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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 MARCH 31, 2003
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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
At May 12, 2003, 700,372,411 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............................................. 4
Unaudited Interim Condensed Consolidated Balance Sheets at
March 31, 2003 and December 31, 2002................................... 4
Unaudited Interim Condensed Consolidated Statements of Income
for the three months ended March 31, 2003 and 2002..................... 5
Unaudited Interim Condensed Consolidated Statement of
Stockholders' Equity for the three months ended March 31, 2003......... 6
Unaudited Interim Condensed Consolidated Statements of Cash
Flows for the three months ended March 31, 2003 and 2002................ 7
Notes to Unaudited Interim Condensed Consolidated Financial Statements.... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................... 29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 74
ITEM 4. CONTROLS AND PROCEDURES........................................... 74
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................ 74
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................. 77
Signatures............................................................... 78
Chief Executive Officer and Chief Financial Officer Certifications....... 79
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 and 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 U.S. 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.
UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002
(DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, DECEMBER 31,
2003 2002
---- ----
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost: $136,235 and $133,152, respectively) $ 144,610 $ 140,553
Equity securities, at fair value (cost: $1,215 and
$1,303, respectively) 1,205 1,348
Mortgage loans on real estate 25,046 25,086
Policy loans 8,615 8,580
Real estate and real estate joint ventures
held-for-investment 4,541 4,566
Real estate held-for-sale 28 159
Other limited partnership interests 2,299 2,395
Short-term investments 3,188 1,921
Other invested assets 3,948 3,727
--------- ---------
Total investments 193,480 188,335
Cash and cash equivalents 4,938 2,323
Accrued investment income 2,179 2,088
Premiums and other receivables 7,968 7,669
Deferred policy acquisition costs 11,889 11,727
Other assets 5,784 5,550
Separate account assets 60,620 59,693
--------- ---------
Total assets $ 286,858 $ 277,385
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 90,686 $ 89,815
Policyholder account balances 69,060 66,830
Other policyholder funds 6,093 5,685
Policyholder dividends payable 1,032 1,030
Policyholder dividend obligation 2,058 1,882
Short-term debt 2,441 1,161
Long-term debt 5,481 4,425
Current income taxes payable 616 769
Deferred income taxes payable 1,954 1,625
Payables under securities loaned transactions 19,566 17,862
Other liabilities 8,935 7,958
Separate account liabilities 60,620 59,693
--------- ---------
Total liabilities 268,542 258,735
--------- ---------
Commitments, contingencies and guarantees (Note 7)
Company-obligated mandatorily redeemable securities
of subsidiary trusts 277 1,265
--------- ---------
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 March 31, 2003
and December 31, 2002; 700,367,236 shares
outstanding at March 31, 2003 and
700,278,412 shares outstanding at
December 31, 2002 8 8
Additional paid-in capital 14,952 14,968
Retained earnings 3,169 2,807
Treasury stock, at cost; 86,399,428 shares at
March 31, 2003 and 86,488,252 shares at
December 31, 2002 (2,402) (2,405)
Accumulated other comprehensive income 2,312 2,007
--------- ---------
Total stockholders' equity 18,039 17,385
--------- ---------
Total liabilities and stockholders' equity $ 286,858 $ 277,385
========= =========
SEE ACCOMPANYING NOTES TO
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS
ENDED MARCH 31,
--------------------
2003 2002
------- -------
REVENUES
Premiums $ 4,838 $ 4,481
Universal life and investment-type product policy fees 566 457
Net investment income 2,897 2,762
Other revenues 298 367
Net investment losses (net of amounts allocated from
other accounts of ($38) and ($13), respectively) (222) (92)
------- -------
Total revenues 8,377 7,975
------- -------
EXPENSES
Policyholder benefits and claims (excludes amounts
directly related to net investment losses
of ($28) and ($7), respectively) 4,953 4,618
Interest credited to policyholder account balances 747 714
Policyholder dividends 503 497
Other expenses (excludes amounts directly related to
net investment losses of ($10) and ($6), respectively) 1,749 1,653
------- -------
Total expenses 7,952 7,482
------- -------
Income from continuing operations before provision for
income taxes 425 493
Provision for income taxes 121 186
------- -------
Income from continuing operations 304 307
Income from discontinued operations, net of income taxes 58 17
------- -------
Income before cumulative effect of change in accounting 362 324
Cumulative effect of change in accounting -- 5
------- -------
Net income $ 362 $ 329
======= =======
Income from continuing operations available to common
shareholders per share
Basic $ 0.40 $ 0.43
======= =======
Diluted $ 0.39 $ 0.42
======= =======
Net income available to common shareholders per share
Basic $ 0.49 $ 0.46
======= =======
Diluted $ 0.47 $ 0.44
======= =======
SEE ACCOMPANYING NOTES TO
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(DOLLARS IN MILLIONS)
Accumulated Other
Comprehensive Income
--------------------
Net Foreign Minimum
Additional Treasury Unrealized Currency Pension
Common Paid-in Retained Stock Investment Translation Liability
Stock Capital Earnings at Cost Gains Adjustment Adjustment Total
----- ------- -------- ------- ----- ---------- ---------- -----
Balance at December 31, 2002 $ 8 $ 14,968 $ 2,807 $ (2,405) $ 2,282 $ (229) $ (46) $ 17,385
Stock grants and issuance of
stock options 5 3 8
Premium on conversion of
company-obligated mandatorily
redeemable securities of a
subsidiary trust (21) (21)
Comprehensive income:
Net income 362 362
Other comprehensive income:
Unrealized gains on
derivative instruments,
net of income taxes 2 2
Unrealized investment gains,
net of related offsets,
reclassification adjustments
and income taxes 298 298
Foreign currency translation
adjustments 14 14
Minimum pension liability adjustment (9) (9)
--------
Other comprehensive income 305
--------
Comprehensive income 667
-------- -------- -------- -------- -------- -------- -------- --------
Balance at March 31, 2003 $ 8 $ 14,952 $ 3,169 $ (2,402) $ 2,582 $ (215) $ (55) $ 18,039
======== ======== ======== ======== ======== ======== ======== ========
SEE ACCOMPANYING NOTES TO
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(DOLLARS IN MILLIONS)
THREE MONTHS
ENDED MARCH 31,
---------------
2003 2002
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,175 $ 667
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales, maturities and repayments of:
Fixed maturities 16,166 14,754
Equity securities 90 1,601
Mortgage loans on real estate 723 589
Real estate and real estate joint ventures 223 49
Other limited partnership interests 113 26
Purchases of:
Fixed maturities (18,410) (20,471)
Equity securities (8) (21)
Mortgage loans on real estate (646) (680)
Real estate and real estate joint ventures (66) (55)
Other limited partnership interests (48) (82)
Net change in short-term investments (1,271) (1,206)
Net change in payable under securities loaned transactions 1,704 1,004
Other, net (316) (396)
-------- --------
Net cash used in investing activities (1,746) (4,888)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits 7,148 6,163
Withdrawals (5,271) (5,148)
Net change in short-term debt 1,298 191
Long-term debt issued 19 --
Long-term debt repaid (8) (194)
Treasury stock acquired -- (240)
-------- --------
Net cash provided by financing activities 3,186 772
-------- --------
Change in cash and cash equivalents 2,615 (3,449)
Cash and cash equivalents, beginning of period 2,323 7,473
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,938 $ 4,024
======== ========
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the period for:
Interest $ 63 $ 66
======== ========
Income taxes $ 189 $ (41)
======== ========
Non-cash transactions during the period:
Purchase money mortgage on real estate sale $ 50 $ --
======== ========
MetLife Capital Trust I transactions $ 1,037 $ --
======== ========
Real estate acquired in satisfaction of debt $ -- $ 17
======== ========
SEE ACCOMPANYING NOTES TO
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
METLIFE, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF 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 other financial services to a broad spectrum of individual and
institutional customers. The Company offers life insurance, annuities,
automobile and property insurance and mutual funds to individuals, as well as
group insurance, reinsurance and 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: (i) investment impairments; (ii) the fair value of investments in
the absence of quoted market values; (iii) the fair value of derivatives; (iv)
the amortization of deferred policy acquisition costs; (v) the liability for
future policyholder benefits; (vi) the liability for litigation matters; and
(vii) accounting for reinsurance transactions, derivatives and employee benefit
plans. In applying these policies, management makes subjective and complex
judgments that frequently require estimates about matters that are inherently
uncertain. Many of these policies, estimates and related judgments are common in
the insurance and financial services industries; others are specific to the
Company's businesses and operations. Actual results could differ from those
estimates.
The accompanying unaudited interim condensed consolidated financial
statements include the accounts of (i) the Holding Company and its subsidiaries;
(ii) partnerships and joint ventures in which the Company has a majority voting
interest; and (iii) variable interest entities entered into or modified after
January 31, 2003 of which the Company is deemed to be the primary beneficiary.
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. See Note 6.
Intercompany accounts and transactions have been eliminated.
The Company uses the equity method of accounting for investments in real
estate joint ventures and other limited partnership interests in which it has
more than a minor interest, has influence over the partnership's operating and
financial policies and does not have a controlling interest. The Company uses
the cost method for minor interest investments and when it has virtually no
influence over the partnership's operating and financial policies.
Minority interest related to consolidated entities included in other
liabilities was $507 million and $491 million at March 31, 2003 and December 31,
2002, respectively.
Certain amounts in the prior period's unaudited interim condensed
consolidated financial statements have been reclassified to conform with the
2003 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 at March 31, 2003, its consolidated results of operations and its
consolidated cash flows for the three months ended March 31, 2003 and 2002 in
accordance with GAAP. 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, 2002 included in
MetLife, Inc.'s 2002 Annual Report on Form 10-K filed with the U.S. Securities
and Exchange Commission.
FEDERAL INCOME TAXES
Federal income taxes for interim periods have been computed using an
estimated annual effective income 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 income tax rate.
8
APPLICATION OF ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") cleared
Statement 133 Implementation Issue No. B36, Embedded Derivatives: Modified
Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk
Exposures That Are Unrelated or Only Partially Related to the Creditworthiness
of the Obligor Under Those Instruments ("Issue B36"). Issue B36 concluded that a
ceding company's funds withheld payable and an assuming company's funds withheld
receivable under a modified coinsurance agreement include an embedded derivative
feature that is not clearly and closely related to the host contract. Therefore,
the embedded derivative feature must be measured at fair value on the balance
sheet and changes in fair value reported in income. Issue B36 is effective
October 1, 2003. The Company is in the process of developing an estimate of the
impact of the adoption of Issue B36 on its consolidated financial statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities ("SFAS 149"). SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Except for certain implementation
guidance that is incorporated in SFAS 149 and already effective, SFAS 149 is
effective for contracts entered into or modified after June 30, 2003. The
Company does not expect SFAS 149 to have a significant impact on its unaudited
interim condensed consolidated financial statements.
Effective February 1, 2003, the Company adopted FASB Interpretation
("FIN") No. 46, Consolidation of Variable Interest Entities, an Interpretation
of APB No. 51 ("FIN 46"). FIN 46 requires certain variable interest entities
created or acquired on or after February 1, 2003 to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. For variable
interest entities created or acquired prior to February 1, 2003, the provisions
of FIN 46 must be applied for the first interim or annual period beginning July
1, 2003. The Company is in the process of assessing the impact of the provisions
of FIN 46 on its unaudited interim condensed consolidated financial statements
for variable interest entities created or acquired prior to February 1, 2003.
The adoption of FIN 46 requires the Company to include disclosures in its
unaudited interim condensed consolidated financial statements related to the
total assets and the maximum exposure to loss resulting from the Company's
interests in variable interest entities. See Note 5.
Effective January 1, 2003, the Company adopted SFAS No. 148, Accounting
for Stock-Based Compensation -- Transition and Disclosure ("SFAS 148"), which
provides guidance on how to apply the fair value method of accounting for stock
options granted by the Company subsequent to December 31, 2002. As permitted
under SFAS 148, options granted prior to January 1, 2003 will continue to be
accounted for under Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and the pro forma impact
of accounting for these options at fair value will continue to be disclosed in
the unaudited interim condensed consolidated financial statements until the last
of those options vest in 2005. See Note 9.
Effective January 1, 2003, the Company adopted FIN No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires entities to
establish liabilities for certain types of guarantees and expands financial
statement disclosures for others. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The adoption of FIN 45
did not have a significant impact on the Company's unaudited interim condensed
consolidated financial statements. See Note 7.
Effective January 1, 2003, the Company adopted SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recorded 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") Issue No. 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"). The Company had no such activities in 2003.
Effective January 1, 2003, the Company adopted SFAS No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections ("SFAS 145"). In addition to amending or rescinding other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions, SFAS
145 generally precludes companies from recording gains and losses from the
extinguishment of debt as an extraordinary item. SFAS 145 also requires
sale-leaseback treatment for certain modifications of a capital lease that
result in the lease being classified as
9
an operating lease. SFAS 145 did not have a significant impact on the Company's
unaudited interim condensed consolidated financial statements.
In June 2001, the FASB issued 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 has been reported in income
as a cumulative effect of a change in accounting for the three months ended
March 31, 2002.
2. SEPTEMBER 11, 2001 TRAGEDIES
On September 11, 2001 terrorist attacks occurred in New York, Washington,
D.C. and Pennsylvania (the "tragedies") triggering a significant loss of life
and property which had an adverse impact on certain of the Company's businesses.
The Company's original estimate of the total insurance losses related to the
tragedies, which was recorded in the third quarter of 2001, was $208 million,
net of income taxes of $117 million. As of March 31, 2003, the Company's
remaining liability for unpaid and future claims associated with the tragedies
was $35 million, principally related to disability coverages. This estimate has
been and will continue to be subject to revision in subsequent periods, as
claims are received from insureds and processed. Any revision to the estimate of
losses in subsequent periods will affect net income in such periods.
The Company's general account investment portfolios include investments,
primarily comprised of fixed maturities, in industries that were originally
affected by the tragedies, including airline, other travel, lodging and
insurance. Exposures to these industries also exist through mortgage loans and
investments in real estate. The carrying value of the Company's investment
portfolio exposed to these industries was approximately $3.3 billion at March
31, 2003.
3. NET INVESTMENT LOSSES
Net investment gains (losses), including changes in valuation allowances,
and related policyholder amounts were as follows:
THREE MONTHS
ENDED MARCH 31,
---------------
2003 2002
---- ----
(DOLLARS IN MILLIONS)
Fixed maturities $ (149) $ (165)
Equity securities (5) 192
Mortgage loans on real estate (14) (19)
Real estate and real estate joint ventures (1) 2 (2)
Other limited partnership interests (66) (31)
Derivatives not qualifying for hedge accounting (34) (29)
Other 6 (51)
--------- ---------
Total (260) (105)
Amounts allocated from:
Deferred policy acquisition costs 10 6
Policyholder dividend obligation 28 7
--------- ---------
Total net investment losses $ (222) $ (92)
========= =========
- ---------
(1) The amounts presented exclude amounts related to sales of real estate
held-for-sale presented as discontinued operations in accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
("SFAS 144").
Investment gains and losses are net of related policyholder amounts. The
amounts netted against investment gains and losses are (i) amortization of
deferred policy acquisition costs to the extent that such amortization results
from investment gains and losses; and (ii) adjustments to the policyholder
dividend obligation resulting from investment gains and losses. This
presentation may not be comparable to presentations made by other insurers.
10
4. DERIVATIVE INSTRUMENTS
The Company uses derivative instruments to manage risk through one of four
principal risk management strategies: (i) the hedging of liabilities; (ii)
invested assets; (iii) portfolios of assets or liabilities; and (iv) firm
commitments and forecasted transactions. Additionally, the Company enters into
income generation and replication derivative transactions as permitted by its
insurance subsidiaries' derivatives use plans approved by the applicable state
insurance departments. The Company's derivative hedging strategy employs a
variety of instruments, including financial futures, financial forwards,
interest rate, credit default and foreign currency swaps, foreign currency
forwards and options, including caps and floors.
On the date the Company enters into a derivative contract, management
designates the derivative as a hedge of the identified exposure (fair value,
cash flow or foreign currency). If a derivative does not qualify as a hedge,
according to SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"), as amended, the changes in its fair value are generally
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 inception of the hedge 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 notional amount and fair value
of derivatives by type of hedge designation at:
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
FAIR VALUE FAIR VALUE
NOTIONAL --------------------- NOTIONAL ----------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
------ ------ ----------- ------ ------ -----------
(DOLLARS IN MILLIONS)
BY TYPE OF HEDGE
Fair value $ 2,076 $ 13 $ 88 $ 420 $ -- $ 64
Cash flow 4,743 100 90 3,520 69 73
Non qualifying 12,169 222 162 13,119 239 183
------- ------- ------- ------- ------- -------
Total $18,988 $ 335 $ 340 $17,059 $ 308 $ 320
======= ======= ======= ======= ======= =======
During both the three months ended March 31, 2003 and 2002, the Company
recognized net investment income of $3 million from the periodic settlement of
interest rate and foreign currency swaps.
During the three months ended March 31, 2003, the Company recognized $9
million in net investment losses related to qualifying fair value hedges. In
addition, $12 million of unrealized gains on fair value hedged investments was
recognized in net investment gains and losses. There were no derivatives
designated as fair value hedges during the three months ended March 31, 2002.
There were no discontinued fair value hedges during the three months ended March
31, 2003 or 2002.
At March 31, 2003 and December 31, 2002, the net amounts accumulated in
other comprehensive income relating to cash flow hedges were net losses of $19
million and $24 million, respectively. During the three months ended March 31,
2003 and 2002, the Company recognized other comprehensive net gains of $7
million and other comprehensive net losses of $12 million, respectively,
relating to the effective portion of cash flow hedges. During the three months
ended March 31, 2003 and 2002, $2 million and $3 million, respectively, of other
comprehensive income was reclassified into net investment income. Approximately
$5 million and $29 million of gains reported in accumulated other comprehensive
income at March 31, 2003 are expected to be reclassified during the year ending
December 31, 2003 into net investment income and net investment gains and
losses, respectively, as the underlying investments mature or expire according
to their original terms.
11
For the three months ended March 31, 2003 and 2002, the Company recognized
net investment income of $9 million and $2 million, respectively, and net
investment losses of $34 million and $29 million, respectively, from derivatives
not qualifying as accounting hedges. The use of these non-speculative
derivatives is permitted by the applicable insurance departments.
5. STRUCTURED INVESTMENT TRANSACTIONS AND VARIABLE INTEREST ENTITIES
The Company participates in structured investment transactions, primarily
asset securitizations and structured notes. These transactions enhance the
Company's total return on its investment portfolio principally by generating
management fee income on asset securitizations and by providing equity-based
returns on debt securities through structured notes consisting of equity linked
notes and similar instruments.
Effective February 1, 2003, FIN 46 established new accounting guidance
relating to the consolidation of variable interest entities ("VIEs"). Certain of
the Company's asset-backed securitizations and structured investment
transactions meet the definition of a VIE under FIN 46. In addition, certain of
the Company's investments in real estate joint ventures and other limited
partnership interests also meet the VIE definition. The Company consolidates any
VIE created on or after February 1, 2003 for which it is the primary beneficiary
and, effective July 1, 2003, will consolidate any VIE created prior to February
1, 2003 for which it is the primary beneficiary.
The Company is still in the process of evaluating its VIEs created prior
to February 1, 2003 with regard to the implementation of FIN 46. The following
table presents the total assets and the maximum exposure to loss relating to
those VIEs that the Company, based on its best knowledge as of March 31, 2003,
believes it is reasonably possible it will need to consolidate or about which it
will need to disclose information in accordance with the provisions of FIN 46
at:
MARCH 31, 2003
--------------
MAXIMUM
EXPOSURE
TOTAL ASSETS TO LOSS
------------ -------
(DOLLARS IN MILLIONS)
Financial asset-backed securitizations and
collateralized debt and bond obligation (1) $ 1,767 $ 6
Real estate joint ventures (2) 683 299
Other limited partnership interests (2) 905 143
Other structured investment transactions (3) 86 38
--------- ---------
Total $ 3,441 $ 486
========= =========
- ------------
(1) The maximum exposure to loss is based on the carrying value of retained
interests.
(2) The maximum exposure to loss is based on the carrying value plus unfunded
commitments reduced by amounts guaranteed by other partners.
(3) The maximum exposure to loss is based on the carrying value of beneficial
interests.
The Company sponsors financial asset securitizations of high yield debt
securities, investment grade bonds and structured finance securities and also is
the collateral manager and a beneficial interest holder in such transactions. As
the collateral manager, the Company earns management fees on the outstanding
securitized asset balance, which are recorded in income as earned. When the
Company transfers assets to a bankruptcy-remote special purpose entity ("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 carrying amount 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. Beneficial interests in securitizations are
carried at fair value in fixed maturities. Income on the beneficial interests is
recognized using the prospective method in accordance with EITF Issue No. 99-20,
Recognition of Interest Income and Impairment on Certain Investments. Prior to
the effective date of FIN 46, the SPEs used to securitize assets were not
consolidated by the Company because unrelated third parties hold controlling
interests through ownership of equity in the SPEs, representing at least three
percent of the value 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
interest of the SPE.
