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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO __________________
COMMISSION FILE NUMBER: 001-15787
METLIFE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 13-4075851
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE MADISON AVENUE
NEW YORK, NEW YORK 10010-3690
(212) 578-2211
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE, AND REGISTRANT'S
TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
At August 7, 2002, 701,878,412 shares of the Registrant's Common Stock, $.01 par
value per share, were outstanding.
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Interim Condensed Consolidated Balance Sheets at June 30, 2002
(Unaudited) and December 31, 2001................................... 4
Unaudited Interim Condensed Consolidated Statements of Income for the
three months and six months ended June 30, 2002 and 2001............ 5
Unaudited Interim Condensed Consolidated Statement of Stockholders'
Equity for the six months ended June 30, 2002....................... 6
Unaudited Interim Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 2002 and 2001......................... 7
Notes to Unaudited Interim Condensed Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................. 22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...... 63
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................... 64
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 66
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 67
2
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the Management's Discussion
and Analysis of Financial Condition and Results of Operations, contains
statements which constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including statements relating
to trends in the operations and financial results and the business and the
products of the Registrant and its subsidiaries, as well as other statements
including words such as "anticipate," "believe," "plan," "estimate," "expect,"
"intend" and other similar expressions. "MetLife" or the "Company" refers to
MetLife, Inc., a Delaware corporation (the "Holding Company"), and its
subsidiaries, including Metropolitan Life Insurance Company ("Metropolitan
Life"). Forward-looking statements are made based upon management's current
expectations and beliefs concerning future developments and their potential
effects on the Company. Such forward-looking statements are not guarantees of
future performance.
Actual results may differ materially from those included in the
forward-looking statements as a result of risks and uncertainties including, but
not limited to the following: (i) changes in general economic conditions,
including the performance of financial markets and interest rates; (ii)
heightened competition, including with respect to pricing, entry of new
competitors and the development of new products by new and existing competitors;
(iii) unanticipated changes in industry trends; (iv) MetLife, Inc.'s primary
reliance, as a holding company, on dividends from its subsidiaries to meet debt
payment obligations and the applicable regulatory restrictions on the ability of
the subsidiaries to pay such dividends; (v) deterioration in the experience of
the "closed block" established in connection with the reorganization of
Metropolitan Life; (vi) catastrophe losses; (vii) adverse litigation or
arbitration results; (viii) regulatory, accounting or tax changes that may
affect the cost of, or demand for, the Company's products or services; (ix)
downgrades in the Company's or its affiliates' claims paying ability, financial
strength or debt ratings; (x) changes in rating agency policies or practices;
(xi) discrepancies between actual claims experience and assumptions used in
setting prices for the Company's products and establishing the liabilities for
the Company's obligations for future policy benefits and claims; (xii)
discrepancies between actual experience and assumptions used in establishing
liabilities related to other contingencies or obligations; (xiii) the effects of
business disruption or economic contraction due to terrorism or other
hostilities; and (xiv) other risks and uncertainties described from time to time
in MetLife, Inc.'s filings with the Securities and Exchange Commission,
including its S-1 and S-3 registration statements. The Company specifically
disclaims any obligation to update or revise any forward-looking statement,
whether as a result of new information, future developments or otherwise.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METLIFE, INC.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 (UNAUDITED) AND DECEMBER 31, 2001
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
2002 2001
---------- ------------
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value (amortized cost:
$120,497 and $112,288, respectively) $ 124,067 $ 115,398
Equity securities, at fair value (cost: $1,525 and $2,459, respectively) 1,661 3,063
Mortgage loans on real estate 23,733 23,621
Policy loans 8,316 8,272
Real estate and real estate joint ventures 5,963 5,730
Other limited partnership interests 1,785 1,637
Short-term investments 2,233 1,203
Other invested assets 3,271 3,298
---------- ----------
Total investments 171,029 162,222
Cash and cash equivalents 3,563 7,473
Accrued investment income 2,215 2,062
Premiums and other receivables 8,170 6,437
Deferred policy acquisition costs 11,774 11,167
Other assets 5,197 4,823
Separate account assets 59,283 62,714
---------- ----------
Total assets $ 261,231 $ 256,898
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 87,268 $ 84,924
Policyholder account balances 63,005 58,923
Other policyholder funds 5,692 5,332
Policyholder dividends payable 1,104 1,046
Policyholder dividend obligation 932 708
Short-term debt 52 355
Long-term debt 3,436 3,628
Current income taxes payable 300 306
Deferred income taxes payable 1,385 1,526
Payables under securities loaned transactions 13,486 12,661
Other liabilities 7,884 7,457
Separate account liabilities 59,283 62,714
---------- ----------
Total liabilities 243,827 239,580
---------- ----------
Commitments and contingencies (Note 8)
Company-obligated mandatorily redeemable securities of subsidiary trusts 1,260 1,256
---------- ----------
Stockholders' Equity:
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized;
none issued -- --
Series A junior participating preferred stock -- --
Common stock, par value $0.01 per share; 3,000,000,000 shares authorized;
786,766,664 shares issued at June 30, 2002 and December 31, 2001;
701,878,412 shares outstanding at June 30, 2002 and 715,506,525 shares
outstanding at December 31, 2001 8 8
Additional paid-in capital 14,967 14,966
Retained earnings 2,065 1,349
Treasury stock, at cost; 84,888,252 shares at June 30, 2002 and 71,260,139
shares at December 31, 2001 (2,365) (1,934)
Accumulated other comprehensive income 1,469 1,673
---------- ----------
Total stockholders' equity 16,144 16,062
---------- ----------
Total liabilities and stockholders' equity $ 261,231 $ 256,898
========== ==========
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
4
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
REVENUES
Premiums $ 4,701 $ 4,118 $ 9,182 $ 8,352
Universal life and investment-type product policy fees 514 473 971 947
Net investment income 2,861 2,834 5,650 5,650
Other revenues 389 373 756 784
Net investment losses (net of amounts allocable to other
accounts of $(73), $(49), $(86) and $(79), respectively) (193) (136) (285) (281)
-------- -------- -------- --------
Total revenues 8,272 7,662 16,274 15,452
-------- -------- -------- --------
EXPENSES
Policyholder benefits and claims (excludes amounts directly
related to net investment losses of $(64), $(27), $(71)
and $(63), respectively) 4,882 4,289 9,500 8,724
Interest credited to policyholder account balances 727 723 1,441 1,483
Policyholder dividends 488 505 985 1,020
Other expenses (excludes amounts directly related to net
investment losses of $(9), $(22), $(15) and $(16), respectively) 1,618 1,652 3,271 3,305
-------- -------- -------- --------
Total expenses 7,715 7,169 15,197 14,532
-------- -------- -------- --------
Income before provision for income taxes and cumulative effect of
change in accounting 557 493 1,077 920
Provision for income taxes 170 173 366 313
-------- -------- -------- --------
Income before cumulative effect of change in accounting 387 320 711 607
Cumulative effect of change in accounting -- -- 5 --
-------- -------- -------- --------
Net income $ 387 $ 320 $ 716 $ 607
======== ======== ======== ========
Income before cumulative effect of change in accounting per share
Basic $ 0.55 $ 0.43 $ 1.00 $ 0.81
======== ======== ======== ========
Diluted $ 0.53 $ 0.41 $ 0.97 $ 0.78
======== ======== ======== ========
Net income per share
Basic $ 0.55 $ 0.43 $ 1.01 $ 0.81
======== ======== ======== ========
Diluted $ 0.53 $ 0.41 $ 0.97 $ 0.78
======== ======== ======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
5
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(DOLLARS IN MILLIONS)
ACCUMULATED OTHER
COMPREHENSIVE INCOME
---------------------------------------
NET
UNREALIZED FOREIGN MINIMUM
ADDITIONAL TREASURY INVESTMENT CURRENCY PENSION
COMMON PAID-IN RETAINED STOCK AND DERIVATIVE TRANSLATION LIABILITY
STOCK CAPITAL EARNINGS AT COST GAINS ADJUSTMENT ADJUSTMENT TOTAL
------ ------- -------- ------- -------------- ---------- ---------- -------
Balance at January 1, 2002 $ 8 $14,966 $ 1,349 $(1,934) $ 1,879 $ (160) $ (46) $16,062
Treasury stock transactions and
exercises of stock options, net 1 (431) (430)
Comprehensive income:
Net income 716 716
Other comprehensive loss:
Unrealized losses on derivative
instruments, net of income
taxes (37) (37)
Unrealized investment losses,
net of related offsets,
reclassification adjustments
and income taxes (191) (191)
Foreign currency translation
adjustments 24 24
-------
Other comprehensive loss (204)
-------
Comprehensive income 512
------ ------- -------- ------- -------- -------- -------- -------
Balance at June 30, 2002 $ 8 $14,967 $ 2,065 $(2,365) $ 1,651 $ (136) $ (46) $16,144
====== ======= ======== ======= ======== ======== ======== =======
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
6
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(DOLLARS IN MILLIONS)
SIX MONTHS ENDED
JUNE 30,
----------------------
2002 2001
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,595 $ 2,075
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Sales, maturities and repayments of:
Fixed maturities 29,242 24,582
Equity securities 1,283 461
Mortgage loans on real estate 1,117 999
Real estate and real estate joint ventures 122 164
Other limited partnership interests 248 165
Purchases of:
Fixed maturities (36,398) (26,353)
Equity securities (99) (505)
Mortgage loans on real estate (1,276) (1,582)
Real estate and real estate joint ventures (257) (189)
Other limited partnership interests (121) (147)
Net change in short-term investments (788) 436
Purchase of businesses, net of cash received (879) (16)
Net change in payables under securities loaned transactions 825 408
Other, net (326) (541)
-------- --------
Net cash used in investing activities (7,307) (2,118)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits 12,625 14,215
Withdrawals (9,897) (13,264)
Net change in short-term debt (303) 1,032
Long-term debt issued 3 51
Long-term debt repaid (195) (166)
Treasury stock acquired (431) (511)
-------- --------
Net cash provided by financing activities 1,802 1,357
-------- --------
Change in cash and cash equivalents (3,910) 1,314
Cash and cash equivalents, beginning of period 7,473 3,434
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,563 $ 4,748
======== ========
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the period for:
Interest $ 231 $ 192
======== ========
Income taxes $ (20) $ (210)
======== ========
Non-cash transactions during the period:
Business acquisitions - assets $ 2,107 $ 90
======== ========
Business acquisitions - liabilities $ 1,751 $ 76
======== ========
Real estate acquired in satisfaction of debt $ 20 $ 8
======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
7
METLIFE, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
MetLife, Inc. (the "Holding Company") and its subsidiaries (together with
the Holding Company, "MetLife" or the "Company") is a leading provider of
insurance and financial services to a broad section of individual and
institutional customers. The Company offers life insurance, annuities and mutual
funds to individuals and group insurance, reinsurance, as well as retirement and
savings products and services to corporations and other institutions.
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 in the unaudited interim condensed consolidated
financial statements. The most significant estimates include those used in
determining investment impairments, the fair value of derivatives, deferred
policy acquisition costs, the liability for future policyholder benefits,
accounting for reinsurance transactions and the liability for litigation
matters. Actual results could differ from those estimates.
The accompanying unaudited interim condensed consolidated financial
statements include the accounts of the Holding Company and its subsidiaries,
partnerships and joint ventures in which the Company has a majority voting
interest. 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.
Intercompany accounts and transactions have been eliminated.
The Company uses the equity method to account for its investments in real
estate joint ventures and other limited partnership interests in which it does
not have a controlling interest, but has more than a minimal interest.
Minority interest related to consolidated entities included in other
liabilities is $443 million and $442 million at June 30, 2002 and December 31,
2001, respectively.
Certain amounts in the prior years' unaudited interim condensed
consolidated financial statements have been reclassified to conform with the
2002 presentation.
The accompanying unaudited interim condensed consolidated financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the consolidated financial position of
the Company, its consolidated results of operations and its consolidated cash
flows. Interim results are not necessarily indicative of full year performance.
These unaudited interim condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements of the Company
for the year ended December 31, 2001 included in MetLife, Inc.'s 2001 Annual
Report on Form 10-K filed with the Securities and Exchange Commission (the
"SEC").
FEDERAL INCOME TAXES
Federal income taxes for interim periods have been computed using an
estimated annual effective tax rate. This rate is revised, if necessary, at the
end of each successive interim period to reflect the current estimate of the
annual effective tax rate.
APPLICATION OF ACCOUNTING PRONOUNCEMENTS
Effective April 1, 2001, the Company adopted certain additional accounting
and reporting requirements of Statement of Financial Accounting Standards
("SFAS") No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities-a replacement for Financial Accounting Standards
Board ("FASB") Statement No. 125, relating to the derecognition of transferred
assets and extinguished liabilities and the reporting of servicing assets and
liabilities. The adoption of these requirements did not have a material impact
on the Company's unaudited interim condensed consolidated financial statements.
8
Effective April 1, 2001, the Company adopted Emerging Issues Task Force
("EITF") 99-20, Recognition of Interest Income and Impairment on Certain
Investments ("EITF 99-20"). This pronouncement requires investors in certain
asset-backed securities to record changes in their estimated yield on a
prospective basis and to apply specific evaluation methods to these securities
for an other-than-temporary decline in value. The adoption of EITF 99-20 did not
have a material impact on the Company's unaudited interim condensed consolidated
financial statements.
In June 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS
141"), and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS
141, which was generally effective July 1, 2001, requires the purchase method of
accounting for all business combinations and separate recognition of intangible
assets apart from goodwill if such intangible assets meet certain criteria. In
accordance with SFAS 141, the elimination of $5 million of negative goodwill was
reported in income in the first quarter of 2002 as a cumulative effect of a
change in accounting. SFAS 142, effective for fiscal years beginning after
December 15, 2001, eliminates the systematic amortization and establishes
criteria for measuring the impairment of goodwill and certain other intangible
assets by reporting unit. The Company did not amortize goodwill during 2002,
whereas for the three months and six months ended June 30, 2001, the Company
recorded amortization of goodwill of $12 million and $24 million, respectively.
The Company is in the process of developing an estimate of the impact of the
adoption of SFAS 142 on its unaudited interim condensed consolidated financial
statements. As a result of completing the first step of the goodwill impairment
test, which is used to identify potential impairment by comparing the fair value
of the reporting unit with its carrying amount, the Company estimates there will
be no significant impairments of goodwill as of January 1, 2002. The amount of
goodwill impairment, if any, will be determined no later then December 31, 2002.
There was no significant impairment of intangible assets or reclassifications
between goodwill and other intangible assets at January 1, 2002.
In July 2001, the SEC released Staff Accounting Bulletin ("SAB") No. 102,
Selected Loan Loss Allowance and Documentation Issues ("SAB 102"). SAB 102
summarizes certain of the SEC's views on the development, documentation and
application of a systematic methodology for determining allowances for loan and
lease losses. The application of SAB 102 by the Company did not have a material
impact on the Company's unaudited interim condensed consolidated financial
statements.
Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 provides
a single model for accounting for long-lived assets to be disposed of by
superceding SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of ("SFAS 121"), and the accounting and
reporting provisions of Accounting Principles Board ("APB") Opinion No. 30,
Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions ("APB 30"). Under SFAS 144, discontinued operations are
measured at the lower of carrying value or fair value less costs to sell, rather
than on a net realizable value basis. Future operating losses relating to
discontinued operations also are no longer recognized before they occur. SFAS
144 (i) broadens the definition of a discontinued operation to include a
component of an entity (rather than a segment of a business); (ii) requires
long-lived assets to be disposed of other than by sale to be considered held and
used until disposed; and (iii) retains the basic provisions of (a) APB 30
regarding the presentation of discontinued operations in the statements of
income, (b) SFAS 121 relating to recognition and measurement of impaired
long-lived assets (other than goodwill), and (c) SFAS 121 relating to the
measurement of long-lived assets classified as held for sale. The adoption of
SFAS 144 by the Company did not have a material impact on the Company's
unaudited interim condensed consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS 146"), which must be adopted for exit
and disposal activities initiated after December 31, 2002. SFAS 146 will require
that a liability for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value only when the liability is
incurred rather than at the date of an entity's commitment to an exit plan as
required by EITF 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring) ("EITF 94-3"). As discussed in Note 7, in the fourth quarter
of 2001, the Company recorded a charge of $330 million, net of taxes of $169
million, associated with business realignment initiatives using the EITF 94-3
accounting guidance.
In the first quarter of 2003, the Company will adopt the fair value-based
employee stock-based compensation expense recognition provisions of SFAS No.
123, Accounting for Stock-Based Compensation ("SFAS 123"), prospectively. The
Company currently applies the intrinsic value-based expense provisions set forth
in APB Opinion No. 25, Accounting for Stock Issued to Employees, ("APB 25").
SFAS 123 states that the adoption of the fair value-based method is a change to
a preferable method of accounting. Management believes the use of the fair
value-based method to record employee stock-based compensation expense is
consistent with the Company's accounting for all other forms of compensation.
The adoption of the fair value-based method in 2002 would have decreased net
income for the full year by an estimated $16 million to $19 million, net of
income taxes of $9 million to $11 million, respectively. This estimate is based
on assumptions as of June 30, 2002.
9
2. SEPTEMBER 11, 2001 TRAGEDIES
On September 11, 2001 a terrorist attack occurred in New York, Washington
D.C. and Pennsylvania (collectively, the "tragedies") triggering a significant
loss of life and property which had an adverse impact on certain of the
Company's businesses. The Company has direct exposures to this event with claims
arising from its Individual, Institutional, Reinsurance and Auto & Home
insurance coverages, although it believes the majority of such claims have been
reported or otherwise analyzed by the Company.
The Company's estimate of the total insurance losses related to the
tragedies was $208 million, net of income tax of $117 million as of December 31,
2001. This estimate is subject to revision in subsequent periods as claims are
received from insureds and claims to reinsurers are identified and processed.
Any revision to the estimate of gross losses and reinsurance recoveries in
subsequent periods will affect net income in such periods. Reinsurance
recoveries are dependent on the continued creditworthiness of the reinsurers,
which may be adversely affected by their other reinsured losses in connection
with the tragedies. As of June 30, 2002, the Company's liability, for future
claims, associated with the tragedies was $103 million.
The long-term effects of the tragedies on the Company's businesses cannot be
assessed at this time. The tragedies have had significant adverse effects on the
general economic, market and political conditions, increasing many of the
Company's business risks. In particular, the declines in share prices
experienced after the reopening of the United States equity markets following
the tragedies have contributed, and may continue to contribute, to a decline in
separate account assets, which in turn could have an adverse effect on fees
earned in the Company's businesses. In addition, the Institutional segment has
received and expects to continue to receive disability claims from individuals
suffering from mental and nervous disorders resulting from the tragedies. This
may lead to a revision in the Company's estimated insurance losses related to
the tragedies. The majority of the Company's disability policies include a
provision that such claims be submitted within two years of the traumatic event.
The Company's general account investment portfolios include investments,
primarily comprised of fixed income securities, in industries that were affected
by the tragedies, including airline, insurance, other travel and lodging and
insurance. Exposures to these industries also exist through mortgage loans and
investments in real estate. The market value of the Company's investment
portfolio exposed to industries affected by the tragedies was approximately $3
billion at June 30, 2002.
3. EARNINGS PER SHARE
The following presents a reconciliation of the weighted average shares used
in calculating basic earnings per share to those used in calculating diluted
earnings per share:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Weighted average common stock outstanding for basic earnings per share 704,674,529 748,313,490 708,349,444 752,915,188
Incremental shares from assumed:
Conversion of forward purchase contracts 28,269,468 26,487,683 27,681,257 27,100,561
Exercise of stock options 991,773 102,305 642,948 151,650
------------ ------------ ------------ ------------
Weighted average common stock outstanding for diluted earnings per share 733,935,770 774,903,478 736,673,649 780,167,399
============ ============ ============ ============
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING $ -- N/A $ 5 N/A
============ ============
Basic earnings per share $ -- N/A $ 0.01 N/A
============ ============
Diluted earnings per share $ -- N/A $ 0.01 N/A
============ ============
NET INCOME $ 387 $ 320 $ 716 $ 607
============ ============ ============ ============
Basic earnings per share $ 0.55 $ 0.43 $ 1.01 $ 0.81
============ ============ ============ ============
Diluted earnings per share $ 0.53 $ 0.41 $ 0.97 $ 0.78
============ ============ ============ ============
On February 19, 2002, the Holding Company's Board of Directors authorized a
$1 billion common stock repurchase program. This program began after the
completion of the March 28, 2001 and June 27, 2000 repurchase programs, each of
which authorized the repurchase of $1 billion of common stock. Under these
authorizations, the Holding Company may purchase common stock from the MetLife
Policyholder Trust, in the open market and in privately negotiated transactions.
For the six months ended June 30, 2002 and 2001, 13,644,492 and 16,907,844
shares of common stock, respectively, were acquired for $431 million and $513
million,
10
respectively. During the six months ended June 30, 2002 and 2001, 16,379 and
62,552 of these shares were reissued for less than $1 million and $2 million,
respectively.
4. NET INVESTMENT LOSSES
Net investment losses, including changes in valuation allowances, are as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
Fixed maturities $ (210) $ (189) $ (375) $ (340)
Equity securities 68 24 260 25
Mortgage loans on real estate (3) (7) (22) (5)
Real estate and real estate joint ventures (14) 19 (16) 24
Other limited partnership interests 13 2 (18) (98)
Other (120) (34) (200) 34
-------- -------- -------- --------
(266) (185) (371) (360)
Amounts allocable to:
Deferred policy acquisition costs 9 22 15 16
Policyholder dividend obligation 64 27 71 63
-------- -------- -------- --------
Total investment losses $ (193) $ (136) $ (285) $ (281)
======== ======== ======== ========
Investment gains and losses have been reduced by (i) deferred policy
acquisition cost amortization to the extent that such amortization results from
investment gains and losses, and (ii) adjustments to the policyholder dividend
obligation resulting from investment gains and losses. This presentation may not
be comparable to presentations made by other insurers.
5. DERIVATIVE INSTRUMENTS
The Company uses derivative instruments to manage risk through one of four
principal risk management strategies: the hedging of liabilities, invested
assets, portfolios of assets or liabilities and anticipated transactions.
Additionally, Metropolitan Life Insurance Company ("Metropolitan Life") enters
into income generation and replication derivative transactions as permitted by
its derivative use plan that was approved by the New York State Insurance
Department ("Department"). The Company's derivative hedging strategy employs a
variety of instruments, including financial futures, financial forwards,
interest rate, credit and foreign currency swaps, foreign exchange contracts,
and options, including caps and floors.
On the date the Company enters into a derivative contract, management
determines the purpose of the derivative and designates the derivative as a
hedge, if appropriate, of the identified exposure (fair value, cash flow or
foreign currency). If a derivative does not qualify for hedge accounting,
according to SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, the derivative is recorded at fair value and changes in
its fair value are reported in net investment gains or losses.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objective and
strategy for undertaking various hedge transactions. In this documentation, the
Company specifically identifies the asset, liability, firm commitment or
forecasted transaction that has been designated as a hedged item and states how
the hedging instrument is expected to hedge the risks related to the hedged
item. The Company formally measures effectiveness of its hedging relationships
both at the hedge inception and on an ongoing basis in accordance with its risk
management policy. The Company generally determines hedge effectiveness based on
total changes in fair value of a derivative instrument. The Company discontinues
hedge accounting prospectively when: (i) it is determined that the derivative is
no longer effective in offsetting changes in the fair value or cash flows of a
hedged item, (ii) the derivative expires or is sold, terminated, or exercised,
(iii) the derivative is de-designated as a hedge instrument, (iv) it is probable
that the forecasted transaction will not occur, (v) a hedged firm commitment no
longer meets the definition of a firm commitment or (vi) management determines
that designation of the derivative as a hedge instrument is no longer
appropriate.
11
The table below provides a summary of the carrying value, notional amount
and fair value of derivatives by hedge accounting classification at:
JUNE 30, 2002 DECEMBER 31, 2001
---------------------------------------------- ----------------------------------------------
FAIR VALUE FAIR VALUE
CARRYING NOTIONAL ----------------------- CARRYING NOTIONAL -----------------------
VALUE AMOUNT ASSETS LIABILITIES VALUE AMOUNT ASSETS LIABILITIES
-------- -------- -------- ----------- -------- -------- -------- -----------
(DOLLARS IN MILLIONS)
BY TYPE OF HEDGE
Fair value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Cash flow 22 1,484 37 15 60 607 61 1
Non qualifying 20 12,556 148 128 180 13,616 226 46
-------- -------- -------- --------- -------- -------- -------- ---------
Total $ 42 $ 14,040 $ 185 $ 143 $ 240 $ 14,223 $ 287 $ 47
======== ======== ======== ========= ======== ======== ======== =========
For the three months and six months ended June 30, 2002 and 2001, the
amount related to hedge ineffectiveness was insignificant and there were no
discontinued hedges.
At June 30, 2002 and December 31, 2001, the accumulated gain in other
comprehensive income relating to cash flow hedges was $14 million and $71
million, respectively. For the three months ended June 30, 2002 and 2001, the
Company recognized other comprehensive losses relating to the effective portion
of cash flow hedges of $39 million and $7 million, respectively. For the six
months ended June 30, 2002 and 2001, the Company recognized other comprehensive
losses of $51 million and other comprehensive income of $38 million,
respectively. During the three months and six months ended June 30, 2002, $3
million and $6 million of other comprehensive income was reclassified into net
investment income. There was no other comprehensive income reclassified into net
investment income for the three months and six months ended June 30, 2001.
Approximately $12 million and $14 million of the pre-tax gain reported in
accumulated other comprehensive income is expected to be reclassified during the
year ending December 31, 2002 into net investment income and net investment
losses, respectively, as the underlying investments mature or expire according
to their original terms. Reclassifications are recognized over the life of the
hedged item.
For the three months ended June 30, 2002 and 2001, the Company recognized
net investment income of $1 million and $3 million, respectively, and net
investment losses of $121 million and $31 million, respectively, from
derivatives not qualifying as accounting hedges. For the six months ended June
30, 2002 and 2001, the Company recognized net investment income of $3 million
and $13 million, respectively, and net investment losses of $150 million and net
investment gains of $39 million, respectively, from derivatives not qualifying
as accounting hedges. The use of these non-speculative derivatives is permitted
by the Department.
