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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 November 5, 2003, 760,163,283 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 September 30, 2003 and December 31,
2002........................................................................................ 4
Unaudited Interim Condensed Consolidated Statements of Income for the Three Months and Nine
Months Ended September 30, 2003 and 2002.................................................... 5
Unaudited Interim Condensed Consolidated Statement of Stockholders' Equity for the Nine Months
Ended September 30, 2003.................................................................... 6
Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 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............................................................................. 33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................. 92
ITEM 4. CONTROLS AND PROCEDURES................................................................ 92
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................................................... 93
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................................... 96
SIGNATURES......................................................................................... 97
EXHIBIT INDEX...................................................................................... 98
- 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 results from
litigation, arbitration or regulatory investigations; (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
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value (amortized cost: $149,985
and $132,899, respectively) $ 159,940 $ 140,288
Equity securities, at fair value (cost: $1,390 and $1,556, respectively) 1,659 1,613
Mortgage loans on real estate 25,535 25,086
Policy loans 8,668 8,580
Real estate and real estate joint ventures held-for-investment 4,724 3,926
Real estate held-for-sale 640 799
Other limited partnership interests 2,450 2,395
Short-term investments 2,718 1,921
Other invested assets 4,617 3,727
--------- ---------
Total investments 210,951 188,335
Cash and cash equivalents 5,372 2,323
Accrued investment income 2,265 2,088
Premiums and other receivables 7,133 6,472
Deferred policy acquisition costs 12,367 11,727
Other assets 6,897 6,788
Separate account assets 69,998 59,693
--------- ---------
Total assets $ 314,983 $ 277,426
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 92,817 $ 89,815
Policyholder account balances 74,857 66,830
Other policyholder funds 6,293 5,685
Policyholder dividends payable 1,159 1,030
Policyholder dividend obligation 2,278 1,882
Short-term debt 2,935 1,161
Long-term debt 5,703 4,425
Shares subject to mandatory redemption 277 -
Current income taxes payable 728 769
Deferred income taxes payable 2,400 1,625
Payables under securities loaned transactions 24,666 17,862
Other liabilities 9,967 7,999
Separate account liabilities 69,998 59,693
--------- ---------
Total liabilities 294,078 258,776
--------- ---------
Commitments, contingencies and guarantees (Note 8)
Company-obligated mandatorily redeemable securities of subsidiary trusts - 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 September 30, 2003 and December 31, 2002;
760,162,476 shares outstanding at September 30, 2003 and 700,278,412 shares
outstanding at December 31, 2002 8 8
Additional paid-in capital 14,960 14,968
Retained earnings 3,667 2,807
Treasury stock, at cost; 26,604,188 shares at September 30, 2003
and 86,488,252 shares at December 31, 2002 (739) (2,405)
Accumulated other comprehensive income 3,009 2,007
--------- ---------
Total stockholders' equity 20,905 17,385
--------- ---------
Total liabilities and stockholders' equity $ 314,983 $ 277,426
========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
- 4 -
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
REVENUES
Premiums $ 5,079 $ 4,672 $ 14,994 $ 13,855
Universal life and investment-type product policy fees 623 591 1,798 1,561
Net investment income 2,864 2,778 8,605 8,341
Other revenues 335 320 988 1,030
Net investment losses (net of amounts allocated from
other accounts of ($39), ($16), ($77) and ($102), respectively) (85) (250) (342) (524)
-------- -------- -------- --------
Total revenues 8,816 8,111 26,043 24,263
-------- -------- -------- --------
EXPENSES
Policyholder benefits and claims (excludes amounts
directly related to net investment losses
of ($29), ($5), ($52) and ($76), respectively) 5,178 4,739 15,096 14,239
Interest credited to policyholder account balances 767 736 2,275 2,177
Policyholder dividends 473 504 1,483 1,489
Other expenses (excludes amounts directly related to
net investment losses of ($10), ($11), ($25) and ($26), respectively) 1,691 1,707 5,286 4,932
-------- -------- -------- --------
Total expenses 8,109 7,686 24,140 22,837
-------- -------- -------- --------
Income from continuing operations before provision for income taxes 707 425 1,903 1,426
Provision for income taxes 147 118 476 456
-------- -------- -------- --------
Income from continuing operations 560 307 1,427 970
Income from discontinued operations, net of income taxes 14 26 89 74
-------- -------- -------- --------
Income before cumulative effect of change in accounting 574 333 1,516 1,044
Cumulative effect of change in accounting - (5) - -
-------- -------- -------- --------
Net income $ 574 $ 328 $ 1,516 $ 1,044
======== ======== ======== ========
Income from continuing operations available to common
shareholders per share
Basic $ 0.74 $ 0.44 $ 1.92 $ 1.37
======== ======== ======== ========
Diluted $ 0.74 $ 0.42 $ 1.92 $ 1.33
======== ======== ======== ========
Net income available to common shareholders per share
Basic $ 0.75 $ 0.47 $ 2.05 $ 1.48
======== ======== ======== ========
Diluted $ 0.75 $ 0.45 $ 2.04 $ 1.42
======== ======== ======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
- 5 -
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 (Losses) 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 13 4 17
Settlement of common stock purchase contracts (656) 1,662 1,006
Premium on conversion of company-obligated
mandatorily redeemable securities of a
subsidiary trust (21) (21)
Comprehensive income:
Net income 1,516 1,516
Other comprehensive income:
Unrealized losses on derivative
instruments, net of income taxes (165) (165)
Unrealized investment gains, net of
related offsets, reclassification
adjustments and income taxes 1,051 1,051
Foreign currency translation adjustments 125 125
Minimum pension liability adjustment (9) (9)
-------
Other comprehensive income 1,002
-------
Comprehensive income 2,518
------ -------- ------ ------- ------ ----- ---- -------
Balance at September 30, 2003 $ 8 $ 14,960 $3,667 $ (739) $3,168 $(104) $(55) $20,905
====== ======== ====== ======= ====== ===== ==== =======
SEE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
- 6 -
METLIFE, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(DOLLARS IN MILLIONS)
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
2003 2002
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 5,043 $ 2,427
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales, maturities and repayments of:
Fixed maturities 55,201 46,342
Equity securities 215 1,558
Mortgage loans on real estate 2,271 1,888
Real estate and real estate joint ventures 276 227
Other limited partnership interests 186 115
Purchases of:
Fixed maturities (71,904) (58,076)
Equity securities (10) (853)
Mortgage loans on real estate (3,215) (1,991)
Real estate and real estate joint ventures (285) (330)
Other limited partnership interests (394) (218)
Net change in short-term investments (800) (1,213)
Purchase of businesses, net of cash received 18 (879)
Proceeds from sales of businesses 5 -
Net change in payable under securities loaned transactions 6,804 3,590
Other, net (645) (69)
-------- --------
Net cash used in investing activities (12,277) (9,909)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits 27,981 21,557
Withdrawals (20,650) (17,753)
Net change in short-term debt 1,774 523
Long-term debt issued 225 10
Long-term debt repaid (53) (210)
Treasury stock acquired - (471)
Settlement of common stock purchase contracts 1,006 -
-------- --------
Net cash provided by financing activities 10,283 3,656
-------- --------
Change in cash and cash equivalents 3,049 (3,826)
Cash and cash equivalents, beginning of period 2,323 7,473
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,372 $ 3,647
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 293 $ 264
======== ========
Income taxes $ 329 $ 177
======== ========
Non-cash transactions during the period:
Business acquisitions - assets $ 126 $ 2,630
======== ========
Business acquisitions - liabilities $ 144 $ 1,751
======== ========
Business dispositions - assets $ 9 $ -
======== ========
Business dispositions - liabilities $ 4 $ -
======== ========
Purchase money mortgage on real estate sale $ 50 $ 222
======== ========
MetLife Capital Trust I transactions $ 1,037 $ -
======== ========
Real estate acquired in satisfaction of debt $ - $ 20
======== ========
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, including value of
business acquired ("DAC"); (v) the liability for future policyholder benefits;
(vi) the liability for litigation, arbitration, or regulatory 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 ("VIEs") created or acquired on
or after February 1, 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 7. 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 partnerships in which it has more
than a minor equity interest or more than minor influence over the partnership's
operations, but does not have a controlling interest. The Company uses the cost
method of accounting for interests in which it has a minor equity investment and
virtually no influence over the partnership's operations.
Minority interest related to consolidated entities included in other
liabilities was $605 million and $491 million at September 30, 2003 and December
31, 2002, respectively.
Certain amounts in the prior period's consolidated financial statements
have been reclassified to conform with the 2003 presentation.
The accompanying unaudited interim condensed consolidated financial
statements reflect all adjustments (including normal recurring adjustments)
necessary to present fairly the consolidated financial position of the Company
at September 30, 2003, its consolidated results of operations for the three
months and nine months ended September 30, 2003 and 2002, its consolidated cash
flows for the nine months ended September 30, 2003 and 2002 and its consolidated
statement of stockholders' equity for the nine months ended September 30, 2003
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 ("SEC").
- 8 -
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.
APPLICATION OF ACCOUNTING PRONOUNCEMENTS
In July 2003, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 03-1, Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate
Accounts ("SOP 03-1"). SOP 03-1 provides guidance on separate account
presentation and valuation, the accounting for sales inducements and the
classification and valuation of long-duration contract liabilities. SOP 03-1 is
effective for fiscal years beginning after December 15, 2003. The Company is in
the process of quantifying the impact of SOP 03-1 on its unaudited interim
condensed consolidated financial statements.
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity ("SFAS 150"). SFAS 150 clarifies the accounting for certain financial
instruments with characteristics of both liabilities and equity and requires
that those instruments be classified as a liability or, in certain
circumstances, an asset. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003 and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of SFAS
150, as of July 1, 2003, required the Company to reclassify $277 million of
company-obligated mandatorily redeemable securities of subsidiary trusts from
mezzanine equity to liabilities, as reflected in its unaudited interim condensed
consolidated financial statements.
In April 2003, the 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 (i) a company's funds withheld payable
and/or receivable under certain reinsurance arrangements, and (ii) a debt
instrument that incorporates credit risk exposures that are unrelated or only
partially related to the creditworthiness of the obligor 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 was
effective October 1, 2003. The Company believes that the impact of the adoption
of Issue B36 will be insignificant. However, management continues to validate
its models and refine its assumptions. Additionally, industry standards and
practices continue to evolve related to valuing these types of embedded
derivative features.
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's adoption of SFAS 149 on July 1, 2003 did not
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 ARB No. 51 ("FIN 46"), as amended. Effective October 9, 2003, FASB Staff
Position No. 46-6, "Effective Date of FASB Interpretation No. 46, Consolidation
of Variable Interest Entities" deferred the effective date of FIN 46 for
variable interests held by a public entity in a VIE that was created before
February 1, 2003 to the end of the first interim or annual period ending after
December 15, 2003. Certain of the Company's asset-backed securitizations,
collateralized debt obligations, structured investment transactions, and
investments in real estate joint ventures and other limited partnership
interests meet the definition of a VIE under FIN 46. FIN 46 defines a VIE as (i)
any entity in which the equity investors at risk in such entity do not have the
characteristics of a controlling financial interest, or (ii) any entity that
does not have sufficient equity at risk to finance its activities without
additional subordinated financial support from other parties. It requires the
consolidation of the VIE by the primary beneficiary. The adoption of FIN 46
requires the Company to include disclosures for VIEs created or acquired on or
after February 1, 2003 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 VIEs (see Note 6). The Company is in
the process of assessing the impact of the provisions of FIN 46 on its
consolidated financial statements for the year ending December 31, 2003 for VIEs
created or acquired prior to February 1, 2003.
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
- 9 -
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 8.
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 and use
the prospective transition method 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 10.
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's activities subject to this guidance in 2003 were not
significant.
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 an operating lease. SFAS 145 did not
have a significant impact on the Company's unaudited interim condensed
consolidated financial statements.
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 September 30,
2003, the Company's remaining liability for unpaid and future claims associated
with the tragedies was $15 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.
- 10 -
3. NET INVESTMENT LOSSES
Net investment gains (losses), including changes in valuation
allowances, and related policyholder amounts were as follows:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
------ ------ ------ ------
(DOLLARS IN MILLIONS)
Fixed maturities $ (23) $(323) $(215) $(698)
Equity securities 5 (38) (3) 222
Mortgage loans on real estate (36) - (58) (22)
Real estate and real estate joint ventures (1) 2 (9) (3) (17)
Other limited partnership interests (11) 42 (73) 24
Derivatives (2) (74) 40 (91) (107)
Other 13 22 24 (28)
----- ----- ----- -----
Total (124) (266) (419) (626)
Amounts allocated from:
Deferred policy acquisition costs 10 11 25 26
Participating contracts - (2) - (2)
Policyholder dividend obligation 29 7 52 78
----- ----- ----- -----
Total net investment losses $ (85) $(250) $(342) $(524)
===== ===== ===== =====
- ---------------------
(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").
(2) The amounts presented include settlement payments on derivative
instruments that do not qualify for hedge accounting under SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, as
amended, ("SFAS 133").
Investment gains and losses are net of related policyholder amounts.
The amounts netted against investment gains and losses are (i) amortization of
DAC to the extent that such amortization results from investment gains and
losses; (ii) adjustments to participating contractholder accounts when amounts
equal to such investment gains and losses are applied to the contractholder's
accounts; and (iii) adjustments to the policyholder dividend obligation
resulting from investment gains and losses. This presentation may not be
comparable to presentations made by other insurers.
4. DERIVATIVE INSTRUMENTS
The Company uses derivative instruments to manage risk through one of
four principal risk management strategies, the hedging of: (i) 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 for hedge
accounting, according to SFAS 133, the changes in its fair value and all
periodic settlement receipts and payments 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 objectives 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; states how the
hedging instrument is expected to hedge the risks related to the hedged item;
sets forth the method that will be used to assess the hedging instrument's
effectiveness both at inception and on an ongoing basis; and establishes the
method that will be used to measure hedge ineffectiveness. The Company generally
determines hedge effectiveness based on total changes in the 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
- 11 -
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:
SEPTEMBER 30, 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 $ 2,620 $ 14 $ 210 $ 420 $ - $ 64
Cash flow 7,982 40 284 3,520 69 73
Non qualifying 19,545 211 132 19,513 239 183
-------- ---- ------- -------- -------- ------
Total $ 30,147 $265 $ 626 $ 23,453 $ 308 $ 320
======== ==== ======= ======== ======== ======
During the three months and nine months ended September 30, 2003, the
Company recognized net investment expense from the periodic settlement of
qualifying interest rate, foreign currency and credit default swaps of $21
million and $36 million, respectively. During the three months and nine months
ended September 30, 2002, the Company recognized net investment expense from the
periodic settlement of qualifying interest rate, foreign currency and credit
default swaps of $14 million and net investment income of $2 million,
respectively.
During the three months and nine months ended September 30, 2003, the
Company recognized $10 million and $102 million, respectively, in net investment
losses related to qualifying fair value hedges. In addition, $14 million of
unrealized losses and $72 million of unrealized gains on fair value hedged
investments were recognized in net investment losses during the three months and
nine months ended September 30, 2003, respectively. There were no derivatives
designated as fair value hedges during the three months and nine months ended
September 30, 2002. There were no discontinued fair value hedges during the
three months and nine months ended September 30, 2003 or 2002.
At September 30, 2003 and December 31, 2002, the net amounts
accumulated in other comprehensive income relating to cash flow hedges were net
losses of $279 million and $24 million, respectively. For the three months and
nine months ended September 30, 2003, the market value of cash flow hedges
decreased by $153 million and $275 million, respectively. During the three
months and nine months ended September 30, 2003, the Company recognized other
comprehensive net losses of $146 million and $262 million, respectively,
relating to the effective portion of cash flow hedges. During the three months
ended September 30, 2003, other comprehensive losses reclassified to net
investment income and to net investment losses were insignificant. During the
nine months ended September 30, 2003, $1 million of other comprehensive losses
was reclassified to net investment income, and $12 million of other
comprehensive losses were reclassified to net investment losses, relating to the
discontinuation of cash flow hedges. For the three months and nine months ended
September 30, 2003, $2 million and $6 million of other comprehensive income were
reclassified to net investment income, respectively, related to the SFAS 133
transition adjustment.
During the three months and nine months ended September 30, 2002, the
Company recognized other comprehensive net losses of $24 million and $75
million, respectively, relating to the effective portion of cash flow hedges.
For the three months and nine months ended September 30, 2002, amounts related
to ineffectiveness of qualifying cash flow hedges were insignificant. During
both the three months and nine months ended September 30, 2002, $46 million of
other comprehensive losses were reclassified to net investment losses relating
to the discontinuation of cash flow hedges. For the three months and nine months
ended September 30, 2002, $3 million and $9 million of other comprehensive
income were reclassified to net investment income, respectively, related to the
SFAS 133 transition adjustment.
Approximately $3 million and $49 million of net losses reported in
accumulated other comprehensive income at September 30, 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.
