EDGAR 10-K Filing

Company CIK: 937834
Filing Year: 2022
Filename: 937834_10-K_2022_0000937834-22-000029.json

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ITEM 1. BUSINESS
Item 1. Business
Business Overview & Strategy
As used in this Form 10-K, “MLIC,” the “Company,” “we,” “our” and “us” refer to Metropolitan Life Insurance Company, a New York corporation incorporated in 1868, and its subsidiaries. Metropolitan Life Insurance Company is a wholly-owned subsidiary of MetLife, Inc. (MetLife, Inc., together with its subsidiaries and affiliates, “MetLife”).
The Company is a provider of insurance, annuities, employee benefits and asset management. We are also one of the largest institutional investors in the United States with a general account portfolio invested primarily in fixed income securities (corporate, structured products, municipals, and government and agency) and mortgage loans, as well as real estate, real estate joint ventures, other limited partnerships and equity securities. See Note 2 of the Notes to the Consolidated Financial Statements for further information about the Company’s business.
Our well-recognized brand, market-leading businesses, competitive and innovative product offerings and financial strength and expertise should help drive future growth. MetLife will continue to execute on its Next Horizon strategy, creating value focusing on the following three pillars: (i) Focus; (ii) Simplify; and (iii) Differentiate.
Regulation
Overview
United States (“U.S.”) state regulators primarily regulate Metropolitan Life Insurance Company, with additional federal regulation of some of our products and services. New York’s insurance holding company laws apply to MetLife, Inc. and its U.S. insurance subsidiaries licensed in New York, including Metropolitan Life Insurance Company. Furthermore, consumer protection laws, privacy, anti-money laundering, securities, commodities, broker-dealer and investment adviser regulations, environmental and unclaimed property laws and regulations, and the Employee Retirement Income Security Act of 1974 (“ERISA”) also apply to some of our operations, products and services.
We expect the scope and extent of regulation and regulatory oversight generally to continue to increase. The regulatory environment and changes in laws in the jurisdictions in which we operate could materially harm our results of operations.
Insurance Regulation
Insurance regulation generally aims to protect policyholders and ensure insurance company solvency. Insurance regulators increasingly seek information about the potential impact of activities on holding company systems as a whole.
MLIC has all material licenses to transact its business in each jurisdiction where it conducts business. The extent of such regulation varies, but most jurisdictions regulate the financial aspects and business conduct of insurers through broad administrative powers with respect to, among other things:
•licensing companies and agents to transact business;
•calculating the value of assets to determine compliance with statutory requirements;
•mandating certain insurance benefits;
•regulating certain premium rates;
•reviewing and approving certain policy forms, including required policyholder disclosures;
•regulating unfair trade and claims practices, including through the imposition of restrictions on marketing and sales practices, distribution arrangements and payment of inducements, and identifying and paying to the states or local authorities benefits and other property that is not claimed by the owners;
•regulating advertising;
•protecting and safeguarding personal information and other sensitive data, including through cybersecurity standards;
•establishing statutory capital and reserve requirements and solvency standards;
•specifying the conditions under which a ceding company can take credit for reinsurance in its statutory financial statements (i.e., reduce its reserves by the amount of reserves ceded to a reinsurer);
•fixing maximum interest rates on insurance policy loans and minimum guaranteed crediting rates on life insurance policies and annuity contracts;
•adopting and enforcing standards with respect to the sale of annuities and other insurance products;
•approving changes in control of insurance companies;
•restricting the payment of dividends and other transactions between affiliates; and
•regulating the types and amounts of investments.
We must file reports, generally including detailed annual financial statements, with insurance regulatory authorities in each of the jurisdictions in which we do business. Such authorities also periodically examine our operations and accounts. We must also file, and in many jurisdictions and in some lines of insurance obtain regulatory approval of, rules, rates, and policy forms relating to the insurance written in the jurisdictions in which we operate.
Insurance, securities, and other regulatory authorities, other law enforcement agencies, and attorneys general, review our compliance with laws and regulations regarding the conduct of our insurance and securities businesses. We cooperate with such inquiries and take corrective action when warranted. See Note 16 of the Notes to the Consolidated Financial Statements.
U.S. Federal Initiatives
U.S. federal initiatives can affect our business in a variety of ways. For instance, legislators and policymakers have proposed various forms of direct and indirect federal regulation of insurance from time to time, such as proposals for the establishment of an optional federal charter for insurance companies. See “Risk Factors - Regulatory and Legal Risks - Changes in Laws or Regulation, or in Supervisory and Enforcement Policies, May Reduce Our Profitability, Limit Our Growth, or Otherwise Adversely Affect Us.”
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) increased the potential federal role in regulating businesses such as ours. The Financial Stability Oversight Council may designate certain financial companies as non-bank systemically important financial institutions subject to supervision by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) and the Federal Reserve Bank of New York (collectively with the Federal Reserve Board, the “Federal Reserve”). Dodd-Frank provisions may also affect our investment activities.
Dodd-Frank and its implementing regulations have changed since the law was adopted. As a result of these changes, and potential changes, we cannot identify all the risks posed and opportunities presented, if any, to our businesses. See “Risk Factors - Regulatory and Legal Risks - Changes in Laws or Regulation, or in Supervisory and Enforcement Policies, May Reduce Our Profitability, Limit Our Growth, or Otherwise Adversely Affect Us.”
Until January 2021, the McCarran-Ferguson Act largely exempted insurance from U.S. antitrust laws. At that time, the Competitive Health Insurance Reform Act applied U.S. antitrust laws to the “business of health insurance” and expanded U.S. regulatory authority accordingly. We expect regulatory oversight and litigation risk for some products, including dental and vision, to increase.
Guaranty Associations and Similar Arrangements
Many jurisdictions in which we transact business require life and health insurers to participate in guaranty or similar associations. These arrangements pay certain insurance benefits owed by impaired, insolvent or failed insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular jurisdiction on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer engaged. In addition, certain jurisdictions have government owned or controlled organizations providing life and health insurance to their citizens, whose activities could place additional stress on the adequacy of guaranty fund assessments. Many of these organizations have the power to levy assessments similar to those of the guaranty associations. Some jurisdictions permit member insurers to recover assessments paid through full or partial premium tax offsets. We have established liabilities for guaranty fund assessments.
Insurance Regulatory Examinations and Other Activities
U.S. state insurance departments periodically examine the books, records, accounts, and business practices of their domiciled insurers. State insurance departments may also conduct examinations of non-domiciliary insurers licensed in their states.
In 2019, MetLife entered into a consent order with the New York State Department of Financial Services (“NYDFS”) relating to the open market conduct quinquennial exam and paid a fine and customer restitution and submitted remediation plans for approval. See Note 16 of the Notes to the Consolidated Financial Statements regarding any reportable contingencies related to findings resulting from our state insurance department examinations.
In 2018, Pennsylvania, California, Florida, North Dakota and New Hampshire insurance regulators scheduled a multistate re-examination of MetLife and its affiliates relating to compliance with a regulatory settlement agreement relating to unclaimed property. This examination is ongoing.
Regulatory authorities in a small number of states, the Financial Industry Regulatory Authority (“FINRA”) and, occasionally, the U.S. Securities and Exchange Commission (the “SEC”) have conducted investigations or made inquiries relating to sales of individual life insurance policies, annuities or other products we have written. These investigations often focus on the conduct and/or supervision of particular financial services representatives, the sale of unregistered or unsuitable products, the misuse of client assets, or sales and replacements of annuities and certain riders on such annuities. Over the past several years, we resolved these (and a number of investigations by other regulators) for monetary payments and certain other relief, including restitution payments. We may continue to receive notice of, and may resolve, further investigations and actions on these matters in a similar manner.
Insurance standard-setting and regulatory support organizations, including the National Association of Insurance Commissioners (“NAIC”), encourage insurance supervisors to establish Supervisory Colleges. These organizations facilitate cooperation and coordination among insurance supervisors to enhance their understanding of the risk profile of U.S.-based insurance groups with international operations. Our lead state regulator, the NYDFS, annually chairs Supervisory College meetings that MetLife’s key U.S. and non-U.S. regulators attend.
In addition, regulators have scrutinized insurers’ claims payment practices. See Note 16 of the Notes to the Consolidated Financial Statements for further information regarding group annuity benefits and unclaimed property inquiries.
Policy and Contract Reserve Adequacy Analysis
We and our captive reinsurance subsidiary must annually analyze our statutory reserves adequacy. In each case, a qualified actuary must submit an opinion that states that the statutory reserves make adequate provision, according to accepted actuarial standards of practice, for the anticipated cash flows required by its contractual obligations and related expenses. The actuary considers the adequacy of the statutory reserves in light of the assets held by the insurer with respect to such reserves and related actuarial items, such as the investment earnings on such assets and the consideration the insurer anticipates receiving and retaining under the related policies and contracts. We may increase reserves in order to submit such an opinion without qualification. We and our captive reinsurance subsidiary have provided the opinions, as required, without qualifications since this requirement began.
National Association of Insurance Commissioners
The NAIC assists state insurance regulatory authorities to serve the public interest and achieve their regulatory goals. State insurance regulators may act independently or adopt regulations proposed by the NAIC. State insurance regulators and the NAIC regularly re-examine existing insurance laws and regulations. State insurance regulators establish standards and best practices, conduct peer reviews, and coordinate their regulatory oversight through the NAIC. The NAIC also provides standardized insurance industry accounting and reporting guidance through its Accounting Practices and Procedures Manual (the “Manual”), which states have largely adopted by regulation. However, individual states establish statutory accounting principles, which may differ from the Manual. Changes to the Manual or modifications by the various state insurance departments may affect our statutory capital and surplus.
State insurance holding company laws and regulations are generally based on the NAIC’s Insurance Holding Company System Regulatory Act and Regulation (“Model Holding Company Act and Regulation”). These vary from jurisdiction to jurisdiction, but generally require a controlled insurance company (i.e., insurers that are subsidiaries of insurance holding companies) to register and file reports with state regulatory authorities on its capital structure, ownership, financial condition, intercompany transactions and general business operations. They require the ultimate controlling person of a U.S. insurer to file an annual enterprise risk report with the insurer’s lead state regulator. The holding company laws also authorize state insurance commissioners to act as global group-wide supervisors. In 2020, the NYDFS amended its laws to permit the New York Superintendent of Financial Services (“Superintendent”) to act as a group-wide supervisor.
In furtherance of the NAIC’s “Solvency Modernization Initiative,” the NAIC has updated model acts and regulations to address insurance company financial regulation, as discussed below, and, in particular, capital requirements; corporate governance and risk management practices; group supervision; liquidity stress testing, statutory accounting and financial reporting; and reinsurance.
The NAIC’s Corporate Governance Annual Disclosure Model Act, which all states have adopted, requires insurers to annually file detailed information regarding their corporate governance policies.
New York has also adopted the NAIC’s Risk Management and Own Risk and Solvency Assessment Model Act, which requires insurers to maintain a risk management framework and to document an internal own risk and solvency assessment (“ORSA”) of its material risks in normal and stressed environments. MetLife, Inc. has submitted on behalf of the enterprise an ORSA summary report to the NYDFS annually since this requirement became effective.
The NAIC has also approved a valuation manual containing a principle-based approach to the calculation of life insurance reserves (the “Valuation Manual”). Principle-based reserving is designed to better address reserving for life insurance and annuity products. The NYDFS promulgated a regulation in 2019 that affirms the Superintendent’s authority to deviate from the Valuation Manual to adjust the reserves of a New York domestic life insurance company, such as MLIC, if the NYDFS determines that an alternative requirement would be in the best interest of New York policyholders. The NYDFS subsequently amended the regulation, as a result of which we increased our statutory reserves by approximately $700 million and our statutory capital requirements by approximately $300 million over the prior reserve and capital requirements. We fully graded these impacts into our statutory financial statements over a one-year period ending December 31, 2020.
The NAIC has been focused on a macro-prudential initiative since 2017, which is intended to enhance risk identification efforts by building on the state-based regulation system. In furtherance of this initiative, the NAIC adopted changes to its Statutory Annual Statement reporting, effective for year-end 2019, to improve liquidity risk monitoring. The NAIC also adopted amendments to the Model Holding Company Act and Regulation that implement requirements related to a liquidity stress-testing framework for certain large U.S. life insurers and insurance groups. The applicability of the framework is based on amounts of certain types of business written or material exposure to certain investment transactions, such as derivatives and securities lending. The framework is consistent with MetLife’s liquidity risks policies and procedures and it will be used as a regulatory tool once the holding company act amendments have been adopted by New York.
We use capital markets solutions to finance a portion of our statutory reserve requirements for several products. These include level premium term life products subject to the NAIC’s Valuation of Life Insurance Policies Model Regulation (commonly referred to as Regulation XXX), universal and variable life policies with secondary guarantees subject to NAIC Actuarial Guideline 38 (commonly referred to as Guideline AXXX), and our closed block. In order to address the use of captives for policies covered by Regulation XXX and Guideline AXXX, the NAIC adopted Actuarial Guideline 48 (“AG 48”). This guideline has enhanced the statutory financial statement disclosure of an insurer's use of captives and has narrowed the types of assets permitted to back statutory reserves that are required to support the insurer’s future obligations.
AG 48 also requires the actuary of a ceding insurer to opine on the assuming insurer’s collateral associated with the treaty and to issue a qualified opinion if the assuming entity is not complying with the requirements of AG 48. The NAIC’s Term and Universal Life Insurance Reserve Financing Model Regulation codifies the same substantive requirements as AG 48, as amended by the NAIC in 2016, and establishes uniform, national standards governing reserve financing arrangements pertaining to the term life and universal life insurance policies with secondary guarantees. This model regulation has only been adopted by a few states, although it is expected to be broadly adopted in the near term since it will become an NAIC accreditation standard on September 1, 2022.
We cannot predict the capital and reserve impacts, compliance costs, or other effects these initiatives will have on our business, financial condition or results of operations.
Surplus and Capital
Insurers must maintain their capital and surplus at or above minimum levels. Regulators generally have discretionary authority to limit or prohibit an insurer’s sales to policyholders if the insurer has not maintained a minimum surplus or capital or if they find that the further transaction of business will be hazardous to policyholders.
New York restricts the dividends or other distributions an insurance company subsidiary may pay to its parent companies and limits the transactions between an insurer and its affiliates. Dividends in excess of prescribed limits and transactions above a specified size between an insurer and its affiliates require the approval of the NYDFS. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Capital - Statutory Capital and Dividends.” See also “Dividend Restrictions” in Note 12 of the Notes to the Consolidated Financial Statements for further information regarding such limitations.
For developments that could affect our surplus and capital, see “Risk Factors.”
Risk-Based Capital
Metropolitan Life Insurance Company is subject to risk-based capital (“RBC”) requirements developed by the NAIC and adopted by New York. Insurers calculate RBC annually based on a formula that applies factors to various asset, premium, claim, expense and statutory reserve items, taking into account asset, insurance, interest rate, and market and business risk characteristics. Regulators use the formula as an early warning tool to identify insurers that may be inadequately capitalized for purposes of initiating regulatory action, and not as a means to rank insurers generally. State insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not meet or exceed certain RBC levels. See “Statutory Equity and Income” in Note 12 of the Notes to the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Capital - Statutory Capital and Dividends.”
The NYDFS issues annual letters on Special Considerations (each, an “SCL”) to New York-licensed insurance companies, including MLIC, that affect year-end asset adequacy testing. An SCL could mandate assumption changes, which would require us to increase or release certain asset adequacy reserves, which could materially impact our statutory capital and surplus. No changes were made to our asset adequacy reserves in either 2021 or 2020 as a result of the applicable SCL. See “Statutory Equity and Income” in Note 12 of the Notes to the Consolidated Financial Statements.
The NAIC adopted revisions to certain factors used to calculate Life RBC, which is the denominator of the RBC ratios, in light of changes to U.S. tax laws in recent years. These revisions have resulted in increased RBC charges and reduced our RBC ratios. The NAIC has approved RBC revisions for corporate bonds, real estate equity and longevity risk that took effect at year-end 2021 and we expect these revisions to have a modest net positive RBC impact on us.
In 2020, the NAIC issued guidance on RBC addressing debt restructuring due to the economic impact of the COVID-19 pandemic, where a counterparty might seek concessions. The guidance provides that an insurer does not need to reclassify the RBC category of some loans or other assets on which it has granted a concession. This may avoid a higher capital charge for the asset. The NAIC extended this guidance through January 1, 2022 in further support of the use of prudent loan modifications to mitigate the impact of the COVID-19 pandemic. Following the expiration of the guidance on January 1, 2022, an insurer should rely upon existing accounting guidance regarding the impact of a debt restructuring on the insurer’s RBC.
NAIC adoptions or NYDFS regulation changes may have a material impact on our RBC ratio.
NYDFS Guidance on Diversity and Corporate Governance
On March 16, 2021, the NYDFS stated that it expects the insurers it regulates to make diversity of their leadership a business priority and a key element of their corporate governance. The NYDFS collected data from insurers that met certain New York premium thresholds, including Metropolitan Life Insurance Company, regarding the diversity of their corporate boards and management. The NYDFS plans to publish such data on an aggregate basis to measure progress in the industry, and it will include diversity-related questions in its examination process starting in 2022. The NAIC is also evaluating issues related to race, diversity and inclusion, and it is examining practices in the insurance industry in order to determine how barriers are created that disadvantage people of color or historically underrepresented groups.
New York Insurance Regulation 210
Insurance Regulation 210 establishes standards for the determination and any readjustment of non-guaranteed elements (“NGEs”) that may vary at the insurer’s discretion for life insurance policies and annuity contracts delivered or issued for delivery in New York. NGEs include cost of insurance for universal life insurance policies, as well as interest crediting rates for annuities and universal life insurance policies. The regulation requires insurers to notify policyholders at least 60 days in advance of any change in NGEs that is adverse to policyholders and, with respect to life insurance, to notify the NYDFS at least 120 days prior to any such changes. The regulation also requires insurers to inform the NYDFS annually of any changes adverse to policyholders made in the prior year. The regulation generally prohibits insurers from increasing profit margins for in-force policies or adjusting NGEs in order to recoup past losses.
Cybersecurity and Data Protection Regulation
We are subject to a variety of laws and regulations at the local, state and federal level regarding the collection, storage, use, processing, disclosure, protection and security of personal information, including health-related and customer information and data of MetLife employees (our “Associates”). Various local, state and federal laws require companies such as ours to inform consumers of data collection and processing practices and further dictate whether, how, and under what circumstances we can transfer, process or receive personal information, the interpretation and scope of which are constantly evolving and vary significantly from jurisdiction to jurisdiction. We are also subject to laws and regulations governing the security and integrity of our information systems and the non-public information stored therein, many of which require the implementation of comprehensive information security policies and procedures, and require notification to affected individuals and regulators of security breaches and other cyber incidents. Given growing cybersecurity risks and threats posed to information and financial systems by nation-states, terrorist organizations and independent criminal actors in recent years, insurance and other regulators have increased focus on cybersecurity practices, and regulatory and legislative activity in the areas of privacy, data protection and cybersecurity continues to increase worldwide. Below, we highlight some of the key data protection and cybersecurity laws and regulations to which we are subject.
Cybersecurity
The New York Cybersecurity Requirements for Financial Services Companies (the “Regulation”) were promulgated by the NYDFS in March 2017 to promote the protection of customer information and information technology systems by establishing and regulating cybersecurity requirements for financial services entities under the NYDFS’s jurisdiction. In general, the Regulation requires covered entities, including banking and insurance entities under its jurisdiction, to assess risks associated with their information systems and establish and maintain a cybersecurity program designed to assess those risks and protect the confidentiality, integrity and availability of such systems and data. Specifically, the Regulation provides for, among other things: (i) technical safeguards and controls relating to the governance framework for a cybersecurity program; (ii) risk-based policies, procedures and minimum standards for technology systems for data protection; (iii) minimum standards for cyber breach responses, including notice to the NYDFS of certain material events; (iv) designation of a chief information security officer and other qualified cybersecurity personnel; (v) oversight of third party service providers with access to the information systems and nonpublic personal information of covered entities, including via implementation of written policies and procedures to evaluate the third party service provider’s cybersecurity practices; and (vi) identification and documentation of material deficiencies, remediation plans and annual certifications of regulatory compliance to the NYDFS. Covered entities who fail to comply with the Regulation may be subject to enforcement actions brought by the NYDFS, the result of which could lead to civil penalties, and other legal and reputational costs.
In 2017, the NAIC introduced the Insurance Data Security Model Law (the “Cybersecurity Model Law”). The Cybersecurity Model Law requires insurers and other entities licensed by a state department of insurance to develop, implement and maintain a risk-based information security program and establishes standards for data security and for the investigation of and notification to insurance commissioners of cybersecurity events involving unauthorized access to, or the misuse of, certain nonpublic information. Over the past few years, several states in which MLIC is licensed have adopted the Cybersecurity Model Law, and more may adopt it in the future, requiring further compliance and oversight efforts. Such compliance efforts may present an increasing demand on our systems and resources, and require significant new and ongoing investments, including investments in compliance processes, personnel, and technical infrastructure.
On May 12, 2021, President Biden signed Executive Order 14028 on Improving the Nation’s Cybersecurity (the “Order”) to strengthen the U.S. federal government’s cybersecurity defenses and that of its vendors. The Office of Management and Budget (“OMB”) has released several memos expounding on various aspects of the Order; for example, OMB released the federal government’s strategy to move towards Zero Trust cybersecurity principles on January 26, 2022. While MetLife provides employee benefits to several of the agencies that are subject to the Order, it is not directly subject to the new requirements at this time, based on the scope of the Order. While the Order is primarily aimed at technology and software providers and suppliers, there are efforts underway within a whole-of-government approach to combat cyber-attacks and ransomware attacks, which could potentially impose additional cybersecurity requirements on MetLife and other federal contractors over time.
Privacy and Data Protection
In the United States, we are subject to state laws, which impose certain obligations on the processing of personal information and provide consumers specific rights to control their personal information. For instance, the California Consumer Privacy Act (“CCPA”), which applies to certain portions of our business, requires covered companies to provide disclosures to California consumers about such companies’ data collection, use and sharing practices and gives California residents expanded rights with respect to the processing of their personal information. In November 2020, the CCPA was amended by the California Privacy Rights Act (“CPRA”), which will take effect in most material respects on January 1, 2023. The CPRA expands the CCPA, including with respect to certain sensitive personal information, and establishes a regulatory agency dedicated to enforcing those requirements. Regulators may impose fines for violations, and individuals have a private right of action for the unauthorized disclosure of personal information as a result of a failure to maintain reasonable security procedures. The CCPA has not been subject to significant litigation and judicial interpretation and it remains unclear how various provisions of the CCPA will be interpreted and enforced. While a significant portion of our business is exempted from the CCPA’s specific requirements, the Health Insurance Portability and Accountability Act and the insurance laws of several states to which we are subject grant similar rights to insureds, including the right to request copies of their personal information that a company has collected.
Several other states either have proposed or adopted new privacy laws similar to CCPA and CPRA (i.e., Virginia and Colorado enacted laws in 2021 which will come into effect in 2023) which would apply to certain portions of our business. Adapting our practices to comply with these laws and regulations may increase compliance costs and potentially change our business practices.
The above laws, and other similar laws that may be passed, may require us to adapt our practices and divert resources from other initiatives and projects to address such evolving compliance and operational requirements. Moreover, despite our efforts, governmental authorities or others may assert that our business practices fail to comply with such requirements, and if we are found to violate any such laws, we may incur substantial fines or damages, have to change our business practices, or face reputational harm, any of which could have an adverse effect on our business.
ERISA and Fiduciary Considerations
We provide products and services to certain employee benefit plans that are subject to ERISA and/or Section 4975 of the Internal Revenue Code of 1986, as amended (the “Code”). ERISA and the Code impose restrictions, including fiduciary duties to perform solely in the interests of ERISA plan participants and beneficiaries, and to avoid prohibited non-exempt transactions. The applicable provisions of ERISA and the Code are subject to enforcement by the U.S. Department of Labor (“DOL”), the Internal Revenue Service and the Pension Benefit Guaranty Corporation.
The prohibited transaction rules of ERISA and the Code generally restrict the provision of investment advice to ERISA plans and participants and to Individual Retirement Accounts (“IRAs”) (and certain other arrangements) if the investment recommendation results in fees paid to an individual advisor, the firm that employs the advisor or their affiliates that vary according to the investment recommendation chosen, unless an exemption or exception is available. Similarly, without an exemption or exception, fiduciary advisors are prohibited from receiving compensation from third parties in connection with their advice. ERISA also affects certain of our in-force insurance policies and annuity contracts, as well as insurance policies and annuity contracts we may sell in the future.
The SEC adopted Regulation Best Interest in 2019, and compliance was required beginning on June 30, 2020. Regulation Best Interest requires broker-dealers to act in the best interest of individual investor retail customers when recommending securities transactions or investment strategies involving securities, including recommendations to IRA owners, as well as non-benefit plan retail customers. In addition, other SEC rules require broker-dealers and investment advisers to retail customers to describe their services and conflicts of interest to their retail customers in client relationship summary disclosure and deliver a copy to their retail customers. In December 2020, the DOL released the final version of the prohibited transaction exemption (“PTE”) 2020-02 to allow investment advice fiduciaries to receive compensation without violating ERISA, subject to impartial conduct standards and disclosure obligations aligned with the new SEC rules. In the preamble to PTE 2020-02, the DOL also provided its interpretation of the five-part test used to determine whether a person is acting as an ERISA investment advice fiduciary. PTE 2020-02 became effective on February 16, 2021. In April 2021, the DOL published additional guidance indicating that it may amend or add to this rule.
State regulators and legislatures in Nevada, New Jersey, Maryland and New York have proposed measures that would make broker-dealers, sales agents, and investment advisers and their representatives subject to a fiduciary duty when providing products and services to customers, including pension plans and IRAs, and Massachusetts has enacted a law to that effect. The NYDFS’s annuity suitability regulation incorporates the “best interest” standard and expands the scope of the regulation beyond annuity transactions to include sales of life insurance policies to consumers. In April 2021, the Appellate Division of the New York Supreme Court overturned the regulation for being unconstitutionally vague, and the NYDFS has appealed the decision. Regulation Best Interest under the Securities Exchange Act of 1934, as amended (“Exchange Act”) does not include a private right of action, although the SEC did not indicate an intent to pre-empt state regulation in this area, and some of the state proposals and adopted regulations would allow for a private right of action. As a result of these developments, it is possible that it may become more costly to provide our products and services in the states subject to the new rules.
Investments Regulation
State insurance laws and regulations limit the amount of investments that an insurer may have in certain asset categories, such as below investment grade fixed income securities, real estate equity, other equity investments, and derivatives, and require diversification of investment portfolios. Investments exceeding regulatory limitations are not admitted for purposes of measuring surplus. In some instances, laws require us to divest any non-qualifying investments.
Derivatives Regulation
Dodd-Frank includes a framework of regulation of the over-the-counter (“OTC”) derivatives markets requiring clearing of certain types of interest rate and credit default swap transactions and imposes additional costs, including reporting and margin requirements. Our costs of risk mitigation are increasing under Dodd-Frank. For example, Dodd-Frank imposes requirements to pledge variation and/or initial margin (i) for “OTC-cleared” transactions (OTC derivatives that are cleared and settled through central clearing counterparties), and (ii) for “OTC-bilateral” transactions (OTC derivatives that are bilateral contracts between two counterparties).
We expect increased margin requirements, and capital charges for our counterparties and central clearinghouses related to holding non-cash collateral, to continue to increase our required holdings of cash and government securities. This may cause lower yields and reduce our income due to less favorable pricing for OTC-cleared and OTC-bilateral transactions. Centralized clearing of certain OTC derivatives exposes us to the risk of a default by a clearing member or clearinghouse with respect to our cleared derivative transactions. We use derivatives to mitigate a wide range of risks in connection with our businesses, including the impact of increased benefit exposures from certain of our annuity products that offer guaranteed benefits. We have always been subject to the risk that hedging and other management procedures might prove ineffective in reducing the risks to which insurance policies expose us, or that unanticipated policyholder behavior or mortality, combined with adverse market events, could produce economic losses beyond the scope of the risk management techniques employed. Any such losses could be increased by higher costs of writing derivatives (including customized derivatives) and the reduced availability of customized derivatives that might result from the implementation of Dodd-Frank and comparable international derivatives regulations.
Dodd-Frank also expanded the definition of “swap” and mandated the SEC and U.S. Commodity Futures Trading Commission (“CFTC”) to study whether “stable value contracts” should be treated as swaps. Pursuant to the new definition and the SEC’s and CFTC’s interpretive regulations, products we offer, other than stable value contracts, might also be treated as swaps. Should such products become regulated as swaps, we cannot predict how the rules would be applied to them or the effect on such products’ profitability or attractiveness to our clients. Special federal banking rules apply to certain qualified financial contracts, including many derivatives contracts, securities lending agreements and repurchase agreements, with banking institutions and certain of their affiliates. These rules generally require the banking institutions and their applicable affiliates to limit or delay their counterparties default rights (such as the right to terminate the contracts or foreclose on collateral) and restrict assignments and transfers of credit enhancements (such as guarantees) in connection with the banking institution or affiliate bankruptcy, insolvency, resolution or similar proceeding. These rules could limit our recovery in the event of a default, limit our ability to close-out transactions upon the bankruptcy of an affiliate of our counterparty, and increase our counterparty risk.
We expect the amount of collateral we are required to pledge and the payments we are required to make under our OTC swaps transactions to increase as a result of the requirement to pledge initial margin for OTC-bilateral transactions, based on the final margin requirements for non-centrally cleared derivatives.
Securities, Broker-Dealer and Investment Adviser Regulation
Federal and state securities laws and regulations apply to insurance products that are also “securities,” including variable annuity contracts and variable life insurance policies, and certain fixed interest rate or index-linked contracts with features that require them to be deemed as securities or sold through private placement issuances. As a result, some of our activities in offering and selling variable insurance contracts and policies are subject to extensive regulation under these securities laws.
Federal and state securities laws and regulations generally grant regulatory agencies broad rulemaking and enforcement powers, including the power to adopt new rules impacting new or existing products, regulate the issuance, sale and distribution of our products and limit or restrict the conduct of business for failure to comply with such laws and regulations.
Some of our activities in offering and selling variable insurance products are subject to extensive regulation under the federal securities laws and regulations administered by the SEC. We issue variable annuity contracts and variable life insurance policies through separate accounts that are registered with the SEC as investment companies under the Investment Company Act of 1940, as amended (the “Investment Company Act”) or are exempt from registration under the Investment Company Act. Such separate accounts are generally divided into sub-accounts, each of which invests in an underlying mutual fund which is itself a registered investment company under the Investment Company Act. In addition, the variable annuity contracts and variable life insurance policies associated with these registered separate accounts are registered with the SEC under the Securities Act of 1933, as amended (the “Securities Act”) or are exempt from registration under the Securities Act. We issue a fixed interest rate contract with features that require it to be registered under the Securities Act.
Certain variable contract separate accounts sponsored by our subsidiaries are exempt from registration but may be subject to other provisions of the federal securities laws.
The SEC, CFTC and FINRA from time to time propose and adopt rules and regulations that impact broker-dealers and products deemed to be securities.
Under SEC rules, broker-dealers recommending variable products and other securities offerings to retail customers are required to comply with a “best interest” standard. SEC rules also require broker-dealers to disclose the nature of services, their standard of conduct, and their conflicts of interest to their retail customers. With regard to insurance products, the NAIC revised its Suitability in Annuity Transactions Model Regulation to add a “best interest” standard for the sale of annuities. In April 2021, as noted above, the Appellate Division of the New York State Supreme Court overturned NYDFS Regulation 187-Suitability and Best Interests in Life Insurance and Annuity Transactions for being unconstitutionally vague. The NYDFS has appealed the decision.
Federal and state securities regulatory authorities and FINRA from time to time make inquiries and conduct examinations regarding our compliance with securities and other laws and regulations. We cooperate with such inquiries and examinations and take corrective action when warranted.
Environmental Laws and Regulations
As an owner and operator of real property in many jurisdictions, we are subject to extensive environmental laws and regulations in such jurisdictions. Inherent in such ownership and operation is also the risk that there may be environmental liabilities and costs in connection with any required remediation of such properties. In addition, we hold equity interests in companies that could potentially be subject to environmental liabilities. We routinely have environmental assessments performed with respect to real estate being acquired for investment and real property to be acquired through foreclosure. Unexpected environmental liabilities may arise. However, based on information currently available to us, we believe that any costs associated with compliance with environmental laws and regulations or any remediation of such properties will not have a material adverse effect on our business, results of operations or financial condition.
The topic of climate risk has come under increased scrutiny by insurance regulators. In September 2020, the NYDFS issued a circular letter to New York domestic and foreign authorized insurers stating that the NYDFS expects insurers to start integrating financial risks related to climate change into their governance frameworks, risk management processes, business strategies and scenario analysis, and developing their approach to climate related financial disclosure.
On November 15, 2021, the NYDFS issued guidance for New York domestic insurers, which states that insurers are expected to manage financial risks from climate change by taking actions that are proportionate to the nature, scale and complexity of their businesses. For instance, insurers should incorporate climate risk into their financial risk management and manage this risk through their enterprise risk management functions. Insurers must have an implementation plan in place by August 15, 2022 with respect to the NYDFS’s expectations for corporate governance and organizational structure changes (e.g., defining roles and responsibilities related to managing climate risk). With respect to implementing additional changes (e.g., reflecting climate risks in the ORSA and using scenario analysis when developing business strategies), insurers are encouraged to start working on these changes, although the NYDFS plans to issue further guidance with more specific timing information.
The NYDFS also adopted an amendment to the regulation governing enterprise risk management, effective August 13, 2021, that requires certain additional risks, including climate change risk, to be specifically included in an insurance group’s enterprise risk management function.
In addition, the Federal Insurance Office (“FIO”) has been instructed by President Biden’s Executive Order on Climate-Related Financial Risk, dated May 20, 2021, to seek public comment on climate-related financial risks in the insurance industry. The FIO’s request for information notes that it will work on assessing how the insurance sector may mitigate climate change impacts and help achieve national climate-related goals. The comment period ended in November 2021.
The SEC is continuing its focus on climate, and environmental, social and governance (“ESG”) risks and opportunities, and has published its rulemaking list which contains several ESG-related rulemakings that the SEC is considering.
Unclaimed Property
We are subject to the laws and regulations of states and other jurisdictions concerning identification, reporting and escheatment of unclaimed or abandoned funds, and are subject to audit and examination for compliance with these requirements. See “- Insurance Regulation - Insurance Regulatory Examinations and Other Activities,” which references the regulatory settlement agreement relating to unclaimed property. See also Note 16 of the Notes to the Consolidated Financial Statements.
London Interbank Offered Rate
The Financial Conduct Authority (“FCA”), the United Kingdom (“U.K.”) regulator of London Interbank Offered Rates (“LIBOR”), previously indicated that it intends to stop persuading or compelling panel banks to submit quotes used to determine LIBOR after 2021. On March 5, 2021, the Intercontinental Exchange (“ICE”) Benchmark Administration, the administrator of LIBOR, announced that it will cease the publication of one week and two-month U.S. Dollar LIBOR and all non-USD (GBP, EUR, CHF and JPY) LIBOR settings at the end of December 2021, but will extend the publication of the remaining U.S. Dollar LIBOR settings (overnight and one-, three-, six- and 12-month U.S. Dollar LIBOR) until the end of June 2023. U.S. bank regulators advised banks to cease writing, subject to certain limited exceptions, new U.S. Dollar LIBOR contracts by the end of 2021.
We use LIBOR and other interbank offered rates as interest reference rates in many of our financial instruments. The transition of our existing LIBOR contracts to alternative reference rates, including the adequacy of LIBOR fallback provisions in such contracts, and whether, how, and when we and others develop and adopt alternative reference rates, will influence the effect of any changes to or discontinuation of LIBOR on us. We continue to identify, assess and monitor market and regulatory developments, assess agreement terms, and evaluate operational readiness related to the transition. The SEC’s Division of Examinations (formerly the Office of Compliance Inspections and Examinations) expects to assess registrants’ efforts to prepare for LIBOR discontinuation and their transition to alternatives. We actively participate in the New York Federal Reserve Bank convened Alternative Reference Rate Committee (“ARRC”) and other industry association efforts on the transition to alternative reference rates. The Company utilized the International Swaps and Derivatives Association, Inc. (“ISDA”) 2020 IBOR Fallbacks Protocol to address the transition from LIBOR and other interbank offered rates to other risk-free rates in its OTC bilateral ISDA derivatives contracts. We also monitor the Financial Accounting Standards Board’s, International Accounting Standards Board’s, and U.S. Treasury Department’s updates on the accounting and tax implications of reference rate reform. In April 2021, the State of New York enacted legislation to address the transition from U.S. Dollar LIBOR for certain New York law governed agreements, which is generally consistent with the ARRC’s recommendations to facilitate the transition. Federal legislation intended to address the transition from U.S. Dollar LIBOR to alternative reference rates for all U.S. law governed contracts with inadequate LIBOR fallback provisions is pending in Congress. There can be no assurance that such federal legislation will be enacted or enacted in a form sufficient to address the LIBOR transition risk for such contracts. We continue to assess current and alternative reference rates’ merits, limitations, risks and suitability for our investment and insurance processes.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
Any or each of the events described below may (or may continue to) adversely affect the global economy, global financial markets, our reputation, our regulatory, customer, or other relationships, our results of operations, our liquidity or cash flows, our statutory capital position, our ability to meet our obligations, our credit and financial strength ratings, or our financial condition. The effects may vary depending on timing, product, market, region or segment.
Many of these risks are interrelated and could occur under similar business and economic conditions, and the occurrence of any of them may cause others to emerge or worsen. Such combinations could materially increase the severity of the cumulative or separate impact of these risks.
These risk factors are not a complete set of all potential risks that could affect us. You should carefully consider the risk factors together with other information contained in this Annual Report on Form 10-K, including “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes in “Financial Statements and Supplementary Data,” and other reports and materials we submit to the SEC.
Economic Environment and Capital Markets Risks
We May Face Difficult Economic Conditions
Market factors, including interest rates, credit spreads, equity prices, derivative prices and availability, real estate conditions, foreign currency exchange rates, consumer and government spending, business investment, volatility, disruptions and strength of the capital markets, deflation and inflation, and government actions in response thereto may inhibit revenue growth, reduce investment opportunities and result in investment losses, derivative losses, changes in insurance liabilities, impairments, increased valuation allowances, increases in reserves, reduced net investment income and changes in unrealized gain or loss positions.
Higher unemployment, changes to inflation, lower family income, lower corporate earnings, lower business investment, lower consumer spending, elevated incidence of claims, adverse utilization of benefits relative to our best estimate expectations, lapses or surrenders of policies, reduced demand for our products, and deferred or canceled payments of insurance premiums may negatively affect our earnings and capitalization.
Declining equity markets may decrease the account value of our products, reducing certain fees generated by these products, which may increase the level of insurance liabilities we carry, and accelerate the amortization of deferred policy acquisition costs (“DAC”). Additionally, lower interest rates may reduce returns in fixed income investments.
Public Health Risks
Pandemics and other public health issues, and governmental, business, and consumer reactions to them, have affected and may continue to affect economic conditions. They have and may continue to cause illnesses and deaths, changes in consumer or business confidence, behavior and activity, changes to interest rates and other market risk factors, and governmental or other restrictions on economic activity for prolonged periods. Any of these issues may cause or exacerbate any of the difficult economic conditions we describe in these risk factors.
Interest Rate Risks
Some of our products and investments expose us to interest rate risks, including changes in the difference between short-term and long-term interest rates, which may reduce or eliminate our investment spread and net income.
Low interest rates and risk asset returns may reduce income from our investment portfolio, increase our liabilities for claims and future benefits, and increase the cost of risk transfer measures, decreasing our profit margins. During certain market events, such as a global credit crisis, a market downturn, or sustained low market returns, we may incur significant losses due to, among other reasons, losses incurred in our general account and the impact of guarantees, including increases in liabilities, capital maintenance obligations and collateral requirements. In addition, during periods of sustained lower interest rates, we may need to reinvest proceeds from certain investments at lower yields, reducing our investment spread. Moreover, borrowers may prepay or redeem the fixed income securities and loans in our investment portfolio with greater frequency. Although we may be able to lower interest crediting rates to help offset decreases in spreads, our ability to lower these rates is limited to our products that have adjustable interest crediting rates, which could be limited by competition or contractually guaranteed minimum rates and may not match the timing or magnitude of changes in asset yields. As a result, our investment spread may decrease or become negative.
Lower spreads may accelerate the amortization of DAC, reducing net income and in turn, harming our credit instrument covenants or rating agency assessment of our financial condition. During periods of declining interest rates, life insurance and annuity products may be more attractive investments to consumers, resulting in increased premium payments on certain products, repayment of policy loans and increased persistency, while our new investments carry lower returns. A market interest rate decline could also reduce our return on investments that do not support particular policy obligations. During periods of sustained lower interest rates, we may need to increase our reserves.
Interest rate increases may also harm our profitability. During rapidly increasing interest rates, we may not be able to replace the investments in our general account with higher yielding investments needed to fund the higher crediting rates required to stay competitive. This could result in a lower spread, lower profitability, decreased sales, and greater loss of existing contracts and related assets. In addition, policy loans, surrenders and withdrawals may increase as policyholders seek investments with higher perceived returns. This may result in cash outflows requiring the sale of investments on less favorable terms, resulting in investment losses. We may accelerate the amortization of DAC and value of business acquired (“VOBA”), reducing net income, harming our credit instrument covenants and rating agency assessment of our financial condition. Interest rate increases may harm the value of our investment portfolio, for example, by decreasing the estimated fair value of fixed income securities, and may increase our daily settlement payments on interest rate futures and cleared swaps, resulting in increased cash outflows and liquidity needs. Furthermore, if interest rates rise, our unrealized gains on fixed income securities may decrease and our unrealized losses may increase. We would recognize the accumulated change in estimated fair value of these fixed income securities in net income when we realize a gain or loss upon the sale of the security or we determine that the decline in estimated fair value is due to a credit loss. Finally, an increase in interest rates may decrease fee income associated with a decline in the value of variable annuity account balances invested in fixed income funds.
Federal Reserve Board monetary policy (and that of other central banks) may also impact the pricing levels of risk-bearing investments and may harm our investment income or product sales.
The measures we take to mitigate the risks of investing in a changing interest rate environment, such as mitigating our fixed income investments relative to our interest rate sensitive liabilities, may not be sufficient. For some of our liability portfolios, we may not be able to invest assets at the full liability duration, thereby creating some asset/liability mismatch.
Credit Spread Risks
Changes in credit spreads may result in market price volatility and cash flow variability. Market price volatility can make valuations of our securities difficult if trading becomes less frequent, which may require us to add to our reserves. Market volatility may cause changes in credit spreads, defaults and a lack of pricing transparency. An increase in credit spreads relative to U.S. Treasury benchmarks may increase our borrowing costs and decrease certain product fee income. A sustained decrease in credit spreads could reduce the yield on our future investments.
Equity Risks
Downturns and volatility in equity markets may harm our savings and investment products’ revenues and investment returns, where fee income is earned based upon the estimated fair value of our managed assets. Our variable annuity business is highly sensitive to equity markets, and a sustained weakness or stagnation in the equity markets may decrease these products’ revenues and earnings. Furthermore, certain of our variable annuity products offer guaranteed benefits that increase our potential benefit exposure should equity markets decline or stagnate.
The timing of distributions from and valuations of our investments in leveraged buy-out funds, hedge funds and other private equity funds depends on the performance of the underlying investments, distribution schedules, and the funds’ need for cash. The amount of net investment income from these investments can vary substantially from period to period and significant volatility may harm our returns and net investment income. In addition, downturns or volatility in the equity markets may decrease the estimated fair value of our alternative investments and equity securities.
Real Estate Risks
Changes in leasable commercial space supply and demand, pandemics and other public health issues, creditworthiness of tenants and partners, capital markets volatility, interest rate fluctuations, commodity prices, farm incomes, housing and commercial property market conditions, and real estate investment supply and demand may adversely impact our investments in commercial, agricultural and residential mortgage loans, and real estate and real estate joint ventures.
Obligor and Counterparty Risks
The issuers or guarantors of fixed income securities and mortgage loans we own may default on principal and interest payments they owe us. Additionally, the change in value of underlying collateral within asset-backed securities (“ABS”), including mortgage-backed securities, may result in a default on principal and interest payments, reducing our cash flows. The occurrence of a major economic downturn, acts of corporate malfeasance, widening credit spreads, or other adverse events may reduce the estimated fair value of our portfolio of fixed income securities and mortgage loans and increase the default rate of the fixed income securities and mortgage loans in our investment portfolio.
Many of our transactions with counterparties such as brokers and dealers, central clearinghouses, commercial banks, investment banks, hedge funds, investment funds, reinsurers and other financial institutions expose us to the risk of counterparty default. Such credit risk may be exacerbated if we cannot realize on the collateral held by us in secured transactions or cannot liquidate such collateral at prices sufficient to recover the full amount of the loan or derivative exposure due to us. Furthermore, potential action by governments and regulatory bodies, such as controlling investment, nationalization, conservatorship, receivership and other intervention, or lack of action by governments and central banks, as well as deterioration in the banks’ credit standing, could negatively impact these instruments, securities, transactions and investments or limit our ability to trade with them. These may cause losses or impairments to the carrying value of our investments.
Our efforts to manage our total exposure to a single counterparty or limited number of counterparties within or among any of our investment, derivative, treasury, and reinsurance relationships, which we adjust from time to time, may not completely or adequately mitigate counterparty risks.
Derivatives Risks
If our counterparties, clearing brokers or central clearinghouses fail or refuse to honor their obligations under our derivatives agreements, our risks may not be hedged. A counterparty, clearing broker, or central clearinghouse may become insolvent or otherwise unable or unwilling to make payments or to return collateral under the terms of derivatives agreements, increasing our costs. If the net estimated fair value of a derivative to which we are a party declines, we may need to pledge collateral or make payments. In addition, we may face increased costs to the extent we replace counterparties who suffer financial difficulties. Furthermore, our derivatives valuations may change based on changes to our valuation methodology or errors in such valuation or valuation methodology.
We May Not Meet Our Liquidity Needs, Access Capital, or May Face Significantly Increased Cost of Capital Due to Adverse Capital and Credit Market Conditions
In cases of volatility, disruption, or other conditions in global capital markets we may have to seek additional financing, the availability and cost of which could be adversely affected by market conditions, regulatory considerations, availability of credit to our industry generally, our credit ratings and credit capacity, reduced business activity, or investment losses, and the perception of our financial prospects. Our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. We may not be able to successfully obtain additional financing we need on favorable terms or at all. We may be required to return significant amounts of cash collateral on short notice under securities lending or derivatives agreements or post collateral or make payments related to specified counterparty agreements.
Our business and financial results may suffer without sufficient liquidity through impaired ability to pay claims, other operating expenses, interest on our debt, maintain our securities lending, replace certain maturing liabilities, and sustain our operations and investments. Capital and credit market volatility may limit our access to capital we need to operate, limiting our ability to raise capital, issue the types of securities we would prefer, timely replace maturing liabilities, satisfy regulatory requirements, and access capital to grow our business, any of which could decrease our profitability and significantly reduce our financial flexibility.
MetLife, Inc. May Be Unable to Access Its Credit Facility, Reducing Our Liquidity and Leading to Downgrades in Credit and Financial Strength Ratings
MetLife, Inc. may fail to comply with or fulfill all conditions under the unsecured credit facility (the “Credit Facility”) MetLife, Inc. and MetLife Funding, Inc. (“MetLife Funding”) maintain. Lenders may fail to fund their lending commitments under the Credit Facility due to insolvency, illiquidity or other reasons. This could limit our affiliates in supporting our liquidity.
We May Lose Business Due to a Downgrade or a Potential Downgrade in Financial Strength or Credit Ratings
Nationally Recognized Statistical Rating Organizations (“NRSROs”) and others may, at any time, downgrade MetLife, Inc.’s or our financial strength ratings or credit ratings, lower MetLife, Inc.’s or our ratings outlooks, increase the scope or frequency of their reviews, or increase capital or other requirements to maintain ratings. Such changes could reduce our product sales, reduce cash flows from funding agreements and other capital market products, and force us to change product pricing and increase our financing costs, policy surrenders or withdrawals, collateral requirements, risk of derivative terminations, cost of reinsurance, regulatory scrutiny, or various other factors.
We May Not Find Available, Affordable or Adequate Reinsurance to Protect Us Against Losses
Reinsurers may increase our reinsurance costs, or may decline to offer us reinsurance, due to policy changes related to pandemics or other public health issues (such as the COVID-19 pandemic), market conditions, or other factors. Our risk of loss may increase if we decrease the amount of our reinsurance. Any of these could harm our ability to write future business or result in the assumption of more risk with respect to the policies we issue.
We may incur costs as a result of a reinsurer’s insolvency, inability or unwillingness to make payments, or inability or unwillingness to maintain collateral.
Our Statutory Life Insurance Reserve Financings Costs May Increase, and We May Find Limited Market Capacity for New Financings
If our ratings decline, market capacity is limited, or on other repricing occasions, our costs to finance statutory life insurance reserves may increase. If regulators disallow assets to back statutory reserves, we would not be able to take some or all related statutory reserve credit, which may harm our statutory capitalization.
Regulatory and Legal Risks
Changes in Laws or Regulation, or in Supervisory and Enforcement Policies, May Reduce Our Profitability, Limit Our Growth, or Otherwise Adversely Affect Us
Insurance or other regulators may change licensing, permit, or approval requirements, or take other actions harmful to us. They may also take actions that harm our customers and independent sales intermediaries or their operations, which may affect our business relationships with them and their ability to purchase or distribute our products.
Governments may change regulation of financial services, insurance, variable annuities and variable life insurance, securities, derivatives, health care, accounting, cybersecurity, privacy and data protection, tort reform legislation, taxation, benefit plan investment advice and related fiduciary duties, antitrust as applied to the business of health insurance or otherwise, and other areas. Laws and regulations may also affect customers, sales intermediaries, or others. We or others may fail to comply with these requirements or suffer adverse regulatory examinations or audits. Regulators may also interpret rules differently from the way we have, or change interpretations of laws or rules, and legislators may change statutes. Any of these changes may harm our ability to continue to offer products we do today or to introduce new products.
We may incur costs to comply with laws and regulations and changes to these laws and regulations may increase our expenses or require us to increase our reserves or change the assets we hold to cover those reserves. Our failure to comply with our own policies or with regulatory requirements may harm our reputation or result in sanctions or legal claims.
Solvency standards compliance may increase our capital and reserve requirements, risk management costs, and reporting costs. We may be subject to enhanced capital standards, supervision and additional requirements, such as group capital standards or insurer capital standards.
Regulators have reacted and may continue to react to pandemics and other public health issues (such as the COVID-19 pandemic). They may require “no lapse” in policy coverage regardless of whether we receive premiums or are able to assess fees against policyholder account balances. They may extend insurance coverage beyond our policy or contract terms and may impose premium grace periods, suspend cancellations, lower or freeze premium rates, and extend proof of loss deadlines, including retroactively, exposing us to risks and costs we are unable to foresee or underwrite. We may also adopt customer accommodations, such as waiving exclusions, forgoing rate increases or implementing lower rate increases than we would otherwise, relaxing claim documentation requirements, relaxing eligibility criteria, granting premium credits, or other accommodations for customers experiencing economic or other distress. Regulators may restrict our underwriting on public policy or other grounds, excluding factors such as exposure, quarantine, infection, and association with others suffering public health-related effects.
Governmental bodies may delay acting on or implementing regulatory or policy changes due to pandemics or other public health issues, or because they are attending to pandemic or public health issues rather than to other topics. This may increase uncertainty, prolong deleterious regulations and policies, delay or prevent beneficial regulatory or policy changes, and create the potential for later, more rapid changes to which we find it more difficult to adjust.
Our New York insurance regulator’s annual SCL for year-end asset adequacy testing may impose unforeseen assumptions or requirements that require us to increase or release reserves, which could affect our statutory capital and surplus.
Governments or Others May Increase our Taxes by Changing or Re-Interpreting Tax Laws, Making Some of Our Products Less Attractive to Consumers
Changes in tax laws or interpretations of such laws could increase our corporate taxes, reduce our earnings, and increase our deferred income tax liabilities. Changes may increase our effective tax rate or have implications that make our products less attractive to consumers. Tax authorities may enact laws, change regulations to increase existing taxes, or add new types of taxes, and authorities who have not imposed taxes in the past may impose taxes.
Customers shifting away from employee benefits, life insurance and annuity contracts, or other tax-preferred products would reduce our income from these products and our asset base, reducing our earnings and potentially affecting the value of our deferred tax assets.
We May Face Increasing Litigation and Regulatory Investigations
Legal or regulatory actions, inquiries or investigations, whether ongoing or yet to come, could harm our reputation, ability to attract or retain customers or our Associates, business, financial condition, or results of operations, even if we ultimately prevail. Regulators or private parties may bring class actions, individual suits, or investigations seeking large recoveries alleging wrongs relating to sales or underwriting practices, claims payments and procedures, failure to adequately or appropriately supervise, inappropriate compensation contrary to licensing requirements, product design, disclosure, administration, investments, denial or delay of benefits, pandemic- or other public health-related practices (such as those related to the COVID-19 pandemic), data security incidents, discriminatory or inequitable practices, and breaches of fiduciary or other duties. We may be unable to anticipate the outcome of a litigation and the amount or range of loss because we do not know how adversaries, fact finders, courts, regulators, or others will evaluate evidence, the law, or accounting principles, and whether they will do so differently than we have.
We May Face Changes to Interest Rates, the Value of our Financial Instruments, the Competitiveness of our Products, the Performance of our Investments, and our Relationships Due to LIBOR’s Discontinuation and the Uncertainties in Our Transition to Alternative Reference Rates
The FCA, the U.K. regulator of LIBOR, and the ICE Benchmark Administration, the administrator of LIBOR, have announced the publication cessation dates for all U.S. Dollar and non-U.S. Dollar LIBOR settings. Most settings ceased at the end of December 2021 and the remaining U.S. Dollar settings (overnight and one-, three-, six- and 12-month U.S. Dollar LIBOR) will cease at the end of June 2023. We continue to actively transition to the alternative reference rates. Differences between LIBOR and the applicable alternative reference rates may impact the value of, return on, and markets for, a broad array of our products, our financial instruments, the instruments in which we invest, or interest rates on our borrowing or debt. The effects on our business and investments will vary depending on the transition of our existing LIBOR contracts to alternative reference rates, including the adequacy of LIBOR fallback provisions in such contracts and whether, how, and when industry participants adopt alternative reference rates for new products or instruments. Uncertainty regarding the continued use and reliability of LIBOR, regarding the calculation of the applicable interest rate or payment amount depending on the terms of the governing instruments, or regarding the application or effectiveness of alternative reference rates, could increase our costs, reduce the value of such instruments, or impair our cash or derivative positions. We may not effectively hedge or manage risks from differences among applicable alternative reference rates or timing of when such rates take effect.
We may fail to adequately prepare for or react to LIBOR discontinuation and replacement, or fail to fully protect ourselves from all the effects of such changes. We may also fail to manage adequately any transition to alternative reference rates in a way that maintains the competitiveness of our products and the performance of our investment portfolio. Our transition may not effectively protect other aspects of our business, such as our operations and the accuracy of the financial models and valuations we use to gauge our risks, for financial reporting, or other purposes.
Any such uncertainties or ineffective management may harm our reputation, our relationships with our customers, or regulators, our financial condition, and our business operations.
Our Efforts to Meet Environmental, Social, and Governance Standards and to Enhance the Sustainability of our Businesses May Not Meet Regulators' or Customers’ Expectations
Our regulators, customers, or others may evaluate our practices by ESG criteria that are continually evolving and not always clear. These standards and expectations may also, as a whole, reflect contrasting or conflicting values or agendas. Our efforts to conduct our business in accordance with some or all these expectations may involve trade-offs. We may fail to meet our commitments or targets. Customers and potential customers may be prohibited or choose not to do business with us based on our sustainability practices and related policies and actions. We may face adverse regulatory, media, or public scrutiny leading to business, reputational, or legal challenges.
Investment Risks
We May Face Defaults, Downgrades, Volatility or Other Events That Adversely Affect the Investments We Hold
In case of a major economic downturn, acts of corporate malfeasance, widening credit risk spreads, ratings downgrades or other events, our estimated fair value of our fixed income securities and loan portfolios and corresponding earnings may decline, and the default rate of our investment portfolio may increase. These changes could harm the issuers or guarantors of securities or the underlying collateral of structured securities that we hold. We may have to hold more capital to support our securities to maintain our RBC levels if securities we hold suffer a ratings downgrade. Our intent to sell, or our assessment of the likelihood that we will be required to sell, fixed income securities may increase our write-downs or impairments. Our realized losses or impairments on these securities may harm our net income.
The default rate, loss severity or other performance of our mortgage loan investments may change. Any concentration of our mortgage loans by geography, tenancy or property type may have an adverse effect on our investment portfolio, the prices we can obtain when we sell assets, and our results of operations or financial condition. Legislation or regulations that would allow or require modifications to the terms of, or impact the value of, mortgage loans could harm our investment portfolio.
Pandemics and other major public health issues (such as the COVID-19 pandemic) have affected and may continue to affect financial markets and our investment portfolio. These have increased and may continue to increase our risk of investment defaults, downgrades and volatility, and lower variable investment income and returns, and may cause or exacerbate any of the investment risks we describe in these risk factors.
Market volatility affects the value of or return on our investments. It may slow or prevent us from reacting to market events as effectively as we otherwise could. When we sell our investment holdings, we may not receive the prices we seek, and may sell at a price lower than our carrying value, due to reduced liquidity during periods of market volatility or disruption, or other reasons. Borrowers may delay or fail to pay principal and interest when due, or may demand loan modifications. Tenants may delay paying rent, or fail to pay it, or demand lease modifications. We may face moratoriums on foreclosures and other enforcement actions impairments, and loan or lease modifications, due to government action or market conditions. We may also encounter credit spread changes, increasing our borrowing costs and decreasing our product fee income. Issuer or guarantor default rates may increase.
We May Have Difficulty Selling Holdings in Our Investment Portfolio or in Our Securities Lending Program in a Timely Manner to Realize Their Full Value
When we sell holdings in our investment portfolio, we may not receive the price we seek and may sell at a price lower than our carrying value. We may face unfavorable conditions in privately-placed fixed income securities, private structured credit, certain derivative instruments, mortgage loans, policy loans, direct financing and leveraged leases, other limited partnership interests, tax credit and renewable energy partnerships, and real estate equity, including real estate joint ventures and funds. Our investments may suffer reduced liquidity during periods of market volatility or disruption or for other reasons. In addition, central banks' efforts to provide market liquidity or otherwise address market conditions may not be successful or sufficient. We may realize losses that harm our financial metrics, which could harm our compliance with our credit requirements and rating agency capital adequacy measures.
We may face similar risks if we are required under our securities lending program to return significant amounts of cash collateral that we have invested. Our securities lending activities and profitability may decrease.
We May Have to Pledge Collateral or Make Payments in Derivatives Transactions
We may have to pledge additional collateral and increase payments we make under our derivatives transactions. Regulators, clearinghouses, or counterparties may restrict or eliminate eligible collateral, increase our collateral requirements, or charge us to pledge such collateral, which would increase our costs, reduce our investment income, and harm our liquidity.
We May Change Our Securities and Investments Valuation, or Take Allowances and Impairments on Our Investments, or Change Our Methodologies, Estimations, and Assumptions
During periods of market disruption or rapidly changing market conditions, such as significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, or infrequent trading, or when market data is limited, our assets may become less liquid. We may base our asset valuations on less observable and more subjective judgments, assumptions, or methods that may result in estimated fair values that significantly vary by period, and may exceed the investment’s sale price. The estimated fair value of our securities may also decrease due to changes in valuation methods and assumptions.
Business Risks
Our Actual Claims or Other Results May Differ From Our Estimates, Assumptions, or Models
If our actual claims experience is less favorable than the underlying underwriting, reserving, and other assumptions we used in establishing claim liabilities, we could be required to reduce DAC or VOBA, increase our liabilities, or incur higher costs.
The amounts that we will ultimately pay to settle our liabilities, particularly when those payments may not occur until well into the future, may vary from what we expect. We may change our liability assumptions and increase our liabilities based on actual experience and accounting requirements. Our operating practices and procedures that support our policyholders and contractholder obligation assumptions, such as obtaining, accumulating, and filtering data, and our use of technology, such as database analysis and electronic communications, may affect our reserve estimates. If these practices and procedures do not accurately produce the data to support our assumptions or cause us to change our assumptions, or if enhanced technological tools become available to us, we may change those assumptions and procedures, as well as our reserves. If any of our operating practices and procedures do not accurately produce, or reproduce, data that we use to conduct any or all aspects of our business, such deviations or errors may negatively impact our business, reputation, results of operations, or financial condition. We may change our assumptions, models, or reserves due to changes in longevity. Increases in the prevalence and accuracy of genetic testing, or restrictions on its use, may exacerbate adverse selection risks.
Pandemics and other public health issues (such as the COVID-19 pandemic) have caused and may continue to cause increased claims under many of our policies (for example, life, disability, leave, long-term care, major medical and supplemental health products), raising our resulting costs. Governments or others may fail to produce accurate population and impact data that we use in our estimates, assumptions, models, or reserves, such as death rates, infections, morbidity, hospitalization, or illness. This may cause or exacerbate any of the risks related to our estimates or assumptions. Pandemics and other public health issues may cause related or consequential long-term economic, social, political, policy, regulatory, business, demographic, or other changes to our claims or other areas subject to estimates, assumptions, models, or reserves. We may not accurately predict, prepare, and adjust to these changes.
We May Face Competition for Business
Competitive pressures, based on a number of factors including service, product features, scale, price, financial strength, claims-paying ratings, credit ratings, e-business capabilities, name recognition, performance against ESG metrics, technology, adaptation in light of pandemics and other public health issues, and other factors, may adversely affect the persistency of our products and our ability to sell products in the future. We may be harmed by competition from other insurance companies, as well as non-insurance financial services companies, which may have a broader array of products, more competitive pricing, higher claims paying ability ratings, greater financial resources with which to compete, or pre-existing customer bases for financial services products. Additionally, we may lose purchasers of group insurance products that are underwritten annually due to more favorable terms from competitors.
We May Face Catastrophes That Affect Liabilities for Policyholder Claims and Reinsurance Availability
Catastrophic events could increase claims, impair assets in or otherwise harm our investment portfolio, and could harm our reinsurers’ financial condition, increasing reinsurance defaults. Pandemics and other public health issues or other events may continue to cause a large number of illnesses or deaths. An event that affects the workforce of one or more of our customers could increase our mortality or morbidity claims. Governmental and non-governmental organizations may not effectively mitigate catastrophes' effects. We may also be called upon to make contributions to guaranty associations or similar organizations as a result of catastrophes.
We May Face Direct or Indirect Effects of Climate Change or Responses to It
Climate change may increase the frequency and severity of near- or long-term weather-related disasters, public health incidents, and pandemics, and their effects may increase over time. Climate change regulation may harm the value of investments we hold or harm our counterparties, including reinsurers, or increase our compliance costs. Our regulators may also increasingly focus their examinations on climate-related risks.
We May Need to Fund Deficiencies in Our Closed Block, and May Not Re-Allocate Closed Block Assets
The closed block assets established in connection with our demutualization, cash flows, and revenue from the closed block policies may not be sufficient to provide for the policies’ guaranteed benefits. If they are not, we must fund the shortfall. We may choose, for competitive or other reasons, to support policyholder dividend payments with our general account funds. Such actions may reduce funds otherwise available for other uses.