6. CLOSED BLOCK
On April 7, 2000, (the "date of demutualization"), Metropolitan Life
converted from a mutual life insurance company to a stock life insurance company
and became a wholly-owned subsidiary of MetLife, Inc. The conversion was
pursuant to an order by the New York Superintendent of Insurance (the
"Superintendent") approving Metropolitan Life's plan of reorganization, as
amended (the "plan"). On the date of demutualization, Metropolitan Life
established a closed block for the benefit of holders of certain individual life
insurance policies of Metropolitan Life.
12
The following table presents closed block liabilities and assets designated to
the closed block at:
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
(DOLLARS IN MILLIONS)
CLOSED BLOCK LIABILITIES
Future policy benefits $ 40,662 $ 40,325
Other policyholder funds 269 321
Policyholder dividends payable 816 757
Policyholder dividend obligation 932 708
Payables under securities loaned transactions 3,782 3,350
Other liabilities 95 90
-------- --------
Total closed block liabilities 46,556 45,551
-------- --------
ASSETS DESIGNATED TO THE CLOSED BLOCK
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost: $26,972 and $25,761, respectively) 27,653 26,331
Equity securities, at fair value (cost: $235 and $240, respectively) 240 282
Mortgage loans on real estate 6,550 6,358
Policy loans 3,916 3,898
Short-term investments 103 170
Other invested assets 65 159
-------- --------
Total investments 38,527 37,198
Cash and cash equivalents 795 1,119
Accrued investment income 569 550
Deferred income taxes 1,070 1,060
Premiums and other receivables 242 244
-------- --------
Total assets designated to the closed block 41,203 40,171
-------- --------
Excess of closed block liabilities over assets designated to
to the closed block 5,353 5,380
-------- --------
Amounts included in accumulated other comprehensive income:
Net unrealized investment gains, net of deferred
income tax of $247 and $219, respectively 434 389
Unrealized derivative gains, net of deferred income
tax of $9 and $9, respectively 12 17
Allocated to policyholder dividend obligation, net of
deferred income tax of $338 and $255, respectively (594) (453)
-------- --------
(148) (47)
-------- --------
Maximum future earnings to be recognized from closed
block assets and liabilities $ 5,205 $ 5,333
======== ========
Information regarding the policyholder dividend obligation is as follows:
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
(DOLLARS IN MILLIONS)
Balance at beginning of period $ 708 $ 385
Impact on income before gains allocable to policyholder
dividend obligation 71 159
Net investment losses (71) (159)
Change in unrealized investment and derivative gains 224 323
------- -----------
Balance at end of period $ 932 $ 708
======= ===========
13
Closed block revenues and expenses are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2002 2001 2002 2001
------- ------- ------- -------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 870 $ 895 $ 1,712 $ 1,775
Net investment income 643 631 1,280 1,245
Net investment gains (losses) (net of amounts allocable
to the policyholder dividend obligation of
$(64), $(27), $(71) and $(63), respectively) 38 (29) 43 (44)
------- ------- ------- -------
Total revenues 1,551 1,497 3,035 2,976
------- ------- ------- -------
EXPENSES
Policyholder benefits and claims 895 934 1,807 1,845
Policyholder dividends 399 393 798 766
Change in policyholder dividend obligation (excludes
amounts directly related to net investment gains (losses) of
$(64), $(27), $(71) and $(63), respectively) 64 27 71 63
Other expenses 78 120 158 208
------- ------- ------- -------
Total expenses 1,436 1,474 2,834 2,882
------- ------- ------- -------
Revenues net of expenses before income taxes 115 23 201 94
Income taxes 42 9 73 35
------- ------- ------- -------
Revenues net of expenses and income taxes $ 73 $ 14 $ 128 $ 59
======= ======= ======= =======
The change in maximum future earnings of the closed block is as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2002 2001 2002 2001
------- ------- ------- -------
(DOLLARS IN MILLIONS)
Beginning of period $ 5,278 $ 5,467 $ 5,333 $ 5,512
End of period 5,205 5,453 5,205 5,453
------- ------- ------- -------
Change during the period $ (73) $ (14) $ (128) $ (59)
======= ======= ======= =======
Metropolitan Life charges the closed block with federal income taxes,
state and local premium taxes, and other additive state or local taxes, as well
as investment management expenses relating to the closed block as provided in
the plan. Metropolitan Life also charges the closed block for maintaining the
policies included in the closed block.
Many of the derivative instrument strategies used by the Company are
also used for the closed block. The table below provides a summary of the
carrying value, notional amount and fair value of derivatives by hedge
accounting classification at:
JUNE 30, 2002 DECEMBER 31, 2001
---------------------------------------------------- ---------------------------------------------------
FAIR VALUE FAIR VALUE
CARRYING NOTIONAL ---------------------- CARRYING NOTIONAL ----------------------
VALUE AMOUNT ASSETS LIABILITIES VALUE AMOUNT ASSETS LIABILITIES
-------- -------- ------ ----------- -------- -------- ------ -----------
(DOLLARS IN MILLIONS)
BY TYPE OF HEDGE
Fair value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Cash flow 17 171 17 -- 22 171 22 --
Non qualifying 8 180 13 5 8 112 13 5
---- ---- ---- ---- ---- ---- ---- ----
Total $ 25 $351 $ 30 $ 5 $ 30 $283 $ 35 $ 5
==== ==== ==== ==== ==== ==== ==== ====
For the three months and six months ended June 30, 2002 and 2001, the
amount related to hedge ineffectiveness was insignificant and there were no
discontinued hedges.
At both June 30, 2002 and December 31, 2001, the accumulated amount in
other comprehensive income relating to cash flow hedges was $21 million. For the
three months ended June 30, 2002 and 2001, the Company recognized other
comprehensive income of $1 million and other comprehensive losses of $5 million,
respectively, relating to the effective portion of cash flow hedges. For the
14
six months ended June 30, 2002 and 2001, the Company recognized other
comprehensive income of $2 million and $5 million, respectively, relating to the
effective portion of cash flow hedges. During the three months and six months
ended June 30, 2002, $1 million and $2 million, respectively, of other
comprehensive income was reclassified into net investment income. There was no
other comprehensive income reclassified into net investment income for the three
months and six months ended June 30, 2001. Approximately $4 million of the
pre-tax gain reported in accumulated other comprehensive income is expected to
be reclassified into net investment income during the year ending December 31,
2002 as the underlying investments mature or expire according to their original
terms. The reclassifications are recognized over the life of the hedged item.
For the three months ended June 30, 2002 and 2001, the Company did not
recognize any net investment income and recognized net investment losses of $9
million and $3 million, respectively, from derivatives not designated as
accounting hedges. For the six months ended June 30, 2002 and 2001, the Company
did not recognize any net investment income, and recognized net investment gains
of $7 million and $9 million, respectively, from derivatives not designated as
accounting hedges. The use of these non-speculative derivatives is permitted by
the Department.
7. BUSINESS REALIGNMENT INITIATIVES
During the fourth quarter of 2001, the Company implemented several
business realignment initiatives, which resulted from a strategic review of
operations and an on-going commitment to reduce expenses. The following table
represents the original expense recorded in the fourth quarter of 2001 and the
remaining liability as of June 30, 2002:
TOTAL 2001 REMAINING LIABILITY
EXPENSE AT JUNE 30, 2002
---------- -------------------
(DOLLARS IN MILLIONS)
EXPENSE TYPE
Severance and severance-related costs $ 44 $ 33
Facilities costs 68 33
Business exit costs 387 92
---- ----
Total $499 $158
==== ====
The severance and severance-related costs recorded in 2001, reflected
1,400 anticipated terminations. As of June 30, 2002, approximately 700 of the
anticipated terminations had been completed.
8. COMMITMENTS AND CONTINGENCIES
SALES PRACTICES CLAIMS
Over the past several years, Metropolitan Life, New England Mutual Life
Insurance Company ("New England Mutual") and General American Life Insurance
Company ("General American") have faced numerous claims, including class action
lawsuits, alleging improper marketing and sales of individual life insurance
policies or annuities. These lawsuits are generally referred to as "sales
practices claims."
In December 1999, a federal court approved a settlement resolving sales
practices claims on behalf of a class of owners of permanent life insurance
policies and annuity contracts or certificates issued pursuant to individual
sales in the United States by Metropolitan Life, Metropolitan Insurance and
Annuity Company or Metropolitan Tower Life Insurance Company between January 1,
1982 and December 31, 1997. The class includes owners of approximately six
million in-force or terminated insurance policies and approximately one million
in-force or terminated annuity contracts or certificates.
Similar sales practices class actions against New England Mutual, with
which Metropolitan Life merged in 1996, and General American, which was acquired
in 2000, have been settled. In October 2000, a federal court approved a
settlement resolving sales practices claims on behalf of a class of owners of
permanent life insurance policies issued by New England Mutual between January
1, 1983 through August 31, 1996. The class includes owners of approximately
15
600,000 in-force or terminated policies. A federal district court has approved a
settlement resolving sales practices claims on behalf of a class of owners of
permanent life insurance policies issued by General American between January 1,
1982 through December 31, 1996. The class includes owners of approximately
250,000 in-force or terminated policies. In October 2001, an appellate court
affirmed the order approving the class. Based on a recent decision on standing
to object, the United States Supreme Court remanded the approval of that
settlement to the United States Court of Appeals for the Eighth Circuit. The
appellate court will consider the District Court's approval of the merits of the
settlement, rather than whether the objectors have standing to appeal.
Implementation of the General American class action settlement is proceeding.
Certain class members have opted out of the class action settlements
noted above and have brought or continued non-class action sales practices
lawsuits. As of June 30, 2002, there are approximately 420 sales practices
lawsuits pending against Metropolitan Life, approximately 30 sales practices
lawsuits pending against New England Mutual and approximately 50 sales practices
lawsuits pending against General American. Metropolitan Life, New England Mutual
and General American continue to defend themselves vigorously against these
lawsuits. Some individual sales practices claims have been resolved through
settlement, won by dispositive motions, or, in a few instances, have gone to
trial. Most of the current cases seek substantial damages, including in some
cases punitive and treble damages and attorneys' fees. Additional litigation
relating to the Company's marketing and sales of individual life insurance may
be commenced in the future.
The Metropolitan Life class action settlement did not resolve two
putative class actions involving sales practices claims filed against
Metropolitan Life in Canada, and these actions remain pending. In March 2002, a
purported class action complaint was filed in the United States District Court
for the District of Kansas by S-G Metals Industries, Inc. against New England
Mutual. The complaint seeks certification of a class on behalf of corporations
and banks that purchased participating life insurance policies, as well as
persons who purchased participating policies for use in pension plans or through
work site marketing. These policyholders were not part of the New England Mutual
class action settlement noted above. New England Mutual intends to defend itself
vigorously against the case.
The Company believes adequate provision has been made in its unaudited
interim condensed consolidated financial statements for all reasonably probable
and estimable losses for sales practices claims against Metropolitan Life, New
England Mutual and General American.
See Note 11 of Notes to Consolidated Financial Statements for the year
ended December 31, 2001 included in MetLife, Inc.'s Annual Report on Form 10-K
filed with the SEC for information regarding reinsurance contracts related to
sales practices claims.
Regulatory authorities in a small number of states have had
investigations or inquiries relating to Metropolitan Life's, New England
Mutual's or General American's sales of individual life insurance policies or
annuities. Over the past several years, these and a number of investigations by
other regulatory authorities were resolved for monetary payments and certain
other relief. The Company may continue to resolve investigations in a similar
manner.
ASBESTOS-RELATED CLAIMS
Metropolitan Life is also a defendant in thousands of lawsuits seeking
compensatory and punitive damages for personal injuries allegedly caused by
exposure to asbestos or asbestos-containing products. Metropolitan Life has
never engaged in the business of manufacturing, producing, distributing or
selling asbestos or asbestos-containing products. Rather, these lawsuits have
principally been based upon allegations relating to certain research,
publication and other activities of one or more of Metropolitan Life's employees
during the period from the 1920's through approximately the 1950's and alleging
that Metropolitan Life 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. Legal theories asserted against Metropolitan Life
have included negligence, intentional tort claims and conspiracy claims
concerning the health risks associated with asbestos. While Metropolitan Life
believes it has meritorious defenses to these claims, and has not suffered any
adverse judgments in respect of these claims, most of the cases have been
resolved by settlements. Metropolitan Life intends to continue to exercise its
best judgment regarding settlement or defense of such cases, including when
trials of these cases are appropriate. The number of such cases that may be
brought or the aggregate amount of any liability that Metropolitan Life may
ultimately incur is uncertain.
See Note 11 of Notes to Consolidated Financial Statements for the year
ended December 31, 2001 included in the MetLife, Inc. Annual Report on Form 10-K
filed with the SEC for information regarding historical asbestos claims
information and insurance policies obtained in 1998 related to asbestos-related
claims.
During 1998, Metropolitan Life paid $878 million in premiums for excess
insurance policies for asbestos-related claims. The excess insurance policies
for asbestos-related claims provide for recovery of losses up to $1,500 million,
which is in excess of a $400 million self-insured retention. The
asbestos-related policies are also subject to annual and per-claim sublimits.
Amounts are recoverable under the policies annually with respect to claims paid
during the prior calendar year. As a result of the excess insurance
16
policies, $878 million is recorded as a recoverable at June 30, 2002. Although
amounts paid in any given year that are recoverable under the policies will be
reflected as a reduction in the Company's operating cash flows for that year,
management believes that the payments will not have a material adverse effect on
the Company's liquidity. Each asbestos-related policy contains an experience
fund and a reference fund that provides for payments to the Company at the
commutation date if the reference fund is greater than zero at commutation or
pro rata reductions from time to time in the loss reimbursements to the Company
if the cumulative return on the reference fund is less than the return specified
in the experience fund. The return in the reference fund is tied to performance
of the Standard & Poor's 500 Index and the Lehman Brothers Aggregate Bond Index.
It is likely that a claim will be made under the excess insurance policies in
2003 for a portion of the amounts paid with respect to asbestos litigation in
2002. As the performance of the Standard & Poor's 500 Index impacts the return
in the reference fund, it is possible that loss reimbursements to the Company in
2003 and in the recoverable with respect to later periods may be less than the
amount submitted. Such forgone loss reimbursements may be recovered upon
commutation. If at some point in the future, the Company believes the liability
for probable and estimable losses for asbestos-related claims should be
increased, an expense would be recorded and the insurance recoverable would be
adjusted subject to the terms, conditions and limits of the excess insurance
policies. Portions of the change in the insurance recoverable would be deferred
and amortized into income over the estimated remaining settlement period of the
insurance policies.
The Company believes adequate provision has been made in its unaudited
interim condensed consolidated financial statements for all reasonably probable
and estimable losses for asbestos-related claims. Estimates of the Company's
asbestos exposure are very difficult to predict due to the limitations of
available data and the substantial difficulty of predicting with any certainty
numerous variables that can affect liability estimates, including the number of
future claims, the cost to resolve claims and the impact of any possible future
adverse verdicts and their amounts. Recent bankruptcies of other companies
involved in asbestos litigation, as well as advertising by plaintiffs' asbestos
lawyers, may be resulting in an increase in the number of claims and the cost of
resolving claims, as well as the number of trials and possible verdicts
Metropolitan Life may experience. Plaintiffs are seeking additional funds from
defendants, including Metropolitan Life, in light of such recent bankruptcies by
certain other defendants. As reported in MetLife, Inc.'s Annual Report on Form
10-K, Metropolitan Life received approximately 59,500 asbestos-related claims in
2001. During the first six months of 2002 and 2001, Metropolitan Life received
approximately 28,000 and 34,600 asbestos-related claims, respectively.
Metropolitan Life is studying its recent claims experience, published literature
regarding asbestos claims experience in the United States and numerous variables
that can affect its asbestos liability exposure, including the recent
bankruptcies of other companies involved in asbestos litigation and legislative
and judicial developments, to identify trends and to assess their impact on the
previously recorded asbestos liability. It is reasonably possible that the
Company's total exposure to asbestos claims may be greater than the liability
recorded by the Company in its consolidated financial statements and that future
charges to income may be necessary. While the potential future charges could be
material in particular quarterly or annual periods in which they are recorded,
based on information currently known by management, it does not believe any such
charges are likely to have a material adverse effect on the Company's
consolidated financial position.
PROPERTY AND CASUALTY ACTIONS
Purported class action suits involving claims by policyholders for the
alleged diminished value of automobiles after accident-related repairs have been
filed in Rhode Island, Texas, Georgia and Tennessee against Metropolitan
Property and Casualty Insurance Company. Rhode Island and Texas trial courts
denied plaintiffs' motions for class certification and a hearing on plaintiffs'
motion in Tennessee for class certification is to be scheduled. A settlement has
been reached in the Georgia class action; the Company determined to settle the
case in light of a Georgia Supreme Court decision involving another insurer. The
settlement is being implemented. A purported class action has been filed against
Metropolitan Property and Casualty Insurance Company's subsidiary, Metropolitan
Casualty Insurance Company, in Florida. The complaint alleges breach of contract
and unfair trade practices with respect to allowing the use of parts not made by
the original manufacturer to repair damaged automobiles. Discovery is ongoing
and a motion for class certification is pending. A two-plaintiff individual
lawsuit brought in Alabama alleges that Metropolitan Property and Casualty
Insurance Company and CCC, a valuation company, violated state law by failing to
pay the proper valuation amount for a total loss has been settled. Total loss
valuation methods also are the subject of national class actions involving other
insurance companies. A Pennsylvania state court purported class action lawsuit
filed in 2001 alleges that Metropolitan Property and Casualty Insurance Company
improperly took depreciation on partial homeowner losses where the insured
replaced the covered item. In addition, in Florida, Metropolitan Property and
Casualty Insurance Company has been named in a class action alleging that it
improperly established preferred provider organizations (hereinafter "PPO").
Other insurers have been named in both the Pennsylvania and the PPO cases.
Metropolitan Property and Casualty Insurance Company and Metropolitan Casualty
Insurance Company are vigorously defending themselves against these lawsuits.
17
DEMUTUALIZATION ACTIONS
Several lawsuits were brought in 2000 challenging the fairness of
Metropolitan Life's plan of reorganization and the adequacy and accuracy of
Metropolitan Life's disclosure to policyholders regarding the plan. These
actions name as defendants some or all of Metropolitan Life, the Holding
Company, the individual directors, the Superintendent and the underwriters for
MetLife, Inc.'s initial public offering, Goldman Sachs & Company and Credit
Suisse First Boston. Five purported class actions pending in the Supreme Court
of the State of New York for New York County have been consolidated within the
commercial part. Metropolitan Life has moved to dismiss these consolidated cases
on a variety of grounds. In addition, there remains a separate purported class
action in New York state court in New York County that Metropolitan Life also
has moved to dismiss. Another purported class action in New York state court in
Kings County has been voluntarily held in abeyance by plaintiffs. The plaintiffs
in the state court class actions seek injunctive, declaratory and compensatory
relief, as well as an accounting and, in some instances, punitive damages. Some
of the plaintiffs in the above described actions also have brought a proceeding
under Article 78 of New York's Civil Practice Law and Rules challenging the
Opinion and Decision of the Superintendent who approved the plan. In this
proceeding, petitioners seek to vacate the Superintendent's Opinion and Decision
and enjoin him from granting final approval of the plan. This case also is being
held in abeyance by plaintiffs. Another purported class action is pending in the
Supreme Court of the State of New York for New York County and has been brought
on behalf of a purported class of beneficiaries of Metropolitan Life annuities
purchased to fund structured settlements claiming that the class members should
have received common stock or cash in connection with the demutualization.
Metropolitan Life has moved to dismiss this case on a variety of grounds. Three
purported class actions were filed in the United States District Court for the
Eastern District of New York claiming violation of the Securities Act of 1933.
The plaintiffs in these actions, which have been consolidated, claim that the
Policyholder Information Booklets relating to the plan failed to disclose
certain material facts and seek rescission and compensatory damages.
Metropolitan Life's motion to dismiss these three cases was denied in 2001. A
purported class action also was filed in the United States District Court for
the Southern District of New York seeking damages from Metropolitan Life and the
Holding Company for alleged violations of various provisions of the Constitution
of the United States in connection with the plan of reorganization. In 2001,
pursuant to a motion to dismiss filed by Metropolitan Life, this case was
dismissed by the District Court. Plaintiffs have appealed to the United States
Court of Appeals for the Second Circuit. Metropolitan Life, the Holding Company
and the individual defendants believe they have meritorious defenses to the
plaintiffs' claims and are contesting vigorously all of the plaintiffs' claims
in these actions.
In 2001, a lawsuit was filed in the Superior Court of Justice, Ontario,
Canada on behalf of a proposed class of certain former Canadian policyholders
against the Holding Company, Metropolitan Life, and Metropolitan Life Insurance
Company of Canada. Plaintiffs' allegations concern the way that their policies
were treated in connection with the demutualization of Metropolitan Life; they
seek damages, declarations, and other non-pecuniary relief. The defendants
believe they have meritorious defenses to the plaintiffs' claims and will
contest vigorously all of plaintiffs' claims in this matter.
In July 2002, a lawsuit was filed in the United States District Court
for the Eastern District of Texas on behalf of a proposed class comprised of the
settlement class in the Metropolitan Life sales practices class action
settlement approved in December 1999 by the United States District Court for the
Western District of Pennsylvania. The Holding Company, Metropolitan Life, the
trustee of the policyholder trust, certain present and former individual
directors and officers of Metropolitan Life are named as defendants. Plaintiffs'
allegations concern the treatment of the cost of the settlement in connection
with the demutualization of Metropolitan Life and the adequacy and accuracy of
the disclosure, particularly with respect to those costs. Plaintiffs seek
compensatory, treble and punitive damages, as well as attorneys' fees and costs.
The defendants believe they have meritorious defenses to the plaintiffs' claims
and will contest them vigorously.
RACE-CONSCIOUS UNDERWRITING CLAIMS
Insurance Departments in a number of states initiated inquiries in 2000
about possible race-conscious underwriting of life insurance. These inquiries
generally have been directed to all life insurers licensed in their respective
states, including Metropolitan Life and certain of its subsidiaries. The
Department has commenced examinations of certain domestic life insurance
companies, including Metropolitan Life, concerning possible past race-conscious
underwriting practices. Metropolitan Life is cooperating fully with that
inquiry, which is ongoing. Four purported class action lawsuits filed against
Metropolitan Life in 2000 and 2001 alleging racial discrimination in the
marketing, sale, and administration of life insurance policies have been
consolidated in the United States District Court for the Southern District of
New York. The plaintiffs seek unspecified monetary damages, punitive damages,
reformation, imposition of a constructive trust, a declaration that the alleged
practices are discriminatory and illegal, injunctive relief requiring
Metropolitan Life to discontinue the alleged discriminatory practices and adjust
policy values, and other relief. At the outset of discovery, Metropolitan Life
moved for summary judgment on statute of limitations grounds. In June 2001, the
District Court denied that motion, citing, among other things, ongoing discovery
on relevant subjects. The ruling does not prevent Metropolitan Life
18
from continuing to pursue a statute of limitations defense. Plaintiffs have
moved for certification of a class consisting of all non-Caucasian policyholders
purportedly harmed by the practices alleged in the complaint. Metropolitan Life
has opposed the class certification motion. Metropolitan Life has been involved
in settlement discussions to resolve the regulatory examination and the actions
pending in the United States District Court for the Southern District of New
York. In that connection, Metropolitan Life recorded a charge in the fourth
quarter of 2001.
Twelve lawsuits involving approximately 100 non-Caucasian plaintiffs
suing Metropolitan Life in their individual capacities are pending in state
court in Tennessee. The complaints, which were filed in 2001, allege under state
common law theories that Metropolitan Life discriminated against non-Caucasians
in the sale, formation and administration of life insurance policies. The
plaintiffs have stipulated that they do not seek and will not accept more than
$74,000 per person if they prevail on their claims. Early in 2002, two
individual actions were filed against Metropolitan Life in federal court in
Alabama alleging both federal and state law claims of racial discrimination in
connection with the sale of life insurance policies. Metropolitan Life is
contesting vigorously plaintiffs' claims in the Tennessee and Alabama actions.
OTHER
In 2001, a putative class action was filed against Metropolitan Life in
the United States District Court for the Southern District of New York alleging
gender discrimination and retaliation in the MetLife Financial Services unit of
the Individual segment. The plaintiffs seek unspecified compensatory damages,
punitive damages, a declaration that the alleged practices are discriminatory
and illegal, injunctive relief requiring Metropolitan Life to discontinue the
alleged discriminatory practices, an order restoring class members to their
rightful positions (or appropriate compensation in lieu thereof), and other
relief. Metropolitan Life is vigorously defending itself against these
allegations.
A lawsuit has been filed against Metropolitan Life in Ontario, Canada
by Clarica Life Insurance Company regarding the sale of the majority of
Metropolitan Life's Canadian operation to Clarica in 1998. Clarica alleges that
Metropolitan Life breached certain representations and warranties contained in
the sale agreement, that Metropolitan Life made misrepresentations upon which
Clarica relied during the negotiations and that Metropolitan Life was negligent
in the performance of certain of its obligations and duties under the sale
agreement. Metropolitan Life is vigorously defending itself against this
lawsuit.
General American has received and responded to subpoenas for documents
and other information from the office of the U.S. Attorney for the Eastern
District of Missouri with respect to certain administrative services provided by
its former Medicare Unit during the period January 1, 1988 through December 31,
1998, which services ended and which unit was disbanded prior to MetLife's
acquisition of General American. The subpoenas were issued as part of the
Government's criminal investigation alleging that General American's former
Medicare Unit engaged in improper billing and claims payment practices. The
Government also conducted a civil investigation under the federal False Claims
Act. In March 2002, General American and the Government reached an agreement in
principle to resolve all issues through a civil settlement and a charge was
recorded. In June 2002, General American completed the settlement.
A putative class action lawsuit is pending in the District of Columbia
federal district court, in which plaintiffs allege that they were denied certain
ad hoc pension increases awarded to retirees under the Metropolitan Life
retirement plan. The ad hoc pension increases were awarded only to retirees
(i.e., individuals who were entitled to an immediate retirement benefit upon
their termination of employment) and not available, in Metropolitan Life's view
to individuals like plaintiffs whose employment, or whose spouse's employment,
had terminated before they became eligible for an immediate retirement benefit.
The district court denied the parties' cross-motions for summary judgment to
allow for discovery. Discovery has not yet commenced pending the court's ruling
as to the timing of a class certification motion. The plaintiffs seek to
represent a class consisting of former Metropolitan Life employees, or their
surviving spouses, who are receiving deferred vested annuity payments under the
retirement plan and who were allegedly eligible to receive the ad hoc pension
increases awarded in 1977, 1980, 1989, 1992, 1996 and 2001, as well as increases
awarded in earlier years. Metropolitan Life is vigorously defending itself
against these allegations.
