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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 SEPTEMBER 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 November 8, 2002, 700,278,412 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 September 30, 2002
(Unaudited) and December 31, 2001 .................................. 4
Unaudited Interim Condensed Consolidated Statements of Income for the
three months and nine months ended September 30, 2002 and 2001 ..... 5
Unaudited Interim Condensed Consolidated Statement of Stockholders'
Equity for the nine months ended September 30, 2002 ................ 6
Unaudited Interim Condensed Consolidated Statements of Cash Flows for
the nine months ended September 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 ............................................... 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .... 69
ITEM 4. CONTROLS AND PROCEDURES ....................................... 70
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ............................................. 70
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................... 71
Signatures ............................................................ 73
Chief Executive Officer and Chief Financial Officer Certifications .... 74
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
SEPTEMBER 30, 2002 (UNAUDITED) AND DECEMBER 31, 2001
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value (amortized cost: $126,316
and $112,288, respectively) $ 133,163 $ 115,398
Equity securities, at fair value (cost: $2,046 and $2,459, respectively) 1,955 3,063
Mortgage loans on real estate 23,885 23,621
Policy loans 8,366 8,272
Real estate and real estate joint ventures held-for-investment 4,377 4,061
Real estate held-for-sale 1,286 1,669
Other limited partnership interests 1,747 1,637
Short-term investments 2,658 1,203
Other invested assets 3,214 3,298
---------- ----------
Total investments 180,651 162,222
Cash and cash equivalents 3,647 7,473
Accrued investment income 2,224 2,062
Premiums and other receivables 8,165 6,437
Deferred policy acquisition costs 11,553 11,167
Other assets 5,645 4,823
Separate account assets 56,049 62,714
---------- ----------
Total assets $ 267,934 $ 256,898
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 88,062 $ 84,924
Policyholder account balances 65,011 58,923
Other policyholder funds 5,764 5,332
Policyholder dividends payable 1,156 1,046
Policyholder dividend obligation 1,672 708
Short-term debt 878 355
Long-term debt 3,428 3,628
Current income taxes payable 403 306
Deferred income taxes payable 1,636 1,526
Payables under securities loaned transactions 16,251 12,661
Other liabilities 9,284 7,457
Separate account liabilities 56,049 62,714
---------- ----------
Total liabilities 249,594 239,580
---------- ----------
Commitments and contingencies (Note 9)
Company-obligated mandatorily redeemable securities of subsidiary trusts 1,263 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 September 30, 2002 and December 31,
2001; 700,278,412 shares outstanding at September 30, 2002 and
715,506,525 shares outstanding at December 31, 2001 8 8
Additional paid-in capital 14,967 14,966
Retained earnings 2,393 1,349
Treasury stock, at cost; 86,488,252 shares at September 30, 2002 and
71,260,139 shares at December 31, 2001 (2,405) (1,934)
Accumulated other comprehensive income 2,114 1,673
---------- ----------
Total stockholders' equity 17,077 16,062
---------- ----------
Total liabilities and stockholders' equity $ 267,934 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
REVENUES
Premiums $ 4,676 $ 4,282 $ 13,858 $ 12,634
Universal life and investment-type product policy fees 587 466 1,558 1,413
Net investment income 2,810 2,822 8,401 8,406
Other revenues 320 346 1,076 1,130
Net investment losses (net of amounts allocable to other
accounts of $(16), $(28), $(102) and $(107), respectively) (269) (99) (547) (380)
-------- -------- -------- --------
Total revenues 8,124 7,817 24,346 23,203
-------- -------- -------- --------
EXPENSES
Policyholder benefits and claims (excludes amounts directly
related to net investment losses of $(5), $(29), $(76) and
$(92), respectively) 4,739 4,723 14,239 13,447
Interest credited to policyholder account balances 736 745 2,177 2,228
Policyholder dividends 504 547 1,489 1,567
Other expenses (excludes amounts directly related to net
investment losses of $(11), $1, $(26) and $(15), respectively) 1,707 1,588 4,978 4,893
-------- -------- -------- --------
Total expenses 7,686 7,603 22,883 22,135
-------- -------- -------- --------
Income from continuing operations before provision for income taxes 438 214 1,463 1,068
Provision for income taxes 124 69 473 360
-------- -------- -------- --------
Income from continuing operations 314 145 990 708
Income from discontinued operations, net of income taxes 19 17 54 61
-------- -------- -------- --------
Income before cumulative effect of change in accounting 333 162 1,044 769
Cumulative effect of change in accounting (5) -- -- --
-------- -------- -------- --------
Net income $ 328 $ 162 $ 1,044 $ 769
======== ======== ======== ========
Income from continuing operations per share
Basic $ 0.45 $ 0.20 $ 1.40 $ 0.95
======== ======== ======== ========
Diluted $ 0.43 $ 0.19 $ 1.35 $ 0.91
======== ======== ======== ========
Net income per share
Basic $ 0.47 $ 0.22 $ 1.48 $ 1.03
======== ======== ======== ========
Diluted $ 0.45 $ 0.21 $ 1.42 $ 0.99
======== ======== ======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
5
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(DOLLARS IN MILLIONS)
ACCUMULATED OTHER
COMPREHENSIVE INCOME
-----------------------------------
NET
UNREALIZED
INVESTMENT FOREIGN MINIMUM
ADDITIONAL TREASURY AND CURRENCY PENSION
COMMON PAID-IN RETAINED STOCK 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 (471) (470)
Comprehensive income:
Net income 1,044 1,044
Other comprehensive income:
Unrealized losses on derivative
instruments, net of income taxes (24) (24)
Unrealized investment gains, net of
related offsets, reclassification
adjustments and income taxes 545 545
Foreign currency translation
adjustments (80) (80)
-------
Other comprehensive income 441
-------
Comprehensive income 1,485
------ -------- -------- ------- -------- -------- -------- -------
Balance at September 30, 2002 $ 8 $ 14,967 $ 2,393 $(2,405) $ 2,400 $ (240) $ (46) $17,077
====== ======== ======== ======= ======== ======== ======== =======
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
6
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(DOLLARS IN MILLIONS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2002 2001
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,540 $ 2,939
CASH FLOW FROM INVESTING ACTIVITIES
Sales, maturities and repayments of:
Fixed maturities 46,334 40,705
Equity securities 1,540 419
Mortgage loans on real estate 1,923 1,433
Real estate and real estate joint ventures 441 163
Other limited partnership interests 240 267
Purchases of:
Fixed maturities (58,096) (42,169)
Equity securities (833) (1,449)
Mortgage loans on real estate (2,271) (2,433)
Real estate and real estate joint ventures (330) (325)
Other limited partnership interests (218) (290)
Net change in short-term investments (1,213) 252
Purchase of businesses, net of cash received (879) (16)
Net change in payables under securities loaned transactions 3,590 822
Other, net (381) (228)
-------- --------
Net cash used in investing activities (10,153) (2,849)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits 19,571 20,283
Withdrawals (15,636) (17,864)
Net change in short-term debt 523 (385)
Long-term debt issued 10 83
Long-term debt repaid (210) (179)
Net treasury stock acquired (471) (1,017)
-------- --------
Net cash provided by financing activities 3,787 921
-------- --------
Change in cash and cash equivalents (3,826) 1,011
Cash and cash equivalents, beginning of period 7,473 3,434
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,647 $ 4,445
======== ========
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the period for:
Interest $ 264 $ 257
======== ========
Income taxes $ 177 $ (183)
======== ========
Non-cash transactions during the period:
Business acquisitions - assets $ 2,630 $ 92
======== ========
Business acquisitions - liabilities $ 1,751 $ 76
======== ========
Business dispositions - assets $ -- $ 102
======== ========
Business dispositions - liabilities $ -- $ 44
======== ========
Real estate acquired in satisfaction of debt $ 20 $ 11
======== ========
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, automobile and property
insurance 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 $480 million and $442 million at September 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 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 July 1, 2001, the Company adopted SFAS No. 141, Business
Combinations ("SFAS 141"). SFAS 141 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.
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets ("SFAS 142"). SFAS 142 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. For the three months and nine months ended
September 30, 2001, the Company recorded amortization of goodwill of $13 million
and $37 million, respectively. The Company has completed the required impairment
tests of goodwill and indefinite-lived intangible assets. As a result of these
tests, the Company recorded a $5 million charge to earnings relating to the
impairment of certain goodwill assets in the third quarter of 2002 as a
cumulative effect of a change in accounting. There was no impairment of
intangible assets or significant reclassifications between goodwill and other
intangible assets at January 1, 2002.
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
superseding 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. Adoption of SFAS
144 did not have a material impact on the Company's unaudited interim condensed
consolidated financial statements for 2002 other than the reclassification to
discontinued operations of net investment income and net investment gains and
losses related to operations of real estate on which the Company initiated
disposition activities subsequent to January 1, 2002. See note 5.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. In addition to amending or rescinding other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions, SFAS 145 generally
precludes companies from recording gains and losses from the extinguishment of
debt as an extraordinary item. SFAS 145 also requires sale-leaseback treatment
for certain modifications of a capital lease that result in the lease being
classified as an operating lease. SFAS 145 is effective for fiscal years
beginning after May 15, 2002, and is not expected to have a significant impact
on the Company's consolidated results of operations, financial position or cash
flows.
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
9
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 8, in the fourth quarter of 2001, the Company
recorded a charge of $330 million, net of income 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 prospectively adopt the fair
value-based employee stock-based compensation expense recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). 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. The estimated impact of the adoption of the
fair value-based method in 2002 would be a decrease to net income for the full
year of approximately $16 million to $19 million, net of income taxes of $9
million to $11 million, respectively. This estimate is based on assumptions as
of September 30, 2002.
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, and 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 taxes of $117 million for the year ended
December 31, 2001. This estimate has been and will continue to be 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 September 30,
2002, the Company's liability for future claims associated with the tragedies
was $86 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.
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
September 30, 2002.
10
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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Weighted average common stock outstanding for basic
earnings per share 701,541,455 735,662,211 706,055,177 747,236,338
Incremental shares from assumed:
Conversion of forward purchase contracts 21,213,435 25,553,409 25,758,555 26,593,205
Exercise of stock options -- -- 5,127 93,614
------------ ------------ ------------ ------------
Weighted average common stock outstanding for diluted
earnings per share 722,754,890 761,215,620 731,818,859 773,923,157
============ ============ ============ ============
INCOME FROM CONTINUING OPERATIONS $ 314 $ 145 $ 990 $ 708
============ ============ ============ ============
Basic earnings per share $ 0.45 $ 0.20 $ 1.40 $ 0.95
============ ============ ============ ============
Diluted earnings per share $ 0.43 $ 0.19 $ 1.35 $ 0.91
============ ============ ============ ============
INCOME FROM DISCONTINUED OPERATIONS $ 19 $ 17 $ 54 $ 61
============ ============ ============ ============
Basic earnings per share $ 0.03 $ 0.02 $ 0.08 $ 0.08
============ ============ ============ ============
Diluted earnings per share $ 0.03 $ 0.02 $ 0.07 $ 0.08
============ ============ ============ ============
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING $ (5) $ -- $ -- $ --
============ ============ ============ ============
Basic earnings per share $ (0.01) $ -- $ -- $ --
============ ============ ============ ============
Diluted earnings per share $ (0.01) $ -- $ -- $ --
============ ============ ============ ============
NET INCOME $ 328 $ 162 $ 1,044 $ 769
============ ============ ============ ============
Basic earnings per share $ 0.47 $ 0.22 $ 1.48 $ 1.03
============ ============ ============ ============
Diluted earnings per share $ 0.45 $ 0.21 $ 1.42 $ 0.99
============ ============ ============ ============
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 nine months ended September 30, 2002 and 2001, 15,244,492 and 34,891,879
shares of common stock, respectively, were acquired for $471 million and $1,019
million, respectively. During the nine months ended September 30, 2002 and 2001,
16,379 and 64,620 of these shares were reissued for $480 thousand and $2
million, respectively. The Company recently announced that it plans no further
share repurchases in 2002.
On October 22, 2002, the Company announced the declaration by its Board of
Directors of a dividend of $0.21 per common share payable on December 13, 2002
to shareholders of record on November 8, 2002.
11
4. NET INVESTMENT LOSSES
Net investment losses, including changes in valuation allowances, are as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2002 2001 2002 2001
------ ------ ------ ------
(DOLLARS IN MILLIONS)
Fixed maturities $ (323) $ (87) $ (698) $ (427)
Equity securities (38) 5 222 30
Mortgage loans on real estate -- (44) (22) (49)
Real estate and real estate joint ventures (1) (9) (25) (18) (1)
Other limited partnership interests 42 (32) 24 (130)
Sales of businesses -- 25 -- 25
Other 43 31 (157) 65
------ ------ ------ ------
(285) (127) (649) (487)
Amounts allocable to:
Deferred policy acquisition costs 11 (1) 26 15
Participating contracts (2) -- (2) --
Policyholder dividend obligation 7 29 78 92
------ ------ ------ ------
Total net investment losses $ (269) $ (99) $ (547) $ (380)
====== ====== ====== ======
- ----------
(1) Excludes amounts related to real estate operations reported as discontinued
operations in accordance with SFAS 144.
Investment gains and losses are net of related policyholder amounts. The
amounts netted against investment gains and losses are (i) deferred policy
acquisition cost amortization, to the extent that such amortization results from
investment gains and losses, (ii) adjustments to participating contractholder
accounts when amounts equal to such investment gains and losses are applied to
the contractholder's accounts, and (iii) 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. DISCONTINUED OPERATIONS
The Company actively manages its real estate portfolio with the objective to
maximize earnings through selective acquisitions and dispositions. Accordingly,
the Company is selling certain real estate holdings out of its portfolio. In
accordance with SFAS No. 144, income related to real estate sold or classified
as held-for-sale for transactions initiated on or after January 1, 2002 is
presented as discontinued operations.
The following table presents the components of income from discontinued
operations:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2002 2001 2002 2001
------ ------ ------ ------
(DOLLARS IN MILLIONS)
Net investment income $ 29 $ 25 $ 88 $ 91
Net investment losses (1) -- (8) --
------ ------ ------ ------
Total revenues 28 25 80 91
Provision for income taxes 9 8 26 30
------ ------ ------ ------
Income from discontinued operations $ 19 $ 17 $ 54 $ 61
====== ====== ====== ======
The carrying value of real estate related to discontinued operations was
$1,249 million and $1,572 million at September 30, 2002 and December 31, 2001,
respectively. See note 11 for net investment income and net investment losses by
business segment.
12
6. 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 approved by the New York State Insurance Department (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.
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.
The table below provides a summary of the carrying value, notional amount and
fair value of derivatives by hedge accounting classification at:
SEPTEMBER 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 42 726 63 21 60 607 61 1
Non-qualifying 67 14,043 285 218 180 13,616 226 46
------- ------- ------- ------- ------- ------- ------- -------
Total $ 109 $14,769 $ 348 $ 239 $ 240 $14,223 $ 287 $ 47
======= ======= ======= ======= ======= ======= ======= =======
For the three months and nine months ended September 30, 2002 and 2001, the
amount related to hedge ineffectiveness was insignificant and there were no
discontinued hedges.
At September 30, 2002 and December 31, 2001, the accumulated gain in other
comprehensive income relating to cash flow hedges was $33 million and $71
million, respectively. For the three months ended September 30, 2002 and 2001,
the Company recognized other comprehensive losses of $24 million and other
comprehensive income of $14 million, respectively, relating to the effective
portion of cash flow hedges. For the nine months ended September 30, 2002 and
2001, the Company recognized other comprehensive losses of $75 million and other
comprehensive income of $52 million, respectively, relating to the effective
portion of cash flow hedges. For the three months ended September 30, 2002 and
2001, $3 million and $15 million, respectively, of other comprehensive income
was reclassified into net investment income. During the nine months ended
September 30, 2002 and 2001, $9 million and $15 million, respectively, of other
comprehensive income was reclassified into net investment income. During the
three months and nine months ended September 30, 2002, $47 million of other
comprehensive losses were reclassified into net investment gains and losses.
There were no reclassifications of other comprehensive income to net investment
gains and losses for the three months and nine months ended September 30, 2001.
Primarily as a result of the initial adoption of SFAS No. 133, approximately $11
million of gains reported in accumulated other comprehensive income are expected
to be reclassified during the year ending December 31, 2002 into net investment
income as the underlying investments mature or expire according to their
original terms. Reclassifications are recognized over the life of the hedged
item. As a result of cash flow hedges of forecasted transactions entered into
during 2002,
13
approximately $19 million of losses reported in accumulated other comprehensive
income are expected to be reclassified during the year ending December 31, 2002
into net investment gains and losses as the forecasted transactions occur.
