amortized cost of $60 million and $58 million at December 31, 2005 and 2004, respectively.
For the years ended December 31, 2005, 2004 and 2003, the Company recognized as net investment gains (losses) changes in fair value of $368 million, ($157) million and ($114) million, respectively, related to derivatives that do not qualify for hedge accounting. For the year ended December 31, 2005, the Company recorded changes in fair value of ($2) million, as interest credited to policyholder account balances related to derivatives that do not qualify for hedge accounting. The Company did not have interest credited to policyholder account balances related to such derivatives for the years ended December 31, 2004 and 2003. For the year ended December 31, 2005, the Company recorded changes in fair value of ($38) million, as net investment income related to derivatives that do not qualify for hedge accounting. The Company did not have net investment income related to such derivatives for the years ended December 31, 2004 and 2003.
The estimated future amortization expense for the next five years allocated to other expenses for VOBA is $506 million in 2006, $477 million in 2007, $449 million in 2008, $422 million in 2009 and $392 million in 2010.
On June 23, 2005, the Holding Company issued in the United States public market $1,000 million aggregate principal amount of 5.00% senior notes due June 15, 2015 at a discount of $2.7 million ($997.3 million) and $1,000 million aggregate principal amount of 5.70% senior notes due June 15, 2035 at a discount of $2.4 million ($997.6 million). In connection with the offering, the Holding Company incurred approximately $12.4 million of issuance costs which have been capitalized and included in other assets. These costs are being amortized using the effective interest method over the respective term of the related senior notes.
Note: The Holding Company is a guarantor under the first four agreements and a party to the fifth agreement above.
- A 1/80 or 1.25% ($12.50), undivided beneficial ownership interest in a series A trust preferred security of MetLife Capital Trust II ("Series A Trust"), with an initial liquidation amount of $1,000.
If the Holding Company defers any of the contract payments on the stock purchase contract, then it will accrue additional amounts on the deferred amounts at the annual rate of 6.375% until paid, to the extent permitted by law.
The Company has recorded a valuation allowance related to tax benefits of certain foreign net operating loss carryforwards. The valuation allowance reflects management's assessment, based on available information, that it is more likely than not that the deferred income tax asset for certain foreign net operating loss carryforwards will not be realized. The tax benefit will be recognized when management believes that it is more likely than not that these deferred income tax assets are realizable. In 2005, the Company recorded $176 million of additional deferred income tax valuation allowance related to certain foreign net operating loss carryforwards.
Legal theories asserted against Metropolitan Life have included negligence, intentional tort claims and conspiracy claims concerning the health risks associated with asbestos. Although Metropolitan Life believes it has meritorious defenses to these claims, and has not suffered any adverse monetary judgments in respect of these claims, due to the risks and expenses of litigation, almost all past cases have been resolved by settlements. Metropolitan Life's defenses (beyond denial of certain factual allegations) to plaintiffs' claims include that: (i) Metropolitan Life owed no duty to the plaintiffs -- it had no special relationship with the plaintiffs and did not manufacture, produce, distribute or sell the asbestos products that allegedly injured plaintiffs; (ii) plaintiffs cannot demonstrate justifiable detrimental reliance; and (iii) plaintiffs cannot demonstrate proximate causation. In defending asbestos cases, Metropolitan Life selects various strategies depending upon the jurisdictions in which such cases are brought and other factors which, in Metropolitan Life's judgment, best protect Metropolitan Life's interests. Strategies include seeking to settle or compromise claims, motions challenging the legal or factual basis for such claims or defending on the merits at trial. Since 2002, trial courts in California, Utah, Georgia, New York, Texas, and Ohio granted motions dismissing claims against Metropolitan Life on some or all of the above grounds. Other courts have denied motions brought by Metropolitan Life to dismiss cases without the necessity of trial. There can be no assurance that Metropolitan
A December 31 measurement date is used for all of the Subsidiaries' defined benefit pension and other postretirement benefit plans.
in order to determine the effect of the expected subsidies on net periodic other postretirement benefit cost. As a result, the accumulated other postretirement benefit obligation was reduced by $213 million at July 1, 2004 and net periodic other postretirement benefit cost from July 1, 2004 through December 31, 2004 was reduced by $17 million. The reduction of net periodic benefit cost was due to reductions in service cost of $3 million, interest cost of $6 million, and amortization of prior actuarial loss of $8 million.
On October 25, 2005, the Holding Company's board of directors approved an annual dividend for 2005 of $0.52 per share of common stock, for a total of $394 million, payable on December 15, 2005 to common shareholders of record on November 7, 2005. On September 28, 2004, the Holding Company's board of directors approved an annual dividend for 2004 of $0.46 per share of common stock, for a total of $343 million, payable on December 13, 2004 to shareholders of record on November 5, 2004. On October 21, 2003, the Holding Company's board of directors approved an annual dividend for 2003 of $0.23 per share of common stock, for a total of $175 million, payable on December 15, 2003 to shareholders of record on November 7, 2003.
Prior to January 1, 2005, the Black-Scholes model was used to determine the fair value of options granted as recognized in the financial statements or as reported in the pro forma disclosure above. The fair value of stock options issued on or after January 1, 2005 was estimated on the date of grant using a binomial lattice model. The Company made this change because lattice models produce more accurate option values due to the ability to incorporate assumptions about employee exercise behavior resulting from changes in the price of the underlying shares. In addition, lattice models allow for changes in critical assumptions over the life of the option in comparison to closed-form models like Black-Scholes, which require single-value assumptions at the time of grant.
As a part of the Travelers acquisition, management realigned certain products and services within several of the Company's segments to better conform to the way it manages and assesses its business. Accordingly, all prior period segment results have been adjusted to reflect such product reclassifications. Also in connection with the Travelers acquisition, management has utilized its economic capital model to evaluate the deployment of capital based upon the unique and specific nature of the risks inherent in the Company's existing and newly acquired businesses and has adjusted such allocations based upon this model.
The estimated future amortization expense allocated to other expenses for the next five years, for VODA, which has a weighted average useful life of 16 years, is $3 million in 2006, $8 million in 2007, $14 million in 2008, $18 million in 2009 and $24 million in 2010.
The Holding Company maintains committed and unsecured credit facilities aggregating $3.0 billion ($1.5 billion expiring in 2009 and $1.5 billion expiring in 2010) and $2.5 billion ($1.0 billion expiring in 2005 and $1.5 billion expiring in 2009) at December 31, 2005 and 2004, respectively, which it shares with Metropolitan Life (a wholly-owned subsidiary of the Company) and MetLife Funding, Inc. (a wholly-owned subsidiary of Metropolitan Life). In April 2005, a $1.0 billion credit facility which expired in 2005 was replaced with a $1.5 billion credit facility expiring in 2010. At December 31, 2005 and 2004, the Holding Company had no borrowings against these credit facilities. When drawn upon, these facilities would bear interest at varying rates as stated in the agreements. These facilities are primarily used for general corporate purposes and as back-up lines of credit for the Holding Company's and MetLife Funding's commercial paper programs.