A reinsurer of universal life policy liabilities of Metropolitan Life
and certain affiliates is seeking rescission and has commenced an arbitration
proceeding claiming that, during underwriting, material misrepresentations or
omissions were made. The reinsurer also has sent a notice purporting to increase
reinsurance premium rates. Metropolitan Life and its affiliates intend to
vigorously defend themselves against the claims of the reinsurer, including the
purported rate increase.
Various litigation, claims and assessments against the Company, in
addition to those discussed above 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
19
to, in connection with its activities as an insurer, employer, investor,
investment advisor and taxpayer. Further, state insurance regulatory authorities
and other federal and state authorities regularly make inquiries and conduct
investigations concerning the Company's compliance with applicable insurance and
other laws and regulations.
SUMMARY
It is not feasible to predict or determine the ultimate outcome of all
pending investigations and legal proceedings or provide reasonable ranges of
potential losses, except as noted above in connection with specific matters. In
some of the matters referred to above, very large and/or indeterminate amounts,
including punitive and treble damages, are sought. Although in light of these
considerations it is possible that an adverse outcome in certain cases could
have a material adverse effect upon the Company's consolidated financial
position, based on information currently known by the Company's management, in
its opinion, the outcomes of such pending investigations and legal proceedings
are not likely to have such an effect. However, given the large and/or
indeterminate amounts sought in certain of these matters and the inherent
unpredictability of litigation, it is possible that an adverse outcome in
certain matters could, from time to time, have a material adverse effect on the
Company's operating results or cash flows in particular quarterly or annual
periods.
9. COMPREHENSIVE INCOME
Comprehensive income is as follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
2002 2001 2002 2001
------- ------- ------- -------
(DOLLARS IN MILLIONS)
Net income $ 387 $ 320 $ 716 $ 607
Other comprehensive income (loss):
Cumulative effect of change in accounting for derivatives,
net of income taxes -- -- -- 32
Unrealized gains (losses) on derivative instruments, net of
income taxes (27) (9) (37) 25
Unrealized investment gains (losses), net of related offsets,
reclassification adjustments and income taxes 630 (328) (191) 242
Foreign currency translation adjustments 24 31 24 (21)
------- ------- ------- -------
Other comprehensive income (loss) 627 (306) (204) 278
------- ------- ------- -------
Comprehensive income $ 1,014 $ 14 $ 512 $ 885
======= ======= ======= =======
20
10. BUSINESS SEGMENT INFORMATION
FOR THE THREE MONTHS AUTO ASSET CORPORATE
ENDED JUNE 30, 2002 INDIVIDUAL INSTITUTIONAL REINSURANCE & HOME MANAGEMENT INTERNATIONAL & OTHER TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Premiums $ 1,094 $ 2,162 $ 472 $ 702 $ -- $ 274 $ (3) $ 4,701
Universal life and
investment-type
product policy
fees 339 168 -- -- -- 7 -- 514
Net investment income 1,580 1,003 102 46 15 95 20 2,861
Other revenues 102 156 11 9 50 3 58 389
Net investment gains
(losses) (89) (109) -- (18) -- 8 15 (193)
Income (loss) before
provision for
income taxes and
cumulative effect
of change in
accounting 217 279 33 29 8 12 (21) 557
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS AUTO ASSET CORPORATE
ENDED JUNE 30, 2001 INDIVIDUAL INSTITUTIONAL REINSURANCE & HOME MANAGEMENT INTERNATIONAL & OTHER TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Premiums $ 1,107 $ 1,739 $ 395 $ 682 $ -- $ 196 $ (1) $ 4,118
Universal life and
investment-type
product policy
fees 310 154 -- -- -- 9 -- 473
Net investment income 1,567 990 88 51 17 62 59 2,834
Other revenues 119 163 7 6 56 2 20 373
Net investment gains
(losses) (61) (47) 9 (3) -- 27 (61) (136)
Income (loss) before
provision for
income taxes and
cumulative effect
of change in
accounting 232 268 36 8 1 40 (92) 493
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS AUTO ASSET CORPORATE
ENDED JUNE 30, 2002 INDIVIDUAL INSTITUTIONAL REINSURANCE & HOME MANAGEMENT INTERNATIONAL & OTHER TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Premiums $ 2,178 $ 4,022 $ 947 $ 1,394 $ -- $ 649 $ (8) $ 9,182
Universal life and
investment-type
product policy
fees 637 320 -- -- -- 14 -- 971
Net investment income 3,111 1,988 201 91 29 170 60 5,650
Other revenues 230 328 19 16 90 6 67 756
Net investment gains
(losses) (86) (191) 2 (32) (4) (14) 40 (285)
Income (loss) before
provision for
income taxes and
cumulative effect
of change in
accounting 493 562 70 56 6 10 (120) 1,077
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS AUTO ASSET CORPORATE
ENDED JUNE 30, 2001 INDIVIDUAL INSTITUTIONAL REINSURANCE & HOME MANAGEMENT INTERNATIONAL & OTHER TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Premiums $ 2,213 $ 3,607 $ 805 $ 1,355 $ -- $ 373 $ (1) $ 8,352
Universal life and
investment-type
product policy
fees 623 304 -- -- -- 20 -- 947
Net investment income 3,100 1,986 185 102 36 126 115 5,650
Other revenues 265 330 16 12 112 6 43 784
Net investment gains
(losses) (114) (117) 14 (6) -- 28 (86) (281)
Income (loss) before
provision for
income taxes and
cumulative effect
of change in
accounting 467 497 65 (37) 10 60 (142) 920
- ------------------------------------------------------------------------------------------------------------------------------------
AT JUNE 30, AT DECEMBER 31,
2002 2001
-------- --------
ASSETS
Individual $132,217 $131,314
Institutional 90,783 89,661
Reinsurance 8,623 7,911
Auto & Home 4,726 4,581
Asset Management 180 256
International 8,256 5,308
Corporate & Other 16,446 17,867
-------- --------
Total $261,231 $256,898
======== ========
As part of the acquisition of GenAmerica Financial Corporation in 2000,
the Company acquired Conning Corporation ("Conning"), the results of which were
included in the Asset Management segment due to the types of products and
strategies employed by the entity from its acquisition date to July 2001, the
date of its disposition. The Company sold Conning, receiving $108
21
million in the transaction, and reported a gain of approximately $16 million,
net of income taxes of $9 million, in the third quarter of 2001.
Corporate & Other consists of various start-up and run-off entities,
including MetLife Bank, N.A., as well as the elimination of all intersegment
amounts. The principal component of the intersegment amounts relates to
intersegment loans, which bear interest rates commensurate with related
borrowings.
The International segment's assets at June 30, 2002 include those
assets of Aseguradora Hidalgo S.A. ("Hidalgo"), a Mexican life insurer that was
acquired on June 20, 2002. The results of Hidalgo from the purchase date through
June 30, 2002 were insignificant.
Net investment income and net investment gains and losses are based
upon the actual results of each segment's specifically identifiable asset
portfolio. Other costs and operating costs were 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.
Revenues derived from any one customer did not exceed 10% of
consolidated revenues for the three months and six months ended June 30, 2002.
Revenues from U.S. operations were $7,885 million and $7,366 million for the
three months ended June 30, 2002 and 2001, respectively, which represented 95%
and 96% of consolidated revenues for the three months ended June 30, 2002 and
2001, respectively. Revenues from U.S. operations were $15,449 million and
$14,899 million for the six months ended June 30, 2002 and 2001, respectively,
which represented 95% and 96% of consolidated revenues for the six months ended
June 30, 2002 and 2001, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For purposes of this discussion, the terms "MetLife" or the "Company"
refer to MetLife, Inc. (the "Holding Company"), a Delaware corporation, and its
subsidiaries, including Metropolitan Life Insurance Company ("Metropolitan
Life"). Following this summary is a discussion addressing the consolidated
results of operations and financial condition of the Company for the periods
indicated. This discussion should be read in conjunction with the Company's
unaudited interim condensed consolidated financial statements and notes thereto
included elsewhere herein.
RECENT REGULATORY AND LEGISLATIVE DEVELOPMENTS
REGULATORY DEVELOPMENTS
In an effort to help restore confidence in Corporate America, a variety
of new laws and regulatory initiatives have been introduced that have changed or
will change the reporting practices of public companies like MetLife, Inc.
One such initiative was the announcement by the Securities and Exchange
Commission (the "SEC") that it would review the annual reports on Form 10-K
submitted by all Fortune 500 companies in 2002. As a result, the Holding
Company's annual report on Form 10-K for the year ended December 31, 2001 (the
"2001 10-K") was reviewed by the SEC. MetLife received correspondence from the
SEC in connection with this review in July 2002. The Holding Company has
responded, on a timely basis, to all of the SEC's comments and expects the
matters summarized below to be resolved in the near future. Based on
communications with the SEC, the Company has included a number of supplemental
disclosures in this Form 10-Q for the quarter ended June 30, 2002 that it
believes address the SEC comments. The Company will include similar disclosures
in its future filings. As of the date of this filing, the Holding Company is
awaiting a formal response from the SEC.
In summary, there appear to be three matters still pending as a result of
the review of the Company's 2001 10-K. The SEC recommended the deletion of the
Adjusted Operating Earnings per Share Data included in the Selected Financial
Data table contained in the 2001 10-K. The Holding Company has agreed to delete
this information in future filings. In addition, the SEC has requested
additional information regarding the Company's investments with unrealized
losses at December 31, 2001. The Company has provided responses to those
requests, and based on the SEC's comments, has included supplemental disclosures
in this filing about securities with unrealized losses as of June 30, 2002.
These supplemental disclosures may be found in "--Investments-Fixed Maturities"
and "--Investments-Equity Securities and Other Limited Partnership Interests."
Further, the SEC requested information regarding "funds withheld at interest"
related to certain types of reinsurance contracts, including whether the
Company's accounting treatment considered whether these agreements contained
embedded derivatives. The Company believes that it has complied with the
relevant accounting guidance related to Securities with unrealized losses and
funds withheld at interest and it has provided the SEC with the information that
was requested in their comment letter.
22
While the Company believes that it has been responsive to the SEC's
comments and that additional disclosures included in this filing addresses all
matters raised, there can be no assurance that the SEC will concur and will not
have further comments or request additional information. The Company will
include these additional disclosures in all future filings.
Another initiative was announced by the SEC in June 2002, which
requires the principal financial officer and the principal executive officer of
certain large public companies to certify the accuracy and completeness of their
company's most recent annual report on Form 10-K and subsequently filed reports
on Form 10-Q, 8-K and proxy materials. The officers of the Holding Company have
signed their respective certifications on August 14, 2002 without modification.
These certifications have been filed with the SEC and are available on the
Company's website (www.metlife.com).
LEGISLATIVE DEVELOPMENTS
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act
of 2002 (the "Act"). Among other things, the Act includes a provision that bars
companies that are subject to the reporting requirements of the U.S. securities
laws from extending or maintaining credit, or arranging for or renewing an
extension of credit, in the form of a personal loan to or for any director or
executive officer (or their equivalent). This provision could be interpreted to
apply to split dollar life insurance arrangements. If this provision of the Act
is interpreted to include split dollar life insurance within the meaning of
"personal loan", then this provision could result in reduced sales of the
Company's split dollar life insurance products and could increase lapse rates on
existing policies. The Company does not expect such interpretation to have a
material adverse impact on its financial condition.
In addition, the Act also requires the chief executive officer and the
chief financial officer to certify that their company's periodic reports
containing financial statements, filed with the SEC, fully comply with
applicable regulations and the information in the report fairly presents, in all
material respects, the financial condition and results of operations of the
company. Such officers of the Holding Company have signed their respective
certifications on August 14, 2002 without modification. These certifications
have been submitted to the SEC and are available on the Company's website.
SENSITIVITY TO FINANCIAL MARKETS
The volatility of the equity market and its recent decline have
negatively impacted the insurance and investment results of certain MetLife
businesses. In variable life and variable annuities (product lines of the
Individual segment), the Company earns management fees based primarily on the
level of account balances in separate accounts, which have been reduced by the
downturn in the equity markets. This has resulted in lower fee income. This
reduction in fees also impacts the future results of these products because, as
profitability decreases, the amortization expense of deferred policy acquisition
costs related to these products increases. An additional effect of depressed
equity markets on life and annuity products is the potential need to increase
reserves for certain policy features that are linked to investment market
performance. Certain other products and services (such as asset management and
brokerage) are also linked to investment market performance and may be
negatively affected if equity markets remain at recent lower levels.
The Company also derives revenues in the form of income received from
various investments included in its general account. Some of these investments,
including limited partnerships, corporate joint ventures, public equity
securities and other structured securities are either directly or indirectly
affected by the performance and volatility of the equity markets. The continued
downturn in the equity markets could adversely impact the returns on the
Company's general account investment portfolio.
Pension expense levels in future periods are linked to actual
investment performance of the underlying plan assets, as well as expectations
about future investment performance. Due to declines in equity markets over
recent months, it is likely that pension expense will increase in future periods
as compared to 2002 levels, and that pension fund contributions under IRS rules
(which were discontinued for over a decade due to historic funding levels)
will resume.
A portion of the Company's earnings from insurance products and
securities lending are dependent on the level of interest rates and the shape of
the yield curve. Future changes in those factors may result in reductions in the
spread between income earned and interest credited or paid. The Company engages
in an active asset-liability management process to mitigate the effects of
changes in interest rates or changes in the shape of the yield curve.
23
ACQUISITIONS AND DISPOSITIONS
On June 20, 2002, the Company acquired Aseguradora Hidalgo S.A.
("Hidalgo"), for approximately $950 million. The purchase price is subject to
adjustment under certain provisions of the purchase agreement. As a result of
the acquisition, the Company anticipates that Hidalgo and Seguros Genesis, S.A.,
("MetLife Genesis"), MetLife's wholly-owned Mexican subsidiary headquartered in
Mexico City, will be integrated and will operate as a combined entity. The
results of Hidalgo's operations from the purchase date through June 30, 2002
were insignificant.
In November 2001, the Company acquired Compania de Seguros de Vida
Santander S.A. and Compania de Reaseguros de Vida Soince Re S.A., wholly-owned
subsidiaries of Santander Central Hispano in Chile. These acquisitions mark
MetLife's entrance into the Chilean insurance market.
In July 2001, the Company completed its sale of Conning Corporation
("Conning"), an affiliate acquired in the acquisition of GenAmerica Financial
Corporation ("GenAmerica") in 2000.
In May 2001, the Company acquired Seguradora America Do Sul S.A. , a
life and pension company in Brazil. Seasul has been integrated into MetLife's
wholly-owned Brazilian subsidiary, Metropolitan Life Seguros e Previdencia
Privada S.A, or "MetLife Brazil."
In February 2001, the Holding Company consummated the purchase of Grand
Bank, N.A., which was renamed MetLife Bank, N.A. ("MetLife Bank"). MetLife Bank
provides banking services to individuals and small businesses in the Princeton,
New Jersey area. On February 12, 2001, the Federal Reserve Board approved the
Holding Company's application for bank holding company status and to become a
financial holding company upon its acquisition of Grand Bank, N.A.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
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 in the unaudited interim condensed consolidated
financial statements. The critical accounting policies and related judgments
underlying the Company's unaudited interim condensed consolidated financial
statements are summarized below. In applying these policies, management makes
subjective and complex judgments that frequently require estimates about matters
that are inherently uncertain. Many of these policies are common in the
insurance and financial services industries; others are specific to the
Company's businesses and operations.
INVESTMENTS
The Company's principal investments are in fixed maturities, mortgage
loans and real estate, all of which are exposed to three primary sources of
investment risk: credit, interest rate and market valuation. The financial
statement risks are those associated with the recognition of income, impairments
and the determination of fair values. In addition, the earnings on certain
investments are dependent upon market conditions which could result in
prepayments and changes in amounts to be earned due to changing interest rates
or equity markets.
DERIVATIVES
The Company enters into freestanding derivative transactions to manage
the risk associated with variability in cash flows related to the Company's
financial assets and liabilities or to changing fair values. The Company also
purchases investment securities and issues certain insurance and reinsurance
policies with embedded derivatives. The associated financial statement risk is
the volatility in net income which can result from (i) changes in fair value of
derivatives not qualifying as accounting hedges, and (ii) ineffectiveness of
designated hedges in an environment of changing interest rates or fair values.
In addition, accounting for derivatives is complex, as evidenced by significant
interpretations of the primary accounting standards which continue to evolve, as
well as the significant judgments and estimates involved in determining fair
value in the absence of quoted market values. These estimates are based on
valuation methodologies and assumptions deemed appropriate in the circumstances;
however, the use of different assumptions may have a material effect on the
estimated fair value amounts.
24
DEFERRED POLICY ACQUISITION COSTS
The Company incurs significant costs in connection with acquiring new
insurance business. These costs, which vary with and are primarily related to
the production of new business, are deferred. The recovery of such costs is
dependent on the future profitability of the related business. The amount of
future profit is dependent principally on investment returns, mortality,
morbidity, persistency, expenses to administer the business and certain economic
variables, such as inflation. These factors enter into management's estimates of
gross margins and profits which generally are used to amortize certain of such
costs. Revisions to estimates result in changes to the amounts expensed in the
reporting period in which the revisions are made and could result in the
impairment of the asset and a charge to income if estimated future gross margins
and profits are less than amounts deferred.
FUTURE POLICY BENEFITS
The Company establishes liabilities for amounts payable under insurance
policies, including traditional life insurance, annuities and disabled lives.
Generally, amounts are payable over an extended period of time and the
profitability of the products is dependent on the pricing of the products.
Principal assumptions used in pricing policies and in the establishment of
liabilities for future policy benefits are mortality, morbidity, expenses,
persistency, investment returns and inflation. Differences between the actual
experience and assumptions used in pricing the policies and in the establishment
of liabilities result in variances in profit and could result in losses.
The Company establishes liabilities for unpaid claims and claims
expenses for property and casualty insurance. Pricing of this insurance takes
into account the expected frequency and severity of losses, the costs of
providing coverage, competitive factors, characteristics of the insured and the
property covered, and profit considerations. Liabilities for property and
casualty insurance are dependent on estimates of amounts payable for claims
reported but not settled and claims incurred but not reported. These estimates
are influenced by historical experience and actuarial assumptions of current
developments, anticipated trends and risk management strategies.
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. The Company
periodically reviews actual and anticipated experience compared to the
assumptions used to establish policy benefits and evaluates the financial
strength of counterparties to its reinsurance agreements. Additionally, for each
of its reinsurance contracts, the Company must determine if the contract
provides indemnification against loss or liability relating to insurance risk,
in accordance with applicable accounting standards. The Company must review all
contractual features, particularly those that may limit the amount of insurance
risk to which the Company is subject or features that delay the timely
reimbursement of claims. If the Company determines that a contract does not
expose it to a reasonable possibility of a significant loss from insurance risk,
the Company records the contract using the deposit method of accounting.
LITIGATION
The Company is a party to a number of legal actions. Given the inherent
unpredictability of litigation, it is difficult to estimate the impact of
litigation on the Company's consolidated financial position. Liabilities are
established when it is probable that a loss has been incurred and the amount of
the loss can be reasonably estimated. Liabilities related to certain lawsuits
are especially difficult to estimate due to the limitation of available data and
uncertainty around numerous variables used to determine amounts recorded. It is
possible that an adverse outcome in certain cases could have a material adverse
effect upon the Company's net income or cash flows in particular quarterly or
annual periods. See "Legal Proceedings."
25
RESULTS OF OPERATIONS
The following table presents consolidated financial information for the
Company for the periods indicated:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 4,701 $ 4,118 $ 9,182 $ 8,352
Universal life and investment-type product policy fees 514 473 971 947
Net investment income 2,861 2,834 5,650 5,650
Other revenues 389 373 756 784
Net investment losses (net of amounts allocable to other
accounts of $(73), $(49), $(86) and $(79), respectively) (193) (136) (285) (281)
-------- -------- -------- --------
Total revenues 8,272 7,662 16,274 15,452
-------- -------- -------- --------
EXPENSES
Policyholder benefits and claims (excludes amounts directly related
to net investment losses of $(64), $(27), $(71) and $(63), respectively) 4,882 4,289 9,500 8,724
Interest credited to policyholder account balances 727 723 1,441 1,483
Policyholder dividends 488 505 985 1,020
Other expenses (excludes amounts directly related to net
investment losses of $(9), $(22), $(15) and $(16), respectively) 1,618 1,652 3,271 3,305
-------- -------- -------- --------
Total expenses 7,715 7,169 15,197 14,532
-------- -------- -------- --------
Income before provision for income taxes and
cumulative effect of change in accounting 557 493 1,077 920
Provision for income taxes 170 173 366 313
-------- -------- -------- --------
Income before cumulative effect of change in accounting 387 320 711 607
Cumulative effect of change in accounting -- -- 5 --
-------- -------- -------- --------
Net income $ 387 $ 320 $ 716 $ 607
======== ======== ======== ========
THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2001 --THE COMPANY
Premiums increased by $583 million, or 14%, to $4,701 million for the
three months ended June 30, 2002 from $4,118 million for the comparable 2001
period. This variance is primarily attributable to increases in the
Institutional, International and Reinsurance segments. The $423 million increase
in Institutional is largely due to an increase in retirement and savings,
resulting from the sale of a significant contract in the second quarter of 2002.
In addition, sales growth in group life, dental, disability and long-term care
businesses contributed to the Institutional variance. The 2001 acquisitions in
Chile and Brazil, as well as growth in Mexico, South Korea and Spain, are the
primary drivers of the $78 million increase in International. New premiums from
facultative and automatic treaties and renewal premiums on existing blocks of
business all contributed to a $77 million increase in Reinsurance.
Universal life and investment-type product policy fees increased by $41
million, or 9%, to $514 million for the three months ended June 30, 2002 from
$473 million for the comparable 2001 period. This variance is primarily
attributable to the Individual and Institutional segments. A $29 million
favorable variance in Individual is largely attributable to an increase in
policy fees from insurance products, primarily due to higher cost of insurance
fees and the continued shift in customer preferences from traditional life
policies to variable life products. These increases are partially offset by
lower policy fees from annuity and investment-type products resulting from poor
equity market performance. Further, if average separate account asset levels
continue to decline, management would expect policy fees from insurance and
investment-type products to continue to be adversely impacted while cost of
insurance fees from variable life products would be expected to rise. The $14
million increase in Institutional is due to a fee related to the termination of
a portion of a bank-owned life insurance contract.
Net investment income increased by $27 million, or 1%, to $2,861
million for the three months ended June 30, 2002 from $2,834 million for the
comparable 2001 period. This variance is primarily attributable to increases of
(i) $56 million, or 431%, in income from equity securities and other limited
partnership interests, (ii) $17 million, or 11%, in real estate and real estate
joint venture income, and (iii) $15 million, or 37%, in income from other
invested assets. These variances are partially offset by decreases of (i) $27
26
million, or 42%, in income on cash and cash equivalents and short-term
investments, (ii) $16 million, or 3%, in income from mortgage loans on real
estate, and (iii) $14 million, or 1%, in fixed maturities income.
The increase in net investment income from equity securities and other
limited partnership interests to $43 million in 2002 from a loss of $13 million
in 2001 is primarily due to increased sales of underlying assets held in
corporate partnerships, coupled with reduced losses in underlying portfolios.
The increase in income from real estate and real estate joint ventures to $174
million from $157 million is due to the transfer of the Company's One Madison
Avenue, New York property from a company use property to an investment property
in the first quarter of 2002, as well as an increase in earnings associated with
real estate joint venture partnerships. The growth in income from other invested
assets to $56 million from $41 million is due to increased funds withheld at
interest. The decline in income from cash and cash equivalents and short-term
investments to $38 million from $65 million is primarily due to a drop in market
rates. The decrease in income from mortgage loans on real estate to $472 million
from $488 million is primarily due to lower market rates on new loan production.
The decline in income from fixed maturities to $2,002 million from $2,016
million is largely due to lower reinvestment rates and lower income from
equity-linked notes. These decreases were partially offset by income resulting
from increased levels of securities lending activity.
The favorable variance in net investment income is attributable to
increases in the International, Reinsurance, Individual and Institutional
segments, partially offset by a decline in Corporate & Other. International
income grew by $33 million primarily due to higher revenues generated from a
higher asset base, primarily as a result of acquisitions in Chile and Brazil.
The $14 million increase in the Reinsurance segment resulted largely from
increases in funds withheld at interest. Income in the Individual segment
increased by $13 million due to a higher general account asset base as well as
increased sales of underlying assets held in corporate partnerships. Income in
the Institutional segment rose by $13 million largely from increased securities
lending and a higher asset base. These favorable variances were partially offset
by a $39 million decrease in Corporate & Other, which predominately rose from a
lower asset base primarily due to the Company's active stock repurchase program
and lower portfolio yield.
Other revenues increased by $16 million, or 4%, to $389 million for the
three months ended June 30, 2002 from $373 million for the comparable 2001
period. This variance is attributable to an increase in Corporate & Other
partially offset by a decrease in the Individual segment. An increase of $38
million in Corporate & Other is due to the recognition of an experience refund
earned on a reinsurance treaty triggered by fewer claims and favorable mortality
experience from a previously established liability related to a sales practice
class action settlement recorded in 1999, partially offset by interest earned
from premiums on deposit with reinsurers in 2001. This variance was partially
offset by a decrease of $17 million in Individual due to lower commission and
fee income associated with decreased volume in the broker/dealer and other
subsidiaries.
The Company's investment gains and losses are net of related
policyholder amounts. The amounts netted against investment gains and losses are
(i) deferred policy acquisition amortization, to the extent that such
amortization results from investment gains and losses, and (ii) adjustments to
the policyholder dividend obligation resulting from investment gains and losses.
Net investment losses increased by $57 million, or 42%, to $193 million
for the three months ended June 30, 2002 from $136 million for the comparable
2001 period. This decrease reflects total gross investment losses of $266
million, an increase of $81 million, or 44%, from $185 million in 2001, before
offsets for the amortization of deferred policy acquisition costs of $9 million
and $22 million in 2002 and 2001, respectively, and changes in the policyholder
dividend obligation of $64 million and $27 million in 2002 and 2001,
respectively. The increase in gross investment losses was primarily driven by
mark-to-market losses recognized on foreign exchange swaps, driven by the
decline in the dollar versus the Euro, partially offset by gains from equity
securities and other limited partnership interests.