For the three months ended September 30, 2002 and 2001, the Company
recognized net investment income of $3 million and $8 million, respectively, and
net investment gains of $21 million and $23 million, respectively, from all
derivatives not qualifying as accounting hedges. For the nine months ended
September 30, 2002 and 2001, the Company recognized net investment income of $23
million and $41 million, respectively, and net investment losses of $129 million
and net investment gains of $62 million, respectively, from all derivatives not
qualifying as accounting hedges. The use of these non-speculative derivatives is
permitted by the Department.
7. 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.
The following table presents closed block liabilities and assets designated to
the closed block at:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(DOLLARS IN MILLIONS)
CLOSED BLOCK LIABILITIES
Future policy benefits $ 40,885 $ 40,325
Other policyholder funds 265 321
Policyholder dividends payable 848 757
Policyholder dividend obligation 1,672 708
Payables under securities loaned transactions 4,094 3,350
Payables on securities purchased 325 --
Other liabilities 390 90
---------- ----------
Total closed block liabilities 48,479 45,551
---------- ----------
ASSETS DESIGNATED TO THE CLOSED BLOCK
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost: $27,688 and $25,761, respectively) 29,282 26,331
Equity securities, at fair value (cost: $546 and $240,
respectively) 502 282
Mortgage loans on real estate 6,697 6,358
Policy loans 3,937 3,898
Short-term investments 83 170
Other invested assets 362 159
---------- ----------
Total investments 40,863 37,198
Cash and cash equivalents 461 1,119
Accrued investment income 568 550
Deferred income taxes 1,158 1,060
Premiums and other receivables 131 244
---------- ----------
Total assets designated to the closed block 43,181 40,171
---------- ----------
Excess of closed block liabilities over assets designated
to the closed block 5,298 5,380
---------- ----------
Amounts included in accumulated other comprehensive income:
Net unrealized investment gains, net of deferred
income taxes of $561 and $219, respectively 985 389
Unrealized derivative gains, net of deferred income
taxes of $13 and $9, respectively 19 17
Allocated to policyholder dividend obligation, net of
deferred income taxes of $606 and $255, respectively (1,066) (453)
---------- ----------
(62) (47)
---------- ----------
Maximum future earnings to be recognized from closed
block assets and liabilities $ 5,236 $ 5,333
========== ==========
14
Information regarding the policyholder dividend obligation is as follows:
SEPTEMBER 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 77 159
Net investment losses (77) (159)
Change in unrealized investment and derivative gains 964 323
---------- ----------
Balance at end of period $ 1,672 $ 708
========== ==========
Closed block revenues and expenses are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 851 $ 863 $ 2,563 $ 2,638
Net investment income and other revenues 645 659 1,925 1,904
Net investment gains (losses) (net of amounts allocable
to the policyholder dividend obligation of
$(7), $(29), $(78) and $(92), respectively) 4 (9) 47 (53)
-------- -------- -------- --------
Total revenues 1,500 1,513 4,535 4,489
-------- -------- -------- --------
EXPENSES
Policyholder benefits and claims 913 939 2,720 2,784
Policyholder dividends 426 384 1,224 1,150
Change in policyholder dividend obligation (excludes
amounts directly related to net investment losses of
$(7), $(29), $(78) and $(92), respectively) 6 29 77 92
Other expenses 76 84 234 292
-------- -------- -------- --------
Total expenses 1,421 1,436 4,255 4,318
-------- -------- -------- --------
Revenues net of expenses before income taxes 79 77 280 171
Income taxes 25 27 98 62
-------- -------- -------- --------
Revenues net of expenses and income taxes $ 54 $ 50 $ 182 $ 109
======== ========= ======== ========
The change in maximum future earnings of the closed block is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
Balance at end of period $ 5,236 $ 5,403 $ 5,236 $ 5,403
Less:
Reallocation of assets 85 -- 85 --
Balance at beginning of period 5,205 5,453 5,333 5,512
-------- -------- -------- --------
Change during the period $ (54) $ (50) $ (182) $ (109)
======== ======== ======== ========
During the three months ended September 30, 2002, the allocation of assets to
the closed block was revised to appropriately classify assets in accordance with
the plan of demutualization. The reallocation of assets had no impact on
consolidated assets or liabilities.
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.
15
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:
SEPTEMBER 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 37 159 37 -- 22 171 22 --
Non-qualifying 5 211 11 6 8 112 13 5
------- ------- ------- ------- ------- ------- ------- -------
Total $ 42 $ 370 $ 48 $ 6 $ 30 $ 283 $ 35 $ 5
======= ======= ======= ======= ======= ======= ======= =======
For the three months and nine months ended September 30, 2002 and 2001, the
amount related to hedge ineffectiveness was insignificant and there were no
discontinued hedges.
At September 30, 2002 and December 31, 2001, the accumulated gain in other
comprehensive income relating to cash flow hedges was $32 million and $26
million, respectively. For the three months ended September 30, 2002 and 2001,
the closed block recognized other comprehensive income of $13 million and other
comprehensive losses of $8 million, respectively, relating to the effective
portion of cash flow hedges. For the nine months ended September 30, 2002 and
2001, the closed block recognized other comprehensive income of $15 million and
$14 million, respectively, relating to the effective portion of cash flow
hedges. During the three months ended September 30, 2002 and 2001, $1 million
and $2 million, respectively, of other comprehensive income was reclassified
into net investment income. During the nine months ended September 30, 2002 and
2001, $3 million and $2 million, respectively, of other comprehensive income was
reclassified into net investment income. 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 September 30, 2002 the closed block recognized net
investment income of $1 million from all derivatives not designated as
accounting hedges. The closed block did not recognize net investment income for
the three months ended September 30, 2001. For the three months ended September
30, 2002 and 2001, the closed block recognized net investment gains of $5
million and net investment losses of $10 million, respectively, from all
derivatives not designated as accounting hedges. For each of the nine months
ended September 30, 2002 and 2001, the closed block recognized net investment
income of $1 million and for the nine months ended September 30, 2002 and 2001,
the closed block recognized net investment losses of $2 million and $6 million,
respectively, in each case from all derivatives not designated as accounting
hedges. The use of these non-speculative derivatives is permitted by the
Department.
8. 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 September 30, 2002:
TOTAL 2001 REMAINING LIABILITY
EXPENSE AT SEPTEMBER 30, 2002
------------ ---------------------
(DOLLARS IN MILLIONS)
EXPENSE TYPE
Severance and severance-related costs $ 44 $ 25
Facilities costs 68 32
Business exit costs 387 85
------------ ------------
Total $ 499 $ 142
============ ============
The severance and severance-related costs recorded in 2001 reflects 1,400
anticipated terminations. As of September 30, 2002, there are approximately 300
terminations to be completed.
16
9. 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 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. An appellate court has affirmed the order
approving the settlement. The class includes owners of approximately 250,000
in-force or terminated policies. 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 September 30, 2002, there are approximately 425 sales practices lawsuits
pending against Metropolitan Life, approximately 60 sales practices lawsuits
pending against New England Mutual and approximately 45 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
17
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 policies,
$878 million is recorded as a recoverable at September 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 nine months of 2002 and 2001, Metropolitan Life received
approximately 45,200 and 49,500 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.
18
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 alleging 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.
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 was filed in the
Supreme Court of the State of New York for New York County 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's
motion to dismiss this case was granted in a decision filed on October 31, 2002.
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
19
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 has cooperated fully with that
inquiry. 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.
Metropolitan Life has entered into settlement agreements to resolve the
regulatory examination and the actions pending in the United States District
Court for the Southern District of New York. The class action settlement, which
has received preliminary approval from the court, must receive final approval
before it can be implemented. A fairness hearing has been set for February 7,
2003. The regulatory settlement agreement is conditioned upon final approval of
the class action settlement. Metropolitan Life recorded a charge in the fourth
quarter of 2001 in connection with the anticipated resolution of these matters
and believes that charge is adequate to cover the costs associated with these
settlements.
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.
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 to individuals like
plaintiffs whose employment, or whose spouses' 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
20
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 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.
10. COMPREHENSIVE INCOME
Comprehensive income is as follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
Net income $ 328 $ 162 $ 1,044 $ 769
Other comprehensive income:
Cumulative effect of change in accounting for derivatives,
net of income taxes -- -- -- 32
Unrealized gains (losses) on derivative instruments, net of
income taxes 13 9 (24) 34
Unrealized investment gains, net of related offsets,
reclassification adjustments and income taxes 736 546 545 788
Foreign currency translation adjustments (104) (46) (80) (67)
-------- -------- -------- --------
Other comprehensive income 645 509 441 787
-------- -------- -------- --------
Comprehensive income $ 973 $ 671 $ 1,485 $ 1,556
======== ======== ======== ========
21
11. BUSINESS SEGMENT INFORMATION
Auto &
For the three months ended September 30, 2002 Individual Institutional Reinsurance Home
- --------------------------------------------- ---------- ------------- ----------- ------
Premiums $ 1,080 $ 2,050 $ 461 $ 711
Universal life and investment-type product
policy fees 375 148 -- --
Net investment income 1,592 964 95 44
Other revenues 95 154 16 11
Net investment (losses) gains (26) (201) 4 (8)
Income (loss) from continuing operations
before provision for income taxes 315 156 39 56
Asset Corporate
For the three months ended September 30, 2002 Management International & Other Total
- --------------------------------------------- ---------- ------------- --------- -------
Premiums $ -- $ 381 $ (7) $ 4,676
Universal life and investment-type product
policy fees -- 64 -- 587
Net investment income 17 133 (35) 2,810
Other revenues 37 2 5 320
Net investment (losses) gains -- 6 (44) (269)
Income (loss) from continuing operations
before provision for income taxes 1 61 (190) 438
Auto &
For the three months ended September 30, 2001 Individual Institutional Reinsurance Home
- --------------------------------------------- ---------- ------------- ----------- ------
Premiums $ 1,093 $ 1,896 $ 392 $ 692
Universal life and investment-type product
policy fees 319 139 -- --
Net investment income 1,551 983 103 48
Other revenues 119 155 12 6
Net investment (losses) gains (43) (37) (12) --
Income (loss) from continuing operations
before provision for income taxes 204 (9) 13 28
Asset Corporate
For the three months ended September 30, 2001 Management International & Other Total
- --------------------------------------------- ---------- ------------- --------- -------
Premiums $ -- $ 210 $ (1) $ 4,282
Universal life and investment-type product
policy fees -- 8 -- 466
Net investment income 18 63 56 2,822
Other revenues 42 4 8 346
Net investment (losses) gains 25 (9) (23) (99)
Income (loss) from continuing operations
before provision for income taxes 29 9 (60) 214
Auto &
For the nine months ended September 30, 2002 Individual Institutional Reinsurance Home
- -------------------------------------------- ---------- ------------- ----------- ------
Premiums $ 3,258 $ 6,072 $ 1,408 $2,105
Universal life and investment-type product
policy fees 1,012 468 -- --
Net investment income 4,674 2,940 296 135
Other revenues 325 482 35 27
Net investment (losses) gains (112) (392) 6 (40)
Income (loss) from continuing operations
before provision for income taxes 779 706 109 112
Asset Corporate
For the nine months ended September 30, 2002 Management International & Other Total
- -------------------------------------------- ---------- ------------- --------- -------
Premiums $ -- $ 1,030 $ (15) $13,858
Universal life and investment-type product
policy fees -- 78 -- 1,558
Net investment income 46 303 7 8,401
Other revenues 127 8 72 1,076
Net investment (losses) gains (4) (8) 3 (547)
Income (loss) from continuing operations
before provision for income taxes 7 71 (321) 1,463
Auto &
For the nine months ended September 30, 2001 Individual Institutional Reinsurance Home
- -------------------------------------------- ---------- ------------- ----------- ------
Premiums $ 3,306 $ 5,503 $ 1,197 $2,047
Universal life and investment-type product
policy fees 942 443 -- --
Net investment income 4,620 2,957 288 150
Other revenues 384 485 28 18
Net investment (losses) gains (157) (154) 2 (6)
Income (loss) from continuing operations
before provision for income taxes 640 476 78 (9)
Asset Corporate
For the nine months ended September 30, 2001 Management International & Other Total
- -------------------------------------------- ---------- ------------- --------- -------
Premiums $ -- $ 583 $ (2) $12,634
Universal life and investment-type product
policy fees -- 28 -- 1,413
Net investment income 54 189 148 8,406
Other revenues 154 10 51 1,130
Net investment (losses) gains 25 19 (109) (380)
Income (loss) from continuing operations
before provision for income taxes 39 69 (225) 1,068
At September 30, At December 31,
2002 2001
---------------- ---------------
Assets
Individual $ 133,551 $ 131,314
Institutional 92,857 89,661
Reinsurance 8,845 7,911
Auto & Home 4,950 4,581
Asset Management 186 256
International 8,377 5,308
Corporate & Other 19,168 17,867
------------ ------------
Total $ 267,934 $ 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 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 the terms of the
related borrowings.
22
The International segment's assets at September 30, 2002 and results of
operations for the three months and nine months ended September 30, 2002 include
those assets and results of operations of Aseguradora Hidalgo S.A. ("Hidalgo"),
a Mexican life insurer that was acquired on June 20, 2002.
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.
The following amounts are reported as discontinued operations in accordance
with SFAS 144:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2002 2001 2002 2001
------ ------ ------ ------
(DOLLARS IN MILLIONS)
Net investment income
Individual $ 13 $ 12 $ 42 $ 43
Institutional 6 6 18 18
Corporate & Other 10 7 28 30
------ ------ ------ ------
Total net investment income $ 29 $ 25 $ 88 $ 91
====== ====== ====== ======
Net investment losses
Individual $ (1) $ -- $ (1) $ --
Corporate & Other -- -- (7) --
------ ------ ------ ------
Total net investment losses $ (1) $ -- $ (8) $ --
====== ====== ====== ======
Revenues derived from any one customer did not exceed 10% of consolidated
revenues for the three months and nine months ended September 30, 2002. Revenues
from domestic operations were $7,538 million and $7,541 million for the three
months ended September 30, 2002 and 2001, respectively, which represented 93%
and 96% of consolidated revenues for the three months ended September 30, 2002
and 2001, respectively. Revenues from domestic operations were $22,935 million
and $22,374 million for the nine months ended September 30, 2002 and 2001,
respectively, which represented 94% and 96% of consolidated revenues for the
nine months ended September 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.
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 previously disclosed by the
Holding Company in its quarterly report on Form 10-Q for the quarter ended June
30, 2002, 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. The Holding Company
received correspondence from the SEC in connection with this review in July,
September and October 2002. The Holding Company responded, on a timely basis, to
all of the SEC's comments and has included a number of supplemental disclosures
in its Forms 10-Q for the quarters ended June 30, 2002 and September 30, 2002.
The Company has been informed by the SEC that they have no further comments on
the 2001 10-K and that they have concluded their review.
23
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 significantly reduced sales
of the Company's split dollar life insurance products and could significantly
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, among other things, 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 November 14, 2002. These certifications have been submitted to
the SEC.
SENSITIVITY TO FINANCIAL MARKETS
The volatility of the equity market and its year to date 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
liabilities for certain policy features that are linked to investment market
performance. One such feature is the guaranteed minimum death benefit. This
provision, which is available on many of the Company's annuity products,
provides for a guaranteed minimum death benefit which can, in some instances, be
higher than the annuity account balance since that balance may be based upon the
performance of the equity markets. 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 is likely to adversely impact the returns on the
Company's general account investment portfolio.
Pension expense levels in future periods are partially linked to actual
investment performance of the underlying plan assets, as well as expectations
about future investment performance. Since approximately 45% (based on fair
value) of the Company's pension fund assets were comprised of equity-related
investments at January 1, 2002 and overall equity markets have declined year to
date, it is likely that pension expense will increase in future periods compared
to 2002 levels and it is possible that pension fund contributions (which
contributions were not necessary for over a decade due to historic funding
levels) could resume. If current depressed market conditions persist at December
31, 2002 and the Company does not make a pension fund contribution prior to year
end, the Company may be required to record a significant minimum pension
liability adjustment through other comprehensive income during the fourth
quarter of 2002.
A portion of the Company's earnings from insurance products and investments
(including securities lending and mortgage loan prepayments) 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.
ACQUISITIONS AND DISPOSITIONS
On June 20, 2002, the Company acquired Aseguradora Hidalgo S.A. ("Hidalgo").
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.
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 marked
MetLife's entrance into the Chilean insurance market.
24
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. ("Seasul"),
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. 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. 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.
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.
25
FUTURE POLICY BENEFITS
The Company establishes liabilities for amounts payable under insurance
policies, including traditional life insurance, annuities and disability
insurance. 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
The Company enters into reinsurance transactions as both a provider and a
purchaser of 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."