We May Be Required to Accelerate the Amortization of or Impair DAC, DSI, VOBA, VODA or VOCRA
Adverse changes to investment returns, mortality, morbidity, persistency, interest crediting rates, dividends paid to policyholders, expenses to administer the business, creditworthiness of reinsurance counterparties, significant or sustained equity market declines, significantly lower spreads, and certain other economic variables, such as inflation, may harm the gross profit or margins that we use to amortize DAC, deferred sales inducements (“DSI”) and VOBA. These factors could also cause an impairment of the value of distribution agreements acquired (“VODA”) or the value of customer relationships acquired (“VOCRA”). We may accelerate amortization or impair these assets in the period these occur.
We May Face Volatility, Higher Risk Management Costs, and Increased Counterparty Risk Due to Guarantees Within Certain of Our Products
Our liabilities for guaranteed benefits, including but not limited to no-lapse guarantee benefits, guaranteed minimum death benefits (“GMDBs”), guaranteed minimum withdrawal benefits, guaranteed minimum accumulation benefits, guaranteed minimum income benefits, and minimum crediting rate features could increase if equity or fixed income funds decline or become more volatile, or interest rates remain low or decrease.
Our derivatives and other risk management strategies to hedge our economic exposure to these liabilities may harm our results. Our use of reinsurance, derivatives, or other risk management techniques may not sufficiently offset the costs of guarantees or protect us against losses from changes in policyholder behavior, mortality, or market events.
Policyholders may also change their behavior in unexpected ways. For example, policyholders and contractholders seeking liquidity due to economic uncertainty or challenges may withdraw or surrender, change their premium payment practices, exercise product options, or take other actions at rates different from those we expect.
Operational Risks
Our Risk Management Policies and Procedures, or Our Models, May Leave Us Exposed to Unidentified or Unanticipated Risk
Our enterprise risk management and business continuity policies and procedures may not be sufficiently comprehensive and may not identify or adequately protect us from every risk to which we are exposed.
Pandemics and other public health issues (such as the COVID-19 pandemic), and authorities’ and people’s reactions thereto, have resulted in and may continue to result in remote, hybrid and/or flexible office working arrangements and other unusual conditions. These may strain our risk management and our business continuity plans, introduce or increase our operational and cybersecurity risks, and otherwise impair our ability to manage our business. They may increase the frequency and sophistication of attempts at unauthorized access to our technology systems. They may hinder our efforts to prevent money-laundering or other fraud, whether due to limited abilities to “know our customers,” strains on our programs to avoid and deter foreign corrupt practices, or otherwise, and may increase both our compliance costs and our risk of violations.
The assumptions, projections and data on which our risk management models are based may be inaccurate, and our models may not be suitable for their purpose, be misused, not operate properly, and contain errors. Our decisions and model adjustments, including determination of reserves, are based on such model output and reports and may be flawed. We may fail to identify or remediate model errors adequately. Our models may not fully predict future exposures or correctly reflect past experience.
Our evaluation of markets, clients, catastrophe occurrence or other matters may not always be accurate, complete, up-to-date or properly evaluated. We may not effectively identify and monitor all risks or appropriately limit our exposures and our Associates, vendors or non-employee sales agents may not follow our risk management policies and procedures. Past or future misconduct by our Associates, vendors or non-employee sales agents could result in investigations, violations of law, regulatory sanctions, and litigation. We may have to implement more extensive or different risk management policies and procedures due to legal and regulatory requirements.
Our Policies and Procedures May Be Insufficient to Protect Us From Operational Risks
We may make errors in any of the large number of transactions we process through our complex administrative systems. Our controls and procedures to prevent such errors may not be effective. Our controls and procedures to comply with and enforce contractual obligations may not always be effective. Mistakes can subject us to claims from our customers.
If we are unable to obtain necessary and accurate information from our customers or their employees, we may be unable to provide or verify coverage and pay claims, or we may pay claims without sufficient documentation.
Pandemics and other public health issues (such as the COVID-19 pandemic) have increased, and may continue to increase, our administrative expenses and have impacted the reliability and efficacy of our operational processes. They may affect our Associates, agents, brokers and distribution partners, vendors, other service providers and counterparties. We may have difficulties conducting our business, including continued challenges in selling some of our products, such as those traditionally sold in person. We may face increased workplace safety costs and risks, lose access to critical Associates, and face increased employment-related claims and employee-relations challenges. Any of the third parties to whom we outsource certain critical business activities may fail to perform due to a force majeure or otherwise.
The controls of our vendors on whom we rely may not meet our standards or be adequate. Our vendors could fail to perform their services accurately or timely. Our exchange of information with vendors may be imperfect, or our vendors may suffer financial or reputational distress. Each of these may cause errors, misconduct, or discontinuation of services.
We may fail to escheat property timely and completely. As a result, we may incur charges, reserve strengthening, and expenses, regulatory examinations, or penalties.
Our practices and procedures may, at times, limit our efforts to contact all our customers, which may result in delayed, untimely, or missed customer payments.
Our Associates, vendors, non-employee sales agents, customers, or others may commit fraud against us. Our policies and procedures may be ineffective in preventing, detecting or mitigating fraud and other illegal or improper acts.
Notwithstanding our compliance with regulatory and accounting requirements in relation to internal controls and our conclusion that internal control over financial reporting is effective as of the date reported, there is a risk that the Company’s internal controls will prove ineffective and significant deficiencies or material weaknesses in internal controls may occur in the future.
We May Fail to Protect the Confidentiality and Integrity of Our Data, Including As a Result of a Failure in Our Cybersecurity or Other Information Security Systems or Our Disaster Recovery Plans or Those of Our Vendors
Our business is highly dependent upon the effective operation of our information systems, and those of our service providers, vendors, and other third parties. Our business relies on the proper functioning of these systems, including processing claims, transactions and applications, providing information to customers and distributors, performing actuarial analyses, and other core business functions. A failure in the security of such systems or a failure to maintain the security of such systems, or the confidential information stored thereon, may adversely affect our ability to conduct business, result in regulatory enforcement action, and harm our results of operations, financial condition and reputation.
We and our vendors, like other commercial entities, continue to be targeted by or subject to computer viruses or other malicious codes, unauthorized or fraudulent access, human errors, ransomware or cyber-attacks, and other breaches of cybersecurity and information security systems. Globally, the frequency, severity and sophistication of cybersecurity incidents have increased, and these trends may continue. While we have implemented, and we require our critical vendors to implement, what we believe to be effective cybersecurity and data protection measures, including a formal risk-based information security program, our efforts to minimize the risk of cyber-incidents and protect our information technology may be insufficient to prevent break-ins, attacks, fraud, security breaches or other unauthorized access to our and our vendors’ systems, including as a result of software code that contains vulnerabilities that are unknown to us or our vendors that may increase the potential of cyber-attacks or unauthorized access. We may not timely detect such incidents.
If we or our vendors fail to prevent, detect, address and mitigate such incidents, we may suffer significant financial and reputational harm. There is no assurance that our security measures or those of our vendors, including information security policies, administrative, technical and physical controls and other actions designed as preventative, will provide fully effective protection from such events.
In addition, we routinely transmit, receive and store personal, confidential and proprietary information by electronic means, including customers’ confidential health-related information. Although we attempt to keep such information confidential and secure, we may be unable to do so in all events, and we or our vendors may also fail to maintain adequate internal controls or comply with relevant policies and procedures designed to ensure the privacy of sensitive data. Such failure may result in our or our vendors’ intentional or unintentional disclosure or misuse of confidential information, as well as others’ misappropriation of such confidential information, which could damage our reputation, reduce demand for our products and services and subject us to significant legal and regulatory liability and expenses, which would harm our business, results of operations and financial condition.
We, our vendors, and our customers may suffer disasters such as a natural catastrophe, epidemic, pandemic, industrial accident, blackout, computer virus, terrorist attack, ransomware or cyber-attack, or war, and our disaster recovery systems may be insufficient to safeguard our ability to conduct normal business operations and maintain our critical business or information technology systems in such circumstances, particularly if such disasters affect computer-based data processing, transmission, storage and retrieval systems and/or destroy or otherwise adversely impact the confidentiality, integrity or availability of valuable data. Our ability to conduct business effectively and maintain the security, integrity, confidentiality or privacy of sensitive data could be severely compromised if, as a result of such disaster, key personnel are unavailable, or our vendors’ ability to provide goods and services and our Associates’ ability to perform their job responsibilities are impaired. We may not carry business interruption insurance sufficient to protect us from all losses that may result from such interruptions, and any insurance for liability, operational and other risks may become less readily available or more expensive in the future.
We may not be able to reliably access all the documents and records in the information storage systems we use, whether electronic or physical. We may fail to obtain or maintain all the records we need to administer and establish appropriate reserves for benefits and claims accurately and timely. If a breach released any of our sensitive financial information, then customers or regulators may develop an inaccurate perception of our financial condition or results of operations. We could be compelled to publicly disclose information prematurely in order to dispel such inaccurate perceptions, or in order to fulfill our disclosure obligations, even if we do not believe the information is yet completely reliable or confirmed per our usual internal controls and disclosure controls. This may result in harm to our reputation.
Regulators’ or others’ scrutiny of cybersecurity, including new laws or regulations, could increase our compliance costs and operational burdens, especially as regulatory and legislative focus on cybersecurity matters intensifies. Regulators, customers, or others may act against us for any cybersecurity failures. We also have an increasing challenge of attracting and retaining highly qualified personnel to assist us in combating these security threats. Our continuous technological evaluations and enhancements, including changes designed to update our protective measures, may increase our risk of a breach or gap in our security. We may incur higher costs to comply with laws on, or regulators’ scrutiny of, our use, collection, management, or transfer of data and other privacy practices. We are continuously evaluating and enhancing our cybersecurity and information security systems and creating new systems and processes. However, there can be no assurance that these measures will be effective in preventing or limiting the impact of future cybersecurity incidents.
We May Face Changes in Accounting Standards
Authorities may change accounting standards that apply to us, and we may adopt changes earlier than required. Changes in accounting rules applicable to our business may have an adverse impact on our results of operations and financial condition. For a discussion of the impact of accounting pronouncements issued but not yet implemented, see Note 1 of the Notes to the Consolidated Financial Statements.
Our Associates May Take Excessive Risks
Our Associates, including executives and others who manage sales, investments, products, wholesaling, underwriting, and others, may take excessive risks. Our compensation programs and practices, and our other controls, may not effectively deter excessive risk-taking or misconduct.
We May Have Difficulty in or Complications from Marketing and Distributing Our Products
Our product distributors may suspend, alter, reduce or terminate their distribution relationships with us if we change our strategy, if our business performance declines, as a result of rating agency actions or concerns about market-related risks, or for other reasons. Our distributors may merge, change their business models in ways that affect us, or terminate their distribution contracts with us, and new distribution channels could emerge, harming our distribution efforts. Distributors may try to renegotiate the terms of any existing selling agreements to less favorable terms due to consolidation or other industry changes or for other reasons. Disruption or changes to our relationships with our distributors could harm our ability to market our products.
Our Associates or unaffiliated firms or agents may distribute our products in an inappropriate manner, or our customers may not understand them or whether they are suitable.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
Not applicable.

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ITEM 2. PROPERTIES
Item 2. Properties
Not applicable.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
See Note 16 of the Notes to the Consolidated Financial Statements.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
Part II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
No established public trading market exists for Metropolitan Life Insurance Company’s common equity; all of Metropolitan Life Insurance Company’s common stock is held by MetLife, Inc.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Reserved

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations
Page
Forward-Looking Statements and Other Financial Information
Overview
Summary of Critical Accounting Estimates
Results of Operations
Investments
Derivatives
Liquidity and Capital Resources
Adopted Accounting Pronouncements
Future Adoption of Accounting Pronouncements
Non-GAAP and Other Financial Disclosures
Risk Management
Forward-Looking Statements and Other Financial Information
For purposes of this discussion, “MLIC,” the “Company,” “we,” “our” and “us” refer to Metropolitan Life Insurance Company, a New York corporation incorporated in 1868, and its subsidiaries. Metropolitan Life Insurance Company is a wholly-owned subsidiary of MetLife, Inc. (MetLife, Inc., together with its subsidiaries and affiliates, “MetLife”). Management's narrative analysis of the Company’s results of operations is presented pursuant to General Instruction I(2)(a) of Form 10-K. This narrative analysis should be read in conjunction with “Note Regarding Forward-Looking Statements,” “Risk Factors,” “Quantitative and Qualitative Disclosures About Market Risk” and the Company's consolidated financial statements included elsewhere herein.
This narrative analysis may contain or incorporate by reference information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See “Note Regarding Forward-Looking Statements” for cautionary language regarding forward-looking statements.
This narrative analysis includes references to our performance measure, adjusted earnings, that is not based on accounting principles generally accepted in the United States of America (“GAAP”). See “- Non-GAAP and Other Financial Disclosures” for definitions and a discussion of this and other financial measures, and “- Results of Operations” and “- Investments” for reconciliations of historical non-GAAP financial measures to the most directly comparable GAAP measures.
Overview
MLIC is a provider of insurance, annuities, employee benefits and asset management. MLIC is organized into two segments: U.S. and MetLife Holdings. In addition, the Company reports certain of its results of operations in Corporate & Other. See Note 2 of the Notes to the Consolidated Financial Statements for further information on the Company’s segments and Corporate & Other.
COVID-19 Pandemic and Current Market Conditions
We continue to closely monitor developments relating to the COVID-19 pandemic and assess its impact on our business. We have implemented risk management and business continuity plans and taken preventive measures and other precautions, such as employee business travel restrictions and remote work arrangements which, to date, have enabled us to maintain our critical business processes, customer service levels, relationships with key vendors, financial reporting systems, internal controls over financial reporting and disclosure controls and procedures.
In 2021 and 2020, we granted certain accommodations to our customers, borrowers and lessees, including (i) waiving exclusions, such as deferred rate increases, extending premium grace periods, waiving late payment fees, and relaxing claim documentation requirements, (ii) credits on insured dental premiums, (iii) payment deferrals and other loan modifications on certain commercial, agricultural and residential mortgage loans, and (iv) certain operating lease concessions. See “- Results of Operations” for further information regarding the effect of the COVID-19 pandemic on our businesses. See also Note 7 of the Notes to the Consolidated Financial Statements for further information regarding COVID-19 pandemic-related mortgage loan concessions.
The COVID-19 pandemic continues to impact the global economy and financial markets and has caused volatility in the global equity, credit and real estate markets. Governments and central banks around the world responded to the COVID-19 pandemic with unprecedented fiscal and monetary policies, but many of these stimulus programs are now winding down due to global economic recovery and rising inflation. In the United States, the Federal Reserve Board has begun to reduce its asset purchases and will end all such purchases by March 2022. Additionally, the board members’ forecasts suggest the policy rate is likely to increase in 2022.
To manage the impact of a changing U.S. interest rate environment, we maintain diversification across products and distribution channels while proactively evaluating interest rate and product strategies. In addition, we apply disciplined asset/liability management (“ALM”) strategies, including the use of derivatives. Our ability to take such actions may be limited by competition, regulatory approval requirements, or minimum crediting rate guarantees and may not match the timing or magnitude of interest rate changes.
Summary of Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported on the Consolidated Financial Statements. For a discussion of our significant accounting policies, see Note 1 of the Notes to the Consolidated Financial Statements. The most critical estimates include those used in determining:
(i) liabilities for future policy benefits and the accounting for reinsurance;
(ii) capitalization and amortization of DAC and the establishment and amortization of VOBA;
(iii) estimated fair values of investments in the absence of quoted market values;
(iv) investment allowance for credit loss (“ACL”) and impairments;
(v) estimated fair values of freestanding derivatives and the recognition and estimated fair value of embedded derivatives requiring bifurcation;
(vi) measurement of employee benefit plan liabilities;
(vii) measurement of income taxes and the valuation of deferred tax assets; and
(viii) liabilities for litigation and regulatory matters.
In applying these policies and estimates, management makes subjective and complex judgments that frequently require assumptions about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our business and operations. Actual results could differ from these estimates.
Liability for Future Policy Benefits
Generally, future policy benefits 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. 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. If experience is less favorable than assumed, additional liabilities may be established, resulting in a charge to policyholder benefits and claims.
Future policy benefit liabilities for disabled lives are estimated using the present value of benefits method and experience assumptions as to claim terminations, expenses and interest.
Liabilities for unpaid claims are estimated based upon our historical experience and other actuarial assumptions that consider the effects of current developments, anticipated trends and risk management programs.
Future policy benefit liabilities for minimum death and income benefit guarantees relating to certain annuity contracts are based on estimates of the expected value of benefits in excess of the projected account balance, recognizing the excess ratably over the accumulation period based on total expected assessments. Liabilities for universal and variable life secondary guarantees and paid-up guarantees are determined by estimating the expected value of death benefits payable when the account balance is projected to be zero and recognizing those benefits ratably over the accumulation period based on total expected assessments. The assumptions used in estimating the secondary and paid-up guarantee liabilities are consistent with those used for amortizing DAC, and are thus subject to the same variability and risk. The assumptions of investment performance and volatility for variable products are consistent with historical experience of the appropriate underlying equity index, such as the S&P Global Ratings (“S&P”) 500 Index.
We regularly review our estimates of liabilities for future policy benefits and compare them with our actual experience. Differences between actual experience and the assumptions used in pricing these policies and guarantees, as well as in the establishment of the related liabilities, result in variances in profit and could result in losses.
Traditional long-duration and limited-payment contracts comprise approximately 60% of MLIC’s liabilities for future policyholder benefits. For such contracts, original assumptions developed at the time of issue are locked-in and used in all future liability calculations provided the resulting liabilities are adequate to provide for future benefits and expenses (i.e., there is no premium deficiency). Therefore, liabilities for these products would not be impacted by changes in assumptions unless such change would result in an adverse impact that would trigger an establishment of a premium deficiency reserve. Favorable experience for traditional long-duration and limited-payment contracts would have no impact on liabilities given that the current assumption is required to remain locked-in, however the positive experience would be reflected in net income over the life of the policies in force.
Our traditional life and other participating blocks comprise approximately 35% of our future policyholder benefit liabilities. For these contracts, MLIC’s risk of adverse experience may be mitigated through adjustments to the dividend scales.
For all insurance assets and liabilities, MLIC holds capital and surplus to mitigate potential adverse experience development. The Company’s approaches for managing liquidity and capital are described in “- Liquidity and Capital Resources.”
See Note 3 of the Notes to the Consolidated Financial Statements for additional information on our liability for future policy benefits.
Reinsurance
Accounting for reinsurance requires extensive use of assumptions and estimates, particularly related to the future performance of the underlying business and the potential impact of counterparty credit risks. We periodically review actual and anticipated experience compared to the aforementioned assumptions used to establish assets and liabilities relating to ceded and assumed reinsurance and evaluate the financial strength of counterparties to our reinsurance agreements using criteria similar to that evaluated in our security impairment process. See “- Investment Allowance for Credit Loss and Impairments.” Additionally, for each of our reinsurance agreements, we determine whether the agreement provides indemnification against loss or liability relating to insurance risk, in accordance with applicable accounting standards. We review all contractual features, including those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims. If we determine that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, we record the agreement using the deposit method of accounting.
See Note 5 of the Notes to the Consolidated Financial Statements for additional information on our reinsurance programs.
Deferred Policy Acquisition Costs and Value of Business Acquired
We incur significant costs in connection with acquiring new and renewal insurance business. Costs that relate directly to the successful acquisition or renewal of insurance contracts are capitalized as DAC. In addition to commissions, certain direct-response advertising expenses and other direct costs, deferrable costs include the portion of an employee’s total compensation and benefits related to time spent selling, underwriting or processing the issuance of new and renewal insurance business only with respect to actual policies acquired or renewed. We utilize various techniques to estimate the portion of an employee’s time spent on qualifying acquisition activities that result in actual sales, including surveys, interviews, representative time studies and other methods. These estimates include assumptions that are reviewed and updated on a periodic basis to reflect significant changes in processes or distribution methods.
VOBA represents the excess of book value over the estimated fair value of acquired insurance, annuity and investment-type contracts in force at the acquisition date. The estimated fair value of the acquired obligations is based on projections, by each block of business, of future policy and contract charges, premiums, mortality and morbidity, separate account performance, surrenders, expenses, investment returns, nonperformance risk adjustment and other factors. Actual experience on the purchased business may vary from these projections. The recovery of DAC and VOBA is dependent upon the future profitability of the related business.
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 $25 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 5.75%.
We periodically review long-term assumptions underlying the projections of estimated gross margins and profits. These assumptions primarily relate to investment returns, policyholder dividend scales, interest crediting rates, mortality, persistency, and expenses to administer business. Assumptions used in the calculation of estimated gross margins and profits which may have significantly changed are updated annually. If the update of assumptions causes expected future gross margins and profits to increase, DAC and VOBA amortization will decrease, resulting in a current period increase to earnings. The opposite result occurs when the assumption update causes expected future gross margins and profits to decrease.
Our most significant assumption updates resulting in a change to expected future gross margins and profits and the amortization of DAC and VOBA are due to revisions to expected future investment returns, expenses, in-force or persistency assumptions and policyholder dividends on participating traditional life contracts, variable and universal life contracts and annuity contracts. We expect these assumptions to be the ones most reasonably likely to cause significant changes in the future. Changes in these assumptions can be offsetting and we are unable to predict their movement or offsetting impact over time.
See Note 4 of the Notes to the Consolidated Financial Statements for additional information on DAC and VOBA.
Estimated Fair Value of Investments
In determining the estimated fair value of our investments, fair values are based on unadjusted quoted prices for identical investments in active markets that are readily and regularly obtainable. When such unadjusted quoted prices are not available, estimated fair values are based on quoted prices in markets that are not active, quoted prices for similar but not identical investments, or other observable inputs. If these inputs are not available, or observable inputs are not determinable, unobservable inputs and/or adjustments to observable inputs requiring significant management judgment, including assumptions or estimates, are used to determine the estimated fair value of investments. Unobservable inputs are based on management’s assumptions about the inputs market participants would use in pricing such investments. The methodologies, assumptions and inputs utilized are described in Note 9 of the Notes to the Consolidated Financial Statements.
For the vast majority of our investments, sensitivity analysis regarding unobservable inputs is not necessary or appropriate, as they are valued using quoted prices, as described above. Quantitative information about the significant unobservable inputs used in fair value measurement and the sensitivity of the estimated fair value to changes in those inputs for the more significant asset and liability classes measured at estimated fair value on a recurring basis is presented in Note 9 of the Notes to the Consolidated Financial Statements.
Financial markets are susceptible to severe events evidenced by rapid depreciation in asset values accompanied by a reduction in asset liquidity. Our ability to sell investments, or the price ultimately realized for investments, depends upon the demand and liquidity in the market and increases the use of judgment in determining the estimated fair value of certain investments.
Investment Allowance for Credit Loss and Impairments
The significant estimates and inherent uncertainties related to our evaluation of credit loss and impairments on our investment portfolio are summarized below. See “Quantitative and Qualitative Disclosures About Market Risk” for information regarding the sensitivity of our fixed maturity securities and mortgage loan portfolios to changes in interest rates and foreign currency exchange rates.
Fixed Maturity Securities
The assessment of whether a credit loss has occurred is based on our case-by-case evaluation of whether the net amount expected to be collected is less than the amortized cost basis. We consider a wide range of factors about the security issuer and use our best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. In accordance with credit loss guidance adopted January 1, 2020, we evaluate credit loss by considering information that changes from time to time about past events, current and forecasted economic conditions, and we measure credit loss by estimating recovery value using a discounted cash flow analysis. We estimate recovery value based on our best estimate of future cash flows, which is inherently subjective, and methodologies can vary depending on the facts and circumstances specific to each security. In accordance with this credit loss guidance, we record an ACL for the amount of the credit loss instead of recording a reduction of the amortized cost as an impairment. The evaluation processes, measurement methodologies, significant inputs and significant judgments and assumptions used to determine the amount of credit loss are described in Notes 1 and 7 of the Notes to the Consolidated Financial Statements. The determination of the amount of ACL is subjective as it includes our estimates and assumptions and assessment of known and inherent risks. We revise these evaluations as conditions change and new information becomes available. The valuation of our fixed maturity securities portfolio is sensitive to changes in interest rates and the estimated fair value of the portion of our fixed maturities securities portfolio that is foreign denominated, is sensitive to changes in foreign currency exchange rates.
Prior to adopting the credit loss guidance, we applied the other than temporary impairment model, where credit loss was recognized when it was anticipated that amortized cost of the security would not be recovered. The credit loss evaluation process and the measurement of credit loss are generally similar under the credit loss guidance and the other than temporary impairment model.
Mortgage Loans
The ACL is established both for pools of loans with similar risk characteristics and for loans with dissimilar risk characteristics, collateral dependent loans and reasonably expected troubled debt restructurings, individually on a loan specific basis. We record an allowance for expected lifetime credit loss in an amount that represents the portion of the amortized cost basis of mortgage loans that we do not expect to collect, resulting in mortgage loans being presented at the net amount expected to be collected. In accordance with credit loss guidance adopted January 1, 2020, to determine the mortgage loan ACL, we apply significant judgement to estimate expected lifetime credit loss over the contractual term of our mortgage loans adjusted for expected prepayments and any extensions; and we consider past events and current and forecasted economic conditions which are subject to inherent uncertainty and which necessarily change from time to time. The ACL methodologies, significant inputs and significant judgements and assumptions used to determine the amount of credit loss are described in Notes 1 and 7 of the Notes to the Consolidated Financial Statements. The determination of the amount of ACL is subjective as it includes our estimates and assumptions and assessment of known and inherent risks. We revise these estimates as conditions change and new information becomes available. The estimated fair value of our mortgage loan portfolio is sensitive to changes in interest rates and the estimated fair value of the portion of our mortgage loan portfolio that is foreign denominated, is sensitive to changes in foreign currency exchange rates.
Prior to adopting the credit loss guidance, we used the incurred loss model, where credit loss was recognized when incurred (when it was probable, based on current information and events, that all amounts due under the loan agreement would not be collected). The credit loss evaluation process and the measurement of credit loss are generally similar under the credit loss guidance and the incurred loss model, except that the credit loss guidance requires recording an ACL for expected lifetime credit loss.
Real Estate, Leases and Other Asset Classes
The determination of the amount of ACL on leases and impairments on real estate and the remaining asset classes is highly subjective and is based upon our quarterly evaluation and assessment of known and inherent risks associated with the respective asset class. The evaluation processes, measurement methodologies, significant inputs and significant judgments and assumptions used to determine the amount of ACL and impairments are described in Notes 1 and 7 of the Notes to the Consolidated Financial Statements. Such evaluations and assessments are revised as conditions change and new information becomes available.
Derivatives
The determination of the estimated fair value of freestanding derivatives, when quoted market values are not available, is based on market standard valuation methodologies and inputs that management believes are consistent with what other market participants would use when pricing the instruments. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, default risk, nonperformance risk, volatility, liquidity and changes in estimates and assumptions used in the pricing models. See Note 8 of the Notes to the Consolidated Financial Statements for additional details on significant inputs into the OTC derivative pricing models and credit risk adjustment.
We issue variable annuity products with guaranteed minimum benefits, some of which are embedded derivatives measured at estimated fair value separately from the host variable annuity product, with changes in estimated fair value reported in net derivative gains (losses). The estimated fair values of these embedded derivatives are determined based on the present value of projected future benefits minus the present value of projected future fees. The projections of future benefits and future fees require capital market and actuarial assumptions, including expectations concerning policyholder behavior. A risk neutral valuation methodology is used under which the cash flows from the guarantees are projected under multiple capital market scenarios using observable risk-free rates. The valuation of these embedded derivatives also includes an adjustment for our nonperformance risk and risk margins for non-capital market inputs. The nonperformance risk adjustment, which is captured as a spread over the risk-free rate in determining the discount rate to discount the cash flows of the liability, 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 compared to MetLife, Inc. Risk margins are established to capture the non-capital market risks of the instrument which represent the additional compensation a market participant would require to assume the risks related to the uncertainties in certain actuarial assumptions. The establishment of risk margins requires the use of significant management judgment, including assumptions of the amount and cost of capital needed to cover the guarantees.
The accounting for derivatives is complex and interpretations of accounting standards continue to evolve in practice. If it is determined that hedge accounting designations were not appropriately applied, reported net income could be materially affected. Assessments of the effectiveness of hedging relationships are also subject to interpretations and estimations and different interpretations or estimates may have a material effect on the amount reported in net income.
Variable annuities with guaranteed minimum benefits may be more costly than expected in volatile or declining equity markets. Market conditions including, but not limited to, changes in interest rates, equity indices, market volatility and foreign currency exchange rates, changes in our nonperformance risk, variations in actuarial assumptions regarding policyholder behavior, mortality and risk margins related to non-capital market inputs, may result in significant fluctuations in the estimated fair value of the guarantees that could materially affect net income. If interpretations change, there is a risk that features previously not bifurcated may require bifurcation and reporting at estimated fair value on the consolidated financial statements and respective changes in estimated fair value could materially affect net income.
Additionally, we ceded the risk associated with certain of the variable annuities with guaranteed minimum benefits described in the preceding paragraphs. The value of the embedded derivatives on the ceded risk is determined using a methodology consistent with that described previously for the guarantees directly written by us with the exception of the input for nonperformance risk that reflects the credit of the reinsurer. Because certain of the direct guarantees do not meet the definition of an embedded derivative and, thus are not accounted for at fair value, significant fluctuations in net income may occur since the change in fair value of the embedded derivative on the ceded risk is being recorded in net income without a corresponding and offsetting change in fair value of the direct guarantee.
See Note 8 of the Notes to the Consolidated Financial Statements for additional information on our derivatives and hedging programs.
Employee Benefit Plans
The Company sponsors a U.S. nonqualified defined benefit pension plan covering MetLife employees who meet specified eligibility requirements of the sponsor and its participating affiliates. The calculation of the obligations and expenses associated with this plan requires an extensive use of assumptions such as the discount rate and rate of future compensation increases, 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 the historical experience of the plan, currently available market and industry data, and expected benefit payout streams.
We determine the discount rate used to value the Company’s pension obligation based upon rates commensurate with current yields on high quality corporate bonds. Given our pension obligations as of December 31, 2020, the beginning of the measurement year, if we had assumed a discount rate for our pension plan that was 100 basis points higher or 100 basis points lower than the rate we assumed, the change in our net periodic benefit costs in 2021 would have been as follows:
Year Ended December 31, 2021
Increase/(Decrease) in Net Periodic Pension Costs
(In millions)
Increase in discount rate by 100 bps
$ (8)
Decrease in discount rate by 100 bps
$ 7
Given our pension obligations as of December 31, 2021, the end of the measurement year, if we had assumed a discount rate for our pension plan that was 100 basis points higher or 100 basis points lower than the rate we assumed, the change in our pension benefit obligation would have been as follows:
Year Ended December 31, 2021
Increase/(Decrease) in Pension Benefit Obligation
(In millions)
Increase in discount rate by 100 bps
$ (136)
Decrease in discount rate by 100 bps
$ 154
These tables consider only changes in our assumed discount rate without consideration of possible changes in any of the other assumptions described above that could ultimately accompany any changes in our assumed discount rate. The assumptions used may differ materially from actual results due to, among other factors, changing market and economic conditions and changes in participant demographics. These differences may have a significant impact on the Company’s consolidated financial statements and liquidity.
See Note 14 of the Notes to the Consolidated Financial Statements for additional discussion of assumptions used in measuring liabilities relating to our employee benefit plans.
Income Taxes
Our accounting for income taxes represents our best estimate of various events and transactions. Tax laws are often complex and may be subject to differing interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions in which we conduct business.
If there were a 1% increase in the global effective income tax rate, the change would have resulted in an approximate $97 million increase in the deferred income tax liabilities balance at December 31, 2021.
See Notes 1 and 15 of the Notes to the Consolidated Financial Statements for additional information on our income taxes.
Litigation Contingencies
We are a defendant in a large number of litigation matters and are involved in a number of regulatory investigations. Given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material effect on the Company’s consolidated net income or cash flows in particular quarterly or annual periods. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Liabilities related to certain lawsuits, including our asbestos-related liability, are especially difficult to estimate due to the limitation of reliable data and uncertainty regarding numerous variables that can affect liability estimates. On a quarterly and annual basis, we review relevant information with respect to liabilities for litigation, regulatory investigations and litigation-related contingencies to be reflected in our consolidated financial statements. It is possible that an adverse outcome in certain of our litigation and regulatory investigations, including asbestos-related cases, or the use of different assumptions in the determination of amounts recorded could have a material effect upon our consolidated net income or cash flows in particular quarterly or annual periods.
See Note 16 of the Notes to the Consolidated Financial Statements for additional information regarding our assessment of litigation contingencies.
Results of Operations
Consolidated Results
Years Ended December 31,
2021 2020
(In millions)
Revenues
Premiums $ 26,191 $ 20,741
Universal life and investment-type product policy fees 2,062 1,996
Net investment income 12,486 10,250
Other revenues 1,616 1,661
Net investment gains (losses) 652 (73)
Net derivative gains (losses) (964) 738
Total revenues 42,043 35,313
Expenses
Policyholder benefits and claims and policyholder dividends 30,151 23,975
Interest credited to policyholder account balances 2,027 2,247
Capitalization of DAC (64) (51)
Amortization of DAC and VOBA 259 406
Interest expense on debt 96 99
Other expenses 5,326 4,559
Total expenses
37,795 31,235
Income (loss) before provision for income tax 4,248 4,078
Provision for income tax expense (benefit) 530 534
Net income (loss)
3,718 3,544
Less: Net income (loss) attributable to noncontrolling interests 5 (6)
Net income (loss) attributable to Metropolitan Life Insurance Company
$ 3,713 $ 3,550
Year Ended December 31, 2021 Compared with the Year Ended December 31, 2020
During 2021, net income (loss) increased $174 million from 2020, primarily driven by favorable changes in adjusted earnings and net investment gains (losses), as well as a favorable change from our annual actuarial assumption reviews, partially offset by an unfavorable change in net derivative gains (losses), net of investment hedge adjustments.
Management of Investment Portfolio and Hedging Market Risks with Derivatives. See “- Investments - Overview” for a discussion of the management of our investment portfolio.
We purchase investments to support our insurance liabilities and not to generate net investment gains and losses. However, net investment gains and losses are incurred and can change significantly from period to period due to changes in external influences, including changes in market factors such as interest rates, foreign currency exchange rates, credit spreads and equity markets; counterparty specific factors such as financial performance, credit rating and collateral valuation; and internal factors such as portfolio rebalancing. Changes in these factors from period to period can significantly impact the levels of provision for credit loss and impairments on our investment portfolio, as well as realized gains and losses on investments sold.
We also use derivatives as an integral part of our management of the investment portfolio and insurance liabilities to hedge certain risks, including changes in interest rates, foreign currency exchange rates, credit spreads and equity market levels. We use freestanding interest rate, equity, credit and currency derivatives to hedge certain invested assets and insurance liabilities. A portion of these hedges are designated and qualify as accounting hedges, which reduce volatility in earnings. For those hedges not designated as accounting hedges, changes in market factors lead to the recognition of fair value changes in net derivative gains (losses) generally without an offsetting gain or loss recognized in earnings for the item being hedged, which creates volatility in earnings. We actively evaluate market risk hedging needs and strategies to ensure our liquidity objectives are met under a range of market conditions.
Certain direct or assumed 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. 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.
We continuously review and refine our hedging strategy in light of changing economic and market conditions, evolving NAIC and NYDFS statutory requirements and accounting rule changes. As a part of our current hedging strategy, we maintain portfolio level derivatives in our macro hedge program. These macro hedge program derivatives, which are included in the non-VA program derivatives section of the table below, mitigate the potential deterioration in our capital positions from significant adverse economic conditions.
Net Derivative Gains (Losses). Direct and assumed variable annuity embedded derivatives and associated freestanding derivative hedges are collectively referred to as “VA program derivatives.” All other derivatives that are economic hedges of certain invested assets and insurance liabilities are referred to as “non-VA program derivatives.” The table below presents the impact on net derivative gains (losses) from non-VA program derivatives and VA program derivatives:
Years Ended December 31,
2021 2020
(In millions)
Non-VA program derivatives:
Interest rate $ (775) $ 2,603
Foreign currency exchange rate 236 (235)
Credit 54 (41)
Equity (726) (869)
Non-VA embedded derivatives 333 (419)
Total non-VA program derivatives (878) 1,039
VA program derivatives:
Embedded derivatives - direct and assumed guarantees:
Market risks 670 59
Nonperformance risk adjustment 27 7
Other risks (297) (204)
Total 400 (138)
Freestanding derivatives hedging direct and assumed embedded derivatives (486) (163)
Total VA program derivatives
(86) (301)
Net derivative gains (losses)
$ (964) $ 738
The unfavorable change in net derivative gains (losses) on non-VA program derivatives was $1.9 billion ($1.5 billion, net of income tax). This was primarily due to long-term rates increasing in 2021 versus decreasing significantly in 2020. This unfavorably impacted the estimated fair value of receive fixed interest rate swaps and options. 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 $215 million ($170 million, net of income tax). This was due to (i) a favorable change of $288 million ($228 million, net of income tax) in market risks in embedded derivatives, net of freestanding derivatives that hedge market risks in embedded derivatives, and (ii) a favorable change of $20 million ($16 million, net of income tax) in the nonperformance risk adjustment included in the valuation of the direct and assumed variable annuity embedded derivatives, partially offset by an unfavorable change of $93 million ($73 million, net of income tax) in other risks in embedded derivatives (primarily policyholder behavior and other non-market risks that generally cannot be hedged).
The aforementioned $288 million ($228 million, net of income tax) favorable change reflects a $611 million ($483 million, net of income tax) favorable change in market risks in embedded derivatives, partially offset by a $323 million ($255 million, net of income tax) unfavorable change in freestanding derivatives that hedge market risks in embedded derivatives.
The primary changes in market factors affecting the valuation of VA program derivatives are summarized as follows:
•Key equity index levels increased more in 2021 compared with 2020 contributing to a favorable change in our embedded derivatives and an unfavorable change in our freestanding derivatives. For example, the S&P 500 Index increased 27% in 2021 and increased 16% in 2020.
•Long-term interest rates increased in 2021 versus decreased significantly in 2020, contributing to a favorable change in our embedded derivatives and an unfavorable change in our freestanding derivatives. For example, the 30-year U.S. swap rate increased 33 basis points in 2021 and decreased 69 basis points in 2020.
The aforementioned $20 million ($16 million, net of income tax) favorable change in the nonperformance risk adjustment on the direct and assumed variable annuity embedded derivatives resulted from a favorable change of $35 million, before income tax, related to changes in our own credit spread, partially offset by an unfavorable change of $15 million, before income tax, related to model changes and changes in capital market inputs, such as long-term interest rates and key equity index levels, on variable annuity guarantees.
The aforementioned $93 million ($73 million, net of income tax) unfavorable change in other risks in embedded derivatives reflects actuarial assumption updates and a combination of factors, such as fees deducted from accounts, changes in the benefit base, premiums, lapses, withdrawals and deaths, in addition to changes to cross-effect, basis mismatch, risk margin and fund allocation.
When equity index levels decrease in isolation, the direct and assumed variable annuity guarantees become more valuable to policyholders, which results in an increase in the undiscounted embedded derivative liability. Discounting this unfavorable change by the risk adjusted rate results in a smaller loss than by discounting at the risk-free rate, thus creating a gain from including an adjustment for nonperformance risk on the direct and assumed variable annuity embedded derivatives.
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 results in a smaller loss than by discounting at the risk-free interest rate, thus creating a gain from including an adjustment for nonperformance risk on the direct and assumed variable annuity embedded derivatives.
When our own credit spread increases in isolation, discounting the embedded derivative liability produces a lower valuation of the liability than if our own credit spread had remained constant. As a result, a gain is created from including an adjustment for nonperformance risk on the direct and assumed variable annuity embedded derivatives. For each of these primary market drivers, the opposite effect occurs when the driver moves in the opposite direction.
Net Investment Gains (Losses). The favorable change in net investment gains (losses) of $725 million ($573 million, net of income tax) primarily reflects: (i) increased gains on sales of real estate investments in 2021, (ii) lower provision for mortgage loan credit loss in 2021 compared to 2020, and (iii) mark-to-market gains in 2021 compared to mark-to-market losses in 2020 on equity securities, which are measured at estimated fair value through net income (loss). These favorable changes were partially offset by a 2020 recovery on a leveraged lease that was previously impaired.
Taxes. Our 2021 effective tax rate on income (loss) before provision for income tax was 12%. Our effective tax rate differed from the U.S. statutory rate of 21% primarily due to tax benefits from tax credits, non-taxable investment income, the non-cash transfer of assets from a wholly-owned U.K. investment subsidiary to its U.S. parent and the corporate tax deduction for stock compensation. Our 2020 effective tax rate on income (loss) before provision for income tax was 13%. Our effective tax rate differed from the U.S. statutory rate of 21% primarily due to tax benefits from tax credits, non-taxable investment income and the finalization of bankruptcy proceedings for a leveraged lease investment.
Actuarial Assumption Review. Results for 2021 include a $167 million ($133 million, net of income tax) charge associated with our annual review of actuarial assumptions related to reserves and DAC, of which a $6 million ($5 million, net of income tax) loss was recognized in net derivative gains (losses).
Of the $167 million charge, a $7 million ($2 million, net of income tax) gain was related to DAC and a $174 million ($135 million, net of income tax) charge was associated with reserves. The portion of the $167 million charge that is included in adjusted earnings is $68 million ($53 million, net of income tax).
The $6 million ($5 million, net of income tax) loss recognized in net derivative gains (losses) associated with our annual review of actuarial assumptions is included within the other risks in embedded derivatives line in the table above.
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 MetLife Holdings segment, driven by updates to behavioral assumptions for variable annuities. The breakdown of total current period results is summarized as follows:
•Economic assumption updates resulted in unfavorable impacts to reserves, partially offset by favorable impacts to DAC, for a net charge of $22 million ($19 million, net of income tax).
•Changes in biometric assumptions resulted in favorable impacts to reserves, partially offset by unfavorable impacts to DAC, for a net gain of $26 million ($22 million, net of income tax).
•Changes in policyholder behavior assumptions resulted in unfavorable impacts to reserves, partially offset by favorable impacts to DAC, for a net charge of $180 million ($143 million, net of income tax).
•Changes in operational assumptions resulted in favorable impacts to reserves, partially offset by unfavorable impacts to DAC, for a net gain of $9 million ($7 million, net of income tax).
Results for 2020 include a $252 million ($199 million, net of income tax) charge associated with our annual review of actuarial assumptions related to reserves and DAC, of which a $57 million ($45 million, net of income tax) gain was recognized in net derivative gains (losses). Of the $252 million charge, $64 million ($51 million, net of income tax) was related to DAC and $188 million ($148 million, net of income tax) was associated with reserves. The portion of the $252 million charge that is included in adjusted earnings is $138 million ($109 million, net of income tax).
Adjusted Earnings. As more fully described in “- Non-GAAP and Other Financial Disclosures,” we use adjusted earnings, which does not equate to net income (loss), as determined in accordance with GAAP, to analyze our performance, evaluate segment performance, and allocate resources. We believe that the presentation of adjusted earnings, 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 allows analysis of our performance and facilitates comparisons to industry results. Adjusted earnings should not be viewed as a substitute for net income (loss). Adjusted earnings increased $836 million, net of income tax, to $4.7 billion, net of income tax, for 2021 from $3.8 billion, net of income tax, for 2020.
Reconciliation of net income (loss) to adjusted earnings and premiums, fees and other revenues to adjusted premiums, fees and other revenues
Years Ended December 31,
2021 2020
(In millions)
Net income (loss) $ 3,718 $ 3,544
Less: adjustments from net income (loss) to adjusted earnings:
Revenues:
Net investment gains (losses) 652 (73)
Net derivative gains (losses) (964) 738
Premiums - -
Universal life and investment-type product policy fees 80 84
Net investment income (579) (578)
Other revenues - -
Expenses:
Policyholder benefits and claims and policyholder dividends (366) (485)
Interest credited to policyholder account balances 2 9
Capitalization of DAC - -
Amortization of DAC and VOBA (32) (60)
Interest expense on debt - -
Other expenses 9 (7)
Provision for income tax (expense) benefit 241 78
Adjusted earnings $ 4,675 $ 3,838
Premiums, fees and other revenues $ 29,869 $ 24,398
Less: adjustments to premiums, fees and other revenues 80 84
Adjusted premiums, fees and other revenues $ 29,789 $ 24,314
Consolidated Results - Adjusted Earnings
Business Overview. Adjusted premiums, fees and other revenues for 2021 increased $5.5 billion, or 23%, compared to 2020, primarily due to growth in both our Group Benefits and Retirement and Income Solutions (“RIS”) businesses in our U.S. segment. Growth from our group life business included increased premiums from our participating contracts, which can fluctuate with claims experience. In addition, growth in other core products was driven by increases in our group disability businesses, as well as the impact of premium credits in 2020, and growth in the dental business. Growth in voluntary products was due to the impact of new sales and growth in membership in our accident & health and legal plans businesses. The increase in premiums in RIS was mainly from our pension risk transfer and post-retirement benefits businesses. Changes in RIS premiums are mostly offset by a corresponding change in policyholder benefits.
Our MetLife Holdings segment consists of operations relating to products and businesses that we no longer actively market. We anticipate an annual decline in adjusted premiums, fees and other revenues in our MetLife Holdings segment from expected business run-off. Although we have discontinued selling our long-term care product, we continue to collect premiums and administer the existing block of business, which contributed to asset growth in the segment, and we expect the related reserves to grow as this block matures. Our future policyholder benefit liability for our long-term care business was $14.4 billion and $14.3 billion as of December 31, 2021 and 2020, respectively.
Year Ended December 31, 2021 Compared with the Year Ended December 31, 2020
Unless otherwise stated, all amounts discussed below are net of income tax.
Overview. The primary drivers of the increase in adjusted earnings were (i) higher investment yields, due to strong returns in our private equity and real estate portfolios, (ii) lower interest credited expenses, (iii) a favorable change from our annual actuarial assumption reviews and (iv) a favorable tax adjustment, partially offset by unfavorable underwriting, which reflected impacts from the COVID-19 pandemic, and an unfavorable change in refinements to certain insurance and other assets and liabilities.
Business Growth. Average assets and net investment income were lower from the impact of dividend payments to MetLife, Inc., partially offset by higher average invested assets in our U.S. segment from positive flows, primarily from funding agreement issuances. Consistent with the growth in the U.S. segment’s average invested assets, interest credited expenses on deposit-type liabilities increased; however, this was more than offset by lower interest credited expenses on our long-duration liabilities. In our MetLife Holdings segment, negative net flows in our deferred annuity business resulted in lower asset-based fee income, which was partially offset by lower costs associated with our variable annuity GMDBs and lower interest credited expense. In addition, premiums declined due to business run-off and the impact of dividend scale reductions. In our U.S. segment, higher volume-related, premium tax and direct expenses, driven by business growth, were partially offset by the 2021 abatement of the annual health insurer fee under the Patient Protection and Affordable Care Act. This net increase in expenses was more than offset by a corresponding increase in adjusted premiums, fees and other revenues. The combined impact of the items affecting our business growth decreased adjusted earnings by $8 million.
Market Factors. Market factors, including interest rate levels, variability in equity market returns, and foreign currency fluctuations, continued to impact our results; however, certain impacts were mitigated by derivatives used to hedge these risks. Investment yields increased driven by the favorable impact of strong equity market returns on our private equity funds and the favorable impact of real estate market returns on our real estate investments, primarily real estate funds. These increases were partially offset by lower yields on fixed income securities and mortgage loans. In our U.S. segment, interest rate fluctuations resulted in a decline in our average interest credited rates on deposit-type and long-duration liabilities, which drove a decrease in interest credited expenses. In our MetLife Holdings segment, higher equity market returns drove higher asset-based fee income in our deferred annuity business, which increased adjusted earnings. The changes in market factors discussed above resulted in a $2.1 billion increase in adjusted earnings.
Underwriting. Underwriting results decreased adjusted earnings by $1.1 billion primarily due to unfavorable mortality and claims experience in our U.S. segment. In addition, in our MetLife Holdings segment, claims experience in our long-term care business and mortality in our life businesses were also unfavorable. Unfavorable mortality in the U.S. segment was primarily driven by our Group Benefits business, partially offset by favorable mortality in our RIS business. Our Group Benefits business experienced (i) increases in both incidence and severity in both COVID-19 and core claims across our life businesses, and (ii) unfavorable results in our accidental death & dismemberment business due to lower incidence in 2020 as a result of the COVID-19 pandemic. The favorable mortality in our RIS business, including the impact of the COVID-19 pandemic, was primarily driven by our pension risk transfer, structured settlement, specialized benefit resource and post-retirement benefit businesses, partially offset by unfavorable results in our institutional income annuity business. In addition, unfavorable claims experience within our U.S. segment was primarily driven by: (i) unfavorable dental results, primarily the result of the COVID-19 pandemic, which limited availability of services and reduced utilization in 2020, and (ii) unfavorable claims experience in our group disability business, partially offset by (i) favorable claims experience in our individual disability business, and (ii) the impact of business growth in our accident & health business.
Actuarial Assumption Review and Other Insurance Adjustments. The favorable change from our annual actuarial assumption reviews resulted in a net increase of $56 million in adjusted earnings. Changes mainly in economic and biometric assumptions were less unfavorable in 2021 when compared to 2020. Refinements to certain insurance and other assets and liabilities in both years resulted in a $483 million decrease in adjusted earnings, primarily due to unfavorable adjustments to certain deposit reinsurance assets in 2021 due to a decrease in projected dividends. Dividend scale reductions, as well as run-off in MLIC’s closed block, contributed to lower dividend expenses of $134 million and lower associated DAC amortization of $75 million, which increased adjusted earnings.
Expenses. Adjusted earnings decreased $12 million compared to 2020, primarily due to higher employee-related expenses and higher interest expenses on tax positions due to audit settlements, partially offset by decreases in corporate-related expenses and legal expenses.
Taxes. Our 2021 effective tax rate on adjusted earnings was 14%. Our effective tax rate differed from the U.S. statutory rate of 21% primarily due to tax benefits from tax credits, non-taxable investment income, the transfer of assets from a wholly-owned U.K. investment subsidiary to its U.S. parent and the corporate tax deduction for stock compensation. Our 2020 effective tax rate on adjusted earnings was 14%. Our effective tax rate differed from the U.S. statutory rate of 21% primarily due to tax benefits from tax credits, non-taxable investment income and the finalization of bankruptcy proceedings for a leveraged lease investment.
Investments
Overview
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 investment income and risk-adjusted total return. Our investment portfolio is heavily weighted toward fixed income investments, with the vast majority of our portfolio invested in fixed maturity securities available-for-sale (“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.
Current Environment
As a large insurer with a diverse investment portfolio, we continue to be impacted by the changing global financial and economic environment, the fiscal and monetary policy of governments and central banks around the world and other governmental measures. The COVID-19 pandemic continues to impact the global economy and financial markets and has caused volatility in the global equity, credit and real estate markets. Uncertainty created by the COVID-19 pandemic may persist for some time and may continue to impact pricing levels of risk-bearing investments, as well as our business operations, investment portfolio and derivatives. See “- Selected Country and Sector Investments,” “- U.S. and Foreign Corporate Fixed Maturity Securities AFS,” “- Mortgage Loans,” and “- Real Estate and Real Estate Joint Ventures” for discussion of impacts of the COVID-19 pandemic on our investment portfolio.
Selected Country and Sector Investments
Selected Country: We have country-specific exposure to volatility posed by local political and economic conditions, as well as from the COVID-19 pandemic, as a result of our global portfolio diversification objectives for our general account investments. The countries included in the following table have been the most affected by these risks. The table below presents a summary of selected country fixed maturity securities AFS, at estimated fair value, on a “country of risk basis” (e.g. where the issuer primarily conducts business).
Selected Country Fixed Maturity Securities AFS at December 31, 2021
Country Sovereign (1) Financial
Services Non-Financial
Services Total (2)
(Dollars in millions)
Mexico $ 296 $ 60 $ 324 $ 680
Chile 141 26 391 558
Columbia 113 20 139 272
Peru 88 15 159 262
Russia 203 7 22 232
Turkey 5 1 12 18
Ukraine 2 - 2 4
Total $ 848 $ 129 $ 1,049 $ 2,026
Investment grade % 81.2 % 67.2 % 82.5 % 81.0 %
______________
(1)Sovereign includes government and agency.
(2)The par value, amortized cost net of ACL, and estimated fair value, net of purchased and written credit default swaps, of these securities were $1.8 billion, $1.9 billion and $1.4 billion, respectively, at December 31, 2021. The notional value and estimated fair value of the net purchased and written credit default swaps were $654 million and ($1) million, respectively, at December 31, 2021.
Selected Sector: As a result of current economic conditions including the effects on the global economy and financial markets from the COVID-19 pandemic, certain sectors of our investment portfolio have continued to experience stress. Our fixed maturity securities AFS exposure to stressed sectors is summarized below:
Selected Sectors at December 31, 2021
Sectors Book Value (1) Investment
Grade % % of Total
Investments
(Dollars in millions)
Airports $ 2,000 75 % 0.7 %
Cruise Lines / Leisure 502 89 % 0.1 %
Airlines 335 76 % 0.1 %
Restaurants 303 96 % 0.1 %
Lodging 148 65 % 0.1 %
Fixed maturity securities AFS exposure to stressed sectors (2) $ 3,288 1.1 %
__________________
(1)Fixed maturity securities AFS at amortized cost, net of ACL.
(2)The par value, estimated fair value and estimated fair value, net of written credit default swaps, of these securities were $3.2 billion, $3.5 billion and $3.6 billion, respectively, at December 31, 2021. The notional value and estimated fair value of the written credit default swaps were $114 million and $2 million, respectively, at December 31, 2021.
We maintain a high quality portfolio of Airports sector fixed maturity securities AFS that is diversified across issuers and geographies, with 55%, 20% and 15% of the exposure in Europe, the U.S and Asia, respectively. This portfolio is primarily invested in higher quality, highly rated investment grade securities. At December 31, 2021, this securities portfolio was in an unrealized gain position of $90 million.
We manage direct and indirect investment exposure in the selected countries and sectors through fundamental analysis and we continually monitor and adjust our level of investment exposure.
Investment Portfolio Results
The reconciliation of net investment income under GAAP to adjusted net investment income, is presented below.
For the Years Ended December 31,
2021 2020
(In millions)
Net investment income - GAAP
$ 12,486 $ 10,250
Investment hedge adjustments 571 568
Other 8 11
Adjusted net investment income (1) $ 13,065 $ 10,829
__________________
(1)See “Financial Measures and Segment Accounting Policies” in Note 2 of the Notes to the Consolidated Financial Statements for a discussion of the adjustments made to net investment income under GAAP in calculating adjusted net investment income.
The following yield table presentation is consistent with how we measure our investment performance for management purposes, and we believe it enhances understanding of our investment portfolio results.
For the Years Ended December 31,
2021 2020
Asset Class Yield% (1) Amount Yield% (1) Amount
(Dollars in millions)
Fixed maturity securities AFS (2), (3) 4.18 % $ 6,183 4.37 % $ 6,518
Mortgage loans (3) 4.19 % 2,656 4.29 % 2,836
Real estate and real estate joint ventures (4) 3.80 % 294 0.29 % 20
Policy loans 4.95 % 292 5.05 % 305
Equity securities 4.67 % 14 4.57 % 25
Other limited partnership interests (4)
42.74 % 3,169 12.36 % 644
Cash and short-term investments 1.89 % 8 1.18 % 9
Other invested assets 778 802
Investment income 5.56 % 13,394 4.60 % 11,159
Investment fees and expenses (0.14) (329) (0.14) (330)
Adjusted net investment income 5.42 % $ 13,065 4.46 % $ 10,829
______________
(1)We calculate yields using adjusted net investment income as a percent of average quarterly asset carrying values. Adjusted net investment income excludes realized gains (losses) from sales and disposals and includes the impact of changes in foreign currency exchange rates. Average quarterly asset carrying values exclude unrealized gains (losses), collateral received in connection with our securities lending program, annuities funding structured settlement claims, freestanding derivative assets, collateral received from derivative counterparties, the effects of consolidating under GAAP certain variable interest entities that are treated as consolidated securitization entities (“CSEs”) and contractholder-directed equity securities. A yield is not presented for other invested assets, as it is not considered a meaningful measure of performance for this asset class.
(2)Investment income from fixed maturity securities includes amounts from fair value option (“FVO”) Securities (“FVO Securities”) of $102 million and $48 million for the years ended December 31, 2021 and 2020, respectively.
(3)Investment income from fixed maturity securities AFS and mortgage loans includes prepayment fees.
(4)See “- Results of Operations - Consolidated Results - Adjusted Earnings” for discussion of results for the year ended December 31, 2021.
See “- Results of Operations - Consolidated Results - Adjusted Earnings” for an analysis of the period over period changes in investment portfolio results.
Fixed Maturity Securities AFS
The following table presents fixed maturity securities AFS by type (public or private) and information about perpetual and redeemable securities held at:
December 31, 2021 December 31, 2020
Securities by Type Estimated
Fair
Value % of Total Estimated
Fair
Value % of Total
(Dollars in millions)
Fixed maturity securities AFS
Publicly-traded $ 131,916 75.0 % $ 136,486 75.3 %
Privately-placed 43,969 25.0 44,854 24.7
Total fixed maturity securities AFS $ 175,885 100.0 % $ 181,340 100.0 %
Percentage of cash and invested assets 60.0 % 60.7 %
Perpetual and redeemable securities
Perpetual securities included within fixed maturity securities AFS
$ 231 $ 209
Redeemable preferred stock with a stated maturity included within fixed maturity securities AFS
$ 621 $ 602
See Note 7 of the Notes to the Consolidated Financial Statements for information about fixed maturity securities AFS by sector, contractual maturities and continuous gross unrealized losses.
Included within fixed maturity securities AFS are structured securities including residential mortgage-backed securities (“RMBS”), ABS and commercial mortgage-backed securities (“CMBS”) (collectively, “Structured Products”).
Perpetual securities are included within fixed maturity securities AFS and equity securities are reported within other invested assets. Upon acquisition, we classify perpetual securities that have attributes of both debt and equity as fixed maturity securities AFS if the securities have an interest rate step-up feature which, when combined with other qualitative factors, indicates that the securities have more debt-like characteristics; while those with more equity-like characteristics are classified as equity securities reported within other invested assets. Many of such securities, commonly referred to as “perpetual hybrid securities,” have been issued by non-U.S. financial institutions that are accorded the highest two capital treatment categories by their respective regulatory bodies (i.e. core capital, or “Tier 1 capital” and perpetual deferrable securities, or “Upper Tier 2 capital”).
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 9 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, 2021.
Senior management, independent of the trading and investing functions, is responsible for the oversight of control systems and valuation policies for securities, mortgage loans, real estate and derivatives. On a quarterly basis, new transaction types and markets are reviewed and approved to ensure that observable market prices and market-based parameters are used for valuation, wherever possible, and for determining that valuation adjustments, when applied, are based upon established policies and are applied consistently over time. Senior management oversees the selection of independent third-party pricing providers and the controls and procedures to evaluate third-party pricing.
We review our valuation methodologies on an ongoing basis and revise those methodologies when necessary based on changing market conditions. Assurance is gained on the overall reasonableness and consistent application of input assumptions, valuation methodologies and compliance with fair value accounting guidance through controls designed to ensure valuations represent an exit price. Several controls are utilized, including certain monthly controls, which include, but are not limited to, analysis of portfolio returns to corresponding benchmark returns, comparing a sample of executed prices of securities sold to the fair value estimates, comparing fair value estimates to management’s knowledge of the current market, reviewing the bid/ask spreads to assess activity, comparing prices from multiple independent pricing services and ongoing due diligence to confirm that independent pricing services use market-based parameters. The process includes a determination of the observability of inputs used in estimated fair values received from independent pricing services or brokers by assessing whether these inputs can be corroborated by observable market data. We ensure that prices received from independent brokers, also referred to herein as “consensus pricing,” are representative of estimated fair value by considering such pricing relative to our knowledge of the current market dynamics and current pricing for similar investments. While independent non-binding broker quotations are utilized, they are not used for a significant portion of the portfolio.
We also apply a formal process to challenge any prices received from independent pricing services that are not considered representative of estimated fair value. If prices received from independent pricing services are not considered reflective of market activity or representative of estimated fair value, independent non-binding broker quotations are obtained, or an internally developed valuation is prepared. Internally developed valuations of current estimated fair value, compared with pricing received from the independent pricing services, did not produce material differences in the estimated fair values for the majority of the portfolio; accordingly, overrides were not material. This is, in part, because internal estimates are generally based on available market evidence and estimates used by other market participants. In the absence of such market-based evidence, management’s best estimate is used.
We have reviewed the significance and observability of inputs used in the valuation methodologies to determine the appropriate fair value hierarchy level for each of our securities. Based on the results of this review and investment class analysis, each instrument is categorized as Level 1, 2 or 3 based on the lowest level significant input to its valuation. See Note 9 of the Notes to the Consolidated Financial Statements for valuation approaches and key inputs by major category of assets or liabilities that are classified within Level 2 and Level 3 of the fair value hierarchy.
Fair Value of Fixed Maturity Securities AFS
Fixed maturity securities AFS measured at estimated fair value on a recurring basis and their corresponding fair value pricing sources were as follows:
December 31, 2021
Level Fixed Maturity
Securities AFS
(Dollars in millions)
Level 1
Quoted prices in active markets for identical assets $ 15,048 8.6 %
Level 2
Independent pricing sources 140,822 80.0
Internal matrix pricing or discounted cash flow techniques 468 0.3
Significant other observable inputs 141,290 80.3
Level 3
Independent pricing sources 15,176 8.6
Internal matrix pricing or discounted cash flow techniques 4,324 2.5
Independent broker quotations 47 -
Significant unobservable inputs
19,547 11.1
Total at estimated fair value $ 175,885 100.0 %
See Note 9 of the Notes to the Consolidated Financial Statements for the fixed maturity securities AFS fair value hierarchy, a rollforward of the fair value measurements for securities measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs; transfers into and/or out of Level 3; and further information about the valuation approaches and inputs by level by major classes of invested assets that affect the amounts reported above.
The majority of the Level 3 fixed maturity securities AFS were concentrated in three sectors at December 31, 2021: foreign corporate securities, U.S. corporate securities and RMBS. During the year ended December 31, 2021, Level 3 fixed maturity securities AFS increased by $204 million, or 1%. The increase was driven by purchases in excess of sales partially offset by a decrease in estimated fair value recognized in other comprehensive income (loss) and by transfers out of Level 3 in excess of transfers into Level 3.
Fixed Maturity Securities AFS
See Note 7 of the Notes to the Consolidated Financial Statements for information about fixed maturity securities AFS by sector, contractual maturities and continuous gross unrealized losses.
Fixed Maturity Securities AFS Credit Quality - Ratings
The Securities Valuation Office of the NAIC evaluates the fixed maturity securities of insurers for regulatory reporting and capital assessment purposes. The NAIC assigns securities to one of six credit quality categories defined as “NAIC designations.” In general, securities with NAIC designations of 1 and 2 are considered investment grade and securities with NAIC designations of 3 through 6 are considered below investment grade. If no NAIC designation is available, then, as permitted by the NAIC, an internally developed designation is used. NAIC designations are generally similar to the credit quality ratings of the NRSRO, except for non-agency RMBS and CMBS as described below, accordingly, NAIC designations may not correspond to NRSRO ratings.