The Company believes its policy of netting related policyholder amounts
against investment gains and losses provides important information in evaluating
its performance. Investment gains and losses are often excluded by investors
when evaluating the overall financial performance of insurers. The Company
believes its presentation enables readers to easily exclude investment gains and
losses and the related effects on the unaudited interim condensed consolidated
statements of income when evaluating its performance. The Company's presentation
of investment gains and losses, net of policyholder amounts, may be different
from the presentation used by other insurance companies and, therefore, amounts
in its unaudited interim condensed consolidated statements of income may not be
comparable to amounts reported by other insurers.
Policyholder benefits and claims increased by $593 million, or 14%, to
$4,882 million for the three months ended June 30, 2002 from $4,289 million for
the comparable 2001 period. This variance reflects total gross policyholder
benefits and claims of $4,818 million, an increase of $556 million, or 13%, from
$4,262 million in 2001, before the offsets for changes in the policyholder
dividend obligation of $64 million and $27 million in 2002 and 2001,
respectively. The net variance in policyholder benefits and claims is
27
attributable to the Institutional, Reinsurance and International segments.
Increases in Institutional and Reinsurance of $417 million and $68 million,
respectively, are commensurate with the growth in premiums discussed above. The
$101 million increase in International is primarily due to the acquisitions in
Chile and Brazil and growth in Mexico, South Korea, and Spain.
Interest credited to policyholder account balances increased by $4
million, or 1%, to $727 million for the three months ended June 30, 2002 from
$723 million for the comparable 2001 period. This variance is attributable to
increases in the Reinsurance and Individual segments, partially offset by a
decrease in the Institutional segment. The unfavorable variance of $13 million
in Reinsurance is primarily due to new single premium deferred annuity
coinsurance agreements in the third quarter of 2001 and the first quarter of
2002. The increase of $8 million in Individual is due to higher policyholder
account balances, partially offset by a slight decline in crediting rates. These
increases are partially offset by an $18 million decrease in Institutional
primarily due to a decline in average crediting rates resulting from the current
interest rate environment.
Policyholder dividends decreased by $17 million, or 3%, to $488 million
for the three months ended June 30, 2002 from $505 million for the comparable
2001 period. This variance is primarily attributable to a decrease of $25
million in the Institutional segment, partially offset by an increase of $11
million in the Individual segment. The decline in Institutional is largely
attributable to unfavorable mortality experience among several large group
clients. Institutional policyholder dividends vary from period to period based
on participating contract experience. The increase in Individual is
predominately due to growth in the investments supporting the policies
associated with this segment's large block of traditional life insurance
business.
Other expenses decreased by $34 million, or 2%, to $1,618 million for
the three months ended June 30, 2002 from $1,652 million for the comparable 2001
period. Excluding the capitalization and amortization of deferred policy
acquisition costs, which are discussed below, other expenses declined by $67
million, or 4%, to $1,763 million in 2002 from $1,830 million in 2001. The
change in accounting as prescribed by Statement of Financial Accounting
Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets ("SFAS 142"),
which eliminates the amortization of goodwill and certain other intangibles,
contributed $12 million to the favorable variance in other expenses and was
spread among all segments. The remaining decrease in other expenses is
attributable to decreases in the Reinsurance, Individual and Asset Management
segments, partially offset by an increase in the International segment. The $34
million decrease in Reinsurance is largely due to a decline in allowances paid.
Allowances paid can fluctuate depending on the type of reinsurance written. The
$30 million decrease in Individual is due to continued expense management
initiatives, partially offset by higher pension and post-retirement benefit
expenses. The $15 million decline in Asset Management is primarily due to the
sale of Conning on July 2, 2001. These variances were partially offset by a $20
million increase in International expenses primarily resulting from the
acquisitions in Chile and Brazil.
Deferred policy acquisition costs are principally amortized in
proportion to gross margins or profits, including investment gains or losses.
The amortization is allocated to investment gains and losses to provide
consolidated statement of income information regarding the impact of investment
gains and losses on the amount of the amortization, and other expenses to
provide amounts related to gross margins or profits originating from
transactions other than investment gains and losses.
Capitalization of deferred policy acquisitions costs increased to $502
million for the three months ended June 30, 2002 from $491 million for the
comparable 2001 period. This variance is primarily due to a $52 million increase
in the Individual segment as a result of higher sales of variable and universal
life insurance policies as well as annuity and investment-type products, which
results in higher commissions and other deferrable expenses. This additional
capitalization was offset by a $40 million reduction in the Reinsurance segment
primarily resulting from lower ceding commissions driven by the change in the
type of reinsurance written. Total amortization of deferred policy acquisition
costs increased by $57 million, or 20%, to $348 million in 2002 from $291
million in 2001. Amortization of $357 million and $313 million are allocated to
other expenses in 2002 and 2001, respectively, while the remainder of the
amortization in each period is allocated to investment gains and losses. The
increase in amortization allocated to other expenses is attributable to the
Individual segment. The $45 million increase in Individual is due to refinements
in the calculation of estimated gross margins and profits including the impacts
of the depressed equity markets.
Income tax expense for the three months ended June 30, 2002 was $170
million, or 31% of income before provision for income taxes and cumulative
effect of change in accounting, compared with $173 million, or 35%, for the
comparable 2001 period. The 2002 effective tax rate differs from the corporate
tax rate of 35% primarily due to the impact of non-taxable investment income.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2001
- --THE COMPANY
Premiums increased by $830 million, or 10%, to $9,182 million for the
six months ended June 30, 2002 from $8,352 million for the comparable 2001
period. This variance is attributable to the Institutional, International and
Reinsurance segments. The $415 million
28
increase in Institutional is primarily attributable to an increase in retirement
and savings due to the sale of a significant contract in the second quarter of
2002. In addition, sales growth in this segment's group life, dental, disability
and long-term care businesses contributed to the Institutional variance. The
sale of an annuity contract to a Canadian trust company, the 2001 acquisitions
in Chile and Brazil, as well as growth in Mexico and South Korea, are the
primary drivers of the $276 million increase in International. New premiums from
facultative and automatic treaties and renewal premiums on existing blocks of
business all contributed to a $142 million increase in Reinsurance.
Universal life and investment-type product policy fees increased by $24
million, or 3%, to $971 million for the six months ended June 30, 2002 from $947
million for the comparable 2001 period. This variance is primarily attributable
to the Institutional and Individual segments. The $16 million increase in
Institutional is principally due to a fee related to the termination of a
portion of a bank-owned life insurance contract. A $14 million favorable
variance in Individual is due to an increase in policy fees from insurance
products, primarily resulting from higher cost of insurance fees and the
continued shift in customer preferences from traditional life policies to
variable life products. This favorable variance is partially offset by a decline
in policy fees from annuity products resulting from poor equity market
performance. If average separate account asset levels continue to decline,
management expects that policy fees from insurance and investment-type products
will continue to be adversely impacted while cost of insurance fees from
variable life products are expected to rise.
Net investment income was $5,650 for both the six months ended June 30,
2002 and 2001. Increases in net investment income on (i) mortgage loans on real
estate of $11 million, or 1%, (ii) fixed maturities of $7 million, or less than
1%, and (iii) real estate and real estate joint ventures of $6 million, or 2%,
were entirely offset by decreases in income from (i) cash and cash equivalents
and short-term investments of $16 million, or 12%, (ii) other invested assets of
$6 million, or 6%, and (iii) equity securities and other limited partnership
interests of $2 million, or 4%.
The increase in net investment income from mortgage loans on real
estate to $934 million from $923 million is largely due to growth in mortgage
assets , partially offset by declining yields and lower prepayment fees. The
increase in income from fixed maturities to $3,959 million from $3,952 million
is due to income resulting from increased levels of securities lending activity
and a higher asset base, partially offset by lower income on equity-linked notes
and declining market rates on reinvestment. The increase in income from real
estate and real estate joint ventures to $324 million from $318 million is
primarily due to the transfer of the Company's One Madison Avenue, New York
property from company use to an investment property in 2002. The decrease in
income from cash and cash equivalents and short-term investments to $121 million
from $137 million is primarily due to declining market rates. The decrease in
income from other invested assets to $102 million from $108 million is primarily
due to lower derivative income. The decrease in income from equity securities
and other limited partnership interests to $52 million from $54 million is
primarily due to a decrease in equity earnings from corporate joint ventures.
Net investment income decreases in Corporate & Other and the Auto &
Home and Asset Management segments were entirely offset by increases in the
International, Reinsurance and Individual segments. A $55 million decrease in
Corporate & Other is due to a lower asset base resulting primarily from the
Company's active stock repurchase program and a lower portfolio yield. Auto &
Home income decreased by $11 million primarily due to a lower asset base. Asset
Management income declined by $7 million primarily due to lower fees received
for investment management activities. International income increased by $44
million due to a higher asset base. Reinsurance income increased by $16 million
primarily due to an increase in funds withheld at interest. The Individual
segment's income increased by $11 million due to a higher general account asset
base. The remaining variance is attributable to the Institutional segment.
Other revenues decreased by $28 million, or 4%, to $756 million for the
six months ended June 30, 2002 from $784 million for the comparable 2001 period.
This variance is primarily attributable to decreases in the Individual and Asset
Management segments, partially offset by an increase in Corporate & Other.
Individual decreased by $35 million as a result of lower commission and fee
income associated with decreased volume in the broker/dealer and other
subsidiaries. A $22 million decrease in Asset Management is primarily due to the
sale of Conning in July 2001. These variances were partially offset by an
increase of $24 million in Corporate & Other principally due to the recognition
of an experience refund earned on a reinsurance treaty triggered by fewer claims
and favorable mortality experience from a previously established liability
related to a sales practice class action settlement recorded in 1999, partially
offset by interest earned from premiums on deposit with reinsurers in 2001.
The Company's investment gains and losses are net of related
policyholder amounts. The amounts netted against investment gains and losses are
(i) deferred policy acquisition amortization, to the extent that such
amortization results from investment gains and losses, and (ii) adjustments to
the policyholder dividend obligation resulting from investment gains and losses.
29
Net investment losses increased by $4 million, or 1%, to $285 million for
the six months ended June 30, 2002 from $281 million for the comparable 2001
period. This decrease reflects total gross investment losses of $371 million, an
increase of $11 million, or 3%, from $360 million in 2001, before offsets for
the amortization of deferred policy acquisition costs of $15 million and $16
million in 2002 and 2001, respectively, and changes in the policyholder dividend
obligation of $71 million and $63 million in 2002 and 2001, respectively. The
increase in gross investment losses is due to mark-to-market losses recognized
on foreign exchange swaps, driven by the decline in the dollar versus the Euro,
partially offset by gains from sales of equity securities and other limited
partnership interests.
The Company believes its policy of netting related policyholder amounts
against investment gains and losses provides important information in evaluating
its performance. Investment gains and losses are often excluded by investors
when evaluating the overall financial performance of insurers. The Company
believes its presentation enables readers to easily exclude investment gains and
losses and the related effects on the unaudited interim condensed consolidated
statements of income when evaluating its performance. The Company's presentation
of investment gains and losses, net of policyholder amounts, may be different
from the presentation used by other insurance companies and, therefore, amounts
in its unaudited interim condensed consolidated statements of income may not be
comparable to amounts reported by other insurers.
Policyholder benefits and claims increased by $776 million, or 9%, to
$9,500 million for the six months ended June 30, 2002 from $8,724 million for
the comparable 2001 period. This variance reflects total gross policyholder
benefits and claims of $9,429 million, an increase of $768 million, or 9%, from
$8,661 million in 2001, before the offsets for changes in the policyholder
dividend obligation of $71 million and $63 million in 2002 and 2001,
respectively. The net variance in policyholder benefits and claims is
attributable to the Institutional, Reinsurance and International segments.
Increases in Institutional and Reinsurance of $435 million and $120 million,
respectively, are commensurate with the growth in premiums discussed above. The
$284 million increase in International is primarily due to the increase in
liabilities for the aforementioned sale of an annuity contract, the acquisitions
in Chile and Brazil and growth in Mexico, South Korea, and Spain.
Interest credited to policyholder account balances decreased by $42
million, or 3%, to $1,441 million for the six months ended June 30, 2002 from
$1,483 million for the comparable 2001 period. This variance is attributable to
decreases in the Institutional and International segments, partially offset by
increases in the Reinsurance and Individual segments. A $61 million decrease in
Institutional is primarily due to a decline in average crediting rates resulting
from the current interest rate environment. A $6 million decrease in
International is due to the planned cessation of product lines offered through a
joint venture with Banco Santander. These variances were offset by an increase
of $18 million in Reinsurance due primarily to new single premium deferred
annuity coinsurance agreements in the third quarter 2001 and first quarter of
2002. In addition, an increase of $7 million in Individual is due to higher
policyholder account balances, partially offset by a slight decline in crediting
rates.
Policyholder dividends decreased by $35 million, or 3%, to $985 million
for the six months ended June 30, 2002 from $1,020 million for the comparable
2001 period. This variance is primarily attributable to a decrease of $67
million in the Institutional segment, partially offset by an increase of $34
million in the Individual segment. The Institutional decline is largely
attributable to unfavorable mortality experienced among several large group
clients. Institutional policyholder dividends vary from period to period based
on participating contract experience. The increase in Individual is due to
growth in the investments supporting the policies associated with this segment's
large block of traditional life insurance business.
Other expenses decreased by $34 million, or 1%, to $3,271 million for the
six months ended June 30, 2002 from $3,305 million for the comparable 2001
period. Excluding the capitalization and amortization of deferred policy
acquisition costs, which are discussed below, other expenses increased by $50
million, or 1%, to $3,617 million in 2002 from $3,567 million in 2001. The
change in accounting as prescribed by SFAS 142, which eliminates the
amortization of goodwill and certain other intangibles, caused a decrease of $24
million in other expenses and was spread among all segments. The remaining $74
million increase is primarily attributable to increases in Corporate & Other and
the International segment, partially offset by decreases in the Asset Management
segment. The increase in Corporate & Other of $67 million is primarily due to an
increase in litigation costs. The 2002 period includes amounts to cover costs
associated with the resolution of federal government investigations of General
American Life Insurance Company ("General American") former Medicare business.
An increase of $41 million in International expenses is due to the Chilean and
Seasul acquisitions. These variances are partially offset by a $28 million
decrease in Asset Management primarily due to the sale of Conning on July 2,
2001.
Deferred policy acquisition costs are principally amortized in proportion
to gross margins or profits, including investment gains or losses. The
amortization is allocated to investment gains and losses to provide consolidated
statement of income information regarding the impact of investment gains and
losses on the amount of the amortization, and other expenses to provide amounts
related to gross
30
margins or profits originating from transactions other than investment gains and
losses.
Capitalization of deferred policy acquisitions costs increased to $1,026
million for the six months ended June 30, 2002 from $943 million for the
comparable 2001 period. This variance is primarily due to increases in the
Individual and International segments, partially offset by a decrease in the
Auto & Home segment. The $86 million increase in Individual is due to higher
sales of variable and universal life insurance policies and annuity and
investment-type products, resulting in higher commissions and other deferrable
expenses. A $14 million increase in International is commensurate with the
business growth in this segment. These increases are partially offset by a $17
million decline in Auto & Home due to an anticipated reduction in retention.
Total amortization of deferred policy acquisitions costs remained unchanged at
$665 million in both 2002 and 2001. Amortization of $680 million and $681
million are allocated to other expenses in 2002 and 2001, respectively, while
the remainder of the amortization in each period is allocated to investment
gains and losses. The decrease in amortization allocated to other expenses is
attributable to decreases in the Individual and Auto & Home segments, partially
offset by an increase in the International segment. The decrease of $15 million
in Individual is due to refinements in the calculation of estimated gross
margins and profits. A decrease in Auto and Home of $12 million is due to the
aforementioned reduction in retention. These decreases were partially offset by
a $20 million increase in International. This increase is commensurate with the
business growth in this segment.
Income tax expense for the six months ended June 30, 2002 was $366
million, or 34% of income before provision for income taxes and cumulative
effect of change in accounting , compared with $313 million, or 34%, for the
comparable 2001 period. The 2002 effective tax rate differs from the corporate
tax rate of 35% primarily due to the impact of non-taxable investment income,
partially offset by the inability to record tax benefits on certain foreign
capital losses. The 2001 effective tax rate differs from the corporate tax rate
of 35% primarily due to the impact of non-taxable investment income, partially
offset by the inability to record tax benefits on certain foreign capital
losses.
INDIVIDUAL
The following table presents consolidated financial information for the
Individual segment for the periods indicated:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 1,094 $ 1,107 $ 2,178 $ 2,213
Universal life and investment-type product policy fees 339 310 637 623
Net investment income 1,580 1,567 3,111 3,100
Other revenues 102 119 230 265
Net investment losses (89) (61) (86) (114)
-------- -------- -------- --------
Total revenues 3,026 3,042 6,070 6,087
-------- -------- -------- --------
EXPENSES
Policyholder benefits and claims 1,263 1,243 2,495 2,476
Interest credited to policyholder account balances 452 444 895 888
Policyholder dividends 461 450 920 886
Other expenses 633 673 1,267 1,370
-------- -------- -------- --------
Total expenses 2,809 2,810 5,577 5,620
-------- -------- -------- --------
Income before provision for income taxes 217 232 493 467
Provision for income taxes 77 95 177 186
-------- -------- -------- --------
Net income $ 140 $ 137 $ 316 $ 281
======== ======== ======== ========
THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2001 -- INDIVIDUAL
Premiums decreased by $13 million, or 1%, to $1,094 million for the three
months ended June 30, 2002 from $1,107 million for the comparable 2001 period.
Premiums from insurance products decreased by $21 million, primarily due to the
continued decline in traditional life policies, along with a continued shift in
policyholder' preferences from traditional policies to variable life products.
Premiums from annuity and investment products increased by $8 million as a
result of higher sales of immediate annuities.
Universal life and investment-type product policy fees increased by $29
million, or 9%, to $339 million for the three months ended June 30, 2002 from
$310 million for the comparable 2001 period. Policy fees from insurance products
increased by $42 million,
31
primarily due to higher cost of insurance fees, which increase as the average
separate account assets supporting the underlying minimum death benefit
declines. In addition, this increase reflects the continued shift in customer
preferences from traditional life policies to variable life products. Policy
fees from annuity and investment-type products decreased by $13 million
primarily due to declines in the average separate account asset base resulting
from poor equity market performance, partially offset by increased annuity
deposits. Policy fees from annuity and investment-type products are typically
calculated as a percentage of average separate account assets. Such assets can
fluctuate depending on equity market performance. If average separate account
asset levels continue to decline, management expects that policy fees from
insurance and investment-type products will continue to be adversely impacted,
while costs of insurance fees from variable life products are expected to rise.
Other revenues decreased by $17 million, or 14%, to $102 million for the
three months ended June 30, 2002 from $119 million for the comparable 2001
period, largely due to lower commission and fee income associated with decreased
volume in the broker/dealer and other subsidiaries.
Policyholder benefits and claims increased by $20 million, or 2%, to
$1,263 million for the three months ended June 30, 2002 from $1,243 million for
the comparable 2001 period. Policyholder benefits and claims for insurance
products increased by $2 million primarily due to an increase in the
policyholder dividend obligation associated with the closed block, partially
offset by favorable mortality experience. Policyholder benefits and claims for
annuity and investment products increased by $18 million, primarily due to an
increase in the liability associated with immediate annuities and unfavorable
mortality experience.
Interest credited to policyholder account balances increased by $8
million, or 2%, to $452 million for the three months ended June 30, 2002 from
$444 million for the comparable 2001 period. This increase is primarily due to
higher policyholder account balances partially offset by a slight decline in
crediting rates.
Policyholder dividends increased by $11 million, or 2%, to $461 million
for the three months ended June 30, 2002 from $450 million for the comparable
2001 period. This variance is due to an increase in the investments supporting
the policies associated with this segment's large block of traditional life
insurance business.
Other expenses decreased by $40 million, or 6%, to $633 for the three
months ended June 30, 2002 from $673 million for the comparable 2001 period.
Excluding the capitalization and amortization of deferred policy acquisition
costs which are discussed below, other expenses decreased by $33 million, or 4%,
to $714 million in 2002 from $747 million in 2001. Decreases of $27 million and
$6 million related to insurance products and annuity and investment products,
respectively, are primarily due to a reduction in expenses resulting from
continued expense management initiatives, partially offset by an increase in
pension and post-retirement benefit expenses.
Deferred policy acquisition costs are principally amortized in proportion
to gross margins or gross profits, including investment gains or losses. The
amortization is allocated to investment gains and losses to provide consolidated
statements of income information regarding the impact of investment gains and
losses on the amount of the amortization, and other expenses to provide amounts
related to gross margins or profits originating from transactions other than
investment gains and losses.
Capitalization of deferred policy acquisition costs increased by $52
million, or 25%, to $258 million for the three months ended June 30, 2002 from
$206 million for the comparable 2001 period, due to higher sales of variable and
universal life insurance policies as well as annuity and investment-type
products, resulting in higher commissions and other deferrable expenses. Total
amortization of deferred policy acquisition costs increased by $60 million, or
55%, to $169 million in 2002 from $109 million in 2001. Amortization of deferred
policy acquisition costs of $177 million and $132 million is allocated to other
expenses in 2002 and 2001, respectively, while the remainder of the amortization
in each period is allocated to investment gains and losses. Increases in
amortization of deferred policy acquisition costs allocated to other expenses,
of $36 million and $9 million related to insurance products and annuity and
investment-type products, respectively, are attributable to refinements in the
calculation of estimated gross margins and profits including the impact of the
depressed equity markets.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2001
- -- INDIVIDUAL
Premiums decreased by $35 million, or 2%, to $2,178 million for the six
months ended June 30, 2002 from $2,213 million for the comparable 2001 period.
Premiums from insurance products decreased by $37 million, primarily due to the
continued decline in traditional life policies, along with a continued shift in
policyholder preferences from traditional policies to variable life products.
Premiums from annuity and investment products increased by $2 million as a
result of higher sales of immediate annuities.
32
Universal life and investment-type product policy fees increased by $14
million, or 2%, to $637 million for the six months ended June 30, 2002 from $623
million for the comparable 2001 period. Policy fees from insurance products
increased by $26 million, primarily due to higher cost of insurance fees, which
increase as the average separate account assets supporting the underlying
minimum death benefits decline. In addition, the increase reflects the continued
shift in customer preferences from traditional life policies to variable life
products. Policy fees from annuity and investment-type products decreased by $12
million primarily due to a decline in the average separate account asset base
resulting from poor equity market performance, partially offset by increased
annuity sales. Policy fees from annuity and investment-type products are
typically calculated as a percentage of average separate account assets. Such
assets can fluctuate depending on equity market performance. If average separate
account asset levels continue to decline, management expects that policy fees
from insurance and investment-type products will continue to be adversely
impacted, while costs of insurance fees from variable life products are expected
to rise.
Other revenues decreased by $35 million, or 13%, to $230 million for the
six months ended June 30, 2002 from $265 million for the comparable 2001 period,
largely due to lower commission and fee income associated with decreased volume
in the broker/dealer and other subsidiaries.
Policyholder benefits and claims increased by $19 million, or 1%, to
$2,495 million for the six months ended June 30, 2002 from $2,476 million for
the comparable 2001 period. Policyholder benefits and claims for annuity and
investment products increased by $23 million largely due to an increase in the
liabilities associated with immediate annuities and unfavorable mortality
experience in this block of business. Policyholder benefits and claims for
insurance products decreased by $4 million, primarily due to favorable mortality
experience.
Interest credited to policyholder account balances increased by $7
million, or 1%, to $895 million for the six months ended June 30, 2002 from $888
million for the comparable 2001 period. This increase is primarily due to higher
policyholder account balances, partially offset by a slight decline in crediting
rates.
Policyholder dividends increased by $34 million, or 4%, to $920 million
for the six months ended June 30, 2002 from $886 million for the comparable 2001
period. This increase is due to an increase in the investments supporting the
policies associated with this segment's large block of traditional life
insurance business.
Other expenses decreased by $103 million, or 8%, to $1,267 for the six
months ended June 30, 2002 from $1,370 million for the comparable 2001 period.
Excluding the capitalization and amortization of deferred policy acquisition
costs which are discussed below, other expenses decreased by $2 million, to
$1,455 million in 2002 from $1,457 million in 2001. A decrease of $31 million in
these expenses related to insurance products was partially offset by a $29
million increase in these expenses related to annuity and investment-type
products. Reductions from continued expense management initiatives are partially
offset by an increase in pension and post-retirement benefit expenses. In
addition, expenses related to annuities increased due to a rise in sales of new
annuity and investment-type products.
Deferred policy acquisition costs are principally amortized in proportion
to gross margins or gross profits, including investment gains or losses. The
amortization is allocated to investment gains and losses to provide consolidated
statements of income information regarding the impact of investment gains and
losses on the amount of the amortization, and other expenses to provide amounts
related to gross margins or profits originating from transactions other than
investment gains and losses.
Capitalization of deferred policy acquisition costs increased by $86
million, or 21%, to $502 million for the six months ended June 30, 2002 from
$416 million for the comparable 2001 period due to higher sales of variable and
universal life insurance policies and annuity and investment-type products,
resulting in higher commissions and other deferrable expenses. Total
amortization of deferred policy acquisition costs decreased by $13 million, or
4%, to $299 million in 2002 from $312 million in 2001. Amortization of deferred
policy acquisition costs of $314 million and $329 million is allocated to other
expenses in 2002 and 2001, respectively, while the remainder of the amortization
in each period is allocated to investment gains and losses. Amortization of
deferred policy acquisition costs allocated to other expenses related to annuity
and investment-type products decreased by $22 million while such costs related
to insurance products increased by $7 million. These variances are due to
refinements in the calculation of estimated gross margins and profits.
33
INSTITUTIONAL
The following table presents consolidated financial information for the
Institutional segment for the periods indicated:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 2,162 $ 1,739 $ 4,022 $ 3,607
Universal life and investment-type product policy fees 168 154 320 304
Net investment income 1,003 990 1,988 1,986
Other revenues 156 163 328 330
Net investment losses (109) (47) (191) (117)
-------- -------- -------- --------
Total revenues 3,380 2,999 6,467 6,110
-------- -------- -------- --------
EXPENSES
Policyholder benefits and claims 2,460 2,043 4,629 4,194
Interest credited to policyholder account balances 232 250 460 521
Policyholder dividends 15 40 37 104
Other expenses 394 398 779 794
-------- -------- -------- --------
Total expenses 3,101 2,731 5,905 5,613
-------- -------- -------- --------
Income before provision for income taxes 279 268 562 497
Provision for income taxes 89 96 195 175
-------- -------- -------- --------
Net income $ 190 $ 172 $ 367 $ 322
======== ======== ======== ========
THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2001 -- INSTITUTIONAL
Premiums increased by $423 million, or 24%, to $2,162 million for the
three months ended June 30, 2002 from $1,739 million for the comparable 2001
period. Retirement and savings premiums increased by $329 million primarily due
to the sale of a significant contract in the second quarter of 2002. Retirement
and savings premium levels are significantly influenced by large transactions
and, as a result, can often fluctuate from period to period. In addition, group
insurance premiums increased by $94 million as a result of higher sales in this
segment's group life, dental, disability and long-term care businesses.