26
RESULTS OF OPERATIONS
The following table presents consolidated financial information for the
Company for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 4,676 $ 4,282 $ 13,858 $ 12,634
Universal life and investment-type product policy fees 587 466 1,558 1,413
Net investment income 2,810 2,822 8,401 8,406
Other revenues 320 346 1,076 1,130
Net investment losses (net of amounts allocable to other
accounts of $(16), $(28), $(102) and $(107), respectively) (269) (99) (547) (380)
-------- -------- -------- --------
Total revenues 8,124 7,817 24,346 23,203
-------- -------- -------- --------
EXPENSES
Policyholder benefits and claims (excludes amounts directly related
to net investment losses of $(5), $(29), $(76) and $(92), respectively) 4,739 4,723 14,239 13,447
Interest credited to policyholder account balances 736 745 2,177 2,228
Policyholder dividends 504 547 1,489 1,567
Other expenses (excludes amounts directly related to net
investment losses of $(11), $1, $(26) and $(15), respectively) 1,707 1,588 4,978 4,893
-------- -------- -------- --------
Total expenses 7,686 7,603 22,883 22,135
-------- -------- -------- --------
Income from continuing operations before provision
for income taxes 438 214 1,463 1,068
Provision for income taxes 124 69 473 360
-------- -------- -------- --------
Income from continuing operations 314 145 990 708
Income from discontinued operations, net of income taxes 19 17 54 61
-------- -------- -------- --------
Income before cumulative effect of change in accounting 333 162 1,044 769
Cumulative effect of change in accounting (5) -- -- --
-------- -------- -------- --------
Net income $ 328 $ 162 $ 1,044 $ 769
======== ======== ======== ========
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2001 -- THE COMPANY
Premiums increased by $394 million, or 9%, to $4,676 million for the three
months ended September 30, 2002 from $4,282 million for the comparable 2001
period. This variance is primarily attributable to increases in the
International, Institutional and Reinsurance segments. The June 2002 acquisition
of Hidalgo and the November 2001 acquisitions in Chile, as well as growth in
South Korea, Spain and Mexico, are the primary drivers of the $171 million
increase in International. A $154 million increase in Institutional is largely
due to sales growth in its group life, dental, disability and long-term care
businesses, as well as additional premiums from existing customers in the
retirement and savings business. New premiums from facultative and automatic
treaties and renewal premiums on existing blocks of business all contributed to
a $69 million increase in the Reinsurance segment.
Universal life and investment-type product policy fees increased by $121
million, or 26%, to $587 million for the three months ended September 30, 2002
from $466 million for the comparable 2001 period. This variance is primarily
attributable to the International and Individual segments. A $56 million
increase in International is due to the acquisition of Hidalgo and acquisitions
in Chile. A $56 million favorable variance in Individual is largely attributable
to an increase in policy fees from insurance products, primarily due to higher
revenue from insurance fees. These increases are partially offset by lower
policy fees from annuity and investment-type products resulting generally from
poor equity market performance. Management would expect policy fees from annuity
and investment-type products to continue to be adversely impacted while revenues
from insurance fees on variable life products would be expected to rise if
average separate account asset levels continue to decline.
Net investment income decreased by $12 million, to $2,810 million for the
three months ended September 30, 2002 from $2,822 million for the comparable
2001 period. This variance is primarily attributable to decreases of (i) $35
million, or 44%, in income from other invested assets, (ii) $31 million, or 39%,
in income from cash and cash equivalents and short-term investments, and (iii)
$7 million, or 35%, in income from equity securities and other limited
partnership interests. These variances are partially offset by
27
increases of (i) $34 million, or 2%, in income from fixed maturities, (ii) $17
million, or 15%, in income from real estate and real estate joint ventures, and
(iii) $10 million, or 8%, in income on policy loans.
The decrease in net investment income from other invested assets to $44
million in 2002 from $79 million in 2001 is primarily due to lower income from
derivative transactions, as well as decreased funds withheld at interest. The
decrease in income from cash and cash equivalents and short-term investments to
$49 million from $80 million is due to a drop in interest rates. The decline in
income from equity securities and other limited partnership interests to $13
million from $20 million is due to lower corporate partnership operating
results. The increase in income from fixed maturities to $2,038 million from
$2,004 million is attributable to a higher asset base, primarily resulting from
the acquisitions in Mexico and Chile, partially offset by decreased income due
to lower reinvestment rates and reduced income from equity-linked notes. The
increase in income from real estate and real estate joint ventures to $131
million from $114 million is primarily due to the transfer of the Company's One
Madison Avenue, New York property to an investment property in the first quarter
of 2002. The increase in income from policy loans to $139 million from $129
million is largely due to increased loans outstanding.
The decline in net investment income is attributable to decreases in
Corporate & Other as well as the Institutional and Reinsurance segments,
partially offset by increases in the International and Individual segments. The
decline in Corporate & Other of $91 million was primarily due to a lower asset
base, resulting from funding the International acquisitions in Mexico and Chile
and the Company's common share repurchases. A decline in corporate partnership
income also contributed to this variance. A $19 million decrease in the
Institutional segment predominantly resulted from lower income from
equity-linked notes. The Reinsurance segment's net investment income declined by
$8 million generally due to a decline in funds withheld at interest. These
unfavorable variances were partially offset by a $70 million increase in
International and a $41 million increase in Individual. Individual increased due
to a higher general account asset base, as well as sales of underlying assets in
corporate partnerships. International increased as a result of the acquisitions
in Mexico and Chile.
Other revenues decreased by $26 million, or 8%, to $320 million for the three
months ended September 30, 2002 from $346 million for the comparable 2001
period. This variance is primarily attributable to a $24 million decrease in the
Individual segment resulting from lower commission and fee income associated
with decreased volume in the broker/dealer and other subsidiaries. This decline
is largely due to the depressed equity markets.
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 cost amortization, to the extent that such amortization
results from investment gains and losses, (ii) adjustments to participating
contractholder accounts when amounts equal to such investment gains and losses
are applied to the contractholder's accounts, and (iii) adjustments to the
policyholder dividend obligation resulting from investment gains and losses.
Net investment losses increased by $170 million, or 172%, to $269 million for
the three months ended September 30, 2002 from $99 million for the comparable
2001 period. This increase reflects total investment losses, before offsets, of
$285 million (including gross gains of $525 million, gross losses of $255
million and writedowns of $555 million), an increase of $158 million, or 124%,
from $127 million in 2001. Offsets include the amortization of deferred policy
acquisition costs of $11 million and ($1) million in 2002 and 2001,
respectively, changes in the policyholder dividend obligation of $7 million and
$29 million in 2002 and 2001, respectively, and adjustments to participating
contracts of $(2) million in 2002. The increase in total investment losses is
due to the continued recognition of deteriorating credits in the portfolio,
consistent with depressed economic conditions since 2001.
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 $16 million, or less than 1%,
to $4,739 million for the three months ended September 30, 2002 from $4,723
million for the comparable 2001 period. This variance is attributable to an
increase in the International segment, offset by decreases in the Institutional
and Individual segments. A $194 million increase in International is primarily
due to the June 2002 acquisition of Hidalgo, the November 2001 acquisitions in
Chile and business growth in Mexico, excluding Hidalgo, South Korea, and Spain.
The decline in Institutional of $107 million is primarily due to the
establishment of a liability in 2001 related to the September 11, 2001
tragedies, partially offset by an increase in policyholder benefits and claims,
which
28
is commensurate with the increase in premiums discussed above. In addition, a
decline of $75 million in Individual is primarily due to an amendment to expand
the Company's coverage under an existing reinsurance agreement, the
establishment of liabilities for the September 11, 2001 tragedies in the
previous year and a reduction in the policyholder dividend obligation associated
with the closed block. These variances are partially offset by an increase in
the liability associated with guaranteed minimum death benefits on variable and
fixed annuities.
Interest credited to policyholder account balances decreased by $9 million,
or 1%, to $736 million for the three months ended September 30, 2002 from $745
million for the comparable 2001 period. This variance is attributable to
decreases in the Institutional and Individual segments, partially offset by an
increase in the International segment. A decrease of $13 million in
Institutional is primarily due to a decline in average crediting rates resulting
from the current interest rate environment. A decrease of $8 million in
Individual is due to a slight decline in crediting rates, partially offset by an
increase in the underlying policyholder account balances. These decreases are
partially offset by a $17 million increase in International primarily due to the
acquisition of Hidalgo, partially offset by a decline in Spain due to the
cessation of product lines offered through a joint venture with Banco Santander
in 2001.
Policyholder dividends decreased by $43 million, or 8%, to $504 million for
the three months ended September 30, 2002 from $547 million for the comparable
2001 period. This variance is primarily attributable to a decrease of $62
million in the Institutional segment, partially offset by an increase of $18
million in the Individual segment. The decline in Institutional is largely
attributable to unfavorable mortality experience of several large group clients.
Institutional policyholder dividends vary from period to period based on
participating contract experience. The increase in Individual is predominantly
due to an increase in the invested assets supporting the policies associated
with this segment's large block of traditional life insurance business.
Other expenses increased by $119 million, or 7%, to $1,707 million for the
three months ended September 30, 2002 from $1,588 million for the comparable
2001 period. Excluding the capitalization and amortization of deferred policy
acquisition costs, which are discussed below, other expenses increased by $78
million, or 4%, to $1,820 million in 2002 from $1,742 million in 2001. Excluding
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,
other expenses increased by $89 million. This variance is attributable to the
International, Reinsurance, and Institutional segments, partially offset by a
decline in the Individual segment. A $58 million increase in International
results primarily from the acquisition of Hidalgo and the acquisitions in Chile.
A $33 million increase in Reinsurance is largely due to an increase in
allowances paid on reinsurance contracts. An increase of $10 million in
Institutional is attributable to growth in operational expenses in group
insurance. This increase is commensurate with the aforementioned premium growth.
These increases are partially offset by a decrease in Individual of $17 million
due to continued expense management initiatives, including reduced
compensation-related expenses, a refund of interest associated with a prior year
tax payment and reductions in volume-related commission expenses in the
broker-dealer and other subsidiaries. These declines are partially offset by
higher pension and post-retirement benefit expenses and an increase in expenses
stemming from sales growth in new annuity and investment-type products.
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 by $65
million, or 12%, to $601 million for the three months ended September 30, 2002
from $536 million for the comparable 2001 period. This variance is primarily due
to a $40 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. In addition, an $18 million increase in International is
primarily due to the June 2002 acquisition of Hidalgo. Total amortization of
deferred policy acquisition costs increased by $94 million, or 25%, to $477
million in 2002 from $383 million in 2001. Amortization of $488 million and $382
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. The increase in amortization allocated to other expenses is largely
attributable to the Individual segment. The $91 million increase in Individual
is due primarily to the impact of the depressed equity markets and refinements
in the calculation of estimated gross margins and profits.
Income tax expense for the three months ended September 30, 2002 was $124
million, or 28% of income from continuing operations before provision for income
taxes, compared with $69 million, or 32%, for the comparable 2001 period. The
2002 and 2001 effective tax rate differs from the corporate tax rate of 35%
primarily due to the impact of non-taxable investment income.
29
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets ("SFAS 144"), income related to the Company's real estate
which was identified as held-for-sale on or after January 1, 2002 is presented
as discontinued operations. The income from discontinued operations is
comprised of net investment income and net investment losses related to 55
properties that the Company began marketing for sale on or after January 1,
2002.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2001 -- THE COMPANY
Premiums increased by $1,224 million, or 10%, to $13,858 million for the nine
months ended September 30, 2002 from $12,634 million for the comparable 2001
period. This variance is primarily attributable to increases in the
Institutional, International and Reinsurance segments. A $569 million increase
in Institutional is largely due to sales growth in group life, dental,
disability and long-term care businesses, as well as additional premiums from
existing customers in the retirement and savings business. The sale of an
annuity contract in the first quarter of 2002 to a Canadian trust company, the
June 2002 acquisition of Hidalgo and the 2001 acquisitions in Chile and Brazil
are the primary drivers of a $447 million increase in International. In
addition, business growth in South Korea, Spain and Mexico, excluding Hidalgo,
also contributed to this variance. New premiums from facultative and automatic
treaties and renewal premiums on existing blocks of business all contributed to
a $211 million increase in the Reinsurance segment.
Universal life and investment-type product policy fees increased by $145
million, or 10%, to $1,558 million for the nine months ended September 30, 2002
from $1,413 million for the comparable 2001 period. This variance is primarily
attributable to the Individual, International and Institutional segments. A $70
million favorable variance in Individual is principally due to an increase in
policy fees from insurance products, primarily due to higher revenue from
insurance fees. This increase is partially offset by lower policy fees from
annuity and investment-type products resulting generally from poor equity market
performance. Management would expect policy fees from annuity and
investment-type products to continue to be adversely impacted, while revenues
from insurance fees on variable life products would be expected to rise if
average separate account asset levels continue to decline. A $50 million
increase in International is largely due to the acquisition of Hidalgo and the
acquisitions in Chile, partially offset by a decrease in Spain due to the
cessation of product lines offered through a joint venture with Banco Santander
in 2001. A $25 million increase in Institutional is principally due to a fee
related to the termination of a portion of a bank-owned life insurance contract,
as well as growth in existing business in the group universal life product.
Net investment income decreased by $5 million, or less than 1%, to $8,401 for
the nine months ended September 30, 2002 from $8,406 for the comparable 2001
period. This variance is primarily attributable to decreases of (i) $47 million,
or 22%, in income on cash and cash equivalents and short-term investments, (ii)
$41 million, or 22%, in income on other invested assets, and (iii) $9 million,
or 12%, in income from equity securities and other limited partnership
interests. These variances are partially offset by increases of (i) $41 million,
or 1%, in income from fixed maturities, (ii) $30 million, or 8%, in income from
real estate and real estate joint ventures, (iii) $10 million, or 1%, in income
on mortgage loans, and (iv) $9 million, or 2%, in income on policy loans.
The decrease in income from cash and cash equivalents and short-term
investments to $170 million from $217 million is due to declining interest
rates. The decrease in net investment income from other invested assets to $146
million in 2002 from $187 million in 2001 is largely attributable to lower
derivative income. The decline in income from equity securities and other
limited partnership interests to $65 million from $74 million is due to a
decrease in dividend income from equity securities. The increase in income from
fixed maturities to $5,997 million from $5,956 million is primarily due to
securities lending income resulting from increased activity in addition to a
program expansion, partially offset by lower income on equity-linked notes and
declining interest rates on reinvestments. The increase in income from real
estate and real estate joint ventures to $396 million from $366 million is
primarily due to the transfer of the Company's One Madison Avenue, New York
property to an investment property in 2002. The increase in income on mortgage
loans to $1,391 million from $1,381 is due to a higher asset base, partially
offset by lower mortgage rates. The increase in income from policy loans to $407
million from $398 million is largely due to increased loans outstanding.
The decline in net investment income is attributable to decreases in
Corporate & Other as well as the Institutional and Auto & Home segments,
partially offset by increases in the International, and Individual segments. A
$141 million decrease in Corporate & Other is due to a lower asset base, as a
result of funding International acquisitions in Mexico and Chile and the
Company's common share repurchases. A decline in corporate partnership income
also contributed to this variance. Institutional decreased by $17 million due
primarily to lower income from equity-linked notes. Auto & Home income declined
by $15 million primarily due to a lower asset base and lower rates on reinvested
assets. International income increased by $114 million due to a higher asset
base resulting from the acquisitions in Chile and Mexico. Individual's income
increased by $54 million due to a higher asset base and higher income from
corporate partnerships, partially offset by lower market rates on reinvestments.
30
Other revenues decreased by $54 million, or 5%, to $1,076 million for the
nine months ended September 30, 2002 from $1,130 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 and the Auto & Home segment. Individual decreased by $59 million primarily
as a result of lower commission and fee income associated with decreased volume
in the broker/dealer and other subsidiaries. This decline in volume is largely
due to the depressed equity markets. A $27 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 $21 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 investment income earned on experience
funds with reinsurers in 2001. In addition, an increase of $9 million in Auto &
Home was principally due to income earned on corporate-owned life insurance
("COLI") purchased in the second quarter of 2002, as well as higher fees on
installment payments.
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 cost amortization, to the extent that such amortization
results from investment gains and losses, (ii) adjustments to participating
contractholder accounts when amounts equal to such investment gains and losses
are applied to the contractholder's accounts, and (iii) adjustments to the
policyholder dividend obligation resulting from investment gains and losses.
Net investment losses increased by $167 million, or 44%, to $547 million for
the nine months ended September 30, 2002 from $380 million for the comparable
2001 period. This increase reflects total investment losses, before offsets, of
$649 million (including gross gains of $1,593 million, gross losses of $1,080,
and writedowns of $1,162 million), an increase of $162 million, or 33%, from
$487 million in 2001. Offsets include the amortization of deferred policy
acquisition costs of $26 million and $15 million in 2002 and 2001, respectively,
changes in the policyholder dividend obligation of $78 million and $92 million
in 2002 and 2001, respectively, and adjustments to participating contracts of
$(2) million in 2002. The increase in gross investment losses is due to the
continued recognition of deteriorating credits in the portfolio, consistent with
depressed economic conditions since 2001.