For the three months and nine months ended September 30, 2003, the
Company recognized as net investment gains, settlement payments on derivative
instruments of $35 million and $55 million, respectively, and net investment
losses from changes in fair value of $109 million and $146 million,
respectively, related to derivatives not qualifying as accounting hedges. For
the three months and nine months ended September 30, 2002 the Company recognized
as net investment gains, settlement payments on derivative instruments of $19
million and $22 million, respectively, and net investment gains of $21 million
and net investment losses of $129
- 12 -
million from changes in fair value, respectively, related to derivatives not
qualifying as accounting hedges. The use of these non-speculative derivatives is
permitted by the applicable insurance departments.
5. 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.
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
(commonly referred to as collateralized debt obligations). 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. Such gains or losses are 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 Purchased and Retained
Beneficial Interests in Securitized Financial Assets. 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 included in fixed maturities.
6. VARIABLE INTEREST ENTITIES
Effective February 1, 2003, FIN 46 established new accounting guidance
relating to the consolidation of VIEs. Certain of the Company's asset-backed
securitizations, collateralized debt obligations, structured investment
transactions, and investments in real estate joint ventures and other limited
partnership interests meet the definition of a VIE under FIN 46. The Company
currently consolidates VIEs created or acquired on or after February 1, 2003 for
which it is the primary beneficiary. At December 31, 2003, the Company will
consolidate those entities created before February 1, 2003 for which it is the
primary beneficiary.
- 13 -
The following table presents the total assets of and maximum exposure
to loss relating to VIEs of which the Company has concluded that it is the
primary beneficiary and which will be consolidated in the Company's financial
statements beginning December 31, 2003:
SEPTEMBER 30, 2003
----------------------------
TOTAL MAXIMUM EXPOSURE
ASSETS (1) TO LOSS (2)
---------- ----------------
(DOLLARS IN MILLIONS)
Real estate joint ventures (3) $ 571 $ 237
Other limited partnerships (4) 27 27
----- -----
Total $ 598 $ 264
===== =====
- ---------------
(1) The assets of the real estate joint ventures and other limited
partnerships are reflected at the carrying amounts at which such assets
would have been reflected on the Company's balance sheet had the
Company consolidated the VIE from the date of its initial investment in
the entity.
(2) The maximum exposure to loss relating to real estate joint ventures and
other limited partnerships is equal to the carrying amounts plus any
unfunded commitments, reduced by amounts guaranteed by other partners.
(3) Real estate joint ventures include partnerships and other ventures,
which engage in the acquisition, development, management and disposal
of real estate investments.
(4) Other limited partnerships include partnerships established for the
purpose of investing in public and private debt and equity securities,
as well as limited partnerships established for the purpose of
investing in low-income housing that qualifies for Federal tax credits.
Had the Company consolidated these VIEs at September 30, 2003, the
transition adjustments would have been $4 million, net of income tax. The
following table presents the total assets of and the maximum exposure to loss
relating to VIEs in which the Company holds a significant variable interest but
is not the primary beneficiary:
SEPTEMBER 30, 2003
--------------------------
TOTAL MAXIMUM EXPOSURE
ASSETS TO LOSS (1)
------ ----------------
(DOLLARS IN MILLIONS)
Asset-backed securitizations and collateralized debt obligations (2) $ 101 $ 14
Other limited partnerships (3) 420 10
Real estate joint ventures (3) 57 50
------ ------
Total $ 578 $ 74
====== ======
- -------------
(1) The maximum exposure to loss of the asset-backed securitizations and
collateralized debt obligations is equal to the carrying amounts of
retained interests. The maximum exposure to loss relating to the other
limited partnerships and real estate joint ventures is equal to the
carrying amounts plus any unfunded commitments reduced by amounts
guaranteed by other partners.
(2) The assets of the asset-backed securitizations and collateralized debt
obligations are reflected at fair value as of September 30, 2003.
(3) The assets of the real estate joint ventures and other limited
partnerships are reflected at the carrying amounts at which such assets
would have been reflected on the Company's balance sheet had the
Company consolidated the VIE from the date of its initial investment in
the entity.
Due to the complexity of the judgments and interpretations required in
the application of FIN 46 to the Company's collateralized debt obligations, the
Company is continuing to evaluate certain entities for consolidation and/or
disclosure under FIN 46. At September 30, 2003, the fair value of the assets of
the entities still under evaluation is approximately $1.3 billion. The Company's
maximum exposure to loss related to these entities at September 30, 2003 is
approximately $5 million.
- 14 -
7. 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:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(DOLLARS IN MILLIONS)
CLOSED BLOCK LIABILITIES
Future policy benefits $ 41,670 $ 41,207
Other policyholder funds 261 279
Policyholder dividends payable 804 719
Policyholder dividend obligation 2,278 1,882
Payables under securities loaned transactions 5,665 4,851
Other liabilities 251 433
-------- ----------
Total closed block liabilities 50,929 49,371
-------- ----------
ASSETS DESIGNATED TO THE CLOSED BLOCK
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost: $29,170 and $28,339, respectively) 31,328 29,981
Equity securities, at fair value (cost: $215 and $236, respectively) 223 218
Mortgage loans on real estate 7,433 7,032
Policy loans 4,041 3,988
Short-term investments 91 24
Other invested assets 394 604
-------- ----------
Total investments 43,510 41,847
Cash and cash equivalents 574 435
Accrued investment income 544 540
Deferred income taxes 1,129 1,151
Premiums and other receivables 89 130
-------- ----------
Total assets designated to the closed block 45,846 44,103
-------- ----------
Excess of closed block liabilities over assets designated
to the closed block 5,083 5,268
-------- ----------
Amounts included in accumulated other comprehensive loss:
Net unrealized investment gains, net of deferred
income tax of $741 and $577, respectively 1,425 1,047
Unrealized derivative (losses) gains, net of deferred income
tax of ($17) and $7, respectively (28) 13
Allocated from policyholder dividend obligation, net of
deferred income tax of ($778) and ($668), respectively (1,500) (1,214)
-------- ----------
(103) (154)
-------- ----------
Maximum future earnings to be recognized from closed
block assets and liabilities $ 4,980 $ 5,114
======== ==========
- 15 -
Information regarding the policyholder dividend obligation is as
follows:
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 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 52 157
Net investment losses (52) (157)
Change in unrealized investment and derivative gains 396 1,174
------- -------
Balance at end of period $ 2,278 $ 1,882
======= =======
Closed block revenues and expenses are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 809 $ 851 $ 2,433 $ 2,563
Net investment income and other revenues 639 645 1,904 1,925
Net investment gains (losses) (net of amounts allocated
from the policyholder dividend obligation of
($29), ($7), ($52) and ($78), respectively) - 4 (29) 47
------- ------- ------- -------
Total revenues 1,448 1,500 4,308 4,535
------- ------- ------- -------
EXPENSES
Policyholder benefits and claims 879 913 2,643 2,720
Policyholder dividends 392 426 1,178 1,224
Change in policyholder dividend obligation (excludes
amounts directly related to net investment losses of
($29), ($7), ($52) and ($78), respectively) 29 6 52 77
Other expenses 73 76 225 234
------- ------- ------- -------
Total expenses 1,373 1,421 4,098 4,255
------- ------- ------- -------
Revenues net of expenses before income taxes 75 79 210 280
Income taxes 27 25 76 98
------- ------- ------- -------
Revenues net of expenses and income taxes $ 48 $ 54 $ 134 $ 182
======= ======= ======= =======
The change in maximum future earnings of the closed block is as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
(DOLLARS IN MILLIONS)
Balance at end of period $ 4,980 $ 5,236 $ 4,980 $ 5,236
Less:
Reallocation of assets - 85 - 85
Balance at beginning of period 5,028 5,205 5,114 5,333
------- ------- ------- -------
Change during period $ (48) $ (54) $ (134) $ (182)
======= ======= ======= =======
During the period ended September 30, 2002, the allocation of assets to
the closed block was revised to appropriately classify assets in accordance with
the plan of demutualization. This reallocation of assets had no impact on
consolidated assets or liabilities.
Metropolitan Life charges the closed block with federal income taxes,
state and local premium taxes, other additive state or local taxes, investment
management expenses and maintenance expenses relating to the closed block as
provided in the plan of demutualization.
- 16 -
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:
SEPTEMBER 30, 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 $ 7 $ - $ 1 $ - $ - $ -
Cash flow 429 - 56 128 2 11
Non qualifying 49 - 1 258 32 2
-------- -------- -------- -------- -------- --------
Total $ 485 $ - $ 58 $ 386 $ 34 $ 13
======== ======== ======== ======== ======== ========
During each of the three months ended September 30, 2003 and 2002, the
closed block recognized insignificant net investment income from the periodic
settlement of interest rate, foreign currency and credit default swaps. During
each of the nine months ended September 30, 2003 and 2002, the closed block
recognized net investment income from the periodic settlement of interest rate,
foreign currency and credit default swaps of $1 million.
During the three months and nine months ended September 30, 2003, the
closed block recognized $4 million and $3 million in net investment gains
related to qualifying fair value hedges, respectively. There were no significant
unrealized gains on fair value hedged investments recognized in net investment
gains and losses during the three months ended September 30, 2003. There was $1
million of unrealized gains on fair value hedged investments recognized in net
investment gains and losses during the nine months ended September 30, 2003.
There were no derivatives designated as fair value hedges during the three
months and nine months ended September 30, 2002. There were no discontinued fair
value hedges during the three months and nine months ended September 30, 2003 or
2002.
At September 30, 2003 and December 31, 2002, the net amounts
accumulated in other comprehensive income relating to cash flow hedges were net
losses of $45 million and net gains of $20 million, respectively. For the three
months and nine months ended September 30, 2003, the market value of cash flow
hedges decreased by $23 million and $71 million, respectively. During the three
months and nine months ended September 30, 2003, the closed block recognized
other comprehensive net losses of $14 million and $62 million, respectively,
relating to the effective portion of cash flow hedges. During the three months
ended September 30, 2003, insignificant amounts of other comprehensive gains
were reclassified to net investment income. During the nine months ended
September 30, 2003, $2 million of other comprehensive gains was reclassified to
net investment income. During the three months and nine months ended September
30, 2003, there were no discontinued cash flow hedges. For both the three months
and nine months ended September 30, 2003, $1 million of other comprehensive
income was reclassified to net investment income related to the SFAS 133
transition adjustment.
During the three months and nine months ended September 30, 2002, the
closed block recognized other comprehensive net gains of $13 million and $15
million, respectively, relating to the effective portion of cash flow hedges.
For the three months and nine months ended September 30, 2002, amounts related
to ineffectiveness of qualifying cash flow hedges were insignificant. During the
three months and nine months ended September 30, 2002, there were no
discontinued cash flow hedges. For the three months and nine months ended
September 30, 2002, $1 million and $3 million of other comprehensive income were
reclassified to net investment income, respectively, related to the SFAS 133
transition adjustment.
For the three months and nine months ended September 30, 2003, the
closed block did not recognize any derivative settlements as net investment
gains or losses, and recognized net investment losses from changes in fair value
of $2 million and $19 million, respectively, from derivatives not qualifying as
accounting hedges. For both the three months and nine months ended September 30,
2002, the closed block recognized derivative settlements as net investment gains
of $1 million from derivatives not qualifying as accounting hedges. For the
three months and nine months ended September 30, 2002, the closed block
recognized changes in fair value in net investment gains of $5 million and net
investment losses of $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.
- 17 -
8. 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
September 30, 2003, there are approximately 383 sales practices lawsuits pending
against Metropolitan Life, approximately 60 sales practices lawsuits pending
against New England Mutual and approximately 25 sales practices lawsuits pending
against General American. Metropolitan Life, New England Mutual and General
American continue to defend themselves vigorously against these lawsuits. Some
individual sales practices claims have been resolved through settlement, won by
dispositive motions, or, in a few instances, have gone to trial. Most of the
current cases seek substantial damages, including in some cases punitive and
treble damages and attorneys' fees. Additional litigation relating to the
Company's marketing and sales of individual life insurance may be commenced in
the future.
The Metropolitan Life class action settlement did not resolve two
putative class actions involving sales practices claims filed against
Metropolitan Life in Canada, and these actions remain pending. In 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. In October 2003, the First
Circuit Court of Appeals affirmed the district court ruling in favor of New
England Mutual.
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
- 18 -
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 2002 and 2003, trial courts in California, Utah and Georgia 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 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 in 2002 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. A
portion 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. In addition, publicity regarding legislative reform efforts may be
- 19 -
resulting in an increase in the number of claims. 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 nine months of 2003 and 2002,
Metropolitan Life received approximately 53,200 and 45,200 asbestos-related
claims, respectively. Of the approximately 53,200 claims received in the first
nine months of 2003, approximately 23,000 were received in April 2003.
A bill reforming asbestos litigation may be voted on by the Senate in
2003. While the Company strongly supports reform efforts, there can be no
assurance that legislative reform will be enacted. 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.
In 2003, Metropolitan Life also has been named as a defendant in a
small number of silicosis, welding and mixed dust cases. The cases are pending
in Mississippi, Texas, Ohio, Pennsylvania, West Virginia, Louisiana, Kentucky,
Georgia and Arkansas. The Company intends to defend itself vigorously against
these cases.
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. In a lawsuit involving
another insurer, the Tennessee Supreme Court held that diminished value is not
covered under a Tennessee automobile policy. Based on that decision, plaintiffs
in Tennessee have dismissed their alleged diminished value lawsuit against
Metropolitan Property and Casualty Insurance Company. A settlement was reached
in the Georgia class action and has been implemented; the Company determined to
settle the case in light of a Georgia Supreme Court decision involving another
insurer. 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. 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
- 20 -
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 served 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. In June 2003, the United States Supreme
Court denied plaintiffs' petition for certiorari in this action. 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. After the defendants' motion to transfer the
lawsuit to the Western District of Pennsylvania was granted, plaintiffs filed an
amended complaint alleging that the treatment of the cost of the sales practices
settlement in connection with the demutualization of Metropolitan Life breached
the terms of the settlement. Plaintiffs sought compensatory and punitive
damages, as well as attorneys' fees and costs. In October 2003, the court
granted defendants' motion to dismiss the action.
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. 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. On April 28, 2003, the United States
District Court approved a class-action settlement of the consolidated actions.
Several persons have filed notices of appeal from the order approving the
settlement, but subsequently the appeals were dismissed. Metropolitan Life also
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. During the three months and
nine months ended September 30, 2003, the Company reduced its reserve by $28
million, net of income tax, and $92 million, net of income tax, respectively.
The Company believes the remaining portion of the previously recorded charge is
adequate to cover the costs associated with the resolution of these matters.
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. In August 2003, the court granted
preliminary approval to a settlement of the lawsuit. At the fairness hearing
held on November 6, 2003, the court approved the settlement of the lawsuit.
Implementation of the settlement will commence in 2004.
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
- 21 -
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. The parties are
engaged in settlement discussions.
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 of its affiliates is seeking rescission and has commenced an
arbitration proceeding claiming that, during underwriting, material
misrepresentations or omissions were made. The reinsurer also has sent a notice
purporting to increase reinsurance premium rates. Metropolitan Life and its
affiliates intend to defend themselves vigorously against the claims of the
reinsurer, including the purported rate increase.
As previously reported, the SEC is conducting a formal investigation of
New England Securities Corporation ("NES"), an indirect subsidiary of New
England Life Insurance Company ("NELICO"), in response to NES informing the SEC
that certain systems and controls relating to one NES advisory program were not
operating effectively. NES is cooperating fully with the SEC and is continuing
to research the effect, if any, of this issue upon approximately 6,500 active
and closed accounts.
Prior to filing the Company's June 30, 2003 Form 10-Q, MetLife
announced a $31 million after-tax charge related to an affiliate, New England
Financial. MetLife notified the SEC about the nature of this charge prior to its
announcement. The SEC is pursuing a formal investigation of the matter and
MetLife is fully cooperating with the investigation.
The American Dental Association and two individual providers have sued
MetLife, Mutual of Omaha and Cigna in a purported class action lawsuit brought
in a Florida federal district court. The plaintiffs purport to represent a
nationwide class of in-network providers who allege that their claims are being
wrongfully reduced by downcoding, bundling, and the improper use and programming
of software. The complaint alleges federal racketeering and various state law
theories of liability. MetLife is vigorously defending the case.
A purported class action in which a policyholder seeks to represent a
class of owners of participating life insurance policies is pending in state
court in New York. Plaintiff asserts that Metropolitan Life breached her policy
in the manner in which it allocated investment income across lines of business
during a period ending with the 2000 demutualization. In August 2003, an
appellate court affirmed the dismissal of fraud claims in this action.
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. Regulatory bodies have contacted the Company
and have requested information relating to market timing and late trading of
mutual funds and variable insurance products. The Company is in the process of
responding and is fully cooperating with regard to these information requests.
At the present time, the Company is not aware of any systemic problems with
respect to such matters that may have a material adverse effect on the
Company's consolidated financial position.