NAIC designations for non-agency RMBS and CMBS are based on a modeling methodology that estimates security level expected losses under a variety of economic scenarios. Prior to December 31, 2021, the modeling methodology incorporated the amortized cost of the security (including any purchase discounts and prior impairments) without regard to the issuance date. As of December 31, 2021, the modeling methodology for non-agency RMBS and CMBS issued prior to January 1, 2013 incorporates the amortized cost of the security (including any purchase discounts and prior impairments) and the likelihood of recovery of the amortized cost; while for non-agency RMBS and CMBS issued after January 1, 2013, the modeling methodology does not incorporate the amortized cost of the security. The NAIC’s objective with the modeling methodology is to increase accuracy in estimating expected losses, and to use the improved assessment to determine an appropriate RBC charge for non-agency RMBS and CMBS. We utilize these NAIC designations for our non-agency RMBS and CMBS. The NAIC evaluates non-agency RMBS and CMBS held by insurers on an annual basis. When we acquire non-agency RMBS and CMBS that have not been previously evaluated by the NAIC, an internally developed designation is used until a NAIC designation becomes available.
Effective December 31, 2020, the NAIC implemented 20 “NAIC designation categories” which is an additional, more granular credit quality categorization. These NAIC designation categories correspond more closely to the NRSRO’s alpha-numeric credit quality ratings. Effective December 31, 2021, the NAIC implemented new unique RBC factors for each of the 20 NAIC designation categories. The NAIC’s goal is to better align RBC charges on securities with the instruments’ actual credit risk.
Rating agency ratings are based on availability of applicable ratings from rating agencies on the NAIC credit rating provider list, including Moody’s Investors Service (“Moody’s”), S&P, Fitch Ratings (“Fitch”), DBRS Morningstar, A.M. Best Company (“A.M. Best”), Kroll Bond Rating Agency and Egan Jones Ratings Company. If no rating is available from a rating agency, then an internally developed rating is used.
The following table presents total fixed maturity securities AFS by NRSRO rating and the applicable NAIC designation from the NAIC published comparison of NRSRO ratings to NAIC designations, except for non-agency RMBS and CMBS, which are presented using NAIC designations for modeled securities. NRSRO ratings and NAIC designations are as of the dates shown below. Over time, credit ratings can migrate, up or down, through the NRSRO's and NAIC’s continuous monitoring process.
December 31,
2021 2020
NAIC
Designation NRSRO Rating Amortized
Cost net of ACL Unrealized
Gain (Loss) Estimated
Fair
Value % of
Total Amortized
Cost net of ACL Unrealized
Gain (Loss) Estimated
Fair
Value % of
Total
(Dollars in millions)
1 Aaa/Aa/A $ 103,617 $ 12,569 $ 116,186 66.0 % $ 100,752 $ 17,377 $ 118,129 65.2 %
2 Baa 44,696 4,826 49,522 28.2 44,673 7,176 51,849 28.6
Subtotal investment grade
148,313 17,395 165,708 94.2 145,425 24,553 169,978 93.8
3 Ba 7,127 215 7,342 4.2 7,597 416 8,013 4.4
4 B 2,463 (12) 2,451 1.4 2,896 10 2,906 1.6
5 Caa and lower 389 (24) 365 0.2 403 (17) 386 0.2
6 In or near default
9 10 19 - 51 6 57 -
Subtotal below investment grade
9,988 189 10,177 5.8 10,947 415 11,362 6.2
Total fixed maturity securities AFS $ 158,301 $ 17,584 $ 175,885 100.0 % $ 156,372 $ 24,968 $ 181,340 100.0 %
The following tables present total fixed maturity securities AFS, at estimated fair value, by sector and by NRSRO rating and the applicable NAIC designations from the NAIC published comparison of NRSRO ratings to NAIC designations, except for non-agency RMBS and CMBS, which are presented using NAIC designations for modeled securities:
Fixed Maturity Securities AFS - by Sector & Credit Quality Rating
NAIC Designation: 1 2 3 4 5 6 Total
Estimated
Fair Value
NRSRO Rating: Aaa/Aa/A Baa Ba B Caa and
Lower In or Near
Default
(Dollars in millions)
December 31, 2021
U.S. corporate $ 26,778 $ 26,018 $ 3,738 $ 1,675 $ 193 $ - $ 58,402
U.S. government and agency
30,765 457 - - - - 31,222
Foreign corporate 8,350 18,242 2,494 487 112 - 29,685
RMBS 22,422 516 132 52 4 19 23,145
ABS 10,840 1,684 260 76 19 - 12,879
Municipals 8,473 238 17 - - - 8,728
CMBS 6,347 330 91 85 25 - 6,878
Foreign government 2,211 2,037 610 76 12 - 4,946
Total fixed maturity securities AFS
$ 116,186 $ 49,522 $ 7,342 $ 2,451 $ 365 $ 19 $ 175,885
Percentage of total
66.0 % 28.2 % 4.2 % 1.4 % 0.2 % - % 100.0 %
December 31, 2020
U.S. corporate $ 27,202 $ 26,984 $ 4,053 $ 1,870 $ 282 $ 18 $ 60,409
U.S. government and agency
30,299 472 - - - - 30,771
Foreign corporate 9,111 19,908 2,689 509 62 - 32,279
RMBS 23,266 614 181 134 13 18 24,226
ABS 11,132 1,186 172 85 - - 12,575
Municipals 8,702 261 20 - - - 8,983
CMBS 5,947 243 358 250 10 21 6,829
Foreign government 2,470 2,181 540 58 19 - 5,268
Total fixed maturity securities AFS
$ 118,129 $ 51,849 $ 8,013 $ 2,906 $ 386 $ 57 $ 181,340
Percentage of total
65.2 % 28.6 % 4.4 % 1.6 % 0.2 % - % 100.0 %
U.S. and Foreign Corporate Fixed Maturity Securities AFS
We maintain a diversified portfolio of corporate fixed maturity securities AFS across industries and issuers. This portfolio did not have any exposure to any single issuer in excess of 1% of total investments at December 31, 2021. The top 10 holdings comprised 2% of total investments at both December 31, 2021 and 2020. The table below presents our U.S. and foreign corporate securities holdings by industry at:
December 31,
2021 2020
Industry Estimated
Fair
Value
% of
Total
Estimated
Fair
Value
% of
Total
(Dollars in millions)
Industrial $ 26,717 30.3 % $ 28,548 30.8 %
Finance 18,828 21.4 19,606 21.2
Consumer 17,381 19.7 19,086 20.6
Utility 15,494 17.6 16,298 17.6
Communications 7,200 8.2 7,092 7.6
Other 2,467 2.8 2,058 2.2
Total $ 88,087 100.0 % $ 92,688 100.0 %
As a result of current economic conditions, including the effects of the COVID-19 pandemic, we have experienced stress within certain sub-sectors of our industrial and consumer corporate securities portfolios, principally in Airports, Cruise Lines / Leisure, Airlines, Restaurants and Lodging. See “- Current Environment - Selected Country and Sector Investments.”
Structured Products
We held $42.9 billion and $43.6 billion of Structured Products, at estimated fair value, at December 31, 2021 and 2020, respectively, as presented in the RMBS, ABS and CMBS sections below.
RMBS
Our RMBS portfolio is diversified by security type and risk profile. The following table presents our RMBS portfolio by security type, risk profile and ratings profile at:
December 31,
2021 2020
Estimated
Fair
Value % of
Total Net
Unrealized
Gains (Losses) Estimated
Fair
Value % of
Total Net
Unrealized
Gains (Losses)
(Dollars in millions)
Security type
Collateralized mortgage obligations $ 13,184 57.0 % $ 913 $ 13,661 56.4 % $ 1,204
Pass-through mortgage-backed securities 9,961 43.0 150 10,565 43.6 470
Total RMBS $ 23,145 100.0 % $ 1,063 $ 24,226 100.0 % $ 1,674
Risk profile
Agency $ 14,472 62.5 % $ 523 $ 15,579 64.3 % $ 1,032
Prime 2,142 9.3 17 1,399 5.8 35
Alt-A 3,354 14.5 256 3,501 14.4 291
Sub-prime 3,177 13.7 267 3,747 15.5 316
Total RMBS $ 23,145 100.0 % $ 1,063 $ 24,226 100.0 % $ 1,674
Ratings profile
Rated Aaa/AAA
$ 16,313 70.5 % $ 17,442 72.0 %
Designated NAIC 1
$ 22,422 96.9 % $ 23,266 96.0 %
Collateralized mortgage obligations are structured by dividing the cash flows of mortgage loans into separate pools or tranches of risk that create multiple classes of bonds with varying maturities and priority of payments. Pass-through mortgage-backed securities are secured by a mortgage loan or collection of mortgage loans. The monthly mortgage loan payments from homeowners pass from the originating bank through an intermediary, such as a government agency or investment bank, which collects the payments and, for a fee, remits or passes these payments through to the holders of the pass-through securities.
The majority of our RMBS holdings were rated Aaa/AAA and were designated NAIC 1 at December 31, 2021 and 2020. Agency RMBS were guaranteed or otherwise supported by Federal National Mortgage Association, Federal Home Loan Mortgage Corporation or Government National Mortgage Association. Non-agency RMBS include prime, alternative residential mortgage loans (“Alt-A”) and sub-prime RMBS. Prime residential mortgage lending includes the origination of residential mortgage loans to the most creditworthy borrowers with high quality credit profiles. Alt-A is a classification of mortgage loans where the risk profile of the borrower is between prime and sub-prime. Sub-prime mortgage lending is the origination of residential mortgage loans to borrowers with weak credit profiles.
Historically, we have managed our exposure to sub-prime RMBS holdings by focusing primarily on senior tranche securities, stress testing the portfolio with severe loss assumptions and closely monitoring the performance of the portfolio. Our sub-prime RMBS portfolio consists predominantly of securities that were purchased at significant discounts to par value and discounts to the expected principal recovery value of these securities. The vast majority of these securities are investment grade under the NAIC designations (e.g., NAIC 1 and NAIC 2).
ABS
Our ABS portfolio is diversified by collateral type and issuer. The following table presents our ABS portfolio by collateral type and ratings profile at:
December 31,
2021 2020
Estimated
Fair
Value % of
Total Net
Unrealized
Gains (Losses) Estimated
Fair
Value % of
Total Net
Unrealized
Gains (Losses)
(Dollars in millions)
Collateral type
Collateralized obligations (1) $ 6,528 50.7 % $ (6) $ 7,405 58.9 % $ (2)
Consumer loans 1,259 9.8 37 1,179 9.4 36
Automobile loans 841 6.5 5 560 4.4 12
Student loans 742 5.8 14 789 6.3 7
Credit card loans 561 4.3 8 600 4.8 11
Foreign residential loans 178 1.4 - 198 1.6 (2)
Other loans (2) 2,770 21.5 34 1,844 14.6 57
Total $ 12,879 100.0 % $ 92 $ 12,575 100.0 % $ 119
Ratings profile
Rated Aaa/AAA
$ 5,409 42.0 % $ 6,584 52.4 %
Designated NAIC 1
$ 10,840 84.2 % $ 11,132 88.5 %
______________
(1)Includes primarily collateralized loan obligations.
(2)Other loans are broadly diversified across several subsectors and issuers, including securities with the following collateral types: digital infrastructure, franchise, equipment, renewable energy and containers.
CMBS
Our CMBS portfolio is comprised primarily of securities collateralized by multiple commercial mortgage loans and is diversified by property type, borrower, geography and vintage year. The following tables present our CMBS portfolio by NRSRO rating and vintage year.
December 31, 2021
Aaa Aa A Baa Below
Investment
Grade Total
Vintage Year Amortized
Cost net of ACL Estimated
Fair
Value Amortized
Cost net of ACL Estimated
Fair
Value Amortized
Cost net of ACL Estimated
Fair
Value Amortized
Cost net of ACL Estimated
Fair
Value Amortized
Cost net of ACL Estimated
Fair
Value Amortized
Cost net of ACL Estimated
Fair
Value
(Dollars in millions)
2003 - 2014 $ 618 $ 641 $ 712 $ 730 $ 391 $ 396 $ 52 $ 50 $ 205 $ 195 $ 1,978 $ 2,012
2015 327 343 39 41 27 28 4 4 - - 397 416
2016 154 163 36 38 13 13 - - - - 203 214
2017 464 481 244 253 123 125 - - - - 831 859
2018 927 1,012 171 177 113 118 10 10 - - 1,221 1,317
2019 460 470 50 50 138 141 - - - - 648 661
2020 435 437 145 145 86 90 - - - - 666 672
2021 322 321 292 290 86 87 29 29 - - 729 727
Total $ 3,707 $ 3,868 $ 1,689 $ 1,724 $ 977 $ 998 $ 95 $ 93 $ 205 $ 195 $ 6,673 $ 6,878
Ratings Distribution 56.2 % 25.1 % 14.5 % 1.4 % 2.8 % 100.0 %
December 31, 2020
Aaa
Aa
A
Baa
Below
Investment
Grade Total
Vintage Year Amortized
Cost net of ACL Estimated
Fair
Value Amortized
Cost net of ACL Estimated
Fair
Value Amortized
Cost net of ACL Estimated
Fair
Value Amortized
Cost net of ACL Estimated
Fair
Value Amortized
Cost net of ACL Estimated
Fair
Value Amortized
Cost net of ACL Estimated
Fair
Value
(Dollars in millions)
2003 - 2014 $ 761 $ 808 $ 906 $ 939 $ 384 $ 375 $ 81 $ 76 $ 110 $ 94 $ 2,242 $ 2,292
2015 325 349 35 38 31 32 3 3 - - 394 422
2016 165 182 26 28 13 13 - - - - 204 223
2017 377 404 317 340 94 95 - - - - 788 839
2018 963 1,070 327 351 130 135 10 9 - - 1,430 1,565
2019 506 525 60 61 133 135 - - - - 699 721
2020 513 525 157 162 76 80 - - - - 746 767
Total
$ 3,610 $ 3,863 $ 1,828 $ 1,919 $ 861 $ 865 $ 94 $ 88 $ 110 $ 94 $ 6,503 $ 6,829
Ratings
Distribution
56.5 % 28.1 % 12.7 % 1.3 % 1.4 % 100.0 %
The tables above reflect NRSRO ratings including Moody’s, S&P, Fitch and DBRS Morningstar. CMBS designated NAIC 1 were 92.3% and 87.1% of total CMBS at December 31, 2021 and 2020, respectively.
Evaluation of Fixed Maturity Securities AFS for Credit Loss, Rollforward of Allowance for Credit Loss and Credit Loss on Fixed Maturity Securities AFS Recognized in Earnings
See Note 7 of the Notes to the Consolidated Financial Statements for information about the evaluation of fixed maturity securities AFS for credit loss, rollforward of the ACL, net credit loss provision (release), impairment loss, as well as realized gross gains and gross losses on fixed maturity securities AFS sold or disposed at and for the years ended December 31, 2021 and 2020.
Securities Lending Transactions and Repurchase Agreements
We participate in securities lending transactions and repurchase agreements with unaffiliated financial institutions in the normal course of business for the purpose of enhancing the total return on our investment portfolio. We account for these arrangements as secured borrowings and record a liability in the amount of the cash received. We obtain collateral, usually cash, from the borrower, which must be returned to the borrower when the securities are returned to us. Through these arrangements, we were liable for cash collateral under our control of $18.3 billion and $16.8 billion at December 31, 2021 and 2020, respectively, including a portion that may require the immediate return of cash collateral we hold. See Notes 1 and 7 of the Notes to the Consolidated Financial Statements for further information about the secured borrowings accounting and the classification of revenues and expenses.
Mortgage Loans
Our mortgage loans are principally collateralized by commercial, agricultural and residential properties. Mortgage loans carried at amortized cost and the related ACL are summarized as follows at:
December 31,
2021 2020
Portfolio Segment Amortized Cost % of
Total ACL ACL as % of
Amortized Cost Amortized Cost % of
Total ACL ACL as % of
Amortized Cost
(Dollars in millions)
Commercial $ 35,772 59.0 % $ 260 0.7 % $ 38,528 57.7 % $ 199 0.5 %
Agricultural 15,450 25.5 79 0.5 % 16,426 24.6 97 0.6 %
Residential 9,406 15.5 197 2.1 % 11,803 17.7 221 1.9 %
Total
$ 60,628 100.0 % $ 536 0.9 % $ 66,757 100.0 % $ 517 0.8 %
The carrying value of all mortgage loans, net of ACL, was 20.5% and 22.2% of cash and invested assets at December 31, 2021 and 2020, respectively.
Our commercial, agricultural and residential mortgage loan portfolios are subject to uncertain market conditions, including the effects of the COVID-19 pandemic. As a result of the COVID-19 pandemic in 2021 and 2020, we granted concessions (e.g., payment deferrals and other loan modifications) to certain of our commercial mortgage loan borrowers (principally in the hotel and retail sectors) and residential mortgage loan borrowers and, to a much lesser extent, some of our agricultural mortgage loan borrowers. While we granted concessions in 2021, both the frequency and number of concessions significantly decreased from 2020. See Note 7 of the Notes to the Consolidated Financial Statements for further information regarding COVID-19 pandemic-related mortgage loan concessions. See also “- Commercial Mortgage Loans by Geographic Region and Property Type.”
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, 87% are collateralized by properties located in the United States, with the remaining 13% collateralized by properties located outside the United States, which includes 5% of properties located in Mexico, at December 31, 2021. The carrying values of our commercial and agricultural mortgage loans located in California, New York and Texas were 17%, 9% and 6%, respectively, of total commercial and agricultural mortgage loans at December 31, 2021. 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.
We manage our residential mortgage loan portfolio in a similar manner to reduce risk of concentration. The carrying values of our residential mortgage loans located in California, Florida, and New York were 32%, 10%, and 10%, respectively, of total residential mortgage loans at December 31, 2021.
Commercial Mortgage Loans by Geographic Region and Property Type. Commercial mortgage loans are the largest mortgage loan portfolio segment. The tables below present the diversification across geographic regions and property types of commercial mortgage loans at:
December 31,
2021 2020
Amount
% of
Total Amount
% of
Total
(Dollars in millions)
Region
Pacific $ 6,996 19.5 % $ 7,946 20.6 %
Non-U.S. 5,500 15.4 5,927 15.4
Middle Atlantic 5,450 15.2 6,075 15.8
South Atlantic 5,146 14.4 5,673 14.7
West South Central 2,563 7.2 3,033 7.9
New England 1,727 4.8 1,335 3.5
East North Central 1,491 4.2 1,851 4.8
Mountain 1,171 3.3 1,154 3.0
West North Central 604 1.7 583 1.5
East South Central 552 1.5 475 1.2
Multi-Region and Other 4,572 12.8 4,476 11.6
Total amortized cost 35,772 100.0 % 38,528 100.0 %
Less: ACL 260 199
Carrying value, net of ACL $ 35,512 $ 38,329
Property Type
Office $ 15,477 43.3 % $ 17,388 45.1 %
Apartment 6,441 18.0 6,103 15.8
Retail 5,725 16.0 5,917 15.4
Industrial 3,735 10.4 4,382 11.4
Hotel 2,421 6.8 2,681 7.0
Other 1,973 5.5 2,057 5.3
Total amortized cost 35,772 100.0 % 38,528 100.0 %
Less: ACL 260 199
Carrying value, net of ACL $ 35,512 $ 38,329
__________________
Our commercial mortgage loan portfolio is well positioned with exposures concentrated in high quality underlying properties located in primary markets typically with institutional investors who are better positioned to manage their assets during periods of market volatility. Our portfolio is comprised primarily of lower risk loans with higher debt-service coverage ratios (“DSCR”) and lower loan-to-value (“LTV”) ratios. See “- Mortgage Loan Credit Quality - Monitoring Process” for further information and Note 7 of the Notes to the Consolidated Financial Statements for a distribution of our commercial mortgage loans by DSCR and LTV ratios. Excluding loans with a COVID-19 pandemic-related payment deferral, 100% of our commercial mortgage loan portfolio, including our hotel and retail commercial mortgage loans, were current at December 31, 2021. See Note 7 of the Notes to the Consolidated Financial Statements for further information regarding COVID-19 pandemic-related mortgage loan concessions.
Mortgage Loan Credit Quality - Monitoring Process. We monitor our mortgage loan investments on an ongoing basis, including a review of loans by credit quality indicator and loans that are current, past due, restructured and under foreclosure. See Note 7 of the Notes to the Consolidated Financial Statements for further information regarding mortgage loans by credit quality indicator, past due and nonaccrual mortgage loans.
We review our commercial mortgage loans on an ongoing basis. These reviews may include an analysis of the property financial statements and rent roll, lease rollover analysis, property inspections, market analysis, estimated valuations of the underlying collateral, LTV ratios, DSCR and tenant creditworthiness. The monitoring process focuses on higher risk loans, which include those that are classified as restructured, delinquent or in foreclosure, as well as loans with higher LTV ratios and lower DSCR and loans with a COVID-19 pandemic-related payment deferral. The monitoring process for agricultural mortgage loans is generally similar, with a focus on higher risk loans, such as loans with higher LTV ratios. Agricultural mortgage loans are reviewed on an ongoing basis which include, but are not limited to, property inspections, market analysis, estimated valuations of the underlying collateral, LTV ratios and borrower creditworthiness, including reviews on a geographic and property-type basis. We review our residential mortgage loans on an ongoing basis, with a focus on higher risk loans, such as nonperforming loans. See Note 7 of the Notes to the Consolidated Financial Statements for information on our evaluation of residential mortgage loans and related ACL methodology.
LTV ratios and DSCR are common measures in the assessment of the quality of commercial mortgage loans. LTV ratios are a common measure in the assessment of the quality of agricultural mortgage loans. LTV ratios compare the amount of the loan to the estimated fair value of the underlying collateral. An LTV ratio greater than 100% indicates that the loan amount is greater than the collateral value. An LTV ratio of less than 100% indicates an excess of collateral value over the loan amount. Generally, the higher the LTV ratio, the higher the risk of experiencing a credit loss. The DSCR compares a property’s net operating income to amounts needed to service the principal and interest due under the loan. Generally, the lower the DSCR, the higher the risk of experiencing a credit loss. For our commercial mortgage loans, our average LTV ratio was 56% and 58% at December 31, 2021 and 2020 respectively, and our average DSCR was 2.4x at both December 31, 2021 and 2020. The DSCR and the values utilized in calculating the ratio, are updated routinely. In addition, the LTV 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 LTV ratio was 48% and 47% at December 31, 2021 and 2020, respectively. The values utilized in calculating our agricultural mortgage loan LTV ratio are developed in connection with the ongoing review of our agricultural loan portfolio and are routinely updated.
Mortgage Loan Allowance for Credit Loss. Our ACL is established for both pools of loans with similar risk characteristics and for mortgage loans with dissimilar risk characteristics, collateral dependent loans and reasonably expected troubled debt restructurings, individually on a loan specific basis. We record an allowance for expected lifetime credit loss in earnings within net investment gains (losses) in an amount that represents the portion of the amortized cost basis of mortgage loans that the Company does not expect to collect, resulting in mortgage loans being presented at the net amount expected to be collected.
In determining our ACL, management (i) pools mortgage loans that share similar risk characteristics, (ii) considers expected lifetime credit loss over the contractual term of our mortgage loans, as adjusted for expected prepayments and any extensions, and (iii) considers past events and current and forecasted economic conditions. Actual credit loss realized could be different from the amount of the ACL recorded. These evaluations and assessments are revised as conditions change and new information becomes available, which can cause the ACL to increase or decrease over time as such evaluations are revised. Negative credit migration, including an actual or expected increase in the level of problem loans, will result in an increase in the ACL. Positive credit migration, including an actual or expected decrease in the level of problem loans, will result in a decrease in the ACL. See Notes 1 and 7 of the Notes to the Consolidated Financial Statements for information on how the ACL is established and monitored, and activity in and balances of the ACL.
Real Estate and Real Estate Joint Ventures
Real estate and real estate joint ventures is comprised of wholly-owned real estate and joint ventures with interests in single property income-producing real estate and, to a lesser extent, joint ventures with interests in multi-property projects with varying strategies ranging from the development of properties to the operation of income-producing properties, as well as real estate funds. The carrying value of real estate and real estate joint ventures was $7.9 billion and $7.5 billion, or 2.7% and 2.5% of cash and invested assets, at December 31, 2021 and 2020, respectively.
Our real estate investments are typically stabilized properties that we intend to hold for the longer-term for portfolio diversification and long-term appreciation. Our real estate investment portfolio has significantly appreciated to a $4.9 billion and $4.5 billion unrealized gain position at December 31, 2021 and 2020, respectively. We continuously monitor expected future cash flows of each of our real estate investments and incorporate them into our periodic impairment analyses. As a result of the COVID-19 pandemic, we performed impairment analyses during the years ended December 31, 2021 and 2020, which included updated estimates of expected future cash flows. As a result of our impairment analyses, we recognized in earnings one impairment during the year ended December 31, 2020 for $13 million. This impairment was recorded in net investment income as the investment is in a real estate fund. There were no impairments recognized in earnings within net investment gains (losses) on real estate and real estate joint ventures for either the year ended December 31, 2021 or 2020.
We diversify our real estate investments by both geographic region and property type to reduce risk of concentration. See Note 7 of the Notes to the Consolidated Financial Statements for a summary of real estate investments, by income type, as well as income earned.
Geographical diversification: Our wholly-owned real estate and real estate joint ventures represented 69% of our total real estate investments, while real estate funds represented 31% of our total real estate investments at December 31, 2021, at carrying value. Within our wholly-owned real estate and real estate joint ventures portfolios, substantially all of our properties were located in the United States, at December 31, 2021, at carrying value. Within our wholly-owned real estate and real estate joint ventures portfolios, the portion of the properties located in Washington, D.C., California and Massachusetts were 14%, 14% and 13%, respectively, at December 31, 2021, at carrying value.
Property type diversification: Real estate and real estate joint venture investments are categorized by property type as follows at:
December 31,
2021 2020
Property Type Carrying
Value % of
Total Carrying
Value % of
Total
(Dollars in millions)
Office $ 2,583 32.8 % $ 2,249 30.1 %
Real estate funds 2,400 30.5 2,154 28.8
Apartment 1,020 13.0 965 12.9
Hotel 581 7.4 501 6.6
Retail 530 6.7 625 8.4
Land 396 5.0 312 4.2
Industrial 336 4.3 371 5.0
Agriculture 18 0.2 20 0.3
Other 9 0.1 281 3.7
Total real estate and real estate joint ventures $ 7,873 100.0 % $ 7,478 100.0 %
Other Limited Partnership Interests
Other limited partnership interests are comprised of investments in private funds, including private equity funds and hedge funds. At December 31, 2021 and 2020, the carrying value of other limited partnership interests was $8.8 billion and $5.8 billion, which included $350 million and $271 million of hedge funds, respectively. Other limited partnership interests were 3.0% and 1.9% of cash and invested assets at December 31, 2021 and 2020, respectively. Cash distributions on these investments are generated from investment gains, operating income from the underlying investments of the funds and liquidation of the underlying investments of the funds.
We use the equity method of accounting for most of our private equity funds. We generally recognize our share of a private equity fund’s earnings in net investment income on a three-month lag when the information is reported to us. Accordingly, changes in equity market levels, which can impact the underlying results of these private equity funds, are recognized in earnings within net investment income on a three-month lag.
Other Invested Assets
The following table presents the carrying value of our other invested assets by type at:
December 31,
2021 2020
Carrying Value % of Total Carrying Value % of Total
Asset Type
(Dollars in millions)
Freestanding derivatives with positive estimated fair values $ 8,618 43.4 % $ 9,318 52.6 %
Funds withheld 3,390 17.1 % 191 1.1 %
Tax credit and renewable energy partnerships 1,554 7.8 % 1,748 9.9 %
Affiliated investments 1,499 7.5 % 2,058 11.6 %
Annuities funding structured settlement claims 1,251 6.3 % 1,263 7.1 %
FVO Securities 848 4.3 % 688 3.9 %
Leveraged leases 787 4.0 % 816 4.6 %
FHLB common stock 718 3.6 % 765 4.3 %
Operating joint venture 411 2.1 % 216 1.2 %
Equity securities 226 1.1 % 409 2.3 %
Direct financing leases 137 0.7 % 176 1.0 %
Other 421 2.1 % 75 0.4 %
Total $ 19,860 100.0 % $ 17,723 100.0 %
Percentage of cash and invested assets 6.8 % 5.9 %
See Notes 1, 5, 7 and 8 of the Notes to the Consolidated Financial Statements for information regarding freestanding derivatives with positive estimated fair values, funds withheld, which is comprised primarily of affiliated funds withheld, tax credit and renewable energy partnerships, affiliated investments, annuities funding structured settlement claims, FVO Securities, leveraged and direct financing leases, Federal Home Loan Bank (“FHLB”) common stock, our operating joint venture, and equity securities, as well as gains on disposals of, and impairments losses on, tax credit and renewable energy partnerships and leveraged leases.
Investment Commitments
We enter into the following commitments in the normal course of business for the purpose of enhancing the total return on our investment portfolio: mortgage loan commitments and commitments to fund partnerships, bank credit facilities, bridge loans and private corporate bond investments. See Note 16 of the Notes to the Consolidated Financial Statements for the amount of our unfunded investment commitments at December 31, 2021 and 2020. See “Net Investment Income” and “Net Investment Gains (Losses)” in Note 7 of the Notes to the Consolidated Financial Statements for information on the investment income, investment expense, gains and losses from such investments and the liability for credit loss for unfunded mortgage loan commitments. See also “- Fixed Maturity Securities AFS,” “- Mortgage Loans,” “- Real Estate and Real Estate Joint Ventures” and “- Other Limited Partnership Interests.”
Derivatives
Overview
We are exposed to various risks relating to our ongoing business operations, including interest rate, foreign currency exchange rate, credit and equity market. We use a variety of strategies to manage these risks, including the use of derivatives, such as market standard purchased and written credit default swap contracts. See Note 8 of the Notes to the Consolidated Financial Statements for:
•A comprehensive description of the nature of our derivatives, including the strategies for which derivatives are used in managing various risks.
•Information about the primary underlying risk exposure, gross notional amount, and estimated fair value of our derivatives by type of hedge designation, excluding embedded derivatives held at December 31, 2021 and 2020.
•The statement of operations effects of derivatives in cash flow, fair value, or nonqualifying hedge relationships for the years ended December 31, 2021, 2020 and 2019.
We enter into market standard purchased and written credit default swap contracts. Payout under such contracts is triggered by certain credit events experienced by the referenced entities. For credit default swaps covering North American corporate issuers, credit events typically include bankruptcy and failure to pay on borrowed money. For European corporate issuers, credit events typically also include involuntary restructuring. With respect to credit default contracts on sovereign debt, credit events typically include failure to pay debt obligations, repudiation, moratorium, or involuntary restructuring. In each case, payout on a credit default swap is triggered only after the relevant third party, Credit Derivatives Determinations Committee, determines that a credit event has occurred.
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.
See “Quantitative and Qualitative Disclosures About Market Risk - Management of Market Risk Exposures - Hedging Activities” for more information about our use of derivatives by major hedge program.
Fair Value Hierarchy
See Note 9 of the Notes to the Consolidated Financial Statements for derivatives measured at estimated fair value on a recurring basis and their corresponding fair value hierarchy.
The valuation of Level 3 derivatives involves the use of significant unobservable inputs and generally requires a higher degree of management judgment or estimation than the valuations of Level 1 and Level 2 derivatives. Although Level 3 inputs are unobservable, management believes they are consistent with what other market participants would use when pricing such instruments and are considered appropriate given the circumstances. The use of different inputs or methodologies could have a material effect on the estimated fair value of Level 3 derivatives and could materially affect net income.
Derivatives categorized as Level 3 at December 31, 2021 include: interest rate forwards with maturities which extend beyond the observable portion of the yield curve and credit default swaps priced using unobservable credit spreads, or that are priced through independent broker quotations. At December 31, 2021, less than 1% of the estimated fair value of our derivatives was priced through independent broker quotations.
See Note 9 of the Notes to the Consolidated Financial Statements for a rollforward of the fair value measurements for derivatives measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs.
See “- Summary of Critical Accounting Estimates - Derivatives” for further information on the estimates and assumptions that affect derivatives.
Credit Risk
See Note 8 of the Notes to the Consolidated Financial Statements for information about how we manage credit risk related to derivatives and for the estimated fair value of our net derivative assets and net derivative liabilities after the application of master netting agreements and collateral.
Our policy is not to offset the fair value amounts recognized for derivatives executed with the same counterparty under the same master netting agreement. This policy applies to the recognition of derivatives on the consolidated balance sheets, and does not affect our legal right of offset.
Credit Derivatives
The following table presents the gross notional amount and estimated fair value of credit default swaps at:
December 31,
2021 2020
Credit Default Swaps Gross
Notional
Amount Estimated
Fair Value Gross
Notional
Amount Estimated
Fair Value
(In millions)
Purchased $ 956 $ 4 $ 886 $ (1)
Written 6,074 99 6,961 126
Total $ 7,030 $ 103 $ 7,847 $ 125
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The following table presents the gross gains, gross losses and net gains (losses) recognized in net derivative gains (losses) for credit default swaps as follows:
Years Ended December 31,
2021 2020
Credit Default Swaps Gross
Gains Gross
Losses Net
Gains
(Losses) Gross
Gains Gross
Losses Net
Gains
(Losses)
(In millions)
Purchased (1) $ 8 $ (6) $ 2 $ 28 $ (34) $ (6)
Written (1) 34 (11) 23 31 (109) (78)
Total $ 42 $ (17) $ 25 $ 59 $ (143) $ (84)
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(1)Gains (losses) do not include earned income (expense) on credit default swaps.
The favorable change in net gains (losses) on written credit default swaps was $101 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020 due to certain credit spreads on certain credit default swaps used as replications narrowing in the current period and widening in the prior period.
The maximum amount at risk related to our written credit default swaps is equal to the corresponding gross notional amount. In a replication transaction, we pair an asset on our balance sheet with a written credit default swap to synthetically replicate a corporate bond, a core asset holding of life insurance companies. Replications are entered into in accordance with the guidelines approved by state insurance regulators and the NAIC and are an important tool in managing the overall corporate credit risk within the Company. In order to match our long-dated insurance liabilities, we seek to buy long-dated corporate bonds. In some instances, these may not be readily available in the market, or they may be issued by corporations to which we already have significant corporate credit exposure. For example, by purchasing Treasury bonds (or other high quality assets) and associating them with written credit default swaps on the desired corporate credit name, we can replicate the desired bond exposures and meet our ALM needs. In addition, given the shorter tenor of the credit default swaps (generally five-year tenors) versus a long-dated corporate bond, we have more flexibility in managing our credit exposures.
Collateral for Derivatives
We enter into derivatives to manage various risks relating to our ongoing business operations. We receive non-cash collateral from counterparties for derivatives, which can be sold or re-pledged subject to certain constraints, and which is not reflected on our consolidated balance sheets. The amounts of this non-cash collateral were $814 million and $1.3 billion at estimated fair value, at December 31, 2021 and 2020, respectively. See “- Liquidity and Capital Resources - Liquidity and Capital Uses - Pledged Collateral” and Note 8 of the Notes to the Consolidated Financial Statements for information regarding the earned income on and the gross notional amount, estimated fair value of assets and liabilities and primary underlying risk exposure of our derivatives.
Embedded Derivatives
See Note 9 of the Notes to the Consolidated Financial Statements for information about embedded derivatives measured at estimated fair value on a recurring basis and their corresponding fair value hierarchy and a rollforward of the fair value measurements for embedded derivatives measured at estimated fair value on a recurring basis using significant unobservable (Level 3) inputs.
See Note 8 of the Notes to the Consolidated Financial Statements for information about the nonperformance risk adjustment included in the valuation of guaranteed minimum benefits accounted for as embedded derivatives.
See “- Summary of Critical Accounting Estimates - Derivatives” for further information on the estimates and assumptions that affect embedded derivatives.
Liquidity and Capital Resources
Overview
Our business and results of operations are materially affected by conditions in the global capital markets and the economy generally due to our large investment portfolio and the sensitivity of our insurance liabilities and derivatives to changing market factors. Changing conditions in the global capital markets and the economy may affect our financing costs and market interest for our debt securities. For further information regarding market factors that could affect our ability to meet liquidity and capital needs, see “- Investments - Current Environment.”
Liquidity Management
Based upon the strength of our franchise, diversification of our businesses, strong financial fundamentals and the substantial funding sources available to us as described herein, we continue to believe we have access to ample liquidity to meet business requirements under current market conditions and reasonably possible stress scenarios. We continuously monitor and adjust our liquidity and capital plans for Metropolitan Life Insurance Company and its subsidiaries in light of market conditions, as well as changing needs and opportunities.
Short-term Liquidity
We maintain a substantial short-term liquidity position, which was $1.8 billion and $2.2 billion at December 31, 2021 and 2020, 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.
Liquid Assets
An integral part of our liquidity management includes managing our level of liquid assets, which was $87.6 billion and $91.3 billion at December 31, 2021 and 2020, 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, funding agreements and secured borrowings, as well as amounts held in the closed block.
Liquidity
Liquidity refers to the ability to generate adequate amounts of cash to meet our needs. We determine our liquidity needs based on a rolling 12-month forecast by portfolio of invested assets which we monitor daily. We adjust the asset mix and asset maturities based on this rolling 12-month forecast. To support this forecast, we conduct cash flow and stress testing, which include various scenarios of the potential risk of early contractholder and policyholder withdrawal. We include provisions limiting withdrawal rights on many of our products, including general account pension products sold to employee benefit plan sponsors. Certain of these provisions prevent the customer from making withdrawals prior to the maturity date of the product. In the event of significant cash requirements beyond anticipated liquidity needs, we have various alternatives available depending on market conditions and the amount and timing of the liquidity need. These available alternatives include cash flows from operations, sales of liquid assets and global funding sources, including commercial paper and the Credit Facility.
Under certain stressful market and economic conditions, our access to liquidity may deteriorate, or the cost to access liquidity may increase. A downgrade in our insurer financial strength or credit ratings, or the credit ratings or insurer financial strength ratings of MetLife, Inc. or its other subsidiaries could also negatively affect our liquidity. See “- Rating Agencies.” If we require significant amounts of cash on short notice in excess of anticipated cash requirements or if we are required to post or return cash collateral in connection with derivatives or our securities lending program, we may have difficulty selling investments in a timely manner, be forced to sell them for less than we otherwise would have been able to realize, or both. In addition, in the event of such forced sale, for securities in an unrealized loss position, realized losses would be incurred on securities sold and impairments would be incurred, if there is a need to sell securities prior to recovery, which may negatively impact our financial condition. See “Risk Factors - Investment Risks - We May Have Difficulty Selling Holdings in Our Investment Portfolio or in Our Securities Lending Program in a Timely Manner to Realize Their Full Value.”
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.
Capital
We manage our capital position to maintain our financial strength and credit ratings. See “- Rating Agencies” for information regarding such ratings. Our capital position is supported by our ability to generate strong cash flows within our operating companies and borrow funds at competitive rates, as well as by our demonstrated ability to raise additional capital to meet operating and growth needs despite adverse market and economic conditions.
Statutory Capital and Dividends
Metropolitan Life Insurance Company has statutory surplus well above levels to meet current regulatory requirements.
RBC requirements are used as minimum capital requirements by the NAIC and the state insurance departments to identify companies that merit regulatory action. RBC is based on a formula calculated by applying factors to various asset, premium, claim, expense and statutory reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk, market risk and business risk and is calculated on an annual basis. The formula is used as an early warning regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. These rules apply to Metropolitan Life Insurance Company. State insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not meet or exceed certain RBC levels. As of the date of the most recent annual statutory financial statement filed with insurance regulators, the total adjusted capital of Metropolitan Life Insurance Company was in excess of each of those RBC levels.
The amount of dividends that Metropolitan Life Insurance Company can pay to MetLife, Inc. is constrained by the amount of surplus Metropolitan Life Insurance Company holds to maintain its ratings and provides an additional margin for risk protection and investment in its businesses. We proactively take actions to maintain capital consistent with these ratings objectives, which may include adjusting dividend amounts and deploying financial resources from internal or external sources of capital. Certain of these activities may require regulatory approval. Furthermore, the payment of dividends and other distributions to MetLife, Inc. by Metropolitan Life Insurance Company is governed by insurance laws and regulations. See “Business - Regulation - Insurance Regulation” and Note 12 of the Notes to the Consolidated Financial Statements.
Affiliated Captive Reinsurance Transactions
Metropolitan Life Insurance Company cedes specific policy classes, including ordinary life insurance, participating whole life insurance and long-term disability insurance, to a wholly-owned subsidiary, Missouri Reinsurance, Inc.(“MoRe”). The results of these transactions are eliminated within our consolidated results of operations. MetLife, Inc. has also provided a guarantee of MoRe’s payment obligations in a retrocession agreement entered into by MoRe. In addition, Metropolitan Life Insurance Company cedes specific policy classes, including term life insurance, universal life insurance and ordinary and industrial life insurance, to other affiliated captive reinsurers. MetLife, Inc. has committed to maintain the surplus of the other affiliated captive reinsurers, as well as provide a guarantee of one such captive reinsurer’s repayment obligations on letters of credit issued by unaffiliated financial institutions. The statutory reserves of such affiliated captive reinsurers are supported by a combination of funds withheld assets, investment assets and the letters of credit. We enter 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 NYDFS continues to have a moratorium on new reserve financing transactions involving captive insurers. We are not aware of any states other than New York implementing such a moratorium. While such a moratorium would not impact our existing reinsurance agreements with affiliated captive reinsurers, a moratorium placed on the use of captives for new reserve financing transactions could impact our ability to write certain products and/or impact our RBC ratio and ability to deploy excess capital in the future. This could result in our need to increase prices, modify product features or limit the availability of those products to our customers. While this affects insurers across the industry, it could adversely impact our competitive position and our results of operations in the future. We continue to evaluate product modifications, pricing structure and alternative means of managing risks, capital and statutory reserves and we expect the discontinued use of captive reinsurance on new reserve financing transactions would not have a material impact on our future consolidated financial results. See Note 5 of the Notes to the Consolidated Financial Statements for further information on our reinsurance activities.
Rating Agencies
Rating agencies assign insurer financial strength and credit ratings to Metropolitan Life Insurance Company and MetLife, Inc.’s other insurance subsidiaries, as well as credit ratings to MetLife, Inc. 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. Insurer financial strength ratings are not statements of fact nor are they recommendations to purchase, hold or sell any security, contract or policy. Each rating should be evaluated independently of any other rating.
Rating agencies use an “outlook statement” of “positive,” “stable,” ‘‘negative’’ or “developing” to indicate a medium- or long-term trend in credit fundamentals which, if continued, may lead to a rating change. A rating may have a “stable” outlook to indicate that the rating is not expected to change; however, a “stable” rating does not preclude a rating agency from changing a rating at any time, without notice. Certain rating agencies assign rating modifiers such as “CreditWatch” or “under review” to indicate their opinion regarding the potential direction of a rating. These ratings modifiers are generally assigned in connection with certain events such as potential mergers, acquisitions, dispositions or material changes in a company’s results, in order for the rating agency to perform its analysis to fully determine the rating implications of the event.
Our insurer financial strength ratings at the date of this filing are indicated in the following table. Outlook is stable unless otherwise indicated. Additional information about financial strength ratings can be found on the websites of the respective rating agencies.
A.M. Best Fitch Moody’s S&P
Ratings Structure “A++ (Superior)” to “S (Suspended)” “AAA (Exceptionally Strong)” to “C (Distressed)” “Aaa (Highest Quality)” to “C (Lowest Rated)” “AAA (Extremely Strong)” to “SD (Selective Default)” or “D (Default)”
Metropolitan Life Insurance Company A+ AA- Aa3 AA-
2nd of 16 4th of 19 4th of 21 4th of 21
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 of Metropolitan Life Insurance Company 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 change the capital and other requirements employed in the rating agency models for maintenance of certain ratings levels.
A downgrade in our insurer financial strength or credit ratings, or the credit ratings or insurer financial strength ratings of MetLife, Inc. or its other subsidiaries would likely impact us in the following ways, including:
•impact our ability to generate cash flows from the sale of funding agreements and other capital market products offered by our RIS business;
•impact the cost and availability of financing for MetLife, Inc. and its subsidiaries, including Metropolitan Life Insurance Company; and
•result in additional collateral requirements or other required payments under certain agreements, which are eligible to be satisfied in cash or by posting investments held by the entities subject to the agreements. See “- Liquidity and Capital Uses - Pledged Collateral.”
See also “Risk Factors - Economic Environment and Capital Markets Risks - We May Lose Business Due to a Downgrade or a Potential Downgrade in Financial Strength or Credit Ratings.”
Summary of Primary Sources and Uses of Liquidity and Capital
Our primary sources and uses of liquidity and capital are summarized as follows:
Years Ended December 31,
2021 2020
(In millions)
Sources:
Operating activities, net $ 3,257 $ 2,937
Net change in policyholder account balances - 2,791
Net change in payables for collateral under securities loaned and other transactions 1,744 2,757
Long-term debt issued 35 128
Financing element on certain derivative instruments and other derivative related transactions, net 173 -
Effect of change in foreign currency exchange rates on cash and cash equivalents balances - 4
Total sources 5,209 8,617
Uses:
Investing activities, net 875 3,235
Net change in policyholder account balances 2,249 -
Long-term debt repaid 26 97
Financing element on certain derivative instruments and other derivative related transactions, net - 40
Dividends paid to MetLife, Inc. 3,393 2,832
Other, net 42 3
Effect of change in foreign currency exchange rates on cash and cash equivalents balances 4 -
Total uses 6,589 6,207
Net increase (decrease) in cash and cash equivalents $ (1,380) $ 2,410
Cash Flows from Operations
The principal cash inflows from our insurance activities come from insurance premiums, net investment income, annuity considerations and deposit funds. The principal cash outflows are the result of various life insurance, annuity and pension products, operating expenses and income tax, as well as interest expense.
Cash Flows from Investments
The principal cash inflows from our investment activities come from repayments of principal, proceeds from maturities and sales of investments and settlements of freestanding derivatives. The principal cash outflows relate to purchases of investments, issuances of policy loans and settlements of freestanding derivatives. We typically have a net cash outflow from investing activities because cash inflows from insurance operations are reinvested in accordance with our ALM discipline to fund insurance liabilities. We closely monitor and manage these risks through our comprehensive investment risk management process.
Cash Flows from Financing
The principal cash inflows from our financing activities come from issuances of debt, deposits of funds associated with policyholder account balances and lending of securities. The principal cash outflows come from repayments of debt, payments of dividends on Metropolitan Life Insurance Company’s common stock, withdrawals associated with policyholder account balances and the return of securities on loan.
Liquidity and Capital Sources
In addition to the general description of liquidity and capital sources in “- Summary of Primary Sources and Uses of Liquidity and Capital,” the Company’s primary sources of liquidity and capital are set forth below.
Global Funding Sources
Liquidity is provided by a variety of global funding sources, including funding agreements, the Credit Facility and commercial paper. Capital is provided by a variety of global funding sources, including short-term and long-term debt. The diversity of our global funding sources enhances our funding flexibility, limits dependence on any one market or source of funds and generally lowers the cost of funds. Our primary global funding sources include:
Commercial Paper, Reported in Short-term Debt
MetLife Funding and MetLife, Inc. each have a commercial paper program that is supported by the Credit Facility (see “- Credit Facility”). MetLife Funding raises cash from its commercial paper program and uses the proceeds to extend loans through MetLife Credit Corp., another subsidiary of Metropolitan Life Insurance Company, to affiliates in order to enhance the financial flexibility and liquidity of these companies.
Policyholder Account Balances
See Notes 1 and 3 of the Notes to the Consolidated Financial Statements for a description of the components of policyholder account balances. See “- Liquidity and Capital Uses - Insurance Liabilities” regarding the source and uncertainties associated with the estimation of the contractual obligations related to future policy benefits and policyholder account balances.
The sum of the estimated cash flows of $98.6 billion ($24.7 billion of which are estimated to occur in one year or less) exceeds the liability amount of $94.5 billion included on the consolidated balance sheet principally due to (i) the time value of money, which accounts for a substantial portion of the difference; (ii) differences in assumptions, between the date the liabilities were initially established and the current date; and (iii) liabilities related to accounting conventions, or which are not contractually due, which are excluded.
The estimated cash flows represent cash payments undiscounted as to interest and including assumptions related to the receipt of future premiums and deposits; withdrawals, including unscheduled or partial withdrawals; policy lapses; surrender charges; annuitization; mortality; future interest credited; policy loans and other contingent events as appropriate for the respective product type. Such estimated cash payments are also presented net of estimated future premiums on policies currently in-force and gross of any reinsurance recoverable. For obligations denominated in foreign currencies, cash payments have been estimated using current spot foreign currency rates.
Federal Home Loan Bank Funding Agreements, Reported in Policyholder Account Balances
Metropolitan Life Insurance Company is a member of the FHLB of New York. For the years ended December 31, 2021 and 2020, we issued $31.7 billion and $32.3 billion, respectively, and repaid $32.2 billion and $31.5 billion, respectively, of funding agreements with the FHLB of New York. At December 31, 2021 and 2020, total obligations outstanding under these funding agreements were $14.7 billion and $15.2 billion, respectively. See Note 3 of the Notes to the Consolidated Financial Statements.
Special Purpose Entity Funding Agreements, Reported in Policyholder Account Balances
We issue fixed and floating rate funding agreements which are denominated in either U.S. dollars or foreign currencies, to certain unconsolidated special purpose entities that have issued either debt securities or commercial paper for which payment of interest and principal is secured by such funding agreements. For the years ended December 31, 2021 and 2020, we issued $39.5 billion and $39.3 billion, respectively, and repaid $41.2 billion and $36.7 billion, respectively, under such funding agreements. At December 31, 2021 and 2020, total obligations outstanding under these funding agreements were $37.2 billion and $38.8 billion, respectively. See Note 3 of the Notes to the Consolidated Financial Statements.
Federal Agricultural Mortgage Corporation Funding Agreements, Reported in Policyholder Account Balances
We have issued funding agreements to a subsidiary of Federal Agricultural Mortgage Corporation. The obligations under all such funding agreements are secured by a pledge of certain eligible agricultural mortgage loans. For the years ended December 31, 2021 and 2020, we issued $425 million and $250 million, respectively, and repaid $750 million and $425 million, respectively, under such funding agreements. At December 31, 2021 and 2020, total obligations outstanding under these funding agreements were $2.1 billion and $2.4 billion, respectively. See Note 3 of the Notes to the Consolidated Financial Statements.
Credit Facility
See Note 11 of the Notes to the Consolidated Financial Statements for information on the Credit Facility.
We have no reason to believe that our lending counterparties will be unable to fulfill their respective contractual obligations under this facility. As commitments under the Credit Facility may expire unused, these amounts do not necessarily reflect our actual future cash funding requirements.
Outstanding Debt Under Global Funding Sources
The following table summarizes our outstanding debt excluding long-term debt relating to CSEs at:
December 31,
2021 2020
(In millions)
Short-term debt (1) $ 100 $ 120
Long-term debt (2) $ 1,659 $ 1,614
______________
(1)Includes $0 and $20 million of debt that is non-recourse to the Company, subject to customary exceptions, at December 31, 2021 and 2020, respectively. Certain investment subsidiaries have pledged assets to secure this debt.
(2)Includes $482 million and $474 million of debt that is non-recourse to the Company, subject to customary exceptions, at December 31, 2021 and 2020, respectively. Certain investment subsidiaries have pledged assets to secure this debt.
Debt and Facility Covenants
Certain of our debt instruments and the Credit Facility contain various administrative, reporting, legal and financial covenants. We believe we were in compliance with all applicable financial covenants at December 31, 2021.
Liquidity and Capital Uses
In addition to the general description of liquidity and capital uses in “- Summary of Primary Sources and Uses of Liquidity and Capital,” the Company’s primary uses of liquidity and capital are set forth below.
Dividends
For the years ended December 31, 2021 and 2020, Metropolitan Life Insurance Company paid cash dividends to MetLife, Inc. of $3.4 billion and $2.8 billion, respectively. See Note 12 of the Notes to the Consolidated Financial Statements.
Debt Repayments
See Note 11 of the Notes to the Consolidated Financial Statements for information on long-term and short-term debt.
Support Agreements
Metropolitan Life Insurance Company is a party to a capital support commitment with its subsidiary, MetLife Funding. Under the arrangement, Metropolitan Life Insurance Company has agreed to cause such entity to meet specified capital requirements. We anticipate that in the event this arrangement places demands upon us, there will be sufficient liquidity and capital to enable us to meet such demands.
Insurance Liabilities
Insurance liabilities include future policy benefits, other policy-related balances, policyholder dividends payable and the policyholder dividend obligation, which are all reported on the consolidated balance sheet and are more fully described in Notes 1 and 3 of the Notes to the Consolidated Financial Statements. The sum of the estimated cash flows of $253.5 billion ($12.4 billion of which are estimated to occur in one year or less) exceeds the liability amounts of $142.4 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.
The estimated cash flows reflect future estimated cash payments and (i) are based on mortality, morbidity, lapse and other assumptions comparable with our experience and expectations of future payment patterns; and (ii) consider future premium receipts on current policies in-force. Estimated cash payments are undiscounted as to interest, net of estimated future premiums on in-force policies and gross of any reinsurance recoverable. Payment of amounts related to policyholder dividends left on deposit are projected based on assumptions of policyholder withdrawal activity.
Actual cash payments may differ significantly from the liabilities as presented on the consolidated balance sheet and the estimated cash payments due to differences between actual experience and the assumptions used in the establishment of these liabilities and the estimation of these cash payments.
For the majority of our insurance operations, estimated contractual obligations for future policy benefits and policyholder account balances are derived from the annual asset adequacy analysis used to develop actuarial opinions of statutory reserve adequacy for state regulatory purposes. These cash flows are materially representative of the cash flows under GAAP. See “- Liquidity and Capital Sources - Global Funding Sources - Policyholder Account Balances.”
Liabilities arising from our insurance activities primarily relate to benefit payments under various life insurance, annuity and group pension products, as well as payments for policy surrenders, withdrawals and loans. For annuity or deposit type products, surrender or lapse behavior differs somewhat by segment. In the MetLife Holdings segment, which includes individual annuities, lapses and surrenders tend to occur in the normal course of business. For both years ended December 31, 2021 and 2020, general account surrenders and withdrawals from annuity products were $1.3 billion. In the RIS business within the U.S. segment, which includes pension risk transfers, bank-owned life insurance and other fixed annuity contracts, as well as funding agreements and other capital market products, most of the products offered have fixed maturities or fairly predictable surrenders or withdrawals. With regard to the RIS business products that provide customers with limited rights to accelerate payments, at December 31, 2021, there were funding agreements totaling $113 million that could be put back to the Company.
Pledged Collateral
We pledge collateral to, and have collateral pledged to us by, counterparties in connection with our derivatives. At December 31, 2021 and 2020, we had received pledged cash collateral from counterparties of $6.6 billion and $6.3 billion, respectively, and provided no cash collateral for either period. See Note 8 of the Notes to the Consolidated Financial Statements.
We also pledge collateral from time to time in connection with funding agreements. See Note 3 of the Notes to the Consolidated Financial Statements.
Securities Lending Transactions and Repurchase Agreements
See “- Investments - Securities Lending Transactions and Repurchase Agreements.”
Litigation
We establish liabilities for litigation and regulatory loss contingencies when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. For material matters where a loss is believed to be reasonably possible but not probable, no accrual is made but we disclose the nature of the contingency and an aggregate estimate of the reasonably possible range of loss in excess of amounts accrued, when such an estimate can be made. It is not possible to predict the ultimate outcome of all pending investigations and legal proceedings. In some of the matters referred to herein, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on our consolidated net income or cash flows in particular quarterly or annual periods. See Note 16 of the Notes to the Consolidated Financial Statements.
Adopted Accounting Pronouncements
See Note 1 of the Notes to the Consolidated Financial Statements.
Future Adoption of Accounting Pronouncements
See Note 1 of the Notes to the Consolidated Financial Statements.
Non-GAAP and Other Financial Disclosures
In this report, the Company presents certain measures of its performance that are not calculated in accordance with GAAP. We believe that these non-GAAP financial measures enhance the understanding for the Company and our investors of our performance by highlighting the results of operations and the underlying profitability drivers of our business.
The following non-GAAP financial measures should not be viewed as substitutes for the most directly comparable financial measures calculated in accordance with GAAP:
Non-GAAP financial measures: Comparable GAAP financial measures:
(i) adjusted premiums, fees and other revenues (i) premiums, fees and other revenues
(ii) adjusted earnings (ii) net income (loss)
(iii) adjusted net investment income (iii) net investment income
Reconciliations of these non-GAAP financial measures to the most directly comparable historical GAAP financial measures are included in “- Results of Operations” and “- Investments.” Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are not accessible on a forward-looking basis because we believe it is not possible without unreasonable effort to provide other than a range of net investment gains and losses and net derivative gains and losses, which can fluctuate significantly within or outside the range and from period to period and may have a material impact on net income.
Our definitions of non-GAAP and other financial measures discussed in this report may differ from those used by other companies.
Adjusted earnings
This measure is used by management to evaluate performance and allocate resources. Consistent with GAAP guidance for segment reporting, adjusted earnings is also our GAAP measure of segment performance. Adjusted earnings allows analysis of our performance and facilitates comparisons to industry results.
Adjusted earnings is defined as adjusted revenues less adjusted expenses, net of income tax. Adjusted loss is defined as negative adjusted earnings. For information relating to adjusted revenues and adjusted expenses, see “Financial Measures and Segment Accounting Policies” in Note 2 of the Notes to the Consolidated Financial Statements.
The following additional information is relevant to an understanding of our performance results:
•We sometimes refer to sales activity for various products. These sales statistics do not correspond to revenues under GAAP, but are used as relevant measures of business activity.
•Near-term represents one to three years.
•Allocated equity is the portion of common stockholders’ equity that MetLife’s management allocates to each of its segments and sub-segments based on local capital requirements and economic capital. See “- Risk Management - Economic Capital.”
Risk Management
MetLife has an integrated process for managing risk, that is supported by a Risk Appetite Statement approved by the MetLife, Inc. Board of Directors (the “Board” or “Board of Directors”). Risk management is overseen and conducted through multiple Board and senior management risk committees (financial and non-financial). The risk committees are established at the enterprise and local levels, as needed, to oversee capital and risk positions, approve ALM strategies and limits, and establish certain corporate risk standards and policies. The risk committees are comprised of senior leaders from the lines of business and corporate functions which ensures comprehensive coverage and sharing of risk reporting. The Enterprise Risk Committee (“ERC”) is responsible for reviewing all material risks to the enterprise and deciding on actions, if necessary, in the event risks exceed desired tolerances, taking into consideration industry best practices and the current environment to resolve or mitigate those risks.
Three Lines of Defense
MetLife operates under the “Three Lines of Defense” model. Under this model, the lines of business and corporate functions are the first and primary line of defense in identifying, measuring, monitoring, managing, and reporting risks. Global Risk Management forms the second line of defense providing strategic advisory services and effective challenge and oversight to the business in the first line of defense. Internal Audit serves as the third line of defense, providing independent assurance and testing over the risk and control environment and related processes and controls.
Global Risk Management
Independent from the lines of business, the centralized Global Risk Management department, led by the Chief Risk Officer (“CRO”), coordinates across all risk committees to ensure that all material risks are properly identified, measured, monitored, managed and reported across the Company. The CRO reports to the Chief Executive Officer (“CEO”) and is primarily responsible for maintaining and communicating the Company’s enterprise risk policies and for monitoring and analyzing all material risks.
Global Risk Management considers and monitors a full range of risks relating to the Company’s solvency, liquidity, earnings, business operations and reputation. Global Risk Management’s primary responsibilities consist of:
•implementing an enterprise risk framework, which outlines our enterprise approach for managing financial and non-financial risk;
•developing policies and procedures for identifying, measuring, monitoring, managing and reporting those risks identified in the enterprise risk framework;
•coordinating Own Risk Solvency Assessment for Board, senior management and regulator use;
•establishing appropriate corporate risk tolerance levels;
•measuring capital on an economic basis;
•mitigating compliance risk and establishing controls;
•integrating climate risk into MetLife’s risk management framework and developing impact assessment capabilities; and
•reporting to (i) the Finance and Risk Committee of MetLife, Inc.’s Board of Directors; (ii) the Compensation Committee of MetLife, Inc.’s Board of Directors; and (iii) the financial and non-financial senior management committees on various aspects of risk.
Key Risk Types
MetLife has defined each material risk to which it is exposed and has established individual frameworks to monitor, manage and report on the respective risk.
•Market Risk: is the risk of loss due to potential changes in the value of assets and liabilities arising from fluctuations in financial market, real estate, and other economic factors. Market risk is comprised of interest rate risk, equity risk, foreign currency exchange rate risk, and spread risk.
•Credit Risk: is the risk of loss or credit rating downgrade arising from an obligor or counterparty with a direct or contingent financial obligation to MetLife that is either unable or unwilling to meet its obligation in full and on a timely basis. These risks arise from public fixed income assets, private loans including real estate, derivative transactions, bank deposits, reinsurance treaties and other similar contracts.
•Insurance Risk: is the risk of loss or adverse change in insurance liabilities from changes in the level, trend, and volatility of insurance and policyholder behavior experience varying from best estimate assumptions. These variances can be driven by catastrophic events such as pandemics or can be the result of misestimating base assumptions. Insurance risks to MetLife generally arise from mortality, morbidity, longevity, and policyholder behavior.
•Non-Financial Risk: is the risk of failed or inadequate internal processes, human errors, system errors or external events that may result in financial loss, non-financial damage, and/or non-compliance with applicable laws and regulations. Non-Financial risk captures operational and compliance risks, including risks such as business interruption, customer protection, financial crime, privacy, fraud and theft, and information security risk.
•Liquidity Risk: refers to the risk that MetLife is unable to raise cash necessary to meet current obligations.
Economic Capital
Economic capital is an internally developed risk capital model, the purpose of which is to measure the risk in the business and to provide a basis upon which capital is deployed. The economic capital model accounts for the unique and specific nature of the risks inherent in MetLife’s and the Company’s business. MetLife’s economic capital model, coupled with considerations of local capital requirements, aligns segment allocated equity with emerging standards and consistent risk principles. The model applies statistics-based risk evaluation principles to the material risks to which the Company is exposed. These consistent risk principles include calibrating required economic capital shock factors to a specific confidence level and time horizon while applying an industry standard method for the inclusion of diversification benefits among risk types. MetLife’s management is responsible for the ongoing production and enhancement of the economic capital model and reviews its approach periodically to ensure that it remains consistent with emerging industry practice standards. For further information, see “Financial Measures and Segment Accounting Policies” in Note 2 of the Notes to the Consolidated Financial Statements.
Asset/Liability Management
MetLife actively manages our assets using an approach that is liability driven and balances quality, diversification, asset/liability matching, liquidity, concentration and investment return. The goals of the investment process are to optimize, net of income tax, risk-adjusted investment income and risk-adjusted total return while ensuring that the assets and liabilities are reasonably aligned on a cash flow and duration basis. The ALM process is the shared responsibility of the ALM, Global Risk Management, and Investments departments, with the engagement of senior members of the business segments and Finance, and is governed by the ALM Committees. The ALM Committees’ duties include reviewing and approving investment guidelines and limits, approving significant portfolio and ALM strategies and providing oversight of the ALM process. The directives of the ALM Committees are carried out and monitored through ALM Working Groups which are set up to manage risk by geography, product or portfolio type. The ALM Steering Committee oversees the activities of the underlying ALM Committees and Working Groups. The ALM Steering Committee reports to the ERC.
MetLife establishes portfolio guidelines that define ranges and limits related to asset allocation, interest rate risk, liquidity, concentration and other risks for each major business segment, legal entity or insurance product group. These guidelines support implementation of investment strategies used to adequately fund our liabilities within acceptable levels of risk. MetLife also establishes hedging programs and associated investment portfolios for different blocks of business. The ALM Working Groups monitor these strategies and programs through regular review of portfolio metrics, such as effective duration, yield curve sensitivity, convexity, value at risk, market sensitivities (to interest rates, equity market levels, equity volatility, and foreign currency exchange rates), stress scenario payoffs, liquidity, asset sector concentration and credit quality.