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 $792 million, or 6%, to $14,239
million for the nine months ended September 30, 2002 from $13,447 million for
the comparable 2001 period. This variance is attributable to increases in the
International, Institutional and Reinsurance segments partially offset by a
decrease in the Auto & Home segment. A $478 million increase in International is
primarily due to the acquisition of Hidalgo, the acquisitions in Chile and
Brazil, the aforementioned sale of an annuity contract and business growth in
South Korea, Spain and Mexico, excluding Hidalgo. The increase in Institutional
of $328 million is primarily due to the growth in premiums as discussed above
largely offset by the establishment of a liability in 2001 related to the
September 11, 2001 tragedies. The increase in Reinsurance of $139 million is
commensurate with the growth in premiums discussed above. These increases were
partially offset by a decrease of $96 million in the Auto & Home segment. This
variance is largely due to improved claim frequency resulting from milder winter
weather, lower catastrophe levels and fewer personal umbrella claims, partially
offset by an increase in current year bodily injury and no-fault severities and
costs associated with the processing of the New York assigned risk business.
Interest credited to policyholder account balances decreased by $51 million,
or 2%, to $2,177 million for the nine months ended September 30, 2002 from
$2,228 million for the comparable 2001 period. This variance is attributable to
a decrease in the Institutional segment, partially offset by increases in the
Reinsurance and International segments. A $74 million decrease in Institutional
is primarily due to a decline in average crediting rates resulting from the
current interest rate environment. This variance was offset by an increase of
$13 million in Reinsurance due primarily to new single premium deferred annuity
coinsurance agreements in the first quarter of 2002 and the third quarter of
2001. In addition, an increase of $11 million in International is principally
due to the acquisition of Hidalgo, partially offset by a decrease in Spain due
to the cessation of product lines offered through a joint venture with Banco
Santander in 2001, and a reduction in the number of investment type policies
in-force in South Korea.
Policyholder dividends decreased by $78 million, or 5%, to $1,489 million for
the nine months ended September 30, 2002 from
31
$1,567 million for the comparable 2001 period. This variance is primarily
attributable to a decrease of $129 million in the Institutional segment,
partially offset by an increase of $52 million in the Individual segment. The
Institutional decline is largely attributable to unfavorable mortality
experience of several large group clients. Institutional policyholder dividends
vary from period to period based on participating contract experience. The
increase in Individual is due to an increase in the invested assets supporting
the policies associated with this segment's large block of traditional life
insurance business.
Other expenses increased by $85 million, or 2%, to $4,978 million for the
nine months ended September 30, 2002 from $4,893 million for the comparable 2001
period. Excluding the capitalization and amortization of deferred policy
acquisition costs, which are discussed below, other expenses increased by $128
million, or 2%, to $5,437 million in 2002 from $5,309 million in 2001. Excluding
the change in accounting as prescribed by SFAS 142, which eliminates the
amortization of goodwill and certain other intangibles, other expenses increased
by $165 million. This increase is primarily attributable to the International
and Reinsurance segments and Corporate & Other, partially offset by a decrease
in the Asset Management segment. An increase of $99 million in International
expenses is primarily due to the acquisition of Hidalgo, the acquisitions in
Chile and Brazil, as well as business growth in South Korea, Mexico, excluding
Hidalgo, Hong Kong and Spain. An increase in Corporate & Other of $76 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's ("General American")
former Medicare business. A $28 million increase in Reinsurance is due to
increases in allowances paid on reinsurance contracts. These variances are
partially offset by a $31 million decrease in Asset Management primarily due to
the sale of Conning on July 2, 2001. In addition, a decrease in Individual of
$13 million is due to continued expense management initiatives, including
reduced compensation-related expenses, a refund of interest associated with a
prior year tax payment and reductions in volume-related commission expenses in
the broker-dealer and other subsidiaries. These declines are partially offset by
higher pension and post-retirement benefit expenses and an increase in expenses
stemming from sales growth in new annuity and investment-type products.
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 by $148
million, or 10%, to $1,627 million for the nine months ended September 30, 2002
from $1,479 million for the comparable 2001 period. This variance is primarily
due to increases in the Individual and International segments. A $127 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 $32 million increase in
International is due to the acquisition of Hidalgo and the aforementioned
premium growth in South Korea, partially offset by a decline in Argentina's
business due to current economic conditions. Total amortization of deferred
policy acquisitions costs increased by $94 million, or 9%, to $1,142 million in
2002 from $1,048 in 2001. Amortization of $1,168 million and $1,063 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
increases in the Individual and International segments. An increase of $78
million in Individual is due primarily to the impact of the depressed equity
markets and refinements in the calculation of estimated gross margins and
profits. An increase in International of $27 million is largely due to the
aforementioned premium growth in South Korea, the acquisition of Hidalgo and
the acquisitions in Chile.
Income tax expense for the nine months ended September 30, 2002 was $473
million, or 32% of income from continuing operations before provision for income
taxes, compared with $360 million, or 34%, for the comparable 2001 period. The
2002 and 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.
In accordance with SFAS 144, income related to the Company's real estate
which was identified as held-for-sale on or after January 1, 2002 is presented
as discontinued operations. The income from discontinued operations is comprised
of net investment income and net investment losses related to 55 properties that
the Company began marketing for sale on or after January 1, 2002.
32
INDIVIDUAL
The following table presents consolidated financial information for the
Individual segment for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
2002 2001 2002 2001
------- ------- ------- -------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 1,080 $1,093 $ 3,258 $ 3,306
Universal life and investment-type product policy fees 375 319 1,012 942
Net investment income 1,592 1,551 4,674 4,620
Other revenues 95 119 325 384
Net investment losses (26) (43) (112) (157)
------- ------- ------- -------
Total revenues 3,116 3,039 9,157 9,095
------- ------- ------- -------
EXPENSES
Policyholder benefits and claims 1,222 1,297 3,717 3,773
Interest credited to policyholder account balances 437 445 1,332 1,333
Policyholder dividends 459 441 1,379 1,327
Other expenses 683 652 1,950 2,022
------- ------- ------- -------
Total expenses 2,801 2,835 8,378 8,455
------- ------- ------- -------
Income from continuing operations before provision
for income taxes 315 204 779 640
Provision for income taxes 112 75 279 249
------- ------- ------- -------
Income from continuing operations 203 129 500 391
Income from discontinued operations, net of income taxes 7 8 26 27
------- ------- ------- -------
Net income $ 210 $ 137 $ 526 $ 418
======= ======= ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2001 -- INDIVIDUAL
Premiums decreased by $13 million, or 1%, to $1,080 million for the three
months ended September 30, 2002 from $1,093 million for the comparable 2001
period. Premiums from insurance products decreased by $33 million, primarily
resulting from a third quarter 2002 amendment of a reinsurance agreement to
increase the amount of insurance ceded from 50% to 100%. This amendment was
effective January 1, 2002. This decline is partially offset by policyholders
expanding their traditional life insurance coverage through the purchase of
additional insurance with dividend proceeds. Premiums from annuity and
investment products increased by $20 million as a result of higher sales of
fixed annuities and supplementary contracts with life contingencies.
Universal life and investment-type product policy fees increased by $56
million, or 18%, to $375 million for the three months ended September 30, 2002
from $319 million for the comparable 2001 period. Policy fees from insurance
products increased by $61 million, primarily due to higher revenue from
insurance fees which increase as the average separate account asset base
supporting the underlying minimum death benefit declines in response to poor
equity market performance. Policy fees from annuity and investment-type products
decreased by $5 million, primarily due to declines in the average separate
account asset base resulting generally from poor equity market performance.
Policy fees from annuity and investment-type products are typically calculated
as a percentage of the average separate account assets. Such assets can
fluctuate for several reasons, including equity market performance. If average
separate account asset levels continue to decline, management expects that
policy fees from annuity and investment-type products will continue to be
adversely impacted, while revenues from insurance fees on variable life products
are expected to rise.
Other revenues decreased by $24 million, or 20%, to $95 million for the
three months ended September 30, 2002 from $119 million for the comparable 2001
period, predominantly due to lower commission and fee income associated with
decreased volume in the broker/dealer and other subsidiaries which is largely
due to the depressed equity markets.
Policyholder benefits and claims decreased by $75 million, or 6%, to
$1,222 million for the three months ended September 30, 2002 from $1,297 million
for the comparable 2001 period. Policyholder benefits and claims for insurance
products decreased by $103 million primarily due to the impact of the
aforementioned reinsurance transaction, the establishment of liabilities for the
September
33
11, 2001 tragedies in the previous year and a reduction in the policyholder
dividend obligation associated with the closed block. Policyholder benefits and
claims for annuity and investment products increased by $28 million, largely due
to an increase in the liability associated with guaranteed minimum death
benefits on variable and fixed annuities and unfavorable mortality experience.
Interest credited to policyholder account balances decreased by $8
million, or 2%, to $437 million for the three months ended September 30, 2002
from $445 million for the comparable 2001 period, primarily due to a slight
decline in crediting rates, partially offset by an increase in the underlying
policyholder account balances which is largely attributable to sales growth.
Policyholder dividends increased by $18 million, or 4%, to $459 million
for the three months ended September 30, 2002 from $441 million for the
comparable 2001 period due to an increase in the invested assets supporting the
policies associated with this segment's large block of traditional individual
life insurance business.
Other expenses increased by $31 million, or 5%, to $683 for the three
months ended September 30, 2002 from $652 million for the comparable 2001
period. Excluding the capitalization and amortization of deferred policy
acquisition costs which are discussed below, other expenses decreased by $20
million, or 3%, to $698 million in 2002 from $718 million in 2001. Other
expenses related to insurance products decreased by $32 million which is
attributable to continued expense management, including reduced
compensation-related expenses, a refund of interest associated with a prior year
tax payment, and reductions in volume-related commission expenses in the
broker-dealer and other subsidiaries. These declines are partially offset by
increased pension and post retirement benefit expenses due to the cessation of
transition asset amortization, the impact of market changes on pension assets,
changes in actuarial assumptions and demographic changes. Other expenses related
to annuity and investment products increased by $12 million. This increase is
primarily 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
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 acquisition costs increased by $40
million, or 18%, to $262 million for the three months ended September 30, 2002
from $222 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
$79 million, or 50%, to $236 million in 2002 from $157 million in 2001.
Amortization of deferred policy acquisition costs of $247 million and $156
million is allocated to other expenses in 2002 and 2001, respectively, while the
remainder of the amortization in each year is allocated to investment gains and
losses. Increases in amortization of deferred policy acquisition costs allocated
to other expenses of $49 million and $42 million related to insurance products
and annuity and investment-type products, respectively, are attributable to the
impact of the depressed equity markets and refinements in the calculation of
estimated gross margins.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2001 -- INDIVIDUAL
Premiums decreased by $48 million, or 1%, to $3,258 million for the nine
months ended September 30, 2002 from $3,306 million for the comparable 2001
period. Premiums from insurance products decreased by $70 million, primarily
resulting from a third quarter 2002 amendment of a reinsurance agreement to
increase the amount of insurance ceded from 50% to 100%. This amendment was
effective January 1, 2002. Also contributing to the decline is the continued
shift in policyholders' preference from traditional policies to annuity and
investment-type products. These decreases are partially offset by policyholders
expanding their traditional life insurance coverage through the purchase of
additional insurance with dividend proceeds in the third quarter of 2002.
Premiums from annuity and investment products increased by $22 million as a
result of higher sales of fixed annuities and supplementary contracts with life
contingencies.
Universal life and investment-type product policy fees increased by $70
million, or 7%, to $1,012 million for the nine months ended September 30, 2002
from $942 million for the comparable 2001 period. Policy fees from insurance
products increased by $87 million primarily due to higher revenue from insurance
fees, which increase as the average separate account asset base supporting the
underlying minimum death benefit declines in response to poor equity market
performance. Policy fees from annuity and investment-type products decreased by
$17 million primarily due to declines in the average separate account asset base
resulting generally from poor equity market performance. 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
34
levels continue to decline, management expects that policy fees from annuity and
investment-type products will continue to be adversely impacted, while revenues
from insurance fees on variable life products are expected to rise.
Other revenues decreased by $59 million, or 15%, to $325 million for the
nine months ended September 30, 2002 from $384 million for the comparable 2001
period, largely due to lower commission and fee income associated with a volume
decline in the broker/dealer and other subsidiaries which is principally due to
the depressed equity markets.
Policyholder benefits and claims decreased by $56 million, or 1%, to
$3,717 million for the nine months ended September 30, 2002 from $3,773 million
for the comparable 2001 period. Policyholder benefits and claims for insurance
products decreased by $107 million, primarily due to the impact of the
aforementioned reinsurance transaction, the establishment of liabilities for the
September 11, 2001 tragedies in the previous year and a reduction in the
policyholder dividend obligation associated with the closed block. Policyholder
benefits and claims for annuity and investment products increased by $51 million
largely due to an increase in the liability associated with guaranteed minimum
death benefits on variable and fixed annuities and unfavorable mortality
experience.
Interest credited to policyholder account balances remained essentially
unchanged at $1,332 million for the nine months ended September 30, 2002
compared with $1,333 for the nine months ended September 30, 2001. Although
interest credited expense remained relatively constant period over period, the
decline in interest crediting rates was offset by an increase in policyholder
account balances which is primarily attributable to sales growth.
Policyholder dividends increased by $52 million, or 4%, to $1,379 million
for the nine months ended September 30, 2002 from $1,327 million for the
comparable 2001 period due to the increase in the invested assets supporting the
policies associated with this segment's large block of traditional individual
life insurance business.
Other expenses decreased by $72 million, or 4%, to $1,950 million for the
nine months ended September 30, 2002 from $2,022 million for the comparable 2001
period. Excluding the capitalization and amortization of deferred policy
acquisition costs, which are discussed below, other expenses decreased by $22
million, or 1%, to $2,153 million in 2002 from $2,175 million in 2001. Other
expenses related to insurance products decreased by $63 million, which is
attributable to continued expense management, including reduced
compensation-related expenses, a refund of interest associated with a prior year
tax payment, and reductions in volume-related commission expenses in the
broker-dealer and other subsidiaries. These declines are partially offset by
increased pension and post retirement benefit expenses due to the cessation of
transition asset amortization, the impact of market changes on pension assets,
changes in actuarial assumptions and demographic changes. Other expenses related
to annuity and investment products increased by $41 million. This increase is
due to a rise in sales of new annuity and investment-type products. Although
there are expense savings for annuities, those savings are offset by higher
commissions and other deferrable expenses from new product sales and increased
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
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 acquisition costs increased by $126
million, or 20%, to $764 million for the nine months ended September 30, 2002
from $638 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 $65 million, or
14%, to $535 million in 2002 from $470 million in 2001. Amortization of deferred
policy acquisition costs of $561 million and $485 million is allocated to other
expenses in 2002 and 2001, respectively, while the remainder of the amortization
in each year is allocated to investment gains and losses. Increases in
amortization of deferred policy acquisition costs allocated to other expenses of
$56 million and $20 million related to insurance products and annuity and
investment products, respectively, are due to the impact of the depressed equity
markets and refinements in the calculation of estimated gross margins.
35
INSTITUTIONAL
The following table presents consolidated financial information for the
Institutional segment for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
2002 2001 2002 2001
------- ------- ------- -------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 2,050 $ 1,896 $ 6,072 $ 5,503
Universal life and investment-type product policy fees 148 139 468 443
Net investment income 964 983 2,940 2,957
Other revenues 154 155 482 485
Net investment losses (201) (37) (392) (154)
------- ------- ------- -------
Total revenues 3,115 3,136 9,570 9,234
------- ------- ------- -------
EXPENSES
Policyholder benefits and claims 2,331 2,438 6,960 6,632
Interest credited to policyholder account balances 236 249 696 770
Policyholder dividends 29 91 66 195
Other expenses 363 367 1,142 1,161
------- ------- ------- -------
Total expenses 2,959 3,145 8,864 8,758
------- ------- ------- -------
Income (loss) from continuing operations before
provision (benefit) for income taxes 156 (9) 706 476
Provision (benefit) for income taxes 55 (14) 246 157
------- ------- ------- -------
Income from continuing operations 101 5 460 319
Income from discontinued operations, net of income taxes 4 4 12 12
------- ------- ------- -------
Net income $ 105 $ 9 $ 472 $ 331
======= ======= ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2001 -- INSTITUTIONAL
Premiums increased by $154 million, or 8%, to $2,050 million for the three
months ended September 30, 2002 from $1,896 million for the comparable 2001
period. Group insurance premiums increased by $119 million as a result of higher
sales in this segment's group life, dental, disability and long-term care
businesses. Retirement and savings premiums increased by $35 million as a result
of higher premiums received from existing customers in 2002. Retirement and
savings premium levels are significantly influenced by large transactions and,
as a result, can often fluctuate from period to period.