The Company purchases or receives beneficial interests in SPEs, which
generally acquire financial assets, including corporate equities, debt
securities and purchased options. The Company has not guaranteed the
performance, liquidity or obligations of the SPEs
12
and the Company's exposure to loss is limited to its carrying value of the
beneficial interests in the SPEs. The Company uses the beneficial interests as
part of its risk management strategy, including asset-liability management.
Prior to the effective date of FIN 46, these SPEs were not consolidated by the
Company because unrelated third parties hold controlling interests through
ownership of equity in the SPEs, representing at least three percent of the
value 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 interest of
the SPE. The beneficial interests in SPEs where the Company exercises
significant influence over the operating and financial policies of the SPE are
accounted for in accordance with the equity method of accounting. Impairments of
these beneficial interests are included in net investment gains and losses. The
beneficial interests in SPEs where the Company does not exercise significant
influence are accounted for based on the substance of the beneficial interest's
rights and obligations. Beneficial interests are accounted for and are included
in fixed maturities. These beneficial interests are generally structured notes,
as defined by EITF Issue No. 96-12, Recognition of Interest Income and Balance
Sheet Classification of Structured Notes, and their income is recognized using
the retrospective interest method or the level yield method, as appropriate.
6. CLOSED BLOCK
On April 7, 2000, (the "date of demutualization"), Metropolitan Life
Insurance Company ("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.
Closed block liabilities and assets designated to the closed block are as
follows:
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
(DOLLARS IN MILLIONS)
CLOSED BLOCK LIABILITIES
Future policy benefits $ 41,332 $ 41,207
Other policyholder funds 293 279
Policyholder dividends payable 754 719
Policyholder dividend obligation 2,058 1,882
Payables under securities loaned transactions 4,472 4,851
Other liabilities 545 433
-------- --------
Total closed block liabilities 49,454 49,371
-------- --------
ASSETS DESIGNATED TO THE CLOSED BLOCK
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost: $28,458 and $28,339, respectively) 30,350 29,981
Equity securities, at fair value (cost: $220 and $236, respectively) 197 218
Mortgage loans on real estate 7,091 7,032
Policy loans 4,004 3,988
Short-term investments 42 24
Other invested assets 589 604
-------- --------
Total investments 42,273 41,847
Cash and cash equivalents 260 435
Accrued investment income 547 540
Deferred income taxes 992 1,151
Premiums and other receivables 200 130
-------- --------
Total assets designated to the closed block 44,272 44,103
-------- --------
Excess of closed block liabilities over assets designated
to the closed block 5,182 5,268
-------- --------
Amounts included in accumulated other comprehensive loss:
Net unrealized investment gains, net of deferred
income tax of $663 and $577, respectively 1,206 1,047
Unrealized derivative gains, net of deferred income
tax of $1 and $7, respectively -- 13
Allocated from policyholder dividend obligation, net of
deferred income tax of $730 and $668, respectively (1,328) (1,214)
-------- --------
(122) (154)
-------- --------
Maximum future earnings to be recognized from closed
block assets and liabilities $ 5,060 $ 5,114
======== ========
13
Information regarding the policyholder dividend obligation is as follows:
THREE MONTHS ENDED YEAR ENDED
------------------ ------------
MARCH 31, DECEMBER 31,
2003 2002
------------------ ------------
(DOLLARS IN MILLIONS)
Balance at beginning of period $ 1,882 $ 708
Impact on net income before amounts
allocated from policyholder
dividend obligation 28 157
Net investment losses (28) (157)
Change in unrealized investment
and derivative gains 176 1,174
--------- ---------
Balance at end of period $ 2,058 $ 1,882
========= =========
Closed block revenues and expenses were as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
---- ----
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 799 $ 842
Net investment income and other revenues 642 637
Net investment (losses) gains (net of amounts
allocated from the policyholder dividend
obligation of ($28) and ($7), respectively) (5) 5
--------- ---------
Total revenues 1,436 1,484
--------- ---------
EXPENSES
Policyholder benefits and claims 853 912
Policyholder dividends 394 399
Change in policyholder dividend obligation
(excludes amounts directly related to net
investment losses of ($28) and ($7),
respectively) 28 7
Other expenses 76 80
--------- ---------
Total expenses 1,351 1,398
--------- ---------
Revenues net of expenses before income taxes 85 86
Income taxes 31 31
--------- ---------
Revenues net of expenses and income taxes $ 54 $ 55
========= =========
The change in maximum future earnings of the closed block was as follows:
THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
---- ----
(DOLLARS IN MILLIONS)
Balance at end of period $ 5,060 $ 5,278
Balance at beginning of period 5,114 5,333
--------- ---------
Change during period $ (54) $ (55)
========= =========
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 of demutualization. Metropolitan Life also charges the closed block for
expenses of maintaining the policies included in the closed block.
14
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 notional
amount and fair value of derivatives by type of hedge designation at:
MARCH 31, 2003 DECEMBER 31, 2002
--------------------------------------- ---------------------------------------
FAIR VALUE FAIR VALUE
NOTIONAL ----------------------- NOTIONAL -----------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
-------- ------ ----------- -------- ------ -----------
(DOLLARS IN MILLIONS)
BY TYPE OF HEDGE
Fair value $ 1 $ -- $ -- $ -- $ -- $ --
Cash flow 297 17 17 128 2 11
Non qualifying 115 7 3 258 32 2
--------- --------- --------- -------- --------- ---------
Total $ 413 $ 24 $ 20 $ 386 $ 34 $ 13
========= ========= ========= ======== ========= =========
During the three months ended March 31, 2003 and 2002, the amount of
investment gains and losses recognized related to hedge ineffectiveness was
insignificant and there were no discontinued hedges.
At March 31, 2003 and December 31, 2002, the net amounts accumulated in
other comprehensive loss relating to cash flow hedges were net gains of $1
million and $20 million, respectively. During the three months ended March 31,
2003 and 2002, the closed block recognized other comprehensive net losses of $18
million and other comprehensive net gains of $4 million, respectively, relating
to the effective portion of cash flow hedges. During both the three months ended
March 31, 2003 and 2002, $1 million of other comprehensive income was
reclassified into net investment income. Approximately $3 million of gains
reported in accumulated other comprehensive income at March 31, 2003 are
expected to be reclassified during the year ending December 31, 2003 into net
investment income, as the underlying investments mature or expire according to
their original terms.
For the three months ended March 31, 2003 and 2002, the closed block did
not recognize any net investment income and recognized net investment gains of
$1 million and $2 million, respectively, from derivatives not qualifying as
accounting hedges. The use of these non-speculative derivatives is permitted by
the New York Insurance Department.
7. COMMITMENTS, CONTINGENCIES AND GUARANTEES
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 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.
In addition, other sales practices lawsuits have been brought. As of March 31,
2003, there are approximately 400 sales practices lawsuits pending against
Metropolitan Life, approximately 60 sales practices lawsuits pending against New
England Mutual and approximately 35 sales practices lawsuits pending against
General American. Metropolitan Life, New England
15
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 2002, a purported class action
complaint was filed in a federal court in 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. The action was
transferred to a federal court in Massachusetts. New England Mutual moved to
dismiss the case and in November 2002, the federal district court dismissed the
case. S-G Metals has filed a notice of appeal. New England Mutual intends to
continue 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 probable and
reasonably estimable losses for sales practices claims against Metropolitan
Life, New England Mutual and General American.
Regulatory authorities in a small number of states have had investigations
or inquiries relating to Metropolitan Life's, New England Mutual's or General
American's sales of individual life insurance policies or annuities. Over the
past several years, these and a number of investigations by other regulatory
authorities were resolved for monetary payments and certain other relief. The
Company may continue to resolve investigations in a similar manner.
ASBESTOS-RELATED CLAIMS
Metropolitan Life is also a defendant in thousands of lawsuits seeking
compensatory and punitive damages for personal injuries allegedly caused by
exposure to asbestos or asbestos-containing products. Metropolitan Life has
never engaged in the business of manufacturing, producing, distributing or
selling asbestos or asbestos-containing products nor has Metropolitan Life
issued liability or workers' compensation insurance to companies in the business
of manufacturing, producing, distributing or selling asbestos or
asbestos-containing products. Rather, these lawsuits have principally been based
upon allegations relating to certain research, publication and other activities
of one or more of Metropolitan Life's employees during the period from the
1920's through approximately the 1950's and have alleged 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. Metropolitan Life believes that it should not have legal liability in
such cases.
Legal theories asserted against Metropolitan Life have included
negligence, intentional tort claims and conspiracy claims concerning the health
risks associated with asbestos. Although Metropolitan Life believes it has
meritorious defenses to these claims, and has not suffered any adverse monetary
judgments in respect of these claims, due to the risks and expenses of
litigation, almost all past cases have been resolved by settlements.
Metropolitan Life's defenses (beyond denial of certain factual allegations) to
plaintiffs' claims include that: (i) Metropolitan Life owed no duty to the
plaintiffs -- it had no special relationship with the plaintiffs and did not
manufacture, produce, distribute or sell the asbestos products that allegedly
injured plaintiffs; (ii) plaintiffs cannot demonstrate justifiable detrimental
reliance; and (iii) plaintiffs cannot demonstrate proximate causation. In
defending asbestos cases, Metropolitan Life selects various strategies depending
upon the jurisdictions in which such cases are brought and other factors which,
in Metropolitan Life's judgment, best protect Metropolitan Life's interests.
Strategies include seeking to settle or compromise claims, motions challenging
the legal or factual basis for such claims or defending on the merits at trial.
In early 2002 and in early 2003, two trial courts granted motions dismissing
claims against Metropolitan Life on some or all of the above grounds. Other
courts have denied motions brought by Metropolitan Life to dismiss cases without
the necessity of trial. There can be no assurance that Metropolitan Life will
receive favorable decisions on motions in the future. 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.
See Note 11 of Notes to Consolidated Financial Statements for the year
ended December 31, 2002 included in the MetLife, Inc. Annual Report on Form 10-K
filed with the SEC for information regarding historical asbestos claims
information and the increase of its recorded liability at December 31, 2002.
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
16
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. Although
amounts paid by Metropolitan Life in any given year that may be recoverable in
the next calendar year under the policies will be reflected as a reduction in
the Company's operating cash flows for the year in which they are paid,
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 Metropolitan Life 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 Metropolitan Life 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. A
claim has been made under the excess insurance policies in 2003 for the amounts
paid with respect to asbestos litigation in excess of the retention. As the
performance of the indices impact the return in the reference fund, it is
possible that loss reimbursements to the Company and the recoverable with
respect to later periods may be less than the amount of the recorded losses.
Such forgone loss reimbursements may be recovered upon commutation depending
upon future performance of the reference fund. If at some point in the future,
the Company believes the liability for probable and reasonably 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 recorded as a deferred gain 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 probable and
reasonably estimable losses for asbestos-related claims. The ability of
Metropolitan Life to estimate its ultimate asbestos exposure is subject to
considerable uncertainty due to numerous factors. The availability of data is
limited and it is difficult to predict with any certainty numerous variables
that can affect liability estimates, including the number of future claims, the
cost to resolve claims, the disease mix and severity of disease, the
jurisdiction of claims filed, tort reform efforts 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 adverse 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 66,000 asbestos-related claims in 2002.
During the first three months of 2003 and 2002, Metropolitan Life received
approximately 16,200 and 11,800 asbestos-related claims, respectively. In 2003,
Metropolitan Life also has been named as a defendant in a small number of
silicosis and mixed dust cases. The cases are pending in Mississippi, Texas,
Ohio, Pennsylvania, West Virginia, Louisiana and Arkansas. The Company intends
to vigorously defend itself against these cases.
It is likely that bills will be introduced in 2003 in the United States
Congress to reform asbestos litigation. While the Company strongly supports
reform efforts, there can be no assurance that legislative reforms will be
enacted. Publicity regarding legislative reform efforts may be resulting in an
increase in the number of claims. Metropolitan Life will continue to study its
claims experience, review external literature regarding asbestos claims
experience in the United States and consider numerous variables that can affect
its asbestos liability exposure, including bankruptcies of other companies
involved in asbestos litigation and legislative and judicial developments, to
identify trends and to assess their impact on the recorded asbestos liability.
The number of asbestos cases that may be brought or the aggregate amount
of any liability that Metropolitan Life may ultimately incur is uncertain.
Accordingly, 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
unaudited interim condensed consolidated financial statements and that future
charges to income may be necessary. While the potential future charges could be
material in particular quarterly or annual periods in which they are recorded,
based on information currently known by management, it does not believe any such
charges are likely to have a material adverse effect on the Company's
consolidated financial position.
PROPERTY AND CASUALTY ACTIONS
Purported class action suits involving claims by policyholders for the
alleged diminished value of automobiles after accident-related repairs have been
filed in Rhode Island, Texas, Georgia and Tennessee against Metropolitan
Property and Casualty Insurance Company. Rhode Island and Texas trial courts
denied plaintiffs' motions for class certification and a hearing on plaintiffs'
motion in Tennessee for class certification is to be scheduled. In a lawsuit
involving another insurer, the Tennessee Supreme Court recently held that
diminished value is not covered under a Tennessee automobile policy. Based on
that decision, Metropolitan Property and
17
Casualty Insurance Company will be seeking dismissal of the Tennessee matter. 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. Total loss valuation methods 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. The court has dismissed the action. An
appeal has been filed. 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 New York state
court in New York County were consolidated within the commercial part. In
addition, there remained a separate purported class action in New York state
court in New York County. On February 21, 2003, the defendants' motions to
dismiss both the consolidated action and separate action were granted; leave to
replead as a proceeding under Article 78 of New York's Civil Practice Law and
Rules has been granted in the separate action. Plaintiffs in the consolidated
action and separate action have filed notices of appeal. 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 New York state court in
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. Plaintiff has withdrawn her notice of
appeal. 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. On
February 4, 2003, plaintiffs filed a consolidated amended complaint adding a
fraud claim under the Securities Exchange Act of 1934. Metropolitan Life has
filed a motion to dismiss the consolidated amended complaint and a motion for
summary judgment in this action. 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. In January
2003, the United States Court of Appeals for the Second Circuit affirmed the
dismissal. Plaintiffs have filed a petition for certiorari with the United
States Supreme Court. Metropolitan Life, the Holding Company and the individual
defendants believe they have meritorious defenses to the plaintiffs' claims and
are contesting vigorously all of the plaintiffs' claims in these actions.
In 2001, a lawsuit was filed in the Superior Court of Justice, Ontario,
Canada on behalf of a proposed class of certain former Canadian policyholders
against the Holding Company, Metropolitan Life, and Metropolitan Life Insurance
Company of Canada. Plaintiffs' allegations concern the way that their policies
were treated in connection with the demutualization of Metropolitan Life; they
seek damages, declarations, and other non-pecuniary relief. The defendants
believe they have meritorious defenses to the plaintiffs' claims and will
contest vigorously all of plaintiffs' claims in this matter.
In July 2002, a lawsuit was filed in the United States District Court for
the Eastern District of Texas on behalf of a proposed class comprised of the
settlement class in the Metropolitan Life sales practices class action
settlement approved in December 1999 by the United States District Court for the
Western District of Pennsylvania. The Holding Company, Metropolitan Life, the
trustee of the policyholder trust, and 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' motion to transfer the lawsuit to the Western District of
18
Pennsylvania was granted on February 14, 2003. The defendants' motion to dismiss
is pending. Plaintiffs have filed a motion for class certification which the
Texas court has adjourned. 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 affiliates. The New York
Insurance Department has concluded its examination of 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. On April 28, 2003, the United States
District Court approved a class-action settlement of the consolidated actions.
Additionally, Metropolitan Life has entered into settlement agreements to
resolve the regulatory examination. 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.
Eighteen lawsuits involving approximately 130 plaintiffs have been filed
in federal and state court in Alabama, Mississippi and Tennessee alleging
federal and/or state law claims of racial discrimination in connection with the
sale, formation, administration or servicing of life insurance policies.
Metropolitan Life is contesting vigorously plaintiffs' claims in these 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. Plaintiffs have filed a motion for class certification. Opposition
papers were filed by Metropolitan Life. Metropolitan Life is vigorously
defending itself against the allegations in the lawsuit.
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 United States District
Court for the District of Columbia, 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 these plaintiffs whose employment, or whose spouses' employment, had
terminated before they became eligible for an immediate retirement benefit. The
plaintiffs seek to represent a class consisting of former Metropolitan Life
employees, or their surviving spouses, who are receiving deferred vested annuity
payments under the retirement plan and who were allegedly eligible to receive
the ad hoc pension increases awarded in 1977, 1980, 1989, 1992, 1996 and 2001,
as well as increases awarded in earlier years. Metropolitan Life is vigorously
defending itself against these allegations.
A reinsurer of universal life policy liabilities of Metropolitan Life and
certain affiliates is seeking rescission and has commenced an arbitration
proceeding claiming that, during underwriting, material misrepresentations or
omissions were made. The reinsurer also has sent a notice purporting to increase
reinsurance premium rates. Metropolitan Life and these 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 unaudited interim condensed 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
19
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 unaudited interim condensed
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 consolidated net income or cash flows in
particular quarterly or annual periods.
COMMITMENTS TO FUND PARTNERSHIP INVESTMENTS
The Company makes commitments to fund partnership investments in the
normal course of business. The amounts of these unfunded commitments were $1,594
million and $1,667 million at March 31, 2003 and December 31, 2002,
respectively. The Company anticipates that these amounts will be invested in the
partnerships over the next three to five years.
GUARANTEES
In the course of its business, the Company has provided certain
indemnities, guarantees and commitments to third parties pursuant to which it
may be required to make payments now or in the future.
In the context of acquisition and disposition transactions, the Company
has provided indemnities and guarantees, including those related to tax,
environmental and other specific liabilities, and other indemnities and
guarantees that are triggered by, among other things, breaches of
representations, warranties or covenants provided by the Company. These
obligations are often subject to time limitations that vary in duration,
including contractual limitations and those that arise by operation of law such
as applicable statutes of limitation. In some cases, the maximum potential
obligation under the indemnities and guarantees is subject to a contractual
limitation ranging from $1 million to $800 million, while in other cases such
limitations are not specified or applicable. Since certain of these obligations
are not subject to limitations, the Company does not believe that it is possible
to determine the maximum potential amount due under these guarantees in the
future.
In addition, the Holding Company and its subsidiaries indemnify their
respective directors and officers as provided in their charters and by-laws.
Since these indemnities are generally not subject to limitation with respect to
duration or amount, the Company does not believe that it is possible to
determine the maximum potential amount due under these indemnities in the
future.
The fair value of such indemnities, guarantees and commitments entered
into subsequent to December 31, 2002 was insignificant. The Company's recorded
liability at March 31, 2003 and December 31, 2002 for indemnities, guarantees
and commitments provided to third parties prior to January 1, 2003 was
insignificant.
20
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 ongoing commitment to reduce expenses. The following tables represent the
original expenses recorded in the fourth quarter of 2001 and the remaining
liability as of March 31, 2003:
PRE-TAX CHARGES RECORDED IN THE FOURTH QUARTER OF 2001
-------------------------------------------------------------------
INSTITUTIONAL INDIVIDUAL AUTO & HOME TOTAL
------------- ------------- ------------- -------------
(DOLLARS IN MILLIONS)
Severance and severance-related costs $ 9 $ 32 $ 3 $ 44
Facilities consolidation costs 3 65 - 68
Business exit costs 387 - - 387
------------ ------------ ------------ ------------
Total $ 399 $ 97 $ 3 $ 499
============ ============ ============ ============
REMAINING LIABILITY AS OF MARCH 31, 2003
-------------------------------------------------
INSTITUTIONAL INDIVIDUAL TOTAL
------------- ------------- -------------
(DOLLARS IN MILLIONS)
Severance and severance-related costs $ - $ 1 $ 1
Facilities consolidation costs - 16 16
Business exit costs 36 - 36
------------- ------------- -------------
Total $ 36 $ 17 $ 53
============= ============= =============
Institutional. The charges to this segment in the fourth quarter of 2001
include costs associated with exiting a business, including the write-off of
goodwill, severance and severance-related costs, and facilities consolidation
costs. These expenses are the result of the discontinuance of certain 401(k)
recordkeeping services and externally-managed guaranteed index separate
accounts. These actions resulted in charges to policyholder benefits and claims
and other expenses of $215 million and $184 million, respectively. The business
realignment initiatives will ultimately result in the elimination of
approximately 930 positions. As of March 31, 2003, there were approximately 330
terminations to be completed in connection with the Company's business exit
activities. The Company continues to carry a liability as of March 31, 2003
since the exit plan could not be completed within one year due to circumstances
outside the Company's control and since certain of its contractual obligations
extended beyond one year.
Individual. The charges to this segment in the fourth quarter of 2001
include facilities consolidation costs, severance and severance-related costs,
which predominately stem from the elimination of approximately 560 non-sales
positions and 190 operations and technology positions supporting this segment.
As of March 31, 2003, there were approximately 20 terminations to be completed.
These costs were recorded in other expenses. The remaining liability as of March
31, 2003 is due to certain contractual obligations that extended beyond one
year.