MetLife manages credit risk through in-house fundamental credit analysis of the underlying obligors, issuers, transaction structures and real estate properties. MetLife also manages credit, market valuation and liquidity risk through industry and issuer diversification and asset allocation limits. These risk limits, approved annually by the Investment Risk Committee, promote diversification by asset sector, avoid concentrations in any single issuer and limit overall aggregate credit and equity risk exposure, as measured by our economic capital framework. For real estate assets, MetLife manages credit and market risk through asset allocation limits and by diversifying by geography, property and product type.
Information Security Risk Management
MetLife manages information security risk through MetLife’s Information Security Program (the “Program”), which is overseen by our enterprise Chief Information Security Officer (“CISO”), with collaboration across lines of businesses and corporate functions. The CISO is a senior-level executive responsible for establishing and executing the company’s information security strategy; the CISO regularly reports about information security risk to the ERC, the Audit Committee of MetLife, Inc. (“Audit Committee”) and the Board. The primary goal of the Program is to protect information and technology assets through physical, technical, and administrative safeguards. This includes monitoring, reporting, managing and remediating cyber threats. The Program aims to prevent data exfiltration, manipulation, and destruction, as well as system and transactional disruption. The Program’s threat-centric and risk-based approach for securing the MetLife environment is based on the cybersecurity framework developed by the U.S. Government’s National Institute of Standards and Technology.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following discussion on market risk should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management.”
Market Risk Exposures
We regularly analyze our exposure to interest rate, foreign currency exchange rate and equity market price risk. As a result of that analysis, we have determined that the estimated fair values of certain assets and liabilities are materially exposed to changes in interest rates, foreign currency exchange rates and equity markets. We have exposure to market risk through our insurance operations and investment activities. For purposes of this disclosure, “market risk” is defined as the risk of loss due to potential changes in the value of assets and liabilities arising from fluctuation in the financial market and other economic factors.
Interest Rates
Our exposure to interest rate changes results most significantly from our holdings of fixed maturity securities AFS and derivatives, as well as our interest rate sensitive liabilities. The fixed maturity securities AFS include U.S. and foreign government bonds, securities issued by government agencies, corporate bonds, mortgage-backed securities and ABS, all of which are mainly exposed to changes in medium- and long-term interest rates. The interest rate sensitive liabilities for purposes of this disclosure include debt, policyholder account balances related to certain investment type contracts, and embedded derivatives on variable annuities with guaranteed minimum benefits which have the same type of interest rate exposure (medium- and long-term interest rates) as fixed maturity securities AFS. The interest rate sensitive liabilities for purposes of this disclosure exclude a significant portion of the liabilities relating to insurance contracts. See “Risk Factors - Economic Environment and Capital Markets Risks - We May Face Difficult Economic Conditions.”
Foreign Currency Exchange Rates
Our exposure to fluctuations in foreign currency exchange rates against the U.S. dollar results from our holdings in non-U.S. dollar denominated fixed maturity and equity securities, mortgage loans, and certain liabilities. The foreign currency exchange rate liabilities for purposes of this disclosure exclude a significant portion of the liabilities relating to insurance contracts. The principal currencies that create foreign currency exchange rate risk in our investment portfolios and liabilities are the Euro, the Japanese yen and the British pound. We hedge foreign currency exchange rate risk with foreign currency swaps, forwards and options.
Equity Market
Along with investments in equity securities, we have exposure to equity market risk through certain liabilities that involve long-term guarantees on equity performance such as embedded derivatives on variable annuities with guaranteed minimum benefits and certain policyholder account balances. Equity exposures associated with real estate and limited partnership interests are excluded from this discussion as they are not considered financial instruments under GAAP.
Management of Market Risk Exposures
We use a variety of strategies to manage interest rate, foreign currency exchange rate and equity market risk, including the use of derivatives.
Interest Rate Risk Management
To manage interest rate risk, we analyze interest rate risk using various models, including multi-scenario cash flow projection models that forecast cash flows of the liabilities and their supporting investments, including derivatives. These projections involve evaluating the potential gain or loss on most of our in-force business under various increasing and decreasing interest rate environments. The NYDFS regulations require that we perform some of these analyses annually as part of our review of the sufficiency of our regulatory reserves. We maintain segmented operating and surplus asset portfolios for the purpose of ALM and the allocation of investment income to product lines. In the United States, for each segment, invested assets greater than or equal to the GAAP liabilities, net of certain non-invested assets allocated to the segment, are maintained, with any excess allocated to Corporate & Other. Statutory results for each line of business within a business segment may differ based on product-related market characteristics which may affect the duration, liquidity or credit quality elements of the investment strategy for a particular business segment.
We measure relative sensitivities of the value of our assets and liabilities to changes in key assumptions utilizing internal models. These models reflect specific product characteristics and include assumptions based on current and anticipated experience regarding lapse, mortality, morbidity and interest crediting rates. In addition, these models include asset cash flow projections reflecting interest payments, sinking fund payments, principal payments, bond calls, mortgage loan prepayments and defaults.
We employ product design, pricing and ALM strategies to reduce the potential effects of interest rate movements. Product design and pricing strategies include the use of surrender charges or restrictions on withdrawals in some products and the ability to reset crediting rates for certain products. ALM strategies include the use of derivatives. We also use reinsurance to mitigate interest rate risk.
We also use common industry metrics, such as duration and convexity, to measure the relative sensitivity of assets and liability values to changes in interest rates. In computing the duration of liabilities, we consider all policyholder guarantees and how we intend to set indeterminate policy elements such as interest credits or dividends. Each asset portfolio or portfolio group has a duration target based on the liability duration and the investment objectives of that portfolio. Where a liability cash flow may exceed the maturity of available assets, we may support such liabilities with equity investments, derivatives or interest rate curve mismatch strategies.
Foreign Currency Exchange Rate Risk Management
MetLife has a well-established policy to manage foreign currency exchange rate exposures within its risk tolerance. In general, investments backing specific liabilities are currency matched. This is achieved through direct investments in matching currency or through the use of foreign currency exchange rate derivatives. Enterprise foreign currency exchange rate risk limits are established by the ERC. Management of each of the Company’s segments, with oversight from MetLife’s FX Working Group and the ALM committee for the respective segment, is responsible for managing any foreign currency exchange rate exposure. The general authorizations of the Investment Committee of the MLIC Board of Directors also set limits on unhedged foreign currency investment exposure.
We use foreign currency swaps, forwards and options to mitigate the liability exposure, risk of loss and financial statement volatility associated with foreign currency denominated fixed income investments and the sale of certain insurance products.
Equity Market Risk Management
We manage equity market risk on an integrated basis with other risks through our ALM strategies, including the dynamic hedging with derivatives of certain variable annuity guarantee benefits, as well as reinsurance, in order to limit losses, minimize exposure to large risks, and provide additional capacity for future growth. We also manage equity market risk exposure in our investment portfolio through the use of derivatives. These derivatives include exchange-traded equity futures, equity index options contracts, total rate of return swaps (“TRRs”) and equity variance swaps. This risk is managed by our ALM Department in partnership with the Investments Department.
Hedging Activities
We use derivative contracts primarily to hedge a wide range of risks including interest rate risk, foreign currency exchange rate risk, and equity market risk. Derivative hedges are designed to reduce risk on an economic basis while considering their impact on financial results under different accounting regimes, including U.S. GAAP and local statutory accounting. Our derivative hedge programs vary depending on the type of risk being hedged. Some hedge programs are asset or liability specific while others are portfolio hedges that reduce risk related to a group of liabilities or assets. Our use of derivatives by major hedge programs is as follows:
•Risks Related to Guaranteed Benefits - We use a wide range of derivative contracts to mitigate the risk associated with living guarantee benefits. These derivatives include equity and interest rate futures, interest rate swaps, currency futures/forwards, equity indexed options, TRRs, interest rate option contracts and equity variance swaps.
•Minimum Interest Rate Guarantees - For certain liability contracts, we provide the contractholder a guaranteed minimum interest rate. These contracts include certain fixed annuities and other insurance liabilities. We purchase interest rate caps and floors to reduce risk associated with these liability guarantees.
•Reinvestment Risk in Long-Duration Liability Contracts - Derivatives are used to hedge interest rate risk related to certain long-duration liability contracts. Hedges include interest rate swaps, swaptions and Treasury bond forwards.
•Foreign Currency Exchange Rate Risk - We use foreign currency swaps, futures, forwards and options to hedge foreign currency exchange rate risk. These hedges are generally used to swap foreign currency denominated bonds or equity market exposures to U.S. dollars.
•General ALM Hedging Strategies - In the ordinary course of managing our asset/liability risks, we use interest rate futures, interest rate swaps, interest rate caps, interest rate floors and inflation swaps. These hedges are designed to reduce interest rate risk or inflation risk related to the existing assets or liabilities or related to expected future cash flows.
•Macro Hedge Program - We use equity options, equity TRRs, interest rate swaptions, interest rate swaps and Treasury lock to mitigate the potential loss of legal entity statutory capital under stress scenarios.
Risk Measurement: Sensitivity Analysis
We measure market risk related to our market sensitive assets and liabilities based on changes in interest rates, foreign currency exchange rates and equity market prices utilizing a sensitivity analysis. For purposes of this disclosure, a significant portion of the liabilities relating to insurance contracts is excluded, as discussed further below. This analysis estimates the potential changes in estimated fair value based on a hypothetical 10% change (increase or decrease) in interest rates, foreign currency exchange rates and equity market prices. We believe that a 10% change (increase or decrease) in these market rates and prices is reasonably possible in the near term. In performing the analysis summarized below, we used market rates at December 31, 2021. The sensitivity analysis separately calculates each of our market risk exposures (interest rate, foreign currency exchange rate and equity market) relating to our assets and liabilities. We modeled the impact of changes (increases and decreases) in market rates and prices on the estimated fair values of our market sensitive assets and liabilities and present the results with the most adverse level of market risk impact to the Company for each of these market risk exposures as follows:
•the net present values of our interest rate sensitive exposures resulting from a 10% change (increase or decrease) in interest rates;
•estimated fair values of our foreign currency exchange rate sensitive exposures due to a 10% change (appreciation or depreciation) in the value of the U.S. dollar compared to all other currencies; and
•the estimated fair value of our equity market sensitive exposures due to a 10% change (increase or decrease) in equity market prices.
The sensitivity analysis is an estimate and should not be viewed as predictive of our future financial performance. We cannot ensure that our actual losses in any particular period will not exceed the amounts indicated in the table below. Limitations related to this sensitivity analysis include:
•interest sensitive and foreign currency exchange rate sensitive liabilities do not include $140.4 billion, at carrying value, of insurance contracts. Management believes that the changes in the economic value of those contracts under changing interest rates and changing foreign currency exchange rates would offset a significant portion of the fair value changes of interest sensitive and foreign currency exchange rate sensitive assets;
•the market risk information is limited by the assumptions and parameters established in creating the related sensitivity analysis, including the impact of prepayment rates on mortgage loans;
•sensitivities do not include the impact on asset or liability valuation of changes in market liquidity or changes in market credit spreads;
•foreign currency exchange rate risk is not isolated for certain embedded derivatives within host asset and liability contracts, as the risk on these instruments is reflected as equity;
•for the derivatives that qualify as hedges, and for certain other assets such as mortgage loans, the impact on reported earnings may be materially different from the change in market values;
•the analysis excludes liabilities pursuant to insurance contracts, as well as real estate holdings, private equity and hedge fund holdings; and
•the model assumes that the composition of assets and liabilities remains unchanged throughout the period.
Accordingly, we use such models as tools and not as substitutes for the experience and judgment of our management. Based on our analysis of the impact of a 10% change (increase or decrease) in market rates and prices, we have determined that such a change could have a material adverse effect on the estimated fair value of certain assets and liabilities from interest rate, foreign currency exchange rate and equity market exposures.
The table below illustrates the potential loss in estimated fair value for each market risk exposure based on market sensitive assets and liabilities at:
December 31, 2021
(In millions)
Interest rate risk $ 2,611
Foreign currency exchange rate risk $ 225
Equity market risk $ 149
The risk sensitivities derived used a 10% increase to interest rates, a 10% weakening of the U.S. dollar against foreign currencies, and a 10% increase in equity prices. The potential losses in estimated fair value presented are for non-trading securities.
The table below provides additional detail regarding the potential loss in estimated fair value of our interest sensitive financial instruments due to a 10% increase in interest rates at:
December 31, 2021
Notional Amount
Estimated
Fair
Value (1) Assuming a 10% Increase in Interest Rates
(In millions)
Assets
Fixed maturity securities AFS
$ 175,885 $ (2,128)
FVO Securities
$ 848 -
Mortgage loans
$ 63,094 (266)
Policy loans
$ 6,710 (34)
Short-term investments
$ 4,866 (1)
Other invested assets
$ 2,614 -
Cash and cash equivalents
$ 9,957 -
Accrued investment income
$ 1,767 -
Premiums, reinsurance and other receivables
$ 12,531 (116)
Total assets
$ (2,545)
Liabilities (3)
Policyholder account balances
$ 79,182 $ 363
Payables for collateral under securities loaned and other transactions
$ 24,866 -
Short-term debt
$ 100 -
Long-term debt
$ 2,000 14
Other liabilities
$ 12,571 120
Embedded derivatives within liability host contracts (2)
$ 1,499 56
Total liabilities
$ 553
Derivative Instruments
Interest rate swaps
$ 29,184 $ 5,307 $ (390)
Interest rate floors
$ 7,701 $ 145 (8)
Interest rate caps
$ 64,309 $ 117 19
Interest rate futures
$ 515 $ - -
Interest rate options
$ 9,703 $ 364 (42)
Interest rate forwards
$ 3,323 $ 48 (77)
Interest rate total return swaps
$ 1,048 $ 5 (33)
Synthetic guaranteed interest contracts
$ 11,307 $ - -
Foreign currency swaps
$ 34,336 $ 602 (86)
Foreign currency forwards
$ 1,902 $ (2) -
Credit default swaps
$ 7,030 $ 103 -
Equity futures
$ 1,751 $ 5 -
Equity index options
$ 26,800 $ 548 (2)
Equity variance swaps
$ 425 $ 2 -
Equity total return swaps
$ 2,148 $ (35) -
Total derivative instruments
$ (619)
Net Change
$ (2,611)
______________
(1)Separate account assets and liabilities, which are interest rate sensitive, are not included herein as any interest rate risk is borne by the contractholder, notwithstanding any general account guarantees which are included within embedded derivatives (see footnote (2) below) or included within future policy benefits and other policy-related balances (see footnote (3) below).
(2)Embedded derivatives are recognized on the consolidated balance sheet in the same caption as the host contract.
(3)Excludes $140.4 billion of liabilities, at carrying value, pursuant to insurance contracts reported within future policy benefits and other policy-related balances. These liabilities would economically offset a significant portion of the net change in fair value of our financial instruments resulting from a 10% increase in interest rates.
Sensitivity to interest rates increased $0.5 billion to $2.6 billion at December 31, 2021 from $2.1 billion at December 31, 2020.
The table below provides additional detail regarding the potential loss in estimated fair value of our portfolio due to a 10% depreciation in the U.S. dollar compared to all other currencies at:
December 31, 2021
Notional Amount
Estimated
Fair
Value (1) Assuming a 10% Depreciation
in the U.S. Dollar
(In millions)
Assets
Fixed maturity securities AFS $ 175,885 $ 1,813
FVO Securities
$ 848 -
Mortgage loans $ 63,094 330
Policy loans $ 6,710 -
Short-term investments $ 4,866 75
Other invested assets $ 2,614 144
Cash and cash equivalents $ 9,957 8
Accrued investment income $ 1,767 13
Premiums, reinsurance and other receivables $ 12,531 -
Total assets $ 2,383
Liabilities (3)
Policyholder account balances $ 79,182 $ (1,294)
Payables for collateral under securities loaned and other transactions $ 24,866 -
Long-term debt $ 2,000 -
Other liabilities $ 12,571 -
Embedded derivatives within liability host contracts (2) $ 1,499 -
Total liabilities $ (1,294)
Derivative Instruments
Interest rate swaps
$ 29,184 $ 5,307 $ -
Interest rate floors $ 7,701 $ 145 -
Interest rate caps $ 64,309 $ 117 -
Interest rate futures $ 515 $ - -
Interest rate options $ 9,703 $ 364 -
Interest rate forwards $ 3,323 $ 48 -
Interest rate total return swaps $ 1,048 $ 5 -
Synthetic guaranteed interest contracts $ 11,307 $ - -
Foreign currency swaps $ 34,336 $ 602 (1,195)
Foreign currency forwards $ 1,902 $ (2) (123)
Credit default swaps $ 7,030 $ 103 4
Equity futures $ 1,751 $ 5 -
Equity index options $ 26,800 $ 548 -
Equity variance swaps $ 425 $ 2 -
Equity total return swaps $ 2,148 $ (35) -
Total derivative instruments $ (1,314)
Net Change $ (225)
______________
(1)Does not necessarily represent those financial instruments solely subject to foreign currency exchange rate risk. Separate account assets and liabilities, which are foreign currency exchange rate sensitive, are not included herein as any foreign currency exchange rate risk is borne by the contractholder, notwithstanding any general account guarantees which are included within embedded derivatives (see footnote (2) below).
(2)Embedded derivatives are recognized on the consolidated balance sheet in the same caption as the host contract.
(3)Excludes $140.4 billion of liabilities, at carrying value, pursuant to insurance contracts reported within future policy benefits and other policy-related balances. These liabilities would economically offset a significant portion of the net change in fair value of our financial instruments resulting from a 10% appreciation in the U.S. dollar compared to all other currencies.
Sensitivity to foreign currency exchange rates increased $72 million to $225 million at December 31, 2021 from $153 million at December 31, 2020. These sensitivities exclude those liabilities, at carrying value, pursuant to insurance contracts reported within future policy benefits and other policy-related balances. These liabilities would economically offset a significant portion of the net change in fair value of our financial instruments resulting from a 10% depreciation in the U.S. dollar compared to all other currencies.
The table below provides additional detail regarding the potential loss in estimated fair value of our portfolio due to a 10% increase in equity prices at:
December 31, 2021
Notional Amount
Estimated
Fair
Value (1) Assuming a
10% Increase
in Equity
Prices
(In millions)
Assets
FVO Securities
$ 848 $ 55
Other invested assets $ 2,614 37
Total assets $ 92
Liabilities (3)
Policyholder account balances $ 79,182 $ -
Embedded derivatives within liability host contracts (2) $ 1,499 144
Total liabilities $ 144
Derivative Instruments
Interest rate swaps
$ 29,184 $ 5,307 $ -
Interest rate floors $ 7,701 $ 145 -
Interest rate caps $ 64,309 $ 117 -
Interest rate futures $ 515 $ - -
Interest rate options $ 9,703 $ 364 -
Interest rate forwards $ 3,323 $ 48 -
Interest rate total return swaps $ 1,048 $ 5 -
Synthetic guaranteed interest contracts $ 11,307 $ - -
Foreign currency swaps $ 34,336 $ 602 -
Foreign currency forwards $ 1,902 $ (2) -
Credit default swaps $ 7,030 $ 103 -
Equity futures $ 1,751 $ 5 (156)
Equity index options $ 26,800 $ 548 10
Equity variance swaps $ 425 $ 2 -
Equity total return swaps $ 2,148 $ (35) (239)
Total derivative instruments
$ (385)
Net Change $ (149)
______________
(1)Does not necessarily represent those financial instruments solely subject to equity price risk. Additionally, separate account assets and liabilities, which are equity market sensitive, are not included herein as any equity market risk is borne by the contractholder, notwithstanding any general account guarantees which are included within embedded derivatives (see footnote (2) below) or included within future policy benefits and other policy-related balances (see footnote (3) below).
(2)Embedded derivatives are recognized on the consolidated balance sheet in the same caption as the host contract.
(3)Excludes $140.4 billion of liabilities, at carrying value, pursuant to insurance contracts reported within future policy benefits and other policy-related balances.
Sensitivity to a 10% equity market increase at December 31, 2021 was $149 million compared to $373 million at December 31, 2020.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements, Notes and Schedules
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID 34)
Financial Statements at December 31, 2021 and 2020 and for the Years Ended December 31, 2021, 2020 and 2019:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Note 1 - Business, Basis of Presentation and Summary of Significant Accounting Policies
Note 2 - Segment Information
Note 3 - Insurance
Note 4 - Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles
Note 5 - Reinsurance
Note 6 - Closed Block
Note 7 - Investments
Note 8 - Derivatives
Note 9 - Fair Value
Note 10 - Leases
Note 11 - Long-term and Short-term Debt
Note 12 - Equity
Note 13 - Other Revenues and Other Expenses
Note 14 - Employee Benefit Plans
Note 15 - Income Tax
Note 16 - Contingencies, Commitments and Guarantees
Note 17 - Related Party Transactions
Financial Statement Schedules at December 31, 2021 and 2020 and for the Years Ended December 31, 2021, 2020 and 2019:
Schedule I - Consolidated Summary of Investments - Other Than Investments in Related Parties
Schedule III - Consolidated Supplementary Insurance Information
Schedule IV - Consolidated Reinsurance
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholder and the Board of Directors of Metropolitan Life Insurance Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Metropolitan Life Insurance Company and subsidiaries (the "Company") as of December 31, 2021 and 2020, 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, 2021, and the related notes and the schedules listed in the Index to Consolidated Financial Statements, Notes and Schedules (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Fixed Maturity Securities Available-for-Sale - Fair Value of Level 3 Fixed Maturity Securities - Refer to Notes 1, 7, and 9 to the financial statements
Critical Audit Matter Description
The Company has investments in certain fixed maturity securities classified as available-for-sale whose fair values are based on unobservable inputs that are supported by little or no market activity. When a price is not available in the active market, from an independent pricing service, or from independent broker quotations, management values the security using internal matrix pricing or discounted cash flow techniques. These investments are categorized as Level 3 and had an estimated fair value of $4.3 billion as of December 31, 2021.
Given management uses considerable judgment when estimating the fair value of Level 3 fixed maturity securities determined using internal matrix pricing or discounted cash flow techniques, performing audit procedures to evaluate the
estimate of fair value required a high degree of auditor judgment and an increased extent of effort. This audit effort included the use of professionals with specialized skills and knowledge, including our fair value specialists, to assist in performing procedures and evaluating the audit evidence obtained.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the valuation of Level 3 fixed maturity securities determined using internal matrix pricing or discounted cash flow techniques included, among others, the following:
•We tested the effectiveness of controls over the determination of fair value.
•We tested the accuracy and completeness of relevant security attributes, including credit ratings, maturity dates and coupon rates, used in the determination of Level 3 fair values.
•With the involvement of our fair value specialists, we developed independent fair value estimates for a sample of securities and compared our estimates to the Company’s estimates and evaluated differences. We developed our estimate by evaluating the observable and unobservable inputs used by management or developing independent inputs.
•We evaluated management’s ability to accurately estimate fair value by comparing management’s historical estimates to subsequent transactions, taking into account changes in market conditions subsequent to December 31, 2021.
Insurance Liabilities - Valuation of Future Policy Benefits for Long-Term Care Insurance - Refer to Notes 1 and 3 to the financial statements
Critical Audit Matter Description
The Company’s products include long-term care insurance. Liabilities for amounts payable under long-term care insurance are recorded in future policy benefits in the Company’s consolidated balance sheets. Such liabilities are established based on actuarial assumptions at the time policies are issued, which are intended to estimate the experience for the period the policy benefits are payable. Significant adverse changes in experience on such contracts may require the establishment of premium deficiency reserves, which are based on current assumptions. Management’s estimate of future policy benefits for long-term care insurance was $14.4 billion as of December 31, 2021.
Management applies considerable judgment in evaluating actual experience to determine whether a change in assumptions for long-term care insurance is warranted. Principal assumptions used in the valuation of future policy benefits for long-term care insurance include morbidity, policy lapse, investment returns and mortality.
Given the inherent uncertainty in selecting assumptions, we have determined that management’s evaluation of actual experience when estimating future policy benefits for long-term care insurance policies is a critical audit matter, which required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the judgments made and the reasonableness of the assumptions used in the valuation. The audit effort included the use of professionals with specialized skill and knowledge, including our actuarial specialists, to assist in performing these procedures and evaluating the audit evidence obtained from these procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the assumptions used to determine the estimate of future policy benefits for long-term care insurance, included, among others, the following:
•We tested the effectiveness of the control over the assumptions used in the valuation of future policy benefits and the effectiveness of the controls over the underlying data.
•With the involvement of our actuarial specialists, we:
◦evaluated judgments applied by management in setting principal assumptions, including evaluating the results of experience studies used as the basis for setting those assumptions.
◦evaluated management’s estimate of, or developed an independent estimate of future policy benefits, on a sample basis, and evaluated differences. This included confirming that assumptions were applied as intended.
◦evaluated the results of the Company’s annual premium deficiency tests.
Derivatives - Valuation of Embedded Derivative Liabilities - Refer to Notes 1, 3, 8, and 9 to the financial statements
Critical Audit Matter Description
The Company’s products include variable annuity contracts with guaranteed minimum benefits that provide the policyholder a minimum return based on their initial deposit adjusted for withdrawals. The guarantees on variable annuity contracts are accounted for as insurance liabilities or as embedded derivatives depending on how and when the benefit is paid. Guarantees accounted for as embedded derivatives include the non-life contingent portion of guaranteed minimum withdrawal benefits and certain non-life contingent portions of guaranteed minimum income benefits, and are recorded in policyholder account balances on the Company’s consolidated balance sheet. Embedded derivatives are measured at estimated fair value separately from the host variable annuity contract using actuarial and capital market assumptions that are updated annually. Management’s estimate of embedded derivative liabilities was $1.5 billion as of December 31, 2021.
Management applies considerable judgment in selecting assumptions used to estimate embedded derivative liabilities and changes in market conditions or variations in certain assumptions could result in significant fluctuations in the estimate. Principal assumptions include mortality, lapse, dynamic lapse, withdrawal, utilization, and risk-free rates and implied volatilities. The valuation of the embedded derivative liabilities is also based on complex calculations which are data intensive.
Given the inherent uncertainty in selecting assumptions and the complexity of the calculations, we have determined that management’s valuation of the embedded derivative liabilities is a critical audit matter which required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the judgments made and the reasonableness of the models and assumptions used in the valuation. The audit effort included the use of professionals with specialized skill and knowledge, including our valuation, modeling and actuarial specialists, to assist in performing these procedures and evaluating the audit evidence obtained from these procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the valuation of embedded derivative liabilities included, among others, the following:
•We tested the effectiveness of controls over the assumptions, including controls over the underlying data used in the valuation of embedded derivative liabilities.
•We tested the effectiveness of controls over the methodologies and models used for determining the embedded derivative liabilities.
•With the involvement of our valuation, modeling and actuarial specialists, we:
◦evaluated the methods, models, and judgments applied by management in the determination of principal assumptions and the calculation of the embedded derivative liabilities
◦evaluated the results of underlying experience studies, capital market projections, and judgments applied by management in setting the assumptions
◦developed an independent estimate of the embedded derivative liabilities, on a sample basis, and evaluated differences.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 7, 2022
We have served as the Company’s auditor since at least 1968; however, an earlier year could not be reliably determined.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Balance Sheets
December 31, 2021 and 2020
(In millions, except share and per share data)
2021 2020
Assets
Investments:
Fixed maturity securities available-for-sale, at estimated fair value (amortized cost: $158,354 and $156,423, respectively; allowance for credit loss of $53 and $51, respectively)
$ 175,885 $ 181,340
Mortgage loans (net of allowance for credit loss of $536 and $517, respectively; includes $224 and $199, respectively, relating to variable interest entities and $127 and $165, respectively, under the fair value option)
60,219 66,405
Policy loans 5,816 5,973
Real estate and real estate joint ventures (includes $1,094 and $1,435, respectively, relating to variable interest entities, $240 and $169, respectively, under the fair value option and $175 and $128, respectively, of real estate held-for-sale)
7,873 7,478
Other limited partnership interests 8,754 5,775
Short-term investments, at estimated fair value 4,866 2,623
Other invested assets (includes $924 and $992, respectively, of leveraged and direct financing leases; $171 and $79, respectively, relating to variable interest entities and allowance for credit loss of $32 and $38, respectively)
19,860 17,723
Total investments 283,273 287,317
Cash and cash equivalents, principally at estimated fair value 9,957 11,337
Accrued investment income 1,767 1,904
Premiums, reinsurance and other receivables 20,505 21,478
Deferred policy acquisition costs and value of business acquired 2,598 2,649
Current income tax recoverable 80 -
Other assets 4,526 4,276
Separate account assets 123,851 128,646
Total assets $ 446,557 $ 457,607
Liabilities and Equity
Liabilities
Future policy benefits $ 132,274 $ 133,921
Policyholder account balances 94,459 96,635
Other policy-related balances 8,094 7,430
Policyholder dividends payable 312 397
Policyholder dividend obligation 1,682 2,969
Payables for collateral under securities loaned and other transactions 24,866 23,122
Short-term debt 100 120
Long-term debt 1,659 1,619
Current income tax payable - 486
Deferred income tax liability 2,036 1,980
Other liabilities 23,796 25,424
Separate account liabilities 123,851 128,646
Total liabilities 413,129 422,749
Contingencies, Commitments and Guarantees (Note 16)
Equity
Metropolitan Life Insurance Company stockholder’s equity:
Common stock, par value $0.01 per share; 1,000,000,000 shares authorized; 494,466,664 shares issued and outstanding
5 5
Additional paid-in capital 12,464 12,460
Retained earnings 10,868 10,548
Accumulated other comprehensive income (loss) 9,917 11,662
Total Metropolitan Life Insurance Company stockholder’s equity 33,254 34,675
Noncontrolling interests 174 183
Total equity 33,428 34,858
Total liabilities and equity $ 446,557 $ 457,607
See accompanying notes to the consolidated financial statements.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Statements of Operations
For the Years Ended December 31, 2021, 2020 and 2019
(In millions)
2021 2020 2019
Revenues
Premiums $ 26,191 $ 20,741 $ 21,608
Universal life and investment-type product policy fees
2,062 1,996 2,037
Net investment income
12,486 10,250 10,973
Other revenues
1,616 1,661 1,573
Net investment gains (losses)
652 (73) 346
Net derivative gains (losses)
(964) 738 (288)
Total revenues
42,043 35,313 36,249
Expenses
Policyholder benefits and claims
29,423 23,074 24,051
Interest credited to policyholder account balances
2,027 2,247 2,624
Policyholder dividends
728 901 1,038
Other expenses
5,617 5,013 4,976
Total expenses
37,795 31,235 32,689
Income (loss) before provision for income tax
4,248 4,078 3,560
Provision for income tax expense (benefit)
530 534 148
Net income (loss)
3,718 3,544 3,412
Less: Net income (loss) attributable to noncontrolling interests
5 (6) (6)
Net income (loss) attributable to Metropolitan Life Insurance Company
$ 3,713 $ 3,550 $ 3,418
See accompanying notes to the consolidated financial statements.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2021, 2020 and 2019
(In millions)
2021 2020 2019
Net income (loss)
$ 3,718 $ 3,544 $ 3,412
Other comprehensive income (loss):
Unrealized investment gains (losses), net of related offsets
(2,462) 1,911 8,053
Unrealized gains (losses) on derivatives
111 216 279
Foreign currency translation adjustments
9 54 (32)
Defined benefit plans adjustment
82 (108) (143)
Other comprehensive income (loss), before income tax
(2,260) 2,073 8,157
Income tax (expense) benefit related to items of other comprehensive income (loss)
515 (436) (1,711)
Other comprehensive income (loss), net of income tax
(1,745) 1,637 6,446
Comprehensive income (loss)
1,973 5,181 9,858
Less: Comprehensive income (loss) attributable to noncontrolling interest, net of income tax
5 (6) (6)
Comprehensive income (loss) attributable to Metropolitan Life Insurance Company
$ 1,968 $ 5,187 $ 9,864
See accompanying notes to the consolidated financial statements.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Statements of Equity
For the Years Ended December 31, 2021, 2020 and 2019
(In millions)
Common
Stock Additional
Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Total
Metropolitan Life
Insurance Company
Stockholder’s Equity Noncontrolling
Interests Total
Equity
Balance at December 31, 2018 $ 5 $ 12,450 $ 9,512 $ 3,562 $ 25,529 $ 198 $ 25,727
Cumulative effects of changes in accounting principles, net of income tax 78 17 95 95
Capital contributions from MetLife, Inc.
5 5 5
Dividends to MetLife, Inc.
(3,065) (3,065) (3,065)
Change in equity of noncontrolling interests
- (8) (8)
Net income (loss)
3,418 3,418 (6) 3,412
Other comprehensive income (loss), net of
income tax
6,446 6,446 6,446
Balance at December 31, 2019 5 12,455 9,943 10,025 32,428 184 32,612
Cumulative effects of changes in accounting principles, net of income tax (113) (113) (113)
Capital contributions from MetLife, Inc. 5 5 5
Dividends to MetLife, Inc.
(2,832) (2,832) (2,832)
Change in equity of noncontrolling interests
- 5 5
Net income (loss)
3,550 3,550 (6) 3,544
Other comprehensive income (loss), net of
income tax
1,637 1,637 1,637
Balance at December 31, 2020 5 12,460 10,548 11,662 34,675 183 34,858
Capital contributions from MetLife, Inc.
4 4 4
Dividends to MetLife, Inc.
(3,393) (3,393) (3,393)
Change in equity of noncontrolling interests
- (14) (14)
Net income (loss)
3,713 3,713 5 3,718
Other comprehensive income (loss), net of
income tax
(1,745) (1,745) (1,745)
Balance at December 31, 2021 $ 5 $ 12,464 $ 10,868 $ 9,917 $ 33,254 $ 174 $ 33,428
See accompanying notes to the consolidated financial statements.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2021, 2020 and 2019
(In millions)
2021 2020 2019
Cash flows from operating activities
Net income (loss) $ 3,718 $ 3,544 $ 3,412
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization expenses
136 125 99
Amortization of premiums and accretion of discounts associated with investments, net
(656) (651) (823)
(Gains) losses on investments and from sales of businesses, net
(652) 73 (346)
(Gains) losses on derivatives, net
2,480 (299) 499
(Income) loss from equity method investments, net of dividends or distributions
(1,873) 238 366
Interest credited to policyholder account balances
1,988 2,213 2,624
Universal life and investment-type product policy fees
(1,070) (1,130) (2,037)
Change in fair value option and trading securities
(125) (171) (151)
Change in accrued investment income
69 72 45
Change in premiums, reinsurance and other receivables
752 826 (200)
Change in deferred policy acquisition costs and value of business acquired, net
194 355 197
Change in income tax
5 104 (351)
Change in other assets
(308) 90 961
Change in insurance-related liabilities and policy-related balances
(957) (1,256) 1,571
Change in other liabilities
(370) (1,372) 277
Other, net
(74) 176 (1)
Net cash provided by (used in) operating activities 3,257 2,937 6,142
Cash flows from investing activities
Sales, maturities and repayments of:
Fixed maturity securities available-for-sale
51,010 46,700 49,464
Equity securities
565 310 183
Mortgage loans
16,790 9,963 11,482
Real estate and real estate joint ventures
1,329 81 1,101
Other limited partnership interests
541 464 494
Purchases and originations of:
Fixed maturity securities available-for-sale
(52,513) (48,561) (48,421)
Equity securities
(48) (106) (49)
Mortgage loans
(10,502) (10,931) (13,458)
Real estate and real estate joint ventures
(1,042) (768) (1,443)
Other limited partnership interests
(1,896) (1,071) (971)
Cash received in connection with freestanding derivatives 1,720 3,823 1,759
Cash paid in connection with freestanding derivatives (5,181) (2,886) (1,957)
Cash received from the redemption of an investment in affiliated preferred stock 315 - -
Receipts on loans to affiliates 87 251 -
Purchases of loans to affiliates (15) - -
Net change in policy loans 157 127 (39)
Net change in short-term investments (2,295) (714) (377)
Net change in other invested assets 74 44 (8)
Net change in property, equipment and leasehold improvements 15 18 60
Other, net 14 21 (4)
Net cash provided by (used in) investing activities $ (875) $ (3,235) $ (2,184)
See accompanying notes to the consolidated financial statements.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Consolidated Statements of Cash Flows - (continued)
For the Years Ended December 31, 2021, 2020 and 2019
(In millions)
2021 2020 2019
Cash flows from financing activities
Policyholder account balances:
Deposits
$ 78,129 $ 77,446 $ 74,049
Withdrawals
(80,378) (74,655) (74,571)
Net change in payables for collateral under securities loaned and other transactions
1,744 2,757 1,893
Long-term debt issued
35 128 -
Long-term debt repaid
(26) (97) (28)
Financing element on certain derivative instruments and other derivative related transactions, net 173 (40) (175)
Dividends paid to MetLife, Inc.
(3,393) (2,832) (3,065)
Other, net
(42) (3) (19)
Net cash provided by (used in) financing activities
(3,758) 2,704 (1,916)
Effect of change in foreign currency exchange rates on cash and cash equivalents balances (4) 4 3
Change in cash and cash equivalents
(1,380) 2,410 2,045
Cash and cash equivalents, beginning of year
11,337 8,927 6,882
Cash and cash equivalents, end of year
$ 9,957 $ 11,337 $ 8,927
Supplemental disclosures of cash flow information
Net cash paid (received) for:
Interest $ 95 $ 99 $ 104
Income tax $ 388 $ 45 $ 552
Non-cash transactions:
Capital contributions from MetLife, Inc. $ 4 $ 5 $ 5
Real estate and real estate joint ventures acquired in satisfaction of debt $ 174 $ 10 $ 32
Increase in equity securities due to in-kind distributions received from other limited partnership interests $ 337 $ 100 $ 41
Increase in other invested assets in connection with affiliated reinsurance transactions $ 3,140 $ - $ -
Operating lease liability associated with the recognition of right-of-use assets $ 4 $ - $ 152
Transfer of fixed maturity securities available-for-sale to an affiliate $ - $ 296 $ -
Transfer of mortgage loans to an affiliate $ - $ 84 $ -
Transfer of real estate from an affiliate $ - $ 380 $ -
See accompanying notes to the consolidated financial statements.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements
1. Business, Basis of Presentation and Summary of Significant Accounting Policies
Business
Metropolitan Life Insurance Company and its subsidiaries (collectively, “MLIC” or the “Company”) is a provider of insurance, annuities, employee benefits and asset management and is organized into two segments: U.S. and MetLife Holdings. Metropolitan Life Insurance Company is a wholly-owned subsidiary of MetLife, Inc. (MetLife, Inc., together with its subsidiaries and affiliates, “MetLife”).
Basis of Presentation
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported on the consolidated financial statements. In applying these policies and estimates, management makes subjective and complex judgments that frequently require assumptions about matters that are inherently uncertain, including uncertainties associated with the COVID-19 pandemic. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Company’s business and operations. Actual results could differ from these estimates.
Consolidation
The accompanying consolidated financial statements include the accounts of Metropolitan Life Insurance Company and its subsidiaries, as well as partnerships and joint ventures in which the Company has a controlling financial interest, and variable interest entities (“VIEs”) for which the Company is the primary beneficiary. Intercompany accounts and transactions have been eliminated.
Since the Company is a member of a controlled group of affiliated companies, its results may not be indicative of those of a stand-alone entity.
Separate Accounts
Separate accounts are established in conformity with insurance laws. Generally, the assets of the separate accounts cannot be used to settle the liabilities that arise from any other business of the Company. Separate account assets are subject to general account claims only to the extent the value of such assets exceeds the separate account liabilities. The Company reports separately, as assets and liabilities, investments held in separate accounts and liabilities of the separate accounts if:
•such separate accounts are legally recognized;
•assets supporting the contract liabilities are legally insulated from the Company’s general account liabilities;
•investment objectives are directed by the contractholder; and
•all investment performance, net of contract fees and assessments, is passed through to the contractholder.
The Company reports separate account assets at their fair value, which is based on the estimated fair values of the underlying assets comprising the individual separate account portfolios. Investment performance (including investment income, net investment gains (losses) and changes in unrealized gains (losses)) and the corresponding amounts credited to contractholders of such separate accounts are offset within the same line on the statements of operations. Separate accounts credited with a contractual investment return are combined on a line-by-line basis with the Company’s general account assets, liabilities, revenues and expenses and the accounting for these investments is consistent with the methodologies described herein for similar financial instruments held within the general account.
The Company’s revenues reflect fees charged to the separate accounts, including mortality charges, risk charges, policy administration fees, investment management fees and surrender charges. Such fees are included in universal life and investment-type product policy fees on the statements of operations.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Summary of Significant Accounting Policies
The following are the Company’s significant accounting policies with references to notes providing additional information on such policies and critical accounting estimates relating to such policies.
Accounting Policy
Note
Insurance 3
Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles 4
Reinsurance 5
Investments 7
Derivatives 8
Fair Value 9
Employee Benefit Plans 14
Income Tax 15
Litigation Contingencies 16
Insurance
Future Policy Benefit Liabilities and Policyholder Account Balances
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. 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.
Premium deficiency reserves may also be established for short-duration contracts to provide for expected future losses. These reserves are based on actuarial estimates of the amount of loss inherent in that period, including losses incurred for which claims have not been reported. The provisions for unreported claims are calculated using studies that measure the historical length of time between the incurred date of a claim and its eventual reporting to the Company. Anticipated investment income is considered in the calculation of premium deficiency losses for short-duration contracts.
Liabilities for universal and variable life policies with secondary guarantees and paid-up guarantees are determined by estimating the expected value of death benefits payable when the account balance is projected to be zero and recognizing those benefits ratably over the life of the contract based on total expected assessments. The assumptions used in estimating the secondary and paid-up guarantee liabilities are consistent with those used for amortizing deferred policy acquisition costs (“DAC”), and are thus subject to the same variability and risk as further discussed herein. The assumptions of investment performance and volatility for variable products are consistent with historical experience of appropriate underlying equity indices, such as the S&P Global Ratings (“S&P”) 500 Index. The benefits used in calculating the liabilities are based on the average benefits payable over a range of scenarios.
The Company regularly reviews its estimates of liabilities for future policy benefits and compares them with its actual experience. Differences result in changes to the liability balances with related charges or credits to benefit expenses in the period in which the changes occur.
Policyholder account balances relate to contracts or contract features where the Company has no significant insurance risk.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
The Company issues directly and assumes through reinsurance variable annuity products with guaranteed minimum benefits that provide the policyholder a minimum return based on their initial deposit adjusted for withdrawals. These guarantees are accounted for as insurance liabilities or as embedded derivatives depending on how and when the benefit is paid. Specifically, a guarantee is accounted for as an embedded derivative if a guarantee is paid without requiring (i) the occurrence of a specific insurable event, or (ii) the policyholder to annuitize. Alternatively, a guarantee is accounted for as an insurance liability if the guarantee is paid only upon either (i) the occurrence of a specific insurable event, or (ii) annuitization. In certain cases, a guarantee may have elements of both an insurance liability and an embedded derivative and in such cases the guarantee is split and accounted for under both models.
Guarantees accounted for as insurance liabilities in future policy benefits include guaranteed minimum death benefits (“GMDBs”), the life-contingent portion of guaranteed minimum withdrawal benefits (“GMWBs”), elective annuitizations of guaranteed minimum income benefits (“GMIBs”), and the life contingent portion of GMIBs that require annuitization when the account balance goes to zero.
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.
Other Policy-Related Balances
Other policy-related balances include policy and contract claims, premiums received in advance, unearned revenue liabilities, obligations assumed under structured settlement assignments, policyholder dividends due and unpaid, and policyholder dividends left on deposit.
The liability for policy and contract claims generally relates to incurred but not reported (“IBNR”) death, disability, and dental claims. In addition, included in other policy-related balances are claims which have been reported but not yet settled for death, disability and dental. 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.
The Company accounts for the prepayment of premiums on its individual life, group life and health contracts as premiums received in advance. These amounts are then recognized in premiums when due.
The unearned revenue liability relates to universal life and investment-type products and represents policy charges for services to be provided in future periods. The charges are deferred as unearned revenue and amortized using the product’s estimated gross profits and margins, similar to DAC as discussed further herein. Such amortization is recorded in universal life and investment-type product policy fees.
Recognition of Insurance Revenues and Deposits
Premiums related to traditional life and annuity contracts with life contingencies 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 related to short-duration non-medical health, disability and accident & health contracts are recognized on a pro rata basis over the applicable contract term.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Deposits related to universal life and investment-type products are credited to policyholder account balances. Revenues from such contracts consist of fees for mortality, policy administration and surrender charges and are recorded in universal life and investment-type product policy fees in the period in which services are provided. Amounts that are charged to earnings include interest credited and benefit claims incurred in excess of related policyholder account balances.
All revenues and expenses are presented net of reinsurance, as applicable.
Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles
The Company incurs significant costs in connection with acquiring new and renewal insurance business. Costs that are related directly to the successful acquisition or renewal of insurance contracts are capitalized as DAC. Such costs include:
•incremental direct costs of contract acquisition, such as commissions;
•the portion of an employee’s total compensation and benefits related to time spent selling, underwriting or processing the issuance of new and renewal insurance business only with respect to actual policies acquired or renewed; and
•other essential direct costs that would not have been incurred had a policy not been acquired or renewed.
All other acquisition-related costs, including those related to general advertising and solicitation, market research, agent training, product development, unsuccessful sales and underwriting efforts, as well as all indirect costs, are expensed as incurred.
Value of business acquired (“VOBA”) is an intangible asset resulting from a business combination that represents the excess of book value over the estimated fair value of acquired insurance, annuity, and investment-type contracts in-force at the acquisition date. The estimated fair value of the acquired liabilities is based on projections, by each block of business, of future policy and contract charges, premiums, mortality and morbidity, separate account performance, surrenders, operating expenses, investment returns, nonperformance risk adjustment and other factors. Actual experience with the purchased business may vary from these projections.
DAC and VOBA are amortized as follows:
Products: In proportion to the following over estimated lives of the contracts:
•
Nonparticipating and non-dividend-paying traditional contracts: Actual and expected future gross premiums
• Term insurance
• Nonparticipating whole life insurance
• Traditional group life insurance
• Non-medical health insurance
•
Participating, dividend-paying traditional contracts
Actual and expected future gross margins
• Fixed and variable universal life contracts Actual and expected future gross profits
• Fixed and variable deferred annuity contracts
See Note 4 for additional information on DAC and VOBA amortization. Amortization of DAC and VOBA is included in other expenses.
The recovery of DAC and VOBA is dependent upon the future profitability of the related business. DAC and VOBA are aggregated on the financial statements for reporting purposes.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
The Company generally has two different types of sales inducements which are included in other assets: (i) the policyholder receives a bonus whereby the policyholder’s initial account balance is increased by an amount equal to a specified percentage of the customer’s deposit; and (ii) the policyholder receives a higher interest rate using a dollar cost averaging method than would have been received based on the normal general account interest rate credited. The Company defers sales inducements and amortizes them over the life of the policy using the same methodology and assumptions used to amortize DAC. The amortization of sales inducements is included in policyholder benefits and claims. Each year, or more frequently if circumstances indicate a potential recoverability issue exists, the Company reviews deferred sales inducements (“DSI”) to determine the recoverability of the asset.
Value of distribution agreements acquired (“VODA”) is reported in other assets and represents the present value of expected future profits associated with the expected future business derived from the distribution agreements acquired as part of a business combination. Value of customer relationships acquired (“VOCRA”) is also reported in other assets and represents the present value of the expected future profits associated with the expected future business acquired through existing customers of the acquired company or business. The VODA and VOCRA associated with past business combinations are amortized over the assets’ useful lives ranging from 10 to 30 years and such amortization is included in other expenses. Each year, or more frequently if circumstances indicate a possible impairment exists, the Company reviews VODA and VOCRA to determine whether the asset is impaired.
Reinsurance
For each of its reinsurance agreements, the Company determines whether the agreement provides indemnification against loss or liability relating to insurance risk in accordance with applicable accounting standards. Cessions under reinsurance agreements do not discharge the Company’s obligations as the primary insurer. The Company reviews all contractual features, including those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims.
For reinsurance of existing in-force blocks of long-duration contracts that transfer significant insurance risk, the difference, if any, between the amounts paid (received), and the liabilities ceded (assumed) related to the underlying contracts is considered the net cost of reinsurance at the inception of the reinsurance agreement. The net cost of reinsurance is amortized on a basis consistent with the methodologies and assumptions used for amortizing DAC related to the underlying reinsured contracts. Subsequent amounts paid (received) on the reinsurance of in-force blocks, as well as amounts paid (received) related to new business, are recorded as ceded (assumed) premiums; and ceded (assumed) premiums, reinsurance and other receivables (future policy benefits) are established.
For prospective reinsurance of short-duration contracts that meet the criteria for reinsurance accounting, amounts paid (received) are recorded as ceded (assumed) premiums and ceded (assumed) unearned premiums. Ceded (assumed) unearned premiums are reflected as a component of premiums, reinsurance and other receivables (future policy benefits). Such amounts are amortized through earned premiums over the remaining contract period in proportion to the amount of insurance protection provided. For retroactive reinsurance of short-duration contracts that meet the criteria for reinsurance accounting, amounts paid (received) in excess of the related insurance liabilities ceded (assumed) are recognized immediately as a loss and are reported in the appropriate line item within the statement of operations. Any gain on such retroactive agreement is deferred and is amortized as part of DAC, primarily using the recovery method.
Amounts currently recoverable under reinsurance agreements are included in premiums, reinsurance and other receivables and amounts currently payable are included in other liabilities. Assets and liabilities relating to reinsurance agreements with the same reinsurer may be recorded net on the balance sheet, if a right of offset exists within the reinsurance agreement. In the event that reinsurers do not meet their obligations to the Company under the terms of the reinsurance agreements, reinsurance recoverable balances could become uncollectible. In such instances, reinsurance recoverable balances are stated net of allowances for uncollectible reinsurance, consistent with credit loss guidance which requires recording an allowance for credit loss (“ACL”).
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
The funds withheld liability represents amounts withheld by the Company in accordance with the terms of the reinsurance agreements. The Company withholds the funds rather than transferring the underlying investments and, as a result, records funds withheld liability within other liabilities. The Company recognizes interest on funds withheld, included in other expenses, at rates defined by the terms of the agreement which may be contractually specified or directly related to the investment portfolio. See “- Investments - Other Invested Assets” for information on funds withheld assets.
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 net derivative gains (losses). Certain assumed GMWBs, GMABs and GMIBs are also accounted for as embedded derivatives with changes in estimated fair value reported in net derivative gains (losses).
If the Company determines that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company records the agreement using the deposit method of accounting. Deposits received are included in other liabilities and deposits made are included within premiums, reinsurance and other receivables. As amounts are paid or received, consistent with the underlying contracts, the deposit assets or liabilities are adjusted. Interest on such deposits is recorded as other revenues or other expenses, as appropriate. Periodically, the Company evaluates the adequacy of the expected payments or recoveries and adjusts the deposit asset or liability through other revenues or other expenses, as appropriate.
Investments
Net Investment Income
Net investment income includes primarily interest income, including amortization of premium and accretion of discount, prepayment fees, dividend income, rental income and equity method income and is net of related investment expenses. Net investment income also includes, to a lesser extent, (i) realized gains (losses) on investments sold or disposed and (ii) unrealized gains (losses) recognized in earnings, representing changes in estimated fair value, primarily for fair value option (“FVO”) securities (“FVO Securities”).
Net Investment Gains (Losses)
Net investment gains (losses) include primarily (i) realized gains (losses) from sales and disposals of investments, which are determined by specific identification, (ii) intent-to-sell impairment losses on fixed maturity securities available-for-sale (“AFS”) and impairment losses on all other asset classes, and to a lesser extent, (iii) recognized gains (losses). Recognized gains (losses) are primarily comprised of the change in the ACL and unrealized gains (losses) for certain investments for which changes in estimated fair value are recognized in earnings. Changes in the ACL includes both (i) provisions for credit loss on fixed maturity securities AFS, mortgage loans and leveraged and direct financing leases and (ii) subsequent changes in the ACL. Unrealized gains (losses), representing changes in estimated fair value recognized in earnings, primarily relate to equity securities and certain other limited partnership interests and real estate joint ventures.
Net investment gains (losses) also include non-investment portfolio gains (losses) which do not relate to the performance of the investment portfolio, including gains (losses) from sales and divestitures of businesses and impairment of property, equipment, leasehold improvements and right-of-use (“ROU”) lease assets.
Accrued Investment Income
Accrued investment income is presented separately on the consolidated balance sheet and excluded from the carrying value of the related investments, primarily fixed maturity securities and mortgage loans.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Fixed Maturity Securities
The majority of the Company’s fixed maturity securities are classified as AFS and are reported at their estimated fair value. Changes in the estimated fair value of these securities not recognized in earnings representing unrecognized unrealized investment gains (losses) are recorded as a separate component of other comprehensive income (loss) (“OCI”), net of policy-related amounts and deferred income taxes. All security transactions are recorded on a trade date basis. Sales of securities are determined on a specific identification basis.
Interest income and prepayment fees are recognized when earned. Interest income is recognized using an effective yield method giving effect to amortization of premium and accretion of discount, and is based on the estimated economic life of the securities, which for mortgage-backed and asset-backed securities considers the estimated timing and amount of prepayments of the underlying loans. See Note 7 “- Fixed Maturity Securities AFS - Methodology for Amortization of Premium and Accretion of Discount on Structured Products.” The amortization of premium and accretion of discount also take into consideration call and maturity dates. Generally, the accrual of income is ceased and accrued investment income that is considered uncollectible is recognized as a charge within net investment gains (losses) when securities are impaired.
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 described in Note 7 “- Fixed Maturity Securities AFS - Evaluation of Fixed Maturity Securities AFS for Credit Loss.”
After adoption of credit loss guidance on January 1, 2020, for securities in an unrealized loss position, a credit loss is recognized in earnings within net investment gains (losses) when it is anticipated that the amortized cost, excluding accrued investment income, will not be recovered. When either: (i) the Company has the intent to sell the security; or (ii) it is more likely than not that the Company will be required to sell the security before recovery, the reduction of amortized cost and the loss recognized in earnings is the entire difference between the security’s amortized cost and estimated fair value. If neither of these conditions exists, the difference between the amortized cost of the security and the present value of projected future cash flows expected to be collected is recognized in earnings as a credit loss by establishing an ACL with a corresponding charge recorded in net investment gains (losses). However, the ACL is limited by the amount that the fair value is less than the amortized cost. This limitation is known as the “fair value floor.” If the estimated fair value is less than the present value of projected future cash flows expected to be collected, this portion of the decline in value related to other-than-credit factors (“noncredit loss”) is recorded in OCI as an unrecognized loss.
During the year ended December 31, 2019, prior to the adoption of credit loss guidance on January 1, 2020, the Company applied other than temporary impairment (“OTTI”) guidance for securities in an unrealized loss position. An OTTI was recognized in earnings within net investment gains (losses) when it was anticipated that the amortized cost would not be recovered. When either: (i) the Company had the intent to sell the security, or (ii) it was more likely than not that the Company would be required to sell the security before recovery, the reduction of amortized cost and the OTTI recognized in earnings was the entire difference between the security’s amortized cost and estimated fair value. If neither of these conditions existed, the difference between the amortized cost of the security and the present value of projected future cash flows expected to be collected was recognized as a reduction of amortized cost and an OTTI in earnings. If the estimated fair value was less than the present value of projected future cash flows expected to be collected, this portion of OTTI related to noncredit loss was recorded in OCI as an unrecognized loss.
The credit loss guidance adopted on January 1, 2020, replaced the model for purchased credit impaired (“PCI”) fixed maturity securities AFS and financing receivables and requires the establishment of an ACL at acquisition, which is added to the purchase price to establish the initial amortized cost of the investment and is not recognized in earnings.
Mortgage Loans
After adoption of credit loss guidance on January 1, 2020, the Company recognizes an ACL in earnings within net investment gains (losses) at time of purchase based on expected lifetime credit loss on financing receivables carried at amortized cost, including, but not limited to, mortgage loans and leveraged and direct financing leases, in an amount that represents the portion of the amortized cost basis of such financing receivables that the Company does not expect to collect, resulting in financing receivables being presented at the net amount expected to be collected.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
During the year ended December 31, 2019, prior to the adoption of credit loss guidance on January 1, 2020, the Company applied incurred loss guidance where credit loss was recognized in earnings within net investment gains (losses) when incurred (when it was probable, based on current information and events, that all amounts due under the loan agreement would not be collected).
The Company disaggregates its mortgage loan investments into three portfolio segments: commercial, agricultural and residential. Also included in commercial mortgage loans are revolving line of credit loans collateralized by commercial properties. The accounting policies that are applicable to all portfolio segments are presented below and the accounting policies related to each of the portfolio segments are included in Note 7.
Mortgage loans are stated at unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or expenses, and are net of ACL. Interest income and prepayment fees are recognized when earned. Interest income is recognized using an effective yield method giving effect to amortization of premium and deferred expenses and accretion of discount and deferred fees.
The Company ceases to accrue interest when the collection of interest is not considered probable, which is based on a current evaluation of the status of the borrower, including the number of days past due. When a loan is placed on non-accrual status, uncollected past due accrued interest income that is considered uncollectible is charged-off against net investment income. Generally, the accrual of interest income resumes after all delinquent amounts are paid and management believes all future principal and interest payments will be collected. The Company records cash receipts on non-accruing loans in accordance with the loan agreement. The Company records charge-offs of mortgage loan balances not considered collectible upon the realization of a credit loss, for commercial and agricultural mortgage loans typically through foreclosure or after a decision is made to sell a loan, and for residential mortgage loans, typically after considering the individual consumer’s financial status. The charge-off is recorded in net investment gains (losses), net of amounts recognized in ACL. Cash recoveries on principal amounts previously charged-off are generally reported in net investment gains (losses).
Also included in mortgage loans are residential mortgage loans for which the FVO was elected, and which are stated at estimated fair value. Changes in estimated fair value are recognized in net investment income.
Mortgage loans that are designated as held-for-sale, are carried at the lower of amortized cost or estimated fair value.
Policy Loans
Policy loans are stated at unpaid principal balances. Interest income is recognized 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 are deducted from the cash surrender value or the death benefit prior to settlement of the insurance policy.
Real Estate
Real estate is stated at cost less accumulated depreciation. Depreciation is recognized on a straight-line basis, without any provision for salvage value, over the estimated useful life of the asset (typically up to 55 years). Rental income is recognized on a straight-line basis over the term of the respective leases. The Company periodically reviews its real estate for impairment and tests for recoverability whenever events or changes in circumstances indicate the carrying value may not be recoverable. Properties whose carrying values are greater than their estimated undiscounted cash flows are written down to their estimated fair value, which is generally computed using the present value of expected future cash flows discounted at a rate commensurate with the underlying risks.
Real estate for which the Company commits to a plan to sell within one year and actively markets in its current condition for a reasonable price in comparison to its estimated fair value is classified as held-for-sale and is not depreciated. Real estate held-for-sale is stated at the lower of depreciated cost or estimated fair value less expected disposition costs.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Real Estate Joint Ventures and Other Limited Partnership Interests
The Company uses the equity method of accounting or the FVO 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 but does not hold a controlling financial interest, including when the Company is not deemed the primary beneficiary of a VIE. Under the equity method, the Company recognizes in earnings within net investment income its share of the investee’s earnings. Contributions paid by the Company increase carrying value and distributions received by the Company reduce carrying value. The Company generally recognizes its share of the investee’s earnings 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.
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 estimated fair value. Unrealized gains (losses), representing changes in estimated fair value of these investments, are recognized in earnings within net investment gains (losses). Due to the nature and structure of these investments, they do not meet the characteristics of an equity security in accordance with applicable accounting guidance.
The Company consolidates real estate joint ventures and other limited partnership interests of which it holds a controlling financial interest, or it is deemed the primary beneficiary of a VIE. Assets of certain of these consolidated other limited partnership interests and real estate joint ventures are recorded at estimated fair value. Unrealized gains (losses) representing changes in estimated fair value are recognized in net investment income.
The Company routinely evaluates its equity method investments for impairment. When it is determined an equity method investment has had a loss in value that is other than temporary, it is impaired. Such an impairment is charged to net investment gains (losses).
Short-term Investments
Short-term investments include highly liquid securities and other investments with remaining maturities of one year or less, but greater than three months, at the time of purchase. Securities included within short-term investments are stated at estimated fair value, while other investments included within short-term investments are stated at amortized cost less ACL, which approximates estimated fair value.
Other Invested Assets
Other invested assets consist principally of the following:
•Freestanding derivatives with positive estimated fair values which are described in “- Derivatives” below.
•Funds withheld represent a receivable for amounts contractually withheld by ceding companies in accordance with reinsurance agreements. The Company recognizes interest on funds withheld at rates defined by the terms of the agreement which may be contractually specified or directly related to the underlying investments.
•Tax credit and renewable energy partnerships which derive a significant source of investment return in the form of income tax credits or other tax incentives. Where tax credits are guaranteed by a creditworthy third party, the investment is accounted for under the effective yield method. Otherwise, the investment is accounted for under the equity method. See Note 15.
•Affiliated investments include affiliated loans and affiliated preferred stock. Affiliated loans are stated at unpaid principal balance, adjusted for any unamortized premium or discount. Interest income is recognized using an effective yield method giving effect to amortization of premium and accretion of discount. Affiliated preferred stock is stated at cost. Dividends are recognized in net investment income when declared.
•Annuities funding structured settlement claims represent annuities funding claims assumed by the Company in its capacity as a structured settlements assignment company. The annuities are stated at their contract value, which represents the present value of the future periodic claim payments to be provided. The net investment income recognized reflects the amortization of discount of the annuity at its implied effective interest rate. See Note 3.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
•FVO Securities are primarily investments in fixed maturity securities held-for-investment that are managed on a total return basis where the FVO has been elected, with changes in estimated fair value included in net investment income.
•Leveraged leases net investment is equal to the minimum lease payment receivables plus the unguaranteed residual value, less the unearned income, less ACL and is reported net of non-recourse debt. Income is recognized by applying the leveraged lease’s estimated rate of return to the net investment in the lease in those periods in which the net investment at the beginning of the period is positive. Leveraged leases derive investment returns in part from their income tax benefit. The Company regularly reviews its minimum lease payment receivables for credit loss and residual value for impairments.
•Investments in Federal Home Loan Bank (“FHLB”) common stock are carried at redemption value and are considered restricted investments until redeemed by the respective regional FHLBs. Dividends are recognized in net investment income when declared.
•Investment in an operating joint venture that engages in insurance underwriting activities is accounted for under the equity method.
•Equity securities are reported at their estimated fair value, with changes in estimated fair value included in net investment gains (losses). Sales of securities are determined on a specific identification basis. Dividends are recognized in net investment income when declared.
•Direct financing leases net investment is equal to the minimum lease payment receivables plus the unguaranteed residual value, less the unearned income, less ACL. Income is determined by applying the pre-tax internal rate of return to the investment balance. The Company regularly reviews its minimum lease payment receivables for credit loss and residual value for impairments.
Securities Lending Transactions and Repurchase Agreements
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. The securities loaned or sold under these agreements are included in invested assets. Income and expenses associated with securities lending transactions and repurchase agreements are recognized as investment income and investment expense, respectively, within net investment income.
Securities Lending Transactions
The Company enters into securities lending transactions, whereby securities are loaned to unaffiliated financial institutions. 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 consolidated financial statements. The Company monitors the ratio of the collateral held to 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.