Universal life and investment-type product policy fees increased by $9
million, or 6%, to $148 million for the three months ended September 30, 2002
from $139 million for the comparable 2001 period. This rise in fees reflects
growth in existing business in the group universal life product.
Other revenues decreased by $1 million, or 1%, to $154 million for the
three months ended September 30, 2002 from $155 million for the comparable 2001
period. A decrease of $8 million in retirement and savings is mainly
attributable to a reduction in administrative fees as a result of the Company's
exit from the large market 401(k) business in late 2001, as well as lower fees
earned on investments in separate accounts. This decrease is offset by a $7
million increase in group insurance due to growth in the administrative services
businesses.
Policyholder benefits and claims decreased by $107 million, or 4%, to
$2,331 million for the three months ended September 30, 2002 from $2,438 million
for the comparable 2001 period. Group insurance decreased by $128 million which
is primarily attributable to $291 million in claims related to the September 11,
2001 tragedies. This decline was offset by growth in this segment's group life,
dental, disability and long-term care businesses, commensurate with the
aforementioned premium growth. Retirement and savings increased by $21 million
commensurate with the aforementioned premium growth.
Interest credited to policyholders decreased by $13 million, or 5%, to
$236 million for the three months ended September 30, 2002 from $249 million for
the comparable 2001 period. Decreases of $7 million and $6 million in group
insurance and retirement and savings, respectively, are largely due to a decline
in the average crediting rates in the third quarter of 2002 as a result of the
current interest rate environment.
36
Policyholder dividends decreased by $62 million, or 68%, to $29 million
for the three months ended September 30, 2002 from $91 million for the
comparable 2001 period. This decline is largely attributable to unfavorable
mortality experience of 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 $363 million for the
three months ended September 30, 2002 from $367 million in the comparable 2001
period. Retirement and savings decreased by $23 million primarily due to the
Company's exit from the large market 401(k) business in late 2001, partially
offset by increased pension and post retirement benefit expenses due primarily
to the cessation of transition asset amortization and the impact of market
changes on pension assets. A $19 million increase in group insurance is mainly
attributable to growth in operational expenses for the small business center
products, increased pension and post retirement benefit expenses and higher
non-deferrable expenses, including certain premium taxes and commissions.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2001 -- INSTITUTIONAL
Premiums increased by $569 million, or 10%, to $6,072 million for the nine
months ended September 30, 2002 from $5,503 million for the comparable 2001
period. Retirement and savings premiums increased by $321 primarily due to the
sale of a significant contract in the second quarter 2002. In addition, group
insurance premiums increased by $248 million as a result of growth in this
segment's group life, dental, disability and long-term care businesses.
Universal life and investment-type product policy fees increased by $25
million, or 6%, to $468 million for the nine months ended September 30, 2002
from $443 million for the comparable 2001 period. This increase is primarily
attributable to a fee resulting from the termination of a portion of a
bank-owned life insurance contract, as well as growth in existing business in
the group universal life product.
Other revenues decreased by $3 million, or 1%, to $482 million for the
nine months ended September 30, 2002 from $485 million for the comparable 2001
period. A decrease of $27 million in retirement and savings is 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, as well as lower fees earned on
investments in separate accounts. This decrease is partially offset by a $24
million increase in group insurance due to growth in the administrative service
businesses and a one-time settlement received in 2002 related to the Company's
former medical business.
Policyholder benefits and claims increased by $328 million, or 5%, to
$6,960 million for the nine months ended September 30, 2002 from $6,632 million
for the comparable 2001 period. Retirement and savings increased by $269 million
commensurate with the aforementioned premium growth. Group insurance increased
by $59 million. Growth in this segment's group life, dental, disability and
long-term care businesses is largely offset by $291 million in claims related to
the September 11, 2001 tragedies.
Interest credited to policyholders decreased by $74 million, or 10%, to
$696 million for the nine months ended September 30, 2002 from $770 million for
the comparable 2001 period. Decreases of $39 million and $35 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 $129 million, or 66%, to $66 million
for the nine months ended September 30, 2002 from $195 million for the
comparable 2001 period. This decline is largely attributable to unfavorable
mortality experience of several large group clients. Policyholder dividends vary
from period to period based on participating contract experience.
Other expenses decreased by $19 million, or 2%, to $1,142 million for the
nine months ended September 30, 2002 from $1,161 million in the comparable 2001
period. Retirement and savings decreased by $60 million primarily due to the
Company's exit from the large market 401(k) business in late 2001, partially
offset by increased pension and post retirement benefit expenses due primarily
to the cessation of transition asset amortization and the impact of market
changes on pension assets. A $41 million increase in group insurance is mainly
attributable to growth in operational expenses for the small business center
products, increased pension and post retirement benefit expenses and higher
non-deferrable expenses, including certain premium taxes and commissions.
37
REINSURANCE
The following table presents consolidated financial information for the
Reinsurance segment for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
2002 2001 2002 2001
------ ------ ------ ------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 461 $ 392 $1,408 $1,197
Net investment income 95 103 296 288
Other revenues 16 12 35 28
Net investment gains (losses) 4 (12) 6 2
------ ------ ------ ------
Total revenues 576 495 1,745 1,515
------ ------ ------ ------
EXPENSES
Policyholder benefits and claims 337 318 1,111 972
Interest credited to policyholder account balances 31 36 97 84
Policyholder dividends 6 5 17 16
Other expenses 142 106 354 309
------ ------ ------ ------
Total expenses 516 465 1,579 1,381
------ ------ ------ ------
Income before provision for income taxes 60 30 166 134
Provision for income taxes 14 4 39 30
Minority interest 21 17 57 56
------ ------ ------ ------
Net income $ 25 $ 9 $ 70 $ 48
====== ====== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2001 - REINSURANCE
Premiums increased by $69 million, or 18%, to $461 million for the three
months ended September 30, 2002 from $392 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 33%, to $16 million for the
three months ended September 30, 2002 from $12 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 $19 million, or 6%, to $337
million for the three months ended September 30, 2002 from $318 million for the
comparable 2001 period. Policyholder benefits and claims were 73% of premiums
for the three months ended September 30, 2002 compared to 81% in the comparable
2001 period. The decrease in policyholder benefits and claims as a percentage of
premiums is primarily attributable to favorable claims experience in the third
quarter of 2002 and the prior year impact of claims associated with the
September 11, 2001 tragedies. The level of claims may fluctuate from
period to period, but exhibits less volatility over the long term.
Interest credited to policyholder account balances decreased by $5
million, or 14%, to $31 million for the three months ended September 30, 2002
from $36 million for the comparable 2001 period. The decrease is due to
underlying asset performance which reduces policyholder account balances. This
decrease is partially offset by an increase in interest credited expense on new
single premium deferred annuity coinsurance agreements which became effective in
the first quarter of 2002 and third quarter of 2001.
Policyholder dividends were essentially unchanged at $6 million for the
three months ended September 30, 2002, compared with $5 million for the
comparable 2001 period.
Other expenses increased by $36 million, or 34%, to $142 million for the
three months ended September 30, 2002 from $106 million for the comparable 2001
period. These expenses fluctuate depending on the mix of the underlying
insurance products being reinsured since allowances paid and the related
capitalization and amortization can vary significantly based on the type of
business and the reinsurance treaty.
Minority interest reflects third-party ownership interests in Reinsurance
Group of America, Incorporated ("RGA").
38
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2001 -- REINSURANCE
Premiums increased by $211 million, or 18%, to $1,408 million for the nine
months ended September 30, 2002 from $1,197 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 $7 million, or 25%, to $35 million for the
nine months ended September 30, 2002 from $28 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 $139 million, or 14%, to
$1,111 million for the nine months ended September 30, 2002 from $972 million
for the comparable 2001 period. Policyholder benefits and claims were 79% of
premiums for the nine months ended September 30, 2002 compared to 81% in the
comparable 2001 period. The decrease in policyholder benefits and claims as a
percentage of premiums is primarily attributable to favorable claims experience
in the third quarter of 2002 and the prior year impact of claims associated with
the September 11, 2001 tragedies. The level of claims may fluctuate from
period to period, but exhibits less volatility over the long term.
Interest credited to policyholder account balances increased by $13
million, or 15%, to $97 million for the nine months ended September 30, 2002
from $84 million for the comparable 2001 period. Contributing to this growth
were new single premium deferred annuity coinsurance agreements which became
effective in the first quarter of 2002 and third quarter of 2001.
Policyholder dividends were essentially unchanged at $17 million for the
nine months ended September 30, 2002, as compared with $16 million for the
comparable 2001 period.
Other expenses increased by $45 million, or 15%, to $354 million for the
nine months ended September 30, 2002 from $309 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.
Minority interest reflects third-party ownership interests in RGA.
39
AUTO & HOME
The following table presents consolidated financial information for the
Auto & Home segment for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
2002 2001 2002 2001
------- ------- ------- -------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 711 $ 692 $ 2,105 $ 2,047
Net investment income 44 48 135 150
Other revenues 11 6 27 18
Net investment losses (8) -- (40) (6)
------- ------- ------- -------
Total revenues 758 746 2,227 2,209
------- ------- ------- -------
EXPENSES
Policyholder benefits and claims 497 512 1,509 1,605
Other expenses 205 206 606 613
------- ------- ------- -------
Total expenses 702 718 2,115 2,218
------- ------- ------- -------
Income (Loss) before provision (benefit) for income taxes 56 28 112 (9)
Provision (Benefit) for income taxes 13 6 24 (14)
------- ------- ------- -------
Net income $ 43 $ 22 $ 88 $ 5
======= ======= ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2001 - AUTO & HOME
Premiums increased by $19 million, or 3%, to $711 million for the three
months ended September 30, 2002 from $692 million for the comparable 2001
period. Auto and property premiums increased by $16 million and $1 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 $2 million.
Other revenues increased by $5 million, or 83%, to $11 million for the
three months ended September 30, 2002 from $6 million for the comparable 2001
period. This increase was primarily due to income earned on COLI that was
purchased in the second quarter of 2002, as well as higher fees on installment
payments.
Policyholder benefits and claims decreased by $15 million, or 3%, to $497
million for the three months ended September 30, 2002 from $512 million for the
comparable 2001 period. Auto policyholder benefits and claims decreased by $9
million largely due to a $7 million decrease in catastrophe losses and
improvements in auto frequency, partially offset by increases in severity.
Property policyholder benefits and claims decreased by $8 million due to better
catastrophe experience. Property catastrophes represented 3.3% of the property
loss ratio in 2002 compared to 7.8% in 2001. Other policyholder benefits and
claims increased by $2 million due to increased personal umbrella losses. This
line of business tends to be volatile in the short-term due to low premium
volume and high liability limits.
Other expenses decreased by $1 million, or less than 1%, to $205 million
for the three months ended September 30, 2002 from $206 million for the
comparable 2001 period. This decrease is due to the elimination of the
amortization of goodwill, reduced employee head-count and reduced expenses
associated with the consolidation of the St. Paul companies acquired in 1999.
These declines are partially offset by an increase in expenses related to the
outsourced New York assigned risk business. The expense ratio decreased to 28.9%
in 2002 from 29.6% in 2001.
The effective income tax rates for the three months ended September 30,
2002 and 2001 differ from the corporate tax rate of 35% due to the impact of
non-taxable investment income.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2001 - AUTO & HOME
Premiums increased by $58 million, or 3%, to $2,105 million for the nine
months ended September 30, 2002 from $2,047 million for the comparable 2001
period. Auto and property premiums increased by $48 million and $4 million,
respectively, primarily due to increases in average premium earned per policy
resulting from rate increases. The impact on premiums from rate increases was
40
partially offset by an expected reduction in retention and a reduction in new
business sales. Premiums from other personal lines increased by $6 million.
Other revenues increased by $9 million, or 50%, to $27 million for the
nine months ended September 30, 2002 from $18 million for the comparable 2001
period. This increase was primarily due to income earned on COLI purchased in
the second quarter of 2002, as well as higher fees on installment payments.
Policyholder benefits and claims decreased by $96 million, or 6%, to $1,509
million for the nine months ended September 30, 2002 from $1,605 million for
the comparable 2001 period. Auto policyholder benefits and claims increased by
$13 million largely due to an increase in current year bodily injury and
no-fault severities. Costs associated with the processing of the New York
assigned risk business also contributed to this increase. These increases were
partially offset by improved claim frequency resulting from milder winter
weather, underwriting and agency management actions, as well as lower
catastrophe losses. Property policyholder benefits and claims decreased by $98
million due to improved claim frequency resulting from milder winter weather,
underwriting and agency management actions and a $31 million reduction in
catastrophe losses. Property catastrophes represented 7.1% of the property loss
ratio in 2002 compared to 16.0% in 2001. Other policyholder benefits and claims
decreased by $11 million due to fewer personal umbrella claims. This line of
business tends to be volatile in the short-term due to low premium volume and
high liability limits.
Other expenses decreased by $7 million, or 1%, to $606 million for the
nine months ended September 30, 2002 from $613 million for the comparable 2001
period. This decrease is primarily due to the elimination of the amortization of
goodwill, reduced employee head-count and reduced expenses associated with the
consolidation of the St. Paul companies acquired in 1999. 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 29.9%
in 2001.
The effective income tax rates for the nine months ended September 30,
2002 and 2001 differ from the corporate tax rate of 35% due to the impact of
non-taxable investment income.
41
ASSET MANAGEMENT
The following table presents consolidated financial information for the
Asset Management segment for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------ -------------------
2002 2001 2002 2001
----- ----- ----- -----
(DOLLARS IN MILLIONS)
REVENUES
Net investment income $ 17 $ 18 $ 46 $ 54
Other revenues 37 42 127 154
Net investment gains (losses) -- 25 (4) 25
----- ----- ----- -----
Total revenues 54 85 169 233
----- ----- ----- -----
OTHER EXPENSES 53 56 162 194
----- ----- ----- -----
Income before provision for income taxes 1 29 7 39
Provision for income taxes 1 11 3 14
----- ----- ----- -----
Net income $ -- $ 18 $ 4 $ 25
===== ===== ===== =====
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2001 - ASSET MANAGEMENT
Other revenues, which primarily consist of management and advisory fees
from third parties, decreased by $5 million, or 12%, to $37 million for the
three months ended September 30, 2002 from $42 million for the comparable 2001
period. This decrease is primarily the result of lower average assets under
management on which these fees are earned, partially offset by incentive and
performance fees earned in 2002. Assets under management were $45 billion at
September 30, 2002 as compared to $51 billion at September 30, 2001. The $6
billion decrease is primarily due to customer withdrawals, as well as the
downturn in the equity markets.
Other expenses decreased by $3 million, or 5%, to $53 million for the
three months ended September 30, 2002 from $56 million for the comparable 2001
period. This decrease is due to reductions in marketing expenses and expenses
related to fund reimbursements, as well as a decline in distribution plan
payments to financial intermediaries, as a result of lower mutual fund assets
under management. This decrease was partially offset by an increase of $2
million in employee compensation due to severance-related expenses resulting
from third quarter 2002 staff reductions.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2001 - ASSET MANAGEMENT
Other revenues, which primarily consist of management and advisory fees
from third parties, decreased by $27 million, or 18%, to $127 million for the
nine months ended September 30, 2002 from $154 million for the comparable 2001
period. The most significant factor contributing to this decline is a $31
million decrease resulting from the sale of Conning, which occurred on July 2,
2001. Excluding the impact of this transaction, other revenues increased $4
million, or 3%, to $127 million in 2002 from $123 million in 2001. This increase
is primarily the result of incentive and performance fees earned in the second
and third quarters of 2002 from certain real estate and hedge fund products,
partially offset by lower fees earned on average assets under management as
discussed above.
Other expenses decreased by $32 million, or 16%, to $162 million for the
nine months ended September 30, 2002 from $194 million for the comparable 2001
period. Excluding the impact of the sale of Conning, other expenses increased by
$2 million, or 1%, to $162 million in 2002 from $160 million in 2001. The
increase is primarily due to severance-related expenses incurred in the third
quarter of 2002 as a result of staff reductions.