Auto & Home. The charges to this segment in the fourth quarter of 2001
include severance and severance-related costs associated with the elimination of
approximately 200 positions. All terminations were completed as of December 31,
2002. The costs were recorded in other expenses.
21
9. STOCK COMPENSATION PLANS
Effective January 1, 2003, the Company elected to apply the fair value method
of accounting for stock options granted by the Company subsequent to December
31, 2002. As permitted under SFAS 148, options granted prior to January 1, 2003,
will continue to be accounted for under APB 25. Had compensation costs for
grants prior to January 1, 2003 been determined based on fair value at the date
of grant in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"), the Company's earnings and earnings per share amounts
would have been reduced to the following pro forma amounts:
THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
---------- ----------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE DATA)
Net Income $ 362 $ 329
Charge for conversion of company-obligated
mandatorily redeemable securities of a
subsidiary trust (1) (21) --
----- -----
Actual net income available to common shareholders $ 341 $ 329
===== =====
Pro forma net income available to common shareholders (2) (3) $ 332 $ 323
===== =====
BASIC EARNINGS PER SHARE
As reported $0.49 $0.46
===== =====
Pro forma (2) (3) $0.47 $0.45
===== =====
DILUTED EARNINGS PER SHARE
As reported $0.47 $0.44
===== =====
Pro forma (2) (3) $0.46 $0.44
===== =====
- -----------------
(1) See Note 12 for a discussion of this charge included in the calculation of
net income available to common shareholders.
(2) The pro forma earnings disclosures are not necessarily representative of
the effects on net income and earnings per share in future years.
(3) Includes the Company's ownership share of stock compensation costs related
to the Reinsurance Group of America, Incorporated incentive stock plan and
the stock compensation costs related to the incentive stock plans at SSRM
Holdings, Inc. determined in accordance with SFAS 123.
Stock-based compensation for the three months ended March 31, 2003 is $5
million, including $1 million of stock-based compensation for non-employees
related to the Company's Stock Incentive Plan and Directors Stock Plan. Expenses
for the three months ended March 31, 2002 include $1 million of such
compensation expense for non-employees.
22
10. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
2003 2002
------- --------
(DOLLARS IN MILLIONS)
Net income $ 362 $ 329
Other comprehensive income (loss):
Unrealized gains (losses) on derivative instruments, net of
income taxes 2 (10)
Unrealized investment gains (losses), net of related offsets,
reclassification adjustments and income taxes 298 (821)
Foreign currency translation adjustments 14 --
Minimum pension liability adjustment (9) --
----- -----
Other comprehensive income (loss) 305 (831)
----- -----
Comprehensive income (loss $ 667 $(502)
===== =====
11. METLIFE CAPITAL TRUST I
In connection with MetLife, Inc.'s initial public offering in April 2000, the
Holding Company and MetLife Capital Trust I (the "Trust") issued equity security
units (the "units"). Each unit originally consisted of (i) a contract to
purchase, for $50, shares of the Holding Company's common stock on May 15, 2003;
and (ii) a capital security of the Trust, with a stated liquidation amount of
$50.
In accordance with the terms of the units, the Trust was dissolved on
February 5, 2003, and $1,006 million aggregate principal amount of 8.00%
debentures of the Holding Company (the "MetLife debentures"), the sole assets of
the Trust, were distributed to the owners of the Trust's capital securities in
exchange for their capital securities. The MetLife debentures were remarketed on
behalf of the debenture owners on February 12, 2003 and the interest rate on the
MetLife debentures was reset as of February 15, 2003 to 3.911% per annum for a
yield to maturity of 2.876%. As a result of the remarketing, the debenture
owners received $21 million ($0.03 per diluted common share) in excess of the
carrying value of the capital securities. This excess was recorded by the
Company as a charge to Additional Paid-in Capital and, for the purpose of
calculating earnings per share, is subtracted from net income to arrive at net
income available to common shareholders.
23
12. EARNINGS PER SHARE
The following table 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 MARCH 31,
-------------------------------
2003 2002
------------ ------------
(DOLLARS IN MILLIONS, EXCEPT
SHARE AND PER SHARE DATA)
Weighted average common stock outstanding for basic earnings per share 700,319,863 712,065,191
Incremental shares from assumed:
Conversion of forward purchase contracts 22,120,491 27,062,683
Exercise of stock options -- 338,127
------------- ------------
Weighted average common stock outstanding for diluted earnings per share 722,440,354 739,466,001
============= ============
INCOME FROM CONTINUING OPERATIONS $ 304 $ 307
CHARGE FOR CONVERSION OF COMPANY-OBLIGATED MANDATORILY
REDEEMABLE SECURITIES OF A SUBSIDIARY TRUST (1) (21) --
------------- ------------
INCOME FROM CONTINUING OPERATIONS AVAILABLE TO COMMON SHAREHOLDERS $ 283 $ 307
============= ============
Basic earnings per share $ 0.40 $ 0.43
============= ============
Diluted earnings per share $ 0.39 $ 0.42
============= ============
INCOME FROM DISCONTINUED OPERATIONS $ 58 $ 17
============= ============
Basic earnings per share $ 0.08 $ 0.02
============= ============
Diluted earnings per share $ 0.08 $ 0.02
============= ============
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING $ -- $ 5
============= ============
Basic earnings per share $ -- $ --
============= ============
Diluted earnings per share $ -- $ --
============= ============
NET INCOME $ 362 $ 329
CHARGE FOR CONVERSION OF COMPANY-OBLIGATED MANDATORILY
REDEEMABLE SECURITIES OF A SUBSIDIARY TRUST (1) (21) --
------------- ------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 341 $ 329
============= ============
Basic earnings per share $ 0.49 $ 0.46
============= ============
Diluted earnings per share $ 0.47 $ 0.44
============= ============
- --------------
(1) In connection with the dissolution of the Trust, on February 5, 2003,
$1,006 million aggregate principal amount of MetLife debentures were
distributed to the owners of the Trust's capital securities in exchange
for their capital securities. The MetLife debentures were remarketed on
behalf of the debenture owners on February 12, 2003. As a result of the
remarketing, the debenture owners received $21 million ($0.03 per diluted
share) in excess of the carrying value of the capital securities. In
accordance with EITF Abstracts Topic D-42, The Effect on the Calculation
of Earnings per Share for the Redemption or Induced Conversion of
Preferred Stock, this excess is recorded as a charge to Additional Paid-in
Capital and, for the purpose of calculating earnings per share, has been
subtracted from the Company's net income to arrive at net income available
to common shareholders.
24
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.
The Holding Company did not acquire any shares of common stock during the three
months ended March 31, 2003. The Holding Company acquired 7,680,041 shares of
common stock for $240 million during the three months ended March 31, 2002.
13. BUSINESS SEGMENT INFORMATION
The Company provides insurance and financial services to customers in the
United States, Canada, Central America, South America, Europe, South Africa,
Asia and Australia. The Company's business is divided into six major segments:
Institutional, Individual, Auto & Home, International, Reinsurance and Asset
Management. These segments are managed separately because they either provide
different products and services, require different strategies or have different
technology requirements.
Institutional offers a broad range of group insurance and retirement and
savings products and services, including group life insurance, non-medical
health insurance such as short and long-term disability, long-term care, and
dental insurance, and other insurance products and services. Individual offers a
wide variety of individual insurance and investment products, including life
insurance, annuities and mutual funds. Auto & Home provides insurance coverages,
including private passenger automobile, homeowners and personal excess liability
insurance. International provides life insurance, accident and health insurance,
annuities and retirement and savings products to both individuals and groups,
and auto and homeowners coverage to individuals. Reinsurance provides primarily
reinsurance of life and annuity policies in North America and various
international markets. Additionally, reinsurance of critical illness policies is
provided in select international markets. Asset Management provides a broad
variety of asset management products and services to individuals and
institutions.
Set forth in the tables below is certain financial information with
respect to the Company's operating segments for the three months ended March 31,
2003 and 2002 and at March 31, 2003 and December 31, 2002. The accounting
policies of the segments are the same as those of the Company, except for the
method of capital allocation and the accounting for gains and losses from
intercompany sales, which are eliminated in consolidation. The Company allocates
capital to each segment based upon an internal capital allocation system that
allows the Company to more effectively manage its capital. The Company evaluates
the performance of each operating segment based upon net income excluding net
investment gains and losses, net of income taxes, and the impact from the
cumulative effect of changes in accounting, net of income taxes. The Company
allocates certain non-recurring items (e.g., expenses associated with the
resolution of proceedings alleging race-conscious underwriting practices, sales
practices claims and claims for personal injuries caused by exposure to asbestos
or asbestos-containing products and demutualization costs) to Corporate & Other.
FOR THE THREE MONTHS ENDED AUTO & ASSET CORPORATE &
MARCH 31, 2003 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE MANAGEMENT OTHER TOTAL
- -------------------------- ------------- ---------- ------- ------------- ----------- ---------- ----------- -------
(DOLLARS IN MILLIONS)
Premiums $ 2,142 $ 1,041 $ 712 $ 395 $ 552 $ -- $ (4) $ 4,838
Universal life and investment-
type product policy fees 155 360 -- 51 -- -- -- 566
Net investment income 978 1,562 39 123 110 16 69 2,897
Other revenues 142 86 9 8 12 29 12 298
Net investment (losses) gains (111) (68) (4) -- (4) 8 (43) (222)
Income (loss) from continuing
operations before provision
for income taxes 228 178 23 42 30 10 (86) 425
FOR THE THREE MONTHS ENDED AUTO & ASSET CORPORATE &
MARCH 31, 2002 INSTITUTIONAL INDIVIDUAL HOME INTERNATIONAL REINSURANCE MANAGEMENT OTHER TOTAL
- -------------------------- ------------- ---------- ------- ------------- ----------- ---------- ----------- -------
(DOLLARS IN MILLIONS)
Premiums $ 1,860 $ 1,084 $ 692 $ 375 $ 475 $ -- $ (5) $ 4,481
Universal life and investment-
type product policy fees 152 298 -- 7 -- -- -- 457
Net investment income 977 1,520 45 75 99 14 32 2,762
Other revenues 172 128 7 3 8 40 9 367
Net investment (losses) gains (82) 3 (14) (22) 2 (4) 25 (92)
Income (loss) from continuing
operations before provision
for income taxes 275 265 27 (2) 37 (2) (107) 493
25
The following amounts are reported as discontinued operations in
accordance with SFAS 144:
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
------ ------
(DOLLARS IN MILLIONS)
Net investment income
Institutional $ 1 $ 8
Individual 1 11
Corporate & Other -- 8
------ ------
Total net investment income $ 2 $ 27
====== ======
Net investment gains
Institutional $ 41 $ --
Individual 40 --
Corporate & Other 9 --
------ ------
Total net investment gains $ 90 $ --
====== ======
The following table presents assets with respect to the Company's
operating segments at:
MARCH 31, DECEMBER 31,
2003 2002(1)
------------ ------------
(DOLLARS IN MILLIONS)
Assets
Institutional $ 102,941 $ 98,234
Individual 147,619 145,152
Auto & Home 4,407 4,540
International 8,400 8,301
Reinsurance 10,505 9,924
Asset Management 286 190
Corporate & Other 12,700 11,044
------------ ------------
Total $ 286,858 $ 277,385
============ ============
(1) These balances have been adjusted to reflect the allocation of capital using
the Risk-Based Capital methodology.
Economic Capital. Beginning in 2003, the Company changed its methodology
of allocating capital from Risk-Based Capital to Economic Capital. Prior to
2003, the Company's business segments' allocated equity was primarily based on
Risk-Based Capital, an internally developed formula based on applying a multiple
to the National Association of Insurance Commissioners Statutory Risk-Based
Capital and included certain GAAP accounting adjustments. Economic Capital is an
internally developed risk capital model, the purpose of which is to measure the
risk in the business and to provide a basis upon which capital is deployed. The
Economic Capital model accounts for the unique and specific nature of the risks
inherent in MetLife's businesses. This is in contrast to the standardized
regulatory Risk-Based Capital formula which is not as refined in its risk
calculations with respect to the nuances of the Company's businesses.
The change in methodology is being applied prospectively. This change has
and will continue to impact the level of net investment income and net income of
each of the Company's business segments. A portion of net investment income is
credited to the segments based on the level of allocated equity. This
methodology change of allocating equity will not impact the Company's
consolidated net investment income or net income.
26
The following table presents actual and pro forma net investment income
with respect to the Company's operating segments for the three months ended
March 31, 2002. The amounts shown as pro forma reflect net investment income
that would have been reported in the prior year had the Company allocated
capital based on Economic Capital rather than on the basis of Risk-Based
Capital.
NET INVESTMENT INCOME
---------------------------
ACTUAL PRO FORMA
---------- ----------
(DOLLARS IN MILLIONS)
Institutional $ 977 $ 994
Individual 1,520 1,498
Auto & Home 45 41
International 75 66
Reinsurance 99 89
Asset Management 14 17
Corporate & Other 32 57
---------- ----------
Total $ 2,762 $ 2,762
========== ==========
The following table presents actual and pro forma assets with respect to
the Company's operating segments at December 31, 2002. The amounts shown as pro
forma reflect assets that would have been reported in the prior year had the
Company allocated capital based on Economic Capital rather than on the basis of
Risk-Based Capital.
ASSETS
-----------------------------
ACTUAL(1) PRO FORMA
------------ ------------
(DOLLARS IN MILLIONS)
Institutional $ 98,234 $ 98,810
Individual 145,152 144,073
Auto & Home 4,540 4,360
International 8,301 7,990
Reinsurance 9,924 9,672
Asset Management 190 320
Corporate & Other 11,044 12,160
----------- -----------
Total $ 277,385 $ 277,385
=========== ===========
- ------------------
(1) These balances have been adjusted to reflect the allocation of capital using
the Risk-Based Capital methodology.
The International segment's assets at March 31, 2003 and results of
operations for the three months ended March 31, 2003 include the assets and
results of operations of Aseguradora Hidalgo S.A., a Mexican life insurer that
was acquired on June 20, 2002.
Corporate & Other includes various start-up and run-off entities, as well
as the elimination of all intersegment amounts. The principal component of the
intersegment amounts relates to intersegment loans, which bear interest rates
commensurate with related borrowings.
Net investment income and net investment gains and losses are based upon
the actual results of each segment's specifically identifiable asset portfolio
adjusted for allocated capital. Other costs and operating costs are allocated to
each of the segments based upon: (i) a review of the nature of such costs; (ii)
time studies analyzing the amount of employee compensation costs incurred by
each segment; and (iii) cost estimates included in the Company's product
pricing.
Revenues derived from any customer did not exceed 10% of consolidated
revenues. Revenues from U.S. operations were $7,800 million and $7,537 million
for the three months ended March 31, 2003 and 2002, respectively, which
represented 93% and 95%, respectively, of consolidated revenues.
27
14. DISCONTINUED OPERATIONS
The Company actively manages its real estate portfolio with the objective
to maximize earnings through selective acquisitions and dispositions. In
accordance with SFAS 144, income related to real estate classified as
held-for-sale 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 MARCH 31,
----------------------------
2003 2002
-------- --------
(DOLLARS IN MILLIONS)
Investment income $ 8 $ 94
Investment expense (6) (67)
Net investment gains 90 --
-------- --------
Total revenues 92 27
Provision for income taxes 34 10
-------- --------
Income from discontinued operations $ 58 $ 17
======== ========
The carrying value of real estate related to discontinued operations was
$28 million and $159 million at March 31, 2003 and December 31, 2002,
respectively.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For purposes of this discussion, the terms "Company" or "MetLife" refer to
MetLife, Inc. (the "Holding Company"), a Delaware corporation formed in 1999
(the "Holding Company"), 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
included elsewhere herein.
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 ongoing commitment to reduce expenses. The following tables
represent the original expenses recorded in the fourth quarter of 2001 and the
remaining liability as of March 31, 2003:
PRE-TAX CHARGES RECORDED IN THE FOURTH QUARTER OF 2001
-------------------------------------------------------------------
INSTITUTIONAL INDIVIDUAL AUTO & HOME TOTAL
------------- ------------- ------------- -------------
(DOLLARS IN MILLIONS)
Severance and severance-related costs $ 9 $ 32 $ 3 $ 44
Facilities consolidation costs 3 65 -- 68
Business exit costs 387 -- -- 387
------------- ------------- ------------- -------------
Total $ 399 $ 97 $ 3 $ 499
============= ============= ============= =============
REMAINING LIABILITY AS OF MARCH 31, 2003
-------------------------------------------------
INSTITUTIONAL INDIVIDUAL TOTAL
------------- ------------- -------------
(DOLLARS IN MILLIONS)
Severance and severance-related costs $ -- $ 1 $ 1
Facilities consolidation costs -- 16 16
Business exit costs 36 -- 36
------------- ------------- -------------
Total $ 36 $ 17 $ 53
============= ============= =============
Institutional. The charges to this segment in the fourth quarter of 2001
include costs associated with exiting a business, including the write-off of
goodwill, severance and severance-related costs, and facilities consolidation
costs. These expenses are the result of the discontinuance of certain 401(k)
recordkeeping services and externally-managed guaranteed index separate
accounts. These actions resulted in charges to policyholder benefits and claims
and other expenses of $215 million and $184 million, respectively. The business
realignment initiatives will ultimately result in the elimination of
approximately 930 positions. As of March 31, 2003, there were approximately 330
terminations to be completed in connection with the Company's business exit
activities. The Company continues to carry a liability as of March 31, 2003
since the exit plan could not be completed within one year due to circumstances
outside the Company's control and since certain of its contractual obligations
extended beyond one year.
Individual. The charges to this segment in the fourth quarter of 2001
include facilities consolidation costs, severance and severance-related costs,
which predominately stem from the elimination of approximately 560 non-sales
positions and 190 operations and technology positions supporting this segment.
As of March 31, 2003, there were approximately 20 terminations to be completed.
These costs were recorded in other expenses. The remaining liability as of March
31, 2003 is due to certain contractual obligations that extended beyond one
year.
Auto & Home. The charges to this segment in the fourth quarter of 2001
include severance and severance-related costs associated with the elimination of
approximately 200 positions. All terminations were completed as of December 31,
2002. The costs were recorded in other expenses.
29
SEPTEMBER 11, 2001 TRAGEDIES
On September 11, 2001 terrorist attacks occurred in New York, Washington,
D.C. and Pennsylvania (the "tragedies") triggering a significant loss of life
and property which had an adverse impact on certain of the Company's businesses.
The Company's original estimate of the total insurance losses related to the
tragedies, which was recorded in the third quarter of 2001, was $208 million,
net of income taxes of $117 million. As of March 31, 2003, the Company's
remaining liability for unpaid and future claims associated with the tragedies
was $35 million, principally related to disability coverages. This estimate has
been and will continue to be subject to revision in subsequent periods, as
claims are received from insureds and processed. Any revision to the estimate of
losses in subsequent periods will affect net income in such periods.
The Company's general account investment portfolios include investments,
primarily comprised of fixed maturities, in industries that were originally
affected by the tragedies, including airline, other travel, lodging and
insurance. Exposures to these industries also exist through mortgage loans and
investments in real estate. The carrying value of the Company's investment
portfolio exposed to these industries was approximately $3.3 billion at March
31, 2003.
METLIFE CAPITAL TRUST I
In connection with MetLife, Inc.'s, initial public offering in April 2000,
the Holding Company and MetLife Capital Trust I (the "Trust") issued equity
security units (the "units"). Each unit originally consisted of (i) a contract
to purchase, for $50, shares of the Holding Company's common stock on May 15,
2003; and (ii) a capital security of the Trust, with a stated liquidation amount
of $50.
In accordance with the terms of the units, the Trust was dissolved on
February 5, 2003, and $1,006 million aggregate principal amount of 8.00%
debentures of the Holding Company (the "MetLife debentures"), the sole assets of
the Trust, were distributed to the owners of the Trust's capital securities in
exchange for their capital securities. The MetLife debentures were remarketed on
behalf of the debenture owners on February 12, 2003 and the interest rate on the
MetLife debentures was reset as of February 15, 2003 to 3.911% per annum for a
yield to maturity of 2.876%. As a result of the remarketing, the debenture
owners received $21 million ($0.03 per diluted common share) in excess of the
carrying value of the capital securities. This excess was recorded by the
Company as a charge to Additional Paid-in Capital and, for the purpose of
calculating earnings per share, is subtracted from net income to arrive at net
income available to common shareholders.
ECONOMIC CAPITAL
Beginning in 2003, the Company changed its methodology of allocating
capital from Risk-Based Capital to Economic Capital. Prior to 2003, the
Company's business segments' allocated equity was primarily based on Risk-Based
Capital, an internally developed formula based on applying a multiple to the
National Association of Insurance Commissioners Statutory Risk-Based Capital and
included certain adjustments in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). Economic Capital is an
internally developed risk capital model, the purpose of which is to measure the
risk in the business and to provide a basis upon which capital is deployed. The
Economic Capital model accounts for the unique and specific nature of the risks
inherent in MetLife's businesses. This is in contrast to the standardized
regulatory Risk-Based Capital formula which is not as refined in its risk
calculations with respect to the nuances of the Company's businesses.
The change in methodology is being applied prospectively. This change has
and will continue to impact the level of net investment income and net income of
each of the Company's business segments. A portion of net investment income is
credited to the segments based on the level of allocated equity. This
methodology change of allocating equity will not impact the Company's
consolidated net investment income or net income.