Repurchase Agreements
The Company participates in short-term repurchase agreements with unaffiliated financial institutions. Under these agreements, the Company sells securities and receives cash in an amount generally equal to 85% to 100% of the estimated fair value of the securities sold at the inception of the transaction, with a simultaneous agreement to repurchase such securities at a future date or on demand in an amount equal to the cash initially received plus interest. The Company monitors the ratio of the cash held to the estimated fair value of the securities sold throughout the duration of the transaction and additional cash or securities are obtained as necessary. Securities sold under such transactions may be sold or re-pledged by the transferee.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Derivatives
Freestanding Derivatives
Freestanding derivatives are carried on the Company’s balance sheet either as assets within other invested assets or as liabilities within other liabilities at estimated fair value. The Company does not offset the estimated fair value amounts recognized for derivatives executed with the same counterparty under the same master netting agreement.
Accruals on derivatives are generally recorded in accrued investment income or within other liabilities. However, accruals that are not scheduled to settle within one year are included with the derivative’s carrying value in other invested assets or other liabilities.
If a derivative is not designated as an accounting hedge or its use in managing risk does not qualify for hedge accounting, changes in the estimated fair value of the derivative are reported in net derivative gains (losses) except as follows:
Statement of Operations Presentation: Derivative:
Policyholder benefits and claims • Economic hedges of variable annuity guarantees included in future policy benefits
Net investment income • Economic hedges of equity method investments in joint ventures
• Economic hedges of FVO Securities which are linked to equity indices
Hedge Accounting
To qualify for hedge accounting, at the inception of the hedging relationship, the Company formally documents its risk management objective and strategy for undertaking the hedging transaction, as well as its designation of the hedge. Hedge designation and financial statement presentation of changes in estimated fair value of the hedging derivatives are as follows:
•Fair value hedge - a hedge of the estimated fair value of a recognized asset or liability - in the same line item as the earnings effect of the hedged item. The carrying value of the hedged recognized asset or liability is adjusted for changes in its estimated fair value due to the hedged risk.
•Cash flow hedge - a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability - in OCI and reclassified into the statement of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item.
The changes in estimated fair values of the hedging derivatives are exclusive of any accruals that are separately reported on the statement of operations within interest income or interest expense to match the location of the hedged item.
In its hedge documentation, the Company sets forth how the hedging instrument is expected to hedge the designated risks related to the hedged item and sets forth the method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and at least quarterly throughout the life of the designated hedging relationship. Assessments of hedge effectiveness are also subject to interpretation and estimation and different interpretations or estimates may have a material effect on the amount reported in net income.
The Company discontinues hedge accounting prospectively when: (i) it is determined that the derivative is no longer highly effective in offsetting changes in the estimated fair value or cash flows of a hedged item; (ii) the derivative expires, is sold, terminated, or exercised; (iii) it is no longer probable that the hedged forecasted transaction will occur; or (iv) the derivative is de-designated as a hedging instrument.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
When hedge accounting is discontinued because it is determined that the derivative is not highly effective in offsetting changes in the estimated fair value or cash flows of a hedged item, the derivative continues to be carried on the balance sheet at its estimated fair value, with changes in estimated fair value recognized in net derivative gains (losses). The carrying value of the hedged recognized asset or liability under a fair value hedge is no longer adjusted for changes in its estimated fair value due to the hedged risk, and the cumulative adjustment to its carrying value is amortized into income over the remaining life of the hedged item. Provided the hedged forecasted transaction is still probable of occurring, the changes in estimated fair value of derivatives recorded in OCI related to discontinued cash flow hedges are released into the statement of operations when the Company’s earnings are affected by the variability in cash flows of the hedged item.
When hedge accounting is discontinued because it is no longer probable that the forecasted transactions will occur on the anticipated date or within two months of that date, the derivative continues to be carried on the balance sheet at its estimated fair value, with changes in estimated fair value recognized currently in net derivative gains (losses). Deferred gains and losses of a derivative recorded in OCI pursuant to the discontinued cash flow hedge of a forecasted transaction that is no longer probable of occurring are recognized immediately in net investment gains (losses).
In all other situations in which hedge accounting is discontinued, the derivative is carried at its estimated fair value on the balance sheet, with changes in its estimated fair value recognized in the current period as net derivative gains (losses).
Embedded Derivatives
The Company issues certain products, which include variable annuities, and investment contracts and is a party to certain reinsurance agreements that have embedded derivatives. The Company assesses each identified embedded derivative to determine whether it is required to be bifurcated. The embedded derivative is bifurcated from the host contract and accounted for as a freestanding derivative if:
•the combined instrument is not accounted for in its entirety at estimated fair value with changes in estimated fair value recorded in earnings;
•the terms of the embedded derivative are not clearly and closely related to the economic characteristics of the host contract; and
•a separate instrument with the same terms as the embedded derivative would qualify as a derivative instrument.
Such embedded derivatives are carried on the balance sheet at estimated fair value with the host contract and changes in their estimated fair value are generally reported in net derivative gains (losses). If the Company is unable to properly identify and measure an embedded derivative for separation from its host contract, the entire contract is carried on the balance sheet at estimated fair value, with changes in estimated fair value recognized in the current period in net investment gains (losses) or net investment income. Additionally, the Company may elect to carry an entire contract on the balance sheet at estimated fair value, with changes in estimated fair value recognized in the current period in net investment gains (losses) or net investment income if that contract contains an embedded derivative that requires bifurcation. 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.
Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In most cases, the exit price and the transaction (or entry) price will be the same at initial recognition.
Subsequent to initial recognition, fair values are based on unadjusted quoted prices for identical assets or liabilities in active markets that are readily and regularly obtainable. When such unadjusted quoted prices are not available, estimated fair values are based on quoted prices in markets that are not active, quoted prices for similar but not identical assets or liabilities, or other observable inputs. If these inputs are not available, or observable inputs are not determinable, unobservable inputs and/or adjustments to observable inputs requiring significant management judgment are used to
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
determine the estimated fair value of assets and liabilities. These unobservable inputs can be based on management’s judgment, assumptions or estimation and may not be observable in market activity. Unobservable inputs are based on management’s assumptions about the inputs market participants would use in pricing the assets.
Employee Benefit Plans
The Company sponsors a U.S. nonqualified defined benefit pension plan covering MetLife employees who meet specified eligibility requirements of the sponsor and its participating affiliates. A December 31 measurement date is used for the Company’s defined benefit pension plan.
The Company recognizes the funded status of its defined benefit pension plan, measured as the difference between the fair value of plan assets and the benefit obligation, which is the projected benefit obligation (“PBO”) for pension benefits.
Actuarial gains and losses result from differences between the plan’s actual experience and the assumed experience on PBO during a particular period and are recorded in accumulated OCI (“AOCI”). To the extent such gains and losses exceed 10% of the PBO, the excess is amortized into net periodic benefit costs, generally over the average projected future service years of the active employees. In addition, prior service costs (credit) are recognized in AOCI at the time of the amendment and then amortized to net periodic benefit costs over the average projected future service years of the active employees.
Net periodic benefit costs are determined using management’s estimates and actuarial assumptions and are comprised of service cost, interest cost, settlement and curtailment costs, amortization of net actuarial (gains) losses, and amortization of prior service costs (credit).
The Company sponsors a nonqualified defined contribution plan for all MetLife employees who qualify. This nonqualified defined contribution plan provides supplemental benefits in excess of limits applicable to a qualified plan which is sponsored by an affiliate.
Income Tax
Metropolitan Life Insurance Company and its includable subsidiaries join with MetLife, Inc. and its includable subsidiaries in filing a consolidated U.S. life insurance and non-life insurance federal income tax return in accordance with the provisions of the Internal Revenue Code of 1986, as amended. Current taxes (and the benefits of tax attributes such as losses) are allocated to Metropolitan Life Insurance Company and its includable subsidiaries under the consolidated tax return regulations and a tax sharing agreement. Under the consolidated tax return regulations, MetLife, Inc. has elected the “percentage method” (and 100% under such method) of reimbursing companies for tax attributes, e.g., net operating losses. As a result, 100% of tax attributes are reimbursed by MetLife, Inc. to the extent that consolidated federal income tax of the consolidated federal tax return group is reduced in a year by tax attributes. On an annual basis, each of the profitable subsidiaries pays to MetLife, Inc. the federal income tax which it would have paid based upon that year’s taxable income. If Metropolitan Life Insurance Company or its includable subsidiaries have current or prior deductions and credits (including but not limited to losses) which reduce the consolidated tax liability of the consolidated federal tax return group, the deductions and credits are characterized as realized (or realizable) by Metropolitan Life Insurance Company and its includable subsidiaries when those tax attributes are realized (or realizable) by the consolidated federal tax return group, even if Metropolitan Life Insurance Company or its includable subsidiaries would not have realized the attributes on a stand-alone basis under a “wait and see” method.
The Company’s accounting for income taxes represents management’s best estimate of various events and transactions.
Deferred tax assets and liabilities resulting from temporary differences between the financial reporting and tax bases of assets and liabilities are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryback or carryforward periods under the tax law in the applicable tax jurisdiction. Valuation allowances are established against deferred tax assets when management determines, based on available information, that it is more likely than not that deferred income tax assets will not be realized. Significant judgment is required in determining whether valuation allowances should be established, as well as the amount of such allowances. When making such determination, the Company considers many factors, including:
•the nature, frequency, and amount of cumulative financial reporting income and losses in recent years;
•the jurisdiction in which the deferred tax asset was generated;
•the length of time that carryforward can be utilized in the various taxing jurisdictions;
•future taxable income exclusive of reversing temporary differences and carryforwards;
•future reversals of existing taxable temporary differences;
•taxable income in prior carryback years; and
•tax planning strategies.
The Company may be required to change its provision for income taxes when estimates used in determining valuation allowances on deferred tax assets significantly change or when receipt of new information indicates the need for adjustment in valuation allowances. Additionally, the effect of changes in tax laws, tax regulations, or interpretations of such laws or regulations, is recognized in net income tax expense (benefit) in the period of change.
The Company determines whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded on the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Unrecognized tax benefits due to tax uncertainties that do not meet the threshold are included within other liabilities and are charged to earnings in the period that such determination is made.
The Company classifies interest recognized as interest expense and penalties recognized as a component of income tax expense.
In December 2017, H.R. 1, commonly referred to as the Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”) was signed into law. See Note 15 for additional information on U.S. Tax Reform.
Litigation Contingencies
The Company is a defendant in a large number of litigation matters and is involved in a number of regulatory investigations. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Except as otherwise disclosed in Note 16, legal costs are recognized as incurred. On a quarterly and annual basis, the Company reviews relevant information with respect to liabilities for litigation, regulatory investigations and litigation-related contingencies to be reflected on the Company’s consolidated financial statements.
Other Accounting Policies
Stock-Based Compensation
The Company does not issue any awards payable in its common stock or options to purchase its common stock. MetLife, Inc. grants certain employees stock-based compensation awards under various plans subject to vesting conditions. In accordance with a services agreement with an affiliate, the Company bears a proportionate share of stock-based compensation expense. The Company’s expense related to stock-based compensation included in other expenses was $59 million, $44 million and $57 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Cash and Cash Equivalents
The Company considers highly liquid securities and other investments purchased with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. Securities included within cash equivalents are stated at estimated fair value, while other investments included within cash equivalents are stated at amortized cost, which approximates estimated fair value.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Property, Equipment and Leasehold Improvements
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 $852 million and $856 million at December 31, 2021 and 2020, respectively. Accumulated depreciation and amortization of property, equipment and leasehold improvements was $695 million and $657 million at December 31, 2021 and 2020, respectively.
Leases
The Company, as lessee, has entered into various lease and sublease agreements for office space and equipment. At contract inception, the Company determines that an arrangement contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. For contracts that contain a lease, the Company recognizes the ROU asset in other assets and the lease liability in other liabilities. The Company evaluates whether a ROU asset is impaired when events or changes in circumstances indicate that its carrying amount may not be recoverable. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the associated lease costs are recorded as an expense on a straight-line basis over the lease term.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are determined using the Company’s incremental borrowing rate based upon information available at commencement date to recognize the present value of lease payments over the lease term. ROU assets also include lease payments and excludes lease incentives. Lease terms may include options to extend or terminate the lease and are included in the lease measurement when it is reasonably certain that the Company will exercise that option.
The Company has lease agreements with lease and non-lease components. The Company does not separate lease and non-lease components and accounts for these items as a single lease component for all asset classes.
The majority of the Company’s leases and subleases are operating leases related to office space. The Company recognizes lease expense for operating leases on a straight-line basis over the lease term.
Other Revenues
Other revenues primarily include fees related to service contracts from customers for prepaid legal plans, administrative services-only contracts, and recordkeeping and related services. Substantially all of the revenue from the services is recognized over time as the applicable services are provided or are made available to the customers. The revenue recognized includes variable consideration to the extent it is probable that a significant reversal will not occur. In addition to the service fees, other revenues also include certain stable value fees and reinsurance ceded. These fees are recognized as earned.
Policyholder Dividends
Policyholder dividends are approved annually by Metropolitan Life Insurance Company’s Board of Directors. The aggregate amount of policyholder dividends is related to actual interest, mortality, morbidity and expense experience for the year, as well as management’s judgment as to the appropriate level of statutory surplus to be retained by Metropolitan Life Insurance Company.
Foreign Currency
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. The local currencies of foreign operations are the 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.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Goodwill
Goodwill represents the future economic benefits arising from net assets acquired in a business combination that are not individually identified and recognized. Goodwill is calculated as the excess of cost over the estimated fair value of such net assets acquired, is not amortized, and is tested for impairment based on a fair value approach at least annually, or more frequently if events or circumstances indicate that there may be justification for conducting an interim test. The Company performs its annual goodwill impairment testing during the third quarter based upon data as of the close of the second quarter. Goodwill associated with a business acquisition is not tested for impairment during the year the business is acquired unless there is a significant identified impairment event.
The impairment test is performed at the reporting unit level, which is the operating segment or a business one level below the operating segment, if discrete financial information is prepared and regularly reviewed by management at that level. For purposes of goodwill impairment testing, if the carrying value of a reporting unit exceeds its estimated fair value, an impairment charge would be recognized for the amount by which the carrying value exceeds the reporting unit’s fair value; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit. Additionally, the Company will consider income tax effects from any tax deductible goodwill on the carrying value of the reporting unit when measuring the goodwill impairment loss, if applicable.
On an ongoing basis, the Company evaluates potential triggering events that may affect the estimated fair value of the Company’s reporting units to assess whether any goodwill impairment exists. Deteriorating or adverse market conditions for certain reporting units may have a significant impact on the estimated fair value of these reporting units and could result in future impairments of goodwill.
For the 2021 annual goodwill impairment tests, the Company concluded that goodwill was not impaired. The goodwill balance was $86 million in the U.S. segment at both December 31, 2021 and 2020. The goodwill balance was $31 million in the MetLife Holdings segment at both December 31, 2021 and 2020.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards update (“ASUs”) to the FASB Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. The following tables provide a description of ASUs recently issued by the FASB and the impact of their adoption on the Company’s consolidated financial statements.
Adopted Accounting Pronouncements
The table below describes the impacts of the ASUs adopted by the Company, effective January 1, 2021.
Standard Description Effective Date and Method of Adoption Impact on Financial Statements
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting; as clarified and amended by ASU 2021-01, Reference Rate Reform (Topic 848): Scope
The guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, with certain exceptions. ASU 2021-01 amends the scope of the recent reference rate reform guidance. New optional expedients allow derivative instruments impacted by changes in the interest rate used for margining, discounting, or contract price alignment to qualify for certain optional relief.
Effective for contract modifications made between March 12, 2020 and December 31, 2022.
The guidance has reduced the operational and financial impacts of contract modifications that replace a reference rate, such as London Interbank Offered Rate (“LIBOR”), affected by reference rate reform.
Contract modifications for invested assets and derivative instruments have occurred during 2021 and are expected to continue into 2022. Based on actions taken to date, the adoption of the guidance has not had a material impact on the Company’s consolidated financial statements. The Company does not expect the adoption of this guidance to have a material ongoing impact and will continue to evaluate the impacts of reference rate reform on contract modifications and hedging relationships through December 31, 2022.
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
The guidance simplifies the accounting for income taxes by removing certain exceptions to the tax accounting guidance and providing clarification to other specific tax accounting guidance to eliminate variations in practice. Specifically, it removes the exceptions related to the a) incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items, b) recognition of a deferred tax liability when foreign investment ownership changes from equity method investment to consolidated subsidiary and vice versa and c) use of interim period tax accounting for year-to-date losses that exceed anticipated losses. The guidance also simplifies the application of the income tax guidance for franchise taxes that are partially based on income and the accounting for tax law changes during interim periods, clarifies the accounting for transactions that result in a step-up in tax basis of goodwill, provides for the option to elect allocation of consolidated income taxes to entities disregarded by taxing authorities for their stand-alone reporting, and requires that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.
January 1, 2021. The Company adopted, using a prospective approach.
The adoption of the guidance did not have a material impact on the Company’s consolidated financial statements.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Future Adoption of Accounting Pronouncements
ASUs not listed below were assessed and either determined to be not applicable or are not expected to have a material impact on the Company’s consolidated financial statements or disclosures. ASUs issued but not yet adopted as of December 31, 2021 that are currently being assessed and may or may not have a material impact on the Company’s consolidated financial statements or disclosures are summarized in the table below.
Standard Description Effective Date and Method of Adoption Impact on Financial Statements
ASU 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, as amended by ASU 2019-09, Financial Services-Insurance (Topic 944): Effective Date, as amended by ASU 2020-11, Financial Services-Insurance (Topic 944): Effective Date and Early Application
The guidance (i) prescribes the discount rate to be used in measuring the liability for future policy benefits for traditional and limited payment long-duration contracts, and requires assumptions for those liability valuations to be updated after contract inception, (ii) requires more market-based product guarantees on certain separate account and other account balance long-duration contracts to be accounted for at fair value, (iii) simplifies the amortization of DAC for virtually all long-duration contracts, and (iv) introduces certain financial statement presentation requirements, as well as significant additional quantitative and qualitative disclosures. The amendments in ASU 2019-09 defer the effective date of ASU 2018-12 to January 1, 2022 for all entities, and the amendments in ASU 2020-11 further defer the effective date of ASU 2018-12 for an additional year to January 1, 2023 for all entities.
January 1, 2023, to be applied retrospectively to January 1, 2021 (with early adoption permitted).
The Company’s implementation efforts and the evaluation of the impacts of the guidance continue to progress. Given the nature and extent of the required changes to a significant portion of the Company’s operations, the adoption of this guidance is expected to have a material impact on its financial position, results of operations, and disclosures, as well as systems, processes, and controls.
The Company expects to adopt the guidance effective January 1, 2023. The modified retrospective approach will be used, except in regard to market risk benefits where the Company will use the full retrospective approach.
The Company has created a governance framework and is managing a detailed implementation plan to support timely application of the guidance. The Company has made progress and continues to refine key accounting policy decisions, technology solutions and internal controls. These activities include, but are not limited to, modifications of actuarial valuation, accounting and financial reporting processes and systems including internal controls.
The most significant transition impacts are expected to be from: (i) the requirement to account for variable annuity guarantees as market risk benefits measured at fair value, (except for the changes in fair value already recognized under an existing accounting model) and (ii) adjustments to AOCI for the change in the current discount rate to be used in measuring the liability for future policy benefits for traditional and limited payment contracts and the removal of shadow account balances associated with long-duration products.
Based on factors such as: (i) the measurement of market risk benefits at fair value; and (ii) the difference between the discount rate currently used for measuring the liability for future policy benefits for traditional and limited payment contracts compared to the observed upper medium grade investment yield at the date of transition for this guidance, the Company’s expected impact of adopting this guidance is anticipated to result in a reduction of total equity. The Company continues to evaluate the impact of the guidance on its consolidated financial statements.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Standard Description Effective Date and Method of Adoption Impact on Financial Statements
ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance
The guidance requires entities to provide annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy and can include tax credits and other forms of government assistance. Entities are required to disclose information about (i) the nature of the transactions and the related accounting policy used to account for the transactions; (ii) the line items on the balance sheet and income statement that are affected by the transactions, including the associated amounts; and (iii) the significant terms and conditions of the transactions, including commitments and contingencies. Annual periods beginning January 1, 2022, to be applied prospectively (with early adoption permitted). The Company is currently evaluating the impact of the guidance on its annual disclosures to be included in its 2022 consolidated financial statements.
ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers
The guidance indicates how to determine whether a contract liability is recognized by the acquirer in a business combination and provides specific guidance on how to recognize and measure acquired contract assets and contract liabilities from revenue contracts in a business combination.
January 1, 2023, to be applied prospectively (with early adoption permitted).
The Company is currently evaluating the impact of the guidance on its consolidated financial statements.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
2. Segment Information
The Company is organized into two segments: U.S. and MetLife Holdings. In addition, the Company reports certain of its results of operations in Corporate & Other.
U.S.
The U.S. segment offers a broad range of protection products and services aimed at serving the financial needs of customers throughout their lives. These products are sold to corporations and their respective employees, other institutions and their respective members, as well as individuals. The U.S. segment is organized into two businesses: Group Benefits and Retirement and Income Solutions (“RIS”).
•The Group Benefits business offers products such as term, variable and universal life insurance, dental, group and individual disability and accident & health insurance.
•The RIS business offers a broad range of life and annuity-based insurance and investment products, including stable value and pension risk transfer products, institutional income annuities, structured settlements, benefit funding solutions and capital markets investment products.
MetLife Holdings
The MetLife Holdings segment consists of operations relating to products and businesses that the Company no longer actively markets. These include variable, universal, term and whole life insurance, variable, fixed and index-linked annuities, and long-term care insurance.
Corporate & Other
Corporate & Other contains various start-up, developing and run-off businesses, including the Company’s ancillary non-U.S. operations. Also included in Corporate & Other are: the excess capital, as well as certain charges and activities, not allocated to the segments (including enterprise-wide strategic initiative restructuring charges), interest expense related to the majority of the Company’s outstanding debt, expenses associated with certain legal proceedings and income tax audit issues, and the elimination of intersegment amounts (which generally relate to affiliated reinsurance and intersegment loans, bearing interest rates commensurate with related borrowings).
Financial Measures and Segment Accounting Policies
Adjusted earnings is used by management to evaluate performance and allocate resources. Consistent with GAAP guidance for segment reporting, adjusted earnings is also the Company’s GAAP measure of segment performance and is reported below. Adjusted earnings should not be viewed as a substitute for net income (loss). The Company believes the presentation of adjusted earnings, as the Company measures it for management purposes, enhances the understanding of its performance by highlighting the results of operations and the underlying profitability drivers of the business.
Adjusted earnings is defined as adjusted revenues less adjusted expenses, net of income tax.
The financial measures of adjusted revenues and adjusted expenses focus on the Company’s primary businesses principally by excluding the impact of market volatility, which could distort trends, and revenues and costs related to non-core products and certain entities required to be consolidated under GAAP. Also, these measures exclude results of discontinued operations under GAAP and other businesses that have been or will be sold or exited by MLIC but do not meet the discontinued operations criteria under GAAP and are referred to as divested businesses. Divested businesses also include the net impact of transactions with exited businesses that have been eliminated in consolidation under GAAP and costs relating to businesses that have been or will be sold or exited by MLIC that do not meet the criteria to be included in results of discontinued operations under GAAP. Adjusted revenues also excludes net investment gains (losses) and net derivative gains (losses).
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
2. Segment Information (continued)
The following additional adjustments are made to revenues, in the line items indicated, in calculating adjusted revenues:
•Universal life and investment-type product policy fees excludes the amortization of unearned revenue related to net investment gains (losses) and net derivative gains (losses) and certain variable annuity GMIB fees (“GMIB fees”); and
•Net investment income: (i) includes adjustments for 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 securitization entities that are VIEs consolidated under GAAP and (iv) 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.
The following additional adjustments are made to expenses, in the line items indicated, in calculating adjusted expenses:
•Policyholder benefits and claims and policyholder dividends excludes: (i) amortization of basis adjustments associated with de-designated fair value hedges of future policy benefits, (ii) changes in the policyholder dividend obligation related to net investment gains (losses) and net derivative gains (losses), (iii) amounts associated with periodic crediting rate adjustments based on the total return of a contractually referenced pool of assets and other pass-through adjustments, (iv) benefits and hedging costs related to GMIBs (“GMIB costs”) and (v) market value adjustments associated with surrenders or terminations of contracts (“Market value adjustments”);
•Interest credited to policyholder account balances includes adjustments for earned income on derivatives and amortization of premium on derivatives that are hedges of policyholder account balances but do not qualify for hedge accounting treatment;
•Amortization of DAC and VOBA excludes amounts related to: (i) net investment gains (losses) and net derivative gains (losses), (ii) GMIB fees and GMIB costs and (iii) Market value adjustments;
•Interest expense on debt excludes certain amounts related to securitization entities that are VIEs consolidated under GAAP; and
•Other expenses excludes: (i) noncontrolling interests, (ii) acquisition, integration and other costs, and (iii) goodwill impairments.
The tax impact of the adjustments mentioned above are calculated net of the U.S. or foreign statutory tax rate, which could differ from the Company’s effective tax rate. Additionally, the provision for income tax (expense) benefit also includes the impact related to the timing of certain tax credits, as well as certain tax reforms.
Set forth in the tables below is certain financial information with respect to the Company’s segments, as well as Corporate & Other, for the years ended December 31, 2021, 2020 and 2019 and at December 31, 2021 and 2020. The segment accounting policies are the same as those used to prepare the Company’s consolidated financial statements, except for adjusted earnings adjustments as defined above. In addition, segment accounting policies include the method of capital allocation described below.
Economic capital is an internally developed risk capital model, the purpose of which is to measure the risk in the business and to provide a basis upon which capital is deployed. The economic capital model accounts for the unique and specific nature of the risks inherent in MetLife’s and the Company’s businesses.
MetLife’s economic capital model, coupled with considerations of local capital requirements, aligns segment allocated equity with emerging standards and consistent risk principles. The model applies statistics-based risk evaluation principles to the material risks to which the Company is exposed. These consistent risk principles include calibrating required economic capital shock factors to a specific confidence level and time horizon while applying an industry standard method for the inclusion of diversification benefits among risk types. MetLife’s management is responsible for the ongoing production and enhancement of the economic capital model and reviews its approach periodically to ensure that it remains consistent with emerging industry practice standards.
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, net income (loss) or adjusted earnings.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
2. Segment Information (continued)
Net investment income is based upon the actual results of each segment’s specifically identifiable investment portfolios adjusted for allocated equity. Other costs are allocated to each of the segments based upon: (i) a review of the nature of such costs; (ii) time studies analyzing the amount of employee compensation costs incurred by each segment; and (iii) cost estimates included in the Company’s product pricing.
Year Ended December 31, 2021 U.S. MetLife Holdings Corporate
& Other Total Adjustments Total
Consolidated
(In millions)
Revenues
Premiums
$ 23,466 $ 2,725 $ - $ 26,191 $ - $ 26,191
Universal life and investment-type product policy fees
1,101 881 - 1,982 80 2,062
Net investment income (1) 7,249 5,833 (17) 13,065 (579) 12,486
Other revenues
861 243 512 1,616 - 1,616
Net investment gains (losses)
- - - - 652 652
Net derivative gains (losses)
- - - - (964) (964)
Total revenues
32,677 9,682 495 42,854 (811) 42,043
Expenses
Policyholder benefits and claims and policyholder dividends
24,504 5,281 - 29,785 366 30,151
Interest credited to policyholder account balances
1,362 666 1 2,029 (2) 2,027
Capitalization of DAC
(59) 1 (6) (64) - (64)
Amortization of DAC and VOBA
56 171 - 227 32 259
Interest expense on debt
6 5 85 96 - 96
Other expenses
3,266 839 1,230 5,335 (9) 5,326
Total expenses
29,135 6,963 1,310 37,408 387 37,795
Provision for income tax expense (benefit)
738 551 (518) 771 (241) 530
Adjusted earnings
$ 2,804 $ 2,168 $ (297) 4,675
Adjustments to:
Total revenues
(811)
Total expenses
(387)
Provision for income tax (expense) benefit
Net income (loss)
$ 3,718 $ 3,718
At December 31, 2021 U.S. MetLife Holdings Corporate
& Other
Total
(In millions)
Total assets
$ 256,381 $ 161,614 $ 28,562 $ 446,557
Separate account assets
$ 77,130 $ 46,721 $ - $ 123,851
Separate account liabilities
$ 77,130 $ 46,721 $ - $ 123,851
__________________
(1)Net investment income from equity method investments represents 22% and 27% of segment net investment income for the U.S. and MetLife Holdings segments, respectively.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
2. Segment Information (continued)
For the Year Ended December 31, 2020 U.S. MetLife Holdings Corporate
& Other Total
Adjustments
Total
Consolidated
(In millions)
Revenues
Premiums
$ 17,778 $ 2,962 $ 1 $ 20,741 $ - $ 20,741
Universal life and investment-type product policy fees
1,044 868 - 1,912 84 1,996
Net investment income (1) 6,348 4,616 (136) 10,828 (578) 10,250
Other revenues
857 224 580 1,661 - 1,661
Net investment gains (losses)
- - - - (73) (73)
Net derivative gains (losses)
- - - - 738 738
Total revenues
26,027 8,670 445 35,142 171 35,313
Expenses
Policyholder benefits and claims and policyholder dividends
17,821 5,669 - 23,490 485 23,975
Interest credited to policyholder account balances
1,569 687 - 2,256 (9) 2,247
Capitalization of DAC
(49) (2) - (51) - (51)
Amortization of DAC and VOBA
56 290 - 346 60 406
Interest expense on debt
7 6 86 99 - 99
Other expenses
3,085 801 666 4,552 7 4,559
Total expenses
22,489 7,451 752 30,692 543 31,235
Provision for income tax expense (benefit)
752 236 (376) 612 (78) 534
Adjusted earnings
$ 2,786 $ 983 $ 69 3,838
Adjustments to:
Total revenues
Total expenses
(543)
Provision for income tax (expense) benefit
Net income (loss)
$ 3,544 $ 3,544
At December 31, 2020 U.S.
MetLife Holdings
Corporate
& Other
Total
(In millions)
Total assets
$ 262,478 $ 164,956 $ 30,173 $ 457,607
Separate account assets
$ 81,866 $ 46,780 $ - $ 128,646
Separate account liabilities
$ 81,866 $ 46,780 $ - $ 128,646
__________________
(1)Net investment income from equity method investments represents 5% and 6% of segment net investment income for the U.S. and MetLife Holdings segments, respectively.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
2. Segment Information (continued)
For the Year Ended December 31, 2019 U.S. MetLife Holdings Corporate
& Other Total
Adjustments
Total
Consolidated
(In millions)
Revenues
Premiums
$ 18,510 $ 3,098 $ - $ 21,608 $ - $ 21,608
Universal life and investment-type product policy fees
1,037 912 - 1,949 88 2,037
Net investment income (1) 6,647 4,688 (73) 11,262 (289) 10,973
Other revenues
815 220 538 1,573 - 1,573
Net investment gains (losses)
- - - - 346 346
Net derivative gains (losses)
- - - - (288) (288)
Total revenues
27,009 8,918 465 36,392 (143) 36,249
Expenses
Policyholder benefits and claims and policyholder dividends
18,963 5,920 - 24,883 206 25,089
Interest credited to policyholder account balances
1,925 718 - 2,643 (19) 2,624
Capitalization of DAC
(53) 10 - (43) - (43)
Amortization of DAC and VOBA
55 220 - 275 (36) 239
Interest expense on debt
10 8 87 105 - 105
Other expenses
2,947 844 877 4,668 7 4,675
Total expenses
23,847 7,720 964 32,531 158 32,689
Provision for income tax expense (benefit)
656 232 (677) 211 (63) 148
Adjusted earnings
$ 2,506 $ 966 $ 178 3,650
Adjustments to:
Total revenues
(143)
Total expenses
(158)
Provision for income tax (expense) benefit
Net income (loss)
$ 3,412 $ 3,412
__________________
(1)Net investment income from equity method investments represents 5% of segment net investment income for both the U.S. and MetLife Holdings segments.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
2. Segment Information (continued)
The following table presents total premiums, universal life and investment-type product policy fees and other revenues by major product groups of the Company’s segments, as well as Corporate & Other:
Years Ended December 31,
2021 2020 2019
(In millions)
Life insurance
$ 15,432 $ 14,018 $ 13,413
Accident & health insurance
9,493 8,650 8,556
Annuities
4,541 1,352 2,917
Other
403 378 332
Total
$ 29,869 $ 24,398 $ 25,218
Substantially all of the Company’s consolidated premiums, universal life and investment-type product policy fees and other revenues originated in the U.S.
Revenues derived from one U.S. segment customer were $3.9 billion, $3.3 billion and $3.0 billion for the years ended December 31, 2021, 2020 and 2019, respectively, which represented 13%, 14% and 12% of the consolidated premiums, universal life and investment-type product policy fees and other revenues, respectively. 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, 2021, 2020 and 2019.
3. Insurance
Insurance Liabilities
Insurance liabilities, including affiliated insurance liabilities on reinsurance assumed and ceded, are comprised of future policy benefits, policyholder account balances and other policy-related balances. Information regarding insurance liabilities by segment, as well as Corporate & Other, was as follows at:
December 31,
2021 2020
(In millions)
U.S.
$ 145,463 $ 147,557
MetLife Holdings
88,991 90,259
Corporate & Other
373 170
Total
$ 234,827 $ 237,986
See Note 5 for discussion of affiliated reinsurance liabilities included in the table above.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
3. Insurance (continued)
Future policy benefits are measured as follows:
Product Type: Measurement Assumptions:
Participating life 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%, and mortality rates guaranteed in calculating the cash surrender values described in such contracts); and (ii) the liability for terminal dividends.
Nonparticipating life Aggregate of the present value of future expected benefit payments and related expenses less the present value of future expected net premiums. Assumptions as to mortality and persistency are based upon the Company’s experience when the basis of the liability is established. Interest rate assumptions for the aggregate future policy benefit liabilities range from 2% to 11%.
Individual and group
traditional fixed annuities
after annuitization Present value of future expected payments. Interest rate assumptions used in establishing such liabilities range from 1% to 11%.
Non-medical health
insurance The net level premium method and assumptions as to future morbidity, withdrawals and interest, which provide a margin for adverse deviation. Interest rate assumptions used in establishing such liabilities range from 1% to 7%.
Disabled lives Present value of benefits method and experience assumptions as to claim terminations, expenses and interest. Interest rate assumptions used in establishing such liabilities range from 2% to 8%.
Participating business represented 3% of the Company’s life insurance in-force at both December 31, 2021 and 2020. Participating policies represented 14%, 17% and 19% of gross traditional life insurance premiums for the years ended December 31, 2021, 2020 and 2019, respectively.
Policyholder account balances are equal to: (i) policy account values, which consist of an accumulation of gross premium payments; and (ii) credited interest, ranging from less than 1% to 8%, less expenses, mortality charges and withdrawals.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
3. Insurance (continued)
Guarantees
The Company issues directly and assumes through reinsurance variable annuity products with guaranteed minimum benefits. GMABs, the non-life contingent portion of GMWBs and certain non-life contingent portions of GMIBs are accounted for as embedded derivatives in policyholder account balances and are further discussed in Note 8. Guarantees accounted for as insurance liabilities include:
Guarantee: Measurement Assumptions:
GMDBs •
A return of purchase payment upon death even if the account value is reduced to zero.
•
Present value of expected death benefits in excess of the projected account balance recognizing the excess ratably over the accumulation period based on the present value of total expected assessments.
•
An enhanced death benefit may be available for an additional fee.
•
Assumptions are consistent with those used for amortizing DAC, and are thus subject to the same variability and risk.
•
Investment performance and volatility assumptions are consistent with the historical experience of the appropriate underlying equity index, such as the S&P 500 Index.
•
Benefit assumptions are based on the average benefits payable over a range of scenarios.
GMIBs •
After a specified period of time determined at the time of issuance of the variable annuity contract, a minimum accumulation of purchase payments, even if the account value is reduced to zero, that can be annuitized to receive a monthly income stream that is not less than a specified amount.
•
Present value of expected income benefits in excess of the projected account balance at any future date of annuitization and recognizing the excess ratably over the accumulation period based on present value of total expected assessments.
•
Certain contracts also provide for a guaranteed lump sum return of purchase premium in lieu of the annuitization benefit.
•
Assumptions are consistent with those used for estimating GMDB liabilities.
•
Calculation incorporates an assumption for the percentage of the potential annuitizations that may be elected by the contractholder.
GMWBs •
A return of purchase payment via partial withdrawals, even if the account value is reduced to zero, provided that cumulative withdrawals in a contract year do not exceed a certain limit.
•
Expected value of the life contingent payments and expected assessments using assumptions consistent with those used for estimating the GMDB liabilities.
•
Certain contracts include guaranteed withdrawals that are life contingent.
The Company also issues other annuity contracts that apply a lower rate on funds deposited if the contractholder elects to surrender the contract for cash and a higher rate if the contractholder elects to annuitize. These guarantees include benefits that are payable in the event of death, maturity or at annuitization. Certain other annuity contracts contain guaranteed annuitization benefits that may be above what would be provided by the current account value of the contract. Additionally, the Company issues universal and variable life contracts where the Company contractually guarantees to the contractholder a secondary guarantee or a guaranteed paid-up benefit.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
3. Insurance (continued)
Information regarding the liabilities for guarantees (excluding base policy liabilities and embedded derivatives) relating to annuity and universal and variable life contracts was as follows:
Annuity Contracts Universal and Variable
Life Contracts
GMDBs and
GMWBs
GMIBs Secondary
Guarantees
Paid-Up
Guarantees
Total
(In millions)
Direct:
Balance at January 1, 2019 $ 317 $ 738 $ 820 $ 114 $ 1,989
Incurred guaranteed benefits 57 19 255 52 383
Paid guaranteed benefits (13) - - - (13)
Balance at December 31, 2019 361 757 1,075 166 2,359
Incurred guaranteed benefits 144 206 320 (12) 658
Paid guaranteed benefits (12) (4) (44) (14) (74)
Balance at December 31, 2020 493 959 1,351 140 2,943
Incurred guaranteed benefits 123 82 164 16 385
Paid guaranteed benefits (14) (7) (52) (15) (88)
Balance at December 31, 2021 $ 602 $ 1,034 $ 1,463 $ 141 $ 3,240
Ceded:
Balance at January 1, 2019 $ - $ - $ 301 $ 80 $ 381
Incurred guaranteed benefits - - 95 15 110
Paid guaranteed benefits - - - - -
Balance at December 31, 2019 - - 396 95 491
Incurred guaranteed benefits - - 93 13 106
Paid guaranteed benefits - - (20) (9) (29)
Balance at December 31, 2020 - - 469 99 568
Incurred guaranteed benefits - - 63 10 73
Paid guaranteed benefits - - (32) (10) (42)
Balance at December 31, 2021 $ - $ - $ 500 $ 99 $ 599
Net:
Balance at January 1, 2019 $ 317 $ 738 $ 519 $ 34 $ 1,608
Incurred guaranteed benefits 57 19 160 37 273
Paid guaranteed benefits (13) - - - (13)
Balance at December 31, 2019 361 757 679 71 1,868
Incurred guaranteed benefits 144 206 227 (25) 552
Paid guaranteed benefits (12) (4) (24) (5) (45)
Balance at December 31, 2020 493 959 882 41 2,375
Incurred guaranteed benefits 123 82 101 6 312
Paid guaranteed benefits (14) (7) (20) (5) (46)
Balance at December 31, 2021 $ 602 $ 1,034 $ 963 $ 42 $ 2,641
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
3. Insurance (continued)
Information regarding the Company’s guarantee exposure, which includes direct business, but excludes offsets from hedging or reinsurance, if any, was as follows at:
December 31,
2021 2020
In the
Event of Death At
Annuitization In the
Event of Death At
Annuitization
(Dollars in millions)
Annuity Contracts:
Variable Annuity Guarantees:
Total account value (1), (2)
$ 48,868 $ 20,140 $ 50,047 $ 21,229
Separate account value (1)
$ 39,882 $ 19,347 $ 40,583 $ 20,368
Net amount at risk
$ 1,160 (3) $ 461 (4) $ 1,178 (3) $ 552 (4)
Average attained age of contractholders
69 years 66 years 68 years 67 years
Other Annuity Guarantees:
Total account value (1), (2)
N/A $ 135 N/A $ 142
Net amount at risk
N/A $ 70 (5) N/A $ 74 (5)
Average attained age of contractholders
N/A 55 years N/A 55 years
December 31,
2021 2020
Secondary
Guarantees Paid-Up
Guarantees Secondary
Guarantees Paid-Up
Guarantees
(Dollars in millions)
Universal and Variable Life Contracts:
Total account value (1), (2)
$ 5,935 $ 826 $ 5,607 $ 861
Net amount at risk (6)
$ 37,482 $ 5,181 $ 39,134 $ 5,525
Average attained age of policyholders 59 years 65 years 58 years 65 years
______________
(1)The Company’s annuity and life contracts with guarantees may offer more than one type of guarantee in each contract. Therefore, the amounts listed above may not be mutually exclusive.
(2)Includes the contractholder’s investments in the general account and separate account, if applicable.
(3)Defined as the death benefit less the total account value, as of the balance sheet date. It represents the amount of the claim that the Company would incur if death claims were filed on all contracts on the balance sheet date and includes any additional contractual claims associated with riders purchased to assist with covering income taxes payable upon death.
(4)Defined as the amount (if any) that would be required to be added to the total account value to purchase a lifetime income stream, based on current annuity rates, equal to the minimum amount provided under the guaranteed benefit. This amount represents the Company’s potential economic exposure to such guarantees in the event all contractholders were to annuitize on the balance sheet date, even though the contracts contain terms that allow annuitization of the guaranteed amount only after the 10th anniversary of the contract, which not all contractholders have achieved.
(5)Defined as either the excess of the upper tier, adjusted for a profit margin, less the lower tier, as of the balance sheet date or the amount (if any) that would be required to be added to the total account value to purchase a lifetime income stream, based on current annuity rates, equal to the minimum amount provided under the guaranteed benefit. These amounts represent the Company’s potential economic exposure to such guarantees in the event all contractholders were to annuitize on the balance sheet date.
(6)Defined as the guarantee amount less the account value, as of the balance sheet date. It represents the amount of the claim that the Company would incur if death claims were filed on all contracts on the balance sheet date.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
3. Insurance (continued)
Guarantees - Separate Accounts
Account balances of contracts with guarantees were invested in separate account asset classes as follows at:
December 31,
2021 2020
(In millions)
Fund Groupings:
Equity
$ 24,519 $ 23,891
Balanced
16,228 16,992
Bond
2,874 3,052
Money Market
41 52
Total
$ 43,662 $ 43,987
Obligations Assumed Under Structured Settlement Assignments
The Company assumed structured settlement claim obligations as an assignment company. These liabilities are measured at the present value of the future periodic claims to be provided and reported as other policy-related balances. The Company received a fee for assuming these claim obligations and, as the assignee of the claim, is legally obligated to ensure periodic payments are made to the claimant. The Company purchased annuities to fund these future periodic payment claim obligations and designates payments to be made directly to the claimant by the annuity writer. These annuities funding structured settlement claims are recorded as an investment. The Company has recorded unpaid claim obligations and annuity contracts of equal amounts of $1.3 billion at both December 31, 2021 and 2020. See Note 1.
Obligations Under Funding Agreements
The Company issues fixed and floating rate funding agreements, which are denominated in either U.S. dollars or foreign currencies, to certain unconsolidated special purpose entities that have issued either debt securities or commercial paper for which payment of interest and principal is secured by such funding agreements. For the years ended December 31, 2021, 2020 and 2019, the Company issued $39.5 billion, $39.3 billion and $37.3 billion, respectively, and repaid $41.2 billion, $36.7 billion and $36.4 billion, respectively, of such funding agreements. At December 31, 2021 and 2020, liabilities for funding agreements outstanding, which are included in policyholder account balances, were $37.2 billion and $38.8 billion, respectively.
Metropolitan Life Insurance Company is a member of the FHLB of New York. Holdings of common stock of the FHLB of New York, included in other invested assets, were $718 million and $765 million at December 31, 2021 and 2020, respectively.
The Company has also entered into funding agreements with the FHLB of New York and a subsidiary of the Federal Agricultural Mortgage Corporation, a federally chartered instrumentality of the U.S. (“Farmer Mac”). The liability for such funding agreements is included in policyholder account balances. Information related to such funding agreements was as follows at:
Liability Collateral
December 31,
2021 2020 2021 2020
(In millions)
FHLB of New York (1)
$ 14,745 $ 15,245 $ 16,645 (2) $ 17,258 (2)
Farmer Mac (3) $ 2,050 $ 2,375 $ 2,159 $ 2,450
__________________
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
3. Insurance (continued)
(1)Represents funding agreements issued to the FHLB of New York in exchange for cash and for which the FHLB of New York has been granted a lien on certain assets, some of which are in the custody of the FHLB of New York, including residential mortgage-backed securities (“RMBS”), to collateralize obligations under such funding agreements. The Company is permitted to withdraw any portion of the collateral in the custody of the FHLB of New York as long as there is no event of default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level. Upon any event of default by the Company, the FHLB of New York’s recovery on the collateral is limited to the amount of the Company’s liability to the FHLB of New York.
(2)Advances are collateralized by mortgage-backed securities. The amount of collateral presented is at estimated fair value.
(3)Represents funding agreements issued to a subsidiary of Farmer Mac. The obligations under these funding agreements are secured by a pledge of certain eligible agricultural mortgage loans and may, under certain circumstances, be secured by other qualified collateral. The amount of collateral presented is at carrying value.
Liabilities for Unpaid Claims and Claim Expenses
The following is information about incurred and paid claims development by segment at December 31, 2021. Such amounts are presented net of reinsurance, and are not discounted. The tables present claims development and cumulative claim payments by incurral year. The development tables are only presented for significant short-duration product liabilities within each segment. The information about incurred and paid claims development prior to 2021 is presented as supplementary information.
U.S.
Group Life - Term
Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance At December 31, 2021
For the Years Ended December 31, Total IBNR
Liabilities Plus
Expected
Development on
Reported Claims Cumulative
Number of
Reported
Claims
(Unaudited)
Incurral Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
(Dollars in millions)
2012 $ 6,503 $ 6,579 $ 6,569 $ 6,546 $ 6,568 $ 6,569 $ 6,569 $ 6,572 $ 6,574 $ 6,575 $ 1 210,236
2013 6,637 6,713 6,719 6,720 6,730 6,720 6,723 6,724 6,726 2 212,892
2014 6,986 6,919 6,913 6,910 6,914 6,919 6,920 6,918 1 215,694
2015 7,040 7,015 7,014 7,021 7,024 7,025 7,026 2 218,188
2016 7,125 7,085 7,095 7,104 7,105 7,104 3 219,581
2017 7,432 7,418 7,425 7,427 7,428 6 260,807
2018 7,757 7,655 7,646 7,650 10 246,519
2019 7,935 7,900 7,907 13 246,245
2020 8,913 9,367 27 281,696
2021 10,555 1,029 221,955
Total 77,256
Cumulative paid claims and paid allocated claim adjustment expenses, net of reinsurance (74,255)
All outstanding liabilities for incurral years prior to 2012, net of reinsurance
Total unpaid claims and claim adjustment expenses, net of reinsurance $ 3,022
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
3. Insurance (continued)
Cumulative Paid Claims and Paid Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
(Unaudited)
Incurral Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
(In millions)
2012 $ 5,132 $ 6,472 $ 6,518 $ 6,532 $ 6,558 $ 6,565 $ 6,566 $ 6,569 $ 6,572 $ 6,572
2013 5,216 6,614 6,664 6,678 6,711 6,715 6,720 6,721 6,723
2014 5,428 6,809 6,858 6,869 6,902 6,912 6,915 6,916
2015 5,524 6,913 6,958 6,974 7,008 7,018 7,022
2016 5,582 6,980 7,034 7,053 7,086 7,096
2017 5,761 7,292 7,355 7,374 7,400
2018 6,008 7,521 7,578 7,595
2019 6,178 7,756 7,820
2020 6,862 9,103
2021 8,008
Total cumulative paid claims and paid allocated claim adjustment expenses, net of reinsurance $ 74,255
Average Annual Percentage Payout
The following is supplementary information about average historical claims duration at December 31, 2021:
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years 1 2 3 4 5 6 7 8 9 10
Group Life - Term 77.5% 20.5% 0.7% 0.2% 0.4% 0.1% -% -% -% -%
Group Long-Term Disability
Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance At December 31, 2021
For the Years Ended December 31, Total IBNR
Liabilities Plus
Expected
Development on
Reported Claims
Cumulative
Number of
Reported
Claims
(Unaudited)
Incurral Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
(Dollars in millions)
2012 $ 966 $ 979 $ 980 $ 1,014 $ 1,034 $ 1,037 $ 1,021 $ 1,015 $ 1,011 $ 1,007 $ - 20,086
2013 1,008 1,027 1,032 1,049 1,070 1,069 1,044 1,032 1,025 - 21,139
2014 1,076 1,077 1,079 1,101 1,109 1,098 1,097 1,081 - 22,853
2015 1,082 1,105 1,093 1,100 1,087 1,081 1,067 - 21,213
2016 1,131 1,139 1,159 1,162 1,139 1,124 - 17,971
2017 1,244 1,202 1,203 1,195 1,165 - 16,324
2018 1,240 1,175 1,163 1,147 - 15,172
2019 1,277 1,212 1,169 7 15,318
2020 1,253 1,223 30 15,381
2021 1,552 687 10,503
Total 11,560
Cumulative paid claims and paid allocated claim adjustment expenses, net of reinsurance (5,943)
All outstanding liabilities for incurral years prior to 2012, net of reinsurance 1,559
Total unpaid claims and claim adjustment expenses, net of reinsurance
$ 7,176
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
3. Insurance (continued)
Cumulative Paid Claims and Paid Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
(Unaudited)
Incurral Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
(In millions)
2012 $ 43 $ 229 $ 365 $ 453 $ 524 $ 591 $ 648 $ 694 $ 730 $ 766
2013 43 234 382 475 551 622 676 722 764
2014 51 266 428 526 609 677 732 778
2015 50 264 427 524 601 665 718
2016 49 267 433 548 628 696
2017 56 290 476 579 655
2018 54 314 497 594
2019 57 342 522
2020 59 355
2021 95
Total cumulative paid claims and paid allocated claim adjustment expenses, net of reinsurance $ 5,943
Average Annual Percentage Payout
The following is supplementary information about average historical claims duration at December 31, 2021:
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years
1 2 3 4 5 6 7 8 9 10
Group Long-Term Disability
4.8% 20.9% 15.0% 9.1% 7.2% 6.4% 5.2% 4.4% 3.8% 3.6%
Significant Methodologies and Assumptions
Group Life - Term and Group Long-Term Disability incurred but not paid (“IBNP”) liabilities are developed using a combination of loss ratio and development methods. Claims in the course of settlement are then subtracted from the IBNP liabilities, resulting in the IBNR liabilities. The loss ratio method is used in the period in which the claims are neither sufficient nor credible. In developing the loss ratios, any material rate increases that could change the underlying premium without affecting the estimated incurred losses are taken into account. For periods where sufficient and credible claim data exists, the development method is used based on the claim triangles which categorize claims according to both the period in which they were incurred and the period in which they were paid, adjudicated or reported. The end result is a triangle of known data that is used to develop known completion ratios and factors. Claims paid are then subtracted from the estimated ultimate incurred claims to calculate the IBNP liability.
An expense liability is held for the future expenses associated with the payment of incurred but not yet paid claims (IBNR and pending). This is expressed as a percentage of the underlying claims liability and is based on past experience and the anticipated future expense structure.
For Group Life - Term and Group Long-Term Disability, first year incurred claims and allocated loss adjustment expenses increased in 2021 compared to the 2020 incurral year due to the growth in the size of the business.
The assumptions used in calculating the unpaid claims and claim adjustment expenses for Group Life - Term and Group Long-Term Disability are updated annually to reflect emerging trends in claim experience.
Certain of our Group Life - Term customers have experience-rated contracts, whereby the group sponsor participates in the favorable and/or adverse claim experience, including favorable and/or adverse prior year development. Claim experience adjustments on these contracts are not reflected in the foregoing incurred and paid claim development tables, but are instead reflected as an increase (adverse experience) or decrease (favorable experience) to premiums on the consolidated statements of operations.
Liabilities for Group Life - Term unpaid claims and claim adjustment expenses are not discounted.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
3. Insurance (continued)
The liabilities for Group Long-Term Disability unpaid claims and claim adjustment expenses were $6.2 billion and $6.0 billion at December 31, 2021 and 2020, respectively. Using interest rates ranging from 2% to 8%, based on the incurral year, the total discount applied to these liabilities was $1.1 billion and $1.2 billion at December 31, 2021 and 2020, respectively. The amount of interest accretion recognized was $518 million, $452 million and $470 million for the years ended December 31, 2021, 2020 and 2019, respectively. These amounts were reflected in policyholder benefits and claims.
For Group Life - Term, claims were based upon individual death claims. For Group Long-Term Disability, claim frequency was determined by the number of reported claims as identified by a unique claim number assigned to individual claimants. 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.
The incurred and paid claims disclosed for the Group Life - Term product includes activity related to the product’s continued protection feature; however, the associated actuarial reserve for future benefit obligations under this feature is excluded from the liability for unpaid claims.
The Group Long-Term Disability IBNR, included in the development tables above, was developed using discounted cash flows, and is presented on a discounted basis.
Reconciliation of the Disclosure of Incurred and Paid Claims Development to the Liability for Unpaid Claims and Claim Adjustment Expenses
The reconciliation of the net incurred and paid claims development tables to the liability for unpaid claims and claims adjustment expenses on the consolidated balance sheet was as follows at:
December 31, 2021
(In millions)
Short-Duration:
Unpaid claims and allocated claims adjustment expenses, net of reinsurance:
U.S.:
Group Life - Term
$ 3,022
Group Long-Term Disability
7,176
Total $ 10,198
Other insurance lines - all segments combined 864
Total unpaid claims and allocated claims adjustment expenses, net of reinsurance 11,062
Reinsurance recoverables on unpaid claims:
U.S.:
Group Life - Term
Group Long-Term Disability
Total 180
Other insurance lines - all segments combined
Total reinsurance recoverable on unpaid claims
Total unpaid claims and allocated claims adjustment expense
11,271
Discounting
(1,133)
Liability for unpaid claims and claim adjustment liabilities - short-duration
10,138
Liability for unpaid claims and claim adjustment liabilities - all long-duration lines 4,921
Total liability for unpaid claims and claim adjustment expense (included in future policy benefits and other policy-related balances)
$ 15,059
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
3. Insurance (continued)
Rollforward of Claims and Claim Adjustment Expenses
Information regarding the liabilities for unpaid claims and claim adjustment expenses was as follows:
Years Ended December 31,
2021 2020 2019
(In millions)
Balance at January 1, $ 13,523 $ 13,140 $ 12,590
Less: Reinsurance recoverables
1,639 1,525 1,497
Net balance at January 1, 11,884 11,615 11,093
Incurred related to:
Current year
21,201 18,620 17,711
Prior years (1)
582 (19) 44
Total incurred
21,783 18,601 17,755
Paid related to:
Current year
(15,405) (13,854) (12,934)
Prior years
(5,466) (4,478) (4,299)
Total paid
(20,871) (18,332) (17,233)
Net balance at December 31, 12,796 11,884 11,615
Add: Reinsurance recoverables
2,263 1,639 1,525
Balance at December 31, $ 15,059 $ 13,523 $ 13,140
______________
(1)For the year ended December 31, 2021, the increase in incurred claim activity and claim adjustment expenses associated with prior years increased primarily due to the impacts from the COVID-19 pandemic, which are partially offset by additional premiums recorded for experience-rated contracts and are not reflected in the table above. For the year ended December 31, 2020, claims and claim adjustment expenses associated with prior years decreased due to favorable claims experience in the current year. For the years ended December 31, 2019, claims and claim adjustment expenses associated with prior years increased due to events incurred in prior years but reported in the current year.
Separate Accounts
Separate account assets and liabilities include two categories of account types: pass-through separate accounts totaling $78.8 billion and $78.0 billion at December 31, 2021 and 2020, respectively, for which the policyholder assumes all investment risk, and separate accounts for which the Company contractually guarantees either a minimum return or account value to the policyholder which totaled $45.0 billion and $50.6 billion at December 31, 2021 and 2020, respectively. The latter category consisted primarily of guaranteed interest contracts (“GICs”). The average interest rate credited on these contracts was 2.16% and 2.54% at December 31, 2021 and 2020, respectively.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
4. Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles
See Note 1 for a description of capitalized acquisition costs.
Nonparticipating and Non-Dividend-Paying Traditional Contracts
The Company amortizes DAC and VOBA related to these contracts (term insurance, nonparticipating whole life insurance, traditional group life insurance, and non-medical health insurance) over the appropriate premium paying period in proportion to the actual and expected future gross premiums that were set at contract issue. The expected premiums are based upon the premium requirement of each policy and assumptions for mortality, morbidity, persistency and investment returns at policy issuance, or policy acquisition (as it relates to VOBA), include provisions for adverse deviation, and are consistent with the assumptions used to calculate future policyholder benefit liabilities. These assumptions are not revised after policy issuance or acquisition unless the DAC or VOBA balance is deemed to be unrecoverable from future expected profits. Absent a premium deficiency, variability in amortization after policy issuance or acquisition is caused only by variability in premium volumes.
Participating, Dividend-Paying Traditional Contracts
The Company amortizes DAC and VOBA related to these contracts over the estimated lives of the contracts in proportion to actual and expected future gross margins. The amortization includes interest based on rates in effect at inception or acquisition of the contracts. The future gross margins are dependent principally on investment returns, policyholder dividend scales, mortality, persistency, expenses to administer the business, creditworthiness of reinsurance counterparties and certain economic variables, such as inflation. For participating contracts within the closed block (dividend-paying traditional contracts) future gross margins are also dependent upon changes in the policyholder dividend obligation. See Note 6. Of these factors, the Company anticipates that investment returns, expenses, persistency and other factor changes, as well as policyholder dividend scales, are reasonably likely to impact significantly the rate of DAC and VOBA amortization. Each reporting period, the Company updates the estimated gross margins with the actual gross margins for that period. When the actual gross margins change from previously estimated gross margins, the cumulative DAC and VOBA amortization is re-estimated and adjusted by a cumulative charge or credit to current operations. When actual gross margins exceed those previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when the actual gross margins are below the previously estimated gross margins. Each reporting period, the Company also updates the actual amount of business in-force, which impacts expected future gross margins. When expected future gross margins are below those previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when the expected future gross margins are above the previously estimated expected future gross margins. Each period, the Company also reviews the estimated gross margins for each block of business to determine the recoverability of DAC and VOBA balances.
Fixed and Variable Universal Life Contracts and Fixed and Variable Deferred Annuity Contracts
The Company amortizes DAC and VOBA related to these contracts over the estimated lives of the contracts in proportion to actual and expected future gross profits. The amortization includes interest based on rates in effect at inception or acquisition of the contracts. The amount of future gross profits is dependent principally upon returns in excess of the amounts credited to policyholders, mortality, persistency, interest crediting rates, expenses to administer the business, creditworthiness of reinsurance counterparties, the effect of any hedges used and certain economic variables, such as inflation. Of these factors, the Company anticipates that investment returns, expenses and persistency are reasonably likely to significantly impact the rate of DAC and VOBA amortization. Each reporting period, the Company updates the estimated gross profits with the actual gross profits for that period. When the actual gross profits change from previously estimated gross profits, the cumulative DAC and VOBA amortization is re-estimated and adjusted by a cumulative charge or credit to current operations. When actual gross profits exceed those previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when the actual gross profits are below the previously estimated gross profits. Each reporting period, the Company also updates the actual amount of business remaining in-force, which impacts expected future gross profits. When expected future gross profits are below those previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when the expected future gross profits are above the previously estimated expected future gross profits. Each period, the Company also reviews the estimated gross profits for each block of business to determine the recoverability of DAC and VOBA balances.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
4. Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles (continued)
Factors Impacting Amortization
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. Returns that are higher than the Company’s long-term expectation produce higher account balances, which increases the Company’s future fee expectations and decreases future benefit payment expectations on minimum death and living benefit guarantees, resulting in higher expected future gross profits. The opposite result occurs when returns are lower than the Company’s long-term expectation. The Company’s 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. The Company monitors these events and only changes the assumption when its long-term expectation changes.
The Company also periodically reviews other long-term assumptions underlying the projections of estimated gross margins and profits. These assumptions primarily relate to investment returns, policyholder dividend scales, interest crediting rates, mortality, persistency, policyholder behavior and expenses to administer business. Management annually updates assumptions used in the calculation of estimated gross margins and profits which may have significantly changed. If the update of assumptions causes expected future gross margins and profits to increase, DAC and VOBA amortization will decrease, resulting in a current period increase to earnings. The opposite result occurs when the assumption update causes expected future gross margins and profits to decrease.
Periodically, the Company modifies product benefits, features, rights or coverages that occur by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by election or coverage within a contract. If such modification, referred to as an internal replacement, substantially changes the contract, the associated DAC or VOBA is written off immediately through income and any new deferrable costs associated with the replacement contract are deferred. If the modification does not substantially change the contract, the DAC or VOBA amortization on the original contract will continue and any acquisition costs associated with the related modification are expensed.
Amortization of DAC and VOBA is attributed to net investment gains (losses) and net derivative gains (losses), and to other expenses for the amount of gross margins or profits originating from transactions other than investment gains and losses. Unrealized investment gains and losses represent the amount of DAC and VOBA that would have been amortized if such gains and losses had been recognized.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
4. Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles (continued)
Information regarding DAC and VOBA was as follows:
Years Ended December 31,
2021 2020 2019
(In millions)
DAC:
Balance at January 1,
$ 2,626 $ 3,427 $ 4,089
Capitalizations
64 51 43
Amortization related to:
Net investment gains (losses) and net derivative gains (losses)
(38) (56) 25
Other expenses
(215) (348) (263)
Total amortization
(253) (404) (238)
Unrealized investment gains (losses)
142 (448) (467)
Balance at December 31,
2,579 2,626 3,427
VOBA:
Balance at January 1,
23 26 28
Amortization related to other expenses
(6) (2) (1)
Unrealized investment gains (losses)
2 (1) (1)
Balance at December 31,
19 23 26
Total DAC and VOBA:
Balance at December 31,
$ 2,598 $ 2,649 $ 3,453
Information regarding total DAC and VOBA by segment, as well as Corporate & Other, was as follows:
December 31,
2021 2020
(In millions)
U.S.
$ 401 $ 398
MetLife Holdings
2,191 2,251
Corporate & Other 6 -
Total
$ 2,598 $ 2,649
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
4. Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles (continued)
Information regarding other intangibles was as follows:
Years Ended December 31,
2021 2020 2019
(In millions)
DSI:
Balance at January 1,
$ 30 $ 62 $ 93
Capitalization
- - 1
Amortization
2 (21) (20)
Unrealized investment gains (losses)
10 (11) (12)
Balance at December 31,
$ 42 $ 30 $ 62
VODA and VOCRA:
Balance at January 1,
$ 135 $ 157 $ 181
Amortization
(19) (22) (24)
Balance at December 31,
$ 116 $ 135 $ 157
Accumulated amortization
$ 341 $ 322 $ 300
The estimated future amortization expense to be reported in other expenses for the next five years is as follows:
VOBA VODA and VOCRA
(In millions)
2022 $ 1 $ 17
2023 $ 2 $ 15
2024 $ 2 $ 13
2025 $ 2 $ 12
2026 $ 2 $ 11
5. Reinsurance
The Company enters into reinsurance agreements that transfer risk from its various insurance products to affiliated and unaffiliated companies. These cessions limit losses, minimize exposure to significant risks and provide additional capacity for future growth. The Company also provides reinsurance by accepting risk from affiliates and nonaffiliates.