42
INTERNATIONAL
The following table presents consolidated financial information for the
International segment for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
2002 2001 2002 2001
------- ------- ------- -------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 381 $ 210 $ 1,030 $ 583
Universal life and investment-type product policy fees 64 8 78 28
Net investment income 133 63 303 189
Other revenues 2 4 8 10
Net investment gains (losses) 6 (9) (8) 19
------- ------- ------- -------
Total revenues 586 276 1,411 829
------- ------- ------- -------
EXPENSES
Policyholder benefits and claims 352 158 941 463
Interest credited to policyholder account balances 32 15 52 41
Policyholder dividends 10 10 27 29
Other expenses 131 84 320 227
------- ------- ------- -------
Total expenses 525 267 1,340 760
------- ------- ------- -------
Income from continuing operations before provision
for income taxes 61 9 71 69
Provision for income taxes 16 4 28 10
------- ------- ------- -------
Income from continuing operations 45 5 43 59
Cumulative effect of change in accounting (5) -- -- --
------- ------- ------- -------
Net income $ 40 $ 5 $ 43 $ 59
======= ======= ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2001 - INTERNATIONAL
Premiums increased by $171 million, or 81%, to $381 million for the three
months ended September 30, 2002 from $210 million for the comparable 2001
period. The June 2002 acquisition of Hidalgo and the November 2001 acquisitions
in Chile increased premiums by $96 million and $29 million, respectively. South
Korea's premiums increased by $26 million, primarily due to a larger
professional sales force and improved agent productivity. Spain's premiums
increased by $9 million due primarily to continued growth in the direct auto
business. Mexico's premiums, excluding Hidalgo, increased by $3 million,
primarily due to increases in its group life, major medical business and
individual life business. The remainder of the variance is attributable to minor
fluctuations in several countries.
Universal life and investment type-product policy fees increased by $56
million, or 700%, to $64 million for the three months ended September 30, 2002
from $8 million for the comparable 2001 period. The acquisition of Hidalgo
resulted in a $52 million increase and the remaining $4 million increase was
attributable to the acquisitions in Chile.
Other revenues decreased by $2 million, or 50%, to $2 million for the
three months ended September 30, 2002 from $4 million for the comparable 2001
period. Spain's other revenue decreased due to income received from Banco
Santander for leasing of available office space which ceased in 2001.
Policyholder benefits and claims increased by $194 million, or 123%, to
$352 million for the three months ended September 30, 2002 from $158 million for
the three months ended September 30, 2001. The acquisition of Hidalgo and the
acquisitions in Chile increased policyholder and benefit claims by $102 million
and $47 million, respectively. Policyholder benefits and claims for South Korea,
Spain and Mexico, excluding Hidalgo, increased by $20 million, $15 million and
$4 million, respectively, commensurate with the overall premium increase
discussed above. The remainder of the variance is attributable to minor
fluctuations in several countries.
Interest credited to policyholder account balances increased by $17
million, or 113%, to $32 million for the three months ended September 30, 2002
from $15 million for the comparable 2001 period. A $21 million increase due to
the acquisition of Hidalgo is partially offset by a $3 million decrease in
Spain. This decrease is due to lower assets under management, as a result of the
cessation of product lines offered through a joint venture with Banco Santander
in 2001. The remainder of the variance is attributable to minor fluctuations in
several countries.
43
Policyholder dividends were $10 million for both the three months ended
September 30, 2002 and 2001.
Other expenses increased by $47 million, or 56%, to $131 million for the
three months ended September 30, 2002 from $84 million for the comparable 2001
period. The acquisition of Hidalgo and the acquisitions in Chile resulted in
increases of $40 million and $5 million, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2001 - INTERNATIONAL
Premiums increased by $447 million, or 77%, to $1,030 million for the nine
months ended September 30, 2002 from $583 million for the comparable 2001
period. A portion of this variance is attributable to a $108 million increase
due to a sale of an annuity contract in the first quarter of 2002 to a Canadian
trust company. The acquisition of Hidalgo and the acquisitions in Chile and
Brazil increased premiums by $96 million, $91 million and $16 million,
respectively. South Korea's premiums increased by $65 million primarily due to a
larger professional sales force and improved agent productivity. Mexico's
premiums, excluding Hidalgo, increased by $54 million, primarily due to
increases in its group life, major medical and individual life businesses.
Spain's premiums increased by $15 million due primarily to continued growth in
the direct auto business. The remainder of the variance is attributable to minor
fluctuations in several countries.
Universal life and investment type-product policy fees increased by $50
million, or 179%, to $78 million for the nine months ended September 30, 2002
from $28 million for the comparable 2001 period. The acquisition of Hidalgo and
the acquisitions in Chile resulted in increases of $52 million and $4 million,
respectively. These variances were partially offset by a decrease of $5 million
in Spain due to a reduction in fees caused by a decline in assets under
management, as a result of the cessation of product lines offered through a
joint venture with Banco Santander in 2001.
Other revenues decreased by $2 million, or 20%, to $8 million for the nine
months ended September 30, 2002 from $10 million for the comparable 2001 period.
Canada's other revenue decreased by $1 million primarily due to the favorable
settlement of two legal cases that occurred in 2001. The remainder of the
variance is attributable to minor fluctuations in several countries.
Policyholder benefits and claims increased by $478 million, or 103%, to
$941 million for the nine months ended September 30, 2002 from $463 million for
the comparable 2001 period. The acquisitions in Chile and the acquisition of
Hidalgo increased policyholder benefits and claims by $129 million and $102
million, respectively. In addition, $108 million of this increase is
attributable to an increase in liabilities for the aforementioned sale of an
annuity contract in Canada. Mexico, excluding Hidalgo, South Korea and Brazil's
policyholder benefits and claims increased by $56 million, $47 million and $9
million, respectively, commensurate with the overall premium increase discussed
above. Spain had an increase in policyholder benefits and claims of $13 million
primarily due to the aforementioned increase in the direct auto business. The
remainder of the variance is attributable to minor fluctuations in several
countries.
Interest credited to policyholder account balances increased by $11
million, or 27%, to $52 million for the nine months ended September 30, 2002
from $41 million for the comparable 2001 period. A $21 million increase due to
the acquisition of Hidalgo was partially offset by a decrease of $8 million in
Spain. This decrease is primarily due to a decline in assets under management,
as a result of the cessation of product lines offered through a joint venture
with Banco Santander in 2001. In addition, South Korea's interest credited to
policyholder account balances decreased by $2 million due to a reduction in the
number of investment-type policies in force.
Policyholder dividends decreased by $2 million, or 7%, to $27 million for
the nine months ended September 30, 2002 from $29 million for the comparable
2001 period. A $4 million decrease in Mexico, excluding Hidalgo, resulting from
lower experience refunds directly related to the Mexican block of business was
partially offset by an increase of $2 million attributable to the acquisition of
Hidalgo.
Other expenses increased by $93 million, or 41%, to $320 million for the nine
months ended September 30, 2002 from $227 million for the comparable 2001
period. The acquisition of Hidalgo and the acquisitions in Chile and Brazil
resulted in increases of $40 million, $19 million and $9 million, respectively.
South Korea's and Mexico's, excluding Hidalgo, other expenses increased by $22
million and $8 million, respectively, primarily due to increased commissions
as a result of the increased sales discussed above. These increases were
partially offset by a decrease of $6 million in Spain's other expenses due
primarily to the cessation of product lines offered through a joint venture
with Banco Santander in 2001. The remainder of the variance is attributable to
minor fluctuations in several countries.
44
CORPORATE & OTHER
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2001 - CORPORATE & OTHER
Excluding the elimination of intercompany activity, other revenues and
other expenses are essentially unchanged for the three months ended September
30, 2002 as compared to the three months ended September 30, 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2001 - CORPORATE & OTHER
Other revenues increased by $21 million, or 41%, to $72 million for the
nine months ended September 30, 2002 from $51 million for the comparable 2001
period. This increase is due to the recognition of a refund earned on a
reinsurance treaty triggered by a sales practices liability release in 2002,
partially offset by a decrease in investment income earned on experience funds
with reinsurers in 2001.
Other expenses increased by $76 million, or 24%, to $387 million for the
nine months ended September 30, 2002 from $311 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 higher levels of debt
outstanding in 2002 as compared to 2001.
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 $4.0 billion
shelf registration statement, effective June 1, 2001, with the 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 September 30, 2002,
$2.75 billion of securities remain 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 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 $3.7 billion, respectively.
During the second quarter of 2002, Metropolitan Life recorded certain
corrections to its statutory results that related to prior periods. Adjusted
statutory surplus and the asset valuation reserve are $5.3 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.
45
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 nine months ended September 30, 2002 and 2001, 15,244,492 and 34,891,879
shares of common stock, respectively, have been acquired for $471 million and
$1,019 million, respectively. During the nine months ended September 30, 2002
and 2001, 16,379 and 64,620 of these shares were reissued for $480 thousand and
$2 million, respectively. The Company recently announced that it plans no
further share repurchases in 2002.
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 September 30, 2002 MetLife 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, automobile and property 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 $122 billion
and $108 billion at September 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, automobile and
property, 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.
Additional cash outflows include those related to obligations of
securities lending activities, investments in real estate, limited partnerships
and joint ventures, as well as legal liabilities.
46
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 or 2003.
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 $3,442 $ 2 $ 447 $ 27 $ 379 $ 603 $1,984
Operating leases 875 40 140 119 104 87 385
Company-obligated securities 1,356 -- -- -- 1,006 -- 350
Partnership investments 1,752 1,752 -- -- -- -- --
Mortgage commitments 474 409 65 -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total $7,899 $2,203 $ 652 $ 146 $1,489 $ 690 $2,719
====== ====== ====== ====== ====== ====== ======
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 September 30, 2002, the Company had outstanding approximately $599
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 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 $15 million at September 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.
In October 2002, the Holding Company contributed $500 million in cash and
short-term securities to Metropolitan Life Insurance Company.
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 and similar rules apply to each of the Company's domestic
insurance subsidiaries. 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. The Department has adopted a modification to its regulations to
be consistent with Codification, effective December 31, 2002, with respect to
the admissibility of deferred income taxes by New York insurers, subject to
certain limitations. 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.
47
Financing. MetLife Funding serves as a centralized finance unit for
Metropolitan Life. Pursuant to a support agreement, Metropolitan Life has agreed
to cause MetLife Funding to have a tangible net worth of at least one dollar. At
September 30, 2002 and December 31, 2001, MetLife Funding had a tangible net
worth of $10.3 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 September 30, 2002 and
December 31, 2001, MetLife Funding had total outstanding liabilities, including
accrued interest payable, of $656 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 September 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 September 30, 2002 and December 31, 2001. At September 30, 2002
and December 31, 2001, there was approximately $26 million and $24 million
outstanding, respectively, under these facilities. At September 30, 2002 and
December 31, 2001, there was $599 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 September 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 December
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
$2,540 million and $2,939 million for the nine months ended September 30, 2002
and 2001, respectively. The fluctuation in cash provided by the Company's
operations between periods is primarily due to a decrease in income taxes
payable and an increase in premiums and other receivables, partially offset by
an increase in other liabilities. 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 $10,153 million and $2,849
million for the nine months ended September 30, 2002 and 2001, respectively.
Purchases of investments exceeded sales, maturities and repayments by $11,270
million and $3,679 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 $4,476 million and $823
million for the nine months ended September 30, 2002 and 2001, respectively.
Deposits to policyholders' account balances exceeded withdrawals by $4,624
million and $2,321 million for the
48
nine months ended September 30, 2002 and 2001, respectively. Short-term
financing increased by $523 million in 2002 as compared with a decrease of $385
million in 2001.
The operating, investing and financing activities described above resulted
in a $3,826 decrease in cash and cash equivalents for the nine months ended
September 30, 2002 and a $1,011 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. For
the three months and nine months ended September 30, 2001, the Company recorded
amortization of goodwill of $13 million and $37 million, respectively. The
Company has completed the required impairment tests of goodwill and
indefinite-lived intangible assets. As a result of these tests, the Company
recorded a $5 million charge to earnings relating to the impairment of certain
goodwill assets in the third quarter of 2002 as a cumulative effect of a change
in accounting. There was no impairment of intangible assets or significant
reclassifications between goodwill and other intangible assets at January 1,
2002. Adoption of SFAS 144 did not have a material impact on the Company's
unaudited interim condensed consolidated financial statements for 2002 other
than the reclassifications to discontinued operations of net investment income
and net investment gains and losses related to operations of real estate on
which the Company initiated disposition activities subsequent to January 1,
2002.
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 Company's accounting treatment of these entities.
The FASB is currently deliberating the issuance of a proposed statement
that would further 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 proposed statement.
In April 2002, FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. In
addition to amending or rescinding other existing authoritative pronouncements
to make various technical corrections, clarify meanings, or describe their
applicability under changed conditions, SFAS 145 generally precludes companies
from recording gains and losses from the extinguishment of debt as an
extraordinary item. SFAS 145 also requires sale-leaseback treatment for
certain modifications of a capital lease that result in the lease being
classified as an operating lease. SFAS 145 is effective for fiscal years
beginning after May 15, 2002, and is not expected to have a significant impact
on the Company's consolidated results of operations, financial position or cash
flows.
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
income taxes of $169 million, associated with business realignment initiatives
using the EITF 94-3 accounting guidance.
49
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. SFAS 123 states
that the adoption of the fair value-based method is a change to a preferable
method of accounting. The estimated impact of the adoption of the fair
value-based method in 2002 would be a decrease to net income for the full year
of approximately $16 million to $19 million, net of income taxes of $9 million
to $11 million, respectively. This estimate is based on assumptions as of
September 30, 2002.
INVESTMENTS
The Company had total cash and invested assets at September 30, 2002 of
$184.3 billion. In addition, the Company had $56 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:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
--------------------- ---------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
Fixed maturities available-for-sale, at fair value $133,163 72.3% $115,398 68.0%
Mortgage loans on real estate 23,885 13.0 23,621 13.9
Policy loans 8,366 4.5 8,272 4.9
Real estate and real estate joint ventures held-for-investment 4,377 2.4 4,061 2.4
Cash and cash equivalents 3,647 2.0 7,473 4.4
Equity securities and other limited partnership interests 3,702 2.0 4,700 2.8
Other invested assets 3,214 1.7 3,298 1.9
Short-term investments 2,658 1.4 1,203 0.7
Real estate held-for-sale 1,286 0.7 1,669 1.0
-------- ----- -------- -----
Total cash and invested assets $184,298 100.0% $169,695 100.0%
======== ===== ======== =====
50
INVESTMENT RESULTS
The annualized yields on general account cash and invested assets,
excluding net investment gains and losses, were 7.1% and 7.5% for the three
months ended September 30, 2002 and 2001, respectively, and 7.2% and 7.6% for
the nine months ended September 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 nine months ended September 30, 2002 and 2001:
AT OR FOR THE THREE MONTHS AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 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 7.45% $ 2,038 7.84% $ 2,004 7.51% $ 5,997 7.80% $ 5,956
Net investment losses (323) (87) (698) (427)
--------- --------- --------- ---------
Total $ 1,715 $ 1,917 $ 5,299 $ 5,529
--------- --------- --------- ---------
Ending assets $ 133,163 $ 117,145 $ 133,163 $ 117,145
--------- --------- --------- ---------
Mortgage Loans: (3)
Investment income 7.68% $ 457 8.06% $ 458 7.82% $ 1,391 8.24% $ 1,381
Net investment losses -- (44) (22) (49)
--------- --------- --------- ---------
Total $ 457 $ 414 $ 1,369 $ 1,332
--------- --------- --------- ---------
Ending assets $ 23,885 $ 22,920 $ 23,885 $ 22,920
--------- --------- --------- ---------
Real Estate, Real Estate Joint Ventures
and Real Estate Held-For-Sale: (4)
Investment income, net of expenses 10.99% $ 160 10.22% $ 139 11.13% $ 484 11.16% $ 457
Net investment losses (10) (25) (26) (1)
--------- --------- --------- ---------
Total $ 150 $ 114 $ 458 $ 456
--------- --------- --------- ---------
Ending assets $ 5,663 $ 5,476 $ 5,663 $ 5,476
--------- --------- --------- ---------
Policy Loans:
Investment income 6.66% $ 139 6.36% $ 129 6.52% $ 407 6.52% $ 398
--------- --------- --------- ---------
Ending assets $ 8,366 $ 8,163 $ 8,366 $ 8,163
--------- --------- --------- ---------
Equity Securities and Other Limited
Partnership Interests:
Investment income 1.56% $ 13 1.87% $ 20 2.31% $ 65 2.49% $ 74
Net investment gains (losses) 4 (27) 246 (100)
--------- --------- --------- ---------
Total $ 17 $ (7) $ 311 $ (26)
--------- --------- --------- ---------
Ending assets $ 3,702 $ 4,661 $ 3,702 $ 4,661
--------- --------- --------- ---------
Cash, Cash Equivalents and Short-term
Investments:
Investment income 3.68% $ 49 6.23% $ 80 3.75% $ 170 5.75% $ 217
Net investment gains (losses) -- -- 1 (5)
--------- --------- --------- ---------
Total $ 49 $ 80 $ 171 $ 212
--------- --------- --------- ---------
Ending assets $ 6,305 $ 5,457 $ 6,305 $ 5,457
--------- --------- --------- ---------
Other Invested Assets:
Investment income 5.44% $ 44 9.61% $ 79 5.87% $ 146 7.65% $ 187
Net investment gains (losses) 43 31 (158) 70
--------- --------- --------- ---------
Total $ 87 $ 110 $ (12) $ 257
--------- --------- --------- ---------
Ending assets $ 3,214 $ 3,250 $ 3,214 $ 3,250
--------- --------- --------- ---------
Total Investments:
Investment income before expenses and fees 7.28% $ 2,900 7.70% $ 2,909 7.33% $ 8,660 7.70% $ 8,670
Investment expenses and fees (0.15%) (61) (0.16%) (62) (0.15%) (171) (0.15%) (173)
---- --------- ---- --------- ---- --------- ----- ---------
Net investment income (4) 7.13% $ 2,839 7.54% $ 2,847 7.18% $ 8,489 7.55% $ 8,497
Net investment losses (4) (286) (152) (657) (512)
Adjustments to investment gains (losses)(5) 16 28 102 107
Gains from sales of subsidiaries -- 25 -- 25
--------- --------- --------- ---------
Total $ 2,569 $ 2,748 $ 7,934 $ 8,117
========= ========= ========= =========
(1) Yields are based on quarterly average asset carrying values for the three
months and nine months ended September 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 $793 million and
$1,125 million at September 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.