SUMMARY
It is not feasible to predict or determine the ultimate outcome of all
pending investigations and legal proceedings or provide reasonable ranges of
potential losses, except as noted above in connection with specific matters. In
some of the matters referred to above, very large and/or indeterminate amounts,
including punitive and treble damages, are sought. Although in light of these
considerations it is possible that an adverse outcome in certain cases could
have a material adverse effect upon the Company's consolidated financial
position, based on information currently known by the Company's management, in
its opinion, the outcomes of such pending investigations and legal proceedings
are not likely to have such an effect. However, given the large and/or
indeterminate amounts sought in certain of these matters and the inherent
unpredictability of litigation, it is possible that an adverse outcome in
certain matters could, from time to time, have a material adverse effect on the
Company's consolidated net income or cash flows in particular quarterly or
annual periods.
- 22 -
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 $1,511
million and $1,667 million at September 30, 2003 and December 31, 2002,
respectively. The Company anticipates that these amounts could be invested in
these partnerships any time over the next 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, disposition, investment and other
transactions, the Company has provided indemnities and guarantees, including
those related to tax, environmental and other specific liabilities, and other
indemnities and guarantees that are triggered by, among other things, breaches
of representations, warranties or covenants provided by the Company. In
addition, in the normal course of business, the Company provides
indemnifications to counterparties in contracts with triggers similar to the
foregoing, as well as for certain other liabilities, such as third party
lawsuits. These obligations are often subject to time limitations that vary in
duration, including contractual limitations and those that arise by operation of
law, such as applicable statutes of limitation. In some cases, the maximum
potential obligation under the indemnities and guarantees is subject to a
contractual limitation ranging from $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 Company indemnifies its directors and officers as
provided in its charters and by-laws. Also, the Company indemnifies other of its
agents for liabilities incurred as a result of their representation of the
Company's interests. Since these indemnities are generally not subject to
limitation with respect to duration or amount, the Company does not believe that
it is possible to determine the maximum potential amount 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 September 30, 2003 and December 31, 2002 for indemnities,
guarantees and commitments provided to third parties prior to January 1, 2003
was insignificant.
- 23 -
9. 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 September 30, 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 SEPTEMBER 30, 2003
--------------------------------------------
INSTITUTIONAL INDIVIDUAL TOTAL
------------- ---------- ------
(DOLLARS IN MILLIONS)
Facilities consolidation costs $ - $ 10 $ 10
Business exit costs 32 - 32
------ ------ ------
Total $ 32 $ 10 $ 42
====== ====== ======
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 and severance and severance-related costs, all of which are included
in business exit 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
September 30, 2003, there were approximately 134 terminations to be completed in
connection with the Company's business exit activities. Management expects these
terminations to be completed by December 31, 2003. The Company continues to
carry a liability as of September 30, 2003 since the exit plan could not be
completed within one year due to circumstances outside the Company's control and
since certain 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 predominantly stem from the elimination of approximately 560 non-sales
positions and 190 operations and technology positions supporting this segment.
All terminations were completed prior to June 30, 2003. These costs were
recorded in other expenses. The remaining liability as of September 30, 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 prior to December
31, 2002. The costs were recorded in other expenses.
- 24 -
10. STOCK COMPENSATION PLANS
Effective January 1, 2003, the Company elected to apply the fair value
method of accounting and use the prospective transition method 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 expense for grants awarded 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- --------------------
2003 2002 2003 2002
-------- ------ --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Net Income $ 574 $ 328 $ 1,516 $ 1,044
Charge for conversion of company-obligated mandatorily
redeemable securities of a subsidiary trust (1) - - (21) -
-------- ------ --------- ---------
Actual net income available to common shareholders $ 574 $ 328 $ 1,495 $ 1,044
======== ====== ========= =========
Pro forma net income available to common shareholders (2)(3) $ 566 $ 317 $ 1,470 $ 1,019
======== ====== ========= =========
BASIC EARNINGS PER SHARE
As reported $ 0.75 $ 0.47 $ 2.05 $ 1.48
======== ====== ========= =========
Pro forma (2)(3) $ 0.74 $ 0.45 $ 2.01 $ 1.44
======== ====== ========= =========
DILUTED EARNINGS PER SHARE
As reported $ 0.75 $ 0.45 $ 2.04 $ 1.42
======== ====== ========= =========
Pro forma (2)(3) $ 0.74 $ 0.44 $ 2.01 $ 1.39
======== ====== ========= =========
- ---------------
(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 expense related to the Company's Stock
Incentive Plan and Directors Stock Plan for the three months and nine months
ended September 30, 2003 was $4 million and $14 million, respectively, including
stock-based compensation for non-employees of $202 thousand and $1 million,
respectively. Stock-based compensation expense for non-employees for the three
months and nine months ended September 30, 2002 was $462 thousand and $1.4
million, respectively.
- 25 -
11. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
(DOLLARS IN MILLIONS)
Net income $ 574 $ 328 $ 1,516 $ 1,044
------- ------- ------- -------
Other comprehensive (loss) income:
Unrealized (losses) gains on derivative instruments, net of
income taxes (96) 13 (165) (24)
Unrealized investment (losses) gains, net of related offsets,
reclassification adjustments and income taxes (183) 736 1,051 545
Foreign currency translation adjustments (18) (104) 125 (80)
Minimum pension liability adjustment - - (9) -
------- ------- ------- -------
Other comprehensive (loss) income (297) 645 1,002 441
------- ------- ------- -------
Comprehensive income $ 277 $ 973 $ 2,518 $ 1,485
======= ======= ======= =======
12. 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 (the
"purchase contracts") 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.
On May 15, 2003, the purchase contracts associated with the units were
settled. In exchange for $1,006 million, the Company issued 2.97 shares of
MetLife, Inc. common stock per purchase contract, or approximately 59.8 million
shares of treasury stock. Approximately $656 million, which represents the
excess of the Company's cost of the treasury stock ($1,662 million) over the
contract price of the stock issued to the purchase contract holders ($1,006
million), was recorded as a direct reduction to retained earnings.
- 26 -
13. 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------- --------------
(DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
Weighted average common stock outstanding for basic earnings per share 760,146,381 701,541,455 730,788,635 706,055,177
Incremental shares from assumed:
Conversion of equity security units - 21,213,435 - 25,758,555
Exercise of stock options 65,029 - - 5,127
Deferred stock compensation 716,283 - 533,422 -
------------ ------------ ------------- --------------
Weighted average common stock outstanding for diluted earnings per share 760,927,693 722,754,890 731,322,057 731,818,859
============ ============ ============= ==============
INCOME FROM CONTINUING OPERATIONS $ 560 $ 307 $ 1,427 $ 970
CHARGE FOR CONVERSION OF COMPANY-OBLIGATED MANDATORILY
REDEEMABLE SECURITIES OF A SUBSIDIARY TRUST (1) - - (21) -
------------ ------------ ------------- --------------
INCOME FROM CONTINUING OPERATIONS AVAILABLE TO COMMON SHAREHOLDERS $ 560 $ 307 $ 1,406 $ 970
============ ============ ============= ==============
Basic earnings per share $ 0.74 $ 0.44 $ 1.92 $ 1.37
============ ============ ============= ==============
Diluted earnings per share $ 0.74 $ 0.42 $ 1.92 $ 1.33
============ ============ ============= ==============
INCOME FROM DISCONTINUED OPERATIONS $ 14 $ 26 $ 89 $ 74
============ ============ ============= ==============
Basic earnings per share $ 0.02 $ 0.04 $ 0.12 $ 0.10
============ ============ ============= ==============
Diluted earnings per share $ 0.02 $ 0.04 $ 0.12 $ 0.10
============ ============ ============= ==============
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING $ - $ (5) $ - $ -
============ ============ ============= ==============
Basic earnings per share $ - $ (0.01) $ - $ -
============ ============ ============= ==============
Diluted earnings per share $ - $ (0.01) $ - $ -
============ ============ ============= ==============
NET INCOME $ 574 $ 328 $ 1,516 $ 1,044
CHARGE FOR CONVERSION OF COMPANY-OBLIGATED MANDATORILY
REDEEMABLE SECURITIES OF A SUBSIDIARY TRUST (1) - - (21) -
------------ ------------ ------------- --------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 574 $ 328 $ 1,495 $ 1,044
============ ============ ============= ==============
Basic earnings per share $ 0.75 $ 0.47 $ 2.05 $ 1.48
============ ============ ============= ==============
Diluted earnings per share $ 0.75 $ 0.45 $ 2.04 $ 1.42
============ ============ ============= ==============
- ----------------
(1) See Note 12.
- 27 -
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 nine months ended September 30, 2003. The Holding Company acquired
15,244,492 shares of common stock for $471 million during the nine months ended
September 30, 2002. During the nine months ended September 30, 2003, 59,884,064
shares of common stock were issued from treasury stock, 59,771,221 of which were
issued in connection with the settlement of the purchase contracts (see Note 12)
for approximately $1,006 million. During the nine months ended September 30,
2002, 16,379 shares of common stock were issued from treasury stock.
On October 21, 2003, the Company announced the declaration by its Board
of Directors of a dividend of $0.23 per common share payable on December 15,
2003 to shareholders of record on November 7, 2003.
14. 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 and nine months
ended September 30, 2003 and 2002 and at September 30, 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 certain net investment gains and losses, net of income
taxes, and the impact from the cumulative effect of changes in accounting, net
of income taxes. Settlement payments on derivative instruments not qualifying
for hedge accounting are included in net investment gains/(losses). 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) to Corporate & Other.
AUTO
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 INSTITUTIONAL INDIVIDUAL & HOME
- --------------------------------------------- ------------- ---------- ------
(DOLLARS IN MILLIONS)
Premiums $ 2,260 $ 1,064 $ 735
Universal life and investment-
type product policy fees 167 386 -
Net investment income 976 1,548 39
Other revenues 144 96 10
Net investment (losses) gains (37) (37) 2
Income (loss) from continuing operations
before provision (benefit) for income taxes 346 225 56
ASSET CORPORATE
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 INTERNATIONAL REINSURANCE MANAGEMENT & OTHER TOTAL
- --------------------------------------------- ------------- ----------- ---------- ------- -----
(DOLLARS IN MILLIONS)
Premiums $ 445 $ 579 $ - $ (4) $ 5,079
Universal life and investment-
type product policy fees 70 - - - 623
Net investment income 119 122 17 43 2,864
Other revenues 20 11 36 18 335
Net investment (losses) gains 8 5 2 (28) (85)
Income (loss) from continuing operations
before provision (benefit) for income taxes 62 30 8 (20) 707
- 28 -
AUTO
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 INSTITUTIONAL INDIVIDUAL & HOME
- --------------------------------------------- ------------- ---------- ------
(DOLLARS IN MILLIONS)
Premiums $ 2,046 $ 1,080 $ 711
Universal life and investment-
type product policy fees 152 375 -
Net investment income 945 1,592 44
Other revenues 154 95 11
Net investment (losses) gains (184) (25) (8)
Income (loss) from continuing operations
before provision (benefit) for income taxes 154 316 56
ASSET CORPORATE
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 INTERNATIONAL REINSURANCE MANAGEMENT & OTHER TOTAL
- --------------------------------------------- ------------- ----------- ---------- --------- -----
(DOLLARS IN MILLIONS)
Premiums $ 381 $ 461 $ - $ (7) $ 4,672
Universal life and investment-
type product policy fees 64 - - - 591
Net investment income 133 95 17 (48) 2,778
Other revenues 2 16 37 5 320
Net investment (losses) gains 6 4 - (43) (250)
Income (loss) from continuing operations
before provision (benefit) for income taxes 61 39 1 (202) 425
AUTO
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 INSTITUTIONAL INDIVIDUAL & HOME
- -------------------------------------------- ------------- ---------- ------
(DOLLARS IN MILLIONS)
Premiums $ 6,730 $ 3,160 $ 2,168
Universal life and investment-
type product policy fees 482 1,124 -
Net investment income 2,951 4,636 119
Other revenues 438 291 23
Net investment (losses) gains (145) (122) (4)
Income (loss) from continuing operations
before provision (benefit) for income taxes 970 617 130
ASSET CORPORATE
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 INTERNATIONAL REINSURANCE MANAGEMENT & OTHER TOTAL
- -------------------------------------------- ------------- ----------- ---------- -------- -------
(DOLLARS IN MILLIONS)
Premiums $ 1,230 $ 1,719 $ - $ (13) $ 14,994
Universal life and investment-
type product policy fees 192 - - - 1,798
Net investment income 373 353 49 124 8,605
Other revenues 54 35 102 45 988
Net investment (losses) gains 7 6 10 (94) (342)
Income (loss) from continuing operations
before provision (benefit) for income taxes 196 93 27 (130) 1,903
AUTO
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 INSTITUTIONAL INDIVIDUAL & HOME
- -------------------------------------------- ------------- ---------- ------
(DOLLARS IN MILLIONS)
Premiums $ 6,069 $ 3,258 $ 2,105
Universal life and investment-
type product policy fees 471 1,012 -
Net investment income 2,925 4,662 135
Other revenues 482 325 27
Net investment (losses) gains (384) (98) (40)
Income (loss) from continuing operations
before provision (benefit) for income taxes 699 781 112
ASSET CORPORATE
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 INTERNATIONAL REINSURANCE MANAGEMENT & OTHER TOTAL
- -------------------------------------------- ------------- ----------- ---------- --------- -----
(DOLLARS IN MILLIONS)
Premiums $ 1,030 $ 1,408 $ - $ (15) $ 13,855
Universal life and investment-
type product policy fees 78 - - - 1,561
Net investment income 303 296 46 (26) 8,341
Other revenues 8 35 127 26 1,030
Net investment (losses) gains (8) 6 (4) 4 (524)
Income (loss) from continuing operations
before provision (benefit) for income taxes 71 109 7 (353) 1,426
-29-
The following table indicates amounts in the current and prior periods
that have been classified as discontinued operations in accordance with SFAS
144:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -----------------
2003 2002 2003 2002
--------- -------- ------- -------
(DOLLARS IN MILLIONS)
Net investment income
Institutional $ - $ 8 $ 1 $ 25
Individual 1 13 4 41
Corporate & Other 14 21 37 60
--------- -------- ------- -------
Total net investment income $ 15 $ 42 $ 42 $ 126
========= ======== ======= =======
Net investment gains (losses)
Institutional $ 6 $ - $ 46 $ -
Individual - (1) 47 (2)
Corporate & Other 2 - 6 (7)
--------- -------- ------- -------
Total net investment gains (losses) $ 8 $ (1) $ 99 $ (9)
========= ======== ======= =======
The following table presents assets for each of the Company's operating
segments at:
SEPTEMBER 30, DECEMBER 31,
2003 2002 (1)
------------- -------------
(DOLLARS IN MILLIONS)
Assets
Institutional $ 112,322 $ 98,234
Individual 159,564 145,152
Auto & Home 4,639 4,540
International 9,313 8,301
Reinsurance 11,408 9,924
Asset Management 294 190
Corporate & Other 17,443 11,085
------------- -------------
Total $ 314,983 $ 277,426
============= =============
- ----------
(1) These balances reflect the allocation of capital using the Risk-Based
Capital methodology, which differs from the original presentation of GAAP
equity included in MetLife, Inc.'s 2002 Annual Report on Form 10-K.
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
change in methodology of allocating equity does not impact the Company's
consolidated net investment income or net income.
The following table presents actual and pro forma net investment income
with respect to the Company's operating segments for the three months and nine
months ended September 30, 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
------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------------ --------------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
---------- ----------- ---------- -------------
(DOLLARS IN MILLIONS)
Institutional $ 945 $ 962 $ 2,925 $ 2,974
Individual 1,592 1,569 4,662 4,595
Auto & Home 44 39 135 122
International 133 124 303 275
Reinsurance 95 86 296 267
Asset Management 17 20 46 55
Corporate & Other (48) (22) (26) 53
---------- ----------- ---------- -------------
Total $ 2,778 $ 2,778 $ 8,341 $ 8,341
========== =========== ========== =============
- 30 -
The following table presents actual and pro forma assets for each of
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 11,085 12,201
---------- -----------
Total $ 277,426 $ 277,426
========== ===========
- ----------
(1) These balances reflect the allocation of capital using the Risk-Based
Capital methodology, which differs from the original presentation of GAAP
equity included in MetLife, Inc.'s 2002 Annual Report on Form 10-K.
The Individual segment's results of operations for the nine months
ended September 30, 2003 include a second quarter 2003 charge resulting from the
recognition of previously deferred expenses.
The International segment's results of operations include the results
of operations of Aseguradora Hidalgo S.A., a Mexican life insurer that was
acquired on June 20, 2002. During the second quarter of 2003, as part of its
acquisition and integration strategy, International completed the legal merger
of Aseguradora Hidalgo, S.A. into its original Mexican subsidiary, Seguros
Genesis, S.A., forming MetLife Mexico, S.A. As a result of the merger of these
companies, during the second quarter of 2003 the Company recorded a tax benefit
of $40 million for the reduction of deferred tax valuation allowances.
Additionally, a change in reserve methodology resulted in the recording of a $22
million after-tax reduction in policyholder liabilities in the second quarter of
2003.
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 for the three months and nine months ended September 30, 2003 and 2002.