Under the terms of the reinsurance agreements, the reinsurer agrees to reimburse the Company for the ceded amount in the event a claim is paid. Cessions under reinsurance agreements do not discharge the Company’s obligation as the primary insurer. In the event that reinsurers do not meet their obligations under the terms of the reinsurance agreements, reinsurance recoverable balances could become uncollectible.
Accounting for reinsurance requires extensive use of assumptions and estimates, particularly related to the future performance of the underlying business and the potential impact of counterparty credit risks. The Company periodically reviews actual and anticipated experience compared to the aforementioned assumptions used to establish assets and liabilities relating to ceded and assumed reinsurance and evaluates the financial strength of counterparties to its reinsurance agreements using criteria similar to that evaluated in the security impairment process discussed in Note 7.
U.S.
For its Group Benefits business, the Company generally retains most of the risk, with the exception of its Group Term Life business and certain client arrangements.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
5. Reinsurance (continued)
The Company reinsures an 80% quota share of its Group Term Life business for capital management purposes. The majority of the Company’s other reinsurance activity within this business relates to client agreements for employer sponsored captive programs, risk-sharing agreements and multinational pooling. The risks ceded under these agreements are generally quota shares of group life and disability policies. The cessions vary and the Company may cede up to 100% of all the risks of these policies.
The Company’s RIS business has engaged in reinsurance activities on an opportunistic basis. Also, the Company assumes certain group annuity contracts from an affiliate.
MetLife Holdings
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.
Catastrophe Coverage
The Company has exposure to catastrophes which could contribute to significant fluctuations in its results of operations. For its U.S. segment, the Company purchases catastrophe coverage to reinsure risks issued within territories that it believes are subject to the greatest catastrophic risks. For its MetLife Holdings segment, the Company uses excess of retention and quota share reinsurance agreements to provide greater diversification of risk and minimize exposure to larger risks. Excess of retention reinsurance agreements provide for a portion of a risk to remain with the direct writing company and quota share reinsurance agreements provide for the direct writing company to transfer a fixed percentage of all risks of a class of policies.
Reinsurance Recoverables
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, 2021 and 2020 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 $1.5 billion and $1.7 billion of unsecured unaffiliated reinsurance recoverable balances at December 31, 2021 and 2020, respectively.
At December 31, 2021, the Company had $2.3 billion of net unaffiliated ceded reinsurance recoverables. Of this total, $1.8 billion, or 78%, were with the Company’s five largest unaffiliated ceded reinsurers, including $1.2 billion of net unaffiliated ceded reinsurance recoverables which were unsecured. At December 31, 2020, the Company had $2.5 billion of net unaffiliated ceded reinsurance recoverables. Of this total, $1.8 billion, or 72%, were with the Company’s five largest unaffiliated ceded reinsurers, including $1.2 billion of net unaffiliated ceded reinsurance recoverables which were unsecured.
The Company has reinsured with an unaffiliated third-party reinsurer, 59% of the closed block through a modified coinsurance agreement. The Company accounts for this agreement under the deposit method of accounting. The Company, having the right of offset, has offset the modified coinsurance deposit with the deposit recoverable.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
5. Reinsurance (continued)
The amounts on the consolidated statements of operations include the impact of reinsurance. Information regarding the significant effects of reinsurance was as follows:
Years Ended December 31,
2021 2020 2019
(In millions)
Premiums
Direct premiums $ 23,008 $ 20,821 $ 21,804
Reinsurance assumed 4,121 909 811
Reinsurance ceded (938) (989) (1,007)
Net premiums $ 26,191 $ 20,741 $ 21,608
Universal life and investment-type product policy fees
Direct universal life and investment-type product policy fees $ 2,371 $ 2,290 $ 2,331
Reinsurance assumed (16) (16) (15)
Reinsurance ceded (293) (278) (279)
Net universal life and investment-type product policy fees $ 2,062 $ 1,996 $ 2,037
Other revenues
Direct other revenues $ 1,066 $ 1,043 $ 1,007
Reinsurance assumed 13 10 (5)
Reinsurance ceded 537 608 571
Net other revenues $ 1,616 $ 1,661 $ 1,573
Policyholder benefits and claims
Direct policyholder benefits and claims $ 26,672 $ 23,488 $ 24,469
Reinsurance assumed 3,964 811 728
Reinsurance ceded (1,213) (1,225) (1,146)
Net policyholder benefits and claims $ 29,423 $ 23,074 $ 24,051
Interest credited to policyholder account balances
Direct interest credited to policyholder account balances $ 1,996 $ 2,218 $ 2,592
Reinsurance assumed 43 42 44
Reinsurance ceded (12) (13) (12)
Net interest credited to policyholder account balances $ 2,027 $ 2,247 $ 2,624
Other expenses
Direct other expenses $ 4,459 $ 4,469 $ 4,464
Reinsurance assumed 163 71 50
Reinsurance ceded 995 473 462
Net other expenses $ 5,617 $ 5,013 $ 4,976
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
5. Reinsurance (continued)
The amounts on the consolidated balance sheets include the impact of reinsurance. Information regarding the significant effects of reinsurance was as follows at:
December 31,
2021 2020
Direct Assumed Ceded Total
Balance
Sheet Direct Assumed Ceded Total
Balance
Sheet
(In millions)
Assets
Premiums, reinsurance and other
receivables
$ 2,778 $ 636 $ 17,091 $ 20,505 $ 2,509 $ 831 $ 18,138 $ 21,478
Deferred policy acquisition costs and
value of business acquired
2,805 18 (225) 2,598 2,864 13 (228) 2,649
Total assets $ 5,583 $ 654 $ 16,866 $ 23,103 $ 5,373 $ 844 $ 17,910 $ 24,127
Liabilities
Future policy benefits $ 128,086 $ 4,198 $ (10) $ 132,274 $ 132,776 $ 1,159 $ (14) $ 133,921
Policyholder account balances 94,059 400 - 94,459 96,479 156 - 96,635
Other policy-related balances 7,757 337 - 8,094 7,103 322 5 7,430
Other liabilities 6,259 2,213 15,324 23,796 7,027 2,406 15,991 25,424
Total liabilities $ 236,161 $ 7,148 $ 15,314 $ 258,623 $ 243,385 $ 4,043 $ 15,982 $ 263,410
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 $11.9 billion and $12.8 billion at December 31, 2021 and 2020, respectively. The deposit liabilities on reinsurance were $1.7 billion and $1.8 billion at December 31, 2021 and 2020, respectively.
Related Party Reinsurance Transactions
The Company has reinsurance agreements with certain of MetLife, Inc.’s subsidiaries, including MetLife Reinsurance Company of Charleston (“MRC”), MetLife Reinsurance Company of Vermont, Metropolitan Tower Life Insurance Company (“MTL”), and MetLife Insurance K.K., all of which are related parties.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
5. Reinsurance (continued)
Information regarding the significant effects of affiliated reinsurance included on the consolidated statements of operations was as follows:
Years Ended December 31,
2021 2020 2019
(In millions)
Premiums
Reinsurance assumed $ 3,237 $ 8 $ 9
Reinsurance ceded (114) (113) (115)
Net premiums $ 3,123 $ (105) $ (106)
Universal life and investment-type product policy fees
Reinsurance assumed $ 1 $ 1 $ 1
Reinsurance ceded (19) (7) (17)
Net universal life and investment-type product policy fees $ (18) $ (6) $ (16)
Other revenues
Reinsurance assumed $ (11) $ (12) $ (19)
Reinsurance ceded 505 572 533
Net other revenues $ 494 $ 560 $ 514
Policyholder benefits and claims
Reinsurance assumed $ 3,138 $ 1 $ 4
Reinsurance ceded (152) (145) (153)
Net policyholder benefits and claims $ 2,986 $ (144) $ (149)
Interest credited to policyholder account balances
Reinsurance assumed $ 31 $ 29 $ 30
Reinsurance ceded (12) (13) (12)
Net interest credited to policyholder account balances $ 19 $ 16 $ 18
Other expenses
Reinsurance assumed $ 89 $ - $ -
Reinsurance ceded 1,055 516 533
Net other expenses $ 1,144 $ 516 $ 533
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
5. Reinsurance (continued)
Information regarding the significant effects of affiliated reinsurance included on the consolidated balance sheets was as follows at:
December 31,
2021 2020
Assumed Ceded Assumed Ceded
(In millions)
Assets
Premiums, reinsurance and other receivables $ 25 $ 11,710 $ 1 $ 12,453
Deferred policy acquisition costs and value of business acquired 6 (139) - (145)
Total assets $ 31 $ 11,571 $ 1 $ 12,308
Liabilities
Future policy benefits $ 3,139 $ (10) $ 48 $ (14)
Policyholder account balances 366 - 123 -
Other policy-related balances 14 - 1 5
Other liabilities 894 12,190 864 12,816
Total liabilities $ 4,413 $ 12,180 $ 1,036 $ 12,807
Effective April 1, 2021, the Company, through its wholly-owned subsidiary Missouri Reinsurance, Inc., entered into an agreement to assume certain group annuity contracts issued in connection with a qualifying pension risk transfer on a modified coinsurance basis from MTL. The significant reinsurance effects to the Company were primarily increases in future policy benefits of $3.1 billion at December 31, 2021, as well as premiums of $3.2 billion and policyholder benefits and claims of $3.1 billion for the year ended December 31, 2021. Also, as a result of this agreement, other invested assets increased by $3.2 billion at December 31, 2021.
The Company ceded two blocks of business to an affiliate on a 75% coinsurance with funds withheld basis. Certain contractual features of these agreements qualify as embedded derivatives, which are separately accounted for at estimated fair value on the Company’s consolidated balance sheets. The embedded derivatives related to the funds withheld associated with these reinsurance agreements are included within other liabilities and were $31 million and $45 million at December 31, 2021 and 2020, respectively. Net derivative gains (losses) associated with these embedded derivatives were $15 million, ($24) million and ($17) million for the years ended December 31, 2021, 2020 and 2019, respectively.
Certain contractual features of the closed block agreement with MRC create an embedded derivative, which is separately accounted for at estimated fair value on the Company’s consolidated balance sheets. The embedded derivative related to the funds withheld associated with this reinsurance agreement is included within other liabilities and was $1.0 billion and $1.4 billion at December 31, 2021 and 2020, respectively. Net derivative gains (losses) associated with the embedded derivative were $341 million, ($387) million and ($535) million for the years ended December 31, 2021, 2020 and 2019, respectively.
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 $677 million and $606 million of unsecured affiliated reinsurance recoverable balances at December 31, 2021 and 2020, respectively.
Affiliated 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 affiliated reinsurance were $10.1 billion and $11.0 billion at December 31, 2021 and 2020, respectively. The deposit liabilities on affiliated reinsurance were $892 million and $863 million at December 31, 2021 and 2020, respectively.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
6. Closed Block
On April 7, 2000 (the “Demutualization Date”), Metropolitan Life Insurance Company 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 Metropolitan Life Insurance Company’s plan of reorganization, as amended (the “Plan of Reorganization”). On the Demutualization Date, Metropolitan Life Insurance Company established a closed block for the benefit of holders of certain individual life insurance policies of Metropolitan Life Insurance Company. Assets have been allocated to the closed block in an amount that has been determined to produce cash flows which, together with anticipated revenues from the policies included in the closed block, are reasonably expected to be sufficient to support obligations and liabilities relating to these policies, including, but not limited to, provisions for the payment of claims and certain expenses and taxes, and to provide for the continuation of policyholder dividend scales in effect for 1999, if the experience underlying such dividend scales continues, and for appropriate adjustments in such scales if the experience changes. At least annually, the Company compares actual and projected experience against the experience assumed in the then-current dividend scales. Dividend scales are adjusted periodically to give effect to changes in experience.
The closed block assets, the cash flows generated by the closed block assets and the anticipated revenues from the policies in the closed block will benefit only the holders of the policies in the closed block. To the extent that, over time, cash flows from the assets allocated to the closed block and claims and other experience related to the closed block are, in the aggregate, more or less favorable than what was assumed when the closed block was established, total dividends paid to closed block policyholders in the future may be greater than or less than the total dividends that would have been paid to these policyholders if the policyholder dividend scales in effect for 1999 had been continued. Any cash flows in excess of amounts assumed will be available for distribution over time to closed block policyholders and will not be available to stockholders. If the closed block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside of the closed block. The closed block will continue in effect as long as any policy in the closed block remains in-force. The expected life of the closed block is over 100 years from the Demutualization Date.
The Company uses the same accounting principles to account for the participating policies included in the closed block as it used prior to the Demutualization Date. However, the Company establishes a policyholder dividend obligation for earnings that will be paid to policyholders as additional dividends as described below. The excess of closed block liabilities over closed block assets at the Demutualization Date (adjusted to eliminate the impact of related amounts in AOCI) represents the estimated maximum future earnings from the closed block expected to result from operations, attributed net of income tax, to the closed block. Earnings of the closed block are recognized in income over the period the policies and contracts in the closed block remain in-force. Management believes that over time the actual cumulative earnings of the closed block will approximately equal the expected cumulative earnings due to the effect of dividend changes. If, over the period the closed block remains in existence, the actual cumulative earnings of the closed block are greater than the expected cumulative earnings of the closed block, the Company will pay the excess to closed block policyholders as additional policyholder dividends unless offset by future unfavorable experience of the closed block and, accordingly, will recognize only the expected cumulative earnings in income with the excess recorded as a policyholder dividend obligation. If over such period, the actual cumulative earnings of the closed block are less than the expected cumulative earnings of the closed block, the Company will recognize only the actual earnings in income. However, the Company may change policyholder dividend scales in the future, which would be intended to increase future actual earnings until the actual cumulative earnings equal the expected cumulative earnings.
Experience within the closed block, in particular mortality and investment yields, as well as realized and unrealized gains and losses, directly impact the policyholder dividend obligation. Amortization of the closed block DAC, which resides outside of the closed block, is based upon cumulative actual and expected earnings within the closed block. Accordingly, the Company’s net income continues to be sensitive to the actual performance of the closed block.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
6. Closed Block (continued)
Closed block assets, liabilities, revenues and expenses are combined on a line-by-line basis with the assets, liabilities, revenues and expenses outside the closed block based on the nature of the particular item.
Information regarding the closed block liabilities and assets designated to the closed block was as follows at:
December 31,
2021 2020
(In millions)
Closed Block Liabilities
Future policy benefits
$ 38,046 $ 38,758
Other policy-related balances
290 321
Policyholder dividends payable
253 337
Policyholder dividend obligation
1,682 2,969
Deferred income tax liability 210 130
Other liabilities
263 172
Total closed block liabilities
40,744 42,687
Assets Designated to the Closed Block
Investments:
Fixed maturity securities available-for-sale, at estimated fair value
25,669 27,186
Mortgage loans
6,417 6,807
Policy loans
4,191 4,355
Real estate and real estate joint ventures
565 559
Other invested assets
556 492
Total investments
37,398 39,399
Cash and cash equivalents
126 -
Accrued investment income
384 402
Premiums, reinsurance and other receivables
50 50
Current income tax recoverable
81 28
Total assets designated to the closed block
38,039 39,879
Excess of closed block liabilities over assets designated to the closed block
2,705 2,808
AOCI:
Unrealized investment gains (losses), net of income tax
2,562 3,524
Unrealized gains (losses) on derivatives, net of income tax
107 23
Allocated to policyholder dividend obligation, net of income tax
(1,329) (2,346)
Total amounts included in AOCI
1,340 1,201
Maximum future earnings to be recognized from closed block assets and liabilities
$ 4,045 $ 4,009
Information regarding the closed block policyholder dividend obligation was as follows:
Years Ended December 31,
2021 2020 2019
(In millions)
Balance at January 1,
$ 2,969 $ 2,020 $ 428
Change in unrealized investment and derivative gains (losses)
(1,287) 949 1,592
Balance at December 31,
$ 1,682 $ 2,969 $ 2,020
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
6. Closed Block (continued)
Information regarding the closed block revenues and expenses was as follows:
Years Ended December 31,
2021 2020 2019
(In millions)
Revenues
Premiums
$ 1,298 $ 1,498 $ 1,580
Net investment income
1,541 1,596 1,740
Net investment gains (losses)
(36) (25) (7)
Net derivative gains (losses)
18 (17) 12
Total revenues
2,821 3,052 3,325
Expenses
Policyholder benefits and claims
2,150 2,330 2,291
Policyholder dividends
621 791 924
Other expenses
96 104 111
Total expenses
2,867 3,225 3,326
Revenues, net of expenses before provision for income tax expense (benefit)
(46) (173) (1)
Provision for income tax expense (benefit)
(10) (36) (2)
Revenues, net of expenses and provision for income tax expense (benefit)
$ (36) $ (137) $ 1
Metropolitan Life Insurance Company charges the closed block with federal income taxes, state and local premium taxes and other state or local taxes, as well as investment management expenses relating to the closed block as provided in the Plan of Reorganization. Metropolitan Life Insurance Company also charges the closed block for expenses of maintaining the policies included in the closed block.
7. Investments
See Note 9 for information about the fair value hierarchy for investments and the related valuation methodologies.
Investment Risks and Uncertainties
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 ACL and 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 determination of ACL and impairments is highly subjective and is based upon quarterly evaluations and assessments of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available.
The recognition of income on certain investments (e.g. structured securities, including mortgage-backed securities, asset-backed securities (“ABS”), certain structured investment transactions and FVO Securities) is dependent upon certain factors such as prepayments and defaults, and changes in such factors could result in changes in amounts to be earned.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
Fixed Maturity Securities AFS
Fixed Maturity Securities AFS by Sector
The following table presents fixed maturity securities AFS by sector. U.S. corporate and foreign corporate sectors include redeemable preferred stock. RMBS includes agency, prime, alternative and sub-prime mortgage-backed securities. ABS includes securities collateralized by corporate loans and consumer loans. Municipals includes taxable and tax-exempt revenue bonds and, to a much lesser extent, general obligations of states, municipalities and political subdivisions. Commercial mortgage-backed securities (“CMBS”) primarily includes securities collateralized by multiple commercial mortgage loans. RMBS, ABS and CMBS are, collectively, “Structured Products.”
December 31,
2021 2020
Amortized
Cost Gross Unrealized Estimated
Fair
Value Amortized
Cost Gross Unrealized Estimated
Fair
Value
Sector Allowance for Credit Loss Gains Losses Allowance for Credit Loss Gains Losses
(In millions)
U.S. corporate
$ 51,328 $ (30) $ 7,257 $ 153 $ 58,402 $ 50,989 $ (43) $ 9,618 $ 155 $ 60,409
U.S. government and agency
26,782 - 4,568 128 31,222 24,620 - 6,178 27 30,771
Foreign corporate
27,475 (10) 2,651 431 29,685 28,093 (8) 4,478 284 32,279
RMBS
22,082 - 1,198 135 23,145 22,552 - 1,706 32 24,226
ABS
12,787 - 127 35 12,879 12,456 - 169 50 12,575
Municipals
6,884 - 1,849 5 8,728 6,888 - 2,096 1 8,983
CMBS
6,686 (13) 237 32 6,878 6,503 - 381 55 6,829
Foreign government
4,330 - 698 82 4,946 4,322 - 978 32 5,268
Total fixed maturity securities AFS
$ 158,354 $ (53) $ 18,585 $ 1,001 $ 175,885 $ 156,423 $ (51) $ 25,604 $ 636 $ 181,340
Methodology for Amortization of Premium and Accretion of Discount on Structured Products
Amortization of premium and accretion of discount on Structured Products considers the estimated timing and amount of prepayments of the underlying loans. Actual prepayment experience is periodically reviewed and effective yields are recalculated when differences arise between the originally anticipated and the actual prepayments received and currently anticipated. Prepayment assumptions for Structured Products are estimated using inputs obtained from third-party specialists and based on management’s knowledge of the current market. For credit-sensitive and certain prepayment-sensitive Structured Products, the effective yield is recalculated on a prospective basis. For all other Structured Products, the effective yield is recalculated on a retrospective basis.
Maturities of Fixed Maturity Securities AFS
The amortized cost, net of ACL, and estimated fair value of fixed maturity securities AFS, by contractual maturity date, were as follows at December 31, 2021:
Due in One
Year or Less
Due After One
Year Through
Five Years
Due After Five
Years Through Ten
Years
Due After Ten
Years
Structured
Products
Total Fixed
Maturity
Securities AFS
(In millions)
Amortized cost, net of ACL $ 2,967 $ 29,155 $ 27,945 $ 56,692 $ 41,542 $ 158,301
Estimated fair value
$ 2,938 $ 29,975 $ 30,739 $ 69,331 $ 42,902 $ 175,885
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
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 Products are shown separately, as they are not due at a single maturity.
Continuous Gross Unrealized Losses for Fixed Maturity Securities AFS by Sector
The following table presents the estimated fair value and gross unrealized losses of fixed maturity securities AFS in an unrealized loss position without an ACL by sector and aggregated by length of time that the securities have been in a continuous unrealized loss position.
December 31,
2021 2020
Less than 12 Months Equal to or Greater
than 12 Months Less than 12 Months Equal to or Greater
than 12 Months
Sector & Credit Quality Estimated
Fair
Value Gross
Unrealized
Losses Estimated
Fair
Value Gross
Unrealized
Losses Estimated
Fair
Value Gross
Unrealized
Losses Estimated
Fair
Value Gross
Unrealized
Losses
(Dollars in millions)
U.S. Corporate $ 4,503 $ 83 $ 784 $ 70 $ 2,351 $ 112 $ 230 $ 36
U.S. government and agency 10,063 78 523 49 1,686 27 - -
Foreign Corporate 4,079 199 1,348 232 2,431 225 34 59
RMBS 7,481 111 314 24 1,119 20 128 12
ABS 5,643 25 593 10 2,561 18 2,233 32
Municipals 154 4 17 1 51 1 - -
CMBS 1,613 20 355 12 1,110 41 306 14
Foreign Government 497 37 148 45 110 6 115 27
Total fixed maturity securities AFS $ 34,033 $ 557 $ 4,082 $ 443 $ 11,419 $ 450 $ 3,046 $ 180
Investment grade $ 31,419 $ 454 $ 3,273 $ 353 $ 9,012 $ 297 $ 2,841 $ 158
Below investment grade 2,614 103 809 90 2,407 153 205 22
Total fixed maturity securities AFS $ 34,033 $ 557 $ 4,082 $ 443 $ 11,419 $ 450 $ 3,046 $ 180
Total number of securities in an unrealized loss position
2,549 427 984 385
Evaluation of Fixed Maturity Securities AFS for Credit Loss
Evaluation and Measurement Methodologies
Management considers a wide range of factors about the security issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations used in the credit loss evaluation process include, but are not limited to:(i) the extent to which the estimated fair value has been below amortized cost, (ii) adverse conditions specifically related to a security, an industry sector or sub-sector, or an economically depressed geographic area, adverse change in the financial condition of the issuer of the security, changes in technology, discontinuance of a segment of the business that may affect future earnings, and changes in the quality of credit enhancement, (iii) payment structure of the security and likelihood of the issuer being able to make payments, (iv) failure of the issuer to make scheduled interest and principal payments, (v) whether the issuer, or series of issuers or an industry has suffered a catastrophic loss or has exhausted natural resources, (vi) whether the Company has the intent to sell or will more likely than not be required to sell a particular security before the decline in estimated fair value below amortized cost recovers, (vii) with respect to Structured Products, changes in forecasted cash flows after considering the changes in the financial condition of the underlying loan obligors and quality of underlying collateral, expected prepayment speeds, current and forecasted loss severity, consideration of the payment terms of the underlying assets backing a particular security, and the payment priority within the tranche structure of the security, (viii) changes in the rating of the security by a rating agency, and (ix) other subjective factors, including concentrations and information obtained from regulators.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
The methodology and significant inputs used to determine the amount of credit loss are as follows:
•The Company calculates the recovery value by performing a discounted cash flow analysis based on the present value of future cash flows. The discount rate is generally the effective interest rate of the security at the time of purchase for fixed-rate securities and the spot rate at the date of evaluation of credit loss for floating-rate securities.
•When determining collectability and the period over which value is expected to recover, the Company applies considerations utilized in its overall credit loss evaluation process which incorporates information regarding the specific security, fundamentals of the industry and geographic area in which the security issuer operates, and overall macroeconomic conditions. Projected future cash flows are estimated using assumptions derived from management’s single best estimate, the most likely outcome in a range of possible outcomes, after giving consideration to a variety of variables that include, but are not limited to: payment terms of the security; the likelihood that the issuer can service the interest and principal payments; the quality and amount of any credit enhancements; the security’s position within the capital structure of the issuer; possible corporate restructurings or asset sales by the issuer; any private and public sector programs to restructure foreign government securities and municipals; and changes to the rating of the security or the issuer by rating agencies.
•Additional considerations are made when assessing the unique features that apply to certain Structured Products including, but not limited to: the quality of underlying collateral, historical performance of the underlying loan obligors, historical rent and vacancy levels, changes in the financial condition of the underlying loan obligors, expected prepayment speeds, current and forecasted loss severity, consideration of the payment terms of the underlying loans or assets backing a particular security, changes in the quality of credit enhancement and the payment priority within the tranche structure of the security.
With respect to securities that have attributes of debt and equity (“perpetual hybrid securities”), consideration is given in the credit loss analysis as to whether there has been any deterioration in the credit of the issuer and the likelihood of recovery in value of the securities that are in a severe unrealized loss position. Consideration is also given as to whether any perpetual hybrid securities with an unrealized loss, regardless of credit rating, have deferred any dividend payments.
After the adoption of credit loss guidance on January 1, 2020, in periods subsequent to the recognition of an initial ACL on a security, the Company reassesses credit loss quarterly. Subsequent increases or decreases in the expected cash flow from the security result in corresponding decreases or increases in the ACL which are recognized in earnings and reported within net investment gains (losses); however, the previously recorded ACL is not reduced to an amount below zero. Full or partial write-offs are deducted from the ACL in the period the security, or a portion thereof, is considered uncollectible. Recoveries of amounts previously written off are recorded to the ACL in the period received. When the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost, any ACL is written off and the amortized cost is written down to estimated fair value through a charge within net investment gains (losses), which becomes the new amortized cost of the security.
Methodologies used during the year ended December 31, 2019 to evaluate the recoverability of a security in an unrealized loss position using OTTI guidance were similar to those used after the adoption of credit loss guidance on January 1, 2020, except: (i) the length of time estimated fair value had been below amortized cost was considered for securities, and (ii) for non-functional currency denominated securities, the impact from weakening non-functional currencies on securities that were near maturity was considered in the evaluation. In addition, measurement methodologies were similar, except: (i) a fair value floor was not utilized to limit the credit loss recognized in earnings, (ii) the amortized cost of securities was adjusted for the OTTI to the expected recoverable amount and an ACL was not utilized, (iii) subsequent to a credit loss being recognized, increases in expected cash flows from the security did not result in an immediate increase in valuation recognized in earnings through net investment gains (losses) from reduction of the ACL instead such increases in value were recorded as unrecognized unrealized gains in OCI, and (iv) in periods subsequent to the recognition of OTTI on a security, the Company accounted for the impaired security as if it had been purchased on the measurement date of the impairment; accordingly, the discount (or reduced premium) based on the new cost basis was accreted over the remaining term of the security in a prospective manner based on the amount and timing of estimated future cash flows.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
Evaluation of Fixed Maturity Securities AFS in an Unrealized Loss Position
Gross unrealized losses on securities without an ACL increased $370 million for the year ended December 31, 2021 to $1.0 billion primarily due to increases in interest rates and widening of credit spreads.
Gross unrealized losses on securities without an ACL that have been in a continuous gross unrealized loss position for 12 months or greater were $443 million at December 31, 2021, or 44% of the total gross unrealized losses on securities without an ACL.
Investment Grade Fixed Maturity Securities AFS
Of the $443 million of gross unrealized losses on securities without an ACL that have been in a continuous gross unrealized loss position for 12 months or greater, $353 million, or 80%, were related to 328 investment grade securities. Unrealized losses on investment grade securities are principally related to widening credit spreads since purchase and, with respect to fixed-rate securities, rising interest rates since purchase.
Below Investment Grade Fixed Maturity Securities AFS
Of the $443 million of gross unrealized losses on securities without an ACL that have been in a continuous gross unrealized loss position for 12 months or greater, $90 million, or 20%, were related to 99 below investment grade securities. Unrealized losses on below investment grade securities are principally related to U.S. and foreign corporate securities (primarily industrial and consumer) and are the result of significantly wider credit spreads resulting from higher risk premiums since purchase, largely due to economic and market uncertainty, as well as with respect to fixed-rate securities, rising interest rates since purchase. Management evaluates U.S. and foreign corporate securities based on several factors such as expected cash flows, financial condition and near-term and long-term prospects of the issuers.
Current Period Evaluation
At December 31, 2021, with respect to securities in an unrealized loss position without an ACL, the Company did not intend to sell these securities, and it was not more likely than not that the Company would be required to sell these securities before the anticipated recovery of the remaining amortized cost. Based on the Company’s current evaluation of its securities in an unrealized loss position without an ACL, the Company concluded that these securities had not incurred a credit loss and should not have an ACL at December 31, 2021.
Future provisions for credit loss will depend primarily on economic fundamentals, issuer performance (including changes in the present value of future cash flows expected to be collected), changes in credit ratings and collateral valuation.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
Mortgage Loans
Mortgage Loans by Portfolio Segment
Mortgage loans are summarized as follows at:
December 31,
2021 2020
Portfolio Segment Carrying
Value
% of
Total
Carrying
Value
% of
Total
(Dollars in millions)
Commercial
$ 35,772 59.4 % $ 38,528 58.0 %
Agricultural
15,450 25.7 16,426 24.7
Residential
9,406 15.6 11,803 17.8
Total amortized cost 60,628 100.7 66,757 100.5
Allowance for credit loss (536) (0.9) (517) (0.8)
Subtotal mortgage loans, net 60,092 99.8 66,240 99.7
Residential - FVO 127 0.2 165 0.3
Total mortgage loans, net $ 60,219 100.0 % $ 66,405 100.0 %
The Company elects the FVO for certain residential mortgage loans that are managed on a total return basis, with changes in estimated fair value included in net investment income. See Note 9 for further information.
The amount of net (discounts) premiums and deferred (fees) expenses, included within total amortized cost, primarily attributable to residential mortgage loans was ($736) million and ($925) million at December 31, 2021 and 2020, respectively. The accrued interest income excluded from total amortized cost for commercial, agricultural and residential mortgage loans at December 31, 2021 was $140 million, $136 million and $77 million, respectively. The accrued interest income excluded from total amortized cost for commercial, agricultural and residential mortgage loans at December 31, 2020 was $164 million, $158 million, $101 million, respectively.
Purchases of unaffiliated mortgage loans, consisting primarily of residential mortgage loans, were $1.4 billion, $2.8 billion and $4.0 billion for the years ended December 31, 2021, 2020 and 2019, respectively.
The Company originates and acquires unaffiliated mortgage loans and simultaneously sells a portion to affiliates under master participation agreements. The aggregate amount of mortgage loan participation interests in unaffiliated mortgage loans sold by the Company to affiliates for the years ended December 31, 2021, 2020 and 2019 was $277 million, $59 million and $100 million, respectively. In connection with the mortgage loan participations, the Company collected mortgage loan principal and interest payments from unaffiliated borrowers on behalf of affiliates and remitted such receipts to the affiliates in the amount of $1.0 billion, $540 million and $951 million for the years ended December 31, 2021, 2020 and 2019, respectively.
The Company originates mortgage loans through an affiliate. The affiliate originates and acquires mortgage loans and the Company simultaneously purchases participation interests under a master participation agreement. The aggregate amount of mortgage loan participation interests purchased by the Company from such affiliate for the years ended December 31, 2021, 2020 and 2019 was $4.7 billion and $3.8 billion and $4.1 billion, respectively. In connection with the mortgage loan participations, the affiliate collected mortgage loan principal and interest payments on the Company’s behalf and the affiliate remitted such payments to the Company in the amount of $1.9 billion, $696 million and $403 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
Rollforward of Allowance for Credit Loss for Mortgage Loans by Portfolio Segment
The rollforward of ACL for mortgage loans, by portfolio segment, is as follows:
For the Years Ended December 31,
2021 2020 2019
Commercial Agricultural Residential Total Commercial Agricultural Residential Total Commercial Agricultural Residential Total
(In millions)
Balance at January 1, $ 199 $ 97 $ 221 $ 517 $ 186 $ 49 $ 54 $ 289 $ 190 $ 44 $ 57 $ 291
Adoption of credit loss guidance - - - - (87) 32 154 99 - - - -
Provision (release) 61 6 (25) 42 100 18 27 145 (4) 10 7 13
Initial credit losses on PCD loans (1)
- - 3 3 - - 18 18 - - - -
Charge-offs, net of recoveries - (24) (2) (26) - (2) (32) (34) - (5) (10) (15)
Balance at December 31, $ 260 $ 79 $ 197 $ 536 $ 199 $ 97 $ 221 $ 517 $ 186 $ 49 $ 54 $ 289
__________________
(1)Represents the initial credit losses accounted for as purchased financial assets with credit deterioration (“PCD”).
Allowance for Credit Loss Methodology
After the adoption of credit loss guidance on January 1, 2020, the Company records an allowance for expected lifetime credit loss in earnings within net investment gains (losses) in an amount that represents the portion of the amortized cost basis of mortgage loans that the Company does not expect to collect, resulting in mortgage loans being presented at the net amount expected to be collected. In determining the Company’s ACL, management applies significant judgment to estimate expected lifetime credit loss, including: (i) pooling mortgage loans that share similar risk characteristics, (ii) considering expected lifetime credit loss over the contractual term of its mortgage loans adjusted for expected prepayments and any extensions, and (iii) considering past events and current and forecasted economic conditions. Each of the Company’s commercial, agricultural and residential mortgage loan portfolio segments are evaluated separately. The ACL is calculated for each mortgage loan portfolio segment based on inputs unique to each loan portfolio segment. On a quarterly basis, mortgage loans within a portfolio segment that share similar risk characteristics, such as internal risk ratings or consumer credit scores, are pooled for calculation of ACL. On an ongoing basis, mortgage loans with dissimilar risk characteristics (i.e., loans with significant declines in credit quality), collateral dependent mortgage loans (i.e., when the borrower is experiencing financial difficulty, including when foreclosure is reasonably possible or probable) and reasonably expected troubled debt restructurings (“TDRs”) (i.e., the Company grants concessions to borrower that is experiencing financial difficulties) are evaluated individually for credit loss. The ACL for loans evaluated individually are established using the same methodologies for all three portfolio segments. For example, the ACL for a collateral dependent loan is established as the excess of amortized cost over the estimated fair value of the loan’s underlying collateral, less selling cost when foreclosure is probable. Accordingly, the change in the estimated fair value of collateral dependent loans, which are evaluated individually for credit loss, is recorded as a change in the ACL which is recorded on a quarterly basis as a charge or credit to earnings in net investment gains (losses).
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
During the year ended December 31, 2019, prior to the adoption of credit loss guidance on January 1, 2020, evaluation and measurement methodologies in determining the ACL were similar, except: (i) credit loss was recognized in earnings within net investment gains (losses) when incurred (when it was probable, based on current information and events, that all amounts due under the loan agreement would not be collected), (ii) pooling of loans with similar risk characteristics was permitted, but not required, (iii) forecasts of economic conditions were not considered in the evaluation, (iv) measurement of the expected lifetime credit loss over the contractual term, or expected term, was not considered in the measurement, and (v) the credit loss for loans evaluated individually could also be determined using either discounted cash flows using the loans’ original effective interest rate or observable market prices.
Commercial and Agricultural Mortgage Loan Portfolio Segments
Commercial and agricultural mortgage loan ACL are calculated in a similar manner. Within each loan portfolio segment, commercial and agricultural, loans are pooled by internal risk rating. Estimated lifetime loss rates, which vary by internal risk rating, are applied to the amortized cost of each loan, excluding accrued investment income, on a quarterly basis to develop the ACL. Internal risk ratings are based on an assessment of the loan’s credit quality, which can change over time. The estimated lifetime loss rates are based on several loan portfolio segment-specific factors, including (i) the Company’s experience with defaults and loss severity, (ii) expected default and loss severity over the forecast period, (iii) current and forecasted economic conditions including growth, inflation, interest rates and unemployment levels, (iv) loan specific characteristics including loan-to-value (“LTV”) ratios, and (v) internal risk ratings. These evaluations are revised as conditions change and new information becomes available. The Company uses its several decades of historical default and loss severity experience which capture multiple economic cycles. The Company uses a forecast of economic assumptions for a two-year period for most of its commercial and agricultural mortgage loans, while a one-year period is used for loans originated in certain markets. After the applicable forecast period, the Company reverts to its historical loss experience using a straight-line basis over two years. For evaluations of commercial mortgage loans, in addition to historical experience, management considers factors that include the impact of a rapid change to the economy, which may not be reflected in the loan portfolio, recent loss and recovery trend experience as compared to historical loss and recovery experience, and loan specific characteristics including debt service coverage ratios (“DSCR”). In estimating expected lifetime credit loss over the term of its commercial mortgage loans, the Company adjusts for expected prepayment and extension experience during the forecast period using historical prepayment and extension experience considering the expected position in the economic cycle and the loan profile (i.e., floating rate, shorter-term fixed rate and longer-term fixed rate) and after the forecast period using long-term historical prepayment experience. For evaluations of agricultural mortgage loans, in addition to historical experience, management considers factors that include increased stress in certain sectors, which may be evidenced by higher delinquency rates, or a change in the number of higher risk loans. In estimating expected lifetime credit loss over the term of its agricultural mortgage loans, the Company’s experience is much less sensitive to the position in the economic cycle and by loan profile; accordingly, historical prepayment experience is used, while extension terms are not prevalent with the Company’s agricultural mortgage loans.
Commercial mortgage loans are reviewed on an ongoing basis, which review includes, but is not limited to, an analysis of the property financial statements and rent roll, lease rollover analysis, property inspections, market analysis, estimated valuations of the underlying collateral, LTV ratios, DSCR and tenant creditworthiness. The monitoring process focuses on higher risk loans, which include those that are classified as restructured, delinquent or in foreclosure, as well as loans with higher LTV ratios and lower DSCR. Agricultural mortgage loans are reviewed on an ongoing basis, which review includes, but is not limited to, property inspections, market analysis, estimated valuations of the underlying collateral, LTV ratios and borrower creditworthiness, as well as reviews on a geographic and property-type basis. The monitoring process for agricultural mortgage loans also focuses on higher risk loans.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
For commercial mortgage loans, the primary credit quality indicator is the DSCR, which compares a property’s net operating income to amounts needed to service the principal and interest due under the loan. Generally, the lower the DSCR, the higher the risk of experiencing a credit loss. The Company also reviews the LTV ratio of its commercial mortgage loan portfolio. LTV ratios compare the unpaid principal balance of the loan to the estimated fair value of the underlying collateral. Generally, the higher the LTV ratio, the higher the risk of experiencing a credit loss. The DSCR and the values utilized in calculating the ratio are updated routinely. In addition, the LTV ratio is routinely updated for all but the lowest risk loans as part of the Company’s ongoing review of its commercial mortgage loan portfolio.
For agricultural mortgage loans, the Company’s primary credit quality indicator is the LTV ratio. The values utilized in calculating this ratio are developed in connection with the ongoing review of the agricultural mortgage loan portfolio and are routinely updated.
Commitments to lend: After loans are approved, the Company makes commitments to lend and, typically, borrowers draw down on some or all of the commitments. The timing of mortgage loan funding is based on the commitment expiration dates. A liability for credit loss for unfunded commercial and agricultural mortgage loan commitments that are not unconditionally cancellable is recognized in earnings and is reported within net investment gains (losses). The liability is based on estimated lifetime loss rates as described above and the amount of the outstanding commitments, which for lines of credit, considers estimated utilization rates. When the commitment is funded or expires, the liability is adjusted accordingly.
Residential Mortgage Loan Portfolio Segment
The Company’s residential mortgage loan portfolio is comprised primarily of purchased closed end, amortizing residential mortgage loans, including both performing loans purchased within 12 months of origination and reperforming loans purchased after they have been performing for at least 12 months post-modification. Residential mortgage loans are pooled by loan type (i.e., new origination and reperforming) and pooled by similar risk profiles (including consumer credit score and LTV ratios). Estimated lifetime loss rates, which vary by loan type and risk profile, are applied to the amortized cost of each loan excluding accrued investment income on a quarterly basis to develop the ACL. The estimated lifetime loss rates are based on several factors, including (i) industry historical experience and expected results over the forecast period for defaults, (ii) loss severity, (iii) prepayment rates, (iv) current and forecasted economic conditions including growth, inflation, interest rates and unemployment levels, and (v) loan pool specific characteristics including consumer credit scores, LTV ratios, payment history and home prices. These evaluations are revised as conditions change and new information becomes available. The Company uses industry historical experience which captures multiple economic cycles as the Company has purchased most of its residential mortgage loans in the last five years. The Company uses a forecast of economic assumptions for a two-year period for most of its residential mortgage loans. After the applicable forecast period, the Company immediately reverts to industry historical loss experience.
For residential mortgage loans, the Company’s primary credit quality indicator is whether the loan is performing or nonperforming. The Company generally defines nonperforming residential mortgage loans as those that are 60 or more days past due and/or in nonaccrual status which is assessed monthly. Generally, nonperforming residential mortgage loans have a higher risk of experiencing a credit loss.
Mortgage Loan Concessions
In response to the adverse economic impact of the COVID-19 pandemic, in 2021 and 2020, the Company granted concessions to certain of its commercial, agricultural and residential mortgage loan borrowers, including payment deferrals and other loan modifications. The Company has elected the option under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the Consolidated Appropriations Act, 2021 and the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) (“Interagency Statement”) issued by bank regulatory agencies, not to account for or report qualifying concessions as TDRs and not to classify such loans as either past due or nonaccrual during the payment deferral period. Additionally, in accordance with the FASB’s published response to a COVID-19 pandemic technical inquiry, the Company continues to accrue interest income on such loans that have deferred payment. The Company records an ACL on this accrued interest income through earnings, which is reported within net investment gains (losses).
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
Commercial
For some commercial mortgage loan borrowers (principally in the retail and hotel sectors), the Company granted concessions which were primarily interest and principal payment deferrals generally ranging from three to four months and, to a much lesser extent, maturity date extensions. Deferred commercial mortgage loan interest and principal payments were $23 million at December 31, 2021.
Agricultural
For some agricultural mortgage loan borrowers (principally in the annual crops and agribusiness sectors), the Company granted concessions which were primarily principal payment deferrals generally ranging from three to twelve months, and covenant changes and, to a much lesser extent, maturity date extensions. Deferred agricultural mortgage loan interest and principal payments were $4 million at December 31, 2021.
Residential
For some residential mortgage loan borrowers, the Company granted concessions which were primarily three-month interest and principal payment deferrals. Deferred residential mortgage loan interest and principal payments were $15 million at December 31, 2021.
Troubled Debt Restructurings
The Company assesses loan concessions prior to the issuance of, or outside the scope of, the CARES Act, the Consolidated Appropriations Act, 2021 and the Interagency Statement on a case-by-case basis to evaluate whether a TDR has occurred. The Company may grant concessions to borrowers experiencing financial difficulties, which, if not significant, are not classified as TDRs, while more significant concessions are classified as TDRs. Generally, the types of concessions include: reduction of the contractual interest rate, extension of the maturity date at an interest rate lower than current market interest rates, and/or a reduction of accrued interest. The amount, timing and extent of the concessions granted are considered in determining any ACL recorded.
For both years ended December 31, 2021 and 2020, the Company did not have any commercial mortgage loans modified in a TDR; and did not have a significant amount of agricultural and residential mortgage loans modified in a TDR.
For both years ended December 31, 2021 and 2020, the Company did not have a significant amount of mortgage loans modified in a TDR with subsequent payment default.
Credit Quality of Mortgage Loans by Portfolio Segment
The amortized cost of commercial mortgage loans by credit quality indicator and vintage year was as follows at December 31, 2021:
Credit Quality Indicator 2021 2020 2019 2018 2017 Prior Revolving
Loans Total % of
Total
(Dollars in millions)
LTV ratios:
Less than 65% $ 3,402 $ 3,128 $ 2,938 $ 3,730 $ 2,760 $ 8,859 $ 2,443 $ 27,260 76.2 %
65% to 75% 1,017 551 2,021 933 337 1,611 - 6,470 18.1
76% to 80% - 18 138 198 149 180 - 683 1.9
Greater than 80% - - - 49 284 1,026 - 1,359 3.8
Total $ 4,419 $ 3,697 $ 5,097 $ 4,910 $ 3,530 $ 11,676 $ 2,443 $ 35,772 100.0 %
DSCR:
> 1.20x $ 4,018 $ 3,306 $ 4,698 $ 4,500 $ 3,190 $ 9,101 $ 2,164 $ 30,977 86.6 %
1.00x - 1.20x 156 69 9 134 27 882 - 1,277 3.6
<1.00x 245 322 390 276 313 1,693 279 3,518 9.8
Total $ 4,419 $ 3,697 $ 5,097 $ 4,910 $ 3,530 $ 11,676 $ 2,443 $ 35,772 100.0 %
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
The amortized cost of agricultural mortgage loans by credit quality indicator and vintage year was as follows at December 31, 2021:
Credit Quality Indicator 2021 2020 2019 2018 2017 Prior Revolving
Loans Total % of
Total
(Dollars in millions)
LTV ratios:
Less than 65% $ 1,399 $ 2,221 $ 1,685 $ 2,264 $ 878 $ 4,286 $ 947 $ 13,680 88.5 %
65% to 75% 237 335 198 150 37 571 112 1,640 10.6
76% to 80% - - - - - 11 - 11 0.1
Greater than 80% - - 76 - - 43 - 119 0.8
Total $ 1,636 $ 2,556 $ 1,959 $ 2,414 $ 915 $ 4,911 $ 1,059 $ 15,450 100.0 %
The amortized cost of residential mortgage loans by credit quality indicator and vintage year was as follows at December 31, 2021:
Credit Quality Indicator 2021 2020 2019 2018 2017 Prior Revolving
Loans Total % of
Total
(Dollars in millions)
Performance indicators:
Performing $ 277 $ 200 $ 811 $ 470 $ 194 $ 7,036 $ - $ 8,988 95.6 %
Nonperforming (1) - 3 46 15 1 353 - 418 4.4
Total $ 277 $ 203 $ 857 $ 485 $ 195 $ 7,389 $ - $ 9,406 100.0 %
__________________
(1)Includes residential mortgage loans in process of foreclosure of $69 million and $102 million at December 31, 2021 and 2020, respectively.
LTV ratios compare the unpaid principal balance of the loan to the estimated fair value of the underlying collateral. The amortized cost of commercial and agricultural mortgage loans with an LTV ratio in excess of 100% was $680 million, or 1% of total commercial and agricultural mortgage loans at December 31, 2021.
Past Due and Nonaccrual Mortgage Loans
The Company has a high quality, well performing mortgage loan portfolio, with 99% of all mortgage loans classified as performing at both December 31, 2021 and 2020. The Company defines delinquency consistent with industry practice, when mortgage loans are past due more than two or more months, as applicable, by portfolio segment. The past due and nonaccrual mortgage loans at amortized cost, prior to ACL, by portfolio segment, were as follows:
Past Due
Greater than 90 Days Past Due and Still Accruing Interest Nonaccrual
Portfolio Segment December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020
(In millions)
Commercial
$ - $ - $ - $ - $ 146 $ 293
Agricultural
124 251 16 20 225 261
Residential
418 516 - 54 418 503
Total
$ 542 $ 767 $ 16 $ 74 $ 789 $ 1,057
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
The amortized cost for nonaccrual commercial, agricultural and residential mortgage loans at beginning of year 2020 was $167 million, $137 million and $377 million, respectively. The amortized cost for nonaccrual commercial mortgage loans with no ACL was $0 and $156 million at December 31, 2021 and 2020, respectively. The amortized cost for nonaccrual agricultural mortgage loans with no ACL was $134 million and $173 million at December 31, 2021 and 2020, respectively. There were no nonaccrual residential mortgage loans without an ACL at either December 31, 2021 or 2020.
Purchased Investments with Credit Deterioration
Investments that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination are classified as PCD. The amortized cost for PCD investments is the purchase price plus an ACL for the initial estimate of expected lifetime credit losses established upon purchase. Subsequent changes in the ACL on PCD investments are recognized in earnings and are reported in net investment gains (losses). The non-credit discount or premium is accreted or amortized to net investment income on an effective yield basis.
The following table reconciles the contractual principal to the purchase price of PCD investments:
For the Year Ended December 31, 2021
Contractual
Principal ACL at
Acquisition Non-Credit
(Discount)
Premium Purchase
Price
(In millions)
PCD residential mortgage loans $ 514 $ (3) $ 32 $ 543
Prior to the adoption of credit loss guidance for the recognition of credit losses on financial instruments, the Company applied applicable guidance for investments acquired with evidence of credit quality deterioration since origination, known as PCI investments. The Company’s PCI investments had an outstanding principal balance of $3.2 billion at December 31, 2019, 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 $2.7 billion at December 31, 2019. Accretion of accretable yield on PCI investments recognized in net investment income was $170 million for the year ended December 31, 2019.
Real Estate and Real Estate Joint Ventures
The Company’s real estate investment portfolio is diversified by property type, geography and income stream, including income from operating leases, operating income and equity in earnings from equity method real estate joint ventures. Real estate investments, by income type, as well as income earned, were as follows at and for the periods indicated:
December 31, For the Years Ended December 31,
2021 2020 2021 2020 2019
Income Type Carrying Value Income
(In millions)
Leased real estate investments $ 1,934 $ 1,965 $ 209 $ 188 $ 165
Other real estate investments 473 418 186 127 174
Real estate joint ventures 5,466 5,095 180 (59) 62
Total real estate and real estate joint ventures
$ 7,873 $ 7,478 $ 575 $ 256 $ 401
The carrying value of real estate investments acquired through foreclosure was $180 million and $18 million at December 31, 2021 and 2020, respectively. Depreciation expense on real estate investments was $86 million, $73 million and $62 million for the years ended December 31, 2021, 2020 and 2019, respectively. Real estate investments were net of accumulated depreciation of $581 million and $789 million at December 31, 2021 and 2020, respectively.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
Leases
Leased Real Estate Investments - Operating Leases
The Company, as lessor, leases investment real estate, principally commercial real estate for office and retail use, through a variety of operating lease arrangements, which typically include tenant reimbursement for property operating costs and options to renew or extend the lease. In some circumstances, leases may include an option for the lessee to purchase the property. In addition, certain leases of retail space may stipulate that a portion of the income earned is contingent upon the level of the tenants’ revenues. The Company has elected a practical expedient of not separating non-lease components related to reimbursement of property operating costs from associated lease components. These property operating costs have the same timing and pattern of transfer as the related lease component, because they are incurred over the same period of time as the operating lease. Therefore, the combined component is accounted for as a single operating lease. Risk is managed through lessee credit analysis, property type diversification, and geographic diversification. Leased real estate investments and income earned, by property type, were as follows at and for the periods indicated:
December 31, For the Years Ended December 31,
2021 2020 2021 2020 2019
Property Type
Carrying Value Income
(In millions)
Leased real estate investments:
Office
$ 782 $ 661 $ 73 $ 31 $ 49
Apartment 506 516 40 40 3
Retail 363 498 44 66 70
Industrial
260 258 52 50 42
Land 23 23 - 1 -
Other
- 9 - - 1
Total leased real estate investments
$ 1,934 $ 1,965 $ 209 $ 188 $ 165
Future contractual receipts under operating leases at December 31, 2021 were $141 million in 2022, $140 million in 2023, $122 million in 2024, $109 million in 2025, $93 million in 2026, $243 million thereafter and, in total, were $848 million.
Leveraged and Direct Financing Leases
The Company has diversified leveraged and direct financing lease portfolios. Its leveraged leases principally include renewable energy generation facilities, rail cars, commercial real estate and commercial aircraft, and its direct financing leases principally include renewable energy generation facilities. These assets are leased through a variety of lease arrangements, which may include options to renew or extend the lease and options for the lessee to purchase the property. Residual values are estimated using available third-party data at inception of the lease. Risk is managed through lessee credit analysis, asset allocation, geographic diversification, and ongoing reviews of estimated residual values, using available third-party data. Generally, estimated residual values are not guaranteed by the lessee or a third party.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
Investment in leveraged and direct financing leases consisted of the following at:
December 31, 2021 December 31, 2020
Leveraged
Leases Direct
Financing
Leases Leveraged
Leases Direct
Financing
Leases
(In millions)
Lease receivables, net (1)
$ 542 $ 141 $ 597 $ 210
Estimated residual values
560 39 573 42
Subtotal
1,102 180 1,170 252
Unearned income
(284) (42) (318) (74)
Investment in leases, before ACL 818 138 852 178
ACL (31) (1) (36) (2)
Investment in leases, net of ACL $ 787 $ 137 $ 816 $ 176
__________________
(1)Future contractual receipts under direct financing leases at December 31, 2021 were $18 million in 2022, $18 million in 2023, $18 million in 2024, $18 million in 2025, $16 million in 2026, $53 million thereafter and, in total, were $141 million.
Lease receivables are generally due in periodic installments. The payment periods for leveraged leases generally range from one to 10 years, but in certain circumstances can be over 10 years, while the payment periods for direct financing leases generally range from one to 12 years. For lease receivables, the primary credit quality indicator is whether the lease receivable is performing or nonperforming, which is assessed monthly. The Company generally defines nonperforming lease receivables as those that are 90 days or more past due. At both December 31, 2021 and 2020, all lease receivables were performing.
The deferred income tax liability related to leveraged leases was $272 million and $287 million at December 31, 2021 and 2020, respectively.
The components of income from investment in leveraged and direct financing leases, excluding net investment gains (losses), were as follows:
For the Years Ended December 31,
2021 2020 2019
Leveraged
Leases Direct
Financing
Leases Leveraged
Leases Direct
Financing
Leases Leveraged
Leases Direct
Financing
Leases
(In millions)
Lease investment income $ 34 $ 11 $ 36 $ 11 $ 37 $ 12
Less: Income tax expense 7 2 8 2 8 3
Lease investment income, net of income tax
$ 27 $ 9 $ 28 $ 9 $ 29 $ 9
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
After the adoption of credit loss guidance on January 1, 2020, the Company records an allowance for expected lifetime credit loss in earnings within investment gains (losses) in an amount that represents the portion of the investment in leases that the Company does not expect to collect, resulting in the investment in leases being presented at the net amount expected to be collected. In determining the ACL, management applies significant judgment to estimate expected lifetime credit loss, including: (i) pooling leases that share similar risk characteristics, (ii) considering expected lifetime credit loss over the contractual term of the lease, and (iii) considering past events and current and forecasted economic conditions. Leases with dissimilar risk characteristics are evaluated individually for credit loss. Expected lifetime credit loss on leveraged and direct financing lease receivables is estimated using a probability of default and loss given default model, where the probability of default incorporates third party credit ratings of the lessee and the related historical default data. The Company also assesses the non-guaranteed residual values for recoverability by comparison to the current estimated fair value of the leased asset and considers other relevant market information such as independent third-party forecasts, consulting, asset brokerage and investment banking reports and data, comparable market transactions, and factors such as the competitive dynamics impacting specific industries, technological change and obsolescence, government and regulatory rules, tax policy, potential environmental liabilities and litigation.
During the year ended December 31, 2019, prior to the adoption of credit loss guidance on January 1, 2020, lease impairment losses were recognized in earnings within investment gains (losses) as incurred. Under the incurred loss model, if all amounts due under the lease agreement would not be collected based on current information and events, an impairment loss was recognized in earnings. The impairment loss was recorded as a reduction of the investment in lease and within net investment gains (losses).
Other Invested Assets
Other invested assets is comprised primarily of freestanding derivatives with positive estimated fair values (see Note 8), affiliated investments (see “- Related Party Investment Transactions”), tax credit and renewable energy partnerships, annuities funding structured settlement claims (see Note 1), leveraged and direct financing leases (see “- Leases - Leveraged and Direct Financing Leases”), operating joint ventures (see Note 1) and FHLB common stock (see “- Invested Assets on Deposit and Pledged as Collateral”) FVO Securities and equity securities. See “- Related Party Investment Transactions” for information regarding affiliated investments.
Tax Credit Partnerships
The carrying value of tax credit partnerships was $937 million and $1.1 billion at December 31, 2021 and 2020, respectively. Losses from tax credit partnerships included within net investment income were $197 million, $225 million and $240 million for the years ended December 31, 2021, 2020 and 2019, respectively.
FVO Securities and Equity Securities
The following table presents FVO Securities and equity securities by security type. Common stock includes common stock and mutual funds.
December 31,
Cost
Net Unrealized Gains (Losses) (1)
Estimated Fair Value
Cost
Net Unrealized Gains (Losses) (1)
Estimated Fair Value
Security Type
(In millions)
FVO Securities $ 598 $ 250 $ 848 $ 544 $ 144 $ 688
Equity securities
Common stock $ 88 $ 32 $ 120 $ 291 $ (73) $ 218
Non-redeemable preferred stock 107 (1) 106 189 2 191
Total equity securities $ 195 $ 31 $ 226 $ 480 $ (71) $ 409
__________________
(1) Represents cumulative changes in estimated fair value, recognized in earnings, and not in OCI.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
Cash Equivalents
Cash equivalents, which includes securities and other investments with an original or remaining maturity of three months or less at the time of purchase, was $4.7 billion and $6.8 billion, principally at estimated fair value, at December 31, 2021 and 2020, respectively.
Net Unrealized Investment Gains (Losses)
Unrealized investment gains (losses) on fixed maturity securities AFS and derivatives and the effect on policyholder liabilities, DAC, VOBA and DSI 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:
December 31,
2021 2020 2019
(In millions)
Fixed maturity securities AFS
$ 17,586 $ 24,954 $ 15,177
Derivatives
2,370 2,259 2,043
Other
377 235 210
Subtotal
20,333 27,448 17,430
Amounts allocated from:
Policyholder liabilities (5,962) (10,572) (3,141)
DAC, VOBA and DSI
(1,357) (1,511) (1,051)
Subtotal
(7,319) (12,083) (4,192)
Deferred income tax benefit (expense)
(2,657) (3,190) (2,742)
Net unrealized investment gains (losses)
$ 10,357 $ 12,175 $ 10,496
The changes in net unrealized investment gains (losses) were as follows:
Years Ended December 31,
2021 2020 2019
(In millions)
Balance at January 1,
$ 12,175 $ 10,496 $ 3,897
Cumulative effects of changes in accounting principles, net of income tax - - 17
Unrealized investment gains (losses) during the year
(7,115) 10,018 11,520
Unrealized investment gains (losses) relating to:
Policyholder liabilities 4,610 (7,431) (2,708)
DAC, VOBA and DSI
154 (460) (480)
Deferred income tax benefit (expense)
533 (448) (1,750)
Balance at December 31,
$ 10,357 $ 12,175 $ 10,496
Change in net unrealized investment gains (losses) $ (1,818) $ 1,679 $ 6,599
Concentrations of Credit Risk
There were no investments in any counterparty that were greater than 10% of the Company’s equity, other than the U.S. government and its agencies, at both December 31, 2021 and 2020.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
Securities Lending Transactions and Repurchase Agreements
Securities, Collateral and Reinvestment Portfolio
A summary of these transactions and agreements accounted for as secured borrowings were as follows:
December 31,
2021 2020
Securities (1) Securities (1)
Agreement Type Estimated Fair Value Cash Collateral Received from Counterparties (2) Reinvestment Portfolio at Estimated Fair Value Estimated Fair Value Cash Collateral Received from Counterparties (2) Reinvestment Portfolio at Estimated Fair Value
(In millions)
Securities lending
$ 14,689 $ 14,977 $ 15,116 $ 13,289 $ 13,566 $ 13,739
Repurchase agreements
$ 3,416 $ 3,325 $ 3,357 $ 3,276 $ 3,210 $ 3,251
__________________
(1)These securities are included within fixed maturity securities AFS and short-term investments.
(2)The liability for cash collateral is included within payables for collateral under securities loaned and other transactions.
Contractual Maturities
Contractual maturities of these transactions and agreements accounted for as secured borrowings were as follows:
December 31,
2021 2020
Remaining Maturities Remaining Maturities
Security Type Open (1) 1 Month
or Less Over 1 Month
to 6 Months Over 6 Months to 1 Year Total Open (1) 1 Month
or Less Over 1 Month to 6 Months Over 6 Months to 1 Year Total
(In millions)
Cash collateral liability by security type:
Securities lending:
U.S. government and agency $ 3,996 $ 5,279 $ 5,702 $ - $ 14,977 $ 1,705 $ 8,768 $ 3,093 $ - $ 13,566
Repurchase agreements:
U.S. government and agency $ - $ 3,325 $ - $ - $ 3,325 $ - $ 3,210 $ - $ - $ 3,210
________________
(1)The related security could be returned to the Company on the next business day, which would require the Company to immediately return the cash collateral.
If the Company is required to return significant amounts of cash collateral on short notice and is forced to sell investments to meet the return obligation, it may have difficulty selling such collateral that is invested in a timely manner, be forced to sell investments in a volatile or illiquid market for less than what otherwise would have been realized under normal market conditions, or both.
The securities lending and repurchase agreements reinvestment portfolios consist principally of high quality, liquid, publicly-traded fixed maturity securities AFS, short-term investments, cash equivalents or cash. If the securities or the reinvestment portfolio become less liquid, liquidity resources within the general account are available to meet any potential cash demands when securities are put back by the counterparty.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
Invested Assets on Deposit and Pledged as Collateral
Invested assets on deposit and pledged as collateral are presented below at estimated fair value for all asset classes, except mortgage loans, which are presented at carrying value and were as follows at:
December 31,
2021 2020
(In millions)
Invested assets on deposit (regulatory deposits)
$ 118 $ 123
Invested assets pledged as collateral (1)
20,390 22,405
Total invested assets on deposit and pledged as collateral
$ 20,508 $ 22,528
__________________
(1)The Company has pledged invested assets in connection with various agreements and transactions, including funding agreements (see Note 3), derivative transactions (see Note 8) and secured debt (see Note 11).
See “- Securities Lending Transactions and Repurchase Agreements” for information regarding securities supporting securities lending transactions and repurchase agreements and Note 6 for information regarding investments designated to the closed block. In addition, the Company’s investment in FHLB common stock, included within other invested assets, which is considered restricted until redeemed by the issuers, was $718 million and $765 million, at redemption value, at December 31, 2021 and 2020, respectively.
Collectively Significant Equity Method Investments
The Company holds investments in real estate joint ventures, real estate funds and other limited partnership interests consisting of private equity funds, hedge funds, real estate joint ventures and real estate funds. The portion of these investments accounted for under the equity method had a carrying value of $16.1 billion at December 31, 2021. 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 $3.3 billion at December 31, 2021. 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.
As described in Note 1, the Company generally recognizes its share of earnings in its equity method investments within net investment income using 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. Aggregate net investment income from these equity method investments exceeded 10% of the Company’s consolidated pre-tax income (loss) for the three most recent annual periods.
The following aggregated summarized financial data reflects the latest available financial information and does not represent the Company’s proportionate share of the assets, liabilities, or earnings of such entities.
Aggregate total assets of these entities totaled $1.0 trillion and $593.9 billion at December 31, 2021 and 2020, respectively. Aggregate total liabilities of these entities totaled $126.4 billion and $80.5 billion at December 31, 2021 and 2020, respectively. Aggregate net income (loss) of these entities totaled $218.6 billion, $34.4 billion and $40.9 billion for the years ended December 31, 2021, 2020 and 2019, respectively. 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).