Universal life and investment-type product policy fees increased by $14
million, or 9%, to $168 million for the three months ended June 30, 2002 from
$154 million for the comparable 2001 period. This increase primarily reflects a
fee related to the termination of a portion of a bank-owned life insurance
contract.
Other revenues decreased by $7 million, or 4%, to $156 million for the
three months ended June 30, 2002 from $163 million for the comparable 2001
period. This decline is largely attributable to a $10 million reduction in
retirement and savings administrative fees as a result of the Company's exit
from the large market 401(k) business in late 2001. Also contributing to this
variance are lower fees earned on retirement and savings' investment in separate
accounts. These decreases are offset by a $3 million increase in group insurance
due to growth in the administrative service businesses.
Policyholder benefits and claims increased by $417 million, or 20%, to
$2,460 million for the three months ended June 30, 2002 from $2,043 million for
the comparable 2001 period. Retirement and savings increased by $311 million,
commensurate with the aforementioned premium growth. In addition, group
insurance increased by $106 million, primarily due to growth and higher premiums
in this segment's group life, dental, disability and long-term care businesses.
Interest credited to policyholder account balances decreased by $18
million, or 7%, to $232 million for the three months ended June 30, 2002 from
$250 million for the comparable 2001 period. Decreases of $12 million and $6
million in retirement and savings and group insurance, respectively, are largely
due to a decline in average crediting rates in the second quarter of 2002 as a
result of the current interest rate environment.
34
Policyholder dividends decreased by $25 million, or 63%, to $15 million
for the three months ended June 30, 2002 from $40 million for the comparable
2001 period. This decline is largely attributable to unfavorable mortality
experience among several large group clients. Policyholder dividends vary from
period to period based on participating contract experience.
Other expenses decreased by $4 million, or 1%, to $394 million for the
three months ended June 30, 2002 from $398 million for the comparable 2001
period. Retirement and savings decreased by $20 million primarily due to the
Company's exit from the large market 401(k) business in late 2001. This decrease
is partially offset by a $16 million increase which is mainly attributable to
group insurance's non-deferrable expenses, including certain premium taxes and
commissions, commensurate with the aforementioned premium growth.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2001
- -- INSTITUTIONAL
Premiums increased by $415 million, or 12%, to $4,022 million for the six
months ended June 30, 2002 from $3,607 million for the comparable 2001 period.
Retirement and savings premiums increased by $286 million primarily due to the
sale of a significant contract in the second quarter 2002. In addition, group
insurance premiums increased by $129 million, as a result of higher sales in
this segment's group life, dental, disability and long-term care businesses.
Universal life and investment-type product policy fees increased by $16
million, or 5%, to $320 million for the six months ended June 30, 2002 from $304
million for the comparable 2001 period. This increase primarily reflects a fee
resulting from the termination of a portion of a bank-owned life insurance
contract.
Other revenues decreased by $2 million, or 1%, to $328 million for the six
months ended June 30, 2002 from $330 million for the comparable 2001 period.
Retirement and savings decreased by $19 million, primarily due to a reduction in
administrative fees as a result of the Company's exit from the large market
401(k) business in late 2001. Also contributing to this variance are lower fees
earned on retirement and savings investment in separate accounts. This decrease
is largely offset by a $17 million increase in group insurance due to growth in
the administrative service businesses, as well as a one-time settlement received
in 2002 related to the Company's former medical business.
Policyholder benefits and claims increased by $435 million, or 10%, to
$4,629 million for the six months ended June 30, 2002 from $4,194 million for
the comparable 2001 period. Retirement and savings increased by $251 million,
commensurate with the aforementioned premium growth. In addition, group
insurance increased by $184 million, largely attributable to growth in this
segment's group life, dental, disability and long-term care businesses.
Interest credited to policyholder account balances decreased by $61
million, or 12%, to $460 million for the six months ended June 30, 2002 compared
with $521 million for the comparable 2001 period. Decreases of $32 million and
$29 million in group insurance and retirement and savings, respectively, are
primarily attributable to declines in the average crediting rates in 2002 as a
result of the current interest rate environment.
Policyholder dividends decreased by $67 million, or 64%, to $37 million
for the six months ended June 30, 2002 from $104 million for the comparable 2001
period. This decline is largely attributable to unfavorable mortality experience
among several large group clients. Policyholder dividends vary from period to
period based on participating insurance contract experience.
Other expenses decreased by $15 million, or 2%, to $779 million for the
six months ended June 30, 2002 from $794 million for the comparable 2001 period.
Retirement and savings decreased by $37 million primarily due to the Company's
exit from the large market 401(k) business in late 2001. This decrease is
partially offset by a $22 million increase which is mainly attributable to group
insurance's non-deferrable expenses, including certain premium taxes and
commissions, commensurate with the aforementioned premium growth.
35
REINSURANCE
The following table presents consolidated financial information for the
Reinsurance segment for the periods indicated:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 472 $ 395 $ 947 $ 805
Net investment income 102 88 201 185
Other revenues 11 7 19 16
Net investment gains -- 9 2 14
-------- -------- -------- --------
Total revenues 585 499 1,169 1,020
-------- -------- -------- --------
EXPENSES
Policyholder benefits and claims 379 311 774 654
Interest credited to policyholder account balances 32 19 66 48
Policyholder dividends 6 6 11 11
Other expenses 114 103 208 203
-------- -------- -------- --------
Total expenses 531 439 1,059 916
-------- -------- -------- --------
Income before provision for income taxes 54 60 110 104
Provision for income taxes 12 15 25 26
Minority interest 21 24 40 39
-------- -------- -------- --------
Net income $ 21 $ 21 $ 45 $ 39
======== ======== ======== ========
THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2001 -- REINSURANCE
Premiums increased by $77 million, or 19%, to $472 million for the three
months ended June 30, 2002 from $395 million for the comparable 2001 period. New
premiums from facultative and automatic treaties and renewal premiums on
existing blocks of business all contributed to the premium growth. Premium
levels are significantly influenced by large transactions and reporting
practices of ceding companies and, as a result, can fluctuate from period to
period.
Other revenues increased by $4 million, or 57%, to $11 million for the
three months ended June 30, 2002 from $7 million for the comparable 2001 period.
This increase is due to fees earned on financial reinsurance which can vary from
period to period.
Policyholder benefits and claims increased by $68 million, or 22%, to $379
million for the three months ended June 30, 2002 from $311 million for the
comparable 2001 period. This increase is commensurate with the growth in
premiums discussed above. The level of death claims may fluctuate from period to
period, but generally exhibits less volatility over the long-term.
Interest credited to policyholder account balances increased by $13
million, or 68%, to $32 million for the three months ended June 30, 2002 from
$19 million for the comparable 2001 period. Contributing to this growth was new
single premium deferred annuity coinsurance agreements in the third quarter of
2001 and the first quarter of 2002.
Policyholder dividends were $6 million for both the three months ended
June 30, 2002 and 2001.
Other expenses increased by $11 million, or 11%, to $114 million for the
three months ended June 30, 2002 from $103 million for the comparable 2001
period. These expenses fluctuate depending on the mix of the underlying
insurance products being reinsured as allowances paid, and the related
capitalization and amortization can vary significantly based on the type of
business and the reinsurance treaty. This increase is commensurate with the
growth in premiums discussed above.
Minority interest reflects third-party ownership interests in Reinsurance
Group of America, Incorporated ("RGA").
36
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2001
- -- REINSURANCE
Premiums increased by $142 million, or 18%, to $947 million for the six
months ended June 30, 2002 from $805 million for the comparable 2001 period. New
premiums from facultative and automatic treaties and renewal premium on existing
blocks of business all contributed to the premium growth. Premium levels are
significantly influenced by large transactions and reporting practices of ceding
companies and, as a result, can fluctuate from period to period.
Other revenues increased by $3 million, or 19%, to $19 million for the six
months ended June 30, 2002 from $16 million for the comparable 2001 period. This
increase is due to higher fees earned on financial reinsurance which can vary
from period to period.
Policyholder benefits and claims increased by $120 million, or 18%, to
$774 million for the six months ended June 30, 2002 from $654 million for the
comparable 2001 period. This increase is commensurate with the growth in
premiums discussed above. The level of death claims fluctuate from period to
period, but generally exhibits less volatility over the long -term.
Interest credited to policyholder account balances increased by $18
million, or 38%, to $66 million for the six months ended June 30, 2002 from $48
million for the comparable 2001 period. Contributing to this growth was new
single premium deferred annuity coinsurance agreements in the third quarter of
2001 and the first quarter of 2002.
Policyholder dividends were $11 million for both the six months ended June
30, 2002 and 2001.
Other expenses increased by $5 million, or 2%, to $208 million for the six
months ended June 30, 2002 from $203 million for the comparable 2001 period.
These expenses fluctuate depending on the mix of the underlying insurance
products being reinsured as allowances paid, and the related capitalization and
amortization, can vary significantly based on the type of business and the
reinsurance treaty. This increase is commensurate with the growth in premiums
discussed above.
Minority interest reflects third-party ownership interests in RGA.
AUTO & HOME
The following table presents consolidated financial information for the
Auto & Home segment for the periods indicated:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 702 $ 682 $ 1,394 $ 1,355
Net investment income 46 51 91 102
Other revenues 9 6 16 12
Net investment losses (18) (3) (32) (6)
-------- -------- -------- --------
Total revenues 739 736 1,469 1,463
-------- -------- -------- --------
EXPENSES
Policyholder benefits and claims 517 530 1,012 1,093
Other expenses 193 198 401 407
-------- -------- -------- --------
Total expenses 710 728 1,413 1,500
-------- -------- -------- --------
Income (Loss) before provision (benefit) for income taxes 29 8 56 (37)
Provision (Benefit) for income taxes 5 (1) 11 (20)
-------- -------- -------- --------
Net income (loss) $ 24 $ 9 $ 45 $ (17)
======== ======== ======== ========
THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2001 - AUTO & HOME
Premiums increased by $20 million, or 3%, to $702 million for the three
months ended June 30, 2002 from $682 million for the comparable 2001 period.
Auto and property premiums increased by $15 million and $3 million,
respectively, primarily due to an
37
increase in average premium earned per policy resulting from rate increases. The
impact on premiums from rate increases was partially offset by an expected
reduction in retention. Premiums from other personal lines increased by $2
million.
Other revenues increased by $3 million, or 50%, to $9 million for the
three months ended June 30, 2002 from $6 million for the comparable 2001 period.
This increase was primarily due to $2 million of income earned in the second
quarter of 2002 on corporate- owned life insurance ("COLI").
Policyholder benefits and claims decreased by $13 million or 2%, to $517
million for the three months ended June 30, 2002 from $530 million for the
comparable 2001 period. Auto policyholder benefits and claims increased by $49
million largely due to a $21 million increase resulting from adverse development
of prior year claims, as well as an increase in the bodily injury and no-fault
severities. In addition, claim costs associated with physical damage increased
period over period primarily due to inflation. Costs associated with the
processing of the New York assigned risk business also contributed to this
increase. Property policyholder benefits and claims decreased by $55 million due
to better catastrophe experience and lower non-catastrophe claim frequencies.
Catastrophes represented 9.4% of the loss ratio in 2002 compared to 29.3% in
2001. Other policyholder benefits and claims decreased by $7 million due to
fewer personal umbrella claims. This line of business tends to be very volatile
in the shorter-term versus the longer-term business cycle due to low premium
volume and high liability limits.
Other expenses decreased by $5 million, or 3%, to $193 million for the
three months ended June 30, 2002 from $198 million for the comparable 2001
period. This decrease is due to the elimination of the amortization of goodwill
and other intangibles and a reduction in expenses resulting from a reduction in
administrative staff. The expense ratio decreased to 27.4% in 2002 from 29.1% in
2001.
The effective income tax rates for the three months ended June 30, 2002
and 2001 differ from the corporate tax rate of 35% due to the impact of
non-taxable investment income.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2001
- - AUTO & HOME
Premiums increased by $39 million, or 3%, to $1,394 million for the six
months ended June 30, 2002 from $1,355 million for the comparable 2001 period.
Auto and property premiums increased by $32 million and $3 million,
respectively, primarily due to an increase in average premium earned per policy
resulting from rate increases. The impact on premiums from rate increases was
partially offset by an expected reduction in retention. Premiums from other
personal lines increased by $4 million.
Other revenues increased by $4 million, or 33%, to $16 million for the six
months ended June 30, 2002 from $12 million for the comparable 2001 period. This
increase was primarily due to $2 million of income earned on COLI, and higher
payment installment fees.
Policyholder benefits and claims decreased by $81 million, or 7%, to
$1,012 million for the six months ended June 30, 2002 from $1,093 million for
the comparable 2001 period. Auto policyholder benefits and claims increased by
$22 million largely due to adverse development of prior year claims, an increase
in the current year bodily injury and no-fault severities, higher claim costs
associated with physical damage and an increase in costs associated with the
processing of the New York assigned risk business. These increases were
partially offset by improved claim frequency resulting from milder winter
weather as well as underwriting and agency management actions. Property
policyholder benefits and claims decreased by $90 million due to improved claim
frequencies resulting from milder winter weather and lower catastrophe levels.
Catastrophes represented 9.1% of the loss ratio in 2002 compared to 20.2% in
2001. Other policyholder benefits and claims decreased by $13 million due to
fewer personal umbrella claims. This line of business tends to be very volatile
in the shorter-term versus the longer-term business cycle due to low premium
volume and high liability limits.
Other expenses decreased by $6 million, or 1%, to $401 million for the six
months ended June 30, 2002 from $407 million for the comparable 2001 period.
This decrease is primarily due to the elimination of the amortization of
goodwill and other intangibles and lower expenses resulting from a reduction in
administrative staff. These declines are partially offset by an increase in
expenses related to the outsourced New York assigned risk business. The expense
ratio decreased to 28.8% in 2002 from 30.1% in 2001.
The effective income tax rates for the six months ended June 30, 2002 and
2001 differ from the corporate tax rate of 35% due to the impact of non-taxable
investment income.
38
ASSET MANAGEMENT
The following table presents consolidated financial information for the
Asset Management segment for the periods indicated:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
REVENUES
Net investment income $ 15 $ 17 $ 29 $ 36
Other revenues 50 56 90 112
Net investment losses -- -- (4) --
-------- -------- -------- --------
Total revenues 65 73 115 148
-------- -------- -------- --------
OTHER EXPENSES 57 72 109 138
-------- -------- -------- --------
Income before provision for income taxes 8 1 6 10
Provision for income taxes 3 -- 2 3
-------- -------- -------- --------
Net income $ 5 $ 1 $ 4 $ 7
======== ======== ======== ========
THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2001 - ASSET MANAGEMENT
Other revenues, which are primarily comprised of management and advisory
fees from third parties, decreased by $6 million, or 11%, to $50 million for the
three months ended June 30, 2002 from $56 million for the comparable 2001
period. The most significant factor contributing to this decline is a $14
million decrease resulting from the sale of Conning, which occurred on July 2,
2001. Excluding the impact of this transaction, other revenues increased by $8
million, or 19%, to $50 million in 2002 from $42 million in 2001. This increase
is primarily the result of incentive and performance fees earned in the second
quarter of 2002 from real estate and hedge fund products. In addition,
investment advisory fees earned from retail mutual funds increased slightly over
the prior period. Excluding Conning, assets under management were $49 billion at
June 30, 2002 as compared to $54 billion at June 30, 2001. The $5 billion
decrease is primarily due to institutional customer withdrawals and the
continuing downturn in the equity market.
Other expenses decreased by $15 million, or 21%, to $57 million for the
three months ended June 30, 2002 from $72 million for the comparable 2001
period. Excluding the impact of the sale of Conning, other expenses were
essentially unchanged at $57 million in 2002 as compared with $56 million in
2001.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2001
- - ASSET MANAGEMENT
Other revenues decreased by $22 million, or 20%, to $90 million for the
six months ended June 30, 2002 from $112 million for the comparable 2001 period.
Excluding the impact of the sale of Conning, other revenues increased $9
million, or 11%, to $90 million in 2002 from $81 million in 2001. This increase
is primarily the result of incentive and performance fees earned in 2002 from
real estate and hedge fund products. In addition, investment advisory fees
earned from retail mutual funds increased slightly over the prior period.
Other expenses decreased by $29 million, or 21%, to $109 million for the
six months ended June 30, 2002 from $138 million for the comparable 2001 period.
Excluding the impact of the sale of Conning, other expenses increased by $5
million, or 5%, to $109 million in 2002 from $104 million in 2001. The $5
million increase is primarily due to the addition of distribution and service
employees to build infrastructure for future growth.
39
INTERNATIONAL
The following table presents consolidated financial information for the
International segment for the periods indicated:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 274 $ 196 $ 649 $ 373
Universal life and investment-type product policy fees 7 9 14 20
Net investment income 95 62 170 126
Other revenues 3 2 6 6
Net investment gains (losses) 8 27 (14) 28
-------- -------- -------- --------
Total revenues 387 296 825 553
-------- -------- -------- --------
EXPENSES
Policyholder benefits and claims 262 161 589 305
Interest credited to policyholder account balances 11 10 20 26
Policyholder dividends 6 9 17 19
Other expenses 96 76 189 143
-------- -------- -------- --------
Total expenses 375 256 815 493
-------- -------- -------- --------
Income before provision for income taxes and
cumulative effect of change in accounting 12 40 10 60
Provision for income taxes 5 6 12 6
-------- -------- -------- --------
Income (loss) before cumulative effect of change in accounting 7 34 (2) 54
Cumulative effect of change in accounting -- -- 5 --
-------- -------- -------- --------
Net income $ 7 $ 34 $ 3 $ 54
======== ======== ======== ========
THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2001 - INTERNATIONAL
Premiums increased by $78 million, or 40%, to $274 million for the three
months ended June 30, 2002 from $196 million for the comparable 2001 period. The
2001 acquisitions in Chile and Brazil increased premiums by $28 million and $6
million, respectively. Mexico's premiums increased by $21 million primarily due
to increases in its group life, major medical and individual life business.
South Korea's premiums increased by $19 million primarily due to improved agent
productivity and a larger professional sales force. Spain's premiums increased
by $4 million primarily due to continued growth in the direct auto business.
Universal life and investment-type product policy fees decreased by $2
million, or 22%, to $7 million for the three months ended June 30, 2002 from $9
million for the comparable 2001 period. This decrease is largely due to a
reduction in fees in Spain caused by a decline in assets under management, as a
result of a planned cessation of product lines offered through a joint venture
with Banco Santander.
Other revenues increased by $1 million, or 50%, to $3 million for the
three months ended June 30, 2002 from $2 million for the comparable 2001 period.
Spain's other revenue increased due to the leasing of available office space.
Policyholder benefits and claims increased by $101 million, or 63%, to
$262 million for the three months ended June 30, 2002 from $161 million for the
comparable 2001 period. The 2001 acquisitions in Chile and Brazil contributed
$48 million to this variance. Mexico's, South Korea's and Spain's policyholder
benefits and claims increased by $24 million, $14 million and $6 million,
respectively, commensurate with the premium variances discussed above. The
remainder of the variance is attributable to minor fluctuations in several
countries.
Interest credited to policyholder account balances was essentially
unchanged at $11 million for the three months ended June 30, 2002, as compared
to $10 million for the 2001 period.
Policyholder dividends decreased by $3 million, or 33%, to $6 million for
the three months ended June 30, 2002 from $9 million for the comparable 2001
period. This reduction is due to lower experience refunds related to the Mexican
block of business.
40
Other expenses increased by $20 million, or 26%, to $96 million for the
three months ended June 30, 2002 from $76 million for the comparable 2001
period. Chile's and Brazil's other expenses increased by $6 million and $3
million, respectively, primarily due to the 2001 acquisitions in Chile and
Brazil. Mexico's other expenses increased by $5 million primarily relating to
integration costs in Mexico as a result of the recent acquisition of Hidalgo. In
addition, South Korea's and Mexico's commissions increased by $8 million and $2
million, respectively, commensurate with the aforementioned new business growth.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2001
- - INTERNATIONAL
Premiums increased by $276 million, or 74%, to $649 million for the six
months ended June 30, 2002 from $373 million for the comparable 2001 period. The
majority of this increase is attributable to the sale of an annuity contract in
the first quarter of 2002 to a Canadian trust company, a pension manager. This
transaction accounted for $108 million of the fluctuation in premiums. The 2001
acquisitions in Chile and Brazil increased premiums by $62 million and $12
million, respectively. Mexico's premiums increased by $51 million primarily due
to increases in its group life, major medical and individual life business.
South Korea's premiums increased by $39 million primarily due to improved agent
productivity and a larger professional sales force. The remainder of the
variance is attributable to minor fluctuations in several countries.
Universal life and investment-type product policy fees decreased by $6
million, or 30%, to $14 million for the six months ended June 30, 2002 from $20
million for the comparable 2001 period. This decrease is primarily due to a
reduction in fees in Spain caused by a decline in assets under management, as a
result of a planned cessation of product lines offered through a joint venture
with Banco Santander.
Other revenues are $6 million for both the six months ended June 30, 2002
and 2001.
Policyholder benefits and claims increased by $284 million, or 93%, to
$589 million for the six months ended June 30, 2002 from $305 million for the
comparable 2001 period. The majority of this increase is attributable to a $108
million increase in liabilities for the aforementioned sale of an annuity
contract. The 2001 acquisitions in Chile and Brazil also contributed $90 million
to this variance. Mexico's, and South Korea's policyholder benefits and claims
increased by $51 million and $27 million, respectively, commensurate with the
premium variances discussed above. The remainder of the variance is attributable
to minor fluctuations in several countries.
Interest credited to policyholder account balances decreased by $6
million, or 23%, to $20 million for the six months ended June 30, 2002 from $26
million for the comparable 2001 period. Spain's interest credited decreased due
to the planned cessation of product lines mentioned above. South Korea's
interest credited to policyholder account balances decreased due to a reduction
in the number of investment-type policies in-force.
Policyholder dividends decreased by $2 million, or 11%, to $17 million for
the six months ended June 30, 2002 from $19 million for the comparable 2001
period. This reduction is due to lower experience refunds related to the Mexican
block of business.
Other expenses increased by $46 million, or 32%, to $189 million for the
six months ended June 30, 2002 from $143 million for the comparable 2001 period.
Chile's and Brazil's other expenses increased by $13 million and $7 million,
respectively, primarily due to the 2001 acquisitions in Chile and Brazil.
Mexico's other expenses increased by $7 million primarily relating to the
acquisition of Hidalgo. In addition, South Korea's and Mexico's commissions
increased by $15 million and $4 million, respectively, which is commensurate
with the aforementioned new business growth discussed above.
41
CORPORATE & OTHER
THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
2001 - CORPORATE & OTHER
Other revenues increased by $38 million, or 190%, to $58 million for the
three months ended June 30, 2002 from $20 million for the comparable 2001
period. This variance is primarily due to the recognition of a refund earned on
a reinsurance treaty triggered by fewer claims and favorable mortality
experience from a previously established liability related to a sales practice
class action settlement recorded in 1999, partially offset by interest earned
from premiums on deposit with reinsurers in 2001.
Other expenses were essentially unchanged at $110 million for the three
months ended June 30, 2002 as compared with $108 million in 2001.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2001
- - CORPORATE & OTHER
Other revenues increased by $24 million, or 56%, to $67 million for the
six months ended June 30, 2002 from $43 million for the comparable 2001 period.
This increase is due to the recognition of a refund earned on a reinsurance
treaty triggered by fewer claims and favorable mortality experience from a
previously established liability related to a sales practice class action
settlement recorded in 1999, partially offset by interest earned from premiums
on deposit with reinsurers in 2001.
Other expenses increased by $67 million, or 32%, to $278 million for the
six months ended June 30, 2002 from $211 million for the comparable 2001 period.
The most significant component of this variance is an increase in litigation
costs. The 2002 period includes amounts to cover costs associated with the
resolution of federal government investigations of General American's former
Medicare business. In addition, there were increases in interest expense and
expenses associated with MetLife's banking initiatives.
42
LIQUIDITY AND CAPITAL RESOURCES
THE HOLDING COMPANY
The primary uses of liquidity of the Holding Company include: cash
dividends on common stock, debt service on outstanding debt, including the
interest payments on debentures issued to MetLife Capital Trust I and senior
notes, contributions to subsidiaries, payment of general operating expenses and
the repurchase of the Company's common stock. The Holding Company irrevocably
guarantees, on a senior and unsecured basis, the payment in full of
distributions on the capital securities and the stated liquidation amount of the
capital securities, in each case to the extent of available trust funds. The
primary source of the Holding Company's liquidity is dividends it receives from
Metropolitan Life and other subsidiaries. Other sources of liquidity also
include programs for short- and long-term borrowing, as needed, arranged through
the Holding Company and MetLife Funding, Inc. ("MetLife Funding"), a subsidiary
of Metropolitan Life. In addition, the Holding Company filed a $3.0 billion
shelf registration statement, effective June 1, 2001, with the Securities and
Exchange Commission ("SEC") which permits the registration and issuance of debt
and equity securities as described more fully therein. In connection with this
registration statement, the Company issued $1.25 billion of senior debt in
November 2001. As of June 30, 2002, $1.75 billion of senior debt remains
unissued. See "-- The Company-Financing" below.
Under the New York Insurance Law, Metropolitan Life is permitted without
prior insurance regulatory clearance to pay a stockholder dividend to the
Holding Company as long as the aggregate amount of all such dividends in any
calendar year does not exceed the lesser of (i) 10% of its statutory surplus as
of the immediately preceding calendar year, and (ii) its statutory net gain from
operations for the immediately preceding calendar year (excluding realized
capital gains). Metropolitan Life will be permitted to pay a stockholder
dividend to the Holding Company in excess of the lesser of such two amounts only
if it files notice of its intention to declare such a dividend and the amount
thereof with the New York Superintendent of Insurance (the "Superintendent") and
the Superintendent does not disapprove the distribution.
Metropolitan Life previously reported surplus and the asset valuation
reserve at December 31, 2001 of $5.4 billion and $3.6 billion, respectively.