Revenues from U.S. operations were $7,924 million and $7,361 million for the
three months ended September 30, 2003 and 2002, respectively, which represented
90% and 91%, respectively, of consolidated revenues. Revenues from U.S.
operations were $23,532 million and $22,384 million for the nine months ended
September 30, 2003 and 2002, respectively, which represented 90% and 92%,
respectively, of consolidated revenues.
- 31 -
15. 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. These assets are carried at the lower of cost or market.
The following table presents the components of income from discontinued
operations:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------
2003 2002 2003 2002
----------- --------- -------- --------
(DOLLARS IN MILLIONS)
Investment income $ 31 $ 118 $ 99 $ 365
Investment expense (16) (76) (57) (239)
Net investment gains (losses) 8 (1) 99 (9)
----------- --------- -------- --------
Total revenues 23 41 141 117
Provision for income taxes 9 15 52 43
----------- --------- -------- --------
Income from discontinued operations $ 14 $ 26 $ 89 $ 74
=========== ========= ======== ========
- 32 -
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., 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 September 30, 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 SEPTEMBER 30, 2003
------------------------------------------------
INSTITUTIONAL INDIVIDUAL TOTAL
------------- ----------- --------------
(DOLLARS IN MILLIONS)
Facilities consolidation costs $ - $ 10 $ 10
Business exit costs 32 - 32
------------- ----------- --------------
Total $ 32 $ 10 $ 42
============= =========== ==============
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 and severance and severance-related costs, all of which are included
in business exit 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
September 30, 2003, there were approximately 134 terminations to be completed in
connection with the Company's business exit activities. Management expects these
terminations to be completed by December 31, 2003. The Company continues to
carry a liability as of September 30, 2003 since the exit plan could not be
completed within one year due to circumstances outside the Company's control and
since certain 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 predominantly stem from the elimination of approximately 560 non-sales
positions and 190 operations and technology positions supporting this segment.
All terminations were completed prior to June 30, 2003. These costs were
recorded in other expenses. The remaining liability as of September 30, 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 prior to December
31, 2002. The costs were recorded in other expenses.
- 33 -
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 September 30,
2003, the Company's remaining liability for unpaid and future claims associated
with the tragedies was $15 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.
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 (the
"purchase contracts") 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.
On May 15, 2003, the purchase contracts associated with the units were
settled. In exchange for $1,006 million, the Company issued 2.97 shares of
MetLife, Inc. common stock per purchase contract, or approximately 59.8 million
shares of treasury stock. Approximately $656 million, which represents the
excess of the Company's cost of the treasury stock ($1,662 million) over the
contract price of the stock issued to the purchase contract holders ($1,006
million), was recorded as a direct reduction to retained earnings.
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
change in methodology of allocating equity does not impact the Company's
consolidated net investment income or net income.
- 34 -
The following table presents actual and pro forma net investment income
with respect to the Company's operating segments for the three months and nine
months ended September 30, 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
------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
----------------------------- ---------------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
------------ ------------- --------- --------------
(DOLLARS IN MILLIONS)
Institutional $ 945 $ 962 $ 2,925 $ 2,974
Individual 1,592 1,569 4,662 4,595
Auto & Home 44 39 135 122
International 133 124 303 275
Reinsurance 95 86 296 267
Asset Management 17 20 46 55
Corporate & Other (48) (22) (26) 53
------------ ------------- --------- --------------
Total $ 2,778 $ 2,778 $ 8,341 $ 8,341
============ ============= ========= ==============
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 of this
acquisition was subject to adjustment under certain provisions of the purchase
agreement. Post-acquisition analysis did not result in any significant
adjustments of the purchase price, although certain changes were made that
affected goodwill, the value of business acquired and reserve balances. The
Company has completed the merger of Hidalgo into Seguros Genesis, S.A.,
MetLife's wholly-owned Mexican subsidiary headquartered in Mexico City. The
combined entity operates under the name MetLife Mexico.
In June 2003, the Company sold its 20 percent interest in Santander
Central Hispano Seguros y Reaseguros S.A. to Banco Santander Central Hispano
S.A. ("Santander") and purchased a 20 percent stake in MetLife Iberia, S.A. from
Santander.
In July 2003, the Company announced the sale of its Spanish operation,
MetLife Iberia, S.A. and its subsidiaries, Seguros Genesis, S.A. and Genesis
Seguros Generales, S.A., to Liberty Insurance, a Spanish subsidiary of Liberty
Mutual Group. The transaction is subject to certain regulatory approvals.
In September 2003, a subsidiary of the Company, Reinsurance Group of
America, Incorporated ("RGA") announced the purchase through coinsurance of the
traditional U.S. life reinsurance business of Allianz Life Insurance Company of
North America. The transaction is subject to certain regulatory approvals and is
expected to close in the fourth quarter of 2003 with an effective date
retroactive to July 1, 2003. RGA expects the transaction will add approximately
$240 billion of life reinsurance in-force.
In October 2003, the Company announced that Metropolitan Life and
Capital Airports Holding Company have reached agreement on forming a joint
venture company to sell life insurance in China. The transaction is subject to
certain regulatory approvals.
In October 2003, the Company completed the purchase of John Hancock
Life Insurance Company's group life insurance business, with an asset size of
approximately $200 million. While this transaction provides strategic benefits
and extends the Company's customer reach, it will have no material impact on
MetLife's 2003 consolidated net income.
- 35 -
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 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 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: (i) valuation methodologies; (ii) securities the
Company deems to be comparable; and (iii) assumptions deemed appropriate given
the circumstances. The use of different methodologies and assumptions may have a
material effect on the estimated fair value amounts.
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, issues certain insurance policies
and engages in certain reinsurance contracts 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, including value of business acquired ("DAC"). 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.
-36-
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, as well as 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 assets and liabilities relating to
ceded and assumed reinsurance and evaluates the financial strength of
counterparties to its reinsurance agreements using criteria similar to that
evaluated in the security impairment process discussed 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 reinsurer is subject or features that delay the timely
reimbursement of claims. If the Company determines that a reinsurance contract
does not expose the reinsurer to a reasonable possibility of a significant loss
from insurance risk, the Company records the contract using the deposit method
of accounting. See "-- Derivatives".
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.
-37-
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 8.5%.
-38-
RESULTS OF OPERATIONS
The following table presents consolidated financial information for the
Company for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 5,079 $ 4,672 $ 14,994 $ 13,855
Universal life and investment-type product policy fees 623 591 1,798 1,561
Net investment income 2,864 2,778 8,605 8,341
Other revenues 335 320 988 1,030
Net investment losses (net of amounts allocated from other
accounts of ($39), ($16), ($77) and ($102), respectively) (85) (250) (342) (524)
---------- ---------- ---------- ----------
Total revenues 8,816 8,111 26,043 24,263
---------- ---------- ---------- ----------
EXPENSES
Policyholder benefits and claims (excludes amounts directly related
to net investment losses of ($29), ($5), ($52) and ($76), respectively) 5,178 4,739 15,096 14,239
Interest credited to policyholder account balances 767 736 2,275 2,177
Policyholder dividends 473 504 1,483 1,489
Other expenses (excludes amounts directly related to net
investment losses of ($10), ($11), ($25) and ($26), respectively) 1,691 1,707 5,286 4,932
---------- ---------- ---------- ----------
Total expenses 8,109 7,686 24,140 22,837
---------- ---------- ---------- ----------
Income from continuing operations before provision
for income taxes 707 425 1,903 1,426
Provision for income taxes 147 118 476 456
---------- ---------- ---------- ----------
Income from continuing operations 560 307 1,427 970
Income from discontinued operations, net of income taxes 14 26 89 74
---------- ---------- ---------- ----------
Income before cumulative effect of change in accounting 574 333 1,516 1,044
Cumulative effect of change in accounting - (5) - -
---------- ---------- ---------- ----------
Net income $ 574 $ 328 $ 1,516 $ 1,044
========== ========== ========== ==========
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2002 -- THE COMPANY
Premiums increased by $407 million, or 9%, to $5,079 million for the
three months ended September 30, 2003 from $4,672 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 $214 million increase in
Institutional is primarily the result of growth in this segment's long-term
care, disability, dental and life products. In addition, retirement and savings
premiums increased due to higher sales in structured settlement products in
2003. New premiums from facultative and automatic treaties and renewal premiums
on existing blocks of business, particularly in the U.S. and United Kingdom,
contributed to a $118 million increase in the Reinsurance segment. A $64 million
increase in International is primarily due to growth in Chile, South Korea and
Spain. Anticipated actions taken by the Mexican government adversely impacted
the insurance and annuities market and resulted in a decline in premiums in
Mexico's group and individual life businesses. In addition, the cancellation of
a large broker-sponsored case at the end of 2002 and the weakening of the peso,
both contributed to the decline in Mexico. A $24 million increase in Auto & Home
is primarily the result of rate increases in both the auto and property lines. A
$16 million decrease in the Individual segment, is largely attributable to
declines in the single premium immediate annuities and supplemental contracts
with life contingencies products. Premiums on these policies can fluctuate based
on product demand. This decrease was partially offset by a net increase in
insurance products which is predominately the result of a drop in reinsurance
ceded in the current period, as well as new business growth in insurance
products. The increase in insurance products was partially offset by a decrease
in renewal premiums associated with an aging block of business, as well as a
decrease in insurance purchased by existing customers with their policy
dividends.
Universal life and investment-type product policy fees increased by $32
million, or 5%, to $623 million for the three months ended September 30, 2003
from $591 million for the comparable 2002 period. This variance is largely
attributable to increases in the
-39-
Institutional, Individual and International segments. A $15 million increase in
Institutional is primarily due to sales growth and improved persistency for the
group universal life product. An $11 million increase in Individual is
predominately due to favorable investment experience and an increase in average
separate account balances in annuity and investment-type products, partially
offset by higher amortization of deferred fees in the comparable 2002 period.
This is a result of lapse, mortality and investment experience. A $6 million
increase in International is primarily due to contributions to the policyholders
account from a large block of business in Mexico.
Net investment income increased by $86 million, or 3%, to $2,864
million for the three months ended September 30, 2003 from $2,778 million for
the comparable 2002 period. This variance is attributable to increases of (i)
$108 million, or 5%, in income from fixed maturities; (ii) $24 million, or 96%,
in income from other invested assets; (iii) $11 million, or 2%, in income from
mortgage loans on real estate; and (iv) $2 million, or 1%, in interest income
from policy loans. These variances are partially offset by decreases of (i) $33
million, or 174%, in income from equity securities and other limited partnership
interests; (ii) $14 million, or 29%, in income from cash, cash equivalents and
short-term investments; (iii) $6 million, or 5%, in income from real estate and
real estate joint ventures held-for-investment, net of investment expenses and
depreciation; and (iv) higher investment expenses of $6 million, or 10%.
The increase in income from fixed maturities to $2,140 million in 2003
from $2,032 million in 2002 is mostly due to a higher asset base resulting from
the reinvestment of cash flows, higher income from equity-linked notes due to
increases in underlying indices, and an increase in income from securities
lending. These favorable variances are partially offset by a decline in
reinvestment rates. The increase in income on other invested assets to $49
million in 2003 from $25 million in 2002 is primarily due to an increase in
reinsurance contracts' funds withheld at interest. The increase in mortgage
loans on real estate to $468 million in 2003 from $457 million in 2002 is due to
a higher asset base coupled with increased income from fees, somewhat offset by
lower reinvestment rates. The decrease in income from equity securities and
other limited partnership interests to ($14) million in 2003 from $19 million in
2002 is primarily due to a decline in valuation and lower realizations on
corporate joint ventures. Income from cash, cash equivalents and short-term
investments decreased to $35 million in 2003 from $49 million in 2002, largely
as a result of overall lower market rates. The decrease in income from real
estate and real estate joint ventures held-for-investment to $112 million in
2003 from $118 million in 2002 is primarily due to decreased income from lower
tenant occupancy at two California properties. The increase in investment
expenses to $67 million in 2003 from $61 million in 2002 is due to higher
corporate and overhead charges applicable to investment activity.
The increase in net investment income is primarily attributable to
increases in Corporate & Other and the Institutional and Reinsurance segments,
partially offset by decreases in the Individual and International segments. A
$91 million increase in Corporate & Other is due to higher sales of underlying
assets held in corporate joint ventures, higher income from equity-linked notes
and securities lending, as well as an increase in income resulting from a higher
asset base, partially offset by lower reinvestment rates. The increase in
Institutional of $31 million is mainly due to an increase in equity-linked
notes, securities lending income and allocated capital, partially offset by a
decline in valuation on corporate joint ventures. The Reinsurance segment
increased $27 million largely resulting from an increase in reinsurance
contracts' funds withheld at interest, partially offset by reduced income from
allocated capital. These increases are partially offset by a decrease in the
Individual segment of $44 million primarily resulting from lower reinvestment
rates and a decline in valuation on corporate joint ventures, partially offset
by a higher income from equity-linked notes and securities lending. The decrease
in International of $14 million is mainly due to lower income from allocated
capital.
Other revenues increased by $15 million, or 5%, to $335 million for the
three months ended September 30, 2003 from $320 million for the comparable 2002
period. This variance is primarily attributable to increases in the
International segment and Corporate & Other, partially offset by decreases in
the Institutional and Reinsurance segments. An $18 million increase in
International is primarily due to the recovery of previously uncollectable
receivables and the cancellation of a reinsurance contract related to a large
block of business in Mexico. A $5 million increase in Corporate & Other is
primarily due to the amortization of a deferred gain related to a property sale
and leaseback transaction. These increases are partially offset by a $10 million
decrease in Institutional due to a decline in administrative fees in the 401(k)
business, as a result of the Company's exit from the large market 401(k)
business in late 2001. A $5 million decrease in Reinsurance is largely due to
less fees earned on financial reinsurance. The remaining variances are due to
minor fluctuations in other lines of business.
Net investment losses decreased by $165 million, or 66%, to $85 million
for the three months ended September 30, 2003 from $250 million for the
comparable 2002 period. Total investment losses for 2003, before offsets, is
comprised of $124 million (including gross gains of $145 million, gross losses
of $106 million, writedowns of $89 million, and a net loss from derivatives of
$74 million which includes settlement payments on derivative instruments that do
not qualify for hedge accounting of $35 million). Total investment losses for
2002, before offsets, is comprised of $266 million (including gross gains of
$408 million, gross losses of $159 million, writedowns of $555 million, and a
net gain from derivatives of $40 million which includes settlement payments on
derivative instruments that do not qualify for hedge accounting of $19 million).
Offsets include the amortization of DAC of $10 million and $11 million for the
three months ended September 30, 2003 and 2002, respectively, and changes in the
policyholder dividend
-40-
obligation of $29 million and $7 million for the three months ended September
30, 2003 and 2002, respectively, and adjustments to participating contracts of
($2) million for the three months ended September 30, 2002.
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 DAC, to the extent that such amortization results from
investment gains and losses; (ii) adjustments to participating contractholder
accounts when amounts equal to such investment gains and losses are applied to
the contractholder's accounts; and (iii) adjustments to the policyholder
dividend obligation resulting from investment gains and losses.
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 unaudited interim
condensed consolidated statements of income may not be comparable to amounts
reported by other insurers.
Policyholder benefits and claims increased by $439 million, or 9%, to
$5,178 million for the three months ended September 30, 2003 from $4,739 million
for the comparable 2002 period. This variance is primarily attributable to
increases in the Institutional, Reinsurance, International, Auto & Home, and
Individual segments. The increases of $178 million, $128 million and $46
million, respectively, in Institutional, Reinsurance and International are
primarily attributable to the aforementioned growth in premiums. The increase in
Auto & Home of $46 million is primarily due to higher auto claims severities and
an increase in the adverse development of prior year claim reserves, partially
offset by a decrease in property benefits due to reduced non-catastrophe claim
frequency and fewer policies in force. A $39 million increase in Individual is
primarily due to the impact of the aforementioned reinsurance ceded variance and
the reduction of a reserve related to a subsidiary merger in the comparable 2002
period, partially offset by a decrease in the demand for single premium
annuities and supplemental contracts with life contingencies, as well as a
decrease in the reserves associated with guaranteed minimum death benefits,
which fluctuate in response to equity market changes.
Interest credited to policyholder account balances increased by $31
million, or 4%, to $767 million for the three months ended September 30, 2003
from $736 million for the comparable 2002 period. This variance is primarily due
to increases in the Reinsurance and Individual segments. A $16 million increase
in Reinsurance is primarily attributable to the addition of several new annuity
transactions during the fourth quarter of 2002 and new deposits on existing
annuity treaties. A $15 million increase in Individual is primarily due to
growth in the variable universal life and deferred annuity products, partially
offset by declines in the interest crediting rates.
Policyholder dividends decreased by $31 million, or 6%, to $473 million
for the three months ended September 30, 2003 from $504 million for the
comparable 2002 period. This variance is primarily attributable to decreases in
the Individual and Institutional segments. A $17 million decrease in Individual
is 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. A $15 million decrease in Institutional's
policyholder dividends can vary from period to period based on participating
contract experience, which is generally offset in part in policyholder benefits
and claims.