30
The following table presents actual and pro forma net investment income
with respect to the Company's operating segments for the three months ended
March 31, 2002. The amounts shown as pro forma reflect net investment income
that would have been reported in the prior year had the Company allocated
capital based on Economic Capital rather than on the basis of Risk-Based
Capital.
NET INVESTMENT INCOME
-------------------------
ACTUAL PRO FORMA
---------- ----------
(DOLLARS IN MILLIONS)
Institutional $ 977 $ 994
Individual 1,520 1,498
Auto & Home 45 41
International 75 66
Reinsurance 99 89
Asset Management 14 17
Corporate & Other 32 57
---------- ----------
Total $ 2,762 $ 2,762
========== ==========
ACQUISITIONS AND DISPOSITIONS
In June 2002, the Company acquired Aseguradora Hidalgo S.A. ("Hidalgo"),
an insurance company based in Mexico with approximately $2.5 billion in assets
as of the date of acquisition. The purchase price is subject to adjustment under
certain provisions of the purchase agreement. The Company does not expect that
any purchase price adjustment will have an impact on its consolidated statements
of income. The Company is in the process of integrating Hidalgo and Seguros
Genesis, S.A., MetLife's wholly-owned Mexican subsidiary headquartered in Mexico
City, to operate as a combined entity under the name MetLife Mexico.
SUMMARY OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to adopt accounting policies and make estimates and assumptions that
affect amounts reported in the consolidated financial statements. The critical
accounting policies, estimates and related judgments underlying the Company's
consolidated financial statements are summarized below. In applying these
accounting policies, management makes subjective and complex judgments that
frequently require estimates about matters that are inherently uncertain. Many
of these policies, estimates and related judgments are common in the insurance
and financial services industries; others are specific to 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 impairments and
income, as well as the determination of fair values. The assessment of whether
impairments have 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 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: (i) the
length of time and the extent to which the market value has been below amortized
cost; (ii) the potential for impairments of securities when the issuer is
experiencing significant financial difficulties; (iii) the potential for
impairments in an entire industry sector or sub-sector; (iv) the potential for
impairments in certain economically depressed geographic locations; (v) 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 (vi) other subjective factors, including concentrations and
information obtained from regulators and rating agencies. 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. The determination of fair values in the
absence of quoted market values is based on valuation methodologies, securities
the Company deems to be comparable and assumptions deemed appropriate given the
circumstances. The use of different methodologies and assumptions may have a
material effect on the estimated fair value amounts.
31
DERIVATIVES
The Company enters into freestanding derivative transactions primarily 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 authoritative 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. Such assumptions include estimated
market volatility and interest rates used in the determination of fair value
where quoted market values are not available. 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 upon 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, creditworthiness of
reinsurance counterparties and certain economic variables, such as inflation. Of
these factors, the Company anticipates that investment returns are most likely
to impact the rate of amortization of such costs. The aforementioned factors
enter into management's estimates of gross margins and profits, which generally
are used to amortize 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. In addition,
the Company utilizes the reversion to the mean assumption, a standard industry
practice, in its determination of the amortization of deferred policy
acquisition costs. This practice assumes that the expectation for long-term
appreciation in equity markets is not changed by minor short-term market
fluctuations, but that it does change when large interim deviations have
occurred.
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.
The Company also 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.
Differences between the actual experience and assumptions used in pricing
these policies and in the establishment of liabilities result in variances in
profit and could result in losses.
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
aforementioned assumptions used to establish policy benefits and evaluates the
financial strength of counterparties to its reinsurance agreements using
criteria similar to that evaluated in the security impairment process discussed
above. 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. See "-- Derivatives" above.
32
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,
including the Company's asbestos-related liability, are especially difficult to
estimate due to the limitation of available data and uncertainty regarding
numerous variables used to determine amounts recorded. The data and variables
that impact the assumption used to estimate the Company's asbestos-related
liability include the number of future claims, the cost to resolve claims, the
disease mix and severity of disease, the jurisdiction of claims filed, tort
reform efforts and the impact of any possible future adverse verdicts and their
amounts. It is possible that an adverse outcome in certain of the Company's
litigation, including asbestos-related cases, or the use of different
assumptions in the determination of amounts recorded could have a material
effect upon the Company's consolidated net income or cash flows in particular
quarterly or annual periods.
EMPLOYEE BENEFIT PLANS
The Company sponsors pension and other retirement plans in various forms
covering employees who meet specified eligibility requirements. The reported
expense and liability associated with these plans requires an extensive use of
assumptions which include the discount rate, expected return on plan assets and
rate of future compensation increases as determined by the Company. Management
determines these assumptions based upon currently available market and industry
data, historical performance of the plan and its assets, and consultation with
an independent consulting actuarial firm to aid it in selecting appropriate
assumptions and valuing its related liabilities. The actuarial assumptions used
by the Company may differ materially from actual results due to changing market
and economic conditions, higher or lower withdrawal rates or longer or shorter
life spans of the participants. These differences may have a significant effect
on the Company's consolidated financial statements and liquidity.
The actuarial assumptions used in the calculation of the Company's
aggregate projected benefit obligation may vary and include an expectation of
long-term market appreciation in equity markets which is not changed by minor
short-term market fluctuations, but does change when large interim deviations
occur. For the largest of the plans sponsored by the Company (the Metropolitan
Life Retirement Plan for United States Employees, with a projected benefit
obligation of $4.3 billion or 98.6% of all qualified plans at December 31,
2002), the discount rate, expected rate of return on plan assets, and the range
of rates of future compensation increases used in that plan's valuation at
December 31, 2002 were 6.75%, 9% and 4% to 8%, respectively. The expected rate
of return on plan assets for use in that plan's valuation in 2003 is currently
anticipated to be 8.5%.
33
RECENT 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 a significant portion of
existing split dollar policies on the lives of affected executives and directors
being surrendered. Such interpretation will not have a material adverse impact
on the Company's financial position since only a relatively small number of
people are involved.
RESULTS OF OPERATIONS
The following table presents consolidated financial information for the
Company for the periods indicated:
THREE MONTHS
ENDED MARCH 31,
--------------------------
2003 2002
---------- ----------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 4,838 $ 4,481
Universal life and investment-type product policy fees 566 457
Net investment income 2,897 2,762
Other revenues 298 367
Net investment losses (net of amounts allocated from other
accounts of ($38) and ($13), respectively) (222) (92)
---------- ----------
Total revenues 8,377 7,975
---------- ----------
EXPENSES
Policyholder benefits and claims (excludes amounts directly
related to net investment losses of ($28) and ($7),
respectively) 4,953 4,618
Interest credited to policyholder account balances 747 714
Policyholder dividends 503 497
Other expenses (excludes amounts directly related to net
investment losses of ($10) and ($6), respectively) 1,749 1,653
---------- ----------
Total expenses 7,952 7,482
---------- ----------
Income from continuing operations before provision
for income taxes 425 493
Provision for income taxes 121 186
---------- ----------
Income from continuing operations 304 307
Income from discontinued operations, net of income taxes 58 17
---------- ----------
Income before cumulative effect of change in accounting 362 324
Cumulative effect of change in accounting -- 5
---------- ----------
Net income $ 362 $ 329
========== ==========
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2002 -- THE COMPANY
Premiums increased by $357 million, or 8%, to $4,838 million for the three
months ended March 31, 2003 from $4,481 million for the comparable 2002 period.
This variance is primarily attributable to increases in the Institutional,
Reinsurance, International and Auto & Home segments, partially offset by a
decrease in the Individual segment. A $282 million increase in Institutional is
primarily the result of growth in this segment's disability and long-term care
businesses, as well as growth in the group life and dental businesses, and
higher sales of structured settlement products. New premiums from facultative
and automatic treaties, and renewal premiums on existing blocks of business
contributed to a $77 million increase in the Reinsurance segment. The
acquisition of Hidalgo, offset by a non-recurring sale of a significant annuity
contract in the first quarter of 2002, contributed to a $20 million increase in
the International segment. Excluding these items, International premiums
decreased by $19 million primarily due to a decrease in
34
Mexico's premiums (excluding Hidalgo) resulting from actions taken by the
Mexican government impacting the insurance and annuities market, the
cancellation of a large broker-sponsored case at the end of 2002 and the
weakening of the peso against the dollar, partially offset by growth in South
Korea and Spain. A $20 million increase in Auto & Home is primarily due to rate
increases in both the auto and property lines. These increases are partially
offset by a $43 million decrease in the Individual segment, primarily
attributable to a third quarter 2002 amendment of a reinsurance agreement and a
decrease in dividends used to purchase additional insurance.
Universal life and investment-type product policy fees increased by $109
million, or 24%, to $566 million for the three months ended March 31, 2003 from
$457 million for the comparable 2002 period. This variance is primarily
attributable to the Individual and International segments. A $62 million
increase in Individual is primarily due to higher revenue from insurance fees,
surrender charges and the recognition of previously deferred fees. The
recognition of previously deferred fees was the result of lapse, mortality and
investment experience. The increase in International of $44 million was
primarily due to the acquisition of Hidalgo in June 2002.
Net investment income increased by $135 million, or 5%, to $2,897 million
for the three months ended March 31, 2003 from $2,762 million for the comparable
2002 period. This variance is primarily attributable to increases of (i) $91
million, or 5%, in income from fixed maturities; (ii) $41 million, or 455%, in
income from equity securities and other limited partnership interests; (iii) $17
million, or 37%, in income on other invested assets; (iv) $8 million, or 2%, in
income on mortgage loans on real estate; (v) $8 million, or 6%, in interest
income on policy loans; and (vi) $2 million, or 2%, in income from real estate
and real estate joint ventures held-for-investment, net of investment expenses
and depreciation. These variances are partially offset by (i) a decrease of $19
million, or 23%, in income on cash, cash equivalents and short-term investments;
and (ii) higher investment expenses of $13 million, or 27%.
The increase in income from fixed maturities to $2,048 million in 2003
from $1,957 million in 2002 is largely due to a higher asset base, primarily
resulting from the reinvestment of cash flows coupled with the acquisition of
Hidalgo in June 2002, as well as higher bond prepayment fees. These increases
are partially offset by a decrease resulting from lower reinvestment rates and
lower income from equity linked notes due to decreases in the underlying
indices. The increase in income from equity securities and other limited
partnership interests to $50 million in 2003 from $9 million in 2002 is
primarily due to sales of underlying assets held in corporate partnerships. The
increase in income on other invested assets to $63 million in 2003 from $46
million in 2002 is largely due to an increase in reinsurance contracts' funds
withheld at interest. The increase in income on mortgage loans on real estate to
$470 million in 2003 from $462 million in 2002 is primarily due to a higher
asset base from new loan production, partially offset by lower yields on
reinvestment. The increase in interest income from policy loans to $139 million
in 2003 from $131 million in 2002 is largely due to increased loans outstanding.
The increase in income from real estate and real estate joint ventures
held-for-investment to $125 million in 2003 from $123 million in 2002 is
primarily due to increased income from space rented at the Company's One Madison
Avenue, New York City location, partially offset by lower income from hotel
properties due to reduced occupancy rates. The decrease in income from cash,
cash equivalents and short-term investments to $64 million in 2003 from $83
million in 2002 is due to declining interest rates. The increase in investment
expenses to $62 million in 2003 from $49 million in 2002 is primarily the result
of higher corporate and overhead charges applicable to investment activity.
The increase in net investment income is attributable to increases in the
International and Individual segments, Corporate & Other and the Reinsurance
segment, partially offset by a decrease in the Auto & Home segment. A $48
million increase in International is primarily due to a higher asset base
resulting from the acquisition of Hidalgo in June 2002, partially offset by
reduced income from allocated capital due to the change in methodology. The
Individual segment increased by $42 million mostly as a result of growth in
fixed income assets from cash flows along with higher bond prepayment fee
income, partially offset by lower income from allocated capital. The increase in
Corporate & Other of $37 million is mainly due to an increase in sales of
underlying assets held in corporate partnerships and higher income from
allocated capital, partially offset by lower income on equity linked notes. The
Reinsurance segment increased $11 million largely resulting from an increase in
reinsurance contracts' funds withheld at interest, partially offset by reduced
income from allocated capital. These increases were partially offset by a
decrease in Auto & Home of $6 million due to lower reinvestment rates and lower
income from allocated capital.
Other revenues decreased by $69 million, or 19%, to $298 million for the
three months ended March 31, 2003 from $367 million for the comparable 2002
period. This variance is attributable to decreases in the Individual,
Institutional and Asset Management segments, partially offset by increases in
the International, Reinsurance and Auto & Home segments. A $42 million decline
in Individual is 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. A $30 million decrease in Institutional is due
primarily to a decline in administrative fees as a result of the Company's exit
from the large market 401(k) business in late 2001, which resulted in reduced
revenue as business transferred to other carriers throughout 2002, as well as
lower fees earned on investments in separate accounts in 2003 resulting
generally from poor equity market performance. An $11 million decrease in Asset
Management is the result of lower average assets under management on which fees
are earned. These decreases were partially offset by an increase of $5 million
in
35
International primarily due to the recovery of a previously written-off
receivable in Mexico. In addition, the Reinsurance segment increased $4 million
due to an increase in fees earned on financial reinsurance and asset-intensive
business in the U.S. as a result of new business obtained in the fourth quarter
of 2002. An increase of $2 million in Auto & Home is primarily due to income
earned on a Corporate-Owned Life Insurance ("COLI") policy purchased in the
second quarter of 2002.
Net investment losses increased by $130 million, or 141%, to $222 million
for the three months ended March 31, 2003 from $92 million for the comparable
2002 period. This increase reflects total investment losses, before offsets, of
$260 million (including gross gains of $125 million, gross losses of $87
million, writedowns of $264 million, and a net loss from derivatives of $34
million), an increase of $155 million, or 148%, from $105 million (including
gross gains of $545 million, gross losses of $283 million, writedowns of $338
million, and a net loss from derivatives of $29 million) for the comparable 2002
period. Offsets include the amortization of deferred policy acquisition costs of
$10 million and $6 million for the three months ended March 31, 2003 and 2002,
respectively, and changes in the policyholder dividend obligation of $28 million
and $7 million for the three months ended March 31, 2003 and 2002, respectively.
The Company's investment gains and losses are net of related policyholder
amounts. The amounts netted against investment gains and losses are (i)
amortization of deferred policy acquisition costs, to the extent that such
amortization results from investment gains and losses; and (ii) adjustments to
the policyholder dividend obligation resulting from investment gains and losses.
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 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 consolidated
statements of income may not be comparable to amounts reported by other
insurers.
Policyholder benefits and claims increased by $335 million, or 7%, to
$4,953 million for the three months ended March 31, 2003 from $4,618 million for
the comparable 2002 period. This variance is attributable to increases in the
Institutional, Auto & Home, Reinsurance, International and Individual segments.
A $210 million increase in Institutional is primarily a result of growth in
premiums as previously discussed. The increase in Auto & Home of $39 million is
primarily due to an increase in auto claims frequencies and increased losses due
to adverse claims development related to older accident years, partially offset
by a decrease in property benefits due to improved claims frequencies, a
reduction in the number of homeowner policies in-force and underwriting and
agency management actions. An increase in Reinsurance of $33 million is
consistent with the growth in premiums as previously discussed. A $31 million
increase in International is primarily due to the acquisition of Hidalgo in June
2002, partially offset by the sale of a significant annuity contract during the
first quarter of 2002. A $20 million increase in Individual is due to increased
benefits related to single premium immediate annuities and an increase in the
expense for guaranteed minimum death benefits.
Interest credited to policyholder account balances increased by $33
million, or 5%, to $747 million for the three months ended March 31, 2003 from
$714 million for the comparable 2002 period. This variance is primarily due to
the International and Reinsurance segments. A $28 million increase in
International is primarily due to the acquisition of Hidalgo in June 2002. A $9
million increase in Reinsurance is primarily due to several new annuity
reinsurance agreements executed primarily during the fourth quarter of 2002, as
well as new deposits during the first quarter of 2003 on existing treaties.
Policyholder dividends increased by $6 million, or 1%, to $503 million for
the three months ended March 31, 2003 from $497 million for the comparable 2002
period. This variance is due to an increase in the Institutional and
International segments, partially offset by a decrease in the Individual
segment. The $17 million increase in Institutional resulted from favorable
mortality experience of several large group clients. Institutional policyholder
dividends vary from period to period based on participating contract experience,
which is generally recorded in policyholder benefits and claims. An $8 million
increase in International is primarily due to the acquisition of Hidalgo in June
2002. These increases were partially offset by a $19 million decrease in
Individual primarily due to the reduction of the dividend scale in the fourth
quarter of 2002, reflecting the impact of the low interest rate environment on
the asset portfolios supporting these policies.
Other expenses increased by $96 million, or 6%, to $1,749 million for the
three months ended March 31, 2003 from $1,653 million for the comparable 2002
period. Excluding the capitalization and amortization of deferred policy
acquisition costs, which are discussed below, other expenses increased by $94
million, or 5%, to $1,948 million for the three months ended March 31, 2003 from
$1,854 million for the comparable 2002 period. This variance is attributable to
increases in the Institutional, Reinsurance and
36
International segments, partially offset by a decrease in Corporate & Other. A
$50 million increase in Institutional is primarily due to a rise in
non-deferrable variable expenses associated with the aforementioned premium
growth and additional post-retirement costs, partially offset by the Company's
exit from the large market 401(k) business in late 2001, which resulted in
expense reductions as business transferred to other carriers throughout 2002. A
$50 million increase in Reinsurance is primarily attributable to increases in
allowances paid, primarily driven by high-allowance business in the U.K. A $47
million increase in the International segment is primarily due to the
acquisition of Hidalgo in June 2002. These increases were partially offset by a
$50 million decrease in Corporate & Other primarily due to a decrease in costs
associated with legal matters. A $55 million expense was recorded in the first
quarter of 2002 to cover costs associated with the resolution of a federal
government investigation of General American's former Medicare business.
Deferred policy acquisition costs are principally amortized in proportion
to gross margins and profits, including investment gains and 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 and profits originating from transactions other than
investment gains and losses.
Capitalization of deferred policy acquisition costs increased by $62
million, or 12%, to $586 million for the three months ended March 31, 2003 from
$524 million for the comparable 2002 period. This variance is primarily due to
the International, Individual and Auto & Home segments. A $26 million increase
in International is primarily due to the acquisition of Hidalgo in June 2002 and
overall business growth in South Korea and Spain, partially offset by a decrease
in Argentina primarily due to lower new sales in the pension business. A $16
million increase in Individual is due to higher sales of annuity and
investment-type products, resulting in higher commissions and other deferrable
expenses, partially offset by lower insurance product sales. The increase in
Auto & Home of $14 million is due to higher premiums from rate increases. Total
amortization of deferred policy acquisition costs increased by $60 million, or
19%, to $377 million for the three months ended March 31, 2003 from $317 million
for the comparable 2002 period. Amortization of $387 million and $323 million
are allocated to other expenses in 2003 and 2002, respectively, while the
remainder of the amortization in each year is allocated to investment gains and
losses. The increase in amortization allocated to other expenses is attributable
to the Individual, Auto & Home and International segments. An increase in
Individual of $38 million is due to the impact from lapse, mortality and equity
market performance. An $11 million increase in Auto & Home is due to higher
premiums from rate increases. A $7 million increase in International is due to
the acquisition of Hidalgo in June 2002.
Income tax expense for the three months ended March 31, 2003 was $121
million, or 29% of income before provision for income taxes and cumulative
effect of accounting change, compared with $186 million, or 38%, for the
comparable 2002 period. The 2003 effective tax rate differs from the corporate
tax rate of 35% primarily due to the impact of non-taxable investment income,
tax credits for investments in low income housing and a tax adjustment for a
recovery of prior year tax overpayments on tax-exempt bonds. The 2002 effective
tax rate differs from the corporate tax rate of 35% primarily due to the
inability to record tax benefits on certain foreign capital losses, partially
offset by the impact of non-taxable investment income.
In accordance with Statement of Financial Accounting Standards ("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 for the three months ended March 31, 2003 and 2002. The income from
discontinued operations is comprised of net investment income and net investment
gains related to 49 properties that the Company began marketing for sale on or
after January 1, 2002. For the three months ended March 31, 2003, the Company
recognized $90 million of net investment gains from discontinued operations
related to 13 properties sold or held-for-sale.