During the six months ended June 30, 2002, Metropolitan Life recorded certain
corrections to its statutory results that related to prior periods. Adjusted
statutory surplus and the asset valuation reserve are $5.1 billion and $3.5
billion, respectively, at December 31, 2001.
Under the New York 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 stockholders. The
New York State Insurance Department (the "Department") has established informal
guidelines for such determinations. The guidelines, among other things, focus
on the insurer's overall financial condition and profitability under statutory
accounting practices. Management of the Company cannot provide assurance that
Metropolitan Life will have statutory earnings to support payment of dividends
to the Holding Company in an amount sufficient to fund its cash requirements
and pay cash dividends or that the Superintendent will not disapprove any
dividends that Metropolitan Life must submit for the Superintendent's
consideration. MetLife's other insurance subsidiaries are also subject to
restrictions on the payment of dividends to their respective parent companies.
The dividend limitation is based on statutory financial results. Statutory
accounting practices, as prescribed by the Department, differ in certain
respects from accounting principles used in financial statements prepared in
conformity with GAAP. The significant differences relate to deferred policy
acquisition costs, deferred income taxes, required investment reserves, reserve
calculation assumptions, goodwill and surplus notes.
Based on the historic cash flows and the current financial results of
Metropolitan Life, subject to any dividend limitations which may be imposed upon
Metropolitan Life or its subsidiaries by regulatory authorities, management
believes that cash flows from operating activities, together with the dividends
Metropolitan Life is permitted to pay without prior insurance regulatory
clearance, will be sufficient to enable the Holding Company to make payments on
the debentures issued to MetLife Capital Trust I and the senior notes, make
dividend payments on its common stock, pay all operating expenses and meet its
other obligations.
On February 19, 2002, the Holding Company's Board of Directors authorized
a $1 billion common stock repurchase program. This program began after the
completion of the March 28, 2001 and June 27, 2000 repurchase programs, each of
which authorized the repurchase of $1 billion of common stock. Under these
authorizations, the Holding Company may purchase common stock from the MetLife
Policyholder Trust, in the open market, and in privately negotiated
transactions. For the six months ended June 30, 2002 and 2001, 13,644,492 and
16,907,844 shares of common stock, respectively, have been acquired for $431
million and $513 million, respectively. During the six months ended June 30,
2002 and 2001, 16,379 and 62,552 of these shares were reissued for less than
$1 million and $2 million, respectively.
Restrictions and Limitations on Bank Holding Companies and Financial
Holding Companies - Capital. MetLife, Inc. and its insured depository
institution subsidiary are subject to risk-based and leverage capital guidelines
issued by the federal banking regulatory agencies for banks and financial
holding companies. The federal banking regulatory agencies are required by law
to take specific prompt corrective actions with respect to institutions that do
not meet minimum capital standards. At June 30, 2002 MetLife
43
and its insured depository institution subsidiary were in compliance with the
aforementioned guidelines.
THE COMPANY
Liquidity Sources. The Company's principal cash inflows from its insurance
activities come from life insurance premiums, annuity considerations and deposit
funds. A primary liquidity concern with respect to these cash inflows is the
risk of early contract holder and policyholder withdrawal. The Company seeks to
include provisions limiting withdrawal rights on many of its products, including
general account institutional pension products (generally group annuities,
including guaranteed interest contracts and certain deposit fund liabilities)
sold to employee benefit plan sponsors.
The Company's principal cash inflows from its investment activities result
from repayments of principal, proceeds from maturities and sales of invested
assets and investment income. The primary liquidity concerns with respect to
these cash inflows are the risk of default by debtors, and interest rate and
other market volatilities. The Company closely monitors and manages these risks.
Additional sources of liquidity to meet unexpected cash outflows are
available from the Company's portfolio of liquid assets. These liquid assets
include substantial holdings of U.S. Treasury securities, short-term
investments, marketable fixed maturity securities and common stocks. The
Company's available portfolio of liquid assets was approximately $113 billion
and $108 billion at June 30, 2002 and December 31, 2001, respectively.
Sources of liquidity also include facilities for short- and long-term
borrowing as needed, arranged through the Holding Company and MetLife Funding.
See "--Financing" below.
Liquidity Uses. The Company's principal cash outflows primarily relate to
the liabilities associated with its various life insurance, property and
casualty, annuity and group pension products, operating expenses and income
taxes, as well as principal and interest on its outstanding debt obligations.
Liabilities arising from its insurance activities primarily relate to benefit
payments under the above-named products, as well as payments for policy
surrenders, withdrawals and loans.
44
The Company's management believes that its sources of liquidity are more
than adequate to meet its current cash requirements. The nature of the Company's
diverse product portfolio and customer base lessen the likelihood that normal
operations will result in any significant strain on liquidity in 2002. The
following table summarizes major contractual obligations, apart from those
arising from its ordinary product and investment purchase activities:
CONTRACTUAL OBLIGATIONS TOTAL 2002 2003 2004 2005 2006 THEREAFTER
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Long-term debt $ 3,436 $ 7 $ 447 $ 28 $ 379 $ 604 $ 1,971
Operating leases 903 78 141 121 106 87 370
Company-obligated securities 1,356 -- -- -- 1,006 -- 350
Partnership investments 1,904 1,904 -- -- -- -- --
Mortgage commitments 501 461 40 -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 8,100 $ 2,450 $ 628 $ 149 $ 1,491 $ 691 $ 2,691
========== ========== ========== ========== ========== ========== ==========
The Company's committed and unsecured credit facilities aggregating $2.4
billion are principally used as back-up for the Company's commercial paper
program. Two facilities totaling $1.1 billion will expire in 2003 and the
remaining facilities will expire in 2005.
At June 30, 2002, the Company had outstanding approximately $550 million
in letters of credit from various banks, all of which expire within one year.
Since commitments associated with letters of credit and financing arrangements
may expire unused, the amounts shown do not necessarily reflect the actual
future cash funding requirements.
On July 11, 2002, an affiliate of the Company elected not to make future
payments required by the terms of a non-recourse loan obligation. The book value
of this loan was $14 million at June 30, 2002. The Company's exposure under the
terms of the applicable loan agreement is limited solely to its investment in
certain securities held by an affiliate.
Litigation. Various litigation claims and assessments against the Company
have arisen in the course of the Company's business, including, but not limited
to, in connection with its activities as an insurer, employer, investor,
investment advisor and taxpayer. Further, state insurance regulatory authorities
and other federal and state authorities regularly make inquiries and conduct
investigations concerning the Company's compliance with applicable insurance and
other laws and regulations.
It is not feasible to predict or determine the ultimate outcome of all
pending investigations and legal proceedings or provide reasonable ranges of
potential losses. In some of the matters, very large and/or indeterminate
amounts, including punitive and treble damages, are sought. Although in light of
these considerations it is possible that an adverse outcome in certain cases
could have a material adverse effect upon the Company's consolidated financial
position, based on information currently known by the Company's management, in
its opinion, the outcomes of such pending investigations and legal proceedings
are not likely to have such an effect. However, given the large and/or
indeterminate amounts sought in certain of these matters and the inherent
unpredictability of litigation, it is possible that an adverse outcome in
certain matters could, from time to time, have a material adverse effect on the
Company's operating results or cash flows in particular quarterly or annual
periods. See Legal Proceedings.
Risk-Based Capital ("RBC"). Section 1322 of the New York Insurance Law
requires that New York domestic life insurers report their RBC based on a
formula calculated by applying factors to various asset, premium and statutory
reserve items. The formula takes into account the risk characteristics of the
insurer, including asset risk, insurance risk, interest rate risk and business
risk. Section 1322 gives the Superintendent explicit regulatory authority to
require various actions by, or take various actions against, insurers whose
total adjusted capital does not exceed certain RBC levels. At December 31,
2001, Metropolitan Life's and each of the other U.S. insurance subsidiaries'
total adjusted capital was in excess of each of the RBC levels required by each
state of domicile.
The National Association of Insurance Commissioners ("NAIC") adopted the
Codification of Statutory Accounting Principles (the "Codification"), which is
intended to standardize regulatory accounting and reporting to state insurance
departments and became effective January 1, 2001. However, statutory accounting
principles continue to be established by individual state laws and permitted
practices. The Department required adoption of the Codification with certain
modifications for the preparation of statutory financial statements effective
January 1, 2001. Further modifications by state insurance departments may impact
the effect of the Codification on the statutory capital and surplus of
Metropolitan Life and the Holding Company's other insurance subsidiaries.
Financing. MetLife Funding serves as a centralized finance unit for
Metropolitan Life. Pursuant to a support agreement,
45
Metropolitan Life has agreed to cause MetLife Funding to have a tangible net
worth of at least one dollar. At June 30, 2002 and December 31, 2001, MetLife
Funding had a tangible net worth of $10.7 million and $10.6 million,
respectively. MetLife Funding raises funds from various funding sources and uses
the proceeds to extend loans, through MetLife Credit Corp., a subsidiary of
Metropolitan Life, to the Holding Company, Metropolitan Life and other
affiliates. MetLife Funding manages its funding sources to enhance the financial
flexibility and liquidity of Metropolitan Life and other affiliated companies.
At June 30, 2002 and December 31, 2001, MetLife Funding had total outstanding
liabilities of $54 million and $133 million, respectively, consisting primarily
of commercial paper. The Holding Company is authorized to raise funds from
various funding sources and uses the proceeds for general corporate purposes. At
both June 30, 2002 and December 31, 2001, the Holding Company had no short-term
debt outstanding. In November 2001, the Holding Company issued $750 million
6.125% senior notes due 2011 and $500 million 5.25% senior notes due 2006
(collectively, "Senior Notes"), under the shelf registration statement discussed
above in " -- the Holding Company."
The Company also maintained approximately $2.4 billion in committed credit
facilities at both June 30, 2002 and December 31, 2001. At June 30, 2002 and
December 31, 2001, there was approximately $26 million and $24 million
outstanding, respectively, under these facilities. At June 30, 2002 and December
31, 2001, there was $550 million and $473 million, respectively, outstanding in
letters of credit from various banks.
Support Agreements. In addition to its support agreement with MetLife
Funding described above, Metropolitan Life has entered into a net worth
maintenance agreement with New England Life Insurance Company ("New England
Life"), whereby it is obligated to maintain New England Life's statutory capital
and surplus at the greater of $10 million or the amount necessary to prevent
certain regulatory action by Massachusetts, the state of domicile of this
subsidiary. The capital and surplus of New England Life at June 30, 2002 was in
excess of the amount that would trigger such an event.
In connection with the Company's acquisition of GenAmerica, Metropolitan
Life entered into a net worth maintenance agreement with General American Life
Insurance Company ("General American"), whereby Metropolitan Life is obligated
to maintain General American's statutory capital and surplus at the greater of
$10 million or the amount necessary to maintain the capital and surplus of
General American at a level not less than 180% of the NAIC Risk Based
Capitalization Model. The capital and surplus of General American at December
31, 2001 was in excess of the required amount.
Metropolitan Life has also entered into arrangements with some of its
other subsidiaries and affiliates to assist such subsidiaries and affiliates in
meeting various jurisdictions' regulatory requirements regarding capital and
surplus. In addition, Metropolitan Life has entered into a support arrangement
with respect to reinsurance obligations of a subsidiary. Management does not
anticipate that these arrangements will place any significant demands upon the
Company's liquidity resources.
The Holding Company has agreed to make capital contributions, in any event
not to exceed $120 million, to Metropolitan Insurance and Annuity Company
("MIAC") in the aggregate amount of the excess of (i) the debt service payments
required to be made, and the capital expenditure payments required to be made or
reserved for, in connection with the affiliated borrowings arranged in November
2001 to fund the purchase by MIAC of certain real estate properties from
Metropolitan Life during the two year period following the date of borrowings,
over (ii) the cash flows generated by these properties.
Consolidated Cash Flows. Net cash provided by operating activities was
$1,595 million and $2,075 million for the six months ended June 30, 2002 and
2001, respectively. The fluctuation in cash provided by the Company's operations
between periods is primarily due to an increase in insurance related
liabilities, offset by a decrease in income taxes payable and a decrease in
premiums and other receivables. Net cash provided by operating activities in the
periods presented was more than adequate to meet liquidity requirements.
Net cash used in investing activities was $7,307 million and $2,118
million for the six months ended June 30, 2002 and 2001, respectively. Purchases
of investments exceeded sales, maturities and repayments by $6,139 million and
$2,405 million in the 2002 and 2001 periods, respectively. The net purchases
were primarily attributable to cash received from the senior notes offering in
the fourth quarter of 2001 that was reinvested in long-term bonds and short-term
investments during the first quarter of 2002.
Net cash provided by financing activities was $1,802 million and $1,357
million for the six months ended June 30, 2002 and 2001, respectively. Deposits
to policyholders' account balances exceeded withdrawals by $2,728 million and
$951 million for the six months ended June 30, 2002 and 2001, respectively.
Short-term financing decreased by $303 million in 2002 compared with an increase
of $1,032 million in 2001.
The operating, investing and financing activities described above resulted
in a $3,910 million decrease in cash and cash
46
equivalents for the six months ended June 30, 2002 and a $1,314 million increase
in cash and cash equivalents for the comparable 2001 period.
EFFECTS OF INFLATION
The Company does not believe that inflation has had a material effect on
its consolidated results of operations, except insofar as inflation may affect
interest rates.
ACCOUNTING STANDARDS
During 2002, the Company adopted or applied the following accounting
standards: (i) SFAS No. 141, Business Combinations ("SFAS 141"), (ii) SFAS No.
142 and (iii) SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets ("SFAS 144"). In accordance with SFAS 141, the Company
eliminated $5 million of negative goodwill in the first quarter of 2002, which
reflects a cumulative effect of a change in accounting. On January 1, 2002, the
Company adopted SFAS 142. The Company did not amortize goodwill during 2002,
whereas for the three months and six months ended June 30, 2001, the Company
recorded amortization of goodwill of $12 million and $24 million, respectively.
As a result of completing the first step of the goodwill impairment test, which
is used to identify potential impairment by comparing the fair value of the
reporting unit with its carrying amount, the Company estimates there will be no
significant impairments of goodwill as of January 1, 2002. The amount of
goodwill impairment, if any, will be determined no later then December 31, 2002.
There was no significant impairment of intangible assets or reclassifications
between goodwill and other intangible assets at January 1, 2002. The adoption of
SFAS 144 by the Company did not have a material impact on the Company's
unaudited interim condensed consolidated financial statements.
The Financial Accounting Standards Board ("FASB") is currently
deliberating the issuance of an interpretation of SFAS No. 94, Consolidation of
All Majority-Owned Subsidiaries, to provide additional guidance to assist
companies in identifying and accounting for special purpose entities ("SPEs"),
including when SPEs should be consolidated by the investor. The interpretation
would introduce a concept that consolidation would be required by the primary
beneficiary of the activities of an SPE unless the SPE can meet certain
independent economic substance criteria. It is not possible to determine at this
time what conclusions will be included in the final interpretation; however, the
result could impact the accounting treatment of these entities by the Company.
The FASB is currently deliberating the issuance of a proposed statement
that would amend SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. The proposed statement will address and resolve certain pending
Derivatives Implementation Group ("DIG") issues. The outcome of the pending DIG
issues and other provisions of the statement could impact the Company's
accounting for beneficial interests, loan commitments and other transactions
deemed to be derivatives under the new statement.
In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS 146"), which must be adopted for exit
and disposal activities initiated after December 31, 2002. SFAS 146 will require
that a liability for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value only when the liability is
incurred rather than at the date of an entity's commitment to an exit plan as
required by Emerging Issues Task Force ("EITF") 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring) ("EITF 94-3"). In the
fourth quarter of 2001 the Company recorded a charge of $330 million, net of
taxes of $169 million, associated with business realignment initiatives using
the EITF 94-3 accounting guidance.
In the first quarter of 2003, the Company will adopt the fair value-based
employee stock-based compensation expense recognition provisions of SFAS No.
123, Accounting for Stock-Based Compensation ("SFAS 123") prospectively. The
Company currently applies the intrinsic value-based expense provisions set forth
in APB Opinion No. 25, Accounting for Stock Issued to Employees, ("APB 25").
SFAS 123 states that the adoption of the fair value-based method is a change to
a preferable method of accounting. Management believes the use of the fair
value-based method to record employee stock-based compensation expense is
consistent with the Company's accounting for all other forms of compensation.
The adoption of the fair value-based method in 2002 would have decreased net
income for the full year by an estimated $16 million to $19 million, net of
income taxes of $9 million to $11 million, respectively. This estimate is based
on assumptions as of June 30, 2002.
47
INVESTMENTS
The Company had total cash and invested assets at June 30, 2002 of $174.6
billion. In addition, the Company had $59.3 billion held in its separate
accounts, for which the Company generally does not bear investment risk.
The Company's primary investment objective is to maximize net income
consistent with acceptable risk parameters. The Company is exposed to three
primary sources of investment risk:
- credit risk, relating to the uncertainty associated with the
continued ability of a given obligor to make timely payments of
principal and interest;
- interest rate risk, relating to the market price and cash flow
variability associated with changes in market interest rates; and
- market valuation risk for equity holdings.
The Company manages risk through in-house fundamental analysis of the
underlying obligors, issuers, transaction structures and real estate properties.
The Company also manages credit risk and market valuation risk through industry
and issuer diversification and asset allocation. For real estate and
agricultural assets, the Company manages credit risk and valuation risk through
geographic, property type, and product type diversification and asset
allocation. The Company manages interest rate risk as part of its asset and
liability management strategies, product design, such as the use of market value
adjustment features and surrender charges, and proactive monitoring and
management of certain non-guaranteed elements of its products, such as the
resetting of credited interest and dividend rates for policies that permit such
adjustments.
The following table summarizes the Company's cash and invested assets at:
JUNE 30, 2002 DECEMBER 31, 2001
-------------------- ----------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
Fixed maturities available-for-sale, at fair value $ 124,067 71.0% $ 115,398 68.0%
Mortgage loans on real estate 23,733 13.6 23,621 13.9
Policy loans 8,316 4.8 8,272 4.9
Real estate and real estate joint ventures 5,963 3.4 5,730 3.4
Cash and cash equivalents 3,563 2.0 7,473 4.4
Equity securities and other limited partnership interests 3,446 2.0 4,700 2.8
Other invested assets 3,271 1.9 3,298 1.9
Short-term investments 2,233 1.3 1,203 0.7
---------- ----- ---------- -----
Total cash and invested assets $ 174,592 100.0% $ 169,695 100.0%
========== ===== ========== =====
48
INVESTMENT RESULTS
The annualized yields on general account cash and invested assets,
excluding net investment gains and losses, were 7.30% and 7.54% for the three
months ended June 30, 2002 and 2001, respectively, and 7.24% and 7.56% for the
six months ended June 30, 2002 and 2001, respectively.
The following table illustrates the annualized yields on average assets
for each of the components of the Company's investment portfolio for the three
months and six months ended June 30, 2002 and 2001:
AT OR FOR THE THREE MONTHS ENDED JUNE 30, AT OR FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------------------- ---------------------------------------------
2002 2001 2002 2001
--------------------- --------------------- --------------------- --------------------
YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT
-------- ---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN MILLIONS)
FIXED MATURITIES:(2)
Investment income 7.50% $ 2,002 7.89% $ 2,016 7.54% $ 3,959 7.77% $ 3,952
Net investment losses (210) (189) (375) (340)
---------- ---------- ---------- ----------
Total $ 1,792 $ 1,827 $ 3,584 $ 3,612
---------- ---------- ---------- ----------
Ending assets $ 124,067 $ 115,488 $ 124,067 $ 115,488
---------- ---------- ---------- ----------
MORTGAGE LOANS ON REAL ESTATE:(3)
Investment income 7.97% $ 472 8.75% $ 488 7.89% $ 934 8.32% $ 923
Net investment losses (3) (7) (22) (5)
---------- ---------- ---------- ----------
Total $ 469 $ 481 $ 912 $ 918
---------- ---------- ---------- ----------
Ending assets $ 23,733 $ 22,561 $ 23,733 $ 22,561
---------- ---------- ---------- ----------
POLICY LOANS:
Investment income 6.56% $ 137 6.65% $ 135 6.46% $ 268 6.60% $ 269
---------- ---------- ---------- ----------
Ending assets $ 8,316 $ 8,122 $ 8,316 $ 8,122
---------- ---------- ---------- ----------
REAL ESTATE AND REAL ESTATE
JOINT VENTURES:(4)
Investment income, net of expenses 11.80% $ 174 11.54% $ 157 11.09% $ 324 11.65% $ 318
Net investment (losses) gains (14) 19 (16) 24
---------- ---------- ---------- ----------
Total $ 160 $ 176 $ 308 $ 342
---------- ---------- ---------- ----------
Ending assets $ 5,963 $ 5,420 $ 5,963 $ 5,420
---------- ---------- ---------- ----------
EQUITY SECURITIES AND OTHER LIMITED
PARTNERSHIP INTERESTS:
Investment income (loss) 5.14% $ 43 (1.36%) $ (13) 2.72% $ 52 2.91% $ 54
Net investment gains (losses) 81 26 242 (73)
---------- ---------- ---------- ----------
Total $ 124 $ 13 $ 294 $ (19)
---------- ---------- ---------- ----------
Ending assets $ 3,446 $ 3,784 $ 3,446 $ 3,784
---------- ---------- ---------- ----------
CASH, CASH EQUIVALENTS AND
SHORT-TERM INVESTMENTS:
Investment income 2.85% $ 38 5.26% $ 65 3.92% $ 121 5.62% $ 137
Net investment (losses) gains (1) (5) 1 (5)
---------- ---------- ---------- ----------
Total $ 37 $ 60 $ 122 $ 132
---------- ---------- ---------- ----------
Ending assets $ 5,796 $ 5,575 $ 5,796 $ 5,575
---------- ---------- ---------- ----------
OTHER INVESTED ASSETS:
Investment income 6.53% $ 56 4.62% $ 41 6.08% $ 102 6.56% $ 108
Net investment (losses) gains (119) (29) (201) 39
---------- ---------- ---------- ----------
Total $ (63) $ 12 $ (99) $ 147
---------- ---------- ---------- ----------
Ending assets $ 3,271 $ 3,427 $ 3,271 $ 3,427
---------- ---------- ---------- ----------
TOTAL INVESTMENTS:
Investment income before expenses
and fees 7.46% $ 2,922 7.69% $ 2,889 7.38% $ 5,760 7.71% $ 5,761
Investment expenses and fees (0.16%) (61) (0.15%) (55) (0.14%) (110) (0.15%) (111)
-------- ---------- -------- ---------- -------- ---------- -------- ----------
Net investment income 7.30% $ 2,861 7.54% $ 2,834 7.24% $ 5,650 7.56% $ 5,650
Net investment losses (266) (185) (371) (360)
Adjustments to investment gains(5) 73 49 86 79
---------- ---------- ---------- ----------
Total $ 2,668 $ 2,698 $ 5,365 $ 5,369
========== ========== ========== ==========
(1) Yields are based on quarterly average asset carrying values for the three
months and six months ended June 30, 2002 and 2001, excluding recognized
and unrealized gains and losses, and for yield calculation purposes,
average assets exclude collateral associated with the Company's securities
lending program.
(2) Included in fixed maturities are equity-linked notes of $958 million and
$1,180 million at June 30, 2002 and 2001, respectively, which include an
equity-like component as part of the notes' return. Investment income for
fixed maturities includes prepayment fees and income from the securities
lending program. Fixed maturity investment income has been reduced by
rebates paid under the program.
(3) Investment income from mortgage loans includes prepayment fees.
49
(4) Real estate and real estate joint venture income is shown net of
depreciation of $56 million and $54 million for the three months ended
June 30, 2002 and 2001, respectively, and $114 million and $108 million
for the six months ended June 30, 2002 and 2001, respectively.
(5) Adjustments to investment gains and losses include amortization of
deferred policy acquisition costs and adjustments to the policyholder
dividend obligation resulting from investment gains and losses.
FIXED MATURITIES
Fixed maturities consist principally of publicly traded and privately
placed debt securities, and represented 71.0% and 68.0% of total cash and
invested assets at June 30, 2002 and December 31, 2001, respectively. Based on
estimated fair value, public fixed maturities represented $105,435 million, or
85.0%, and $96,579 million, or 83.7%, of total fixed maturities at June 30, 2002
and December 31, 2001, respectively. Based on estimated fair value, private
fixed maturities represented $18,632 million, or 15.0%, and $18,819 million, or
16.3%, of total fixed maturities at June 30, 2002 and December 31, 2001,
respectively. The Company invests in privately placed fixed maturities to (i)
obtain higher yields than can ordinarily be obtained with comparable public
market securities, (ii) provide the Company with protective covenants, call
protection features and, where applicable, a higher level of collateral, and
(iii) increase diversification. However, the Company may not freely trade its
privately placed fixed maturities because of restrictions imposed by federal and
state securities laws and illiquid trading markets.
In cases where quoted market prices are not available, fair values are
estimated using present value or valuation techniques. The fair value estimates
are made at a specific point in time, based on available market information and
judgments about the financial instruments, including estimates of the timing and
amounts of expected future cash flows and the credit standing of the issuer or
counter-party. Factors considered in estimating fair value include: coupon rate,
maturity, estimated duration, call provisions, sinking fund requirements, credit
rating, industry sector of the issuer and quoted market prices of comparable
securities.
The Securities Valuation Office of the NAIC evaluates the bond investments
of insurers for regulatory reporting purposes and assigns securities to one of
six investment categories called "NAIC designations." The NAIC designations
parallel the credit ratings of the Nationally Recognized Statistical Rating
Organizations for marketable bonds. NAIC designations 1 and 2 include bonds
considered investment grade (rated "Baa3" or higher by Moody's Investors
Services ("Moody's"), or rated "BBB-" or higher by Standard & Poor's ("S&P")) by
such rating organizations. NAIC designations 3 through 6 include bonds
considered below investment grade (rated "Ba1" or lower by Moody's, or rated
"BB+" or lower by S&P).