Other expenses decreased by $16 million, or 1%, to $1,691 million for
the three months ended September 30, 2003 from $1,707 million for the comparable
2002 period. Excluding the capitalization and amortization of DAC, which are
discussed below, other expenses increased by $139 million, or 8%, to $1,959
million for the three months ended September 30, 2003 from $1,820 million for
the comparable 2002 period. This variance is primarily attributable to increases
in the Individual, Reinsurance, Institutional, and International segments,
partially offset by a decrease in Corporate & Other and the Auto & Home segment.
A $97 million increase in Individual is primarily due to higher commissions
resulting from sales growth in new annuity and investment-type products and
increased pension and post-retirement benefit expenses. A $64 million increase
in Reinsurance is primarily due to an increase in allowances paid on assumed
reinsurance, particularly on certain high commission business in the United
Kingdom. A $41 million increase in Institutional is predominantly due to a rise
in non-deferrable expenses associated with the aforementioned premium growth and
additional post-retirement costs. The increase in Institutional is partially
offset by expense savings resulting from the Company's exit from the large
market 401(k) business. A $20 million increase in International is primarily the
result of new business growth and general expansion of operations in South
Korea, as well as an increase in sales in Spain, partially offset by a decrease
in Mexico due to the weakening of the peso. These increases are partially offset
by a $62 million decrease in Corporate & Other due to a $44 million reduction in
legal expenses, primarily due to a reduction of a previously established
liability related to the Company's race conscious underwriting settlement. A $15
million decrease in Auto & Home is primarily due to a reduction of expenses
resulting from the
-41-
completion of the St. Paul integration and management's focus on expenses, as
well as a reduction in the cost of the New York assigned risk plan.
DAC is 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 DAC increased by $81 million, or 13%, to $682 million
for the three months ended September 30, 2003 from $601 million for the
comparable 2002 period. This variance is primarily due to increases in the
Reinsurance, Individual, Institutional and International segments. A $37 million
increase in Reinsurance is primarily due to an increase in the amount of
high-allowance business written in the respective periods, particularly in the
United Kingdom. An $18 million increase in Individual is primarily due to higher
commissions and other deferrable expenses resulting from higher sales of annuity
and investment-type products. An $18 million increase in Institutional is
primarily due to an increase in acquisition related costs associated with the
aforementioned premium growth, especially in the long-term care product. A $12
million increase in International is primarily due to higher sales in Spain,
Mexico and Korea. Total amortization of DAC decreased by $73 million, or 15%, to
$404 million for the three months ended September 30, 2003 from $477 million for
the comparable 2002 period. Amortization of DAC of $414 million and $488 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 decreases in amortization allocated to other expenses is largely
attributable to the Individual, and Auto & Home segments, partially offset by
increases in the Reinsurance, Institutional and International segments. An $85
million decrease in Individual is primarily the result of refinements in the
calculation of estimated gross margins in the comparable 2002 period, with the
remaining variance attributable to the impact of lapse, mortality and investment
experience. A $20 million decrease in Reinsurance is primarily due to a change
in product mix. In addition, a $7 million decrease in Auto & Home is primarily
due to a change in new business product mix by distribution channels in prior
periods. These decreases are partially offset by a $21 million increase in
Institutional is primarily due to the reclassification of DAC related to the
disability product as well as additional expenses related to increased sales
activity. A $17 million increase in International is primarily due to an
increase in the amortization of the value of business acquired related a change
in reserve methodology in the second quarter of 2003, as well as refinements in
the DAC model in Taiwan.
Income tax expense for the three months ended September 30, 2003 was
$147 million, or 21% of income before provision for income taxes and cumulative
effect of change in accounting, compared with $118 million, or 28%, 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 tax benefits related to
the sale of foreign subsidiaries. In addition, the 2003 effective tax rate
reflects an adjustment consisting primarily of a revision in the estimate of
income taxes for 2002. The 2002 effective tax rate differs from the corporate
tax rate of 35% primarily due to the impact of non-taxable investment income,
partially offset by the inability to record tax benefits on certain foreign
capital losses.
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 September 30, 2003 and 2002. The income
from discontinued operations is comprised of net investment income, and net
investment gains related to 51 properties that the Company began marketing for
sale on or after January 1, 2002. For the three months ended September 30, 2003,
the Company recognized $8 million of net investment gains from discontinued
operations related to 51 properties sold or held-for-sale.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 -- THE COMPANY
Premiums increased by $1,139 million, or 8%, to $14,994 million for the
nine months ended September 30, 2003 from $13,855 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 $661 million increase in
Institutional is primarily the result of growth in this segment's long-term
care, disability, dental and life products. In addition, retirement and savings
premiums increased due to higher sales in structured settlement products in
2003, partially offset by a sale of a significant single premium contract in the
second quarter of 2002. New premiums from facultative and automatic treaties and
renewal premiums on existing blocks of business, particularly in the U.S. and
United Kingdom, contributed to a $311 million increase in the Reinsurance
segment. A $200 million increase in International is primarily due to the
acquisition of Hidalgo in June 2002, which accounted for $255 million of the
variance, largely offset by a decrease of $108 million attributable to a
non-recurring sale of an annuity contract in the first quarter of 2002 in
Canada. Excluding these items, International premiums increased by $53 million
primarily due to growth in South Korea, Chile, Taiwan and Spain. Anticipated
actions taken by the Mexican government adversely
-42-
impacted the insurance and annuities market and resulted in a decline in
premiums in Mexico's group and individual life businesses. In addition, the
cancellation of a large broker-sponsored case at the end of 2002 and the
weakening of the peso, both contributed to the decline in Mexico. A $63 million
increase in Auto & Home is primarily due to the result of rate increases in both
the auto and property lines. These increases are partially offset by a $98
million decrease in Individual primarily due to a decrease in renewal premiums
associated with an aging block of business, as well as a decrease in insurance
purchased by existing customers with their policy dividends. In addition, there
was a decrease in the single premium immediate annuities and supplemental
contracts with life contingencies products. Premiums on these policies can
fluctuate based on product demand.
Universal life and investment-type product policy fees increased by
$237 million, or 15%, to $1,798 million for the nine months ended September 30,
2003 from $1,561 million for the comparable 2002 period. This variance is
primarily attributable to increases in the International, Individual, and
Institutional segments. A $114 million increase in International is primarily
due to the acquisition of Hidalgo in June 2002 which contributed $102 million to
this variance. Excluding this acquisition, International's premiums increased
$12 million due to an increase in contributions to the policyholders account
from a large block of business in Mexico. A $112 million increase in Individual
is predominately due to higher insurance fees, surrender charges and the
amortization of deferred fees. This is a result of lapse, mortality and
investment experience. In addition, an increase in average separate account
balances and favorable investment experience resulted in an increase in
universal life and investment-type product policy fees from annuity and
investment-type products. An $11 million increase in Institutional is primarily
due to sales growth and improved persistency for the group universal life
product, partially offset by a decline in fees resulting from the inclusion in
the second quarter of 2002 of significant fees from two bank owned life
insurance contracts.
Net investment income increased by $264 million, or 3%, to $8,605
million for the nine months ended September 30, 2003 from $8,341 million for the
comparable 2002 period. This variance is primarily attributable to increases of
(i) $273 million, or 5%, in income from fixed maturities; (ii) $37 million, or
30%, in income from other invested assets; (iii) $19 million, or 1%, in income
from mortgage loans on real estate; and (iv) $12 million, or 3%, in interest
income from policy loans. These variances are partially offset by decreases of
(i) $29 million, or 17%, in income from cash, cash equivalents and short-term
investments; (ii) $21 million, or 6%, in income from real estate and real estate
joint ventures held-for-investment, net of investment expenses and depreciation;
(iii) higher investment expenses of $21 million, or 12%; and (iv) $6 million, or
8%, in income from equity securities and other limited partnership interests.
The increase in income from fixed maturities to $6,257 million in 2003
from $5,984 million in 2002 is due to a higher asset base resulting from the
reinvestment of cash flows, higher income from equity-linked notes resulting
from appreciation in underlying indices, an increase in income from securities
lending, and an increase in bond prepayment fees. These increases are partially
offset by a decline in reinvestment rates. The increase in income on other
invested assets to $161 million in 2003 from $124 million in 2002 is largely due
to an increase in reinsurance contracts' funds withheld at interest. The
increase in mortgage loans on real estate to $1,410 million in 2003 from $1,391
million in 2002 is due to a higher asset base coupled with an increase in
prepayment fees, partially offset by lower reinvestment rates. The increase in
interest on policy loans to $419 million in 2003 from $407 in 2002 is due to
increased loans outstanding. The decrease in income from cash, cash equivalents
and short-term investments to $141 million in 2003 from $170 million in 2002 is
mainly due to a decline in short-term interest rates, partially offset by a
higher asset base resulting from an increase in short-term financing related
liabilities. The decrease in income from real estate and real estate joint
ventures held-for-investment to $337 million in 2003 from $358 million in 2002
is largely due to decreased income from lower tenant occupancy at two California
properties. The increase in investment expenses to $192 million in 2003 from
$171 million in 2002 is due to higher corporate and overhead charges applicable
to investment activity. The decrease in income from equity securities and other
limited partnership interests to $72 million in 2003 from $78 million in 2002 is
primarily due to a decline in valuation and lower realizations on corporate
joint ventures, partially offset by an increase in sales of underlying assets
held in corporate joint ventures.
The increase in net investment income is primarily attributable to
increases in Corporate & Other and the International, Reinsurance and
Institutional segments, partially offset by decreases in the Individual, and
Auto & Home segments. Corporate & Other increased by $150 million which is
primarily due to higher income from allocated capital, increased income from
corporate joint ventures, equity-linked notes and securities lending. The
increase in International of $70 million is mainly due to an increase in income
resulting from a higher asset base resulting from the acquisition of Hidalgo in
June 2002, partially offset by a decline in income from allocated capital. The
Reinsurance segment increased $57 million primarily as a result of an increase
in reinsurance contracts' funds withheld at interest somewhat offset by income
from allocated capital. The Institutional segment increased $26 million
predominantly as a result of higher income from allocated capital and
equity-linked notes, partially offset by lower income on other invested assets.
These increases are partially offset by a decrease in the Individual segment of
$26 million primarily resulting from a decline in valuation on corporate joint
ventures and lower income from allocated capital, partially offset by income
from higher asset base. These increases are also partially offset by a $16
million decrease in the Auto & Home segment due to lower reinvestment rates and
reduced income from allocated capital.
Other revenues decreased by $42 million, or 4%, to $988 million for the
nine months ended September 30, 2003 from $1,030 million for the comparable 2002
period. This variance is primarily attributable to decreases in the
Institutional, Individual, and Asset
-43-
Management segments, partially offset by increases in the International segment
and Corporate & Other. A $44 million decrease in Institutional is primarily
attributable to a decline in administrative fees from the 401(k) business, as a
result of the Company's exit from the large market 401(k) business in late 2001.
A $34 million decrease in Individual is primarily due to lower commission and
fee income associated with the volume decline in the broker/dealer and other
subsidiaries, principally due to the slow recovery of the equity markets. A $25
million decrease in Asset Management is primarily the result of lower average
assets under management on which management and advisory fees are earned. In
addition performance fees earned during 2003 on certain investment products were
lower than in the comparable period. These decreases are partially offset by a
$46 million increase in International primarily due to the acquisition of
Hidalgo in June 2002. Excluding this acquisition, International's premiums
increased $18 million due to the recovery of previously uncollectable
receivables and the cancellation of a reinsurance contract related to a large
block of business in Mexico. A $10 million increase in Corporate & Other is
largely due to the amortization of a deferred gain related to a property sale
and leaseback transaction. The remaining variances are due to minor
fluctuations in other lines of business.
Net investment losses decreased by $182 million, or 35%, to $342
million for the nine months ended September 30, 2003 from $524 million for the
comparable 2002 period. Total investment losses for 2003, before offsets, is
comprised of $419 million (including gross gains of $394 million, gross losses
of $262 million, writedowns of $460 million, and a net loss from derivatives of
$91 million which includes settlement payments on derivative instruments that
do not qualify for hedge accounting of $55 million). Total investment losses
for 2002, before offsets, is comprised of $626 million (including gross gains
of $1,391 million, gross losses of $748 million, writedowns of $1,162 million,
and a net loss from derivatives of $107 million which includes settlement
payments on derivative instruments that do not qualify for hedge accounting of
$22 million). Offsets include the amortization of DAC of $25 million and $26
million for the nine months ended September 30, 2003 and 2002, respectively,
and changes in the policyholder dividend obligation of $52 million and $78
million for the nine months ended September 30, 2003 and 2002, respectively,
and adjustments to participating contracts of ($2) million for the nine months
ended September 30, 2002.
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 DAC, to the extent that such amortization results from
investment gains and losses; (ii) adjustments to participating contractholder
accounts when amounts equal to such investment gains and losses are applied to
the contractholder's accounts; and (iii) adjustments to the policyholder
dividend obligation resulting from investment gains and losses.
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 unaudited interim
condensed consolidated statements of income may not be comparable to amounts
reported by other insurers.
Policyholder benefits and claims increased by $857 million, or 6%, to
$15,096 million for the nine months ended September 30, 2003 from $14,239
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. The increases
of $434 million and $242 million, respectively, in Institutional and Reinsurance
are primarily attributable to the aforementioned growth in premiums. A $101
million increase in International is primarily due to the acquisition of Hidalgo
in June 2002, which accounted for $256 million of the variance, largely offset
by a decrease of $108 million attributable to a non-recurring sale of an annuity
contract in the first quarter of 2002 in Canada. Excluding these items,
International's policyholder benefits and claims decreased by $47 million
primarily due to a reduction in Mexican policyholder liabilities related to a
change in reserve methodology as well as the impact of the overall premium
decreases discussed above. This decrease is partially offset by business growth
in Chile, South Korea and Spain. A $95 million increase in Auto & Home is
primarily due to an increase in auto claims frequencies resulting largely from
adverse road conditions in the first quarter of 2003 and higher losses due to
adverse claims development related to prior accident years, partially offset by
a decrease in property benefits due to reduced non-catastrophe claim frequency,
fewer policies in force and underwriting and agency management actions. These
increases are partially offset by an $18 million decrease in Individual
primarily due to benefits paid on single premium immediate annuities, partially
offset by an increase in the reserves associated with guaranteed minimum death
benefits, which fluctuate in response to equity market changes.
Interest credited to policyholder account balances increased by $98
million, or 5%, to $2,275 million for the nine months ended September 30, 2003
from $2,177 million for the comparable 2002 period. This variance is primarily
due to increases in the International, Reinsurance, and Individual segments,
partially offset by a decrease in the Institutional segment. A $55 million
increase in International is primarily due to the acquisition of Hidalgo in June
2002. A $38 million increase in Reinsurance is primarily due to the addition of
several new annuity transactions during the fourth quarter of 2002 and new
deposits on existing annuity treaties. A $15 million increase in Individual is
primarily due to growth in variable universal life and deferred annuity
products, partially offset by
-44-
declines in the interest crediting rates. These increases are partially offset
by a $10 million decrease in Institutional primarily attributable to a decline
in average crediting rates in 2003 as a result of the lower interest rate
environment, offset in part by an increase in policyholder account balances.
Policyholder dividends decreased by $6 million, or less than 1%, to
$1,483 million for the nine months ended September 30, 2003 from $1,489 million
for the comparable 2002 period. This variance is primarily attributable to a
decrease in the Individual segment, partially offset by increases in the
Institutional, and International segments. A $58 million decrease in Individual
is 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. This decrease is partially offset by a $41
million increase in Institutional 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
offset in policyholder benefits and claims. A $12 million increase in
International is primarily attributable to the acquisition of Hidalgo in June
2002.
Other expenses increased by $354 million, or 7%, to $5,286 million for
the nine months ended September 30, 2003 from $4,932 million for the comparable
2002 period. Excluding the capitalization and amortization of DAC, which are
discussed below, other expenses increased by $528 million, or 10%, to $5,919
million for the nine months ended September 30, 2003 from $5,391 million for the
comparable 2002 period. This variance is primarily attributable to increases in
the Individual, Reinsurance, Institutional, and International segments,
partially offset by decreases in Corporate & Other and the Asset Management and
Auto & Home segments. A $228 million increase in Individual is primarily due to
higher commissions resulting from sales growth in new annuity and
investment-type products and increased pensions and post-retirement benefit
expenses. A $221 million increase in Reinsurance is primarily due to an increase
in allowances paid on assumed reinsurance, particularly on certain high
commission business in the United Kingdom. A $156 million increase in
Institutional is predominantly due to a rise in non-deferrable expenses
associated with the aforementioned premium growth, post-retirement costs and a
$15 million charge in the first half of 2003 principally related to office
consolidations. These increases in Institutional are partially offset by expense
savings resulting from the Company's exit from the large market 401(k) business
in late 2001. A $130 million increase in International is primarily due to
higher sales in South Korea and Spain, partially offset by a decrease in Mexico
due to lower headcount and the weakening of the peso. These increases are
partially offset by a $153 million decrease in Corporate & Other which is
largely attributable to a $180 million reduction in legal expenses which
includes a $144 million reduction, in 2003, of a previously established
liability related to the Company's race conscious underwriting settlement. A
decrease of $28 million in Asset Management is largely due to staff reductions
in the third and fourth quarters of 2002 and reduced expenses as a result of
lower average assets under management. A decrease of $26 million in Auto & Home
is primarily due to a reduction in expenses resulting from the completion of the
St. Paul integration and the reduction in the cost of the New York assigned risk
plan.