37
INSTITUTIONAL
The following table presents consolidated financial information for the
Institutional segment for the periods indicated:
THREE MONTHS
ENDED MARCH 31,
--------------------------
2003 2002
---------- ----------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 2,142 $ 1,860
Universal life and investment-type product policy
fees 155 152
Net investment income 978 977
Other revenues 142 172
Net investment losses (111) (82)
---------- ----------
Total revenues 3,306 3,079
---------- ----------
EXPENSES
Policyholder benefits and claims 2,379 2,169
Interest credited to policyholder account balances 224 228
Policyholder dividends 39 22
Other expenses 436 385
---------- ----------
Total expenses 3,078 2,804
---------- ----------
Income from continuing operations before
provision for income taxes 228 275
Provision for income taxes 80 103
---------- ----------
Income from continuing operations 148 172
Income from discontinued operations, net of income
taxes 27 5
---------- ----------
Net income $ 175 $ 177
========== ==========
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2002 -- INSTITUTIONAL
Premiums increased by $282 million, or 15%, to $2,142 million for the
three months ended March 31, 2003 from $1,860 million for the comparable 2002
period. Group insurance premiums increased by $206 million primarily from group
life, dental, disability and long-term care. The group life increase resulted
from higher sales of term insurance, strong persistency, a premium rate increase
for an existing large contract and increased revenue from reinsurance
agreements. The dental increase was driven by strong sales and improved
persistency. The increase in disability was generated by higher sales, favorable
renewal actions and persistency in the first quarter of 2003. The long-term care
increase is primarily due to premiums related to a significant contract entered
into in 2002. In addition, retirement and savings premiums increased by $76
million primarily resulting from higher sales in structured settlement products.
Retirement and savings premium levels are significantly influenced by large
transactions and, as a result, can fluctuate from period to period.
Universal life and investment-type product policy fees increased by $3
million, or 2%, to $155 million for the three months ended March 31, 2003 from
$152 million for the comparable 2002 period. This increase is primarily
attributable to higher sales in the group universal life product, partially
offset by a decrease in the private placement variable universal life product as
a result of higher fees received from a customer in 2002.
Other revenues decreased by $30 million, or 17%, to $142 million for the
three months ended March 31, 2003 from $172 million for the comparable 2002
period. Retirement and savings other revenues decreased $25 million primarily
due to a decline in administrative fees as a result of the Company's exit from
the large market 401(k) business in late 2001, which resulted in reduced revenue
as business transferred to other carriers throughout 2002. In addition, there
have been lower fees earned on investments in separate accounts in 2003
resulting generally from poor equity market performance. Group insurance other
revenues decreased by $5 million as the 2002 period includes income from a
settlement relating to the Company's former medical business.
38
Policyholder benefits and claims increased by $210 million, or 10%, to
$2,379 million for the three months ended March 31, 2003 from $2,169 million for
the comparable 2002 period. Group insurance increased by $122 million, primarily
as a result of the aforementioned premium growth in this segment's disability
and long-term care businesses, as well as growth in the group life and dental
businesses. Retirement and savings increased by $88 million, primarily as a
result of the aforementioned premium growth.
Interest credited to policyholders decreased by $4 million, or 2%, to $224
million for the three months ended March 31, 2003 from $228 million for the
comparable 2002 period. Retirement and savings decreased by $8 million primarily
attributable to declines in the average crediting rates in 2003 as a result of
the interest rate environment. This decrease is partially offset by a $4 million
increase in group insurance primarily attributable to the growth in the
policyholder account balance, offset by declines in the average crediting rates.
Policyholder dividends increased by $17 million, or 77%, to $39 million
for the three months ended March 31, 2003 from $22 million for the comparable
2002 period. This increase is largely attributable to favorable mortality
experience among several large group clients. Policyholder dividends vary from
period to period based on participating contract experience, which is generally
recorded in policyholder benefits and claims.
Other expenses increased by $51 million, or 13%, to $436 million for the
three months ended March 31, 2003 from $385 million in the comparable 2002
period. Group insurance and retirement and savings expenses increased by $46
million and $5 million, respectively, primarily due to a rise in non-deferrable
variable expenses associated with the aforementioned premium growth, as well as
additional post-retirement costs. Non-deferrable variable expenses include a
certain portion of premium taxes, commissions, claim approval and case
administration expenses. The increase in retirement and savings is partially
offset by the Company's exit from the large market 401(k) business in late 2001
which resulted in expense reductions as business transferred to other carriers
throughout 2002.
39
INDIVIDUAL
The following table presents consolidated financial information for the
Individual segment for the periods indicated:
THREE MONTHS
ENDED MARCH 31,
--------------------------
2003 2002
---------- ----------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 1,041 $ 1,084
Universal life and investment-type product policy fees 360 298
Net investment income 1,562 1,520
Other revenues 86 128
Net investment (losses) gains (net of amounts allocated from other
accounts of ($38) and ($13), respectively) (68) 3
---------- ----------
Total revenues 2,981 3,033
---------- ----------
EXPENSES
Policyholder benefits and claims (excludes amounts directly related
to net investment losses of ($28) and ($7), respectively) 1,252 1,232
Interest credited to policyholder account balances 443 443
Policyholder dividends 440 459
Other expenses (excludes amounts directly related to net
investment losses of ($10) and ($6), respectively) 668 634
---------- ----------
Total expenses 2,803 2,768
---------- ----------
Income from continuing operations before provision
for income taxes 178 265
Provision for income taxes 63 95
---------- ----------
Income from continuing operations 115 170
Income from discontinued operations, net of income taxes 26 6
---------- ----------
Net income $ 141 $ 176
========== ==========
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2002 -- INDIVIDUAL
Premiums decreased by $43 million, or 4%, to $1,041 million for the three
months ended March 31, 2003 from $1,084 million for the comparable 2002 period.
Premiums from insurance products decreased by $47 million, primarily from a
third quarter 2002 amendment of a reinsurance agreement to increase the amount
of insurance ceded, as well as a decrease in dividends used to purchase
additional insurance as a direct result of the dividend scale reduction adopted
in the fourth quarter of 2002. Premiums from annuity and investment-type
products increased by $4 million as a result of higher sales of single premium
immediate annuities.
Universal life and investment-type product policy fees increased by $62
million, or 21%, to $360 million for the three months ended March 31, 2003 from
$298 million for the comparable 2002 period. Policy fees from insurance products
increased by $61 million due to higher revenue from insurance fees, surrender
charges, and the recognition of previously deferred fees. The recognition of
previously deferred fees was the result of lapse, mortality and investment
experience. Policy fees from annuity and investment-type products remained
essentially unchanged as new deposits offset a slight decline in the average
separate account balances.
Other revenues decreased by $42 million, or 33%, to $86 million for the
three months ended March 31, 2003 from $128 million for the comparable 2002
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.
The Company's investment gains and losses are net of related policyholder
amounts. The amounts netted against investment gains and losses are (i)
amortization of deferred policy acquisition costs, to the extent that such
amortization results from investment gains and losses; and (ii) adjustments to
the policyholder dividend obligation resulting from investment gains and losses.
40
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 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 consolidated
statements of income may not be comparable to amounts reported by other
insurers.
Policyholder benefits and claims increased by $20 million, or 2%, to
$1,252 million for the three months ended March 31, 2003 from $1,232 million for
the comparable 2002 period. Policyholder benefits and claims for annuity and
investment-type products increased by $16 million largely due to increased
benefits related to single premium immediate annuities and an increase in the
expense for guaranteed minimum death benefits. Policyholder benefits and claims
for insurance products increased by $4 million primarily due to unfavorable
mortality experience, offset by the impact from the aforementioned reinsurance
arrangement.
Interest credited to policyholder account balances remained essentially
unchanged at $443 million for the comparable periods. Declines in the interest
crediting rates were offset by growth in policyholder account balances.
Policyholder dividends decreased by $19 million, or 4%, to $440 million
for the three months ended March 31, 2003 from $459 million for the comparable
2002 period due to the reduction of the dividend scale in the fourth quarter of
2002, reflecting the impact of the low interest rate environment on the asset
portfolios supporting these policies.
Other expenses increased by $34 million, or 5%, to $668 million in 2003
from $634 million for the comparable 2002 period. Excluding the capitalization
and amortization of deferred policy acquisition costs that are discussed below,
other expenses increased by $12 million, or 2%, to $753 million in 2003 from
$741 million in 2002. Other expenses related to insurance products decreased by
$18 million due to continued expense management, partially offset by increased
pension and post-retirement benefit expenses over the comparable period.
Additionally, reductions in volume-related commission expenses in the
broker/dealer and other subsidiaries contributed to the decline. Other expenses
related to annuity and investment-type products increased by $30 million. This
increase is due to a rise in sales of new annuity and investment-type products
offered by the MetLife Investors Group distribution channel, as well as
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 and 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 $16
million, or 7%, to $260 million for the three months ended March 31, 2003 from
$244 million for the comparable 2002 period due to higher sales of annuity and
investment-type products, resulting in higher commissions and other deferrable
expenses, partially offset by lower insurance product sales. Total amortization
of deferred policy acquisition costs increased by $34 million, or 26%, to $165
million in 2003 from $131 million in 2002. Amortization of deferred policy
acquisition costs of $175 million and $137 million is allocated to other
expenses in 2003 and 2002, 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
$30 million and $8 million related to insurance products and annuity and
investment-type products, respectively, are due to the impact from lapse,
mortality and equity market performance.
41
AUTO & HOME
The following table presents consolidated financial information for the
Auto & Home segment for the periods indicated:
THREE MONTHS
ENDED MARCH 31,
--------------------------
2003 2002
---------- ----------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 712 $ 692
Net investment income 39 45
Other revenues 9 7
Net investment losses (4) (14)
---------- ----------
Total revenues 756 730
---------- ----------
EXPENSES
Policyholder benefits and claims 534 495
Other expenses 199 208
---------- ----------
Total expenses 733 703
---------- ----------
Income before (benefit) provision for income taxes 23 27
(Benefit) provision for income taxes (4) 6
---------- ----------
Net income $ 27 $ 21
========== ==========
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2002 -- AUTO & HOME
Premiums increased by $20 million, or 3%, to $712 million for the three
months ended March 31, 2003 from $692 million for the comparable 2002 period.
Auto and property premiums increased by $11 million and $7 million,
respectively, primarily due to rate increases. Premiums from other personal
lines increased by $2 million.
Other revenues increased by $2 million, or 29%, to $9 million for the
three months ended March 31, 2003 from $7 million for the comparable 2002
period. The increase is primarily due to income earned on a COLI policy
purchased in the second quarter of 2002.
Policyholder benefits and claims increased by $39 million, or 8%, to $534
million for the three months ended March 31, 2003 from $495 million for the
comparable 2002 period. Auto policyholder benefits and claims increased by $52
million due to an increase in claims frequencies and increased losses due to
adverse claims development related to older accident years. Correspondingly, the
auto loss ratio increased to 83.3% in 2003 from 75.0% in 2002. Property
policyholder benefits and claims decreased by $18 million due to improved claims
frequencies, a reduction in the number of homeowner policies in-force, and
underwriting and agency management actions. The property loss ratio decreased to
50.2% in 2003 from 63.2% in 2002. Property catastrophes represented 6.9% of the
loss ratio in 2003 compared with 8.7% in 2002. Other policyholder benefits and
claims increased by $5 million, primarily due to more personal umbrella claims.
Fluctuations in these policyholder benefits and claims may not be commensurate
with the change in premiums for a given period due to low premium volume and
high liability limits.
Other expenses decreased by $9 million, or 4%, to $199 million for the
three months ended March 31, 2003 from $208 million for the comparable period in
2002. This decrease is due to a reduction in headcount, as well as lower
integration costs and increased efficiencies associated with the St. Paul
acquisition. The expense ratio decreased to 28.0% in 2003 from 30.1% in 2002.
The effective income tax rates for the three months ended March 31, 2003
and 2002 differ from the corporate tax rate of 35% due to the impact of
non-taxable investment income, and a $7 million tax adjustment recorded in the
first quarter of 2003 for a recovery of prior year tax overpayments on
tax-exempt bonds.
42
INTERNATIONAL
The following table presents consolidated financial information for the
International segment for the periods indicated:
THREE MONTHS
ENDED MARCH 31,
-------------------------
2003 2002
---------- ----------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 395 $ 375
Universal life and investment-type product policy fees 51 7
Net investment income 123 75
Other revenues 8 3
Net investment losses -- (22)
---------- ----------
Total revenues 577 438
---------- ----------
EXPENSES
Policyholder benefits and claims 358 327
Interest credited to policyholder account balances 37 9
Policyholder dividends 19 11
Other expenses 121 93
---------- ----------
Total expenses 535 440
---------- ----------
Income (loss) from continuing operations before provision
for income taxes 42 (2)
Provision for income taxes 14 7
---------- ----------
Income (loss) from continuing operations 28 (9)
Cumulative effect of change in accounting -- 5
---------- ----------
Net income (loss) $ 28 $ (4)
========== ==========
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2002 -- INTERNATIONAL
Premiums increased by $20 million, or 5%, to $395 million for the three
months ended March 31, 2003 from $375 million for the comparable 2002 period.
The acquisition of Hidalgo in June 2002 increased premiums by $142 million.
Partially offsetting this increase is a decrease of $103 million attributable to
a non-recurring sale of an annuity contract in the first quarter of 2002 to a
Canadian trust company. Excluding these items, premiums decreased by $19
million, or 7%, over the comparable 2002 period. Mexico's premiums (excluding
Hidalgo) decreased by $48 million, which is attributable to decreases in both
its group and individual life businesses. Actions taken by the Mexican
government, which were anticipated, impacting the insurance and annuities
market, caused certain products to be less advantageous to customers, which
resulted in reduced sales. In addition, the cancellation of a large
broker-sponsored case at the end of 2002 and the weakening of the peso against
the dollar contributed to the decline. Chile's premiums decreased by $8 million
mainly due to lower sales results in the individual annuities business.
Partially offsetting these declines, 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 to a combination of
growth and the strengthening of the Euro. Taiwan's premiums increased by $3
million due primarily to renewal premium in its 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 $44
million, or 629%, to $51 million for the three months ended March 31, 2003 from
$7 million for the comparable 2002 period, primarily due to the acquisition of
Hidalgo in June 2002 which accounted for $42 million of this increase. The
remainder of the variance is attributable to minor fluctuations in several
countries.
Other revenues increased by $5 million, or 167%, to $8 million for the
three months ended March 31, 2003 from $3 million for the comparable 2002
period. This increase is primarily due to the recovery of a receivable that had
previously been written-off in Mexico.
43
Policyholder benefits and claims increased by $31 million, or 9%, to $358
million for the three months ended March 31, 2003 from $327 million for the
comparable 2002 period. The acquisition of Hidalgo in June 2002 increased
policyholder benefits and claims by $137 million. Partially offsetting this
increase is a decrease of $103 million for the aforementioned non-recurring sale
of an annuity contract during the first quarter of 2002. Excluding these items,
policyholder benefits and claims decreased by $3 million, or 1%, from the
comparable 2002 period. Mexico's policyholder benefits (excluding Hidalgo)
decreased by $48 million commensurate with the overall premium decreases
discussed above. South Korea's, Spain's and Taiwan's policyholder benefits and
claims increased by $24 million, $18 million and $3 million respectively,
primarily as a result of the overall premium increase previously discussed.
Interest credited to policyholder account balances increased by $28
million, or 311%, to $37 million for the three months ended March 31, 2003 from
$9 million for the comparable 2002 period. The acquisition of Hidalgo in June
2002 accounted for $25 million of this variance. Mexico's interest credited
(excluding Hidalgo) increased by $2 million due primarily to an increase in the
crediting rates reflective of Mexico's interest rate environment. The remainder
of the variance is attributable to minor fluctuations in several countries.
Policyholder dividends increased by $8 million, or 73%, to $19 million for
the three months ended March 31, 2003 from $11 million for the comparable 2002
period. The acquisition of Hidalgo in June 2002 increased policyholder dividends
by $9 million. The remainder of the variance is attributable to minor
fluctuations in several countries.
Other expenses increased by $28 million, or 30%, to $121 million for the
three months ended March 31, 2003 from $93 million for the comparable 2002
period. The acquisition of Hidalgo in June 2002 accounted for a $31 million
increase. The remainder of the variance is attributable to minor fluctuations in
several countries.
44
REINSURANCE
The following table presents consolidated financial information for the
Reinsurance segment for the periods indicated:
THREE MONTHS
ENDED MARCH 31,
---------------------
2003 2002
--------- --------
(Dollars in millions)
REVENUES
Premiums $ 552 $ 475
Net investment income 110 99
Other revenues 12 8
Net investment (losses) gains (4) 2
------ -----
Total revenues 670 584
------ -----
EXPENSES
Policyholder benefits and claims 428 395
Interest credited to policyholder
account balances 43 34
Policyholder dividends 5 5
Other expenses 164 113
------ -----
Total expenses 640 547
------ -----
Income before provision for income
taxes 30 37
Provision for income taxes 10 13
------ -----
Net income $ 20 $ 24
====== =====
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2002 -- REINSURANCE
Premiums increased by $77 million, or 16%, to $552 million for the three
months ended March 31, 2003 from $475 million for the comparable 2002 period.
New premiums from facultative and automatic treaties and renewal premiums on
existing blocks of business, particularly in the U.S. and U.K. reinsurance
operations, 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 50%, to $12 million for the
three months ended March 31, 2003 from $8 million for the comparable 2002
period. This variance is due to an increase in fees earned on financial
reinsurance and asset-intensive business in the U.S. as a result of new business
obtained in the fourth quarter of 2002.
Policyholder benefits and claims increased by $33 million, or 8%, to $428
million for the three months ended March 31, 2003 from $395 million for the
comparable 2002 period. As a percentage of premiums, policyholder benefits and
claims decreased to 78% in 2003 from 83% in 2002. This decrease is primarily
attributable to favorable mortality in the U.S. traditional business, partially
offset by unfavorable claim experience in certain international reinsurance
operations. 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 $9
million, or 26%, to $43 million for the three months ended March 31, 2003 from
$34 million for the comparable 2002 period. Interest credited to policyholder
account balances relates to amounts credited on deposit-type contracts and
certain cash-value contracts. Contributing to this growth was several new
annuity reinsurance agreements executed primarily during the fourth quarter of
2002, as well as new deposits during the first quarter of 2003 on existing
treaties. The crediting rate on certain blocks of annuities is based on the
performance of the underlying assets.
Policyholder dividends were unchanged at $5 million for both the three
months ended March 31, 2003 and 2002.
Other expenses increased by $51 million, or 45%, to $164 million for the
three months ended March 31, 2003 from $113 million for the comparable 2002
period. Other expenses includes minority interest of $20 million and $19 million
for the three months ended March 31, 2003 and 2002, respectively. Excluding
minority interest, the increase in other expenses is primarily attributable to
the reinsurance business in the U.K., which is characterized by higher initial
reinsurance allowances than those historically experienced in this
45
segment. 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.
46
ASSET MANAGEMENT
The following table presents consolidated financial information for the
Asset Management segment for the periods indicated:
THREE MONTHS
ENDED MARCH 31,
-----------------
2003 2002
-------- --------
(Dollars in millions)
REVENUES
Net investment income $16 $14
Other revenues 29 40
Net investment gains (losses) 8 (4)
--- ---
Total revenues 53 50
--- ---
OTHER EXPENSES 43 52
--- ---
Income (loss) before provision for
income taxes 10 (2)
Provision (benefit) for income taxes 4 (1)
--- ---
Net income (loss) $6 $(1)
=== ===
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2002 -- ASSET MANAGEMENT
Other revenues, which primarily consist of management and advisory fees
from third parties, decreased by $11 million, or 28%, to $29 million for the
three months ended March 31, 2003 from $40 million for the comparable 2002
period. This decrease is primarily the result of significantly lower average
assets under management on which these fees are earned.
Other expenses decreased by $9 million, or 17%, to $43 million for the
three months ended March 31, 2003 from $52 million for the comparable 2002
period. This decrease is primarily attributable to staff reductions in the third
and fourth quarters of 2002 and reduced expenses as a result of lower average
assets under management.
47
CORPORATE & OTHER
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2002 -- CORPORATE & OTHER
Other revenues increased by $3 million, or 33%, to $12 million for the
three months ended March 31, 2003 from $9 million for the comparable 2002
period. This variance includes a $3 million increase in income earned on a COLI
policy resulting from higher crediting rates. In the first quarter of 2003, the
Company recorded $3 million for the amortization of a deferred gain related to a
property lease-back transaction. The Company anticipates that the deferred gain
will be amortized into income through 2005. These increases are partially offset
by a $3 million decrease related to the finite risk experience refunds.
Experience refunds can vary from period to period based on market performance.
Other expenses decreased by $50 million, or 30%, to $118 million for the
three months ended March 31, 2003 from $168 million for the comparable 2002
period. This variance is primarily due to a decrease in costs associated with
legal matters. A $55 million expense was recorded in the first quarter of 2002
to cover costs associated with the resolution of a federal government
investigation of General American's former Medicare business. This decrease was
partially offset by a net increase of $3 million related to asbestos
reinsurance. This variance is comprised of the amortization of the deferred gain
in the first quarter of 2003 of $17 million, partially offset by a $14 million
expense to record a reduction in the recoverable asset resulting from market
changes.
48
LIQUIDITY AND CAPITAL RESOURCES
THE HOLDING COMPANY
CAPITAL
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 March 31, 2003, MetLife and its insured
depository institution subsidiary were in compliance with the aforementioned
guidelines.
LIQUIDITY
Liquidity refers to a company's ability to generate adequate amounts of
cash to meet its needs. It is managed to preserve stable, reliable and
cost-effective sources of cash to meet all current and future financial
obligations and is provided by a variety of sources, including a portfolio of
liquid assets, a diversified mix of short- and long-term funding sources from
the wholesale financial markets and the ability to borrow through committed
credit facilities. The Holding Company is an active participant in the global
financial markets through which it obtains a significant amount of funding.