Variable Interest Entities
The Company has invested in legal entities that are VIEs. In certain instances, the Company holds both the power to direct the most significant activities of the entity, as well as an economic interest in the entity and, as such, is deemed to be the primary beneficiary or consolidator of the entity. The determination of the VIE’s primary beneficiary requires an evaluation of the contractual and implied rights and obligations associated with each party’s relationship with or involvement in the entity.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
Consolidated VIEs
Creditors or beneficial interest holders of VIEs where the Company is the primary beneficiary have no recourse to the general credit of the Company, as the Company’s obligation to the VIEs is limited to the amount of its committed investment.
The following table presents the total assets and total liabilities relating to investment related VIEs for which the Company has concluded that it is the primary beneficiary and which are consolidated at:
December 31,
2021 2020
Asset Type Total
Assets Total
Liabilities Total
Assets Total
Liabilities
(In millions)
Real estate joint ventures (1)
$ 1,094 $ - $ 1,435 $ -
Investment funds (primarily mortgage loans) (2) 226 - 201 -
Other (primarily other invested assets and cash and cash equivalents) 101 - 4 5
Renewable energy partnership (primarily other invested assets) 79 - 87 -
Total
$ 1,500 $ - $ 1,727 $ 5
__________________
(1)The Company’s investment in affiliated real estate joint ventures was $1.0 billion and $1.3 billion at December 31, 2021 and 2020, respectively. Other affiliates’ investments in these affiliated real estate joint ventures were $112 million and $130 million at December 31, 2021 and 2020, respectively.
(2)The Company’s investment in affiliated investment funds was $187 million and $164 million, at December 31, 2021 and 2020, respectively. Other affiliates’ investments in these affiliated investment funds were $39 million and $37 million at December 31, 2021 and 2020, respectively.
Unconsolidated VIEs
The carrying amount and maximum exposure to loss relating to VIEs in which the Company holds a significant variable interest but is not the primary beneficiary and which have not been consolidated were as follows at:
December 31,
2021 2020
Asset Type Carrying
Amount Maximum
Exposure
to Loss (1) Carrying
Amount Maximum
Exposure
to Loss (1)
(In millions)
Fixed maturity securities AFS (2) $ 43,653 $ 43,653 $ 43,708 $ 43,708
Other limited partnership interests
8,005 11,057 5,247 8,589
Other invested assets
1,605 1,815 1,436 1,517
Real estate joint ventures
97 100 18 21
Total
$ 53,360 $ 56,625 $ 50,409 $ 53,835
__________________
(1)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 and real estate joint ventures 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 $5 million and $3 million at December 31, 2021 and 2020, respectively. Such a maximum loss would be expected to occur only upon bankruptcy of the issuer or investee.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
(2)For variable interests in Structured Products included within fixed maturity securities AFS, the Company’s involvement is limited to that of a passive investor in mortgage-backed or asset-backed securities issued by trusts that do not have substantial equity.
As described in Note 16, 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 for each of the years ended December 31, 2021, 2020 and 2019.
The Company securitizes certain residential mortgage loans and acquires an interest in the related RMBS issued. While the Company has a variable interest in the issuer of the securities, it is not the primary beneficiary of the issuer of the securities since it does not have any rights to remove the servicer or veto rights over the servicer’s actions. The resulting gains (losses) from the securitizations are included within net investment gains (losses). The estimated fair value of the related RMBS acquired in connection with the securitizations is included in the carrying amount and maximum exposure to loss for Structured Products presented in the table above.
The Company did not securitize any loans during 2021. The carrying value and the estimated fair value of residential mortgage loans securitized during the year ended December 31, 2020 were $308 million and $313 million, respectively. Gains on securitizations were $5 million and $24 million for the years ended December 31, 2020 and 2019, respectively, which are included within net investment gains (losses). The estimated fair value of RMBS acquired in connection with these securitizations was $0 and $43 million at December 31, 2021 and 2020, respectively.
See Note 9 for information on how the estimated fair value of mortgage loans and RMBS is determined, the valuation approaches and key inputs, their placement in the fair value hierarchy, and for certain RMBS, quantitative information about the significant unobservable inputs and the sensitivity of their estimated fair value to changes in those inputs.
Net Investment Income
The composition of net investment income by asset type was as follows:
For the Years Ended December 31,
Asset Type 2021 2020 2019
(In millions)
Fixed maturity securities AFS
$ 6,101 $ 6,535 $ 7,015
Equity securities
16 25 35
Mortgage loans
2,661 2,836 3,147
Policy loans
292 305 307
Real estate and real estate joint ventures
575 256 401
Other limited partnership interests
3,161 633 545
Cash, cash equivalents and short-term investments
11 77 183
FVO Securities 102 48 74
Operating joint venture
65 80 69
Other
142 154 221
Subtotal investment income 13,126 10,949 11,997
Less: Investment expenses
640 699 1,024
Net investment income
$ 12,486 $ 10,250 $ 10,973
Net investment income included realized and unrealized gains (losses), recognized in earnings, of $190 million,$96 million, and $108 million for the years ended December 31, 2021, 2020 and 2019, respectively. The amount includes realized gains (losses) on sales and disposals, primarily related to FVO Securities, of $22 million, $2 million and $20 million for the years ended December 31, 2021, 2020 and 2019, respectively. The amount also includes unrealized gains (losses), representing changes in estimated fair value, recognized in earnings, primarily related to FVO Securities, of $168 million, $94 million, and $88 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Changes in estimated fair value subsequent to purchase of equity-linked notes included within FVO Securities, still held at the end of the respective periods and included in net investment income were $77 million, $46 million and $74 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
See “- Related Party Investment Transactions” for discussion of affiliated net investment income and investment expenses.
Net investment income from equity method investments, comprised primarily of real estate joint ventures, other limited partnership interests, tax credit and renewable energy partnerships and an operating joint venture, was $3.2 billion, $427 million and $458 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Net Investment Gains (Losses)
Net Investment Gains (Losses) by Asset Type and Transaction Type
The composition of net investment gains (losses) by asset type and transaction type was as follows:
Years Ended December 31,
Asset Type 2021 2020 2019
(In millions)
Fixed maturity securities AFS $ (49) $ (58) $ 12
Equity securities 40 (76) 50
Mortgage loans (34) (188) (13)
Real estate and real estate joint ventures (excluding changes in estimated fair value)
568 7 396
Other limited partnership interests (excluding changes in estimated fair value)
(15) (12) 3
Other gains (losses)
109 293 (46)
Subtotal
619 (34) 402
Change in estimated fair value of other limited partnership interests and real estate joint ventures 45 (5) (15)
Non-investment portfolio gains (losses) (12) (34) (41)
Subtotal
33 (39) (56)
Net investment gains (losses) $ 652 $ (73) $ 346
Transaction Type
Realized gains (losses) on investments sold or disposed $ 579 $ 306 $ 517
Impairment (losses) (24) (50) (142)
Recognized gains (losses):
Change in allowance for credit loss recognized in earnings (41) (204) (10)
Unrealized net gains (losses) recognized in earnings 150 (91) 22
Total recognized gains (losses) 664 (39) 387
Non-investment portfolio gains (losses) (12) (34) (41)
Net investment gains (losses) $ 652 $ (73) $ 346
Net realized investment gains (losses) of $601 million, $308 million and $537 million for the years ended December 31, 2021, 2020 and 2019, respectively, represent realized gains (losses) on sales and disposals from all invested asset classes, including realized gains (losses) on sales and disposals recognized in net investment income, primarily related to FVO Securities.
Changes in estimated fair value subsequent to purchase of equity securities still held as of the end of the period included in net investment gains (losses) were $10 million, ($80) million and $31 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Other gains (losses) included $91 million and $128 million reclassified from AOCI to earnings due to the sale of certain investments that were hedged in qualifying cash flow hedges for the years ended December 31, 2021 and 2020, respectively. Other gains (losses) also included a leveraged lease gain of $87 million for the year ended December 31, 2020; and tax credit partnership impairment (losses) of ($92) million, and a renewable energy partnership disposal gain of $46 million for the year ended December 31, 2019.
See “- Related Party Investment Transactions” for discussion of affiliated net investment gains (losses) related to transfers of invested assets to affiliates.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
Net investment gains (losses) includes gains (losses) from foreign currency transactions of $62 million, ($19) million and ($57) million for the years ended December 31, 2021, 2020 and 2019, respectively.
Fixed Maturity Securities AFS and Equity Securities - Composition of Net Investment Gains (Losses)
The composition of net investment gains (losses) for these securities is as follows:
For the Years Ended December 31,
Fixed Maturity Securities AFS
2021 2020 2019
(In millions)
Proceeds $ 27,587 $ 20,453 $ 32,175
Gross investment gains $ 232 $ 419 $ 392
Gross investment (losses) (256) (376) (341)
Realized gains (losses) on sales and disposals (24) 43 51
Net credit loss (provision) release (change in ACL recognized in earnings) (1) (51) -
Impairment (loss) (1), (2) (24) (50) (39)
Net credit loss (provision) release and impairment (loss) (25) (101) (39)
Net investment gains (losses) $ (49) $ (58) $ 12
Equity Securities
Realized gains (losses) on sales and disposals $ (61) $ 10 $ 12
Unrealized net gains (losses) recognized in earnings 101 (86) 38
Net investment gains (losses) $ 40 $ (76) $ 50
__________________
(1)Impairment (loss) by sector for industrial corporate, consumer corporate, foreign government securities and RMBS for the year ended December 31, 2019 were ($19) million, ($16) million, ($2) million, and ($2) million, respectively. Due to the adoption of credit loss guidance on January 1, 2020, prior period OTTI (loss) is presented as impairment (loss).
(2)After adoption of new guidance on January 1, 2020, impairment (loss) was comprised of intent-to-sell and direct write down losses; prior to January 1, 2020, it was comprised of OTTI losses and intent-to-sell losses.
Related Party Investment Transactions
The Company transfers invested assets primarily consisting of fixed maturity securities AFS, mortgage loans and real estate and real estate joint ventures to and from affiliates. Invested assets transferred were as follows:
Years Ended December 31,
2021 2020 2019
(In millions)
Estimated fair value of invested assets transferred to affiliates
$ 795 $ 393 $ -
Amortized cost of invested assets transferred to affiliates
$ 776 $ 379 $ -
Net investment gains (losses) recognized on transfers
$ 19 $ 14 $ -
Estimated fair value of invested assets transferred from affiliates
$ 1,346 $ 381 $ 46
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
7. Investments (continued)
Recurring related party investments and related net investment income were as follows at and for the periods ended:
December 31, Years Ended December 31,
2021 2020 2021 2020 2019
Investment Type/Balance Sheet Category Related Party Carrying Value Net Investment Income
(In millions)
Affiliated investments (1) MetLife, Inc. $ 1,399 $ 1,643 $ 31 $ 35 $ 34
Affiliated investments (2) American Life Insurance Company 100 100 2 3 3
Affiliated investments (3) Metropolitan Property and Casualty Insurance Company - 315 1 6 11
Other invested assets $ 1,499 $ 2,058 $ 34 $ 44 $ 48
________________
(1)Represents an investment in affiliated senior unsecured notes which have maturity dates from July 2023 to December 2031 and bear interest, payable semi-annually, at rates per annum ranging from 1.60% to 1.85%. In July 2021, ¥38.4 billion (the equivalent of $351 million) of 2.97% affiliated senior unsecured notes matured and were refinanced with the following senior unsecured notes: (i) ¥7.8 billion 1.61% due July 2026, (ii) ¥11.5 billion 1.76% due July 2028 and (iii) ¥19.1 billion 1.85% due July 2031. In December 2021, ¥51.0 billion (the equivalent of $467 million) of 3.14% affiliated senior unsecured notes matured of which ¥40.9 billion (the equivalent of $372 million) were refinanced with the following senior unsecured notes: (i) ¥19.1 billion 1.72% due December 2028, (ii) ¥21.8 billion 1.85% due December 2031, and, of which ¥10.1 billion (the equivalent of $95 million) were paid off at maturity.
(2)Represents an affiliated surplus note which matures in June 2025 and bears interest, payable semi-annually, at a rate per annum of 1.88%.
(3)Represents an investment in affiliated preferred stock which was redeemed at par plus accrued dividends in April 2021.
The Company incurred investment advisory charges from an affiliate of $292 million, $280 million and $299 million for the years ended December 31, 2021, 2020, and 2019, respectively.
See “- Variable Interest Entities” for information on investments in affiliated real estate joint ventures and affiliated investment funds.
See Note 5 “- Related Party Reinsurance Transactions” for information about affiliated funds withheld.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
8. Derivatives
Accounting for Derivatives
See Note 1 for a description of the Company’s accounting policies for derivatives and Note 9 for information about the fair value hierarchy for derivatives.
Derivative Strategies
The Company is exposed to various risks relating to its ongoing business operations, including interest rate, foreign currency exchange rate, credit and equity market. The Company uses a variety of strategies to manage these risks, including the use of derivatives.
Derivatives are financial instruments with values derived from interest rates, foreign currency exchange rates, credit spreads and/or other financial indices. Derivatives may be exchange-traded or contracted in the over-the-counter (“OTC”) market. Certain of the Company’s OTC derivatives are cleared and settled through central clearing counterparties (“OTC-cleared”), while others are bilateral contracts between two counterparties (“OTC-bilateral”). The types of derivatives the Company uses include swaps, forwards, futures and option contracts. To a lesser extent, the Company uses credit default swaps and structured interest rate swaps to synthetically replicate investment risks and returns which are not readily available in the cash markets.
Interest Rate Derivatives
The Company uses a variety of interest rate derivatives to reduce its exposure to changes in interest rates, including interest rate swaps, interest rate total return swaps, caps, floors, swaptions, futures and forwards.
Interest rate swaps are used by the Company primarily to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and liabilities (duration mismatches). In an interest rate swap, the Company agrees with another party to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts as calculated by reference to an agreed notional amount. The Company utilizes interest rate swaps in fair value, cash flow and nonqualifying hedging relationships.
The Company uses structured interest rate swaps to synthetically create investments that are either more expensive to acquire or otherwise unavailable in the cash markets. These transactions are a combination of a derivative and a cash instrument such as a U.S. government and agency, or other fixed maturity securities AFS. Structured interest rate swaps are included in interest rate swaps and are not designated as hedging instruments.
Interest rate total return swaps are swaps whereby the Company agrees with another party to exchange, at specified intervals, the difference between the economic risk and reward of an asset or a market index and a benchmark interest rate, calculated by reference to an agreed notional amount. No cash is exchanged at the outset of the contract. Cash is paid and received over the life of the contract based on the terms of the swap. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by the counterparty at each due date. Interest rate total return swaps are used by the Company to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and liabilities (duration mismatches). The Company utilizes interest rate total return swaps in nonqualifying hedging relationships.
The Company purchases interest rate caps primarily to protect its floating rate liabilities against rises in interest rates above a specified level, and against interest rate exposure arising from mismatches between assets and liabilities, and interest rate floors primarily to protect its minimum rate guarantee liabilities against declines in interest rates below a specified level. In certain instances, the Company locks in the economic impact of existing purchased caps and floors by entering into offsetting written caps and floors. The Company utilizes interest rate caps and floors in nonqualifying hedging relationships.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
8. Derivatives (continued)
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 issued by the Company. The Company utilizes exchange-traded interest rate futures in nonqualifying hedging relationships.
Swaptions are used by the Company to hedge interest rate risk associated with the Company’s long-term liabilities and invested assets. A swaption is an option to enter into a swap with a forward starting effective date. In certain instances, the Company locks in the economic impact of existing purchased swaptions by entering into offsetting written swaptions. The Company pays a premium for purchased swaptions and receives a premium for written swaptions. The Company utilizes swaptions in nonqualifying hedging relationships. Swaptions are included in interest rate options.
The Company enters into interest rate forwards to buy and sell securities. The price is agreed upon at the time of the contract and payment for such a contract is made at a specified future date. The Company utilizes interest rate forwards in cash flow and nonqualifying hedging relationships.
A synthetic GIC is a contract that simulates the performance of a traditional GIC through the use of financial instruments. The contractholder owns the underlying assets, and the Company provides a guarantee (or “wrap”) on the participant funds for an annual risk charge. The Company’s maximum exposure to loss on synthetic GICs is the notional amount, in the event the values of all of the underlying assets were reduced to zero. The Company’s risk is substantially lower due to contractual provisions that limit the portfolio to high quality assets, which are pre-approved and monitored for compliance, as well as the collection of risk charges. In addition, the crediting rates reset periodically to amortize market value gains and losses over a period equal to the duration of the wrapped portfolio, subject to a 0% floor. While plan participants may transact at book value, contractholder withdrawals may only occur immediately at market value, or at book value paid over a period of time per contract provisions. Synthetic GICs are not designated as hedging instruments.
Foreign Currency Exchange Rate Derivatives
The Company uses foreign currency exchange rate derivatives, including foreign currency swaps and foreign currency forwards, to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated in foreign currencies.
In a foreign currency swap transaction, the Company agrees with another party to exchange, at specified intervals, the difference between one currency and another at a fixed exchange rate, generally set at inception, calculated by reference to an agreed upon notional amount. The notional amount of each currency is exchanged at the inception and termination of the currency swap by each party. The Company utilizes foreign currency swaps in fair value, cash flow and nonqualifying hedging relationships.
In a foreign currency forward transaction, the Company agrees with another party to deliver a specified amount of an identified currency at a specified future date. The price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. The Company utilizes foreign currency forwards in nonqualifying hedging relationships.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
8. Derivatives (continued)
Credit Derivatives
The Company enters into purchased credit default swaps to hedge against credit-related changes in the value of its investments. In a credit default swap transaction, the Company agrees with another party to pay, at specified intervals, a premium to hedge credit risk. If a credit event occurs, as defined by the contract, the contract may be cash settled or it may be settled gross by the delivery of par quantities of the referenced investment equal to the specified swap notional amount in exchange for the payment of cash amounts by the counterparty equal to the par value of the investment surrendered. Credit events vary by type of issuer but typically include bankruptcy, failure to pay debt obligations and involuntary restructuring for corporate obligors, as well as repudiation, moratorium or governmental intervention for sovereign obligors. In each case, payout on a credit default swap is triggered only after the relevant third party, Credit Derivatives Determinations Committee determines that a credit event has occurred. The Company utilizes credit default swaps in nonqualifying hedging relationships.
The Company enters into written credit default swaps to synthetically create credit investments that are either more expensive to acquire or otherwise unavailable in the cash markets. These transactions are a combination of a derivative and one or more cash instruments, such as U.S. government and agency, or other fixed maturity securities AFS. These credit default swaps are not designated as hedging instruments.
The Company enters into forwards to lock in the price to be paid for forward purchases of certain securities. The price is agreed upon at the time of the contract and payment for the contract is made at a specified future date. When the primary purpose of entering into these transactions is to hedge against the risk of changes in purchase price due to changes in credit spreads, the Company designates these transactions as credit forwards. The Company utilizes credit forwards in cash flow hedging relationships.
Equity Derivatives
The Company uses a variety of equity derivatives to reduce its exposure to equity market risk, including equity index options, equity variance swaps, exchange-traded equity futures and equity total return swaps.
Equity index options are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products issued by the Company. To hedge against adverse changes in equity indices, the Company enters into contracts to sell the underlying equity index within a limited time at a contracted price. The contracts will be net settled in cash based on differentials in the indices at the time of exercise and the strike price. Certain of these contracts may also contain settlement provisions linked to interest rates. In certain instances, the Company may enter into a combination of transactions to hedge adverse changes in equity indices within a pre-determined range through the purchase and sale of options. The Company utilizes equity index options in nonqualifying hedging relationships.
Equity variance swaps are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products issued by the Company. In an equity variance swap, the Company agrees with another party to exchange amounts in the future, based on changes in equity volatility over a defined period. The Company utilizes equity variance swaps in nonqualifying hedging relationships.
In exchange-traded equity 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 equity 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 equity futures are used primarily to hedge minimum guarantees embedded in certain variable annuity products issued by the Company. The Company utilizes exchange-traded equity futures in nonqualifying hedging relationships.
In an equity total return swap, the Company agrees with another party to exchange, at specified intervals, the difference between the economic risk and reward of an asset or a market index and a benchmark interest rate, calculated by reference to an agreed notional amount. No cash is exchanged at the outset of the contract. Cash is paid and received over the life of the contract based on the terms of the swap. The Company uses equity total return swaps to hedge its equity market guarantees in certain of its insurance products. Equity total return swaps can be used as hedges or to synthetically create investments. The Company utilizes equity total return swaps in nonqualifying hedging relationships.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
8. Derivatives (continued)
Primary Risks Managed by Derivatives
The following table presents the primary underlying risk exposure, gross notional amount and estimated fair value of the Company’s derivatives, excluding embedded derivatives, held at:
Primary Underlying Risk Exposure December 31,
2021 2020
Estimated Fair Value Estimated Fair Value
Gross
Notional
Amount Assets Liabilities Gross
Notional
Amount Assets Liabilities
(In millions)
Derivatives Designated as Hedging Instruments:
Fair value hedges:
Interest rate swaps
Interest rate
$ 3,540 $ 2,163 $ 6 $ 3,175 $ 3,224 $ 4
Foreign currency swaps
Foreign currency exchange rate
764 8 22 1,049 5 76
Subtotal
4,304 2,171 28 4,224 3,229 80
Cash flow hedges:
Interest rate swaps
Interest rate
4,079 4 1 4,400 14 -
Interest rate forwards
Interest rate
3,058 69 1 5,081 489 -
Foreign currency swaps
Foreign currency exchange rate
28,772 1,317 966 28,017 1,102 1,353
Subtotal
35,909 1,390 968 37,498 1,605 1,353
Total qualifying hedges
40,213 3,561 996 41,722 4,834 1,433
Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate swaps
Interest rate
21,565 3,206 59 30,512 3,041 7
Interest rate floors
Interest rate
7,701 145 - 12,701 350 -
Interest rate caps
Interest rate
64,309 117 - 40,104 13 -
Interest rate futures
Interest rate
515 - - 406 - -
Interest rate options
Interest rate
9,703 364 - 15,337 174 -
Interest rate forwards
Interest rate
265 - 20 265 - 9
Interest rate total return swaps Interest rate 1,048 9 4 1,048 - 59
Synthetic GICs
Interest rate
11,307 - - 11,739 - -
Foreign currency swaps
Foreign currency exchange rate
4,800 340 75 5,596 292 238
Foreign currency forwards
Foreign currency exchange rate
1,902 11 13 1,236 9 18
Credit default swaps - purchased
Credit
956 12 8 886 8 9
Credit default swaps - written
Credit
6,074 111 12 6,961 126 -
Equity futures
Equity market
1,751 5 - 2,591 - 16
Equity index options
Equity market
26,800 714 166 19,601 459 189
Equity variance swaps
Equity market
425 12 10 425 11 9
Equity total return swaps
Equity market
2,148 11 46 2,542 1 274
Total non-designated or nonqualifying derivatives
161,269 5,057 413 151,950 4,484 828
Total
$ 201,482 $ 8,618 $ 1,409 $ 193,672 $ 9,318 $ 2,261
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
8. Derivatives (continued)
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, 2021 and 2020. 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.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
8. Derivatives (continued)
The Effects of Derivatives on the Consolidated Statements of Operations and Comprehensive Income (Loss)
The following table presents the consolidated financial statement location and amount of gain (loss) recognized on fair value, cash flow, nonqualifying hedging relationships and embedded derivatives:
Year Ended December 31, 2021
Net Investment Income Net Investment Gains (Losses) Net Derivative Gains (Losses) Policyholder Benefits and Claims Interest Credited to Policyholder Account Balances OCI
(In millions)
Gain (Loss) on Fair Value Hedges:
Interest rate derivatives:
Derivatives designated as hedging instruments (1)
$ 6 $ - $ - $ (455) $ - N/A
Hedged items
(6) - - 405 - N/A
Foreign currency exchange rate derivatives:
Derivatives designated as hedging instruments (1)
49 - - - - N/A
Hedged items
(43) - - - - N/A
Subtotal
6 - - (50) - N/A
Gain (Loss) on Cash Flow Hedges:
Interest rate derivatives: (1)
Amount of gains (losses) deferred in AOCI
N/A N/A N/A N/A N/A $ (570)
Amount of gains (losses) reclassified from AOCI into income
57 87 - - - (144)
Foreign currency exchange rate derivatives: (1)
Amount of gains (losses) deferred in AOCI
N/A N/A N/A N/A N/A 600
Amount of gains (losses) reclassified from AOCI into income
4 (229) - - - 225
Foreign currency transaction gains (losses) on hedged items
- 227 - - - -
Credit derivatives: (1)
Amount of gains (losses) deferred in AOCI
N/A N/A N/A N/A N/A -
Amount of gains (losses) reclassified from AOCI into income
- - - - - -
Subtotal
61 85 - - - 111
Gain (Loss) on Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate derivatives (1)
2 - (1,523) - - N/A
Foreign currency exchange rate derivatives (1)
- - 264 - - N/A
Credit derivatives - purchased (1)
- - 2 - - N/A
Credit derivatives - written (1)
- - 23 - - N/A
Equity derivatives (1)
(1) - (1,043) (265) - N/A
Foreign currency transaction gains (losses) on hedged items
- - (65) - - N/A
Subtotal
1 - (2,342) (265) - N/A
Earned income on derivatives
167 - 645 206 (159) -
Embedded derivatives (2)
N/A N/A 733 - N/A N/A
Total
$ 235 $ 85 $ (964) $ (109) $ (159) $ 111
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
8. Derivatives (continued)
Year Ended December 31, 2020
Net Investment Income Net Investment Gains (Losses) Net Derivative Gains (Losses) Policyholder Benefits and Claims Interest Credited to Policyholder Account Balances OCI
(In millions)
Gain (Loss) on Fair Value Hedges:
Interest rate derivatives:
Derivatives designated as hedging instruments (1)
$ (10) $ - $ - $ 360 $ - N/A
Hedged items
12 - - (399) - N/A
Foreign currency exchange rate derivatives:
Derivatives designated as hedging instruments (1)
(45) - - - - N/A
Hedged items
43 - - - - N/A
Subtotal
- - - (39) - N/A
Gain (Loss) on Cash Flow Hedges:
Interest rate derivatives: (1)
Amount of gains (losses) deferred in AOCI
N/A N/A N/A N/A N/A $ 1,268
Amount of gains (losses) reclassified from AOCI into income
36 121 - - - (157)
Foreign currency exchange rate derivatives: (1)
Amount of gains (losses) deferred in AOCI
N/A N/A N/A N/A N/A (124)
Amount of gains (losses) reclassified from AOCI into income
3 768 - - - (771)
Foreign currency transaction gains (losses) on hedged items
- (680) - - - -
Credit derivatives: (1)
Amount of gains (losses) deferred in AOCI
N/A N/A N/A N/A N/A -
Amount of gains (losses) reclassified from AOCI into income
- - - - - -
Subtotal
39 209 - - - 216
Gain (Loss) on Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate derivatives (1)
(6) - 1,999 - - N/A
Foreign currency exchange rate derivatives (1)
- - (371) - - N/A
Credit derivatives - purchased (1)
- - (6) - - N/A
Credit derivatives - written (1)
- - (78) - - N/A
Equity derivatives (1)
(2) - (973) (238) - N/A
Foreign currency transaction gains (losses) on hedged items
- - 91 - - N/A
Subtotal
(8) - 662 (238) - N/A
Earned income on derivatives
239 - 633 186 (152) -
Embedded derivatives (2)
N/A N/A (557) - N/A N/A
Total
$ 270 $ 209 $ 738 $ (91) $ (152) $ 216
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
8. Derivatives (continued)
Year Ended December 31, 2019
Net Investment Income Net Investment Gains (Losses) Net Derivative Gains (Losses) Policyholder Benefits and Claims Interest Credited to Policyholder Account Balances OCI
(In millions)
Gain (Loss) on Fair Value Hedges:
Interest rate derivatives:
Derivatives designated as hedging instruments (1)
$ (2) $ - $ - $ 339 $ 1 N/A
Hedged items
4 - - (369) - N/A
Foreign currency exchange rate derivatives:
Derivatives designated as hedging instruments (1)
(54) - - - - N/A
Hedged items
54 - - - - N/A
Subtotal
2 - - (30) 1 N/A
Gain (Loss) on Cash Flow Hedges:
Interest rate derivatives: (1)
Amount of gains (losses) deferred in AOCI
N/A N/A N/A N/A N/A $ 605
Amount of gains (losses) reclassified from AOCI into income
23 4 - - - (27)
Foreign currency exchange rate derivatives: (1)
Amount of gains (losses) deferred in AOCI
N/A N/A N/A N/A N/A (67)
Amount of gains (losses) reclassified from AOCI into income
(3) 212 - - - (209)
Foreign currency transaction gains (losses) on hedged items
- (211) - - - -
Credit derivatives: (1)
Amount of gains (losses) deferred in AOCI
N/A N/A N/A N/A N/A -
Amount of gains (losses) reclassified from AOCI into income
1 - - - - (1)
Subtotal
21 5 - - - 301
Gain (Loss) on Derivatives Not Designated or Not Qualifying as Hedging Instruments:
Interest rate derivatives (1)
(3) - 720 - - N/A
Foreign currency exchange rate derivatives (1)
- - (49) - - N/A
Credit derivatives - purchased (1)
- - (25) - - N/A
Credit derivatives - written (1)
- - 172 - - N/A
Equity derivatives (1)
- - (944) (150) - N/A
Foreign currency transaction gains (losses) on hedged items
- - (4) - - N/A
Subtotal
(3) - (130) (150) - N/A
Earned income on derivatives
270 - 272 135 (147) -
Embedded derivatives (2)
N/A N/A (430) - N/A N/A
Total
$ 290 $ 5 $ (288) $ (45) $ (146) $ 301
__________________
(1)Excludes earned income on derivatives.
(2)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 $27 million, $7 million and ($16) million for the years ended December 31, 2021, 2020 and 2019, respectively.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
8. Derivatives (continued)
Fair Value Hedges
The Company designates and accounts for the following as fair value hedges when they have met the requirements of fair value hedging: (i) interest rate swaps to convert fixed rate assets and liabilities to floating rate assets and liabilities; and (ii) foreign currency swaps to hedge the foreign currency fair value exposure of foreign currency denominated assets and liabilities.
The following table presents the balance sheet classification, carrying amount and cumulative fair value hedging adjustments for items designated and qualifying as hedged items in fair value hedges:
Balance Sheet Line Item Carrying Amount of the
Hedged
Assets/(Liabilities) Cumulative Amount
of Fair Value Hedging Adjustments
Included in the Carrying Amount of Hedged
Assets/(Liabilities) (1)
December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020
(In millions)
Fixed maturity securities AFS $ 366 $ 461 $ (1) $ (1)
Mortgage loans $ 617 $ 925 $ 3 $ 20
Future policy benefits $ (4,735) $ (5,512) $ (877) $ (1,307)
__________________
(1)Includes ($161) million and ($1) million of hedging adjustments on discontinued hedging relationships at December 31, 2021 and 2020, respectively.
All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
Cash Flow Hedges
The Company designates and accounts for the following as cash flow hedges when they have met the requirements of cash flow hedging: (i) interest rate swaps to convert floating rate assets and liabilities to fixed rate assets and liabilities; (ii) foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated assets and liabilities; (iii) interest rate forwards and credit forwards to lock in the price to be paid for forward purchases of investments; and (iv) interest rate swaps and interest rate forwards to hedge the forecasted purchases of fixed rate investments.
In certain instances, the Company discontinued cash flow hedge accounting because the forecasted transactions were no longer probable of occurring. Because certain of the forecasted transactions also were not probable of occurring within two months of the anticipated date, the Company reclassified amounts from AOCI into income. These amounts were $6 million, $45 million, and $51 million for the years ended December 31, 2021, 2020 and 2019, respectively.
At December 31, 2021 and 2020, the maximum length of time over which the Company was hedging its exposure to variability in future cash flows for forecasted transactions did not exceed seven years and eight years, respectively.
At December 31, 2021 and 2020, the balance in AOCI associated with cash flow hedges was $2.4 billion and $2.3 billion, respectively.
All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
At December 31, 2021, the Company expected to reclassify ($21) million of deferred net gains (losses) on derivatives in AOCI, to earnings within the next 12 months.
Credit Derivatives
In connection with synthetically created credit investment transactions, the Company writes credit default swaps for which it receives a premium to insure credit risk. Such credit derivatives are included within the effects of derivatives on the consolidated statements of operations and comprehensive income (loss) table. If a credit event occurs, as defined by the contract, the contract may be cash settled or it may be settled gross by the Company paying the counterparty the specified swap notional amount in exchange for the delivery of par quantities of the referenced credit obligation. The Company can terminate these contracts at any time through cash settlement with the counterparty at an amount equal to the then current estimated fair value of the credit default swaps.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
8. Derivatives (continued)
The following table presents the estimated fair value, maximum amount of future payments and weighted average years to maturity of written credit default swaps at:
December 31,
2021 2020
Rating Agency Designation of Referenced
Credit Obligations (1)
Estimated
Fair Value
of Credit
Default Swaps
Maximum
Amount
of Future
Payments under
Credit Default
Swaps
Weighted
Average
Years to
Maturity (2)
Estimated
Fair Value
of Credit
Default Swaps
Maximum
Amount
of Future
Payments under
Credit Default
Swaps
Weighted
Average
Years to
Maturity (2)
(Dollars in millions)
Aaa/Aa/A
Single name credit default swaps (3)
$ - $ 10 2.5 $ - $ 54 0.6
Credit default swaps referencing indices
17 1,191 2.5 27 1,779 2.5
Subtotal
17 1,201 2.5 27 1,833 2.4
Baa
Single name credit default swaps (3)
1 60 3.3 2 174 2.1
Credit default swaps referencing indices
90 4,698 5.1 97 4,954 5.3
Subtotal
91 4,758 5.1 99 5,128 5.2
Ba
Single name credit default swaps (3)
1 65 0.5 - - -
Credit default swaps referencing indices
(1) 20 5.0 - - -
Subtotal
- 85 1.5 - - -
Caa3
Credit default swaps referencing indices
(9) 30 4.5 - - -
Subtotal
(9) 30 4.5 - - -
Total
$ 99 $ 6,074 4.6 $ 126 $ 6,961 4.5
__________________
(1)The rating agency designations are based on availability and the midpoint of the applicable ratings among Moody’s Investors Service (“Moody’s”), S&P and Fitch Ratings. If no rating is available from a rating agency, then an internally developed rating is used.
(2)The weighted average years to maturity of the credit default swaps is calculated based on weighted average gross notional amounts.
(3)Single name credit default swaps may be referenced to the credit of corporations, foreign governments, or municipals.
Credit Risk on Freestanding Derivatives
The Company may be exposed to credit-related losses in the event of nonperformance by its counterparties to derivatives. Generally, the current credit exposure of the Company’s derivatives is limited to the net positive estimated fair value of derivatives at the reporting date after taking into consideration the existence of master netting or similar agreements and any collateral received pursuant to such agreements.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
8. Derivatives (continued)
The Company manages its credit risk related to derivatives by entering into transactions with creditworthy counterparties in jurisdictions in which it understands that close-out netting should be enforceable and establishing and monitoring exposure limits. The Company’s OTC-bilateral derivative transactions are governed by the International Swaps and Derivatives Association, Inc. (“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, close-out netting permits the Company (subject to financial regulations such as the Orderly Liquidation Authority under Title II of Dodd-Frank) to set off receivables from the counterparty against payables to the same counterparty arising out of all included transactions and to apply collateral to the obligations without application of the automatic stay, upon the counterparty’s bankruptcy. 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 as required by applicable law. Additionally, effective September 1, 2021, the Company is required to pledge initial margin for certain new OTC-bilateral derivative transactions to third party custodians.
The Company’s OTC-cleared derivatives are effected through central clearing counterparties and its exchange-traded derivatives are effected through regulated exchanges. Such positions are marked to market and margined on a daily basis (both initial margin and variation margin), and the Company has minimal exposure to credit-related losses in the event of nonperformance by brokers and central clearinghouses to such derivatives.
See Note 9 for a description of the impact of credit risk on the valuation of derivatives.
The estimated fair values of the Company’s net derivative assets and net derivative liabilities after the application of master netting agreements and collateral were as follows at:
December 31,
2021 2020
Derivatives Subject to a Master Netting Arrangement or a Similar Arrangement Assets Liabilities Assets Liabilities
(In millions)
Gross estimated fair value of derivatives:
OTC-bilateral (1)
$ 8,602 $ 1,379 $ 9,244 $ 2,192
OTC-cleared (1)
104 8 139 6
Exchange-traded
5 - - 16
Total gross estimated fair value of derivatives presented on the consolidated balance sheets (1) 8,711 1,387 9,383 2,214
Gross amounts not offset on the consolidated balance sheets:
Gross estimated fair value of derivatives: (2)
OTC-bilateral
(1,364) (1,364) (1,996) (1,996)
OTC-cleared
(3) (3) (5) (5)
Cash collateral: (3), (4)
OTC-bilateral
(6,414) - (6,073) -
OTC-cleared
(91) - (98) -
Securities collateral: (5)
OTC-bilateral
(767) (14) (1,115) (188)
OTC-cleared
- (5) - (1)
Exchange-traded
- - - (16)
Net amount after application of master netting agreements and collateral
$ 72 $ 1 $ 96 $ 8
__________________
(1)At December 31, 2021 and 2020, derivative assets included income (expense) accruals reported in accrued investment income or in other liabilities of $93 million and $65 million, respectively, and derivative liabilities included (income) expense accruals reported in accrued investment income or in other liabilities of ($22) million and ($47) million, respectively.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
8. Derivatives (continued)
(2)Estimated fair value of derivatives is limited to the amount that is subject to set-off and includes income or expense accruals.
(3)Cash collateral received by the Company for OTC-bilateral and OTC-cleared derivatives, where the centralized clearinghouse treats variation margin as collateral, 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.
(4)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, 2021 and 2020, the Company received excess cash collateral of $60 million and $175 million, respectively, and provided no excess cash collateral for either period.
(5)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, 2021, 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, 2021 and 2020, the Company received excess securities collateral with an estimated fair value of $47 million and $150 million, respectively, for its OTC-bilateral derivatives, which are not included in the table above due to the foregoing limitation. At December 31, 2021 and 2020, the Company provided excess securities collateral with an estimated fair value of $95 million and $185 million, respectively, for its OTC-bilateral derivatives, $584 million and $1.4 billion, respectively, for its OTC-cleared derivatives, and $106 million and $188 million, respectively, for its exchange-traded derivatives, which are not included in the table above due to the foregoing limitation.
The Company’s collateral arrangements for its OTC-bilateral derivatives generally require the counterparty in a net liability position, after considering the effect of netting agreements, to pledge collateral when the collateral amount owed by that counterparty reaches a minimum transfer amount. All of the Company’s netting agreements for derivatives contain provisions that require both Metropolitan Life Insurance Company and the counterparty to maintain a specific investment grade financial strength or credit rating from each of Moody’s and S&P. If a party’s financial strength or credit rating were to fall below that specific investment grade financial strength or credit rating, that party would be in violation of these provisions, and the other party to the derivatives could terminate the transactions and demand immediate settlement and payment based on such party’s reasonable valuation of the derivatives.
The following table presents the estimated fair value of the Company’s OTC-bilateral derivatives that were in a net liability position after considering the effect of netting agreements, together with the estimated fair value and balance sheet location of the collateral pledged.
December 31,
2021 2020
Derivatives Subject to Financial
Strength-Contingent Provisions
(In millions)
Estimated fair value of derivatives in a net liability position (1) $ 15 $ 196
Estimated fair value of collateral provided:
Fixed maturity securities AFS
$ 17 $ 239
__________________
(1)After taking into consideration the existence of netting agreements.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
8. Derivatives (continued)
Embedded Derivatives
The Company issues certain products or purchases certain investments that contain embedded derivatives that are required to be separated from their host contracts and accounted for as freestanding derivatives.
The following table presents the estimated fair value and balance sheet location of the Company’s embedded derivatives that have been separated from their host contracts at:
December 31,
Balance Sheet Location 2021 2020
(In millions)
Embedded derivatives within liability host contracts:
Direct guaranteed minimum benefits
Policyholder account balances $ 257 $ 488
Assumed guaranteed minimum benefits
Policyholder account balances 5 5
Funds withheld on ceded reinsurance (including affiliated) Other liabilities
1,072 1,428
Fixed annuities with equity indexed returns
Policyholder account balances 165 139
Other guarantees Policyholder account balances - 1
Embedded derivatives within liability host contracts
$ 1,499 $ 2,061
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
9. Fair Value
When developing estimated fair values, the Company considers three broad valuation approaches: (i) the market approach, (ii) the income approach, and (iii) the cost approach. The Company determines the most appropriate valuation approach to use, given what is being measured and the availability of sufficient inputs, giving priority to observable inputs. The Company categorizes its assets and liabilities measured at estimated fair value into a three-level hierarchy, based on the significant input with the lowest level in its valuation. The input levels are as follows:
Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities. The Company defines active markets based on average trading volume for equity securities. The size of the bid/ask spread is used as an indicator of market activity for fixed maturity securities AFS.
Level 2
Quoted prices in markets that are not active or inputs that are observable either directly or indirectly. These inputs can include quoted prices for similar assets or liabilities other than quoted prices in Level 1, quoted prices in markets that are not active, or other significant inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
Unobservable inputs that are supported by little or no market activity and are significant to the determination of estimated fair value of the assets or liabilities. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.
Financial markets are susceptible to severe events evidenced by rapid depreciation in asset values accompanied by a reduction in asset liquidity. The Company’s ability to sell securities, as well as the price ultimately realized for these securities, depends upon the demand and liquidity in the market and increases the use of judgment in determining the estimated fair value of certain securities.
Considerable judgment is often required in interpreting the market data used to develop estimates of fair value, and the use of different assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
9. Fair Value (continued)
Recurring Fair Value Measurements
The assets and liabilities measured at estimated fair value on a recurring basis and their corresponding placement in the fair value hierarchy, including those items for which the Company has elected the FVO, are presented below at:
December 31, 2021
Fair Value Hierarchy
Level 1 Level 2 Level 3 Total
Estimated
Fair Value
(In millions)
Assets
Fixed maturity securities AFS:
U.S. corporate
$ - $ 51,290 $ 7,112 $ 58,402
U.S. government and agency
15,041 16,181 - 31,222
Foreign corporate
- 21,862 7,823 29,685
RMBS
7 20,333 2,805 23,145
ABS
- 11,455 1,424 12,879
Municipals
- 8,728 - 8,728
CMBS
- 6,507 371 6,878
Foreign government
- 4,934 12 4,946
Total fixed maturity securities AFS
15,048 141,290 19,547 175,885
Short-term investments
4,187 677 2 4,866
Residential mortgage loans - FVO
- - 127 127
Other investments 328 192 894 1,414
Derivative assets: (1)
Interest rate
- 5,982 95 6,077
Foreign currency exchange rate
- 1,676 - 1,676
Credit
- 106 17 123
Equity market
5 730 7 742
Total derivative assets
5 8,494 119 8,618
Separate account assets (2)
28,231 93,656 1,964 123,851
Total assets (3)
$ 47,799 $ 244,309 $ 22,653 $ 314,761
Liabilities
Derivative liabilities: (1)
Interest rate
- 70 21 91
Foreign currency exchange rate
- 1,076 - 1,076
Credit
- 8 12 20
Equity market
- 222 - 222
Total derivative liabilities
- 1,376 33 1,409
Embedded derivatives within liability host contracts (4)
- - 1,499 1,499
Separate account liabilities (2)
7 12 6 25
Total liabilities
$ 7 $ 1,388 $ 1,538 $ 2,933
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
9. Fair Value (continued)
December 31, 2020
Fair Value Hierarchy
Level 1 Level 2 Level 3 Total
Estimated
Fair Value
(In millions)
Assets
Fixed maturity securities AFS:
U.S. corporate
$ - $ 53,717 $ 6,692 $ 60,409
U.S. government and agency
12,697 18,074 - 30,771
Foreign corporate
- 24,098 8,181 32,279
RMBS
- 21,186 3,040 24,226
ABS
- 11,351 1,224 12,575
Municipals
- 8,983 - 8,983
CMBS
- 6,628 201 6,829
Foreign government
- 5,263 5 5,268
Total fixed maturity securities AFS
12,697 149,300 19,343 181,340
Short-term investments
2,216 406 1 2,623
Residential mortgage loans - FVO
- - 165 165
Other investments
431 270 565 1,266
Derivative assets: (1)
Interest rate
- 6,816 489 7,305
Foreign currency exchange rate
- 1,408 - 1,408
Credit
- 109 25 134
Equity market
- 454 17 471
Total derivative assets
- 8,787 531 9,318
Separate account assets (2)
28,296 99,405 945 128,646
Total assets (3)
$ 43,640 $ 258,168 $ 21,550 $ 323,358
Liabilities
Derivative liabilities: (1)
Interest rate
$ - $ 11 $ 68 $ 79
Foreign currency exchange rate
- 1,683 2 1,685
Credit
- 9 - 9
Equity market
16 463 9 488
Total derivative liabilities
16 2,166 79 2,261
Embedded derivatives within liability host contracts (4)
- - 2,061 2,061
Separate account liabilities (2)
12 8 6 26
Total liabilities
$ 28 $ 2,174 $ 2,146 $ 4,348
__________________
(1)Derivative assets are presented within other invested assets on the consolidated balance sheets and derivative liabilities are presented within other liabilities on the consolidated balance sheets. The amounts are presented gross in the tables above to reflect the presentation on the consolidated balance sheets, but are presented net for purposes of the rollforward in the Fair Value Measurements Using Significant Unobservable Inputs (Level 3) tables.
(2)Investment performance related to separate account assets is fully offset by corresponding amounts credited to contractholders whose liability is reflected within separate account liabilities. Separate account liabilities are set equal to the estimated fair value of separate account assets. Separate account liabilities presented in the tables above represent derivative liabilities.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
9. Fair Value (continued)
(3)Total assets included in the fair value hierarchy exclude other limited partnership interests that are measured at estimated fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient. At December 31, 2021 and 2020, the estimated fair value of such investments was $95 million and $70 million, respectively.
(4)Embedded derivatives within liability host contracts are presented within policyholder account balances and other liabilities on the consolidated balance sheets.
The following describes the valuation methodologies used to measure assets and liabilities at fair value.
Investments
Securities, Short-term Investments and Other Investments
When available, the estimated fair value of these financial instruments is based on quoted prices in active markets that are readily and regularly obtainable. Generally, these are the most liquid of the Company’s securities holdings and valuation of these securities does not involve management’s judgment.
When quoted prices in active markets are not available, the determination of estimated fair value of securities is based on market standard valuation methodologies, giving priority to observable inputs. The significant inputs to the market standard valuation methodologies for certain types of securities with reasonable levels of price transparency are inputs that are observable in the market or can be derived principally from, or corroborated by, observable market data. When observable inputs are not available, the market standard valuation methodologies rely on inputs that are significant to the estimated fair value that are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. These unobservable inputs can be based in large part on management’s judgment or estimation and cannot be supported by reference to market activity. Unobservable inputs are based on management’s assumptions about the inputs market participants would use in pricing such investments.
The estimated fair value of short-term investments and other investments is determined on a basis consistent with the methodologies described herein.
The valuation approaches and key inputs for each category of assets or liabilities that are classified within Level 2 and Level 3 of the fair value hierarchy are presented below. The primary valuation approaches are the market approach, which considers recent prices from market transactions involving identical or similar assets or liabilities, and the income approach, which converts expected future amounts (e.g. cash flows) to a single current, discounted amount. The valuation of most instruments listed below is determined using independent pricing sources, matrix pricing, discounted cash flow methodologies or other similar techniques that use either observable market inputs or unobservable inputs.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
9. Fair Value (continued)
Instrument
Level 2
Observable Inputs
Level 3
Unobservable Inputs
Fixed maturity securities AFS
U.S. corporate and Foreign corporate securities
Valuation Approaches: Principally the market and income approaches.
Valuation Approaches: Principally the market approach.
Key Inputs:
Key Inputs:
• quoted prices in markets that are not active
• illiquidity premium
• benchmark yields; spreads off benchmark yields; new issuances; issuer ratings • delta spread adjustments to reflect specific credit-related issues
• trades of identical or comparable securities; duration • credit spreads
• privately-placed securities are valued using the additional key inputs:
• quoted prices in markets that are not active for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2
•
market yield curve; call provisions
• observable prices and spreads for similar public or private securities that incorporate the credit quality and industry sector of the issuer
•
independent non-binding broker quotations
• delta spread adjustments to reflect specific credit-related issues
U.S. government and agency securities, Municipals and Foreign government securities
Valuation Approaches: Principally the market approach.
Valuation Approaches: Principally the market approach.
Key Inputs:
Key Inputs:
• quoted prices in markets that are not active
• independent non-binding broker quotations
• benchmark U.S. Treasury yield or other yields
• quoted prices in markets that are not active for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2
• the spread off the U.S. Treasury yield curve for the identical security
• issuer ratings and issuer spreads; broker-dealer quotations • credit spreads
• comparable securities that are actively traded
Structured Products
Valuation Approaches: Principally the market and income approaches.
Valuation Approaches: Principally the market and income approaches.
Key Inputs:
Key Inputs:
• quoted prices in markets that are not active • credit spreads
• spreads for actively traded securities; spreads off benchmark yields
• quoted prices in markets that are not active for identical or similar securities that are less liquid and based on lower levels of trading activity than securities classified in Level 2
• expected prepayment speeds and volumes
• current and forecasted loss severity; ratings; geographic region
• independent non-binding broker quotations
• weighted average coupon and weighted average maturity
• credit ratings
• average delinquency rates; DSCR
• credit ratings
• issuance-specific information, including, but not limited to:
• collateral type; structure of the security; vintage of the loans
• payment terms of the underlying assets
• payment priority within the tranche; deal performance
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
9. Fair Value (continued)
Instrument Level 2
Observable Inputs
Level 3
Unobservable Inputs
Short-term investments and Other investments
• Certain short-term investments and certain other investments are of a similar nature and class to the fixed maturity securities AFS described above; while certain other investments are similar to equity securities. The valuation approaches and observable inputs used in their valuation are also similar to those described above. Other investments contain equity securities valued using quoted prices in markets that are not considered active. • Certain short-term investments and certain other investments are of a similar nature and class to the fixed maturity securities AFS described above, while certain other investments are similar to equity securities. The valuation approaches and unobservable inputs used in their valuation are also similar to those described above. Other investments contain equity securities that use key unobservable inputs such as credit ratings; issuance structures, in addition to those described above for fixed maturities AFS. Other investments also include certain real estate joint ventures and use the valuation approach and key inputs as described for other limited partnership interests below.
Residential mortgage loans - FVO
• N/A Valuation Approaches: Principally the market approach.
Valuation Techniques and Key Inputs: These investments are based primarily on matrix pricing or other similar techniques that utilize inputs from mortgage servicers that are unobservable or cannot be derived principally from, or corroborated by, observable market data.
Separate account assets and Separate account liabilities (1)
Mutual funds and hedge funds without readily determinable fair values as prices are not published publicly
Key Input: • N/A
• quoted prices or reported NAV provided by the fund managers
Other limited partnership interests
•
N/A Valued giving consideration to the underlying holdings
of the partnerships and adjusting, if appropriate.
Key Inputs:
• liquidity; bid/ask spreads; performance record of the fund manager
• other relevant variables that may impact the exit value of the particular partnership interest
__________________
(1)Estimated fair value equals carrying value, based on the value of the underlying assets, including: mutual fund interests, fixed maturity securities, equity securities, derivatives, hedge funds, other limited partnership interests, short-term investments and cash and cash equivalents. The estimated fair value of fixed maturity securities, equity securities, derivatives, short-term investments and cash and cash equivalents is determined on a basis consistent with the assets described under “- Securities, Short-term Investments and Other Investments” and “- Derivatives - Freestanding Derivatives.”
Derivatives
The estimated fair value of derivatives is determined through the use of quoted market prices for exchange-traded derivatives, or through the use of pricing models for OTC-bilateral and OTC-cleared derivatives. The determination of estimated fair value, when quoted market values are not available, is based on market standard valuation methodologies and inputs that management believes are consistent with what other market participants would use when pricing such instruments. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, default risk, nonperformance risk, volatility, liquidity and changes in estimates and assumptions used in the pricing models.
The significant inputs to the pricing models for most OTC-bilateral and OTC-cleared derivatives are inputs that are observable in the market or can be derived principally from, or corroborated by, observable market data. Certain OTC-bilateral and OTC-cleared derivatives may rely on inputs that are significant to the estimated fair value that are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. These unobservable inputs may involve significant management judgment or estimation. Unobservable inputs are based on management’s assumptions about the inputs market participants would use in pricing such derivatives.
Most inputs for OTC-bilateral and OTC-cleared derivatives are mid-market inputs but, in certain cases, liquidity adjustments are made when they are deemed more representative of exit value. Market liquidity, as well as the use of different methodologies, assumptions and inputs, may have a material effect on the estimated fair values of the Company’s derivatives and could materially affect net income.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
9. Fair Value (continued)
The credit risk of both the counterparty and the Company are considered in determining the estimated fair value for all OTC-bilateral and OTC-cleared derivatives, and any potential credit adjustment is based on the net exposure by counterparty after taking into account the effects of netting agreements and collateral arrangements. The Company values its OTC-bilateral and OTC-cleared derivatives using standard swap curves which may include a spread to the risk-free rate, depending upon specific collateral arrangements. This credit spread is appropriate for those parties that execute trades at pricing levels consistent with similar collateral arrangements. As the Company and its significant derivative counterparties generally execute trades at such pricing levels and hold sufficient collateral, additional credit risk adjustments are not currently required in the valuation process. The Company’s ability to consistently execute at such pricing levels is, in part, due to the netting agreements and collateral arrangements that are in place with all of its significant derivative counterparties. An evaluation of the requirement to make additional credit risk adjustments is performed by the Company each reporting period.
Freestanding Derivatives
Level 2 Valuation Approaches and Key Inputs:
This level includes all types of derivatives utilized by the Company with the exception of exchange-traded derivatives included within Level 1 and those derivatives with unobservable inputs as described in Level 3.
Level 3 Valuation Approaches and Key Inputs:
These valuation methodologies generally use the same inputs as described in the corresponding sections for Level 2 measurements of derivatives. However, these derivatives result in Level 3 classification because one or more of the significant inputs are not observable in the market or cannot be derived principally from, or corroborated by, observable market data.
Freestanding derivatives are principally valued using the income approach. Valuations of non-option-based derivatives utilize present value techniques, whereas valuations of option-based derivatives utilize option pricing models. Key inputs are as follows:
Instrument Interest Rate Foreign Currency
Exchange Rate Credit Equity Market
Inputs common to Level 2 and Level 3 by instrument type
• swap yield curves
• swap yield curves
• swap yield curves
• swap yield curves
• basis curves
• basis curves
• credit curves
• spot equity index levels
• interest rate volatility (1) • currency spot rates
• recovery rates
• dividend yield curves
•
cross currency basis curves •
equity volatility (1)
Level 3 • swap yield curves (2)
• swap yield curves (2)
• swap yield curves (2)
• dividend yield curves (2)
• basis curves (2)
• basis curves (2)
• credit curves (2)
• equity volatility (1), (2)
• repurchase rates
• cross currency basis curves (2)
• credit spreads • correlation between model inputs (1)
• interest rate volatility (1), (2) • currency correlation
• repurchase rates
• independent non-binding broker quotations
__________________
(1)Option-based only.
(2)Extrapolation beyond the observable limits of the curve(s).
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
9. Fair Value (continued)
Embedded Derivatives
Embedded derivatives principally include certain direct and assumed variable annuity guarantees, annuity contracts, and investment risk within funds withheld related to certain reinsurance agreements. Embedded derivatives are recorded at estimated fair value with changes in estimated fair value reported in net income.
The Company issues certain variable annuity products with guaranteed minimum benefits. GMWBs, GMABs and certain GMIBs contain embedded derivatives, which are measured at estimated fair value separately from the host variable annuity contract, with changes in estimated fair value reported in net derivative gains (losses). These embedded derivatives are classified within policyholder account balances on the consolidated balance sheets.
The Company calculates the fair value of these embedded derivatives, which is estimated as the present value of projected future benefits minus the present value of projected future fees using actuarial and capital market assumptions including expectations concerning policyholder behavior. The calculation is based on in-force business, projecting future cash flows from the embedded derivative over multiple risk neutral stochastic scenarios using observable risk-free rates.
Capital market assumptions, such as risk-free rates and implied volatilities, are based on market prices for publicly traded instruments to the extent that prices for such instruments are observable. Implied volatilities beyond the observable period are extrapolated based on observable implied volatilities and historical volatilities. Actuarial assumptions, including mortality, lapse, withdrawal and utilization, are unobservable and are reviewed at least annually based on actuarial studies of historical experience.
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.
Risk margins are established to capture the non-capital market risks of the instrument which represent the additional compensation a market participant would require to assume the risks related to the uncertainties of such actuarial assumptions as annuitization, premium persistency, partial withdrawal and surrenders. The establishment of risk margins requires the use of significant management judgment, including assumptions of the amount and cost of capital needed to cover the guarantees. These guarantees may be more costly than expected in volatile or declining equity markets. Market conditions including, but not limited to, changes in interest rates, equity indices, market volatility and foreign currency exchange rates; changes in nonperformance risk; and variations in actuarial assumptions regarding policyholder behavior, mortality and risk margins related to non-capital market inputs, may result in significant fluctuations in the estimated fair value of the guarantees that could materially affect net income.
The estimated fair value of the embedded derivatives within funds withheld related to certain ceded reinsurance is determined based on the change in estimated fair value of the underlying assets held by the Company in a reference portfolio backing the funds withheld liability. The estimated fair value of the underlying assets is determined as described in “- Investments - Securities, Short-term Investments and Other Investments.” The estimated fair value of these embedded derivatives is included, along with their funds withheld hosts, in other liabilities on the consolidated balance sheets with changes in estimated fair value recorded in net derivative gains (losses). Changes in the credit spreads on the underlying assets, interest rates and market volatility may result in significant fluctuations in the estimated fair value of these embedded derivatives that could materially affect net income.
The Company issues certain annuity contracts which allow the policyholder to participate in returns from equity indices. These equity indexed features are embedded derivatives which are measured at estimated fair value separately from the host fixed annuity contract, with changes in estimated fair value reported in net derivative gains (losses). These embedded derivatives are classified within policyholder account balances on the consolidated balance sheets.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
9. Fair Value (continued)
The estimated fair value of the embedded equity indexed derivatives, based on the present value of future equity returns to the policyholder using actuarial and present value assumptions including expectations concerning policyholder behavior, is calculated by the Company’s actuarial department. The calculation is based on in-force business and uses standard capital market techniques, such as Black-Scholes, to calculate the value of the portion of the embedded derivative for which the terms are set. The portion of the embedded derivative covering the period beyond where terms are set is calculated as the present value of amounts expected to be spent to provide equity indexed returns in those periods. The valuation of these embedded derivatives also includes the establishment of a risk margin, as well as changes in nonperformance risk.
Embedded Derivatives Within Asset and Liability Host Contracts
Level 3 Valuation Approaches and Key Inputs:
Direct and assumed guaranteed minimum benefits
These embedded derivatives are principally valued using the income approach. Valuations are based on option pricing techniques, which utilize significant inputs that may include swap yield curves, currency exchange rates and implied volatilities. These embedded derivatives result in Level 3 classification because one or more of the significant inputs are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. Significant unobservable inputs generally include: the extrapolation beyond observable limits of the swap yield curves and implied volatilities, actuarial assumptions for policyholder behavior and mortality and the potential variability in policyholder behavior and mortality, nonperformance risk and cost of capital for purposes of calculating the risk margin.
Embedded derivatives within funds withheld related to certain ceded reinsurance
These embedded derivatives are principally valued using the income approach. The valuations are based on present value techniques, which utilize significant inputs that may include the swap yield curves and the fair value of assets within the reference portfolio. These embedded derivatives result in Level 3 classification because one or more of the significant inputs are not observable in the market or cannot be derived principally from, or corroborated by, observable market data. Significant unobservable inputs generally include the fair value of certain assets within the reference portfolio which are not observable in the market and cannot be derived principally from, or corroborated by, observable market data.
Transfers between Levels
Overall, transfers between levels occur when there are changes in the observability of inputs and market activity.
Transfers into or out of Level 3:
Assets and liabilities are transferred into Level 3 when a significant input cannot be corroborated with market observable data. This occurs when market activity decreases significantly and underlying inputs cannot be observed, current prices are not available, and/or when there are significant variances in quoted prices, thereby affecting transparency. Assets and liabilities are transferred out of Level 3 when circumstances change such that a significant input can be corroborated with market observable data. This may be due to a significant increase in market activity, a specific event, or one or more significant input(s) becoming observable.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
9. Fair Value (continued)
Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)
The following table presents certain quantitative information about the significant unobservable inputs used in the fair value measurement, and the sensitivity of the estimated fair value to changes in those inputs, for the more significant asset and liability classes measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at:
December 31, 2021 December 31, 2020 Impact of
Increase in Input
on Estimated
Fair Value (2)
Valuation Techniques Significant
Unobservable Inputs Range Weighted
Average (1) Range Weighted
Average (1)
Fixed maturity securities AFS (3)
U.S. corporate and foreign corporate
• Matrix pricing • Offered quotes (4) 1 - 165 110 - - 186 118 Increase
• Market pricing • Quoted prices (4) - - 117 101 - - 116 99 Increase
RMBS • Market pricing • Quoted prices (4) - - 121 99 - - 159 98 Increase (5)
ABS • Market pricing • Quoted prices (4) 91 - 110 102 1 - 107 100 Increase (5)
Derivatives
Interest rate • Present value techniques
• Swap yield (6) 151 - 200 188 92 - 184 149 Increase (7)
• Repurchase rates (8) - - - - (12) - 1 (6) Decrease (7)
• Volatility (9) 1% - 1% 1% - - - - Increase (7)
Foreign currency exchange rate • Present value techniques
• Swap yield (6) - - - - (31) - (13) (20) Increase (7)
Credit • Present value techniques
• Credit spreads (10) 96 - 133 109 96 - 99 98 Decrease (7)
• Consensus pricing • Offered quotes (11)
Equity market • Present value techniques or option pricing models
• Volatility (12) - - - - 21% - 28% 28% Increase (7)
• Correlation (13) - - - - 10% - 30% 10%
Embedded derivatives
Direct and assumed guaranteed minimum benefits
• Option pricing techniques
• Mortality rates:
Ages 0 - 40
0.01% - 0.12% 0.08% 0.01% - 0.12% 0.06% Decrease (14)
Ages 41 - 60
0.05% - 0.65% 0.27% 0.05% - 0.65% 0.30% Decrease (14)
Ages 61 - 115
0.32% - 100% 2.08% 0.31% - 100% 1.90% Decrease (14)
• Lapse rates:
Durations 1 - 10
0.25% - 100% 6.30% 0.25% - 100% 6.86% Decrease (15)
Durations 11 - 20
0.70% - 100% 5.22% 4.70% - 100% 5.18% Decrease (15)
Durations 21 - 116
1.60% - 100% 5.22% 2% - 100% 5.18% Decrease (15)
• Utilization rates 0% - 22% 0.22% 0% - 22% 0.17% Increase (16)
• Withdrawal rates 0.25% - 10% 3.72% 0.25% - 10% 3.98% (17)
• Long-term equity volatilities
16.44% - 22.16% 18.60% 16.66% - 22.21% 18.70% Increase (18)
• Nonperformance risk spread
0.04% - 0.40% 0.35% 0.04% - 0.39% 0.40% Decrease (19)
__________________
(1)The weighted average for fixed maturity securities AFS and derivatives is determined based on the estimated fair value of the securities and derivatives. The weighted average for embedded derivatives is determined based on a combination of account values and experience data.