DAC is 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 DAC increased by $324 million, or 20%, to $1,951
million for the nine months ended September 30, 2003 from $1,627 million for the
comparable 2002 period. This variance is primarily due to increases in the
Reinsurance, International, Individual, Institutional, and Auto & Home segments.
A $153 million increase in Reinsurance is primarily due to an increase in the
amount of high-allowance business written in the respective periods,
particularly in the United Kingdom. A $57 million increase in International is
primarily due to the acquisition of Hidalgo and higher sales in Spain and South
Korea. A $56 million increase in Individual is primarily due to higher
commissions and other deferrable expenses resulting from higher sales of annuity
and investment-type products, partially offset by the impact of a revision to
previously deferred expenses. A $36 million increase in Institutional is
primarily due to an increase in acquisition-related costs associated with the
aforementioned premium growth, especially in the long-term care product. A $22
million increase in Auto & Home is primarily due to higher sales and an increase
in the average premium per policy due to rate increases. Total amortization of
DAC increased by $151 million, or 13%, to $1,293 million for the nine months
ended September 30, 2003 from $1,142 million for the comparable 2002 period.
Amortization of DAC of $1,318 million and $1,168 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 increases in the
International, Reinsurance, Institutional, and Auto & Home segments, partially
offset by a decrease in the Individual segment. A $79 million increase in
International is primarily due to the acquisition of Hidalgo and an increase in
Mexico commensurate with the aforementioned change in reserve methodology. A $37
million increase in Reinsurance is primarily due to a change in product mix. A
$37 million increase in Institutional is primarily due to the reclassification
of DAC related to the disability product, as well as additional expenses related
to year over year sales activity. A $14 million increase in Auto & Home is due
to higher sales and an increase in the average premium per policy due to rate
increases in the comparable period. These increases are partially offset by a
$17
-45-
million decrease in Individual primarily due to a charge resulting from the
amortization of deferred expenses, with the remainder of the variance
attributable to the impact of lapse, mortality and investment experience.
Income tax expense for the nine months ended September 30, 2003 was
$476 million, or 25% of income before provision for income taxes and cumulative
effect of change in accounting, compared with $456 million, or 32%, 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, a tax recovery of prior year
tax overpayments on tax-exempt bonds, a reduction of the deferred tax valuation
allowance to recognize the effect of certain foreign net operating loss
carryforwards, and tax benefits related to the sale of foreign subsidiaries. In
addition, the 2003 effective tax rate reflects an adjustment consisting
primarily of a revision in the estimate of income taxes for 2002. The 2002
effective tax rate differs from the corporate tax rate of 35% primarily due to
the impact of non-taxable investment income, partially offset by the inability
to record tax benefits on certain foreign capital losses.
In accordance with SFAS 144, income related to the Company's real
estate which was identified as held-for-sale on or after January 1, 2002 is
presented as discontinued operations for the nine months ended September 30,
2003 and 2002. The income from discontinued operations is comprised of net
investment income and net investment gains related to 51 properties that the
Company began marketing for sale on or after January 1, 2002. For the nine
months ended September 30, 2003, the Company recognized $99 million of net
investment gains from discontinued operations related to 51 properties sold or
held-for-sale.
-46-
INSTITUTIONAL
The following table presents consolidated financial information for the
Institutional segment for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 2,260 $ 2,046 $ 6,730 $ 6,069
Universal life and investment-type product policy fees 167 152 482 471
Net investment income 976 945 2,951 2,925
Other revenues 144 154 438 482
Net investment losses (37) (184) (145) (384)
---------- ---------- ---------- ----------
Total revenues 3,510 3,113 10,456 9,563
---------- ---------- ---------- ----------
EXPENSES
Policyholder benefits and claims 2,509 2,331 7,394 6,960
Interest credited to policyholder account balances 234 236 686 696
Policyholder dividends 14 29 107 66
Other expenses 407 363 1,299 1,142
---------- ---------- ---------- ----------
Total expenses 3,164 2,959 9,486 8,864
---------- ---------- ---------- ----------
Income from continuing operations before
provision for income taxes 346 154 970 699
Provision for income taxes 122 54 343 243
---------- ---------- ---------- ----------
Income from continuing operations 224 100 627 456
Income from discontinued operations, net of income taxes 4 5 30 16
---------- ---------- ---------- ----------
Net income $ 228 $ 105 $ 657 $ 472
========== ========== ========== ==========
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2002 -- INSTITUTIONAL
Premiums increased by $214 million, or 10%, to $2,260 million for the
three months ended September 30, 2003 from $2,046 million for the comparable
2002 period. Group insurance premiums increased by $125 million, primarily in
the long-term care, disability, dental and life products. The increase in
long-term care is largely attributable to a significant contract for which the
Company began receiving premiums in the fourth quarter of 2002. Favorable
renewals and persistency generated the majority of the increase in disability.
The increase in life and dental premiums resulted from improved persistency and
strong sales. Retirement and savings premiums increased by $89 million largely
due to higher sales in structured settlement products in 2003. 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 $15
million, or 10%, to $167 million for the three months ended September 30, 2003
from $152 million for the comparable 2002 period. This increase is primarily due
to sales growth and improved persistency for the group universal life product.
Other revenues decreased by $10 million, or 6%, to $144 million for the
three months ended September 30, 2003 from $154 million for the comparable 2002
period. This decrease is largely due to a decline in retirement and savings
administrative fees from the Company's 401(k) business. This decline resulted
from its exit from the large market 401(k) business in late 2001. Consequently,
revenue declined as business was transferred to other carriers throughout 2002.
Policyholder benefits and claims increased by $178 million, or 8%, to
$2,509 million for the three months ended September 30, 2003 from $2,331 million
for the comparable 2002 period. Retirement and savings increased by $94 million,
commensurate with the aforementioned increase in premiums. Group insurance
increased by $84 million, primarily as a result of the premium growth in the
long-term care, disability, dental and life products, as well as an $11 million
reclassification of DAC related to the disability product in 2002.
-47-
Interest credited to policyholder account balances decreased by $2
million, or 1%, to $234 million for the three months ended September 30, 2003
from $236 million for the comparable 2002 period. This decrease is primarily
attributable to declines in average crediting rates in 2003 as a result of the
lower interest rate environment, offset in part by an increase in policyholder
account balances.
Policyholder dividends decreased by $15 million, or 52%, to $14 million
for the three months ended September 30, 2003 from $29 million for the
comparable 2002 period. Policyholder dividends vary from period to period based
on participating contract experience, which is generally offset in policyholder
benefits and claims.
Other expenses increased by $44 million, or 12%, to $407 million for
the three months ended September 30, 2003 from $363 million for the comparable
2002 period. Excluding the impact of capitalization and amortization of DAC
which are discussed below, other expenses increased by $41 million, or 11%, to
$430 million in 2003 from $389 million in 2002. Group insurance and retirement
and savings expenses increased by $32 million and $9 million, respectively,
primarily due to a rise in non-deferrable expenses associated with the
aforementioned premium growth and post-retirement costs. 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 expense reductions achieved as the large market 401(k) business was
transferred to other carriers throughout 2002.
Capitalization of DAC increased by $18 million, or 51%, to $53 million
for the three months ended September 30, 2003 from $35 million for the
comparable 2002 period. This variance is primarily due to an increase in
acquisition-related costs associated with the aforementioned premium growth,
especially in the long-term care product. Amortization of DAC increased by $21
million, or 233%, to $30 million in 2003 from $9 million in 2002 due to the
aforementioned policyholder benefits reclassification, as well as additional
expenses related to quarter over quarter sales activity.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 -- INSTITUTIONAL
Premiums increased by $661 million, or 11%, to $6,730 million for the
nine months ended September 30, 2003 from $6,069 million for the comparable 2002
period. Group insurance premiums increased by $533 million primarily in the
long-term care, disability, dental and life products. The increase in long-term
care is largely attributable to a significant contract entered into for which
the Company began receiving premiums in the fourth quarter of 2002. Favorable
renewals and persistency generated the increase in disability. The increase in
life and dental premiums resulted from improved persistency, strong sales and
growth on the existing block of business. Retirement and savings premiums
increased by $128 million, primarily as a result of higher sales in structured
settlement products, partially offset by a sale of a significant single premium
contract in the second quarter of 2002. 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 $11
million, or 2%, to $482 million for the nine months ended September 30, 2003
from $471 million for the comparable 2002 period. This increase is primarily due
to sales growth and improved persistency for the group universal life product.
This favorable variance is offset in part by a decline in fees resulting from
the inclusion in the second quarter of 2002 of significant fees from two bank
owned life insurance contracts.
Other revenues decreased by $44 million, or 9%, to $438 million for the
nine months ended September 30, 2003 from $482 million for the comparable 2002
period. This decrease is largely due to a decline in retirement and savings
administrative fees from the Company's 401(k) business. This decline resulted
from its exit from the large market 401(k) business in late 2001. Consequently,
revenue declined as business was transferred to other carriers throughout 2002.
Policyholder benefits and claims increased by $434 million, or 6%, to
$7,394 million for the nine months ended September 30, 2003 from $6,960 million
for the comparable 2002 period. Group insurance increased by $294 million,
primarily as a result of the aforementioned premium growth in this segment's
long-term care, disability, dental and life products, as well as an $11 million
reclassification of DAC related to the disability product in 2002. The increase
in retirement and savings of $140 million is commensurate with the premium
growth.
Interest credited to policyholder account balances decreased by $10
million, or 1%, to $686 million for the nine months ended September 30, 2003
from $696 million for the comparable 2002 period. This decrease is primarily
attributable to a decline in average crediting rates in 2003 as a result of the
lower interest rate environment, offset in part by an increase in policyholder
account balances.
Policyholder dividends increased by $41 million, or 62%, to $107
million for the nine months ended September 30, 2003 from $66 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 offset in policyholder benefits and claims.
-48-
Other expenses increased by $157 million, or 14%, to $1,299 million for
the nine months ended September 30, 2003 from $1,142 million for the comparable
2002 period. Excluding the impact of capitalization and amortization of DAC
which are discussed below, other expenses increased by $156 million, or 13%, to
$1,369 million in 2003 from $1,213 million in 2002. Group insurance and
retirement and savings expenses increased by $123 million and $33 million,
respectively, primarily due to a rise in non-deferrable expenses associated with
the aforementioned premium growth, post-retirement costs and a $15 million
charge in the first half of 2003 principally related to office consolidations.
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 expense reductions achieved as the large market
401(k) business was transferred to other carriers throughout 2002.
Capitalization of DAC increased by $36 million, or 33%, to $144 million
for the nine months ended September 30, 2003 from $108 million for the
comparable 2002 period. This variance is primarily due to an increase in
acquisition-related costs associated with the aforementioned premium growth,
especially in the long-term care product. Amortization of DAC increased by $37
million to $74 million in 2003 from $37 million in 2002 due to the
aforementioned policyholder benefits reclassification, as well as additional
expenses related to year over year sales activity.
-49-
INDIVIDUAL
The following table presents consolidated financial information for the
Individual segment for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- ---------------------
2003 2002 2003 2002
------- ------- -------- ---------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 1,064 $ 1,080 $ 3,160 $ 3,258
Universal life and investment-type product policy fees 386 375 1,124 1,012
Net investment income 1,548 1,592 4,636 4,662
Other revenues 96 95 291 325
Net investment losses (net of amounts allocated from other
accounts of ($39), ($16), ($77) and ($102), respectively) (37) (25) (122) (98)
------- ------- -------- --------
Total revenues 3,057 3,117 9,089 9,159
------- ------- -------- --------
EXPENSES
Policyholder benefits and claims (excludes amounts directly related
to net investment losses of ($29), ($5), ($52) and ($76),
respectively) 1,261 1,222 3,699 3,717
Interest credited to policyholder account balances 452 437 1,347 1,332
Policyholder dividends 442 459 1,321 1,379
Other expenses (excludes amounts directly related to net
investment losses of ($10), ($11), ($25) and ($26),
respectively) 677 683 2,105 1,950
------- ------- -------- --------
Total expenses 2,832 2,801 8,472 8,378
------- ------- -------- --------
Income from continuing operations before provision
for income taxes 225 316 617 781
Provision for income taxes 72 113 210 280
------- ------- -------- --------
Income from continuing operations 153 203 407 501
Income from discontinued operations, net of income taxes 1 7 32 25
------- ------- -------- --------
Net income $ 154 $ 210 $ 439 $ 526
======= ======= ======== ========
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2002 -- INDIVIDUAL
Premiums decreased by $16 million, or 2%, to $1,064 million for the
three months ended September 30, 2003 from $1,080 million for the comparable
2002 period. Premiums from annuity and investment-type products decreased by $18
million in the single premium immediate annuities and supplemental contracts
with life contingencies products. Premiums on these policies can fluctuate based
on product demand. Premiums from insurance products increased by $2 million,
primarily as a result of a third quarter 2002 amendment to a reinsurance
agreement which increased the amount of insurance ceded in that period, as well
as new business growth in insurance products. This variance was partially offset
by a decrease in renewal premiums associated with an aging block of business, as
well as a decrease in insurance purchased by existing customers with their
policy dividends. This decline is a direct result of the dividend scale
reduction adopted in the fourth quarter of 2002.
Universal life and investment-type product policy fees increased by $11
million, or 3%, to $386 million for the three months ended September 30, 2003
from $375 million for the comparable 2002 period. Policy fees from annuity and
investment-type products increased by $24 million resulting from favorable
investment experience and an increase in average separate account balances.
Policy fees from insurance products decreased by $13 million due to higher
amortization of deferred fees in the comparable 2002 period. This is a result of
lapse, mortality and investment experience.
Other revenues remained essentially unchanged at $96 million for the
three months ended September 30, 2003 from $95 million for the comparable 2002
period.
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 DAC, to the extent that such amortization results from
investment gains and losses; (ii) adjustments to participating contractholder
accounts when amounts equal to such investment gains and losses are applied to
the contractholder's accounts; and (iii) adjustments to the policyholder
dividend obligation resulting from investment gains and losses.
- 50 -
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 unaudited interim
condensed consolidated statements of income may not be comparable to amounts
reported by other insurers.
Policyholder benefits and claims increased by $39 million, or 3%, to
$1,261 million for the three months ended September 30, 2003 from $1,222 million
for the comparable 2002 period. Policyholder benefits and claims for insurance
products increased by $60 million primarily due to the impact of the
aforementioned amendment to a reinsurance agreement and the reduction of a
reserve related to a subsidiary merger, both of which occurred in the comparable
2002 period. In addition, policyholder benefits and claims increased as a result
of new business growth. Policyholder benefits and claims for annuity and
investment-type products decreased by $21 million largely due to product demand
for single premium immediate annuities and supplemental contracts with life
contingencies and a decrease in the reserves associated with guaranteed minimum
death benefits, which fluctuate in response to equity market changes.
Interest credited to policyholder account balances increased by $15
million, or 3%, to $452 million for the three months ended September 30, 2003
from $437 million for the comparable 2002 period. This variance is due to growth
in variable universal life and deferred annuity products, partially offset by
declines in the interest crediting rates.
Policyholder dividends decreased by $17 million, or 4%, to $442 million
for the three months ended September 30, 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 decreased by $6 million, or 1%, to $677 million for the
three months ended September 30, 2003 from $683 million for the comparable 2002
period. Excluding the capitalization and amortization of DAC that are discussed
below, other expenses increased by $97 million, or 14%, to $795 million in 2003
from $698 million in 2002. Other expenses related to insurance products
increased by $52 million. Although there are savings from ongoing expense
management initiatives, these savings are more than offset by increased pension
and post retirement benefits and non-recurring charges. Other expenses related
to annuity and investment-type products increased by $45 million. This is
primarily due to an increase in commissions stemming from the continued 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.
DAC is principally amortized in proportion to gross margins or gross
profits, including investment gains or losses. The amortization is allocated to
investment gains and losses to provide consolidated statement of income
information regarding the impact of investment gains and losses on the amount of
the amortization and other expenses to provide amounts related to gross margins
or profits originating from transactions other than investment gains and losses.