These markets, which serve as cost-effective sources of funds, are critical
components of the Holding Company's liquidity management. Decisions to access
these markets are based upon relative costs, prospective views of balance sheet
growth, and a targeted liquidity profile. A disruption in the financial markets
could limit the Holding Company's access to liquidity.
The Holding Company's ability to maintain regular access to competitively
priced wholesale funds is fostered by its current debt ratings from the major
credit rating agencies. Management views its capital ratios, credit quality,
stable and diverse earnings streams, diversity of liquidity sources and its
liquidity monitoring procedures as critical to retaining high credit ratings.
Liquidity is monitored through the use of internal liquidity risk metrics,
including the composition and level of the liquid asset portfolio, timing
differences in short-term cash flow obligations, access to the financial markets
for capital and term-debt transactions, and exposure to contingent draws on the
Holding Company's liquidity.
LIQUIDITY SOURCES
Dividends. The primary source of the Holding Company's liquidity is
dividends it receives from Metropolitan Life. Under the New York Insurance Law,
Metropolitan Life is permitted without prior insurance regulatory clearance to
pay a stockholder dividend to the Holding Company as long as the aggregate
amount of all such dividends in any calendar year does not exceed the lesser of
(i) 10% of its statutory surplus as of the immediately preceding calendar year;
and (ii) its statutory net gain from operations for the immediately preceding
calendar year (excluding realized capital gains). Metropolitan Life will be
permitted to pay a stockholder dividend to the Holding Company in excess of the
lesser of such two amounts only if it files notice of its intention to declare
such a dividend and the amount thereof with the Superintendent and the
Superintendent does not disapprove the distribution. 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 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 Holding 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. In addition, the Holding Company
also receives dividends from its other subsidiaries. The Holding Company's other
insurance subsidiaries are also subject to restrictions on the payment of
dividends to their respective parent companies.
The dividend limitation is based on statutory financial results. Statutory
accounting practices, as prescribed by the Department, differ in certain
respects from accounting principles used in financial statements prepared in
conformity with GAAP. The significant differences relate to the treatment of
deferred policy acquisition costs, certain deferred income taxes, required
investment reserves, reserve calculation assumptions, goodwill and surplus
notes.
49
Liquid Assets. An integral part of the Holding Company's liquidity
management is the amount of liquid assets that it holds. Liquid assets include
cash, cash equivalents, short-term investments and marketable fixed maturities.
At March 31, 2003 and December 31, 2002, the Holding Company had $950 million
and $1,343 million in liquid assets, respectively.
Global Funding Sources. Liquidity is also provided by a variety of both
short- and long-term instruments, including repurchase agreements, commercial
paper, medium- and long-term debt, capital securities and stockholders' equity.
The diversification of the Holding Company's funding sources enhances funding
flexibility and limits dependence on any one source of funds, and generally
lowers the cost of funds.
At March 31, 2003 and December 31, 2002, the Holding Company had $100
million and $249 million in short-term debt outstanding, respectively. At both
March 31, 2003 and December 31, 2002, the Holding Company had $3.3 billion in
long-term debt outstanding.
The Holding Company filed a $4.0 billion shelf registration statement,
effective June 1, 2001, with the U.S. Securities and Exchange Commission which
permits the registration and issuance of debt and equity securities as described
more fully therein. The Holding Company has issued senior debt in the amount of
$2.25 billion under this registration statement. In December 2002, the Holding
Company issued $400 million 5.375% senior notes due 2012 and $600 million 6.50%
senior notes due 2032 and, in November 2001, the Holding Company issued $500
million 5.25% senior notes due 2006 and $750 million 6.125% senior notes due
2011. In addition, in February 2003, the Holding Company remarketed under the
shelf registration statement $1,006 million aggregate principal amount of
debentures previously issued in connection with the issuance of equity security
units as part of MetLife, Inc.'s initial public offering in April 2000.
Other sources of the Holding Company's liquidity include programs for
short- and long-term borrowing, as needed, arranged through Metropolitan Life.
Credit Facilities. The Holding Company maintains a committed and unsecured
credit facility for approximately $1.25 billion that it shares with
Metropolitan Life and MetLife Funding, Inc. ("MetLife Funding") which expires
in 2005. In April 2003, Metropolitan Life and MetLife Funding replaced an
expiring $1 billion five-year credit facility with a $1 billion 364-day credit
facility and the Holding Company was added as a borrower. Drawdowns under
these facilities bear interest at varying rates stated in the agreements.
These facilities are primarily used for general corporate purposes and as
back-up lines of credit for the borrowers' commercial paper programs. At March
31, 2003, none of the Holding Company, Metropolitan Life or MetLife Funding
had drawn against these credit facilities.
LIQUIDITY USES
The primary uses of liquidity of the Holding Company include cash
dividends on common stock, service on debt, contributions to subsidiaries,
payment of general operating expenses and the repurchase of the Holding
Company's common stock.
Dividends. In the fourth quarter of 2002, the Holding Company declared an
annual dividend for 2002 of $0.21 per share. The 2002 dividend represented an
increase of $0.01 per share from the 2001 annual dividend of $0.20 per share.
Dividends, if any, in any year will be determined by the Holding Company's Board
of Directors after taking into consideration factors such as the Holding
Company's current earnings, expected medium- and long-term earnings, financial
condition, regulatory capital position, and applicable governmental regulations
and policies.
Capital Contributions to Subsidiaries. During the three months ended March
31, 2003, the Holding Company contributed $10 million to MetLife Group, Inc. In
2002, the Holding Company contributed $500 million to Metropolitan Life.
Share Repurchase. 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. The Holding Company did not acquire any shares of common stock
during the three months ended March 31, 2003. The Holding Company acquired
7,680,041 shares of common stock for $240 million during the three months ended
March 31, 2002. At March 31, 2003 the Holding Company had approximately $806
million remaining on its existing share repurchase authorization. The Company
does not anticipate any share repurchases in the three months ending June 30,
2003 and any repurchases during the remainder of 2003 will be
50
dependent upon several factors, including the Company's capital position, its
financial strength and credit ratings, general market conditions and the price
of the Company's common stock.
Support Agreements. In 2002, the Holding Company entered into a net worth
maintenance agreement with three of its insurance subsidiaries, MetLife
Investors Insurance Company, First MetLife Investors Insurance Company and
MetLife Investors Insurance Company of California. Under the agreements, the
Holding Company agreed, without limitation as to the amount, to cause each of
these subsidiaries to have a minimum capital and surplus of $10 million (or,
with respect to MetLife Investors Insurance Company of California, $5 million),
total adjusted capital at a level not less than 150% of the company action level
Risk-Based Capital ("RBC"), as defined by state insurance statutes, and
liquidity necessary to enable it to meet its current obligations on a timely
basis. At March 31, 2003, the capital and surplus of each of these subsidiaries
was in excess of the minimum capital and surplus amounts referenced above, and
their total adjusted capital was in excess of the most recent referenced RBC
calculated at December 31, 2002.
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 the
borrowings, over (ii) the cash flows generated by these properties.
Based on management's analysis of its expected cash inflows from the
dividends it receives from subsidiaries, including Metropolitan Life, that are
permitted to be paid without prior insurance regulatory approval and its
portfolio of liquid assets and other anticipated cash flows, management believes
there will be sufficient liquidity to enable the Holding Company to make
payments on debt, make dividend payments on its common stock, pay all operating
expenses and meet other obligations.
THE COMPANY
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; 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 to take various actions against, insurers whose total adjusted
capital does not exceed certain RBC levels. At December 31, 2002, Metropolitan
Life's and each of the Holding Company's domestic 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 of insurance
companies domiciled in New York effective January 1, 2001. Effective December
31, 2002, the Department adopted a modification to its regulations to be
consistent with Codification with respect to the admissibility of deferred
income taxes by New York insurers, subject to certain limitations. The adoption
of the Codification, as modified by the Department, did not adversely affect
Metropolitan Life's statutory capital and surplus. 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.
LIQUIDITY SOURCES
Cash Flow from Operations. The Company's principal cash inflows from its
insurance activities come from insurance premiums, annuity considerations and
deposit funds. A primary liquidity concern with respect to these cash inflows is
the risk of early contractholder 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
51
default by debtors and market volatilities. The Company closely monitors and
manages these risks through its credit risk management process.
Liquid Assets. An integral part of the Company's liquidity management is
the amount of liquid assets it holds. Liquid assets include cash, cash
equivalents, short-term investments, marketable fixed maturities and equity
securities. At March 31, 2003 and December 31, 2002, the Company had $134
billion and $127 billion in liquid assets, respectively.
Global Funding Sources. Liquidity is also provided by a variety of both
short- and long-term instruments, including repurchase agreements, commercial
paper, medium- and long-term debt, capital securities and stockholders' equity.
The diversification of the Company's funding sources enhances funding
flexibility and limits dependence on any one source of funds, and generally
lowers the cost of funds.
At March 31, 2003 and December 31, 2002, the Company had $2,441 million
and $1,161 million in short-term debt outstanding, respectively, and $5,481
million and $4,425 million in long-term debt outstanding, respectively. See
"-- The Holding Company -- Global Funding Sources."
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 both
March 31, 2003 and December 31, 2002, MetLife Funding had a tangible net worth
of $10.7 million. 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 March 31, 2003 and December 31, 2002, MetLife Funding had total outstanding
liabilities, including accrued interest payable, of $1,052 million and $400
million, respectively, consisting primarily of commercial paper.
Credit Facilities. The Company maintains committed and unsecured credit
facilities aggregating $2.4 billion ($1.1 billion expiring in the second quarter
of 2003 and a total of approximately $1.3 billion expiring in 2005). If these
facilities were drawn upon, they would bear interest at varying rates in
accordance with the agreements. The facilities can be used for general corporate
purposes and also as back-up lines of credit for the Company's commercial paper
programs. At March 31, 2003, the Company had drawn approximately $35 million
under two of the three facilities expiring in 2005 at interest rates ranging
from 4.15% to 5.56% and approximately another $10 million under a facility
expiring in 2003 at an interest rate of 1.81%. In April 2003, the Company
replaced an expiring $1 billion five-year credit facility with a $1 billion
364-day credit facility and the Holding Company was added as a borrower.
LIQUIDITY USES
Insurance Liabilities. The Company's principal cash outflows primarily
relate to the liabilities associated with its various life insurance, property
and casualty, annuity and group pension products, operating expenses and income
taxes, as well as principal and interest on its outstanding debt obligations.
Liabilities arising from its insurance activities primarily relate to benefit
payments under the aforementioned products, as well as payments for policy
surrenders, withdrawals and loans.
Investment and Other. Additional cash outflows include those related to
obligations of securities lending activities, investments in real estate,
limited partnership and joint ventures, as well as legal liabilities.
52
The following table summarizes the Company's major contractual obligations
(other than those arising from its ordinary product and investment purchase
activities) as of March 31, 2003:
Contractual Obligations Total 2003 2004 2005 2006 2007 Thereafter
- ----------------------- ----- ---- ---- ---- ---- ---- ----------
Long-term debt (1) $5,491 $ 461 $ 126 $1,296 $ 603 $ 3 $3,002
Partnership investments 1,594 1,594 -- -- -- -- --
Operating leases 1,397 149 175 157 139 121 656
Mortgage commitments 797 797 -- -- -- -- --
Company-obligated
securities (1) 350 -- -- -- -- -- 350
------ ------ ------ ------ ------- ------ -------
Total $9,629 $3,001 $ 301 $1,453 $ 742 $ 124 $4,008
====== ====== ====== ====== ======= ====== =======
- ----------
(1) Amounts differ from the balances presented on the consolidated balance
sheets. The amounts above do not include related premiums and discounts.
On April 11, 2003, an affiliate of the Company elected not to make future
payments required by the terms of a non-recourse loan obligation. The book value
of this loan was $14 million at March 31, 2003. 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.
Letters of Credit. At March 31, 2003 and December 31, 2002, the Company
had outstanding approximately $608 million and $625 million, respectively, 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, these amounts do not necessarily reflect the actual future cash
funding requirements.
Support Agreements. In addition to the support agreements described above,
Metropolitan Life entered into a net worth maintenance agreement with New
England Life Insurance Company ("New England Life") at the time Metropolitan
Life acquired New England Life. Under the agreement, Metropolitan Life agreed,
without limitation as to the amount to cause New England Life to have a minimum
capital and surplus of $10 million, total adjusted capital at a level not less
than the company action level RBC, as defined by state insurance statutes, and
liquidity necessary to enable it to meet its current obligations on a timely
basis. The agreement may be terminated under certain circumstances. At March 31,
2003, the capital and surplus of New England Life was in excess of the minimum
capital and surplus amounts referenced above, and its total adjusted capital was
in excess of the most recent referenced RBC calculated at December 31, 2002.
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"). Under the agreement, Metropolitan Life
agreed without limitation as to amount to cause General American to have a
minimum capital and surplus of $10 million, total adjusted capital at a level
not less than 180% of the company action level RBC, as defined by state
insurance statutes, and liquidity necessary to enable it to meet its current
obligations on a timely basis. The agreement was subsequently amended to provide
that, for the five year period from 2003 through 2007, total adjusted capital
must be maintained at a level not less than 200% of the company action level
RBC, as defined by state insurance statutes. At March 31, 2003, the capital and
surplus of General American was in excess of the minimum capital and surplus
amounts referenced above, and its total adjusted capital was in excess of the
most recent referenced RBC calculated at December 31, 2002.
Metropolitan Life has entered into a net worth maintenance agreement with
Security Equity Life Insurance Company ("Security Equity"), an insurance
subsidiary acquired in the GenAmerica transaction. Under the agreement,
Metropolitan Life agreed without limitation as to amount to cause Security
Equity to have a minimum capital and surplus of $10 million, total adjusted
capital at a level not less than 150% of the company action level RBC, as
defined by state insurance statutes, and sufficient liquidity to meet its
current obligations. The agreement may be terminated under certain
circumstances. At March 31, 2003, the capital and surplus of Security Equity was
in excess of the minimum capital and surplus amounts referenced above, and its
total adjusted capital was in excess of the most recent referenced RBC
calculated at December 31, 2002.
Metropolitan Life has also entered into arrangements for the benefit of
some of its other subsidiaries and affiliates to assist such subsidiaries and
affiliates in meeting various jurisdictions' regulatory requirements regarding
capital and surplus and security deposits. In addition, Metropolitan Life has
entered into a support arrangement with respect to a subsidiary under which
Metropolitan Life may become responsible, in the event that the subsidiary
becomes the subject of insolvency proceedings, for the payment of certain
reinsurance recoverables due from the subsidiary to one or more of its cedents
in accordance with the terms and conditions of the applicable reinsurance
agreements.
53
General American has agreed to guarantee the obligations of its
subsidiary, Paragon Life Insurance Company, and certain obligations of its
former subsidiaries, Security Equity, MetLife Investors Insurance Company
("MetLife Investors"), First MetLife Investors Insurance Company and MetLife
Investors Insurance Company of California. In addition, General American has
entered into a contingent reinsurance agreement with MetLife Investors. Under
this agreement, in the event that MetLife Investors statutory capital and
surplus is less than $10 million or total adjusted capital falls below 150% of
the company action level RBC, as defined by state insurance statutes, General
American would assume as assumption reinsurance, subject to regulatory approvals
and required consents, all of MetLife Investors life insurance policies and
annuity contract liabilities. At March 31, 2003, the capital and surplus of
MetLife Investors was in excess of the minimum capital and surplus amounts
referenced above, and its total adjusted capital was in excess of the most
recent referenced RBC calculated at December 31, 2002.
Management does not anticipate that these arrangements will place any
significant demands upon the Company's liquidity resources.
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 except with respect to certain matters. 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 unaudited interim condensed 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 consolidated
net income or cash flows in particular quarterly or annual periods.
Based on management's analysis of its expected cash inflows from operating
activities, the dividends it receives from subsidiaries, including Metropolitan
Life, that are permitted to be paid without prior insurance regulatory approval
and its portfolio of liquid assets and other anticipated cash flows, management
believes there will be sufficient liquidity to enable the Company to make
payments on debt, make dividend payments on its common stock, pay all operating
expenses and meet other obligations. 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 2003.
Consolidated cash flows. Net cash provided by operating activities was
$1,175 million and $667 million for the three months ended March 31, 2003 and
2002, respectively. The $508 million increase in operating cash flows in 2003
from the comparable 2002 period is primarily attributable to the growth in
MetLife Bank's customer deposits and the securities lending program. In
addition, operating cash flows from insurance products increased due to sales
growth in the group life, dental, disability and long-term care businesses, as
well as higher sales in retirement and saving's structured settlement products.
These increases are partially offset by the payment for an additional COLI
policy purchased late in the first quarter of 2003.
Net cash used in investing activities was $1,746 million and $4,888
million for the three months ended March 31, 2003 and 2002, respectively. The
$3,142 million decrease in net cash used in investing activities in 2003 from
the comparable 2002 period is primarily attributable to proceeds from sales of
fixed maturities being reinvested in cash equivalents and a decrease in
purchases of fixed maturities. These items are partially offset by 2002 sales of
equity securities which were purchased as part of the Company's investment in
the equity markets following the September 11, 2001 tragedies.
Net cash provided by financing activities was $3,186 million and $772
million for the three months ended March 31, 2003 and 2002, respectively. The
$2,414 million increase in financing activities in 2003 from the comparable 2002
period was due to an $862 million increase in policyholder account balances
primarily from sales of annuity products and the issuance of $1.1 billion in
short-term debt to pre-fund the issuance of guaranteed interest contracts in
April 2003. The Company had a $240 million reduction in stock repurchases and a
$186 million reduction in cash outflows related to the repayment of long-term
debt in 2003 versus the comparable 2002 period.
54
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
In April 2003, the Financial Accounting Standards Board ("FASB") cleared
Statement 133 Implementation Issue No. B36, Embedded Derivatives: Modified
Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk
Exposures That Are Unrelated or Only Partially Related to the Creditworthiness
of the Obligor Under Those Instruments ("Issue B36"). Issue B36 concluded that a
ceding company's funds withheld payable and an assuming company's funds withheld
receivable under a modified coinsurance agreement include an embedded derivative
feature that is not clearly and closely related to the host contract. Therefore,
the embedded derivative feature must be measured at fair value on the balance
sheet and changes in fair value reported in income. Issue B36 is effective
October 1, 2003. The Company is in the process of developing an estimate of the
impact of the adoption of Issue B36 on its consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Except for
certain implementation guidance that is incorporated in SFAS 149 and already
effective, SFAS 149 is effective for contracts entered into or modified after
June 30, 2003. The Company does not expect SFAS 149 to have a significant impact
on its unaudited interim condensed consolidated financial statements.
During 2003, the Company adopted or applied the following accounting
standards and/or interpretations: (i) FASB Interpretation ("FIN") No. 46,
Consolidation of Variable Interest Entities, an Interpretation of APB No. 51
("FIN 46"); (ii) SFAS No. 148, Accounting for Stock-Based Compensation --
Transition and Disclosure; (iii) FIN No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees Including Indirect Guarantees of
Indebtedness of Others; (iv) SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities; and (v) SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. None of the accounting standards and/or interpretations described
in this paragraph had a significant impact on the Company's unaudited interim
condensed consolidated financial statements.
55
INVESTMENTS
The Company had total cash and invested assets at March 31, 2003 and
December 31, 2002 of $198.4 billion and $190.7 billion, respectively. In
addition, the Company had $60.6 billion and $59.7 billion held in its separate
accounts, for which the Company generally does not bear investment risk as of
March 31, 2003 and December 31, 2002, respectively.
The Company's primary investment objective is to maximize net investment
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.