51
(4) Real estate and real estate joint venture income is shown net of
depreciation of $52 million and $54 million for the three months ended
September 30, 2002 and 2001, respectively, and $166 million and $162
million for the nine months ended September 30, 2002 and 2001,
respectively. Real estate and real estate joint venture income includes
amounts classified as discontinued operations of $29 million and $25
million for the three months ended September 30, 2002 and 2001,
respectively, and $88 million and $91 million for the nine months ended
September 30, 2002 and 2001, respectively. These amounts are net of
depreciation of $10 million and $20 million for the three months ended
September 30, 2002 and 2001, respectively, and $44 and $58 million for the
nine months ended September 30, 2002 and 2001, respectively. Net
investment losses includes $1 million and $8 million classified as
discontinued operations for the three months and nine months ended
September 30, 2002, respectively.
(5) Adjustments to investment gains and losses include amortization of
deferred policy acquisition costs, charges and credits to participating
contracts, 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 72.3% and 68.0% of total cash and
invested assets at September 30, 2002 and December 31, 2001, respectively. Based
on estimated fair value, public fixed maturities represented $113,731 million,
or 85.4%, and $96,579 million, or 83.7%, of total fixed maturities at September
30, 2002 and December 31, 2001, respectively. Based on estimated fair value,
private fixed maturities represented $19,432 million, or 14.6%, and $18,819
million, or 16.3%, of total fixed maturities at September 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 ratings are
similar to the rating agency designations of the Nationally Recognized
Statistical Rating Organizations for marketable bonds. NAIC ratings 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 ratings 3 through 6 include bonds
considered below investment grade (rated "Ba1" or lower by Moody's, or rated
"BB+" or lower by S&P).
52
The following table presents the Company's total fixed maturities by
Nationally Recognized Statistical Rating Organizations designation and the
equivalent ratings of the NAIC, as well as the percentage, based on estimated
fair value, that each designation comprises at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
--------------------------------------- --------------------------------------
ESTIMATED ESTIMATED
NAIC RATING AGENCY AMORTIZED FAIR % OF AMORTIZED FAIR % OF
RATING DESIGNATION (1) COST VALUE TOTAL COST VALUE TOTAL
- ------ -------------- -------- -------- ----- -------- -------- -----
(DOLLARS IN MILLIONS)
1 Aaa/Aa/A $ 84,065 $ 90,651 68.1% $ 72,098 $ 75,265 65.2%
2 Baa 30,118 31,290 23.5 29,128 29,581 25.6
3 Ba 6,653 6,324 4.8 6,021 5,856 5.1
4 B 3,410 3,096 2.3 3,205 3,100 2.7
5 Caa and lower 937 840 0.6 726 597 0.5
6 In or near default 322 275 0.2 327 237 0.2
-------- -------- ----- -------- -------- -----
Subtotal 125,505 132,476 99.5 111,505 114,636 99.3
Redeemable preferred stock 811 687 0.5 783 762 0.7
-------- -------- ----- -------- -------- -----
Total fixed maturities $126,316 $133,163 100.0% $112,288 $115,398 100.0%
======== ======== ===== ======== ======== =====
- ----------
(1) Amounts presented are based on rating agency designations. Comparisons
between NAIC ratings and rating agency designations are published by the NAIC.
Based on estimated fair values, investment grade fixed maturities
comprised 91.6% and 90.8% of total fixed maturities in the general account at
September 30, 2002 and December 31, 2001, respectively.
The following table shows the amortized cost and estimated fair value of
fixed maturities, by contractual maturity dates (excluding scheduled sinking
funds) at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
-------------------------- -------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
Due in one year or less $ 4,619 $ 4,686 $ 4,001 $ 4,049
Due after one year through five years 26,645 27,698 20,168 20,841
Due after five years through ten years 20,943 22,428 22,937 23,255
Due after ten years 31,600 33,869 30,565 32,017
-------- -------- -------- --------
Subtotal 83,807 88,681 77,671 80,162
Mortgage-backed and other asset-backed securities 41,698 43,795 33,834 34,474
-------- -------- -------- --------
Subtotal 125,505 132,476 111,505 114,636
Redeemable preferred stock 811 687 783 762
-------- -------- -------- --------
Total fixed maturities $126,316 $133,163 $112,288 $115,398
======== ======== ======== ========
53
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 is
comprised at:
SEPTEMBER 30, 2002
-----------------------------------------------------------------------------
GROSS UNREALIZED
AMORTIZED -------------------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
-------- -------- -------- ---------- -----
(DOLLARS IN MILLIONS)
Corporate securities $ 65,563 $ 4,363 $ 1,723 $ 68,203 51.2%
Mortgage-backed securities 32,005 1,968 19 33,954 25.5
U.S. treasuries/agencies 8,493 1,601 1 10,093 7.6
Asset-backed securities 9,693 300 152 9,841 7.4
Foreign government securities 6,065 407 157 6,315 4.7
Other fixed income assets 4,497 378 118 4,757 3.6
-------- -------- -------- -------- -----
Total $126,316 $ 9,017 $ 2,170 $133,163 100.0%
======== ======== ======== ======== =====
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 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.
54
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:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
--------------------------- ---------------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- -------- ---------- --------
(DOLLARS IN MILLIONS)
Performing $132,257 99.4% $114,879 99.6%
Potential problem 539 0.4 386 0.3
Problem 330 0.2 111 0.1
Restructured 37 0.0 22 0.0
-------- -------- -------- --------
Total $133,163 100.0% $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
- 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 $501 million and $38 million for the three months ended
September 30, 2002 and 2001, respectively. The Company's three largest
writedowns totaled $147 million for the three months ended September 30, 2002.
Writedowns of fixed maturities were $1,026 million and $215 million for the nine
months ended September 30, 2002 and 2001, respectively. The Company's three
largest writedowns totaled $291 million for the nine months ended September 30,
2002. The circumstances that gave rise to these impairments were financial
restructurings or bankruptcy filings. During the three months ended September
30, 2002, the Company sold fixed maturity securities with a fair value of $2,096
million at a loss of $145 million. During the nine months ended September 30,
2002, the Company sold fixed maturity securities with a fair value of $9,341
million at a loss of $627 million.
The gross unrealized loss related to the Company's fixed maturities at
September 30, 2002 was $2,170 million. These fixed maturities mature as follows:
4% due in one year or less; 29% due in greater than one year to five years; 20%
due in greater than five years to ten years; and 47% due in greater than ten
years (calculated as a percentage of amortized cost). Additionally, such
securities
55
are concentrated by security type in US corporates (64%) and foreign corporates
(13%); and are concentrated by industry in communications (23%) and finance
(16%) (calculated as a percentage of gross unrealized loss). Noninvestment grade
securities represent 30% of the $17,070 million of the fair value and 50% of the
gross unrealized loss on fixed maturities.
The following table presents the amortized cost, gross unrealized losses
and number of securities for fixed maturities where the estimated fair value had
declined and remained below amortized cost by less than 20%, or 20% or more for:
AT SEPTEMBER 30, 2002
----------------------------------------------------------------------------
AMORTIZED COST GROSS UNREALIZED LOSSES NUMBER OF SECURITIES
-------------------- ------------------------ --------------------
LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR
20% MORE 20% MORE 20% MORE
-------------------- ------------------------ --------------------
(DOLLARS IN MILLIONS)
Less than six months $ 7,312 $ 2,949 $ 405 $ 1,046 524 215
Six months or greater but less than nine months 6,082 156 379 61 367 23
Nine months or greater but less than twelve months 556 130 26 46 49 19
Twelve months or greater 1,850 205 115 92 145 27
-------------------- ------------------------ --------------------
Total $15,800 $ 3,440 $ 925 $ 1,245 1,085 284
==================== ========================= ====================
The Company's review of its fixed maturities for impairments includes an
analysis of the total gross unrealized losses by three categories of securities:
(i) securities where the estimated fair value had declined and remained below
amortized cost by less than 20%; (ii) securities where the estimated fair value
had declined and remained below amortized cost by 20% or more for less than six
months; and (iii) securities where the estimated value had declined and remained
below amortized cost by 20% or more for six months or greater. 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 following table presents the total gross unrealized losses for fixed
maturities where the estimated fair value had declined and remained below
amortized cost by:
AT SEPTEMBER 30, 2002
------------------------------
GROSS
UNREALIZED % OF
LOSSES TOTAL
------ -----
(DOLLARS IN MILLIONS)
Less than 20% $ 925 42.6%
20% or more for less than six months 1,046 48.2
20% or more for six months or greater 199 9.2
------ ----
Total $2,170 100.0%
====== ====
The category of fixed maturity securities where the estimated fair value
has declined and remained below amortized cost by less than 20% is comprised of
1,085 securities with an amortized cost of $15,800 million and a gross
unrealized loss of $925 million. These fixed maturities mature as follows: 4%
due in one year or less; 31% due in greater than one year to five years; 17% due
in greater than five years to ten years; and 48% due in greater than ten years
(calculated as a percentage of amortized cost). Additionally, such securities
are concentrated by security type in US corporates (58%) and foreign corporates
(12%); and are concentrated by industry in finance (22%) and transportation
(17%) (calculated as a percentage of gross unrealized loss). Non-investment
grade securities represent 28% of the $14,875 million fair value and 30% of the
$925 million gross unrealized loss.
The category of fixed maturity securities where the estimated fair value
has declined and remained below amortized cost by 20% or more for less than six
months is 215 securities with an amortized cost of $2,949 million and a gross
unrealized loss of $1,046 million. These fixed maturities mature as follows: 1%
due in one year or less; 21% due in greater than one year to five years; 41% due
in greater than five years to ten years; and 37% due in greater than ten years
(calculated as a percentage of amortized cost). Additionally, such securities
are concentrated by security type in US corporates (71%) and foreign corporates
(13%); and are concentrated by industry in communications (30%) and
transportation (19%) (calculated as a percentage of gross unrealized loss).
56
Non-investment grade securities represent 55% of the $1,903 million fair value
and 62% of the $1,046 million gross unrealized loss.
The category of fixed maturity securities where the estimated fair value
has declined and remained below amortized cost by 20% or more for six months or
greater is comprised of 69 securities with an amortized cost of $491 million and
a gross unrealized loss of $199 million. These fixed maturities mature as
follows: 24% due in greater than one year to five years; 18% due in greater than
five years to ten years; and 58% due in greater than ten years (calculated as a
percentage of amortized cost). Additionally, such securities are concentrated by
security type in US corporates (58%) and foreign corporates (22%); and are
concentrated by industry in communications (27%) and transportation (23%)
(calculated as a percentage of gross unrealized loss). Non-investment grade
securities represent 67% of the $292 million fair value and 77% of the $199
million gross unrealized loss.
The Company held 35 fixed maturity securities each with a gross unrealized
loss at September 30, 2002 greater than $10 million. Four of these securities
represent 36% of the gross unrealized loss on fixed maturities where the
estimated fair value had declined and remained below amortized cost by 20% or
more for six months or greater. The estimated fair value and gross unrealized
loss at September 30, 2002 for these securities were $53 million and $72
million, respectively. These securities were concentrated in the US corporate
sector. The Company analyzed, on a case-by-case basis, each of the four fixed
maturity securities as of September 30, 2002 to determine if the securities were
other-than-temporarily impaired. The Company believes that the estimated fair
value of these securities, which were concentrated in the communications and
transportation industries, 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 September 30, 2002.
Corporate Fixed Maturities. The table below shows the major industry types
that comprise the corporate bond holdings at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------------- --------------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ------- ---------- -------
(DOLLARS IN MILLIONS)
Industrial $28,533 41.9% $27,346 43.7%
Utility 7,532 11.0 7,030 11.2
Finance 15,280 22.4 12,997 20.7
Yankee/Foreign (1) 16,499 24.2 14,767 23.6
Other 359 0.5 516 0.8
------- ------- ------- -------
Total $68,203 100.0% $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 September 30, 2002, the Company's combined
holdings in the ten issuers to which it had the greatest exposure totaled $3,981
million, which was less than 3% of the Company's total invested assets at such
date. The exposure to the largest single issuer of corporate bonds the Company
held at September 30, 2002 was $508 million.
At September 30, 2002 and December 31, 2001, investments of $12,207
million and $7,120 million, respectively, or 74.0% 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.
57
The Company's exposure to future deterioration in the economic and
political environment in Brazil and Argentina, with respect to its Brazilian and
Argentine related investments (including local insurance operations), is
limited to the net carrying value of those assets, which totaled approximately
$360 million and $160 million, respectively, as of September 30, 2002. The net
carrying value of the Company's Brazilian and Argentine related investments is
net of writedowns for other-than-temporary impairments.
Mortgage-Backed Securities. The following table shows the types of
mortgage-backed securities the Company held at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
----------------------- -----------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ------- ---------- -------
(DOLLARS IN MILLIONS)
Pass-through securities $13,894 41.0% $10,542 40.0%
Collateralized mortgage obligations 14,037 41.3 10,432 39.7
Commercial mortgage-backed securities 6,023 17.7 5,354 20.3
------- ------- ------- -------
Total $33,954 100.0% $26,328 100.0%
======= ======= ======= =======
At September 30, 2002, pass-through and collateralized mortgage
obligations totaled $27,931 million, or 82.3% 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 September 30,
2002, approximately $3,158 million, or 52.4% of the commercial mortgage-backed
securities, and $27,326 million, or 97.8% 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 securities 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. Approximately $4,760 million and $3,427 million or
48.4% and 42.1%, of total asset-backed securities were rated Aaa/AAA by Moody's
or S&P at September 30, 2002 and December 31, 2001, respectively.
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
58
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 $1.3 billion in financial assets as of September 30, 2002. These
transactions were executed prior to 2002. The Company's beneficial interests in
these SPEs and the related investment income were insignificant as of September
30, 2002 and December 31, 2001 and for the three months and nine months ended
September 30, 2002 and 2001.
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 $1.3 billion at September 30, 2002 and $1.6
billion at December 31, 2001. The related income recognized was $17 million and
$61 million for the three months and nine months ended September 30, 2002,
respectively. The related losses recognized were $23 million and $5 million for
the three months and nine months ended September 30, 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 13.0% and 13.9% of the Company's total cash and invested assets
at September 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:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
---------------------- ----------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
------- ------- ------- -------
(DOLLARS IN MILLIONS)
Commercial $18,348 76.8 % $17,959 76.0 %
Agricultural 5,155 21.6 5,268 22.3
Residential 382 1.6 394 1.7
------- ----- ------- -----
Total $23,885 100.0 % $23,621 100.0 %
======= ===== ======= =====
59
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:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
-------------------- --------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
------- ----- ------- -----
(DOLLARS IN MILLIONS)
REGION
South Atlantic $ 4,832 26.3% $ 4,729 26.3%
Pacific 3,860 21.0 3,593 20.0
Middle Atlantic 3,315 18.1 3,248 18.1
East North Central 1,962 10.7 2,003 11.2
New England 1,270 6.9 1,198 6.7
West South Central 975 5.3 1,021 5.7
Mountain 763 4.2 733 4.1
West North Central 647 3.5 727 4.0
International 546 3.0 526 2.9
East South Central 178 1.0 181 1.0
------- ----- ------- -----
Total $18,348 100.0% $17,959 100.0%
======= ===== ======= =====
PROPERTY TYPE
Office $ 8,431 45.9% $ 8,293 46.2%
Retail 4,332 23.6 4,208 23.4
Apartments 2,602 14.2 2,553 14.2
Industrial 1,933 10.5 1,813 10.1
Hotel 818 4.5 864 4.8
Other 232 1.3 228 1.3
------- ----- ------- -----
Total $18,348 100.0% $17,959 100.0%
======= ===== ======= =====
60
The following table presents the scheduled maturities for the Company's
commercial mortgage loans at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
-------------------- --------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
------- ----- ------- -----
(DOLLARS IN MILLIONS)
Due in one year or less $ 750 4.1% $ 840 4.7%
Due after one year through two years 1,115 6.1 677 3.8
Due after two years through three years 1,595 8.7 1,532 8.5
Due after three years through four years 2,393 13.0 1,772 9.9
Due after four years through five years 1,724 9.4 2,078 11.6
Due after five years 10,771 58.7 11,060 61.5
------- ----- ------- -----
Total $18,348 100.0% $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.