(2)The impact of a decrease in input would have resulted in the opposite impact on estimated fair value. For embedded derivatives, changes to direct and assumed guaranteed minimum benefits are based on liability positions.
(3)Significant increases (decreases) in expected default rates in isolation would have resulted in substantially lower (higher) valuations.
(4)Range and weighted average are presented in accordance with the market convention for fixed maturity securities AFS of dollars per hundred dollars of par.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
9. Fair Value (continued)
(5)Changes in the assumptions used for the probability of default would have been accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumptions used for prepayment rates.
(6)Ranges represent the rates across different yield curves and are presented in basis points. The swap yield curves are utilized among different types of derivatives to project cash flows, as well as to discount future cash flows to present value. Since this valuation methodology uses a range of inputs across a yield curve to value the derivative, presenting a range is more representative of the unobservable input used in the valuation.
(7)Changes in estimated fair value are based on long U.S. dollar net asset positions and will be inversely impacted for short U.S. dollar net asset positions.
(8)Ranges represent different repurchase rates utilized as components within the valuation methodology and are presented in basis points.
(9)Ranges represent the underlying interest rate volatility quoted in percentage points. Since this valuation methodology uses an equivalent of LIBOR for secured overnight financing rate volatility, presenting a range is more representative of the unobservable input used in the valuation.
(10)Represents the risk quoted in basis points of a credit default event on the underlying instrument. Credit derivatives with significant unobservable inputs are primarily comprised of written credit default swaps.
(11)At both December 31, 2021 and 2020, independent non-binding broker quotations were used in the determination of less than 1% of the total net derivative estimated fair value.
(12)Ranges represent the underlying equity volatility quoted in percentage points. Since this valuation methodology uses a range of inputs across multiple volatility surfaces to value the derivative, presenting a range is more representative of the unobservable input used in the valuation.
(13)Ranges represent the different correlation factors utilized as components within the valuation methodology. Presenting a range of correlation factors is more representative of the unobservable input used in the valuation. Increases (decreases) in correlation in isolation will increase (decrease) the significance of the change in valuations.
(14)Mortality rates vary by age and by demographic characteristics such as gender. Mortality rate assumptions are based on company experience. A mortality improvement assumption is also applied. For any given contract, mortality rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative.
(15)Base lapse rates are adjusted at the contract level based on a comparison of the actuarially calculated guaranteed values and the current policyholder account value, as well as other factors, such as the applicability of any surrender charges. A dynamic lapse function reduces the base lapse rate when the guaranteed amount is greater than the account value as in the money contracts are less likely to lapse. Lapse rates are also generally assumed to be lower in periods when a surrender charge applies. For any given contract, lapse rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative.
(16)The utilization rate assumption estimates the percentage of contractholders with GMIBs or a lifetime withdrawal benefit who will elect to utilize the benefit upon becoming eligible. The rates may vary by the type of guarantee, the amount by which the guaranteed amount is greater than the account value, the contract’s withdrawal history and by the age of the policyholder. For any given contract, utilization rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative.
(17)The withdrawal rate represents the percentage of account balance that any given policyholder will elect to withdraw from the contract each year. The withdrawal rate assumption varies by age and duration of the contract, and also by other factors such as benefit type. For any given contract, withdrawal rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. For GMWBs, any increase (decrease) in withdrawal rates results in an increase (decrease) in the estimated fair value of the guarantees. For GMABs and GMIBs, any increase (decrease) in withdrawal rates results in a decrease (increase) in the estimated fair value.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
9. Fair Value (continued)
(18)Long-term equity volatilities represent equity volatility beyond the period for which observable equity volatilities are available. For any given contract, long-term equity volatility rates vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative.
(19)Nonperformance risk spread varies by duration and by currency. For any given contract, multiple nonperformance risk spreads will apply, depending on the duration of the cash flow being discounted for purposes of valuing the embedded derivative.
Generally, all other classes of assets and liabilities classified within Level 3 that are not included in the preceding table use the same valuation techniques and significant unobservable inputs as previously described for Level 3. The sensitivity of the estimated fair value to changes in the significant unobservable inputs for these other assets and liabilities is similar in nature to that described in the preceding table. The valuation techniques and significant unobservable inputs used in the fair value measurement for the more significant assets measured at estimated fair value on a nonrecurring basis and determined using significant unobservable inputs (Level 3) are summarized in “- Nonrecurring Fair Value Measurements.”
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
9. Fair Value (continued)
The following tables summarize the change of all assets (liabilities) measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Fixed Maturity Securities AFS
Corporate (6) Structured Products Municipals Foreign
Government Short-term
Investments
(In millions)
Balance, January 1, 2020 $ 9,382 $ 3,395 $ 7 $ 10 $ 17
Total realized/unrealized gains (losses) included in
net income (loss) (1), (2)
(91) 46 - - -
Total realized/unrealized gains (losses) included in AOCI 979 22 - - -
Purchases (3) 3,018 1,670 - - 1
Sales (3) (960) (740) - (2) (2)
Issuances (3) - - - - -
Settlements (3) - - - - -
Transfers into Level 3 (4) 2,968 108 - - -
Transfers out of Level 3 (4) (423) (36) (7) (3) (15)
Balance, December 31, 2020 14,873 4,465 - 5 1
Total realized/unrealized gains (losses) included in
net income (loss) (1), (2)
(40) 45 - - -
Total realized/unrealized gains (losses) included in AOCI
(745) 8 - (1) -
Purchases (3) 2,369 1,247 - - 2
Sales (3) (1,211) (1,239) - (2) -
Issuances (3) - - - - -
Settlements (3) - - - - -
Transfers into Level 3 (4) 162 332 - 10 -
Transfers out of Level 3 (4) (473) (258) - - (1)
Balance, December 31, 2021 $ 14,935 $ 4,600 $ - $ 12 $ 2
Changes in unrealized gains (losses) included in net
income (loss) for the instruments still held at
December 31, 2019: (5)
$ (34) $ 42 $ - $ - $ -
Changes in unrealized gains (losses) included in net
income (loss) for the instruments still held at
December 31, 2020: (5)
$ (53) $ 52 $ - $ - $ -
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at December 31, 2021 (5) $ (7) $ 41 $ - $ - $ -
Changes in unrealized gains (losses) included in
AOCI for the instruments still held at
December 31, 2020: (5)
$ 963 $ 22 $ - $ - $ -
Changes in unrealized gains (losses) included in
AOCI for the instruments still held at
December 31, 2021: (5)
$ (731) $ 10 $ - $ (1) $ -
Gains (Losses) Data for the year ended
December 31, 2019
Total realized/unrealized gains (losses) included in net income (loss) (1), (2) $ (41) $ 43 $ - $ - $ -
Total realized/unrealized gains (losses) included in AOCI $ 564 $ 30 $ - $ - $ -
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
9. Fair Value (continued)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Residential
Mortgage
Loans - FVO
Other Investments Net
Derivatives (7)
Net Embedded
Derivatives (8)
Separate
Accounts (9)
(In millions)
Balance, January 1, 2020 $ 188 $ 799 $ (72) $ (1,325) $ 915
Total realized/unrealized gains (losses) included in
net income (loss) (1), (2)
9 73 176 (557) -
Total realized/unrealized gains (losses) included in AOCI
- - 772 - -
Purchases (3) - 33 4 - 184
Sales (3) (13) (147) - - (153)
Issuances (3) - - (2) - (4)
Settlements (3) (19) - (426) (179) 1
Transfers into Level 3 (4) - - - - 1
Transfers out of Level 3 (4) - (193) - - (5)
Balance, December 31, 2020 165 565 452 (2,061) 939
Total realized/unrealized gains (losses) included in
net income (loss) (1), (2)
(5) 183 (69) 733 8
Total realized/unrealized gains (losses) included in AOCI
- - (352) - -
Purchases (3) - 139 28 - 1,044
Sales (3) (11) (38) - - (44)
Issuances (3) - - (13) - (2)
Settlements (3) (22) - 38 (171) 6
Transfers into Level 3 (4) - 74 1 - 10
Transfers out of Level 3 (4) - (29) 1 - (3)
Balance, December 31, 2021 $ 127 $ 894 $ 86 $ (1,499) $ 1,958
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at December 31, 2019: (5) $ (14) $ 86 $ (44) $ (422) $ -
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at December 31, 2020: (5) $ 3 $ 67 $ (76) $ (565) $ -
Changes in unrealized gains (losses) included in net income (loss) for the instruments still held at December 31, 2021: (5) $ (10) $ 170 $ (7) $ 735 $ -
Changes in unrealized gains (losses) included in
AOCI for the instruments still held at
December 31, 2020: (5)
$ - $ - $ 579 $ - $ -
Changes in unrealized gains (losses) included in
AOCI for the instruments still held at
December 31, 2021: (5)
$ - $ - $ (128) $ - $ -
Gains (Losses) Data for the year ended
December 31, 2019
Total realized/unrealized gains (losses) included in
net income (loss) (1), (2)
$ 7 $ 94 $ (36) $ (429) $ 7
Total realized/unrealized gains (losses) included in AOCI
$ - $ - $ 161 $ - $ -
__________________
(1)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).
(2)Interest and dividend accruals, as well as cash interest coupons and dividends received, are excluded from the rollforward.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
9. Fair Value (continued)
(3)Items purchased/issued and then sold/settled in the same period are excluded from the rollforward. Fees attributed to embedded derivatives are included in settlements.
(4)Items transferred into and then out of Level 3 in the same period are excluded from the rollforward.
(5)Changes in unrealized gains (losses) included in net income (loss) and included in AOCI relate to assets and liabilities still held at the end of the respective periods. Substantially all changes in unrealized gains (losses) included in net income (loss) for net derivatives and net embedded derivatives are reported in net derivative gains (losses).
(6)Comprised of U.S. and foreign corporate securities.
(7)Freestanding derivative assets and liabilities are presented net for purposes of the rollforward.
(8)Embedded derivative assets and liabilities are presented net for purposes of the rollforward.
(9)Investment performance related to separate account assets is fully offset by corresponding amounts credited to contractholders within separate account liabilities. Therefore, such changes in estimated fair value are not recorded in net income (loss). For the purpose of this disclosure, these changes are presented within net income (loss). Separate account assets and liabilities are presented net for the purposes of the rollforward.
Fair Value Option
The Company elects the FVO for certain residential mortgage loans that are managed on a total return basis. The following table presents information for residential mortgage loans which are accounted for under the FVO and were initially measured at fair value.
December 31,
2021 2020
(In millions)
Unpaid principal balance $ 130 $ 172
Difference between estimated fair value and unpaid principal balance (3) (7)
Carrying value at estimated fair value $ 127 $ 165
Loans in nonaccrual status $ 32 $ 45
Loans more than 90 days past due $ 14 $ 27
Loans in nonaccrual status or more than 90 days past due, or both - difference between aggregate estimated fair value and unpaid principal balance $ (7) $ (13)
Nonrecurring Fair Value Measurements
The following table presents information for assets measured at estimated fair value on a nonrecurring basis during the periods and still held at the reporting dates (for example, when there is evidence of impairment), using significant unobservable inputs (Level 3).
At December 31, For the Years Ended December 31,
2021 2020 2021 2020 2019
Carrying Value After Measurement Gains (Losses)
(In millions)
Mortgage loans, net (1) $ 266 $ 320 $ (91) $ (110) $ (2)
__________________
(1)Estimated fair values for impaired mortgage loans are based on estimated fair value of the underlying collateral.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
9. Fair Value (continued)
Fair Value of Financial Instruments Carried at Other Than Fair Value
The following tables provide fair value information for financial instruments that are carried on the balance sheet at amounts other than fair value. These tables exclude the following financial instruments: cash and cash equivalents, accrued investment income, payables for collateral under securities loaned and other transactions, short-term debt and those short-term investments that are not securities, such as time deposits, and therefore are not included in the three-level hierarchy table disclosed in the “- Recurring Fair Value Measurements” section. The Company believes that due to the short-term nature of these excluded assets, which are primarily classified in Level 2, the estimated fair value approximates carrying value. All remaining balance sheet amounts excluded from the tables below are not considered financial instruments subject to this disclosure.
The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows at:
December 31, 2021
Fair Value Hierarchy
Carrying
Value
Level 1 Level 2 Level 3 Total
Estimated
Fair Value
(In millions)
Assets
Mortgage loans (1) $ 60,092 $ - $ - $ 63,094 $ 63,094
Policy loans
$ 5,816 $ - $ - $ 6,710 $ 6,710
Other invested assets
$ 2,230 $ - $ 1,932 $ 356 $ 2,288
Premiums, reinsurance and other receivables $ 12,101 $ - $ 156 $ 12,375 $ 12,531
Liabilities
Policyholder account balances
$ 76,387 $ - $ - $ 79,182 $ 79,182
Long-term debt
$ 1,659 $ - $ 2,000 $ - $ 2,000
Other liabilities
$ 12,357 $ - $ 159 $ 12,412 $ 12,571
Separate account liabilities
$ 54,254 $ - $ 54,254 $ - $ 54,254
December 31, 2020
Fair Value Hierarchy
Carrying
Value Level 1 Level 2 Level 3 Total
Estimated
Fair Value
(In millions)
Assets
Mortgage loans (1) $ 66,240 $ - $ - $ 70,391 $ 70,391
Policy loans
$ 5,973 $ - $ - $ 7,148 $ 7,148
Other invested assets
$ 2,849 $ - $ 2,586 $ 167 $ 2,753
Premiums, reinsurance and other receivables $ 13,173 $ - $ 363 $ 13,274 $ 13,637
Liabilities
Policyholder account balances
$ 78,059 $ - $ - $ 82,982 $ 82,982
Long-term debt
$ 1,615 $ - $ 2,018 $ - $ 2,018
Other liabilities
$ 12,595 $ - $ 134 $ 12,778 $ 12,912
Separate account liabilities
$ 59,103 $ - $ 59,103 $ - $ 59,103
_________________
(1)Includes mortgage loans measured at estimated fair value on a nonrecurring basis and excludes mortgage loans measured at estimated fair value on a recurring basis.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
10. Leases
The Company, as lessee, has entered into various lease and sublease agreements primarily for office space. The Company has operating leases with remaining lease terms of less than one year to 9 years. The remaining lease terms for the subleases are less than one year to 9 years.
ROU Assets and Lease Liabilities
ROU assets and lease liabilities for operating leases were:
December 31, 2021 December 31, 2020
(In millions)
ROU assets $ 601 $ 718
Lease liabilities $ 701 $ 795
Lease Costs
The components of operating lease costs were as follows:
For the Years Ended December 31,
2021 2020 2019
(In millions)
Operating lease cost $ 120 $ 117 $ 109
Variable lease cost 14 15 20
Sublease income (91) (89) (80)
Net lease cost
$ 43 $ 43 $ 49
Other Information
Supplemental other information related to operating leases was as follows:
December 31, 2021 December 31, 2020
(Dollars in millions)
Cash paid for amounts included in the measurement of lease liability - operating cash flows $ 122 $ 125
ROU assets obtained in exchange for new lease liabilities $ 4 $ -
Weighted-average remaining lease term 7 years 8 years
Weighted-average discount rate 4.0 % 4.0 %
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
10. Leases (continued)
Maturities of Lease Liabilities
Maturities of operating lease liabilities were as follows:
December 31, 2021
(In millions)
2022 $ 126
2023 117
2024 108
2025 108
2026 103
Thereafter
Total undiscounted cash flows
Less: interest 114
Present value of lease liability
$ 701
See Note 7 for information about the Company’s investments in leased real estate and leveraged and direct financing leases.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
11. Long-term and Short-term Debt
Long-term and short-term debt outstanding, excluding debt relating to consolidated securitization entities, was as follows:
December 31,
Interest Rates (1)
2021 2020
Range Weighted Average Maturity Face
Value Unamortized
Discount and Issuance Costs Carrying
Value Face
Value Unamortized
Discount and Issuance Costs Carrying
Value
(In millions)
Surplus notes - affiliated 7.38% - 7.38% 7.38% 2037 $ 700 $ (8) $ 692 $ 700 $ (8) $ 692
Surplus notes
7.80% - 7.88% 7.83% 2024 - 2025 400 (1) 399 400 (2) 398
Other notes (2) 0.08% - 3.75% 2.48% 2022 - 2058 571 (3) 568 527 (3) 524
Total long-term debt
1,671 (12) 1,659 1,627 (13) 1,614
Total short-term debt
100 - 100 120 - 120
Total
$ 1,771 $ (12) $ 1,759 $ 1,747 $ (13) $ 1,734
__________________
(1)Range of interest rates and weighted average interest rates are for the year ended December 31, 2021.
(2)During 2021, a subsidiary of Metropolitan Life Insurance Company issued $35 million of long-term debt to MetLife, Inc.
The aggregate maturities of long-term debt at December 31, 2021 for the next five years and thereafter are $82 million in 2022, $0 in 2023, $184 million in 2024, $250 million in 2025, $347 million in 2026 and $796 million thereafter.
Unsecured senior debt which consists of senior notes and other notes rank highest in priority. Payments of interest and principal on Metropolitan Life Insurance Company’s surplus notes are subordinate to all other obligations and may be made only with the prior approval of the New York State Department of Financial Services (“NYDFS”).
Other Notes
At December 31, 2021, MetLife Private Equity Holdings, LLC (“MPEH”), a wholly-owned indirect investment subsidiary of Metropolitan Life Insurance Company, was party to a credit agreement providing for $350 million of term loans and $75 million of a revolving loan (the “Credit Agreement”), which matures in September 2026. In March 2020, MPEH borrowed $75 million on a revolving loan under the Credit Agreement and repaid this loan in July 2020. Simultaneously, in July 2020, MPEH borrowed $50 million on the term loan under the Credit Agreement. MPEH has pledged invested assets to secure the loans; however, these loans are non-recourse to Metropolitan Life Insurance Company.
Short-term Debt
Short-term debt with maturities of one year or less was as follows:
December 31,
2021 2020
(Dollars in millions)
Commercial paper
$ 100 $ 100
Short-term borrowings (1)
- 20
Total short-term debt
$ 100 $ 120
Average daily balance
$ 105 $ 125
Average days outstanding
104 days 73 days
__________________
(1)Represents short-term debt related to repurchase agreements, secured by assets consolidated by the Company.
For the years ended December 31, 2021, 2020 and 2019, the weighted average interest rate on short-term debt was 0.23%, 1.51% and 2.74%, respectively.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
11. Long-term and Short-term Debt (continued)
Interest Expense
Interest expense included in other expenses was $96 million, $99 million and $105 million for the years ended December 31, 2021, 2020 and 2019, respectively. These amounts include $52 million of interest expense related to affiliated debt for each of the three years ended December 31, 2021, 2020 and 2019.
Credit Facility
At December 31, 2021, MetLife, Inc. and MetLife Funding, Inc., a wholly-owned subsidiary of Metropolitan Life Insurance Company (“MetLife Funding”), maintained a $3.0 billion unsecured revolving credit facility (the “Credit Facility”). When drawn upon, this facility bears interest at varying rates in accordance with the agreement.
The Credit Facility is used for general corporate purposes, to support the borrowers’ commercial paper programs and for the issuance of letters of credit. Total fees associated with the Credit Facility were $7 million for each of the years ended December 31, 2021, 2020 and 2019, respectively, and were included in other expenses.
Information on the Credit Facility at December 31, 2021 was as follows:
Borrower(s)
Expiration
Maximum
Capacity Letters of Credit Used by the Company (1) Letters of Credit Used by Affiliates (1) Drawdowns Unused
Commitments
(In millions)
MetLife, Inc. and MetLife Funding, Inc. February 2026 (2) $ 3,000 $ 412 $ 47 $ - $ 2,541
__________________
(1)MetLife, Inc. and MetLife Funding are severally liable for their respective obligations under the Credit Facility. MetLife Funding was not an applicant under letters of credit outstanding as of December 31, 2021 and is not responsible for any reimbursement obligations under such letters of credit.
(2)In February 2021, the Credit Facility was amended and restated to, among other things, extend the maturity date. The Company incurred costs of $3 million related to the Credit Facility, which were capitalized and included in other assets. These costs are being amortized over the remaining term of the Credit Facility. All borrowings under the amended and restated Credit Facility must be repaid by February 26, 2026, except that letters of credit outstanding upon termination may remain outstanding until February 26, 2027.
Debt and Facility Covenants
Certain of the Company’s debt instruments and the 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, 2021.
12. Equity
Statutory Equity and Income
Metropolitan Life Insurance Company prepares statutory-basis financial statements in accordance with statutory accounting practices prescribed or permitted by the NYDFS. The National Association of Insurance Commissioners (“NAIC”) has adopted the Codification of Statutory Accounting Principles (“Statutory Codification”). Statutory Codification is intended 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. Modifications by the NYDFS may impact the effect of Statutory Codification on the statutory capital and surplus of Metropolitan Life Insurance Company.
New York, the state of domicile of Metropolitan Life Insurance Company, imposes risk-based capital (“RBC”) requirements that were developed by the NAIC. Regulatory compliance is determined by a ratio of a company’s total adjusted capital, calculated in the manner prescribed by the NAIC (“TAC”), with modifications by the state insurance department, 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 (“CAL RBC”). The CAL RBC ratios for Metropolitan Life Insurance Company were in excess of 360% and in excess of 350% at December 31, 2021 and 2020, respectively.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
12. Equity (continued)
Metropolitan Life Insurance Company’s ancillary foreign insurance operations are regulated by applicable authorities of the jurisdictions in which each entity operates and are subject to minimum capital and solvency requirements in those jurisdictions before corrective action commences. The aggregate required capital and surplus of Metropolitan Life Insurance Company’s foreign insurance operations was $430 million and the aggregate actual regulatory capital and surplus of such operations was $722 million as of the date of the most recent required capital adequacy calculation for each jurisdiction. The Company’s foreign insurance operations exceeded the minimum capital and solvency requirements as of the date of the most recent fiscal year-end capital adequacy calculation for each jurisdiction.
Statutory accounting principles differ from GAAP primarily by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions, reporting surplus notes as surplus instead of debt and valuing securities on a different basis.
In addition, certain assets are not admitted under statutory accounting principles and are charged directly to surplus. The most significant assets not admitted by Metropolitan Life Insurance Company are net deferred income tax assets resulting from temporary differences between statutory accounting principles basis and tax basis not expected to reverse and become recoverable within three years. Further, statutory accounting principles do not give recognition to purchase accounting adjustments.
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 Considerations Letter, which mandates certain assumptions in asset adequacy testing. The collective impact of these prescribed accounting practices decreased the statutory capital and surplus of Metropolitan Life Insurance Company by $1.2 billion and $1.6 billion at December 31, 2021 and 2020, respectively, compared to what capital and surplus would have been had it been measured under NAIC guidance.
Statutory net income (loss) of Metropolitan Life Insurance Company, a New York domiciled insurer, was $3.5 billion, $3.4 billion and $3.9 billion at December 31, 2021, 2020 and 2019, respectively. Statutory capital and surplus was $11.8 billion and $11.3 billion at December 31, 2021 and 2020, respectively. All such amounts are derived from the statutory-basis financial statements as filed with the NYDFS.
Dividend Restrictions
Under the New York State Insurance Law, Metropolitan Life Insurance Company 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, Metropolitan Life Insurance Company 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, Metropolitan Life Insurance Company 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, Metropolitan Life Insurance Company 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, Metropolitan Life Insurance Company 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.
Metropolitan Life Insurance Company paid $3.4 billion and $2.8 billion in dividends to MetLife, Inc. for the years ended December 31, 2021 and 2020, respectively, including amounts where regulatory approval was obtained as required. Under
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
12. Equity (continued)
New York State Insurance Law, Metropolitan Life Insurance Company has calculated that it may pay approximately $3.5 billion to MetLife, Inc. without prior regulatory approval by the end of 2022.
Accumulated Other Comprehensive Income (Loss)
Information regarding changes in the balances of each component of AOCI attributable to Metropolitan Life Insurance Company was as follows:
Unrealized
Investment Gains
(Losses), Net of
Related Offsets (1) Unrealized
Gains (Losses)
on Derivatives Foreign
Currency
Translation
Adjustments Defined
Benefit
Plans
Adjustment Total
(In millions)
Balance at December 31, 2018 $ 2,515 $ 1,382 $ (74) $ (261) $ 3,562
OCI before reclassifications
7,993 516 (32) (167) 8,310
Deferred income tax benefit (expense)
(1,678) (109) 9 35 (1,743)
AOCI before reclassifications, net of income tax
8,830 1,789 (97) (393) 10,129
Amounts reclassified from AOCI
60 (237) - 24 (153)
Deferred income tax benefit (expense)
(13) 50 - (5) 32
Amounts reclassified from AOCI, net of income tax
47 (187) - 19 (121)
Cumulative effects of changes in accounting principles (1) 22 - - 21
Deferred income tax benefit (expense), cumulative effects of changes in accounting principles - (4) - - (4)
Cumulative effects of changes in accounting principles, net of income tax (1) 18 - - 17
Balance at December 31, 2019 8,876 1,620 (97) (374) 10,025
OCI before reclassifications
1,852 1,144 54 (145) 2,905
Deferred income tax benefit (expense)
(391) (240) (10) 30 (611)
AOCI before reclassifications, net of income tax
10,337 2,524 (53) (489) 12,319
Amounts reclassified from AOCI
59 (928) - 37 (832)
Deferred income tax benefit (expense)
(12) 195 - (8) 175
Amounts reclassified from AOCI, net of income tax
47 (733) - 29 (657)
Balance at December 31, 2020 10,384 1,791 (53) (460) 11,662
OCI before reclassifications
(2,564) 30 9 44 (2,481)
Deferred income tax benefit (expense)
586 (8) (1) (9) 568
AOCI before reclassifications, net of income tax
8,406 1,813 (45) (425) 9,749
Amounts reclassified from AOCI
102 81 - 38 221
Deferred income tax benefit (expense)
(23) (22) - (8) (53)
Amounts reclassified from AOCI, net of income tax
79 59 - 30 168
Balance at December 31, 2021 $ 8,485 $ 1,872 $ (45) $ (395) $ 9,917
__________________
(1)See Note 7 for information on offsets to investments related to policyholder liabilities, DAC, VOBA and DSI.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
12. Equity (continued)
Information regarding amounts reclassified out of each component of AOCI was as follows:
Years Ended December 31,
2021 2020 2019
AOCI Components Amounts Reclassified from AOCI Consolidated Statements of
Operations Locations
(In millions)
Net unrealized investment gains (losses):
Net unrealized investment gains (losses)
$ (67) $ (30) $ 17 Net investment gains (losses)
Net unrealized investment gains (losses)
(13) (18) (16) Net investment income
Net unrealized investment gains (losses)
(22) (11) (61) Net derivative gains (losses)
Net unrealized investment gains (losses), before income tax (102) (59) (60)
Income tax (expense) benefit
23 12 13
Net unrealized investment gains (losses), net of income tax
(79) (47) (47)
Unrealized gains (losses) on derivatives - cash flow hedges:
Interest rate derivatives
57 36 23 Net investment income
Interest rate derivatives
87 121 4 Net investment gains (losses)
Foreign currency exchange rate derivatives
4 3 (3) Net investment income
Foreign currency exchange rate derivatives
(229) 768 212 Net investment gains (losses)
Credit derivatives
- - 1 Net investment income
Gains (losses) on cash flow hedges, before income tax
(81) 928 237
Income tax (expense) benefit
22 (195) (50)
Gains (losses) on cash flow hedges, net of income tax
(59) 733 187
Defined benefit plans adjustment: (1)
Amortization of net actuarial gains (losses)
(43) (39) (27)
Amortization of prior service (costs) credit
5 2 3
Amortization of defined benefit plan items, before income tax
(38) (37) (24)
Income tax (expense) benefit
8 8 5
Amortization of defined benefit plan items, net of income tax
(30) (29) (19)
Total reclassifications, net of income tax
$ (168) $ 657 $ 121
__________________
(1)These AOCI components are included in the computation of net periodic benefit costs. See Note 14.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
13. Other Revenues and Other Expenses
Other Revenues
Information on other revenues, which primarily includes fees related to service contracts from customers, was as follows:
Years Ended December 31,
2021 2020 2019
(In millions)
Prepaid legal plans $ 395 $ 371 $ 329
Recordkeeping and administrative services (1) 211 194 204
Administrative services-only contracts 219 218 210
Other revenue from service contracts from customers 35 36 39
Total revenues from service contracts from customers 860 819 782
Other (2) 756 842 791
Total other revenues $ 1,616 $ 1,661 $ 1,573
__________________
(1)Related to products and businesses no longer actively marketed by the Company.
(2)Primarily includes reinsurance ceded. See Note 5.
Other Expenses
Information on other expenses was as follows:
Years Ended December 31,
2021 2020 2019
(In millions)
General and administrative expenses (1) $ 2,331 $ 2,285 $ 2,480
Pension, postretirement and postemployment benefit costs 112 33 107
Premium taxes, other taxes, and licenses & fees 332 399 274
Commissions and other variable expenses 2,551 1,842 1,814
Capitalization of DAC (64) (51) (43)
Amortization of DAC and VOBA 259 406 239
Interest expense on debt 96 99 105
Total other expenses $ 5,617 $ 5,013 $ 4,976
__________________
(1)Includes ($113) million, ($104) million and ($165) million for the years ended December 31, 2021, 2020 and 2019, respectively, for the net change in cash surrender value of investments in certain life insurance policies, net of premiums paid.
Capitalization of DAC and Amortization of DAC and VOBA
See Note 4 for additional information on DAC and VOBA including impacts of capitalization and amortization. See also Note 6 for a description of the DAC amortization impact associated with the closed block.
Expenses related to Debt
See Note 11 for additional information on interest expense on debt, including affiliated interest expense.
Affiliated Expenses
See Notes 5 and 17 for a discussion of affiliated expenses related to reinsurance and service agreement transactions, respectively, included in the table above.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
14. Employee Benefit Plans
Pension Benefit Plans
The Company sponsors a U.S. nonqualified defined benefit pension plan covering MetLife employees who meet specified eligibility requirements of the sponsor and its participating affiliates. Participating affiliates are allocated a proportionate share of net expense related to the plan. Pension benefits are provided utilizing either a traditional formula or cash balance formula. The traditional formula provides benefits that are primarily based upon years of credited service and final average earnings. The cash balance formula utilizes hypothetical or notional accounts which credit participants with benefits equal to a percentage of eligible pay, as well as interest credits, determined annually based upon the annual rate of interest on 30-year U.S. Treasury securities, for each account balance. In September 2018, the nonqualified defined benefit pension plan was amended, effective January 1, 2023, to provide benefit accruals for all active participants under the cash balance formula and to cease future accruals under the traditional formula. The pension plan sponsored by the Company provides supplemental benefits in excess of limits applicable to a qualified plan which is sponsored by an affiliate.
Obligations and Funded Status
December 31,
2021 2020
Pension Benefits
(In millions)
Change in benefit obligations:
Benefit obligations at January 1,
$ 1,343 $ 1,210
Service costs
17 17
Interest costs
37 40
Net actuarial (gains) losses (1) (42) 143
Settlements and curtailments (1) -
Benefits paid
(80) (67)
Benefit obligations at December 31, 1,274 1,343
Change in plan assets:
Estimated fair value of plan assets at January 1,
- -
Employer contributions
80 67
Benefits paid
(80) (67)
Estimated fair value of plan assets at December 31, - -
Over (under) funded status at December 31, $ (1,274) $ (1,343)
Amounts recognized on the consolidated balance sheets:
Other liabilities
$ (1,274) $ (1,343)
AOCI:
Net actuarial (gains) losses
$ 510 $ 598
Prior service costs (credit)
(9) (14)
AOCI, before income tax
$ 501 $ 584
Accumulated benefit obligation
$ 1,220 $ 1,275
__________________
(1)For the year ended December 31, 2021, significant sources of actuarial (gains) losses for pension benefits included the impact of changes to financial assumptions of ($47) million, and plan experience of $5 million. For the year ended December 31, 2020, significant sources of actuarial (gains) losses for pension benefits included the impact of changes to financial assumptions of $106 million, demographic assumptions of $5 million, and plan experience of $32 million.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
14. Employee Benefit Plans (continued)
Information on pension plans with PBOs and/or accumulated benefit obligations (“ABO”) in excess of plan assets was as follows at:
December 31,
2021 2020 2021 2020
PBO Exceeds Estimated Fair Value
of Plan Assets ABO Exceeds Estimated Fair Value
of Plan Assets
(In millions)
Projected benefit obligations
$ 1,274 $ 1,343 $ 1,274 $ 1,343
Accumulated benefit obligations
$ 1,220 $ 1,275 $ 1,220 $ 1,275
Net Periodic Benefit Costs
The components of net periodic benefit costs and benefit obligations recognized in OCI were as follows for pension benefits:
Years Ended December 31,
2021 2020 2019
(In millions)
Net periodic benefit costs:
Service costs
$ 17 $ 17 $ 17
Interest costs
37 40 46
Settlement and curtailment (gains) losses (3) - -
Amortization of net actuarial (gains) losses
43 39 27
Amortization of prior service costs (credit)
(2) (2) (3)
Total net periodic benefit costs (credit) 92 94 87
Other changes in plan assets and benefit obligations recognized in OCI:
Net actuarial (gains) losses
(42) 143 161
Prior service costs (credit)
- - 3
Settlement and curtailment (gains) losses 1 - -
Amortization of net actuarial (gains) losses
(43) (39) (27)
Amortization of prior service (costs) credit
2 2 3
Total recognized in OCI
(82) 106 140
Total recognized in net periodic benefit costs and OCI
$ 10 $ 200 $ 227
Assumptions
Assumptions used in determining the benefit obligation for the plan were as follows:
Pension Benefits
December 31, 2021
Weighted average discount rate
2.95%
Weighted average interest crediting rate
3.18%
Rate of compensation increase
2.50% - 8.00%
December 31, 2020
Weighted average discount rate
2.65%
Weighted average interest crediting rate
3.46%
Rate of compensation increase
2.50% - 8.00%
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
14. Employee Benefit Plans (continued)
Assumptions used in determining the net periodic benefit cost for the plan were as follows:
Pension Benefits
Year Ended December 31, 2021
Weighted average discount rate
3.01%
Weighted average interest crediting rate
3.24%
Rate of compensation increase
2.50% - 8.00%
Year Ended December 31, 2020
Weighted average discount rate
3.30%
Weighted average interest crediting rate
3.38%
Rate of compensation increase
2.25% - 8.50%
Year Ended December 31, 2019
Weighted average discount rate
4.35%
Weighted average interest crediting rate
4.01%
Rate of compensation increase
2.25% - 8.50%
The weighted average discount rate is determined annually based on the yield, measured on a yield to worst basis, of a hypothetical portfolio constructed of high quality debt instruments available on the measurement date, which would provide the necessary future cash flows to pay the aggregate PBO when due.
The weighted average interest crediting rate is determined annually based on the plan selected rate, long-term financial forecasts of that rate and the demographics of the plan participants.
Expected Future Contributions and Benefit Payments
Benefit payments due under the nonqualified pension plan are primarily funded from the Company’s general assets as they become due under the provisions of the plan. The Company expects to make benefit payments of $80 million in 2022.
Gross benefit payments for the next 10 years, which reflect expected future service where appropriate, are expected to be as follows:
Pension Benefits
(In millions)
2022 $ 83
2023 $ 81
2024 $ 79
2025 $ 74
2026 $ 80
2027-2031 $ 407
Defined Contribution Plans
The Company contributed to defined contribution plans $24 million, $23 million and $26 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
15. Income Tax
The provision for income tax was as follows:
Years Ended December 31,
2021 2020 2019
(In millions)
Current:
U.S. federal
$ (89) $ 527 $ 280
U.S. state and local
5 3 1
Non-U.S.
43 (2) 26
Subtotal
(41) 528 307
Deferred:
U.S. federal
577 (18) (148)
Non-U.S.
(6) 24 (11)
Subtotal
571 6 (159)
Provision for income tax expense (benefit)
$ 530 $ 534 $ 148
The Company’s income (loss) before income tax expense (benefit) was as follows:
Years Ended December 31,
2021 2020 2019
(In millions)
Income (loss):
U.S.
$ 4,143 $ 3,984 $ 3,454
Non-U.S.
105 94 106
Total
$ 4,248 $ 4,078 $ 3,560
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
15. Income Tax (continued)
The reconciliation of the income tax provision at the U.S. statutory rate to the provision for income tax as reported was as follows:
Years Ended December 31,
2021 2020 2019
(In millions)
Tax provision at U.S. statutory rate $ 892 $ 856 $ 748
Tax effect of:
Dividend received deduction (39) (32) (36)
Tax-exempt income (27) (26) (40)
Prior year tax (1) (13) 22 (173)
Low income housing tax credits (178) (202) (254)
Other tax credits (38) (37) (43)
Foreign tax rate differential (7) (13) (7)
Change in valuation allowance - (1) (7)
U.S. Tax Reform impact (2) - - (6)
Other, net (3) (60) (33) (34)
Provision for income tax expense (benefit) $ 530 $ 534 $ 148
__________________
(1)As discussed further below, prior year tax includes a non-cash benefit related to an uncertain tax position of $158 million for the year ended December 31, 2019.
(2)For the year ended December 31, 2019, U.S. Tax Reform impact includes a $6 million tax benefit related to the effect of sequestration on the alternative minimum tax credit.
(3)For the year ended December 31, 2021, other primarily includes a tax benefit of $53 million related to a non-cash transfer of assets from a wholly-owned United Kingdom (“U.K.”) subsidiary to Metropolitan Life Insurance Company.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
15. Income Tax (continued)
Deferred income tax represents the tax effect of the differences between the book and tax bases of assets and liabilities. Net deferred income tax assets and liabilities consisted of the following at:
December 31,
2021 2020
(In millions)
Deferred income tax assets:
Policyholder liabilities and receivables
$ 1,622 $ 1,475
Net operating loss carryforwards (1)
75 80
Employee benefits
535 540
Tax credit carryforwards (2)
741 876
Litigation-related and government mandated
84 96
Other
118 379
Total gross deferred income tax assets
3,175 3,446
Less: Valuation allowance
74 79
Total net deferred income tax assets
3,101 3,367
Deferred income tax liabilities:
Investments, including derivatives
2,147 1,738
Intangibles
28 32
DAC 317 400
Net unrealized investment gains 2,645 3,177
Total deferred income tax liabilities
5,137 5,347
Net deferred income tax asset (liability)
$ (2,036) $ (1,980)
__________________
(1)The Company has recorded a deferred tax asset of $75 million primarily related to U.S. state net operating loss carryforwards and an offsetting valuation allowance for the year ended December 31, 2021. U.S. state net operating loss carryforwards will expire between 2022 and 2041, whereas others have an unlimited carryforward period.
(2)Tax credit carryforwards for the year ended December 31, 2021 primarily reflect general business credits expiring between 2038 and 2041 and are reduced by $43 million related to unrecognized tax benefits.
The Company participates in a tax sharing agreement with MetLife, Inc., as described in Note 1. Pursuant to this tax sharing agreement, the amounts due to (from) MetLife, Inc. included ($120) million and $183 million at December 31, 2021 and 2020, respectively.
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 Internal Revenue Service (“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 2014.
In 2021, the Company filed amended Federal income tax returns with the IRS for MetLife, Inc. and subsidiaries for tax years 2010 through 2013. In 2021, the IRS reviewed and acknowledged acceptance of the 2010 through 2013 amended Federal income tax returns and closed the years to further audit.
The Company filed refund claims 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 U.K. investment subsidiary that was structured as a joint venture until early
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
15. Income Tax (continued)
2009. In 2020, the Company received refunds from these claims filed in 2017, and as a result, the Company recorded a $28 million interest benefit ($22 million, net of tax) included in other expenses.
For tax years 2000 through 2002 and tax years 2007 through 2009, the Company entered into binding agreements with the IRS in 2019 under which all remaining issues regarding the foreign tax credit matter noted above were resolved. Accordingly, in 2019, the Company recorded a non-cash benefit to net income of $226 million, net of tax, comprised of a $158 million tax benefit recorded in provision for income tax expense (benefit) and a $86 million interest benefit ($68 million, net of tax) included in other expenses.
The Company’s overall liability for unrecognized tax benefits may increase or decrease in the next 12 months. For example, U.S. 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.
A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:
Years Ended December 31,
2021 2020 2019
(In millions)
Balance at January 1,
$ 35 $ 33 $ 442
Additions for tax positions of prior years
- 1 -
Reductions for tax positions of prior years (1)
(14) - (158)
Additions for tax positions of current year
2 1 3
Settlements with tax authorities (2)
- - (254)
Balance at December 31,
$ 23 $ 35 $ 33
Unrecognized tax benefits that, if recognized, would impact the effective rate
$ 23 $ 35 $ 33
__________________
(1)The decreases in 2021 and 2019 are primarily related to non-cash benefits from tax audit settlements.
(2)The decrease in 2019 is primarily related to tax audit settlements, of which $251 million was reclassified to the current income tax payable account.
The Company classifies interest accrued related to unrecognized tax benefits in interest expense, included within other expenses.
Interest was as follows:
Years Ended December 31,
2021 2020 2019
(In millions)
Interest expense (benefit) recognized on the consolidated statements of operations (1)
$ (9) $ 4 $ (187)
December 31,
2021 2020
(In millions)
Interest included in other liabilities on the consolidated balance sheets
$ 4 $ 13
__________________
(1) The decrease in 2019 is primarily related to tax audit settlements, of which $68 million was recorded in other expenses and $119 million was reclassified to the current income tax payable account.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
16. Contingencies, Commitments and Guarantees
Contingencies
Litigation
The Company is a defendant in a large number of litigation matters. Putative or certified class action litigation and other litigation and claims and assessments against the Company, in addition to those discussed below and those otherwise provided for in the Company’s consolidated financial statements, have arisen in the course of the Company’s business, including, but not limited to, in connection with its activities as an insurer, mortgage lending bank, employer, investor, investment advisor, broker-dealer, and taxpayer.
The Company also receives and responds to subpoenas or other inquiries seeking a broad range of information from state regulators, including state insurance commissioners; state attorneys general or other state governmental authorities; federal regulators, including the U.S. Securities and Exchange Commission; federal governmental authorities, including congressional committees; and the Financial Industry Regulatory Authority, as well as from local and national regulators and government authorities in jurisdictions outside the United States where the Company conducts business. The issues involved in information requests and regulatory matters vary widely, but can include inquiries or investigations concerning the Company’s compliance with applicable insurance and other laws and regulations. The Company cooperates in these inquiries.
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. In certain circumstances where liabilities have been established there may be coverage under one or more corporate insurance policies, pursuant to which there may be an insurance recovery. Insurance recoveries are recognized as gains when any contingencies relating to the insurance claim have been resolved, which is the earlier of when the gains are realized or realizable. 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, 2021. 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.
Matters as to Which an Estimate Can Be Made
For some of the matters disclosed below, the Company is able to estimate a reasonably possible range of loss. For matters where a loss is believed to be reasonably possible, but not probable, the Company has not made an accrual. As of December 31, 2021, the Company estimates the aggregate range of reasonably possible losses in excess of amounts accrued for these matters to be $0 to $100 million.
Matters as to Which an Estimate Cannot Be Made
For other matters disclosed below, the Company is not currently able to estimate the reasonably possible loss or range of loss. The Company is often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, analysis by experts, and the progress of settlement negotiations. On a quarterly and annual basis, the Company reviews relevant information with respect to litigation contingencies and updates its accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
16. Contingencies, Commitments and Guarantees (continued)
Asbestos-Related Claims
Metropolitan Life Insurance Company is and has been a defendant in a large number of asbestos-related suits filed primarily in state courts. These suits principally allege that the plaintiff or plaintiffs suffered personal injury resulting from exposure to asbestos and seek both actual and punitive damages. Metropolitan Life Insurance Company has never engaged in the business of manufacturing or selling asbestos-containing products, nor has Metropolitan Life Insurance Company issued liability or workers’ compensation insurance to companies in the business of manufacturing or selling asbestos-containing products. The lawsuits principally have focused on allegations with respect to certain research, publication and other activities of one or more of Metropolitan Life Insurance Company’s employees during the period from the 1920s through approximately the 1950s and allege that Metropolitan Life Insurance Company learned or should have learned of certain health risks posed by asbestos and, among other things, improperly publicized or failed to disclose those health risks. Metropolitan Life Insurance Company believes that it should not have legal liability in these cases. The outcome of most asbestos litigation matters, however, is uncertain and can be impacted by numerous variables, including differences in legal rulings in various jurisdictions, the nature of the alleged injury and factors unrelated to the ultimate legal merit of the claims asserted against Metropolitan Life Insurance Company.
Metropolitan Life Insurance Company’s defenses include that: (i) Metropolitan Life Insurance Company owed no duty to the plaintiffs; (ii) plaintiffs did not rely on any actions of Metropolitan Life Insurance Company; (iii) Metropolitan Life Insurance Company’s conduct was not the cause of the plaintiffs’ injuries; and (iv) plaintiffs’ exposure occurred after the dangers of asbestos were known. During the course of the litigation, certain trial courts have granted motions dismissing claims against Metropolitan Life Insurance Company, while other trial courts have denied Metropolitan Life Insurance Company’s motions. There can be no assurance that Metropolitan Life Insurance Company will receive favorable decisions on motions in the future. While most cases brought to date have settled, Metropolitan Life Insurance Company intends to continue to defend aggressively against claims based on asbestos exposure, including defending claims at trials.
The approximate total number of asbestos personal injury claims pending against Metropolitan Life Insurance Company as of the dates indicated, the approximate number of new claims during the years ended on those dates and the approximate total settlement payments made to resolve asbestos personal injury claims at or during those years are set forth in the following table:
December 31,
2021 2020 2019
(In millions, except number of claims)
Asbestos personal injury claims at year end
58,785 60,618 61,134
Number of new claims during the year
2,824 2,496 3,187
Settlement payments during the year (1)
$ 53.0 $ 52.9 $ 49.4
__________________
(1)Settlement payments represent payments made by Metropolitan Life Insurance Company during the year in connection with settlements made in that year and in prior years. Amounts do not include Metropolitan Life Insurance Company’s attorneys’ fees and expenses.
The number of asbestos cases that may be brought, the aggregate amount of any liability that Metropolitan Life Insurance Company may incur, and the total amount paid in settlements in any given year are uncertain and may vary significantly from year to year.
The ability of Metropolitan Life Insurance Company to estimate its ultimate asbestos exposure is subject to considerable uncertainty, and the conditions impacting its liability can be dynamic and subject to change. The availability of reliable data is limited and it is difficult to predict the numerous variables that can affect liability estimates, including the number of future claims, the cost to resolve claims, the disease mix and severity of disease in pending and future claims, the willingness of courts to allow plaintiffs to pursue claims against Metropolitan Life Insurance Company when exposure to asbestos took place after the dangers of asbestos exposure were well known, and the impact of any possible future adverse verdicts and their amounts.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
16. Contingencies, Commitments and Guarantees (continued)
The ability to make estimates regarding ultimate asbestos exposure declines significantly as the estimates relate to years further in the future. In the Company’s judgment, there is a future point after which losses cease to be probable and reasonably estimable. It is reasonably possible that the Company’s total exposure to asbestos claims may be materially greater than the asbestos liability currently accrued and that future charges to income may be necessary, but management does not believe any such charges are likely to have a material effect on the Company’s financial position.
The Company believes adequate provision has been made in its consolidated financial statements for all probable and reasonably estimable losses for asbestos-related claims. Metropolitan Life Insurance Company’s recorded asbestos liability covers pending claims, claims not yet asserted, and legal defense costs and is based on estimates and includes significant assumptions underlying its analysis.
Metropolitan Life Insurance Company 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. Based upon its regular reevaluation of its exposure from asbestos litigation, Metropolitan Life Insurance Company has updated its recorded liability for asbestos-related claims to $372 million at December 31, 2021. The recorded liability was $425 million at December 31, 2020.
Julian & McKinney v. Metropolitan Life Insurance Company (S.D.N.Y., filed February 9, 2017)
Plaintiffs filed this putative class and collective action on behalf of themselves and all current and former long-term disability (“LTD”) claims specialists between February 2011 and the present for alleged wage and hour violations under the Fair Labor Standards Act (“FLSA”), the New York Labor Law, and the Connecticut Minimum Wage Act. The suit alleges that Metropolitan Life Insurance Company improperly reclassified the plaintiffs and similarly situated LTD claims specialists from non-exempt to exempt from overtime pay in November 2013. As a result, they and members of the putative class were no longer eligible for overtime pay even though they allege they continued to work more than 40 hours per week. Plaintiffs seek unspecified compensatory and punitive damages, as well as other relief. The court denied the plaintiffs’ motion to certify the class and the United States Circuit Court for the Second Circuit denied plaintiffs leave to appeal this ruling. The court granted Metropolitan Life Insurance Company’s motion for summary judgment as to the lead plaintiff’s FLSA claims and its motion to de-certify the class as a collective action. Plaintiffs’ motion for interlocutory review of the de-certification ruling is still pending. The Company intends to defend this action vigorously.
Total Asset Recovery Services, LLC. v. MetLife, Inc., et al. (Supreme Court of the State of New York, County of New York, filed December 27, 2017)
Total Asset Recovery Services (the “Relator”) brought an action under the qui tam provision of the New York False Claims Act (the “Act”) on behalf of itself and the State of New York. The Relator originally filed this action under seal in 2010, and the complaint was unsealed on December 19, 2017. The Relator alleges that MetLife, Inc., Metropolitan Life Insurance Company, and several other insurance companies violated the Act by filing false unclaimed property reports with the State of New York from 1986 to 2017, to avoid having to escheat the proceeds of more than 25,000 life insurance policies, including policies for which the defendants escheated funds as part of their demutualizations in the late 1990s. The Relator seeks treble damages and other relief. The Appellate Division of the New York State Supreme Court, First Department, reversed the court’s order granting MetLife, Inc. and Metropolitan Life Insurance Company’s motion to dismiss and remanded the case to the trial court where the Relator has filed an amended complaint. The Company intends to defend the action vigorously.
Matters Related to Group Annuity Benefits
In 2018, the Company announced that it identified a material weakness in its internal control over financial reporting related to the practices and procedures for estimating reserves for certain group annuity benefits. Several regulators have made inquiries into this issue and it is possible that other jurisdictions may pursue similar investigations or inquiries. The Company is also exposed to lawsuits and could be exposed to additional legal actions relating to this issue. These may result in payments, including damages, fines, penalties, interest and other amounts assessed or awarded by courts or regulatory authorities under applicable escheat, tax, securities, Employee Retirement Income Security Act of 1974, or other laws or regulations. The Company could incur significant costs in connection with these actions.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Notes to the Consolidated Financial Statements - (continued)
16. Contingencies, Commitments and Guarantees (continued)
Commitments
Mortgage Loan Commitments
The Company commits to lend funds under mortgage loan commitments. The amounts of these mortgage loan commitments were $3.1 billion and $2.4 billion at December 31, 2021 and 2020, respectively.
Commitments to Fund Partnership Investments, Bank Credit Facilities, Bridge Loans and Private Corporate Bond Investments
The Company commits to fund partnership investments and to lend funds under bank credit facilities, bridge loans and private corporate bond investments. The amounts of these unfunded commitments were $4.5 billion and $4.3 billion at December 31, 2021 and 2020, respectively.
Guarantees
In the normal course of its business, the Company has provided certain indemnities, guarantees and commitments to third parties such that it may be required to make payments now or in the future. In the context of acquisition, disposition, investment and other transactions, the Company has provided indemnities and guarantees, including those related to tax, environmental and other specific liabilities and other indemnities and guarantees that are triggered by, among other things, breaches of representations, warranties or covenants provided by the Company. In addition, in the normal course of business, the Company provides indemnifications to counterparties in contracts with triggers similar to the foregoing, as well as for certain other liabilities, such as third-party lawsuits. These obligations are often subject to time limitations that vary in duration, including contractual limitations and those that arise by operation of law, such as applicable statutes of limitation. In some cases, the maximum potential obligation under the indemnities and guarantees is subject to a contractual limitation ranging from less than $1 million to $289 million, with a cumulative maximum of $405 million, while in other cases such limitations are not specified or applicable. Since certain of these obligations are not subject to limitations, the Company does not believe that it is possible to determine the maximum potential amount that could become due under these guarantees in the future. Management believes that it is unlikely the Company will have to make any material payments under these indemnities, guarantees, or commitments.
In addition, the Company indemnifies its directors and officers as provided in its charters and by-laws. Also, the Company indemnifies its agents for liabilities incurred as a result of their representation of the Company’s interests. Since these indemnities are generally not subject to limitation with respect to duration or amount, the Company does not believe that it is possible to determine the maximum potential amount that could become due under these indemnities in the future.
The Company’s recorded liabilities were $2 million and $3 million at December 31, 2021 and 2020, respectively, for indemnities, guarantees and commitments.
17. Related Party Transactions
Service Agreements
The Company has entered into various agreements with affiliates for services necessary to conduct its activities. Typical services provided under these agreements include personnel, policy administrative functions and distribution services. The bases for such charges are modified and adjusted by management when necessary or appropriate to reflect fairly and equitably the actual cost incurred by the Company and/or its affiliates. Expenses and fees incurred with affiliates related to these agreements, recorded in other expenses, were $2.5 billion, $2.4 billion and $2.9 billion for the years ended December 31, 2021, 2020 and 2019, respectively. Total revenues received from affiliates related to these agreements were $40 million, $40 million and $29 million for the years ended December 31, 2021, 2020 and 2019, respectively.
The Company had net payables to affiliates, related to the items discussed above, of $143 million and $198 million at December 31, 2021 and 2020, respectively.
See Notes 1, 5, 7, 11 and 12 for additional information on related party transactions.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Schedule I
Consolidated Summary of Investments -
Other Than Investments in Related Parties
December 31, 2021
(In millions)
Types of Investments Cost or
Amortized Cost (1)
Estimated
Fair
Value
Amount at
Which Shown on
Balance Sheet
Fixed maturity securities AFS:
Bonds:
U.S. government and agency
$ 26,782 $ 31,222 $ 31,222
Public utilities
6,104 7,279 7,279
Municipals
6,884 8,728 8,728
Foreign government
4,330 4,946 4,946
All other corporate bonds
72,005 80,002 80,002
Total bonds
116,105 132,177 132,177
Mortgage-backed and asset-backed securities
41,555 42,902 42,902
Redeemable preferred stock
694 806 806
Total fixed maturity securities AFS
158,354 175,885 175,885
Mortgage loans
60,755 60,219
Policy loans
5,816 5,816
Real estate and real estate joint ventures
7,692 7,692
Real estate acquired in satisfaction of debt
181 181
Other limited partnership interests
8,754 8,754
Short-term investments
4,889 4,866
Other invested assets
19,860 19,860
Total investments
$ 266,301 $ 283,273
______________
(1)Amortized cost for fixed maturity securities AFS, mortgage loans, policy loans and short-term investments represents original cost reduced by repayments and adjusted for amortization of premium or accretion of discount; for real estate, cost represents original cost reduced by impairments and depreciation; for real estate joint ventures and other limited partnership interests, cost represents original cost reduced for impairments or original cost adjusted for equity in earnings and distributions.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Schedule III
Consolidated Supplementary Insurance Information
December 31, 2021 and 2020
(In millions)
Segment DAC
and
VOBA Future Policy Benefits,
Other Policy-Related
Balances and
Policyholder Dividend
Obligation
Policyholder
Account
Balances Policyholder
Dividends
Payable Unearned
Premiums (1), (2) Unearned
Revenue (1)
U.S.
$ 401 $ 72,530 $ 72,933 $ - $ 304 $ 21
MetLife Holdings
2,191 69,367 21,306 312 154 158
Corporate & Other
6 153 220 - - -
Total
$ 2,598 $ 142,050 $ 94,459 $ 312 $ 458 $ 179
U.S.
$ 398 $ 73,274 $ 74,283 $ - $ 171 $ 23
MetLife Holdings
2,251 70,845 22,383 397 150 157
Corporate & Other
- 201 (31) - - -
Total
$ 2,649 $ 144,320 $ 96,635 $ 397 $ 321 $ 180
_____________
(1)Amounts are included within the future policy benefits, other policy-related balances and policyholder dividend obligation column.
(2)Includes premiums received in advance.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Schedule III
Consolidated Supplementary Insurance Information - (continued)
For the Years Ended December 31, 2021, 2020 and 2019
(In millions)
Segment Premiums and Universal Life
and Investment-Type
Product Policy Fees
Net
Investment
Income Policyholder
Benefits and
Claims and
Interest Credited
to Policyholder
Account Balances Amortization of
DAC and
VOBA
Charged to
Other
Expenses Other
Expenses (1)
U.S.
$ 24,566 $ 6,960 $ 25,893 $ 56 $ 3,212
MetLife Holdings
3,687 5,561 5,557 203 1,574
Corporate & Other
- (35) - - 1,300
Total
$ 28,253 $ 12,486 $ 31,450 $ 259 $ 6,086
U.S.
$ 18,822 $ 6,053 $ 19,424 $ 56 $ 3,042
MetLife Holdings
3,914 4,355 5,897 350 1,707
Corporate & Other
1 (158) - - 759
Total
$ 22,737 $ 10,250 $ 25,321 $ 406 $ 5,508
U.S.
$ 19,547 $ 6,481 $ 20,906 $ 55 $ 2,904
MetLife Holdings
4,097 4,579 5,769 184 1,900
Corporate & Other
1 (87) - - 971
Total
$ 23,645 $ 10,973 $ 26,675 $ 239 $ 5,775
_____________
(1)Includes other expenses and policyholder dividends, excluding amortization of DAC and VOBA charged to other expenses.
Metropolitan Life Insurance Company
(A Wholly-Owned Subsidiary of MetLife, Inc.)
Schedule IV
Consolidated Reinsurance
December 31, 2021, 2020 and 2019
(Dollars in millions)
Gross Amount
Ceded
Assumed
Net Amount
% Amount
Assumed
to Net
Life insurance in-force
$ 3,991,763 $ 164,834 $ 546,176 $ 4,373,105 12.5 %
Insurance premium
Life insurance (1)
$ 13,631 $ 792 $ 4,080 $ 16,919 24.1 %
Accident & health insurance
9,377 146 41 9,272 0.4 %
Total insurance premium
$ 23,008 $ 938 $ 4,121 $ 26,191 15.7 %
Life insurance in-force
$ 3,793,310 $ 178,420 $ 507,488 $ 4,122,378 12.3 %
Insurance premium
Life insurance (1)
$ 12,304 $ 862 $ 870 $ 12,312 7.1 %
Accident & health insurance
8,517 127 39 8,429 0.5 %
Total insurance premium
$ 20,821 $ 989 $ 909 $ 20,741 4.4 %
Life insurance in-force
$ 3,810,612 $ 257,882 $ 525,190 $ 4,077,920 12.9 %
Insurance premium
Life insurance (1)
$ 14,114 $ 879 $ 785 $ 14,020 5.6 %
Accident & health insurance
7,690 128 26 7,588 0.3 %
Total insurance premium
$ 21,804 $ 1,007 $ 811 $ 21,608 3.8 %
______________
(1) Includes annuities with life contingencies.
For the year ended December 31, 2021, reinsurance ceded and assumed included affiliated transactions for life insurance in-force of $13.7 billion and $1.9 billion, respectively, and life insurance premiums of $114 million and $3.2 billion, respectively. For the year ended December 31, 2020, reinsurance ceded and assumed included affiliated transactions for life insurance in-force of $14.0 billion and $1.1 billion, respectively, and life insurance premiums of $113 million and $8 million, respectively. For the year ended December 31, 2019, reinsurance ceded and assumed included affiliated transactions for life insurance in-force of $14.2 billion and $1.3 billion, respectively, and life insurance premiums of $115 million and $9 million, respectively.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. The Company has designed these controls and procedures to ensure that information the Company is required to disclose in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to Company management, including the CEO and Chief Financial Officer (“CFO”) as appropriate, to allow timely decisions regarding required disclosure.
Management, including the CEO and CFO, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, the CEO and CFO concluded that the disclosure controls and procedures were effective as of December 31, 2021.
There were no changes to the Company’s internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. In fulfilling this responsibility, management’s estimates and judgments must assess the expected benefits and related costs of control procedures. The Company’s internal control objectives include providing management with reasonable, but not absolute, assurance that the Company has safeguarded assets against loss from unauthorized use or disposition, and that the Company has executed transactions in accordance with management’s authorization and recorded them properly to permit the preparation of consolidated financial statements in conformity with GAAP.
Management evaluated the design and operating effectiveness of the Company’s internal control over financial reporting based on the criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In the opinion of management, Metropolitan Life Insurance Company maintained effective internal control over financial reporting as of December 31, 2021.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
Deloitte & Touche LLP (“Deloitte”), the independent auditor of MetLife, Inc., has served as the independent auditor of the Company since at least 1968. Its long-term knowledge of the MetLife group of companies, its independence, combined with its insurance industry expertise and global presence, has enabled it to carry out its audits of the Company’s financial statements with effectiveness and efficiency. Deloitte is a registered public accounting firm with the Public Company Accounting Oversight Board (United States) (“PCAOB”) as required by the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the Rules of the PCAOB.
Under current legal requirements, the lead or concurring audit partner for MetLife may not serve in that role for more than five consecutive fiscal years, and the Audit Committee ensures the regular rotation of the audit engagement team partners as required by law. The Audit Committee, along with management and the Chair of the Audit Committee, is actively involved in the selection process for the lead and concurring partners.
Independent Auditor’s Fees for 2021 and 2020
The table below presents fees for professional services rendered by Deloitte for the audit of the Company’s annual financial statements, audit-related services, tax services and all other services for the years ended December 31, 2021 and 2020. All fees shown in the table were related to services that were approved by the Audit Committee.
2021 2020
(In millions)
Audit fees (1) $ 40.3 $ 44.3
Audit-related fees (2) $ 3.9 $ 4.2
Tax fees (3) $ - $ -
All other fees (4) $ 0.7 $ 4.1
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(1)Fees for services to perform an audit or review in accordance with auditing standards of the PCAOB and services that generally only the Company’s independent auditor can reasonably provide, such as comfort letters, statutory audits, attest services, consents, and assistance with and review of documents filed with the SEC.
(2)Fees for assurance and related services, including System and Organization Control (SOC) audit reports, as mandated by Statement on Standards for Attestation Engagements No. 18 (SSAE 18), control reviews, attest services not required by statute or regulation, and consultation concerning financial accounting and reporting standards.
(3)Fees for tax compliance, consultation, and planning services.
(4)Fees for other types of permitted services, including consulting, financial advisory services, and actuarial services.
Approval of Fees
The Audit Committee approves Deloitte’s audit and non-audit services in advance as required under Sarbanes-Oxley and SEC rules. Before the commencement of each fiscal year, the Audit Committee appoints the independent auditor to perform pre-approved audit services and pre-approved audit-related tax and other permitted non-audit services that MetLife expects to be performed for the fiscal year. The Audit Committee or a designated member of the Audit Committee to whom authority has been delegated may, from time to time, pre-approve additional audit and non-audit services to be performed by MetLife’s independent auditor. Any pre-approval of services between Audit Committee meetings must be reported to the full Audit Committee at its next scheduled meeting.
The Audit Committee is responsible for approving fees for the audit and for any audit-related, tax or other permitted non-audit services. If the audit, audit-related, tax and other permitted non-audit fees for a particular period or service exceed the amounts previously approved, the Audit Committee determines whether or not to approve the additional fees.
Part IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this report:
1. Financial Statements
The financial statements are listed in the Index to Consolidated Financial Statements, Notes and Schedules on page 78.
2. Financial Statement Schedules
The financial statement schedules are listed in the Index to Consolidated Financial Statements, Notes and Schedules on page 78.
3. Exhibits
The exhibits are listed in the Exhibit Index which begins on page 213.