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:
March 31, 2003 December 31, 2002
-------------- -----------------
Carrying % of Carrying % of
Value Total Value Total
----- ----- ----- -----
(Dollars in millions)
Fixed maturities available-for-sale,
at fair value $144,610 72.9% $140,553 73.7%
Mortgage loans on real estate 25,046 12.6 25,086 13.2
Policy loans 8,615 4.3 8,580 4.5
Cash and cash equivalents 4,938 2.5 2,323 1.2
Real estate and real estate joint
ventures held-for-investment 4,541 2.3 4,566 2.4
Other invested assets 3,948 2.0 3,727 1.9
Equity securities and other limited
partnership interests 3,504 1.8 3,743 2.0
Short-term investments 3,188 1.6 1,921 1.0
Real estate held-for-sale 28 0.0 159 0.1
-------- ----- -------- -----
Total cash and invested assets $198,418 100.0% $190,658 100.0%
======== ===== ======== =====
56
INVESTMENT RESULTS
The annualized yields on general account cash and invested assets,
including net investment income from discontinued operations and excluding all
net investment gains and losses, were 6.89% and 7.18% for the three months ended
March 31, 2003 and 2002, 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 ended March 31, 2003 and 2002:
At or for the three months ended March 31,
------------------------------------------
2003 2002
------------------ ------------------
Yield(1) Amount Yield(1) Amount
-------- ------ -------- ------
(Dollars in millions)
FIXED MATURITIES: (2)
Investment income 7.01% $ 2,048 7.56% $ 1,957
Net investment losses (149) (165)
-------- --------
Total $ 1,899 $ 1,792
-------- --------
Ending assets $144,610 $118,477
-------- --------
MORTGAGE LOANS ON REAL
ESTATE: (3)
Investment income 7.51% $ 470 7.81% $ 462
Net investment losses (14) (19)
-------- --------
Total $ 456 $ 443
-------- --------
Ending assets $ 25,046 $ 23,684
-------- --------
REAL ESTATE AND REAL ESTATE
JOINT VENTURES: (4)
Investment income, net of
expenses 10.94% $ 127 10.36% $ 150
Net investment gains (losses) 92 (2)
-------- --------
Total $ 219 $ 148
-------- --------
Ending assets $ 4,569 $ 5,862
-------- --------
POLICY LOANS:
Investment income 6.47% $ 139 6.35% $ 131
-------- --------
Ending assets $ 8,615 $ 8,310
-------- --------
EQUITY SECURITIES AND OTHER
LIMITED PARTNERSHIP INTERESTS:
Investment income 5.53% $ 50 0.87% $ 9
Net investment (losses) gains (71) 161
-------- --------
Total $ (21) $ 170
-------- --------
Ending assets $ 3,504 $ 3,311
-------- --------
CASH, CASH EQUIVALENTS AND
SHORT-TERM INVESTMENTS:
Investment income 4.57% $ 64 4.92% $ 83
Net investment (losses) gains (4) 2
-------- --------
Total $ 60 $ 85
-------- --------
Ending assets $ 8,126 $ 6,434
-------- --------
OTHER INVESTED ASSETS:
Investment income 6.52% $ 63 5.49% $ 46
Net investment losses (24) (82)
-------- --------
Total $ 39 $ (36)
-------- --------
Ending assets $ 3,948 $ 3,512
-------- --------
TOTAL INVESTMENTS:
Investment income before
expenses and fees 7.04% $ 2,961 7.31% $ 2,838
Investment expenses and fees (0.15%) (62) (0.13%) (49)
-------- -------- ------- ---------
Net investment income 6.89% $ 2,899 7.18% $ 2,789
Net investment losses (170) (105)
Adjustments to investment
losses (5) 38 13
------- --------
Total $ 2,767 $ 2,697
======= ========
57
-------------
(1) Yields are based on quarterly average asset carrying values,
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 $798 million
and $995 million at March 31, 2003 and 2002, 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
securities lending program.
(3) Investment income from mortgage loans on real estate includes
prepayment fees.
(4) Real estate and real estate joint venture income is shown net of
depreciation of $45 million and $58 million for the three months
ended March 31, 2003 and 2002, respectively. Real estate and real
estate joint venture income includes amounts classified as
discontinued operations of $2 million and $27 million for the three
months ended March 31, 2003 and 2002, respectively. These amounts
are net of depreciation of $1 million and $18 million for the three
months ended March 31, 2003 and 2002, respectively. Net investment
gains include $90 million of gains classified as discontinued
operations for the three months ended March 31, 2003. There were no
gains classified as discontinued operations for the three months
ended March 31, 2002.
(5) Adjustments to investment gains and losses include amortization of
deferred policy acquisition costs and adjustments to the
policyholder dividend obligation resulting from investment gains and
losses.
FIXED MATURITIES
Fixed maturities consist principally of publicly traded and privately
placed debt securities, and represented 72.9% and 73.7% of total cash and
invested assets at March 31, 2003 and December 31, 2002, respectively. Based on
estimated fair value, public fixed maturities represented $125,043 million, or
86.5%, and $121,191 million, or 86.2%, of total fixed maturities at March 31,
2003 and December 31, 2002, respectively. Based on estimated fair value, private
fixed maturities represented $19,567 million, or 13.5%, and $19,362 million, or
13.8%, of total fixed maturities at March 31, 2003 and December 31, 2002,
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 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 fixed maturity
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 generally 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 generally considered below investment grade (rated "Ba1" or lower by
Moody's, or rated "BB+" or lower by S&P).
58
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:
March 31, 2003 December 31, 2002
-------------------------------- --------------------------------
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 $ 94,101 $100,489 69.5% $ 91,250 $97,495 69.4%
2 Baa 29,139 31,264 21.6 29,345 31,060 22.1
3 Ba 7,464 7,581 5.2 7,413 7,304 5.2
4 B 3,491 3,441 2.4 3,463 3,227 2.3
5 Caa and lower 712 626 0.4 434 339 0.2
6 In or near default 522 514 0.4 430 416 0.3
--------- -------- ----- -------- -------- -----
Subtotal 135,429 143,915 99.5 132,335 139,841 99.5
Redeemable preferred stock 806 695 0.5 817 712 0.5
--------- -------- ----- -------- -------- -----
Total fixed maturities $ 136,235 $144,610 100.0% $133,152 $140,553 100.0%
========= ======== ===== ======== ======== =====
-----------
(1) Amounts presented are based on rating agency designations.
Comparisons between NAIC ratings and rating agency designations are
published by the NAIC. The rating agency designations are based upon
the availability of the applicable ratings beginning with Moody's,
followed by S&P.
Based on estimated fair values, investment grade fixed maturities
comprised 91.1% and 91.5% of total fixed maturities in the general account at
March 31, 2003 and December 31, 2002, respectively.
The following table shows the amortized cost and estimated fair value of
fixed maturities, by contractual maturity dates (excluding scheduled sinking
funds) at:
March 31, 2003 December 31, 2002
-------------------- ---------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(Dollars in millions)
Due in one year or less $ 4,846 $ 4,949 $ 4,592 $ 4,662
Due after one year through five
years 24,627 25,888 26,200 27,354
Due after five years through ten
years 24,388 26,372 23,297 24,987
Due after ten years 35,249 38,713 35,507 38,452
-------- -------- -------- --------
Subtotal 89,110 95,922 89,596 95,455
Mortgage-backed and other
asset-backed securities 46,319 47,993 42,739 44,386
-------- -------- -------- --------
Subtotal 135,429 143,915 132,335 139,841
Redeemable preferred stock 806 695 817 712
-------- -------- -------- --------
Total fixed maturities $136,235 $144,610 $133,152 $140,553
======== ======== ======== ========
Actual maturities may differ as a result of prepayments by the issuer.
59
The Company diversifies its fixed maturities by security sector. The
following tables set forth the amortized cost, gross unrealized gain and 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:
March 31, 2003
--------------------------------------------------------------
Gross Unrealized
Amortized ----------------- Estimated % of
Cost Gain Loss Fair Value Total
--------- ------- ------ ---------- -----
(Dollars in millions)
U.S. corporate securities $ 49,186 $ 3,599 $ 618 $ 52,167 36.1%
Mortgage-backed securities 36,168 1,661 60 37,769 26.1
Foreign corporate
securities 18,241 1,518 217 19,542 13.5
U.S. treasuries/agencies 10,919 1,574 4 12,489 8.6
Asset-backed securities 10,151 229 156 10,224 7.1
Foreign government
securities 7,670 746 42 8,374 5.8
State and political
subdivisions 2,522 186 25 2,683 1.8
Other fixed income assets 572 108 13 667 0.5
-------- -------- -------- -------- -----
Total bonds 135,429 9,621 1,135 143,915 99.5
Redeemable preferred stocks 806 22 133 695 0.5
-------- -------- -------- -------- -----
Total fixed maturities $136,235 $ 9,643 $ 1,268 $144,610 100.0%
======== ======== ======== ======== =====
December 31, 2002
---------------------------------------------------------
Gross Unrealized
Amortized ------------------- Estimated % of
Cost Gain Loss Fair Value Total
--------- ------ ------ ---------- -----
(Dollars in millions)
U.S. corporate securities $ 47,021 $ 3,193 $ 957 $ 49,257 35.0%
Mortgage-backed securities 33,256 1,649 22 34,883 24.8
Foreign corporate
securities 18,001 1,435 207 19,229 13.7
U.S. treasuries/agencies 14,373 1,565 4 15,934 11.3
Asset-backed securities 9,483 228 208 9,503 6.8
Foreign government
securities 7,012 636 52 7,596 5.4
State and political
subdivisions 2,580 182 20 2,742 2.0
Other fixed income assets 609 191 103 697 0.5
-------- ----- ------ ------- ------
Total bonds 132,335 9,079 1,573 139,841 99.5
Redeemable preferred
stocks 817 12 117 712 0.5
-------- ----- ------ ------- ------
Total fixed maturities $ 133,152 $ 9,091 $ 1,690 $140,553 100.0%
======== ===== ====== ======= ======
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 as a result of
specific credit concerns; and
- other subjective factors.
60
The Company defines restructured securities in the fixed maturities
category as securities to which the Company has granted a concession that it
would not have otherwise considered but for the financial difficulties of the
obligor. The Company enters into a restructuring when it believes it will
realize a greater economic value under the new terms rather than through
liquidation or disposition. The terms of the restructuring may involve some or
all of the following characteristics: a reduction in the interest rate, an
extension of the maturity date, an exchange of debt for equity or a partial
forgiveness of principal or interest.
The following table presents the estimated fair value of the Company's
total fixed maturities classified as performing, potential problem, problem and
restructured at:
March 31, 2003 December 31, 2002
----------------------- -----------------------
Estimated % of Estimated % of
Fair Value Total Fair Value Total
---------- -------- ---------- ------
(Dollars in millions)
Performing $143,755 99.4% $139,717 99.4%
Potential problem 458 0.3 450 0.3
Problem 369 0.3 358 0.3
Restructured 28 -- 28 --
-------- ----- -------- -----
Total $144,610 100.0% $140,553 100.0%
======== ===== ======== =====
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:
- length of time and the extent to which the market value has been
below amortized cost;
- 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;
- potential for impairments in an entire industry sector or
sub-sector;
- potential for impairments in certain economically depressed
geographic locations;
- 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 $176 million and $275 million for the three months ended March
31, 2003 and 2002, respectively. The Company's three largest writedowns totaled
$101 million and $99 million for the three months ended March 31, 2003 and 2002,
respectively. The circumstances that gave rise to these impairments were
financial restructurings or bankruptcy filings. During the three months ended
March 31, 2003 and 2002, the Company sold fixed maturities with a fair value of
$5,584 million and $4,012 million at a loss of $73 million and $202 million,
respectively.
The gross unrealized loss related to the Company's fixed maturities at
March 31, 2003 was $1,268 million. These fixed maturities mature as follows: 2%
due in one year or less; 23% due in greater than one year to five years; 21% due
in greater than five years to ten years; and 54% due in greater than ten years
(calculated as a percentage of amortized cost). Additionally, such securities
are
61
concentrated by security type in U.S. corporates (48%), foreign corporates
(22%) and asset-backed (12%); and are concentrated by industry in finance (15%),
utilities (14%), asset-backed (12%) and transportation (11%) (calculated as a
percentage of gross unrealized loss). Non-investment grade securities represent
26% of the $18,606 million of the fair value and 43% of the $1,268 million 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:
March 31, 2003
------------------------------------------------------------------------
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 $ 9,873 $ 768 $ 342 $ 216 504 91
Six months or greater but less
than nine months 1,529 513 67 193 141 57
Nine months or greater but less
than twelve months 1,794 108 58 43 134 9
Twelve months or greater 5,194 95 306 43 281 13
------- ------- ------- ------- ----- ---
Total $18,390 $ 1,484 $ 773 $ 495 1,060 170
======= ======= ======= ======= ===== ===
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 and overall economic conditions. 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:
March 31, 2003
--------------
Gross % of
unrealized losses Total
----------------- -----
(Dollars in millions)
Less than 20% $ 773 61.0%
20% or more for less than six months 216 17.0
20% or more for six months or greater 279 22.0
------ -----
Total $1,268 100.0%
====== =====
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
1,060 securities with an amortized cost of $18,390 million and a gross
unrealized loss of $773 million. These fixed maturities mature as follows: 3%
due in one year or less; 23% due in greater than one year to five years; 20% due
in greater than five years to ten years; and 54% due in greater than ten years
(calculated as a percentage of amortized cost). Additionally, such securities
are concentrated by security type in U.S. corporates (42%) and foreign
corporates (27%); and are concentrated by industry in finance (20%), utilities
(11%) and consumer (10%) (calculated as a percentage of gross unrealized loss).
Non-investment grade securities represent 25% of the $17,617 million fair value
and 36% of the $773 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 comprised of 91 securities with an amortized cost of $768 million and
a gross unrealized loss of $216 million. These fixed maturities mature as
follows: 17% due in greater than one year to five years; 17% due in greater than
five years to ten years; and 66% due in greater than ten years (calculated as a
percentage of amortized cost). Additionally, such securities are concentrated by
security type in U.S. corporates (56%) and asset-backed (25%); and are
concentrated by industry in transportation (26%) and asset-backed (25%)
(calculated as a percentage of gross unrealized loss). Non-investment grade
securities represent 33% of the $552 million fair value and 35% of the $216
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 79 securities with an amortized cost of $716 million and
a gross unrealized loss of
62
$279 million. These fixed maturities mature as follows: 23% due in greater than
one year to five years; 38% due in greater than five years to ten years; and 39%
due in greater than ten years (calculated as a percentage of amortized cost).
Additionally, such securities are concentrated by security type in U.S.
corporates (58%), asset-backed (16%) and foreign corporate (13%); and are
concentrated by industry in, transportation (28%), utilities (27%) and
asset-backed (16%) (calculated as a percentage of gross unrealized loss).
Non-investment grade securities represent 65% of the $437 million fair value and
70% of the $279 million gross unrealized loss.
The Company held 13 fixed maturity securities each with a gross unrealized
loss at March 31, 2003 greater than $10 million. Eight of these securities
represent 47% 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 March 31, 2003 for these securities were $250 million and $131 million,
respectively. These securities were concentrated in the U.S. corporate sector.
The Company analyzed, on a case-by-case basis, each of the eight fixed maturity
securities as of March 31, 2003 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 utility and
transportation industries, were depressed as a result of 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 March 31, 2003.
Corporate Fixed Maturities. The table below shows the major industry types
that comprise the corporate bond holdings at:
March 31, 2003 December 31, 2002
------------------------ -----------------------
Estimated % of Estimated % of
Fair Value Total Fair Value Total
---------- ------ ---------- -----
(Dollars in millions)
Industrial $ 29,413 41.0% $ 29,077 42.5%
Utility 8,434 11.8 7,219 10.5
Finance 13,035 18.2 12,596 18.4
Yankee/Foreign (1) 19,542 27.2 19,229 28.1
Other 1,285 1.8 365 0.5
--------- ----- -------- -----
Total $ 71,709 100.0% $ 68,486 100.0%
========= ===== ======== =====
------------
(1) Includes publicly traded, U.S. 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 March 31, 2003, the Company's combined holdings in
the ten issuers to which it had the greatest exposure totaled $4,698 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
March 31, 2003 was $573 million.
At March 31, 2003 and December 31, 2002, investments of $14,960 million
and $14,778 million, respectively, or 76.6% and 76.9%, respectively, of the
Yankee/Foreign sector, represented exposure to traditional Yankee bonds. The
balance of this exposure was primarily U.S. dollar-denominated and concentrated
by security type in industrial and financial institutions. The Company
diversifies the Yankee/Foreign portfolio by country and issuer.
The Company does not have material exposure to foreign currency risk in
its invested assets. In the Company's international insurance operations, both
its assets and liabilities are generally denominated in local currencies.
Foreign currency denominated securities supporting U.S. dollar liabilities are
generally swapped back into U.S. dollars.
The Company's exposure to future deterioration in the economic and
political environment in 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 $358
million and $144 million, respectively, as of March 31, 2003. The net carrying
value of the Company's Brazilian and Argentine related investments is net of
writedowns for other-than-temporary impairments.
63
Mortgage-Backed Securities. The following table shows the types of
mortgage-backed securities the Company held at:
March 31, 2003 December 31, 2002
------------------- ---------------------
Estimated % of Estimated % of
Fair Value Total Fair Value Total
---------- ----- ---------- -----
(Dollars in millions)
Pass-through securities $13,825 36.6% $12,515 35.9%
Collateralized mortgage obligations 16,435 43.5 15,511 44.5
Commercial mortgage-backed securities 7,509 19.9 6,857 19.6
------- ----- ------- -----
Total $37,769 100.0% $34,883 100.0%
======= ===== ======= =====
At March 31, 2003 and December 31, 2002, pass-through and collateralized
mortgage obligations totaled $30,260 million and $28,026 million, respectively,
or 80.1% and 80.4%, respectively, 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 March 31, 2003
and December 31, 2002, approximately $3,901 million and $3,598 million,
respectively, or 52.0% and 52.5%, respectively, of the commercial
mortgage-backed securities, and $28,976 million and $27,590 million,
respectively, or 95.8% and 98.4%, respectively, 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 $5,719 million and $4,912 million,
or 55.9% and 51.7%, of total asset-backed securities were rated Aaa/AAA by
Moody's or S&P at March 31, 2003 and December 31, 2002, 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, primarily asset securitizations and structured notes.
These transactions enhance the Company's total return on its investment
portfolio principally by generating management fee income on asset
securitizations and by providing equity-based returns on debt securities through
structured notes consisting of equity linked notes and similar instruments.
Effective February 1, 2003, FIN 46 established new accounting guidance
relating to the consolidation of variable interest entities ("VIEs"). Certain of
the Company's asset-backed securitizations and structured investment
transactions meet the definition of a VIE under FIN 46. In addition, certain of
the Company's investments in real estate joint ventures and other limited
partnership interests also meet the VIE definition. The Company consolidates any
VIE created on or after February 1, 2003 for which it is the primary beneficiary
and, effective July 1, 2003, will consolidate any VIE created prior to February
1, 2003 for which it is the primary beneficiary.
The Company sponsors financial asset securitizations of high yield debt
securities, investment grade bonds and structured finance securities and also is
the collateral manager and a beneficial interest holder in such transactions. As
the collateral manager, the Company earns management fees on the outstanding
securitized asset balance, which are recorded in income as earned. When the
Company transfers assets to a bankruptcy-remote special purpose entity ("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 carrying amount 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. Beneficial interests in securitizations are
carried at fair value in fixed maturities. Income on the beneficial interests is
recognized using the prospective method in accordance with Emerging Issues Task
Force ("EITF") Issue No. 99-20, Recognition of
64
Interest Income and Impairment on Certain Investments. Prior to the effective
date of FIN 46, the SPEs used to securitize assets were not consolidated by the
Company because unrelated third parties hold controlling interests through
ownership of equity in the SPEs, representing at least three percent of the
value 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 interest of
the SPE.
The Company purchases or receives beneficial interests in SPEs, which
generally acquire financial assets, including corporate equities, debt
securities and purchased options. The Company has not guaranteed the
performance, liquidity or obligations of the SPEs and the Company's exposure to
loss is limited to its carrying value of the beneficial interests in the SPEs.
The Company uses the beneficial interests as part of its risk management
strategy, including asset-liability management. Prior to the effective date of
FIN 46, these SPEs were not consolidated by the Company because unrelated third
parties hold controlling interests through ownership of equity in the SPEs,
representing at least three percent of the value 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 interest of the SPE. The beneficial interests in
SPEs where the Company exercises significant influence over the operating and
financial policies of the SPE are accounted for in accordance with the equity
method of accounting. Impairments of these beneficial interests are included in
net investment gains and losses. The beneficial interests in SPEs where the
Company does not exercise significant influence are accounted for based on the
substance of the beneficial interest's rights and obligations. Beneficial
interests are accounted for and are included in fixed maturities. These
beneficial interests are generally structured notes, as defined by EITF Issue
No. 96-12, Recognition of Interest Income and Balance Sheet Classification of
Structured Notes, and their income is recognized using the retrospective
interest method or the level yield method, as appropriate.
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 12.6% and 13.2% of the Company's total cash and invested assets
at March 31, 2003 and December 31, 2002, 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:
March 31, 2003 December 31, 2002
-------------------- -------------------
Carrying % of Carrying % of
Value Total Value Total
----- ----- ----- -----
(Dollars in millions)
Commercial $19,623 78.3% $ 19,552 78.0%
Agricultural 5,052 20.2 5,146 20.5
Residential 371 1.5 388 1.5
------- ----- -------- -----
Total $25,046 100.0% $ 25,086 100.0%
======= ===== ======== =====
65
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:
MARCH 31, 2003 DECEMBER 31, 2002
---------------------- ----------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
----- ----- ----- -----
(DOLLARS IN MILLIONS)
REGION
South Atlantic $ 5,167 26.3% $ 5,076 26.0%
Pacific 4,198 21.4 4,180 21.4
Middle Atlantic 3,416 17.4 3,441 17.6
East North Central 2,260 11.5 2,147 11.0
New England 1,168 6.0 1,323 6.8
West South Central 1,149 5.9 1,097 5.6
Mountain 858 4.4 833 4.2
International 631 3.2 632 3.2
West North Central 598 3.0 645 3.3
East South Central 178 0.9 178 0.9
------- ------- ------- -------
Total $19,623 100.0% $19,552 100.0%
======= ======= ======= =======
PROPERTY TYPE
Office $ 9,301 47.5% $ 9,340 47.8%
Retail 4,321 22.0 4,320 22.1
Apartments 2,867 14.6 2,793 14.3
Industrial 1,893 9.6 1,910 9.7
Hotel 996 5.1 942 4.8
Other 245 1.2 247 1.3
------- ------- ------- -------
Total $19,623 100.0% $19,552 100.0%
======= ======= ======= =======
The following table presents the scheduled maturities for the Company's
commercial mortgage loans at:
MARCH 31, 2003 DECEMBER 31, 2002
---------------------- ---------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
----- ----- ----- -----
(DOLLARS IN MILLIONS)
Due in one year or less $ 792 4.0% $ 713 3.6%
Due after one year through two years 1,018 5.2 1,204 6.2
Due after two years through three years 2,220 11.3 1,939 9.9
Due after three years through four years 1,888 9.6 2,048 10.5
Due after four years through five years 3,041 15.5 2,443 12.5
Due after five years 10,664 54.4 11,205 57.3
------- ------- ------- -------
Total $19,623 100.0% $19,552 100.0%
======= ======= ======= =======
Problem, Potential Problem and Restructured Mortgage Loans. The Company
monitors its mortgage loan investments on an ongoing 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.