Capitalization of DAC increased by $18 million, or 7%, to $280 million
for the three months ended September 30, 2003 from $262 million for the
comparable 2002 period due to higher commissions and other deferrable expenses
resulting from higher sales of annuity and investment-type products. Total
amortization of DAC decreased by $84 million, or 36%, to $152 million in 2003
from $236 million in 2002. Amortization of DAC of $162 million and $247 million
is allocated to other expenses in 2003 and 2002, respectively, while the
remainder of the amortization in each period is allocated to investment gains
and losses. The $60 million decrease in amortization of DAC allocated to other
expenses for insurance products is primarily the result of refinements in the
calculation of estimated gross margins in the comparable 2002 period, with the
remaining variance attributable to the impact of lapse, mortality and investment
experience. The decrease in amortization of DAC allocated to other expenses for
annuity and investment-type products of $25 million is due to the impact of
investment experience.
- 51 -
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 -- INDIVIDUAL
Premiums decreased by $98 million, or 3%, to $3,160 million for the
nine months ended September 30, 2003 from $3,258 million for the comparable 2002
period. Premiums from insurance products decreased by $79 million, primarily due
to a decrease in renewal premiums associated with an aging block of business, as
well as a decrease in insurance purchased by existing customers with their
policy dividends. This decline is a direct result of the dividend scale
reduction adopted in the fourth quarter of 2002. Premiums from annuity and
investment-type products decreased by $19 million in the single premium
immediate annuities and supplemental contracts with life contingencies products.
Premiums from these policies can fluctuate based on product demand.
Universal life and investment-type product policy fees increased by
$112 million, or 11%, to $1,124 million for the nine months ended September 30,
2003 from $1,012 million for the comparable 2002 period. Policy fees from
insurance products increased by $71 million due to higher insurance fees,
surrender charges, and the amortization of deferred fees. The growth in
insurance fees stems primarily from an increase in the average general account
balance of universal life products. This is a result of lapse, mortality and
investment experience. Policy fees from annuity and investment-type products
increased by $41 million resulting from favorable investment experience which
resulted in an increase in average separate account balances.
Other revenues decreased by $34 million, or 10%, to $291 million for
the nine months ended September 30, 2003 from $325 million for the comparable
2002 period, largely due to lower commission and fee income associated with the
sales volume decline in the broker/dealer and other subsidiaries which is
principally due to the slow recovery of the equity markets. Other revenues,
which primarily consist of commission and fee income related to the
broker/dealer and other subsidiaries, fluctuate from period to period in
response to equity market changes.
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 DAC, to the extent that such amortization results from
investment gains and losses; (ii) adjustments to participating contractholder
accounts when amounts equal to such investment gains and losses are applied to
the contractholder's accounts; and (iii) adjustments to the policyholder
dividend obligation resulting from investment gains and losses.
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 unaudited interim
condensed consolidated statements of income may not be comparable to amounts
reported by other insurers.
Policyholder benefits and claims decreased by $18 million, or 1%, to
$3,699 million for the nine months ended September 30, 2003 from $3,717 million
for the comparable 2002 period. Policyholder benefits and claims for annuity and
investment-type products decreased by $19 million, largely due to benefits paid
on single premium immediate annuities, partially offset by an increase in the
reserves associated with guaranteed minimum death benefits, which fluctuate in
response to equity market changes. Policyholder benefits and claims for life
products remained essentially unchanged.
Interest credited to policyholder account balances increased by $15
million, or 1%, to $1,347 million for the nine months ended September 30, 2003
from $1,332 million for the comparable 2002 period. This variance is due to
growth in variable universal life and deferred annuity products, partially
offset by declines in the interest crediting rates.
Policyholder dividends decreased by $58 million, or 4%, to $1,321
million for the nine months ended September 30, 2003 from $1,379 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 $155 million, or 8%, to $2,105 million for
the nine months ended September 30, 2003 from $1,950 million for the comparable
2002 period. Excluding the capitalization and amortization of DAC that are
discussed below, other expenses increased by $228 million, or 11%, to $2,381
million in 2003 from $2,153 million in 2002. Other expenses related to annuity
and investment-type products increased by $161 million. This is primarily due to
an increase in commissions attributable to the continued 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. Other expenses related to insurance products increased by $67
- 52 -
million. Although there are savings from ongoing expense management initiatives,
these savings are more than offset by increased pension and post-retirement
benefit expenses and non-recurring charges.
DAC is principally amortized in proportion to gross margins or gross
profits, including investment gains or losses. The amortization is allocated to
investment gains and losses to provide consolidated statement of income
information regarding the impact of investment gains and losses on the amount of
the amortization and other expenses to provide amounts related to gross margins
or profits originating from transactions other than investment gains and losses.
Capitalization of DAC increased by $56 million, or 7%, to $820 million
for the nine months ended September 30, 2003 from $764 million for the
comparable 2002 period due to higher commissions and other deferrable expenses
as a result of higher sales of annuity and investment-type products, partially
offset by the impact of non-deferrable expenses from insurance products that
were previously deferred. Total amortization of DAC decreased by $16 million, or
3%, to $519 million in 2003 from $535 million in 2002. Amortization of DAC of
$544 million and $561 million is allocated to other expenses in 2003 and 2002,
respectively, while the remainder of the amortization in each period is
allocated to investment gains and losses. The decrease in amortization of DAC
allocated to other expenses for annuity and investment-type products of $34
million is due to the impact of investment experience. The $17 million increase
in amortization of DAC allocated to other expenses for insurance products is
primarily due to an adjustment resulting from the amortization of deferred
expenses, with the remaining variance attributable to the impact of lapse,
mortality and investment experience.
- 53 -
AUTO & HOME
The following table presents consolidated financial information for the
Auto & Home segment for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- --------------------
2003 2002 2003 2002
------- -------- -------- --------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 735 $ 711 $ 2,168 $ 2,105
Net investment income 39 44 119 135
Other revenues 10 11 23 27
Net investment gains (losses) 2 (8) (4) (40)
------- ------- ------- -------
Total revenues 786 758 2,306 2,227
------- ------- ------- -------
EXPENSES
Policyholder benefits and claims 543 497 1,604 1,509
Other expenses 187 205 572 606
------- ------- ------- -------
Total expenses 730 702 2,176 2,115
------- ------- ------- -------
Income before provision for income taxes 56 56 130 112
Provision for income taxes 13 13 19 24
------- ------- ------- -------
Net income $ 43 $ 43 $ 111 $ 88
======= ======= ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2002 -- AUTO & HOME
Premiums increased by $24 million, or 3%, to $735 million for the three
months ended September 30, 2003 from $711 million for the comparable 2002
period. Auto and property premiums both increased by $12 million due to
increases in average premium resulting from rate increases. Premiums from other
personal lines remained unchanged at $13 million.
Other revenues decreased by $1 million, or 9%, to $10 million for the
three months ended September 30, 2003 from $11 million for the comparable 2002
period. The decrease is due to less income earned on corporate-owned life
insurance ("COLI") and fewer installment payment fees. The decrease in payment
fees is a result of a decline in policies in force.
Policyholder benefits and claims increased by $46 million, or 9%, to
$543 million for the three months ended September 30, 2003 from $497 million for
the comparable 2002 period. Auto policyholder benefits and claims increased by
$51 million due to higher claims severities and an increase in the adverse
development of prior year claim reserves. Additionally, the third quarter 2002
results include two reinsurance recoverables totaling $17 million. Automobile
non-catastrophe claims frequency was relatively flat versus the comparable 2002
period. Property policyholder benefits and claims decreased by $8 million due to
reduced non-catastrophe claim frequency and fewer policies in force. These
decreases were partially offset by an increase in catastrophes of $19 million.
The property loss ratio decreased by 9.7 percentage points due to this decrease
in policyholder benefits and claims and an increase in average earned premium of
17% due to rate increases and insurance-to-value programs. Catastrophes
represented 3.4% of the total loss ratio in 2003 compared to .8% in 2002, as a
result of adverse weather, including Hurricane Isabel. Ongoing risk management
programs, including underwriting activity, agency management, product changes
and reinsurance mitigated the impact of the adverse weather. These actions
offset catastrophe losses in the third quarter of 2003 by $31 million. Other
policyholder benefits and claims increased by $3 million primarily due to more
personal umbrella claims.
Other expenses decreased $18 million, or 9%, to $187 million for the
three months ended September 30, 2003 from $205 million for the comparable 2002
period. The expense ratio decreased to 25.5% in 2003 from 28.9% in 2002.
Excluding the capitalization and amortization of DAC that are discussed below,
other expenses decreased by $15 million, or 7%, to $193 million in 2003 from
$208 million in 2002. This decrease is partially due to a $8 million reduction
of expenses resulting from the completion of the St. Paul integration and
management's focus on expenses, as well as a $7 million reduction in the cost of
the New York assigned risk plan.
Capitalization of DAC decreased by $4 million, or 3%, to $112 million
for the three months ended September 30, 2003 from $116 million for the
comparable 2002 period due to a change in product mix by distribution channel.
Amortization of DAC decreased by $7
- 54 -
million, or 6%, to $106 million in 2003 from $113 million in 2002 due to a
change in new business product mix by distribution channel in prior periods.
The effective income tax rates for the three months ended September 30,
2003 and 2002 differ from the corporate tax rate of 35% due to the impact of
non-taxable investment income.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 -- AUTO & HOME
Premiums increased by $63 million, or 3%, to $2,168 million for the
nine months ended September 30, 2003 from $2,105 million for the comparable 2002
period. Auto and property premiums increased by $33 million and $28 million,
respectively, due to increases in average earned premium due to rate increases.
These increases were 8% for auto and 17% for property. Premiums from other
personal lines increased by $2 million to $41 million.
Other revenues decreased by $4 million, or 15%, to $23 million for the
nine months ended September 30, 2003 from $27 million for the comparable 2002
period. This decrease is due to fewer installment payment fees and less COLI
income.
Policyholder benefits and claims increased by $95 million, or 6%, to
$1,604 million for the nine months ended September 30, 2003 from $1,509 million
for the comparable 2002 period. Auto policyholder benefits and claims increased
by $111 million primarily due to an increase in claims frequencies resulting
largely from adverse road conditions in the first quarter of 2003 and higher
losses due to adverse claims development related to prior accident years,
resulting mostly from bodily injury and uninsured motorists claims. The auto
loss ratio increased to 79.2% for 2003 from 73.9% in 2002. Property policyholder
benefits and claims decreased by $20 million due to improved non-catastrophe
claims frequencies, a reduction in the number of homeowners policies in-force,
and underwriting and agency management actions. The property loss ratio
decreased to 58.8% in 2003 from 66.3% in 2002. Other policyholder benefits and
claims increased by $4 million primarily due to more personal umbrella claims.
Other expenses decreased by $34 million, or 6%, to $572 million for the
nine months ended September 30, 2002 from $606 million for the comparable 2002
period. Excluding the capitalization and amortization of DAC that are discussed
below, other expenses decreased by $26 million, or 5%, to $578 million in 2003
from $604 million in 2002. This decrease is partially due to a $18 million
reduction in expenses resulting from the completion of the St. Paul integration
and a $15 million reduction in the cost of the New York assigned risk plan. The
expense ratio decreased to 26.4% in 2003 from 28.8% in 2002.
Capitalization of DAC increased by $22 million, or 7%, to $334 million
for the nine months ended September 30, 2003 from $312 million for the
comparable 2002 period due to an increase in sales and an increase in average
premium per policy due to rate increases. Amortization of DAC increased by $14
million, or 4%, to $328 million in 2003 from $314 million in 2002 due to an
increase in new business production and an increase in average premium per
policy due to rate increases in prior periods.
The effective income tax rates for the nine months ended September 30,
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 recovery recorded in the
first quarter of 2003 for prior year tax overpayments on non-taxable investment
income.
- 55 -
INTERNATIONAL
The following table presents consolidated financial information for the
International segment for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
------- -------- ------- --------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 445 $ 381 $ 1,230 $ 1,030
Universal life and investment-type product policy fees 70 64 192 78
Net investment income 119 133 373 303
Other revenues 20 2 54 8
Net investment gains (losses) 8 6 7 (8)
------- ------- ------- -------
Total revenues 662 586 1,856 1,411
------- ------- ------- -------
EXPENSES
Policyholder benefits and claims 398 352 1,042 941
Interest credited to policyholder account balances 34 32 107 52
Policyholder dividends 12 10 39 27
Other expenses 156 131 472 320
------- ------- ------- -------
Total expenses 600 525 1,660 1,340
------- ------- ------- -------
Income from continuing operations before provision
for income taxes 62 61 196 71
Provision for income taxes 11 16 19 28
------- ------- ------- -------
Income from continuing operations 51 45 177 43
Cumulative effect of change in accounting - (5) - -
------- ------- ------- -------
Net income $ 51 $ 40 $ 177 $ 43
======= ======= ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2002 -- INTERNATIONAL
Premiums increased by $64 million, or 17%, to $445 million for the
three months ended September 30, 2003 from $381 million for the comparable 2002
period. Chile's premiums increased by $29 million due to growth in the
individual annuities business. South Korea's premiums increased by $19 million
primarily due to a larger professional sales force. Spain's premiums increased
by $16 million due to continued business growth and the strengthening of the
Euro. These increases were partially offset by a net decrease in Mexico of $3
million attributable to the group and individual life businesses. These declines
are primarily the result of anticipated actions taken by the Mexican government,
adversely impacting the insurance and annuities market. In addition, the
cancellation of a large broker-sponsored case at the end of 2002 and the
weakening of the peso contributed to the decline. The decreases in Mexico are
partially offset by an increase in premiums due to growth in the institutional
major medical and life lines of business. The remainder of the variance is
attributable to minor fluctuations in several countries.
Universal life and investment-type fees increased by $6 million, or 9%,
to $70 million for the three months ended September 30, 2003 from $64 million
for the comparable 2002 period. Mexico's universal life and investment-type fees
increased by $8 million primarily due to an increase in contributions to the
policyholders account from a large block of business. The remainder of the
variance is attributable to minor fluctuations in several countries.
Other revenues increased by $18 million, or 900% to $20 million for
the three months ended September 30, 2003 from $2 million for the comparable
2002 period. Mexico's other revenue increased by $17 million primarily due to
the recovery of previously uncollectable receivables and the cancellation of a
reinsurance contract related to a large block of business. The remainder of the
variance is attributable to minor fluctuations in several countries.
Policyholder benefits and claims increased by $46 million, or 13%, to
$398 million for the three months ended September 30, 2003 from $352 million for
the comparable 2002 period. Chile's, South Korea's and Spain's policyholder
benefits and claims increased by $21 million, $18 million and $14 million,
respectively, commensurate with the aforementioned premium increases. In
addition, the strengthening of the Euro contributed to the increase in Spain.
These increases are partially offset by a net decrease in
- 56 -
Mexico's policyholder benefits and claims of $12 million which is commensurate
with the premium variance discussed above and the weakening of the peso. The
remainder of the variance is attributable to minor fluctuations in several
countries.
Interest credited to policyholder account balances increased by $2
million, or 6%, to $34 million for the three months ended September 30, 2003
from $32 million for the comparable 2002 period. This variance is primarily due
to an increase of the average policyholder fund balances in Mexico.
Policyholder dividends increased by $2 million or 20% to $12 million
for the three months ended September 30, 2003 from $10 million for the
comparable 2002 period. This variance is primarily attributable to a $1 million
increase in Mexico's private institutional line of business and minor
fluctuations in several countries.
Other expenses increased by $25 million, or 19%, to $156 million for
the three months ended September 30, 2003 from $131 million for the comparable
2002 period. Excluding the capitalization and amortization of DAC which are
discussed below, other expenses increased by $20 million, or 12%, to $187
million in 2003 from $167 million in 2002. South Korea's expenses increased by
$12 million as a result of new business growth and general expansion of
operations. Spain's other expenses increased by $5 million primarily due to an
increase in commissions from higher sales in investment-type products. These
increases are partially offset by a decrease of $3 million in Mexico due to the
weakening of the peso. The remainder of the variance is attributable to minor
fluctuations in several countries.
Capitalization of DAC increased by $12 million, or 20%, to $72 million
for the three months ended September 30, 2003 from $60 million for comparable
2002 period. This increase is primarily due to higher sales in Spain's
investment-type products, Mexico's individual universal life and group life
businesses and South Korea's variable universal life business. The remainder of
the variance is attributable to minor fluctuations in several countries.
Amortization of DAC increased by $17 million, or 71%, to $41 million for the
three months ended September 30, 2003 from $24 million for the comparable 2002
period. Mexico's amortization of DAC increased by $10 million primarily due to
an increase in the amortization of the value of business acquired related to a
change in reserve methodology in the second quarter of 2003. Taiwan's
amortization of DAC increased by $5 million primarily as the result of
refinements made to the DAC models during the comparable 2002 period.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 -- INTERNATIONAL
Premiums increased by $200 million, or 19%, to $1,230 million for the
nine months ended September 30, 2003 from $1,030 million for the comparable 2002
period. The acquisition of Hidalgo in June 2002 contributed $255 million to this
increase. Partially offsetting this is a decline of $108 million attributable to
a non-recurring sale of an annuity contract in the first quarter of 2002 in
Canada. Excluding these items, premiums increased by $53 million, or 5%, from
the comparable 2002 period. Excluding the effects of the acquisition, South
Korea's premiums increased by $68 million primarily due to a larger professional
sales force and new business growth. Chile's premiums increased by $31 million
mainly due to higher sales in the individual annuities business. Spain's
premiums increased by $26 million primarily due to business growth and the
strengthening of the Euro. Taiwan's premiums increased by $12 million primarily
due to increased renewals in the individual life business. These increases are
partially offset by a decrease of $92 million in Mexico's premiums primarily
attributable to decreases in both the group and individual life businesses.