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 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 market risks include the
general level of interest rates, the liquidity for these securities in the
marketplace and the capital available for loan refinancing.
The Company has a $525 million mortgage loan on a high profile office
complex that has been affected by the September 11, 2001 tragedies causing the
obligor to impair its investment in the property. The Company did not classify
this loan as a problem or potential problem as of September 30, 2002 as the
obligor is performing as agreed and the estimated collateral value provides
sufficient coverage for the loan.
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.
61
The following table presents the amortized cost and valuation allowance
for commercial mortgage loans distributed by loan classification at:
SEPTEMBER 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 $18,055 97.7% $ 56 0.3% $17,495 96.6% $ 52 0.3%
Restructured 261 1.4 52 19.9% 448 2.5 55 12.3%
Delinquent or under
foreclosure 32 0.2 7 21.9% 14 0.1 7 50.0%
Potentially delinquent 133 0.7 18 13.5% 136 0.8 20 14.7%
------- ----- ---- ------- ----- ----
Total $18,481 100.0% $133 0.7% $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:
NINE MONTHS ENDED
SEPTEMBER 30, 2002
------------------
(DOLLARS IN MILLIONS)
Balance, beginning of period $ 134
Additions 27
Deductions for writedowns and dispositions (28)
-----
Balance, end of period $ 133
=====
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 63.5% of the $5,155 million of agricultural mortgage loans
outstanding at September 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.
62
The following table presents the amortized cost and valuation allowances
for agricultural mortgage loans distributed by loan classification at:
SEPTEMBER 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 $4,875 94.4% $ -- 0.0% $5,055 95.8% $ 3 0.1%
Restructured 186 3.6 2 1.1% 188 3.6 3 1.6%
Delinquent or under
foreclosure 91 1.8 4 4.4% 29 0.5 2 6.9%
Potentially delinquent 9 0.2 -- 0.0% 5 0.1 1 20.0%
------ ----- ----- ------ ----- -----
Total $5,161 100.0% $ 6 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:
NINE MONTHS ENDED
SEPTEMBER 30, 2002
------------------
(DOLLARS IN MILLIONS)
Balance, beginning of period $ 9
Additions 2
Deductions for writedowns and dispositions (5)
---
Balance, end of period $ 6
===
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.
63
REAL ESTATE, REAL ESTATE JOINT VENTURES AND REAL ESTATE HELD-FOR-SALE
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 September 30, 2002 and
December 31, 2001, the carrying value of the Company's real estate, real estate
joint ventures and real estate held-for-sale was $5,663 million and $5,730
million, respectively, or 3.1% and 3.4% of total cash and invested assets,
respectively. 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, real estate
joint ventures and real estate held-for-sale at:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
-------------------- --------------------
CARRYING % OF CARRYING % OF
TYPE VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
Real estate held-for-investment $4,061 71.7% $3,705 64.7%
Real estate joint ventures held-for-investment 316 5.6 356 6.2
------ ----- ------ -----
Subtotal 4,377 77.3 4,061 70.9
------ ----- ------ -----
Real estate held-for-sale 1,241 21.9 1,620 28.3
Foreclosed real estate held-for-sale 45 0.8 49 0.8
------ ----- ------ -----
Subtotal 1,286 22.7 1,669 29.1
------ ----- ------ -----
Total $5,663 100.0% $5,730 100.0%
====== ===== ====== =====
Office properties representing 61.2% and 63.5% of the Company's real
estate, real estate joint ventures and real estate held-for-sale at
September 30, 2002 and December 31, 2001, respectively, are well diversified
geographically, principally within the United States. The average occupancy
level of office properties was 89% and 91% at September 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, when the carrying value of the real estate exceeds the sum of the
undiscounted cash flow expected to result from the use and eventual disposition
of the real estate. 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 current real estate equity portfolio is mainly comprised of a core
portfolio of multi-tenanted office buildings with high tenant credit quality,
net leased properties and apartments. The objective is to maximize earnings by
building upon and strengthening the core portfolio through selective
acquisitions and dispositions. In light of this objective, the Company currently
is seeking to take advantage of a significant demand for Class A, institutional
grade properties and, as a result, is selling certain real estate holdings in
its portfolio. This sales program does not represent any fundamental change in
the Company's investment strategy.
Once the Company identifies a property that is expected to be sold within
one year and commences a firm plan for marketing the property, in accordance
with SFAS 144, the Company classifies the property as held-for-sale and reports
the related net investment income and any resulting investments gains and losses
as discontinued operations. Further, 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
64
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 to
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 $1,286 million and $1,669 million
at September 30, 2002 and December 31, 2001, respectively, are net of
impairments of $180 million and $172 million, respectively, and net of valuation
allowances of $51 million and $35 million, respectively.
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.
EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS
The Company's carrying value of equity securities, which primarily
consist of investments in common stocks, was $1,955 million and $3,063 million
at September 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 $1,747 million and $1,637
million at September 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
excluding partnerships represented 1.1% and 1.8% of cash and invested assets at
September 30, 2002 and December 31, 2001, respectively.
Equity securities include, at September 30, 2002 and December 31, 2001,
$451 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 $1,752
million and $1,898 million at September 30, 2002 and December 31, 2001,
respectively.
65
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:
SEPTEMBER 30, 2002
----------------------------------------------------------
GROSS UNREALIZED
----------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
------ ---- ----- ---------- -----
(DOLLARS IN MILLIONS)
Equity Securities:
Common stocks $1,594 $ 99 $ 191 $1,502 76.8%
Nonredeemable preferred stocks 452 13 12 453 23.2
------ ---- ----- ------ -----
Total equity securities $2,046 $112 $ 203 $1,955 100.0%
====== ==== ===== ====== =====
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 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;
66
- 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 $51 million and $20 million for the
three months ended September 30, 2002 and 2001, respectively and $111 million
and $117 million for the nine months ended September 30, 2002 and 2001,
respectively. During the three months ended September 30, 2002, the Company sold
equity securities with an estimated fair value of $2 million at a loss of $2
million. During the nine months ended September 30, 2002, the Company sold
equity securities with an estimated fair value of $77 million at a loss of $43
million.
The gross unrealized loss related to the Company's equity securities at
September 30, 2002 was $203 million. Such securities are concentrated by
security type in common stock (50%) and mutual funds (46%); and are concentrated
by industry in domestic broad market mutual funds (38%) and financial (33%)
(calculated as a percentage of gross unrealized loss).
The following table presents the amortized costs, gross unrealized losses
and number of securities for equity securities where the estimated fair value
had declined and remained below cost by less than 20%, or 20% or more for:
AT SEPTEMBER 30, 2002
-------------------------------------------------------------------
GROSS
AMORTIZED COST UNREALIZED LOSSES NUMBER OF SECURITIES
-------------------- ------------------- --------------------
LESS THAN 20% OR LESS THAN 20% OR LESS THAN 20% OR
20% MORE 20% MORE 20% MORE
-------------------- ------------------- --------------------
(DOLLARS IN MILLIONS)
Less than six months $607 $355 $24 $106 415 292
Six months or greater but less than nine months 205 7 32 4 3 8
Nine months or greater but less than twelve months 3 8 1 2 3 8
Twelve months or greater 5 81 -- 34 2 64
-------------------- ------------------- --------------------
Total $820 $451 $57 $146 423 372
==================== =================== ====================
The Company's review of its equity security exposure includes the analysis
of the total gross unrealized losses by three categories of securities: (i)
securities where the estimated fair value had declined and remained below cost
by less than 20%; (ii) securities where the estimated fair value had declined
and remained below cost by 20% or more for less than six months; and (iii)
securities where the estimated fair value had declined and remained below cost
by 20% or more for six months or greater. 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 following table presents the total gross unrealized losses for equity
securities at September 30, 2002 where the estimated fair value had declined and
remained below cost by:
AT SEPTEMBER 30, 2002
------------------------
GROSS
UNREALIZED % OF
LOSSES TOTAL
----------- ----------
(DOLLARS IN MILLIONS)
Less than 20% $ 57 28.1%
20% or more for less than six months 106 52.2
20% or more for six months or greater 40 19.7
---- -----
Total $203 100.0%
==== =====
67
The category of equity securities where the estimated fair value has
declined and remained below cost by less than 20% is comprised of 423 equity
securities with a cost of $820 million and a gross unrealized loss of $57
million. These securities are concentrated by security type in mutual funds
(80%); and concentrated by industry in domestic broad market mutual funds (80%)
(calculated as a percentage of gross unrealized loss). The significant factors
considered at September 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.
The category of equity securities where the estimated fair value has
declined and remained below cost by 20% or more for less than six months is
comprised of 292 equity securities with a cost of $355 million and a gross
unrealized loss of $106 million. These securities are concentrated by security
type in common stock (86%); and concentrated by industry in financial (62%) and
domestic broad market mutual funds (13%) (calculated as a percentage of gross
unrealized loss). The significant factors considered at September 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.
The category of equity securities where the estimated fair value has
declined and remained below cost by 20% or more for six months or greater is
comprised of 80 equity securities with a cost of $96 million and a gross
unrealized loss of $40 million. These securities are concentrated by security
type in mutual funds (87%); and concentrated by industry in domestic broad
market mutual funds (46%) and global mutual funds (40%) (calculated as a
percentage of gross unrealized loss). A portion of the 80 equity securities
described above had estimated fair values below cost by 20% or more for twelve
months or greater. The significant factors considered at September 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.
The Company held four equity securities with a gross unrealized loss at
September 30, 2002 greater than $5 million. None of these securities represented
losses where the estimated fair value had declined and remained below amortized
cost by 20% or more for six months or greater.
OTHER INVESTED ASSETS
The Company's other invested assets consist principally of leveraged
leases and funds withheld at interest of $2.5 billion and $2.7 billion at
September 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 1.7% and 1.9% of cash and invested assets at September 30,
2002 and December 31, 2001, respectively.
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.
68
The table below provides a summary of the carrying value, notional amount
and fair value of derivative financial instruments held at:
SEPTEMBER 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 $ (1) $ 31 $ -- $ 1 $ -- $ -- $ -- $--
Interest rate swaps 84 3,681 202 118 70 1,849 79 9
Floors 7 325 7 -- 11 325 11 --
Caps -- 7,590 -- -- 5 7,890 5 --
Financial forwards (19) 250 -- 19 -- -- -- --
Foreign currency swaps 38 2,099 135 97 162 1,925 188 26
Options 3 55 3 -- (12) 1,857 -- 12
Foreign exchange contracts (3) 47 -- 3 4 67 4 --
Written covered calls -- 315 -- -- -- 40 -- --
Credit default swaps -- 376 1 1 -- 270 -- --
----- ------- ---- ---- ----- ------- ---- ---
Total contractual commitments $ 109 $14,769 $348 $239 $ 240 $14,223 $287 $47
===== ======= ==== ==== ===== ======= ==== ===
SECURITIES LENDING
The Company operates a securities lending program 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. Securities with a cost or
amortized cost of $14,641 million and $13,471 million and an estimated fair
value of $15,991 and $12,195 million were on loan under the program at September
30, 2002 and December 31, 2001, respectively. The Company was liable for cash
collateral under its control of $16,251 million and $12,661 million at September
30, 2002 and December 31, 2001, 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 September 30, 2002 is
relatively unchanged in amount from that reported on December 31, 2001, a
description of which may be found in the 2001 Annual Report on Form 10-K.
69
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Based on their
evaluation as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-Q (the "Evaluation Date"), the Holding Company's principal
executive officer and principal financial officer have concluded that the
Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934, as amended) were effective.
(b) Change in Internal Controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the Evaluation Date including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following should be read in conjunction with Note 9 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 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." Settlements have been reached in the
sales practices class actions against Metropolitan Life, New England Mutual and
General American. An appellate court has affirmed the order approving the
General American settlement and the implementation 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
September 30, 2002, there are approximately 425 sales practices lawsuits pending
against Metropolitan Life, approximately 60 lawsuits pending against New England
Mutual and approximately 45 of such lawsuits pending against General American.
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, Metropolitan Life received approximately 59,500
asbestos-related claims in 2001. During the first nine months of 2002 and 2001,
Metropolitan Life received approximately 45,200 and 49,500 asbestos-related
claims, respectively.
DEMUTUALIZATION ACTIONS
The Company has previously reported that a purported class action was
filed in the Supreme Court of the State of New York for New York County on
behalf of a purported class of beneficiaries of Metropolitan Life annuities
purchased to fund structured settlements. The class members claimed that
they should have received common stock or cash in connection with the
demutualization. Metropolitan Life's motion to dismiss this case was granted in
a decision filed on October 31, 2002.
RACE-CONSCIOUS UNDERWRITING CLAIMS
As previously disclosed, 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 has cooperated fully
with that inquiry. Four purported class action lawsuits filed against
Metropolitan Life in 2000 and 2001 alleging
70
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. Metropolitan Life has entered into
settlement agreements to resolve the regulatory examination and the actions
pending in the United States District Court for the Southern District of New
York. The class action settlement, which has received preliminary approval from
the court, must receive final approval before it can be implemented. A fairness
hearing has been set for February 7, 2003. The regulatory settlement agreement
is conditioned upon final approval of the class action settlement.
OTHER
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 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Regulatory Settlement Agreement dated as of August 29,
2002, by and between Metropolitan Life Insurance Company
and the State of New York Insurance Department, along
with the insurance regulators of each of the states of
the United States and of the District of Columbia that
adopt, approve and agree to the Regulatory Settlement
Agreement.
10.2 Stipulation of Settlement dated August 29, 2002, by and
between Thompson et al. as Plaintiffs in their
individual and representative capacities, and
Metropolitan Life Insurance Company, as Defendant.
10.3 Separation Agreement, Waiver and General Release dated
July 16, 2002 by and between Metropolitan Life Insurance
Company and James M. Benson.
10.4 MetLife Deferred Compensation Plan for Officers as
amended and restated effective October 22, 2002.
(b) Reports on Form 8-K
During the three months ended September 30, 2002, the following
current reports were filed on Form 8-K:
1. Current Report on Form 8-K filed July 18, 2002 attaching
press release dated July 17, 2002 announcing combination
of Individual and Institutional Businesses.
2. Current Report on Form 8-K filed August 6, 2002
attaching press release dated August 5, 2002 announcing
second quarter 2002 results.
3. Current Report on Form 8-K filed August 12, 2002
attaching press release dated August 12, 2002 announcing
adoption of fair-value recognition provisions of
accounting for employee stock options effective January,
2003.
71
4. Current Report on Form 8-K filed August 14, 2002
attaching press release dated August 14, 2002 announcing
submission of sworn statements to the Securities and
Exchange Commission ("SEC") pursuant to SEC Order No.
4-460 and submission of certifications to SEC pursuant
to 18 U.S.C. Section 1350.
5. Current Report on Form 8-K filed August 16, 2002
regarding correction of typographical error.
6. Current Report on Form 8-K filed August 29, 2002
attaching press release dated August 29, 2002 announcing
proposed class-action litigation settlement.
7. Current Report on Form 8-K filed September 6, 2002
regarding ratings action by Moody's Investors Services.
8. Current Report on Form 8-K filed September 20, 2002
regarding ratings action by Fitch Ratings.
72
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: November 14, 2002
73
CERTIFICATIONS
I, Robert H. Benmosche, Chief Executive Officer of MetLife, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of MetLife, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002 /s/ Robert H. Benmosche
----------------- -----------------------
Name: Robert H. Benmosche
Title: Chairman, President and Chief
Executive Officer
74
I, Stewart G. Nagler, Chief Financial Officer of MetLife, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of MetLife, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002 /s/ Stewart G. Nagler
----------------- ---------------------
Name: Stewart G. Nagler
Title: Vice Chairman and Chief
Financial Officer
75
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER EXHIBIT NAME NUMBER
10.1 Regulatory Settlement Agreement dated as of August
29, 2002, by and between Metropolitan Life
Insurance Company and the State of New York
Insurance Department, along with the insurance
regulators of each of the states of the United
States and of the District of Columbia that adopt,
approve and agree to the Regulatory Settlement
Agreement.
10.2 Stipulation of Settlement dated August 29, 2002, by
and between Thompson et al. as Plaintiffs in their
individual and representative capacities, and
Metropolitan Life Insurance Company, as Defendant.
10.3 Separation Agreement, Waiver and General Release
dated July 16, 2002 by and between Metropolitan
Life Insurance Company and James M. Benson.
10.4 MetLife Deferred Compensation Plan for Officers as
amended and restated effective October 22, 2002.
76