66
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 on an ongoing basis. These reviews may
include an analysis of the property financial statements and rent roll, lease
rollover analysis, property inspections, market analysis 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 diversification 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 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
Impairments of a Loan ("SFAS 114"), as loans which it probably will not collect
all amounts due according to applicable contractual terms of the agreement. The
Company bases valuation allowances upon the present value of expected future
cash flows discounted at the loan's original effective interest rate or the
value of the loan's collateral. The Company records valuation allowances as
investment losses. The Company records subsequent adjustments to allowances as
investment gains or losses.
The Company has a $525 million non-recourse 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
continues to be in discussions with the borrower concerning the borrower's
ownership interest in the property. A change in circumstances could result in a
borrower default, MetLife classifying the loan as impaired or the transfer of
ownership of the property to the Company. The Company did not classify this loan
as a problem or potential problem as of March 31, 2003 since the obligor is
performing as agreed and the estimated collateral value provides sufficient
coverage for the loan. Based on the Company's current estimate that the
property's market value exceeds the loan balance, the Company would not record a
loss in accordance with SFAS 114 in the event the loan was classified as
impaired.
The following table presents the amortized cost and valuation allowance for
commercial mortgage loans distributed by loan classification at:
MARCH 31, 2003 DECEMBER 31, 2002
----------------------------------------------- --------------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST (1) TOTAL ALLOWANCE COST COST (1) TOTAL ALLOWANCE COST
-------- ----- --------- ---- -------- ----- --------- ----
(DOLLARS IN MILLIONS)
Performing $19,440 98.5% $ 57 0.3% $19,343 98.3% $ 60 0.3%
Restructured 201 1.0 50 24.9% 246 1.3 49 19.9%
Delinquent or under
foreclosure 14 0.1 -- 0.0% 14 0.1 -- 0.0%
Potentially delinquent 86 0.4 11 12.8% 68 0.3 10 14.7%
------- ----- ------- ------- ----- -------
Total $19,741 100.0% $ 118 0.6% $19,671 100.0% $ 119 0.6%
======= ===== ======= ======= ===== =======
- ----------
(1) Amortized cost is equal to carrying value before valuation allowances.
67
The following table presents the changes in valuation allowances for
commercial mortgage loans for the:
THREE MONTHS ENDED
MARCH 31, 2003
--------------
(DOLLARS IN MILLIONS)
Balance, beginning of period $119
Net additions 2
Deductions for dispositions, foreclosures and writedowns (3)
----
Balance, end of period $118
====
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 63.4% of the $5,052 million of agricultural mortgage loans
outstanding at March 31, 2003 were subject to rate resets prior to maturity. A
substantial portion of these loans generally is successfully renegotiated and
remains outstanding to maturity. The process and policies for monitoring the
agricultural mortgage loans and classifying them by performance status are
generally the same as those for the commercial loans.
The following table presents the amortized cost and valuation allowances for
agricultural mortgage loans distributed by loan classification at:
MARCH 31, 2003 DECEMBER 31, 2002
---------------------------------------------- ----------------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST (1) TOTAL ALLOWANCE COST COST (1) TOTAL ALLOWANCE COST
-------- ----- --------- ---- -------- ----- --------- ----
(DOLLARS IN MILLIONS)
Performing $4,864 95.9% $ -- 0.0% $4,980 96.7% $ -- 0.0%
Restructured 123 2.4 14 11.4% 140 2.7 5 3.6%
Delinquent or under
foreclosure 75 1.5 4 5.3% 14 0.3 -- 0.0%
Potentially delinquent 8 0.2 -- 0.0% 18 0.3 1 5.6%
------ ------ ------ ------ ------ ------
Total $5,070 100.0% $ 18 0.4% $5,152 100.0% $ 6 0.1%
====== ====== ====== ====== ====== ======
- ----------
(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:
THREE MONTHS ENDED
MARCH 31, 2003
--------------
(DOLLARS IN MILLIONS)
Balance, beginning of period $ 6
Net additions 12
Deductions for dispositions, foreclosures and writedowns --
---
Balance, end of period $18
===
The principal risks in holding agricultural mortgage loans are property
specific, supply and demand, and 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.
68
REAL ESTATE AND REAL ESTATE JOINT VENTURES
The Company's real estate and real estate joint venture investments consist
of commercial and agricultural properties located primarily throughout the U.S.
The Company manages these investments through a network of regional offices
overseen by its investment department. At March 31, 2003 and December 31, 2002,
the carrying value of the Company's real estate, real estate joint ventures and
real estate held-for-sale was $4,569 million and $4,725 million, respectively,
or 2.3% and 2.5% 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. The following table presents the carrying value of the
Company's real estate, real estate joint ventures, real estate held-for-sale and
real estate acquired upon foreclosure at:
MARCH 31, 2003 DECEMBER 31, 2002
--------------------- ---------------------
CARRYING % OF CARRYING % OF
TYPE VALUE TOTAL VALUE TOTAL
----- ----- ----- -----
(DOLLARS IN MILLIONS)
Real estate held-for-investment $4,174 91.4% $4,187 88.6%
Real estate joint ventures
held-for-investment 365 8.0 377 8.0
Foreclosed real estate held-for-investment 2 0.0 2 0.0
------ ------ ------ ------
4,541 99.4 4,566 96.6
------ ------ ------ ------
Real estate held-for-sale 25 0.5 151 3.2
Foreclosed real estate held-for-sale 3 0.1 8 0.2
------ ------ ------ ------
28 0.6 159 3.4
------ ------ ------ ------
Total real estate, real estate joint
ventures and real estate held-for-sale $4,569 100.0% $4,725 100.0%
====== ====== ====== ======
Office properties represent 57% and 58% of the Company's equity real estate
portfolio at March 31, 2003 and December 31, 2002, respectively. The average
occupancy level of office properties was 90% and 92% at March 31, 2003 and
December 31, 2002, 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.
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 took
advantage of a significant demand for Class A, institutional grade properties
and, as a result, sold certain real estate holdings in its portfolio mostly
during the fourth quarter of 2002, although several sales occurred in the first
quarter of 2003. 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 investment 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 valuation
allowances as investment losses and subsequent adjustments as investment gains
or losses. If circumstances arise that were previously considered unlikely and,
as a result, the property is expected to be on the market longer than
anticipated, a held-for-sale property is reclassified to held-for-investment and
measured as such.
69
The Company's carrying value of real estate held-for-sale, including real
estate acquired upon foreclosure of commercial and agricultural mortgage loans,
in the amounts of $28 million and $159 million at March 31, 2003 and December
31, 2002, respectively, are net of impairments of $1 million and $5 million,
respectively, and net of valuation allowances of $8 million and $11 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 $1,205 million and $1,348 million at March 31,
2003 and December 31, 2002, 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 $2,299 million and $2,395 million at
March 31, 2003 and December 31, 2002, 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 uses the equity method of accounting for investments in limited
partnership interests in which it has more than a minor interest, has influence
over the partnership's operating and financial policies and does not have a
controlling interest. The Company uses the cost method for minor interest
investments and when it has virtually no influence over the partnership's
operating and financial policies. The Company's investments in equity securities
excluding partnerships represented 0.6% and 0.7% of cash and invested assets at
March 31, 2003 and December 31, 2002, respectively.
Equity securities include, at March 31, 2003 and December 31, 2002, $428
million and $443 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 markets.
The Company makes commitments to fund partnership investments in the normal
course of business. The amounts of these unfunded commitments were $1,594
million and $1,667 million at March 31, 2003 and December 31, 2002,
respectively. The Company anticipates that these amounts will be invested in the
partnerships over the next three to five years.
The following tables set forth the cost, gross unrealized gain or loss and
estimated fair value of the Company's equity securities, as well as the
percentage of the total equity securities at:
MARCH 31, 2003
----------------------------------------------------------
GROSS UNREALIZED
---------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
---- ---- ---- ---------- -----
(DOLLARS IN MILLIONS)
Equity Securities:
Common stocks $ 805 $ 98 $119 $ 784 65.1%
Nonredeemable preferred stocks 410 16 5 421 34.9
------ ---- ---- ------ -----
Total equity securities $1,215 $114 $124 $1,205 100.0%
====== ==== ==== ====== =====
DECEMBER 31, 2002
----------------------------------------------------------
GROSS UNREALIZED
---------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
---- ---- ---- ---------- -----
(DOLLARS IN MILLIONS)
Equity Securities:
Common stocks $ 877 $115 $79 $ 913 67.7%
Nonredeemable preferred stocks 426 13 4 435 32.3
------ ---- --- ------ -----
Total equity securities $1,303 $128 $83 $1,348 100.0%
====== ==== === ====== =====
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 entered into bankruptcy.
70
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:
- length of time and the extent to which the market value has been below
cost;
- 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;
- potential for impairments in an entire industry sector or sub-sector;
- potential for impairments in certain economically depressed geographic
locations;
- 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 $77 million and $36 million for the three
months ended March 31, 2003 and 2002, respectively. During the three months
ended March 31, 2003 and 2002, the Company sold equity securities with an
estimated fair value of $20 million and $28 million at a loss of $5 million and
$31 million, respectively.
The gross unrealized loss related to the Company's equity securities at March
31, 2003 was $124 million. Such securities are concentrated by security type in
common stock (72%) and mutual funds (24%); and are concentrated by industry in
financial (73%) and domestic broad market mutual funds (23%) (calculated as a
percentage of gross unrealized loss).
71
The following table presents the cost, 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:
MARCH 31, 2003
---------------------------------------------------------------------
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 $352 $258 $33 $91 65 8
Six months or greater but less than nine months 4 -- -- -- 1 --
Nine months or greater but less than twelve
months 3 -- -- -- 1 --
Twelve months or greater -- -- -- -- -- --
---------------- -------------- ---------------
Total $359 $258 $33 $91 67 8
================ ============== ===============
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 and
overall economic conditions. 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 March 31, 2003 where the estimated fair value had declined and
remained below cost by:
MARCH 31, 2003
----------------------------
GROSS % OF
UNREALIZED LOSSES TOTAL
----------------- -----
(DOLLARS IN MILLIONS)
Less than 20% $ 33 26.6%
20% or more for less than six months 91 73.4
20% or more for six months or greater -- --
---- -----
Total $124 100.0%
==== =====
The category of equity securities where the estimated fair value has declined
and remained below cost by less than 20% is comprised of 67 equity securities
with a cost of $359 million and a gross unrealized loss of $33 million. These
securities are concentrated by security type in mutual funds (88%); and
concentrated by industry in domestic broad market mutual funds (87%) (calculated
as a percentage of gross unrealized loss). The significant factors considered at
March 31, 2003 in the review of equity securities for other-than-temporary
impairment were the unusual and severely depressed market conditions and the
instability of the global economy.
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
eight equity securities with a cost of $258 million and a gross unrealized loss
of $91 million. These securities are concentrated by security type in common
stock (95%); and concentrated by industry in financial (98%) (calculated as a
percentage of gross unrealized loss). The significant factors considered at
March 31, 2003 in the review of equity securities for other-than-temporary
impairment were the unusual and severely depressed market conditions and the
instability of the global economy.
The Company held two equity securities with a gross unrealized loss at March
31, 2003 greater than $5 million. Neither of these securities represented gross
unrealized losses where the estimated fair value had declined and remained below
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 $3.3 billion and $3.1 billion at March 31,
2003 and December 31, 2002, respectively. 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
72
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 2.0% and 1.9% of cash
and invested assets at March 31, 2003 and December 31, 2002, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative instruments to manage risk through one of four
principal risk management strategies: (i) the hedging of liabilities; (ii)
invested assets; (iii) portfolios of assets or liabilities; and (iv) firm
commitments and forecasted transactions. Additionally, the Company enters into
income generation and replication derivative transactions as permitted by its
insurance subsidiaries' derivatives use plans approved by the applicable state
insurance departments. The Company's derivative hedging strategy employs a
variety of instruments, including financial futures, financial forwards,
interest rate, credit default and foreign currency swaps, foreign currency
forwards and options, including caps and floors.
The table below provides a summary of the notional amount and fair value of
derivative financial instruments held at:
MARCH 31, 2003 DECEMBER 31, 2002
----------------------------------- -----------------------------------
FAIR VALUE FAIR VALUE
NOTIONAL --------------------- NOTIONAL ---------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
------ ------ ----------- ------ ------ -----------
Financial futures $ 4 $ -- $ -- $ 4 $ -- $ --
Interest rate swaps 5,139 222 87 3,866 196 126
Floors 325 9 -- 325 9 --
Caps 8,040 -- -- 8,040 -- --
Financial forwards 2,224 36 7 1,945 -- 12
Foreign currency swaps 2,702 65 244 2,371 92 181
Options 55 -- -- 78 9 --
Foreign currency forwards 53 -- 1 54 -- 1
Credit default swaps 446 3 1 376 2 --
------- ---- ---- ------- ---- ----
Total contractual commitments $18,988 $335 $340 $17,059 $308 $320
======= ==== ==== ======= ==== ====
SECURITIES LENDING
The Company participates in a securities lending program whereby blocks of
securities, which are included in investments, 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 $16,525 million and
$14,873 million and an estimated fair value of $19,352 million and $17,625
million were on loan under the program at March 31, 2003 and December 31, 2002,
respectively. The Company was liable for cash collateral under its control of
$19,566 million and $17,862 million at March 31, 2003 and December 31, 2002,
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
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.
73
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has material exposure to interest rate, equity market and foreign
currency 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 March 31, 2003 is relatively
unchanged in amount from that reported on December 31, 2002, a description of
which may be found in the 2002 Annual Report on Form 10-K.
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 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) Changes 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 7 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.
Certain class members have opted out of these class action settlements and
have brought or continued non-class action sales practices lawsuits. In
addition, other sales practices lawsuits have been brought. As of March 31,
2003, there are approximately 400 sales practices lawsuits pending against
Metropolitan Life, approximately 60 sales practices lawsuits pending against New
England Mutual and approximately 35 sales practices lawsuits pending against
General American.
The Company believes adequate provision has been made in its unaudited
interim condensed consolidated financial statements for all probable and
reasonably 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 66,000
asbestos-related claims in 2002. During the first three months of 2003 and 2002,
Metropolitan Life received approximately 16,200 and 11,800 asbestos-related
claims, respectively. In 2003, a claim was made under the excess insurance
policies obtained by the Company in 1998 for the amounts paid with respect to
asbestos litigation in excess of the self-insured retention under the policies.
In 2003, Metropolitan Life also has been named as a defendant in a small number
of silicosis and mixed dust cases. The cases are pending in Mississippi, Texas,
Ohio, Pennsylvania, West Virginia, Louisiana and Arkansas. The Company intends
to vigorously defend itself against these cases.
The Company believes adequate provision has been made in its unaudited
interim condensed consolidated financial statements for all probable and
reasonably estimable losses for asbestos-related claims. The ability of
Metropolitan Life to estimate its ultimate
74
asbestos exposure is subject to considerable uncertainty due to numerous
factors. The availability of data is limited and it is difficult to predict with
any certainty numerous variables that can affect liability estimates, including
the number of future claims, the cost to resolve claims, the disease mix and
severity of disease, the jurisdiction of claims filed, tort reform efforts and
the impact of any possible future adverse verdicts and their amounts.
It is likely that bills will be introduced in 2003 in the United States
Congress to reform asbestos litigation. While the Company strongly supports
reform efforts, there can be no assurance that legislative reforms will be
enacted. Publicity regarding legislative reform efforts may be resulting in an
increase in the number of claims. Metropolitan Life will continue to study its
claims experience, review external literature regarding asbestos claims
experience in the United States and consider numerous variables that can affect
its asbestos liability exposure, including bankruptcies of other companies
involved in asbestos litigation and legislative and judicial developments, to
identify trends and to assess their impact on the recorded asbestos liability.
The number of asbestos cases that may be brought or the aggregate amount of
any liability that Metropolitan Life may ultimately incur is uncertain.
Accordingly, 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
unaudited interim condensed consolidated financial statements and that future
charges to income may be necessary. While the potential future charges could be
material in particular quarterly or annual periods in which they are recorded,
based on information currently known by management, it does not believe any such
charges are likely to have a material adverse effect on the Company's
consolidated financial position.
PROPERTY AND CASUALTY ACTIONS
As previously reported, 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. In a lawsuit involving another insurer, the Tennessee Supreme
Court recently held that diminished value is not covered under a Tennessee
automobile policy. Based on that decision, Metropolitan Property and Casualty
Insurance Company will be seeking dismissal of the Tennessee matter.
DEMUTUALIZATION ACTIONS
The Company has previously reported that 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. Five purported class actions pending in the New York state
court in New York County were consolidated within the commercial part. In
addition, there remained a separate purported class action in New York state
court in New York County. On February 21, 2003, the defendants' motions to
dismiss both the consolidated action and separate action were granted; leave to
replead as a proceeding under Article 78 of New York's Civil Practice Law and
Rules has been granted in the separate action. Plaintiffs in the consolidated
action and separate action have filed notices of appeal.
Three purported class actions were previously 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. On February 4, 2003, plaintiffs filed a consolidated amended
complaint adding a fraud claim under the Securities Exchange Act of 1934.
Metropolitan Life has filed a motion to dismiss the consolidated amended
complaint and a motion for summary judgment in this action.
A purported class action also was previously 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. In January
2003, the United States Court of Appeals for the Second Circuit affirmed the
dismissal. Plaintiffs have filed a petition for certiorari with the United
States Supreme Court. 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.
75
RACE-CONSCIOUS UNDERWRITING CLAIMS
As previously reported, 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
affiliates. The New York Insurance Department has concluded its examination of
Metropolitan Life concerning possible past race-conscious underwriting
practices. The 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 were 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. On April 28, 2003, the United States District Court approved a class
action settlement of the consolidated actions. 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.
Eighteen lawsuits involving approximately 130 plaintiffs have been filed in
federal and state court in Alabama, Mississippi and Tennessee alleging federal
and/or state law claims of racial discrimination in connection with the sale,
formation, administration or servicing of life insurance policies. Metropolitan
Life is contesting vigorously plaintiffs' claims in these 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. Plaintiffs have filed a motion for class certification. Opposition
papers were filed by Metropolitan Life. Metropolitan Life is vigorously
defending itself against the allegations in the lawsuit.
Various litigation, claims and assessments against the Company, in addition
to those discussed above and those otherwise provided for in the Company's
unaudited interim condensed 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 unaudited interim condensed
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 consolidated net income or cash flows in
particular quarterly or annual periods.
76
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 MetLife, Inc. Amended and Restated Bylaws (effective
April 22, 2003).
99.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
During the three months ended March 31, 2003, the following
current reports were filed on Form 8-K:
1. Form 8-K filed January 14, 2003 (dated January 14,
2003) attaching press release regarding declaration
of the date for the annual shareholders meeting.
2. Form 8-K filed February 3, 2003 (dated February 3,
2003) regarding the remarketing of debentures and
attaching the Statement of Eligibility on Form T-1 of
the trustee.
3. Form 8-K filed February 6, 2003 (dated February 6,
2003) attaching press release regarding the
remarketing of debentures underlying equity security
units.
4. Form 8-K filed February 10, 2003 (dated February 10,
2003) regarding asbestos-related claims.
5. Form 8-K filed February 12, 2003 (dated February 11,
2003) attaching press release regarding fourth
quarter and full-year 2002 results.
6. Form 8-K filed February 13, 2003 (dated February 13,
2003) attaching press release regarding the interest
rate on the remarketed debentures.
7. Form 8-K filed February 19, 2003 (dated February 19,
2003) regarding the closing of the remarketing and
attaching the Remarketing Agreement.
77
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: May 13, 2003
78
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: May 13, 2003 /s/ Robert H. Benmosche
-----------------------
Name: Robert H. Benmosche
Title: Chairman, President and
Chief Executive Officer
79
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: May 13, 2003 /s/ Stewart G. Nagler
---------------------
Name: Stewart G. Nagler
Title: Vice Chairman and Chief
Financial Officer
80
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER EXHIBIT NAME NUMBER
3.1 MetLife, Inc. Amended and Restated Bylaws
(effective April 22, 2003).
99.1 Certification of Chief Executive Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
81