The following table presents the Company's total fixed maturities by NAIC
designation and the equivalent ratings of the Nationally Recognized Statistical
Rating Organizations, as well as the percentage, based on estimated fair value,
that each designation comprises at:
JUNE 30, 2002 DECEMBER 31, 2001
------------------------------------- -------------------------------------
ESTIMATED ESTIMATED
NAIC RATING AGENCY AMORTIZED FAIR % OF AMORTIZED FAIR % OF
RATING EQUIVALENT DESIGNATION COST VALUE TOTAL COST VALUE TOTAL
- ------ -------------------------- ----------- ----------- ------- ----------- ----------- -------
(DOLLARS IN MILLIONS)
1 Aaa/Aa/A $ 78,495 $ 82,235 66.3% $ 72,098 $ 75,265 65.2%
2 Baa 29,946 30,480 24.6 29,128 29,581 25.6
3 Ba 6,650 6,435 5.2 6,021 5,856 5.1
4 B 3,532 3,275 2.6 3,205 3,100 2.7
5 Caa and lower 832 671 0.5 726 597 0.5
6 In or near default 226 228 0.2 327 237 0.2
----------- ----------- ------- ----------- ----------- -------
Subtotal 119,681 123,324 99.4 111,505 114,636 99.3
Redeemable preferred stock 816 743 0.6 783 762 0.7
----------- ----------- ------- ----------- ----------- -------
Total fixed maturities $ 120,497 $ 124,067 100.0% $ 112,288 $ 115,398 100.0%
=========== =========== ======= =========== =========== =======
Based on estimated fair values, investment grade fixed maturities
comprised 90.9% of total fixed maturities in the general account at both June
30, 2002 and December 31, 2001.
The following table shows the amortized cost and estimated fair value of
fixed maturities, by contractual maturity dates (excluding scheduled sinking
funds) at:
50
JUNE 30, 2002 DECEMBER 31, 2001
------------------------ ------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
Due in one year or less $ 5,734 $ 5,794 $ 4,001 $ 4,049
Due after one year through five years 25,422 26,134 20,168 20,841
Due after five years through ten years 20,317 20,929 22,937 23,255
Due after ten years 31,466 32,624 30,565 32,017
---------- ---------- ---------- ----------
Subtotal 82,939 85,481 77,671 80,162
Mortgage-backed and other asset-backed securities 36,743 37,843 33,834 34,474
---------- ---------- ---------- ----------
Subtotal 119,682 123,324 111,505 114,636
Redeemable preferred stock 815 743 783 762
---------- ---------- ---------- ----------
Total fixed maturities $ 120,497 $ 124,067 $ 112,288 $ 115,398
========== ========== ========== ==========
The Company diversifies its fixed maturities by security sector. The
following tables set forth the amortized cost, gross unrealized gain or loss and
estimated fair value of the Company's fixed maturities by sector, as well as the
percentage of the total fixed maturities holdings that each security sector
comprised at:
JUNE 30, 2002
------------------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------------ ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
---------- ---------- ---------- ---------- ---------
(DOLLARS IN MILLIONS)
Corporate securities $ 64,668 $ 2,696 $ 1,493 $ 65,871 53.1 %
Mortgage-backed securities 28,027 1,123 34 29,116 23.5
U.S. treasuries/agencies 8,828 995 26 9,797 7.9
Asset-backed securities 8,719 217 209 8,727 7.0
Foreign government securities 6,175 331 104 6,402 5.2
Other fixed income assets 4,080 222 148 4,154 3.3
---------- ---------- ---------- ---------- ---------
Total $ 120,497 $ 5,584 $ 2,014 $ 124,067 100.0 %
========== ========== ========== ========== =========
DECEMBER 31, 2001
------------------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------------ ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
---------- ---------- ---------- ---------- ---------
(DOLLARS IN MILLIONS)
Corporate securities $ 61,984 $ 2,211 $ 1,539 $ 62,656 54.3 %
Mortgage-backed securities 25,723 661 56 26,328 22.8
U.S. treasuries/agencies 8,230 1,026 43 9,213 8.0
Asset-backed securities 8,111 245 210 8,146 7.1
Foreign government securities 4,512 419 41 4,890 4.2
Other fixed income assets 3,728 509 72 4,165 3.6
---------- ---------- ---------- ---------- ---------
Total $ 112,288 $ 5,071 $ 1,961 $ 115,398 100.0 %
========== ========== ========== ========== =========
Problem, Potential Problem and Restructured Fixed Maturities. The Company
monitors fixed maturities to identify investments that management considers to
be problems or potential problems. The Company also monitors investments that
have been restructured.
The Company defines problem securities in the fixed maturities category as
securities with principal or interest payments in default, securities to be
restructured pursuant to commenced negotiations, or securities issued by a
debtor that has entered into bankruptcy.
The Company defines potential problem securities in the fixed maturity
category as securities of an issuer deemed to be experiencing significant
operating problems or difficult industry conditions. The Company uses various
criteria, including the
51
following, to identify potential problem securities:
- debt service coverage or cash flow falling below certain thresholds
which vary according to the issuer's industry and other relevant
factors;
- significant declines in revenues or margins;
- violation of financial covenants;
- public securities trading at a substantial discount deemed to be
other-than-temporary as a result of specific credit concerns; and
- other subjective factors.
The Company defines restructured securities in the fixed maturities
category as securities to which the Company has granted a concession that it
would not have otherwise considered but for the financial difficulties of the
obligor. The Company enters into a restructuring when it believes it will
realize a greater economic value under the new terms rather than through
liquidation or disposition. The terms of the restructuring may involve some or
all of the following characteristics: a reduction in the interest rate, an
extension of the maturity date, an exchange of debt for equity or a partial
forgiveness of principal or interest.
The following table presents the estimated fair value of the Company's
total fixed maturities classified as performing, potential problem, problem and
restructured fixed maturities at:
JUNE 30, 2002 DECEMBER 31, 2001
---------------------- ----------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- --------- ---------- ---------
(DOLLARS IN MILLIONS)
Performing $ 123,355 99.4 % $ 114,879 99.6 %
Potential Problem 480 0.4 386 0.3
Problem 217 0.2 111 0.1
Restructured 15 0.0 22 0.0
---------- --------- ---------- ---------
Total $ 124,067 100.0 % $ 115,398 100.0 %
========== ========= ========== =========
Fixed Maturity Impairment. The Company classifies all of its fixed
maturities as available-for-sale and marks them to market through other
comprehensive income. All securities with gross unrealized losses at the
consolidated balance sheet date are subjected to the Company's process for
identifying other-than-temporary impairments. The Company writes down to fair
value securities that it deems to be other-than-temporarily impaired in the
period the securities are deemed to be so impaired. The assessment of whether
such impairment has occurred is based on management's case-by-case evaluation of
the underlying reasons for the decline in fair value. Management considers a
wide range of factors, as described below, about the security issuer and uses
its best judgment in evaluating the cause of the decline in the estimated fair
value of the security and in assessing the prospects for near-term recovery.
Inherent in management's evaluation of the security are assumptions and
estimates about the operations of the issuer and its future earnings potential.
Considerations used by the Company in the impairment evaluation process
include, but are not limited to, the following:
- The length of time and the extent to which the market value has been
below amortized cost;
- The potential for impairments of securities when the issuer is
experiencing significant financial difficulties, including a review
of all securities of the issuer, including its known subsidiaries
and affiliates, regardless of the form of the Company's ownership;
- The potential for impairments in an entire industry sector or
sub-sector;
- The potential for impairments in certain economically depressed
geographic locations;
- The potential for impairments of securities where the issuer, series
of issuers or industry has suffered a catastrophic type of loss or
has exhausted natural resources; and
52
- Other subjective factors, including concentrations and information
obtained from regulators and rating agencies.
The Company records writedowns as investment losses and adjusts the cost
basis of the fixed maturities accordingly. The Company does not change the
revised cost basis for subsequent recoveries in value. Writedowns of fixed
maturities were $250 million and $130 million for the three months ended June
30, 2002 and 2001, respectively. Writedowns of fixed maturities were $525
million and $177 million for the six months ended June 30, 2002 and 2001,
respectively. The Company's three largest writedowns totaled $188 million and
$236 million for the three months and six months ended June 30, 2002,
respectively. The circumstances that gave rise to these impairments were
financial restructurings or bankruptcy filings. During the six months ended June
30, 2002, the Company sold fixed maturity securities with a fair value of $7,245
million at a loss of $482 million.
The gross unrealized loss related to the Company's fixed maturities at
June 30, 2002 was $2,014 million. These fixed maturities mature as follows: 5%
due in one year or less; 27% due in one to five years; 25% due in six to ten
years; and 43% due in over ten years (calculated as a percentage of amortized
cost). Additionally, such securities are concentrated by security type in US
corporates (57%) and foreign corporates (17%); and are concentrated by industry
in communications (30%) and finance (21%) (calculated as a percentage of gross
unrealized loss). Noninvestment grade securities represent 43% of the gross
unrealized loss on fixed maturities.
The total gross unrealized loss consists of three categories of
securities: (i) securities where the estimated fair value had declined and
remained below amortized cost by less than 20% ($957 million); (ii) securities
where the estimated fair value had declined and remained below amortized cost by
20% or more for less than six months ($734 million); and (iii) securities where
the estimated value had declined and remained below amortized cost by 20% or
more over the previous six months ($323 million). The first two categories have
generally been adversely impacted by the downturn in the financial markets,
overall economic conditions and continuing effects of the September 11, 2001
tragedies. While all of these securities are monitored for potential impairment,
the Company's experience indicates that the first two categories do not present
as great a risk of impairment, and often, fair values recover over time as the
factors that caused the declines improve.
The category of fixed maturity securities where the estimated fair value
has declined and remained below amortized cost by 20% or more over the previous
six months is comprised of 118 securities with an amortized cost of $823 million
and a gross unrealized loss of $323 million. These fixed maturities mature as
follows: 4% due in one year or less; 13% due in one to five years; 45% due in
six to ten years; and 38% due in over ten years (calculated as a percentage of
amortized cost). Additionally, such securities are concentrated by security type
in US corporates (45%) and foreign corporates (31%); and are concentrated by
industry in finance (26%) and communications (22%) (calculated as a percentage
of gross unrealized loss). Noninvestment grade securities represent 78% of the
$323 million gross unrealized loss. A portion of the 118 fixed maturity
securities described above had estimated fair values below amortized cost by 20%
or more over the previous twelve months. This sub-category is comprised of 35
fixed maturities with an amortized cost of $241 million and a gross unrealized
loss of $97 million.
The Company held five fixed maturity securities each with a gross
unrealized loss at June 30, 2002 greater than $10 million representing 24% of
the gross unrealized loss on fixed maturities where the estimated fair value had
declined and remained below amortized cost by 20% or more over the previous six
months. The estimated fair value and gross unrealized loss at June 30, 2002 for
these securities were $97 million and $478 million, respectively. These
securities were distributed among the asset-backed, US corporate and foreign
corporate sectors. The Company analyzed, on a case-by-case basis, each of the
five fixed maturity securities as of June 30, 2002 to determine if the
securities were other-than-temporarily impaired. The Company believes that the
estimated fair value of many of these securities, which were concentrated in the
communications industry, were artificially depressed as a result of unusually
strong negative market reaction in this sector and generally poor economic and
market conditions. The Company believes that the analysis of each such security
indicated that the financial strength, liquidity, leverage, future outlook
and/or recent management actions support the view that the security was not
other-than-temporarily impaired as of June 30, 2002.
Corporate Fixed Maturities. The table below shows the major industry types
that comprise the corporate bond holdings at:
JUNE 30, 2002 DECEMBER 31, 2001
---------------------- ----------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- --------- ---------- ---------
(DOLLARS IN MILLIONS)
Industrial $ 28,012 42.6 % $ 27,346 43.7 %
Utility 7,068 10.7 7,030 11.2
Finance 14,510 22.0 12,997 20.7
Yankee/Foreign (1) 15,890 24.1 14,767 23.6
Other 391 0.6 516 0.8
---------- --------- ---------- ---------
Total $ 65,871 100.0 % $ 62,656 100.0 %
========== ========= ========== =========
--------
(1) Includes publicly traded, dollar-denominated debt obligations of
foreign obligors, known as Yankee bonds, and other foreign
investments.
The Company diversifies its corporate bond holdings by industry and
issuer. The portfolio has no exposure to any single issuer in excess of 1% of
its total invested assets. At June 30, 2002, the Company's combined holdings in
the ten issuers to which it had the greatest exposure totaled $5,513 million,
which was less than 4% of the Company's total invested assets at such date. The
exposure to the largest single issuer of corporate bonds the Company held at
June 30, 2002 was $961 million.
At June 30, 2002 and December 31, 2001, investments of $7,153 million and
$7,120 million, respectively, or 45.0% and 48.2%, respectively, of the
Yankee/Foreign sector, represented exposure to traditional Yankee bonds. The
balance of this exposure was primarily dollar-denominated, foreign private
placements and project finance loans. The Company diversifies the Yankee/Foreign
portfolio by country and issuer.
The Company does not have material exposure to foreign currency risk in
its invested assets. In the Company's international insurance operations, both
its assets and liabilities are generally denominated in local currencies.
Foreign currency denominated securities supporting U.S. dollar liabilities are
generally swapped back into U.S. dollars.
The Company's exposure to future deterioration in the economic and
political environment in Argentina, with respect to its Argentine-related
investments, is limited to the net carrying value of those assets, which totaled
less than $200 million as of June 30, 2002. The net carrying value of the
Company's Argentine-related investments is net of writedowns for
other-than-temporary impairments.
53
Mortgage-Backed Securities. The following table shows the types of
mortgage-backed securities the Company held at:
JUNE 30, 2002 DECEMBER 31, 2001
---------------------- ----------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- --------- ---------- ---------
(DOLLARS IN MILLIONS)
Pass-through securities $ 13,076 44.9 % $ 10,542 40.0 %
Collateralized mortgage obligations 10,556 36.3 10,432 39.7
Commercial mortgage-backed securities 5,484 18.8 5,354 20.3
---------- --------- ---------- ---------
Total $ 29,116 100.0 % $ 26,328 100.0 %
========== ========= ========== =========
At June 30, 2002, pass-through and collateralized mortgage obligations
totaled $23,632 million, or 81.2% of total mortgage-backed securities, and a
majority of this amount represented agency-issued pass-through and
collateralized mortgage obligations guaranteed or otherwise supported by the
Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation or the Government National Mortgage Association. At June 30, 2002,
approximately $2,964 million, or 54.0% of the commercial mortgage-backed
securities, and $21,815 million, or 92.3% of the pass-through securities and
collateralized mortgage obligations, were rated Aaa/AAA by Moody's or S&P.
The principal risks inherent in holding mortgage-backed securities are
prepayment, extension and collateral risks, which will affect the timing of when
cash will be received. The Company's active monitoring of its mortgage-backed
securities mitigates exposure to losses from cash flow risk associated with
interest rate fluctuations.
Asset-Backed Securities. Asset-backed securities, which include home
equity loans, credit card receivables, collateralized debt obligations and
automobile receivables, are purchased both to diversify the overall risks of the
Company's fixed maturity assets and to provide attractive returns. The Company's
asset-backed security are diversified both by type of asset and by issuer. Home
equity loans constitute the largest exposure in the Company's asset-backed
securities investments. Except for asset-backed securities backed by home equity
loans, the asset-backed security investments generally have little sensitivity
to changes in interest rates.
The principal risks in holding asset-backed securities are structural,
credit and capital market risks. Structural risks include the security's
priority in the issuer's capital structure, the adequacy of and ability to
realize proceeds from the collateral and the potential for prepayments. Credit
risks include consumer or corporate credits such as credit card holders,
equipment lessees, and corporate obligors. Capital market risks include the
general level of interest rates and the liquidity for these securities in the
marketplace.
Structured investment transactions. The Company participates in structured
investment transactions as part of its risk management strategy, including
asset/liability management, and to enhance the Company's total return on its
investment portfolio. These investments are predominately made through
bankruptcy-remote SPEs, which generally acquire financial assets, including
corporate equities, debt securities and purchased options. These investments are
referred to as "beneficial interests".
The Company's exposure to losses related to these SPEs is limited to its
carrying value since the Company has not guaranteed the performance, liquidity
or obligations of the SPEs. As prescribed by GAAP, the Company does not
consolidate such SPEs since unrelated third parties hold controlling interests
through ownership of the SPEs' equity, representing at least three percent of
the total assets of the SPE throughout the life of the SPE, and such equity
class has the substantive risks and rewards of the residual interests in the
SPE.
The Company sponsors financial asset securitizations of high yield debt
securities, investment grade bonds and structured finance securities and is also
the collateral manager and a beneficial interest holder in such transactions. As
the collateral manager, the Company earns a management fee on the outstanding
securitized asset balance. When the Company transfers assets to an SPE and
surrenders control over the transferred assets, the transaction is accounted for
as a sale. Gains or losses on securitizations are determined with reference to
the cost or amortized cost of the financial assets transferred, which is
allocated to the assets sold and the beneficial interests retained based on
relative fair values at the date of transfer. The Company has sponsored four
securitizations with a total of approximately $1.5 billion in financial assets
as of June 30, 2002. Two of these transactions, which were executed in 2001,
included the transfer of assets totaling approximately $289 million, which
resulted in the recognition of an insignificant amount of investment gains. The
Company's beneficial interests in these SPEs and the related investment income
were insignificant as of June 30, 2002 and December 31, 2001 and for the three
months and six months ended June 30, 2002 and 2001.
54
The Company also invests in structured investment transactions, which are
managed and controlled by unrelated third parties. In instances where the
Company exercises significant influence over the operating and financial
policies of an SPE, the beneficial interests are accounted for in accordance
with the equity method of accounting. Where the Company does not exercise
significant influence, the structure of the beneficial interests (i.e., debt or
equity securities) determines the method of accounting for the investment. Such
beneficial interests generally are structured notes, which are classified as
fixed maturities, and the related income is recognized using the retrospective
interest method. Beneficial interests other than structured notes are also
classified as fixed maturities, and the related income is recognized using the
level yield method. The market value of all such structured investments,
including SPEs, was approximately $1.5 billion at June 30, 2002 and $1.6 billion
at December 31, 2001. The related income recognized was $11 million and $31
million for the three months ended June 30, 2002 and 2001, respectively, and $44
million and $18 million for the six months ended June 30, 2002 and 2001,
respectively.
MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loans on real estate are collateralized by
commercial, agricultural and residential properties. Mortgage loans on real
estate comprised 13.6% and 13.9% of the Company's total cash and invested assets
at June 30, 2002 and December 31, 2001, respectively. The carrying value of
mortgage loans on real estate is stated at original cost net of repayments,
amortization of premiums, accretion of discounts and valuation allowances. The
following table shows the carrying value of the Company's mortgage loans on real
estate by type at:
JUNE 30, 2002 DECEMBER 31, 2001
----------------------- -----------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
Commercial $ 18,153 76.5 % $ 17,959 76.0 %
Agricultural 5,174 21.8 5,268 22.3
Residential 406 1.7 394 1.7
---------- ---------- ---------- ----------
Total $ 23,733 100.0 % $ 23,621 100.0 %
========== ========== ========== ==========
55
Commercial Mortgage Loans. The Company diversifies its commercial mortgage
loans by both geographic region and property type, and manages these investments
through a network of regional offices overseen by its investment department. The
following table presents the distribution across geographic regions and property
types for commercial mortgage loans at:
JUNE 30, 2002 DECEMBER 31, 2001
----------------------- -----------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
REGION
South Atlantic $ 4,806 26.4 % $ 4,729 26.3 %
Pacific 3,715 20.5 3,593 20.0
Middle Atlantic 3,310 18.2 3,248 18.1
East North Central 1,956 10.8 2,003 11.2
New England 1,246 6.9 1,198 6.7
West South Central 982 5.4 1,021 5.7
Mountain 766 4.2 733 4.1
West North Central 653 3.6 727 4.0
International 540 3.0 526 2.9
East South Central 179 1.0 181 1.0
---------- ---------- ---------- ----------
Total $ 18,153 100.0% $ 17,959 100.0%
========== ========== ========== ==========
PROPERTY TYPE
Office $ 8,311 45.8% $ 8,293 46.2%
Retail 4,349 24.0 4,208 23.4
Apartments 2,582 14.2 2,553 14.2
Industrial 1,876 10.3 1,813 10.1
Hotel 822 4.5 864 4.8
Other 213 1.2 228 1.3
---------- ---------- ---------- ----------
Total $ 18,153 100.0% $ 17,959 100.0%
========== ========== ========== ==========
The following table presents the scheduled maturities for the Company's
commercial mortgage loans at:
JUNE 30, 2002 DECEMBER 31, 2001
----------------------- -----------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
Due in one year or less $ 947 5.2 % $ 840 4.7 %
Due after one year through two years 1,229 6.8 677 3.8
Due after two years through three years 1,004 5.5 1,532 8.5
Due after three years through four years 2,845 15.7 1,772 9.9
Due after four years through five years 1,435 7.9 2,078 11.6
Due after five years 10,693 58.9 11,060 61.5
---------- ---------- ---------- ----------
Total $ 18,153 100.0 % $ 17,959 100.0 %
========== ========== ========== ==========
Problem, Potential Problem and Restructured Mortgage Loans. The Company
monitors its mortgage loan investments on a continual basis. Through this
monitoring process, the Company reviews loans that are restructured, delinquent
or under foreclosure and identifies those that management considers to be
potentially delinquent. These loan classifications are generally consistent with
those used in industry practice.
56
The Company defines restructured mortgage loans, consistent with industry
practice, as loans in which the Company, for economic or legal reasons related
to the debtor's financial difficulties, grants a concession to the debtor that
it would not otherwise consider. This definition provides for loans to exit the
restructured category under certain conditions. The Company defines delinquent
mortgage loans, consistent with industry practice, as loans in which two or more
interest or principal payments are past due. The Company defines mortgage loans
under foreclosure, consistent with industry practice, as loans in which
foreclosure proceedings have formally commenced. The Company defines potentially
delinquent loans as loans that, in management's opinion, have a high probability
of becoming delinquent.
The Company reviews all mortgage loans at least annually. These reviews
may include an analysis of the property financial statements and rent roll,
lease rollover analysis, property inspections, market analysis and tenant
creditworthiness. The Company also reviews loan-to-value ratios and debt
coverage ratios for restructured loans, delinquent loans, loans under
foreclosure, potentially delinquent loans, loans with an existing valuation
allowance, loans maturing within two years and loans with a loan-to-value ratio
greater than 90% as determined in the prior year.
The Company establishes valuation allowances for loans that it deems
impaired, as determined through its mortgage review process. The Company defines
impaired loans consistent with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, as loans which it probably will not collect all amounts
due according to applicable contractual terms of the agreement. The Company
bases valuation allowances upon the present value of expected future cash flows
discounted at the loan's original effective interest rate or the value of the
loan's collateral. The Company records valuation allowances as investment
losses. The Company records subsequent adjustments to allowances as investment
gains or losses.
The following table presents the amortized cost and valuation allowance
for commercial mortgage loans distributed by loan classification at:
JUNE 30, 2002 DECEMBER 31, 2001
------------------------------------------------ ------------------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST (1) TOTAL ALLOWANCE COST COST (1) TOTAL ALLOWANCE COST
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
Performing $ 17,751 97.0 % $ 68 0.4 % $ 17,495 96.6 % $ 52 0.3 %
Restructured 422 2.3 56 13.3 % 448 2.5 55 12.3 %
Delinquent or under
foreclosure 43 0.2 7 16.3 % 14 0.1 7 50.0 %
Potentially delinquent 84 0.5 16 19.0 % 136 0.8 20 14.7 %
---------- ---------- ---------- ---------- ---------- ----------
Total $ 18,300 100.0 % $ 147 0.8 % $ 18,093 100.0 % $ 134 0.7 %
========== ========== ========== ========== ========== ==========
--------
(1) Amortized cost is equal to carrying value before valuation
allowances.
The following table presents the changes in valuation allowances for
commercial mortgage loans for the:
SIX MONTHS ENDED
JUNE 30, 2002
---------------
(DOLLARS IN MILLIONS)
Balance, beginning of period $ 134
Additions 23
Deductions for writedowns and dispositions (10)
-------------
Balance, end of period $ 147
=============
The principal risks in holding commercial mortgage loans are property
specific, supply and demand, financial and capital market risks. Property
specific risks include the geographic location of the property, the physical
condition of the property, the diversity of tenants and the rollover of their
leases and the ability of the property manager to attract tenants and manage
expenses. Supply and demand risks include changes in the supply and/or demand
for rental space which cause changes in vacancy rates and/or rental rates.
Financial risks include the overall level of debt on the property and the amount
of principal repaid during the loan term. Capital
57
market risks include the general level of interest rates, the liquidity for
these securities in the marketplace and the capital available for loan
refinancing.
Agricultural Mortgage Loans. The Company diversifies its agricultural
mortgage loans by both geographic region and product type. The Company manages
these investments through a network of regional offices and field professionals
overseen by its investment department.
Approximately 62.8% of the $5,174 million of agricultural mortgage loans
outstanding at June 30, 2002 were subject to rate resets prior to maturity. A
substantial portion of these loans generally are successfully renegotiated and
remain outstanding to maturity. The process and policies for monitoring the
agricultural mortgage loans and classifying them by performance status are
generally the same as those for the commercial loans.
The following table presents the amortized cost and valuation allowances
for agricultural mortgage loans distributed by loan classification at:
JUNE 30, 2002 DECEMBER 31, 2001
------------------------------------------------ ------------------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST (1) TOTAL ALLOWANCE COST COST (1) TOTAL ALLOWANCE COST
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
Performing $ 4,926 95.1 % $ -- 0.0 % $ 5,055 95.8 % $ 3 0.1 %
Restructured 182 3.5 3 1.6 % 188 3.6 3 1.6 %
Delinquent or under
foreclosure 63 1.2 2 3.2 % 29 0.5 2 6.9 %
Potentially delinquent 8 0.2 -- 0.0 % 5 0.1 1 20.0 %
------- ------ ----- ----- ------- ----
Total $ 5,179 100.0 % $ 5 0.1 % $ 5,277 100.0 % $ 9 0.2 %
======= ====== ===== ======= ======= ====
--------
(1) Amortized cost is equal to carrying value before valuation
allowances.
The following table presents the changes in valuation allowances for
agricultural mortgage loans for the:
SIX MONTHS ENDED
JUNE 30, 2002
-------------
(DOLLARS IN MILLIONS)
Balance, beginning of period $ 9
Additions 2
Deductions for writedowns and dispositions (6)
-------------
Balance, end of period $ 5
=============
The principal risks in holding agricultural mortgage loans are property
specific, supply and demand, financial and capital market risks. Property
specific risks include the geographic location of the property, soil types,
weather conditions and the other factors that may impact the borrower's
guaranty. Supply and demand risks include the supply and demand for the
commodities produced on the specific property and the related price for those
commodities. Financial risks include the overall level of debt on the property
and the amount of principal repaid during the loan term. Capital market risks
include the general level of interest rates, the liquidity for these securities
in the marketplace and the capital available for loan refinancing.
58
REAL ESTATE AND REAL ESTATE JOINT VENTURES
The Company's real estate and real estate joint venture investments
consist of commercial and agricultural properties located throughout the U.S.
and Canada. The Company manages these investments through a network of regional
offices overseen by its investment department. At June 30, 2002 and December 31,
2001, the carrying value of the Company's real estate and real estate joint
ventures was $5,963 million and $5,730 million, respectively, or 3.4% of total
cash and invested assets for both periods. The carrying value of real estate is
stated at depreciated cost net of impairments and valuation allowances. The
carrying value of real estate joint ventures is stated at the Company's equity
in the real estate joint ventures net of impairments and valuation allowances.
These holdings consist of real estate, interests in real estate joint ventures
and real estate acquired upon foreclosure of commercial and agricultural
mortgage loans. The following table presents the carrying value of the Company's
real estate and real estate joint ventures at:
JUNE 30, 2002 DECEMBER 31, 2001
-------------------- --------------------
CARRYING % OF CARRYING % OF
TYPE VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
Real estate $5,615 94.1% $5,325 92.9%
Real estate joint ventures 297 5.0 356 6.2
------ ----- ------ -----
Subtotal 5,912 99.1 5,681 99.1
Foreclosed real estate 51 0.9 49 0.9
------ ----- ------ -----
Total $5,963 100.0% $5,730 100.0%
====== ===== ====== =====
Office properties representing 63.4% and 63.5% of the Company's real
estate and real estate joint venture holdings at June 30, 2002 and December 31,
2001, respectively, are well diversified geographically, principally within the
United States. The average occupancy level of office properties was 91% and 92%
at June 30, 2002 and December 31, 2001, respectively.
The Company classifies real estate and real estate joint ventures as
held-for-investment or held-for-sale. The carrying value of real estate and real
estate joint ventures held-for-investment was $5,316 million and $5,633 million
at June 30, 2002 and December 31, 2001, respectively. The carrying value of real
estate and real estate joint ventures held-for-sale was $647 million and $97
million at June 30, 2002 and December 31, 2001, respectively.
Ongoing management of these investments includes quarterly valuations,
as well as an annual market update and review of each property's budget,
financial returns, lease rollover status and the Company's exit strategy. In
addition to individual property reviews, the Company employs an overall strategy
of selective dispositions and acquisitions as market opportunities arise.
The Company adjusts the carrying value of real estate and real estate
joint ventures held-for-investment for impairments whenever events or changes in
circumstances indicate that the carrying value of the property may not be
recoverable. The Company writes down impaired real estate to estimated fair
value, which it generally computes using the present value of future cash flows
from the property, discounted at a rate commensurate with the underlying risks.
The Company records writedowns as investment losses and reduces the cost basis
of the properties accordingly. The Company does not change the revised cost
basis for subsequent recoveries in value.
The Company records real estate acquired upon foreclosure of commercial
and agricultural mortgage loans at the lower of estimated fair value or the
carrying value of the mortgage loan at the date of foreclosure.
Once the Company identifies a property that is expected to be sold
within one year and commences a firm plan for marketing the property, the
Company establishes and periodically revises, if necessary, a valuation
allowance to adjust the carrying value of the property to its expected sales
value, less associated selling costs, if it is lower than the property's
carrying value. The Company records allowances as investment losses. The Company
records subsequent adjustments to allowances as investment gains or losses. If
circumstances arise that were previously considered unlikely and, as a result,
the property is expected to be on the market longer than anticipated, a
held-for-sale property is reclassified as held-for-investment and measured as
such.
The Company's carrying value of real estate and real estate joint
ventures held-for-sale, including real estate acquired upon foreclosure of
commercial and agricultural mortgage loans, in the amounts of $647 million and
$97 million at June 30, 2002 and
59
December 31, 2001, respectively, are net of impairments of $105 million and $88
million, respectively, and net of valuation allowances of $45 million and $35
million, respectively.
EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS
The Company's carrying value of equity securities, which primarily
consists of investments in common stocks, was $1,661 million and $3,063 million
at June 30, 2002 and December 31, 2001, respectively. Substantially all of the
common stock is publicly traded on major securities exchanges. The carrying
value of the other limited partnership interests (which primarily represent
ownership interests in pooled investment funds that make private equity
investments in companies in the U.S. and overseas) was $1,785 million and $1,637
million at June 30, 2002 and December 31, 2001, respectively. The Company
classifies its investments in common stocks as available-for-sale and marks them
to market except for non-marketable private equities which are generally carried
at cost. The Company accounts for its investments in limited partnership
interests in which it does not have a controlling interest in accordance with
the equity method of accounting. The Company's investments in equity securities
represented 1.0% and 1.8% of cash and invested assets at June 30, 2002 and
December 31, 2001, respectively.
Equity securities include, at June 30, 2002 and December 31, 2001, $238
million and $329 million, respectively, of private equity securities. The
Company may not freely trade its private equity securities because of
restrictions imposed by federal and state securities laws and illiquid trading
markets.
During the year ended December 31, 2001, two exchangeable subordinated
debt securities matured, resulting in a gross gain of $44 million on the equity
exchanged in satisfaction of the note. In February 2002, the remaining
exchangeable debt security issued by the Company matured. The debt security was
satisfied for cash, and no equity was exchanged.
The Company makes commitments to fund partnership investments in the
normal course of business. The amounts of these unfunded commitments were $1,904
million and $1,898 million at June 30, 2002 and December 31, 2001, respectively.
The Company anticipates that these amounts will be invested in the partnerships
over the next three to five years.
The following tables set forth the cost, gross unrealized gain or loss
and estimated fair value of the Company's equity securities, as well as the
percentage of the total equity securities at:
JUNE 30, 2002
-------------------------------------------------------------
GROSS UNREALIZED
--------------------
COST GAIN LOSS FAIR VALUE TOTAL
------ ------ ------ ---------- -----
(DOLLARS IN MILLIONS)
Equity Securities:
Common stocks $1,047 $ 202 $ 47 $1,202 72.4%
Nonredeemable preferred stocks 478 11 30 459 27.6
------ ------ ------ ------ -----
Total equity securities $1,525 $ 213 $ 77 $1,661 100.0%
====== ====== ====== ====== =====
DECEMBER 31, 2001
-------------------------------------------------------------
GROSS UNREALIZED
-------------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
------ ------ ------ ---------- -----
(DOLLARS IN MILLIONS)
Equity Securities:
Common stocks $1,968 $ 657 $ 78 $2,547 83.2%
Nonredeemable preferred stocks 491 28 3 516 16.8
------ ------ ------ ------ -----
Total equity securities $2,459 $ 685 $ 81 $3,063 100.0%
====== ====== ====== ====== =====
Problem and Potential Problem Equity Securities and Other Limited
Partnership Interests. The Company monitors its equity securities and other
limited partnership interests on a continual basis. Through this monitoring
process, the Company identifies investments that management considers to be
problems or potential problems.
Problem equity securities and other limited partnership interests are
defined as securities (i) in which significant declines in revenues and/or
margins threaten the ability of the issuer to continue operating, or (ii) where
the issuer has subsequently entered
60
bankruptcy.
Potential problem equity securities and other limited partnership
interests are defined as securities issued by a company that is experiencing
significant operating problems or difficult industry conditions. Criteria
generally indicative of these problems or conditions are (i) cash flows falling
below varying thresholds established for the industry and other relevant
factors, (ii) significant declines in revenues and/or margins, (iii) public
securities trading at a substantial discount compared to original cost as a
result of specific credit concerns, and (iv) other information that becomes
available.
Equity Security Impairment. The Company classifies all of its equity
securities as available-for-sale and marks them to market through other
comprehensive income. All securities with gross unrealized losses at the
consolidated balance sheet date are subjected to the Company's process for
identifying other-than-temporary impairments. The Company writes down to fair
value securities that it deems to be other-than-temporarily impaired in the
period the securities are deemed to be so impaired. The assessment of whether
such impairment has occurred is based on management's case-by-case evaluation of
the underlying reasons for the decline in fair value. Management considers a
wide range of factors, as described below, about the security issuer and uses
its best judgment in evaluating the cause of the decline in the estimated fair
value of the security and in assessing the prospects for near-term recovery.
Inherent in management's evaluation of the security are assumptions and
estimates about the operations of the issuer and its future earnings potential.
Considerations used by the Company in the impairment evaluation process
include, but are not limited to, the following:
- The length of time and the extent to which the market value
has been below cost;
- The potential for impairments of securities when the issuer is
experiencing significant financial difficulties, including a
review of all securities of the issuer, including its known
subsidiaries and affiliates, regardless of the form of the
Company's ownership;
- The potential for impairments in an entire industry sector or
sub-sector;
- The potential for impairments in certain economically
depressed geographic locations;
- The potential for impairments of securities where the issuer,
series of issuers or industry has suffered a catastrophic type
of loss or has exhausted natural resources; and
- Other subjective factors, including concentrations and
information obtained from regulators and rating agencies.
Equity securities or other limited partnership interests which are
deemed to be other-than-temporarily impaired are written down to fair value. The
Company records writedowns as investment losses and adjusts the cost basis of
the equity securities accordingly. The Company does not change the revised cost
basis for subsequent recoveries in value. Writedowns of equity securities and
other limited partnership interests were $60 million and $97 million for the six
months ended June 30, 2002 and 2001, respectively. During the six months ended
June 30, 2002, the Company sold equity securities with an estimated fair value
of $75 million at a loss of $41 million.
The gross unrealized loss related to the Company's equity securities at
June 30, 2002 was $77 million. Such securities are concentrated by security type
in mutual funds (45%) and preferred stock (39%); and are concentrated by
industry in domestic broad market mutual funds (30%) and communications (22%)
(calculated as a percentage of gross unrealized loss).
The total gross unrealized loss consists of three categories of
securities: (i) securities where the estimated fair value had declined and
remained below cost by less than 20% ($9 million); (ii) securities where the
estimated fair value had declined and remained below cost by 20% or more for
less than six months ($37 million); and (iii) securities where the estimated
fair value had declined and remained below cost by 20% or more over the previous
six months ($31 million). The first two categories have generally been adversely
impacted by the downturn in the financial markets, overall economic conditions
and continuing effects of the September 11, 2001 tragedies. While all of these
securities are monitored for potential impairment, the Company's experience
indicates that the first two categories do not present as great a risk of
impairment, and often, fair values recover over time as the factors that caused
the declines improve.
61
The category of equity securities where the estimated fair value has
declined and remained below cost by 20% or more over the previous six months is
comprised of 82 equity securities with a cost of $93 million and a gross
unrealized loss of $31 million. These securities are concentrated by security
type in mutual funds (88%); and concentrated by industry in domestic broad
market mutual funds (54%) and global mutual funds (34%) (calculated as a
percentage of gross unrealized loss). A portion of the 82 equity securities
described above had estimated fair values below cost by 20% or more over the
previous twelve months. This sub-category is comprised of 43 equity securities
with a cost of $44 million and a gross unrealized loss of $16 million. The
significant factors considered at June 30, 2002 in the review of equity
securities for other-than-temporary impairment were the unusual and severely
depressed market conditions, the instability of the global economy and the
lagging effects of the September 11, 2001 tragedies. Additional factors such as
liquidity, leverage, recent management actions and earnings in line with
estimates also were considered in the Company's conclusion that these equity
securities were not other-than-temporarily impaired at June 30, 2002.
There were no equity securities with an unrealized loss at June 30,
2002 greater than $5 million where the estimated fair value had declined and
remained below cost by 20% or more over the previous six months.
OTHER INVESTED ASSETS
The Company's other invested assets consist principally of leveraged
leases and funds withheld at interest of $2.7 billion at both June 30, 2002 and
December 31, 2001. The leveraged leases are recorded net of non-recourse debt.
The Company participates in lease transactions which are diversified by
geographic area. The Company regularly reviews residual values and writes down
residuals to expected values as needed. Funds withheld represent amounts
contractually withheld by ceding companies in accordance with reinsurance
agreements. For agreements written on a modified coinsurance basis and certain
agreements written on a coinsurance basis, assets supporting the reinsured
policies equal to the net statutory reserves are withheld and continue to be
legally owned by the ceding company. Interest accrues to these funds withheld at
rates defined by the treaty terms and may be contractually specified or directly
related to the investment portfolio. The Company's other invested assets
represented 1.9% of cash and invested assets at both June 30, 2002 and December
31, 2001.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative instruments to manage risk through one of
four principal risk management strategies: the hedging of liabilities, invested
assets, portfolios of assets or liabilities and anticipated transactions.
Additionally, Metropolitan Life enters into income generation and replication
derivative transactions as permitted by its derivatives use plan that was
approved by the Department. The Company's derivative hedging strategy employs a
variety of instruments, including financial futures, financial forwards,
interest rate, credit and foreign currency swaps, foreign exchange contracts,
and options, including caps and floors.
62
The table below provides a summary of the carrying value, notional
amount and fair value of derivative financial instruments held at:
JUNE 30, 2002 DECEMBER 31, 2001
----------------------------------------------- -----------------------------------------------
CURRENT MARKET CURRENT MARKET
OR FAIR VALUE OR FAIR VALUE
CARRYING NOTIONAL --------------------- CARRYING NOTIONAL ---------------------
VALUE AMOUNT ASSETS LIABILITIES VALUE AMOUNT ASSETS LIABILITIES
-------- -------- ------- ----------- -------- -------- ------- -----------
(DOLLARS IN MILLIONS)
Financial futures $ -- $ 54 $ -- $ -- $ -- $ -- $ -- $ --
Interest rate swaps 56 3,570 88 32 70 1,849 79 9
Floors 3 325 3 -- 11 325 11 --
Caps 1 6,590 1 -- 5 7,890 5 --
Financial forwards (14) 1,000 -- 14 -- -- -- --
Foreign currency swaps (3) 2,062 93 96 162 1,925 188 26
Exchange traded options -- -- -- -- (12) 1,857 -- 12
Foreign exchange contracts (1) 43 -- 1 4 67 4 --
Written covered calls -- 40 -- -- -- 40 -- --
Credit default swaps -- 356 -- -- -- 270 -- --
------- ------- ------- ------- ------- ------- ------- -------
Total contractual commitments $ 42 $14,040 $ 185 $ 143 $ 240 $14,223 $ 287 $ 47
======= ======= ======= ======= ======= ======= ======= =======
SECURITIES LENDING
The Company operates a securities lending programs whereby blocks of
securities are loaned to third parties, primarily major brokerage firms. The
Company requires a minimum of 102% of the fair value of the loaned securities to
be separately maintained as collateral for the loans. The Company's securities
on loan at June 30, 2002 and December 31, 2001 had estimated fair value of
$13,370 million and $12,195 million, respectively. Security collateral on
deposit from customers may not be sold or repledged and is not reflected in the
unaudited interim condensed consolidated financial statements.
SEPARATE ACCOUNT ASSETS
The Company manages each separate account's assets in accordance with
the prescribed investment policy that applies to that specific separate account.
The Company establishes separate accounts on a single client and multi-client
commingled basis in conformity with insurance laws. Generally, separate accounts
are not chargeable with liabilities that arise from any other business of the
Company. Separate account assets are subject to the Company's general account
claims only to the extent that the value of such assets exceeds the separate
account liabilities, as defined by the account's contract. If the Company uses a
separate account to support a contract providing guaranteed benefits, the
Company must comply with the asset maintenance requirements stipulated under
Regulation 128 of the Department. The Company monitors these requirements at
least monthly and, in addition, performs cash flow analyses, similar to that
conducted for the general account, on an annual basis. The Company reports
separately as assets and liabilities investments held in separate accounts and
liabilities of the separate accounts. The Company reports substantially all
separate account assets at their fair market value. Investment income and gains
or losses on the investments of separate accounts accrue directly to
contractholders, and, accordingly, the Company does not reflect them in its
unaudited interim condensed consolidated statements of income and cash flows.
The Company reflects in its revenues fees charged to the separate accounts by
the Company, including mortality charges, risk charges, policy administration
fees, investment management fees and surrender charges.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has material exposure to interest rate, equity market and
foreign exchange risk. The Company analyzes 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 derivative
instruments. The Company's market risk exposure at June 30, 2002 is relatively
unchanged in amount from that reported on December 31, 2001, a description of
which may be found in the 2001 10-K.
63
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following should be read in conjunction with Note 8 to unaudited
interim condensed consolidated financial statements in Part I of this Report.
SALES PRACTICES CLAIMS
As previously disclosed, over the past several years Metropolitan Life,
New England Mutual Life Insurance Company ("New England Mutual") and General
American have faced numerous claims, including class action lawsuits, alleging
improper marketing and sales of individual life insurance policies or annuities.
These lawsuits are generally referred to as "sales practices claims."
Settlements have been reached in the sales practices class actions against
Metropolitan Life, New England Mutual and General American. Based on a recent
decision on standing to object, the United States Supreme Court remanded the
approval of the General American settlement to the United States Court of
Appeals for the Eighth Circuit. The appellate court will consider the District
Court's approval of the merits of the settlement, rather than whether the
objectors have standing to appeal. Implementation of the General American class
action settlement is proceeding.
Certain class members have opted out of these class action settlements
and have brought or continued non-class action sales practices lawsuits. As of
June 30, 2002, there are approximately 420 sales practices lawsuits pending
against Metropolitan Life, approximately 30 sales practices lawsuits pending
against New England Mutual and approximately 50 of such lawsuits pending against
General American. Metropolitan Life, New England Mutual and General American
continue to defend themselves vigorously against these lawsuits.
The Company believes adequate provision has been made in its unaudited
interim condensed consolidated financial statements for all reasonably probable
and estimable losses for sales practices claims against Metropolitan Life, New
England Mutual and General American.
ASBESTOS-RELATED CLAIMS
As previously reported, during 1998, Metropolitan Life paid $878
million in premiums for excess insurance policies for asbestos-related claims.
The excess insurance policies for asbestos-related claims provide for recovery
of losses up to $1,500 million, which is in excess of a $400 million
self-insured retention. The asbestos-related policies are also subject to annual
and per-claim sublimits. Amounts are recoverable under the policies annually
with respect to claims paid during the prior calendar year. As a result of the
excess insurance policies, $878 million is recorded as a recoverable at June 30,
2002 and December 31, 2001. Although amounts paid in any given year that are
recoverable under the policies will be reflected as a reduction in the Company's
operating cash flows for that year, management believes that the payments will
not have a material adverse effect on the Company's liquidity. Each
asbestos-related policy contains an experience fund and a reference fund that
provides for payments to the Company at the commutation date if the reference
fund is greater than zero at commutation or pro rata reductions from time to
time in the loss reimbursements to the Company if the cumulative return on the
reference fund is less than the return specified in the experience fund. The
return in the reference fund is tied to performance of the Standard & Poor's 500
Index and the Lehman Brothers Aggregate Bond Index. It is likely that a claim
will be made under the excess insurance policies in 2003 for a portion of the
amounts paid with respect to asbestos litigation in 2002. As the performance of
the Standard & Poor's 500 Index impacts the return in the reference fund, it is
possible that loss reimbursements to the Company in 2003 and in the recoverable
with respect to later periods may be less than the amount submitted. Such
forgone loss reimbursements may be recovered upon commutation. If at some point
in the future, the Company believes the liability for probable and estimable
losses for asbestos-related claims should be increased, an expense would be
recorded and the insurance recoverable would be adjusted subject to the terms,
conditions and limits of the excess insurance policies. Portions of the change
in the insurance recoverable would be deferred and amortized into income over
the estimated remaining settlement period of the insurance policies.
As previously reported, Metropolitan Life received approximately 59,500
asbestos-related claims in 2001. During the first six months of 2002 and 2001,
Metropolitan Life received approximately 28,000 and 34,600 asbestos-related
claims, respectively.
64
PROPERTY AND CASUALTY ACTIONS
In February 2002, a new purported class action suit was filed against
Metropolitan Property and Casualty Insurance Company in a state court in Georgia
involving claims by policyholders for the alleged diminished value of
automobiles after accident-related repairs. A settlement has been reached in
this case; the Company determined to settle the case in light of a Georgia
Supreme Court decision involving another insurer. This settlement is being
implemented.
DEMUTUALIZATION ACTIONS
In July 2002, a lawsuit was filed in the United States District Court
for the Eastern District of Texas on behalf of a proposed class comprised of the
settlement class in the Metropolitan Life sales practices class action
settlement approved in December 1999 by the United States District Court for the
Western District of Pennsylvania. The Holding Company, Metropolitan Life, the
trustee of the policyholder trust, certain present and former individual
directors and officers of Metropolitan Life are named as defendants. Plaintiffs'
allegations concern the treatment of the cost of the settlement in connection
with the demutualization of Metropolitan Life and the adequacy and accuracy of
the disclosure, particularly with respect to those costs. Plaintiffs seek
compensatory, treble and punitive damages, as well as attorneys' fees and costs.
The defendants believe they have meritorious defenses to the plaintiffs' claims
and will contest them vigorously.
OTHER
As previously disclosed, General American has received and responded to
subpoenas for documents and other information from the office of the U.S.
Attorney for the Eastern District of Missouri with respect to certain
administrative services provided by its former Medicare Unit during the period
January 1, 1988 through December 31, 1998, which services ended and which unit
was disbanded prior to MetLife's acquisition of General American. In March 2002,
General American and the federal government reached an agreement in principle to
resolve all issues through a civil settlement and a charge was recorded. In June
2002, General American completed the settlement.
A putative class action lawsuit is pending in the District of Columbia
federal district court, in which plaintiffs allege that they were denied certain
ad hoc pension increases awarded to retirees under the Metropolitan Life
retirement plan. The ad hoc pension increases were awarded only to retirees
(i.e., individuals who were entitled to an immediate retirement benefit upon
their termination of employment) and not available, in Metropolitan Life's view
to individuals like plaintiffs whose employment, or whose spouse's employment,
had terminated before they became eligible for an immediate retirement benefit.
The district court denied the parties' cross-motions for summary judgment to
allow for discovery. Discovery has not yet commenced pending the court's ruling
as to the timing of a class certification motion. The plaintiffs seek to
represent a class consisting of former Metropolitan Life employees, or their
surviving spouses, who are receiving deferred vested annuity payments under the
Retirement Plan and who were allegedly eligible to receive the ad hoc pension
increases awarded in 1977, 1980, 1989, 1992, 1996 and 2001, as well as increases
awarded in earlier years. Metropolitan Life is vigorously defending itself
against these allegations.
A reinsurer of universal life policy liabilities of Metropolitan Life
and certain affiliates is seeking rescission and has commenced an arbitration
proceeding claiming that, during underwriting, material misrepresentations or
omissions were made. The reinsurer also has sent a notice purporting to increase
reinsurance premium rates. Metropolitan Life and its affiliates intend to
vigorously defend themselves against the claims of the reinsurer, including the
purported rate increase.
Various litigation, claims and assessments against the Company, in
addition to those discussed above 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, employer, investor, investment advisor and taxpayer.
Further, state insurance regulatory authorities and other federal and state
authorities regularly make inquiries and conduct investigations concerning the
Company's compliance with applicable insurance and other laws and regulations.
SUMMARY
It is not feasible to predict or determine the ultimate outcome of all
pending investigations and legal proceedings or provide reasonable ranges of
potential losses, except as noted above in connection with specific matters. In
some of the matters referred to above, very large and/or indeterminate amounts,
including punitive and treble damages, are sought. Although in light of these
considerations it is possible that an adverse outcome in certain cases could
have a material adverse effect upon the Company's consolidated financial
position, based on information currently known by the Company's management, in
its opinion, the outcomes of
65
such pending investigations and legal proceedings are not likely to have such an
effect. However, given the large and/or indeterminate amounts sought in certain
of these matters and the inherent unpredictability of litigation, it is possible
that an adverse outcome in certain matters could, from time to time, have a
material adverse effect on the Company's operating results or cash flows in
particular quarterly or annual periods.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of stockholders on April 23, 2002, the
stockholders elected five Class III directors, each for a term expiring at the
Company's 2005 annual meeting. The voting results are as follows:
NAME VOTES FOR VOTES WITHHELD
- -------------------------- --------------- ------------------
James R. Houghton 675,497,841 6,050,091
Helene L. Kaplan 662,558,577 18,989,355
Catherine R. Kinney 677,975,815 3,572,117
Stewart G. Nagler 676,146,610 5,401,322
William C. Steere, Jr. 675,501,668 6,046,264
The directors whose terms continued and the years their terms expire are as
follows:
Class I Directors - Term Expires in 2003
Robert H. Benmosche
Gerald Clark
John J. Phelan, Jr.
Hugh B. Price
Class II Directors - Term Expires in 2004
Curtis H. Barnette
John C. Danforth
Burton A. Dole, Jr.
Harry P. Kamen
Charles M. Leighton
The stockholders also ratified the appointment of Deloitte & Touche LLP
as the Company's independent auditors for 2002. The voting results are as
follows:
FOR AGAINST ABSTAIN
- ----------- --------- ---------
672,149,075 7,157,259 2,241,598
66
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Credit Agreement, dated as of April 23, 2002, among
MetLife, Inc., Metropolitan Life Insurance Company, MetLife
Funding, Inc. and the other parties signatory thereto.
10.2 Form of Management Stock Option Agreement
10.3 Form of Director Stock Option Agreement
(b) Reports on Form 8-K
During the three months ended June 30, 2002, the following current
reports were filed on Form 8-K:
1. Current Report on Form 8-K filed April 12, 2002 attaching
press release dated April 11, 2002 announcing charge taken by
General American Life Insurance Company.
2. Current Report on Form 8-K filed May 7, 2002 attaching press
release dated May 7, 2002 announcing first quarter 2002
results.
3. Current Report on Form 8-K filed June 25, 2002 attaching (i)
press release dated June 25, 2002 announcing enhanced
flexibility in the Company's stock repurchase program, and
(ii) press release dated June 25, 2002 responding to U.S.
Department of Justice Statement.
4. Current Report Form 8-K filed June 27, 2002 attaching press
release dated June 26, 2002 announcing organizational changes.
67
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METLIFE, INC.
By: /s/ Virginia M. Wilson
----------------------------------------
Virginia M. Wilson
Senior Vice-President and Controller
(Authorized signatory and
principal accounting officer)
Date: August 14, 2002
68
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER EXHIBIT NAME NUMBER
10.1 Credit Agreement, dated as of April 23,
2002, among MetLife, Inc., Metropolitan
Life Insurance Company, MetLife Funding,
Inc. and the other parties signatory
thereto.
10.2 Form of Management Stock Option Agreement
10.3 Form of Director Stock Option Agreement