These declines are primarily the result of anticipated actions taken by the
Mexican government, adversely impacting the insurance and annuities market. In
addition, the cancellation of a large broker-sponsored case at the end of 2002
and the weakening of the peso contributed to this decline. These unfavorable
variances in Mexico are partially offset by growth in the institutional, major
medical and life lines of business. The remainder of the variance is
attributable to minor fluctuations in several countries.
Universal life and investment type-product policy fees increased by
$114 million, or 146%, to $192 million for the nine months ended September 30,
2003 from $78 million for the comparable 2002 period The acquisition of Hidalgo
in June 2002 accounted for $102 million of this increase. Excluding this
acquisition, universal life and investment type-product policy fees increased
$12 million, or 15%, from the comparable 2002 period. Mexico's universal life
and investment type-product policy fees increased by $8 million primarily due to
an increase in contributions to the policyholders account from a large block of
business. South Korea's universal life and investment type-product policy fees
increased by $6 million largely due to a new variable universal life product
launched in 2003. The remainder of the variance is attributable to minor
fluctuations in several countries.
Other revenues increased by $46 million, or 575%, to $54 million for
the nine months ended September 30, 2003 from $8 million for the comparable 2002
period. The acquisition of Hidalgo in June 2002 contributed $28 million to this
increase. Excluding the impact of this acquisition, other revenues increased by
$18 million, or 225%, from the comparable 2002 period. Mexico's other revenue
increased by $15 million, primarily due to the recovery of previously
uncollectable receivables and the cancellation of a reinsurance contract related
to a large block of business. The remainder of the variance is attributable to
minor fluctuations in several countries.
- 57 -
Policyholder benefits and claims increased by $101 million, or 11%, to
$1,042 million for the nine months ended September 30, 2003 from $941 million
for the comparable 2002 period. The acquisition of Hidalgo in June 2002
contributed $256 million to this increase. Partially offsetting this is a
decrease of $108 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 $47 million, or 5%, from the comparable 2002
period. Mexico's policyholder benefits and claims decreased by $183 million
primarily as a result of a reduction in policyholder liabilities related to a
change in reserve methodology in the second quarter of 2003, as well as the
impact of the overall premium decreases discussed above. South Korea's, Spain's,
Chile's and Taiwan's policyholder benefits and claims increased by $54 million,
$31 million, $34 million and $5 million, respectively, commensurate with the
overall premium increases discussed above, and the strengthening of the Euro in
Spain. Brazil's policyholder benefits increased by $5 million primarily due to
higher claims in 2003. The remainder of the variance is attributable to minor
fluctuations in several countries.
Interest credited to policyholder account balances increased by $55
million, or 106%, to $107 million for the nine months ended September 30, 2003
from $52 million for the comparable 2002 period. The acquisition of Hidalgo in
June 2002 contributed $50 million to this increase. Excluding this acquisition,
interest credited increased by $5 million, or 10%, from the comparable 2002
period. Spain's interest credited increased by $4 million due to the
strengthening of the Euro. Mexico's interest credited increased by $3 million
due to an increase in the average policyholder fund balances. The remainder of
the variance is attributable to minor fluctuations in several countries.
Policyholder dividends increased by $12 million, or 44%, to $39 million
for the nine months ended September 30, 2003 from $27 million for the comparable
2002 period. This increase is primarily attributable to the acquisition of
Hidalgo in June 2002.
Other expenses increased by $152 million, or 48%, to $472 million for
the nine months ended September 30, 2003 from $320 million for the comparable
2002 period. Excluding the capitalization and amortization of DAC that are
discussed below, other expenses increased by $130 million, or 34%, to $517
million in 2003 from $387 million in 2002. The acquisition of Hidalgo in June
2002 contributed $97 million to the current period result. Excluding this
acquisition, other expenses increased $33 million, or 9%, from the comparable
2002 period. South Korea's other expenses increased by $32 million primarily a
result of new business growth and general expansion of operations. Spain's other
expenses increased by $15 million primarily due to higher commissions on sales
of investment-type products, as well as the strengthening of the Euro. These
increases were partially offset by a decrease in Mexico's other expenses of $17
million primarily due to lower headcount and the weakening of the peso. The
remainder of the variance is attributable to minor fluctuations in several
countries.
Capitalization of DAC increased by $57 million, or 41%, to $197 million
for the nine months ended September 30, 2003 from $140 million for comparable
2002 period. The acquisition of Hidalgo in June 2002 contributed $41 million to
this variance. Excluding this acquisition, capitalization of DAC increased by
$16 million, or 11% from the comparable 2002 period. This variance is due to
higher sales of Spain's investment-type products of $22 million and South
Korea's variable universal life business of $9 million. Taiwan's capitalization
of DAC decreased by $4 million primarily as a result of lower first year
premiums. Argentina's capitalization of DAC decreased by $5 million primarily
due to the results of refinements in the DAC model in the current period. Hong
Kong's capitalization of DAC decreased by $5 million due to lower brokerage
sales. The remainder of the variance is attributable to small fluctuations in
several countries. Amortization of DAC increased by $79 million, or 108%, to
$152 million for the nine months ended September 30, 2003 from $73 million for
comparable 2002 period. The acquisition of Hidalgo contributed $21 million to
this variance. Excluding this acquisition, amortization of DAC increased by $58
million, or 79% from the comparable 2002 period. Mexico's amortization of DAC
increased by $59 million commensurate with the aforementioned change in reserve
methodology. Taiwan's amortization of DAC increased by $3 million primarily due
to refinements in the DAC model in the prior year. The remainder of the variance
is attributable to small fluctuations in several countries.
Income tax decreased by $9 million, or 32%, to $19 million for the nine
months ended September 30, 2003 from $28 million for the comparable 2002 period.
As a result of the merger of the Company's Mexican operation, the Company
recorded a tax benefit of $40 million for the reduction of deferred tax
valuation allowances.
- 58 -
REINSURANCE
The following table presents consolidated financial information for the
Reinsurance segment for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
------- -------- ------- --------
(DOLLARS IN MILLIONS)
REVENUES
Premiums $ 579 $ 461 $ 1,719 $ 1,408
Net investment income 122 95 353 296
Other revenues 11 16 35 35
Net investment gains 5 4 6 6
------- -------- ------- --------
Total revenues 717 576 2,113 1,745
------- -------- ------- --------
EXPENSES
Policyholder benefits and claims 465 337 1,353 1,111
Interest credited to policyholder account balances 47 31 135 97
Policyholder dividends 5 6 16 17
Other expenses 170 163 516 411
------- -------- ------- --------
Total expenses 687 537 2,020 1,636
------- -------- ------- --------
Income before provision for income taxes 30 39 93 109
Provision for income taxes 11 14 32 39
------- -------- ------- --------
Net income $ 19 $ 25 $ 61 $ 70
======= ======== ======= ========
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2002 -- REINSURANCE
Premiums increased by $118 million, or 26%, to $579 million for the
three months ended September 30, 2003 from $461 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 United
Kingdom 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 decreased by $5 million, or 31%, to $11 million for the
three months ended September 30, 2003 from $16 million for the comparable 2002
period. Fees earned on financial reinsurance can vary period to period depending
on the level of surplus relief provided to ceding companies.
Policyholder benefits and claims increased by $128 million, or 38%, to
$465 million for the three months ended September 30, 2003 from $337 million for
the comparable 2002 period. As a percentage of premiums, policyholder benefits
and claims increased to 80% for the three months ended September 30, 2003 from
73% for the comparable 2002 period. Adverse mortality in the U.S. traditional
business was the primary reason for the increase in this ratio. The U.S.
traditional business reported favorable mortality experience in the prior-period
quarter. Claims are reasonably predictable over a period of many years, but are
less predictable over shorter periods and are subject to significant
fluctuation.
Interest credited to policyholder account balances increased by $16
million, or 52%, to $47 million for the three months ended September 30, 2003
from $31 million for the comparable 2002 period. Interest credited to
policyholder account balances relates to amounts credited on deposit-type
contracts, such as annuities, and certain cash-value contracts. This increase in
expense can be attributed to the addition of several new annuity transactions
during the fourth quarter of 2002 and new deposits on existing annuity treaties.
The crediting rate on certain blocks of annuities is based on the performance of
the underlying assets.
Policyholder dividends were essentially unchanged at $5 million for the
three months ended September 30, 2003 from $6 million for the comparable 2002
period.
- 59 -
Other expenses increased by $7 million, or 4%, to $170 million for the
three months ended September 30, 2003 from $163 million for the comparable 2002
period. Excluding the capitalization and amortization of DAC that are discussed
below, other expenses increased by $64 million, or 33%, to $260 million in 2003
from $196 million in 2002 due to a $63 million increase in allowances paid on
assumed reinsurance, particularly on certain high commission business in the
United Kingdom.
Capitalization of DAC increased by $37 million, or 29%, to $165 million
for the three months ended September 30, 2003 from $128 million for the
comparable 2002 period due to an increase in the amount of high-allowance
business written in the respective periods, particularly in the United Kingdom.
Amortization of DAC decreased by $20 million, or 21%, to $75 million in 2003
from $95 million in 2002. The capitalization and amortization of DAC can
fluctuate significantly due to the mix of business, including the type of
product being reinsured, form of the reinsurance treaty and geographic region.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 -- REINSURANCE
Premiums increased by $311 million, or 22%, to $1,719 million for the
nine months ended September 30, 2003 from $1,408 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 United
Kingdom 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 were unchanged at $35 million for both the nine months
ended September 30, 2003 and 2002.
Policyholder benefits and claims increased by $242 million, or 22%, to
$1,353 million for the nine months ended September 30, 2003 from $1,111 million
for the comparable 2002 period. Policyholder benefits and claims were
approximately 79% of premiums for the first nine months of 2003 and 2002. Claims
are reasonably predictable over a period of many years, but are less predictable
over shorter periods and are subject to significant fluctuation.
Interest credited to policyholder account balances increased by $38
million, or 39%, to $135 million for the nine months ended September 30, 2003
from $97 million for the comparable 2002 period. Interest credited to
policyholder account balances relates to amounts credited on deposit-type
contracts, such as annuities, and certain cash-value contracts. This increase in
expense can be attributed to the addition of several new annuity transactions
during the fourth quarter of 2002 and new deposits on existing annuity treaties.
The crediting rate on certain blocks of annuities is based on the performance of
the underlying assets.
Policyholder dividends were essentially unchanged at $16 million for the
nine months ended September 30, 2003 from $17 million for the comparable 2002
period.
Other expenses increased by $105 million, or 26%, to $516 million for
the nine months ended September 30, 2003 from $411 million for the comparable
2002 period. Excluding the capitalization and amortization of DAC that are
discussed below, other expenses increased by $221 million, or 42%, to $752
million in 2003 from $531 million in 2002 primarily due to a $192 million
increase in allowances paid on assumed reinsurance, particularly on certain high
commission businesses in the United Kingdom.
Capitalization of DAC increased by $153 million, or 50%, to $456
million for the nine months ended September 30, 2003 from $303 million for the
comparable 2002 period due to due to an increase in the amount of high-allowance
business written in the respective periods, particularly in the United Kingdom.
Amortization of DAC increased by $37 million, or 20%, to $220 million in 2003
from $183 million in 2002. The capitalization and amortization of DAC can
fluctuate significantly due to the mix of business, including the type of
product being reinsured, form of the reinsurance treaty and geographic region.
- 60 -
ASSET MANAGEMENT
The following table presents consolidated financial information for the
Asset Management segment for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- --------
(DOLLARS IN MILLIONS)
REVENUES
Net investment income $ 17 $ 17 $ 49 $ 46
Other revenues 36 37 102 127
Net investment gains (losses) 2 - 10 (4)
------- ------- ------- -------
Total revenues 55 54 161 169
------- ------- ------- -------
OTHER EXPENSES 47 53 134 162
------- ------- ------- -------
Income before provision for income taxes 8 1 27 7
Provision for income taxes 2 1 10 3
------- ------- ------- -------
Net income $ 6 $ - $ 17 $ 4
======= ======= ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2002 -- ASSET MANAGEMENT
Other revenues, which primarily consist of management and advisory fees
from third parties, decreased $1 million, or 3%, to $36 million for the three
months ended September 30, 2003 from $37 million for the comparable 2002 period.
This decrease is primarily the result of lower average assets under management
on which these fees are earned.
Other expenses decreased by $6 million, or 11%, to $47 million for the
three months ended September 30, 2003 from $53 million for the comparable 2002
period. This decrease is largely attributable to staff reductions in the third
and fourth quarters of 2002 and reductions in incentive compensation. In
addition, there was a reduction in expenses due to lower average assets under
management. These decreases were partially offset by an increase in general and
administrative expenses.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 -- ASSET MANAGEMENT
Other revenues, which primarily consist of management and advisory fees
from third parties, decreased $25 million, or 20% to $102 million for the nine
months ended September 30, 2003 from $127 million for the comparable 2002
period. This decrease is primarily the result of lower average assets under
management on which these fees are earned. In addition, performance fees earned
during 2003 on certain investment products were lower than in the comparable
2002 period.
Other expenses decreased by $28 million, or 17%, to $134 million for
the nine months ended September 30, 2003 from $162 million for the comparable
2002 period. This decrease is largely due to staff reductions in the third and
fourth quarters of 2002, and reductions in incentive compensation. Additionally,
expenses declined as a result of lower average assets under management. The
remainder of the variance is due to a decrease in general and administrative
expenses.
- 61 -
CORPORATE & OTHER
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2002 -- CORPORATE & OTHER
Other revenues increased by $13 million, or 260%, to $18 million for
the three months ended September 30, 2003 from $5 million for the comparable
2002 period. This variance is primarily due to the amortization of a deferred
gain related to a property sale and leaseback transaction. The Company
anticipates that the deferred gain will be amortized into income through 2005.
The remainder of the change is due to an increase in the elimination of
intersegment activity.
Other expenses decreased by $62 million, or 57%, to $47 million for the
three months ended September 30, 2003 from $109 million for the comparable 2002
period. This variance is primarily due to a $44 million reduction in legal
expenses, primarily due to a reduction of a previously established liability
related to the Company's race conscious underwriting settlement. In addition, $5
million of the decrease in other expenses is attributable to the remeasurement
of the asbestos insurance recoverable and the amortization of the deferred gain
on asbestos insurance, both of which are impacted by equity market performance.
The remainder of the change is due to an increase in the elimination of
intersegment activity.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 -- CORPORATE & OTHER
Other revenues increased by $19 million, or 73%, to $45 million for the
nine months ended September 30, 2003 from $26 million for the comparable 2002
period. This variance is primarily due to the amortization of a deferred gain
related to a property sale and leaseback transaction. The Company anticipates
that the deferred gain will be amortized into income through 2005. The remainder
of the change is due to an increase in the elimination of intersegment activity.
Other expenses decreased by $153 million, or 45%, to $188 million for
the nine months ended September 30, 2003 from $341 million for the comparable
2002 period. The 2003 period includes a $144 million reduction of a previously
established liability related to the Company's race conscious underwriting
settlement. The 2002 period includes a $55 million charge to cover costs
associated with the resolution of a federal government investigation of General
American's former Medicare business and a $46 million reduction of a previously
established liability for settlement death benefits related to the sales
practices class action settlement recorded in 1999. In addition, $20 million of
the decrease in other expenses is attributable to the remeasurement of the
asbestos insurance recoverable and the amortization of the deferred gain on
asbestos insurance, both of which are impacted by equity market performance.
These decreases were partially offset by a $38 million increase in interest
expense related to the Company's long-term debt activities in the fourth quarter
of 2002 and the first quarter of 2003. The remainder of the change is due to an
increase in the elimination of intersegment activity.
- 62 -
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 September 30, 2003, MetLife, Inc. 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 New York Superintendent of
Insurance (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
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 insurance regulators of various
states in which the Company conducts business, differ in certain respects from
accounting principles used in financial statements prepared in conformity with
GAAP. The significant differences relate to the treatment of DAC, certain
deferred income taxes, required investment reserves, reserve calculation
assumptions, goodwill and surplus notes.
- 63 -
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 equity and fixed
maturity securities. Liquid assets exclude assets relating to securities lending
and dollar roll activity. At September 30, 2003 and December 31, 2002, the
Holding Company had $1,540 million and $597 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 September 30, 2003, the Holding Company did not have short-term debt
outstanding. At December 31, 2002, the Holding Company had $249 million in
short-term debt outstanding. At both September 30, 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 described below.
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 (the
"purchase contracts") on May 15, 2003; and (ii) a capital security of the Trust,
with a stated liquidation amount of $50. On May 15, 2003, the purchase contracts
associated with the units were settled. In exchange for $1,006 million, the
Company issued 2.97 shares of MetLife, Inc. common stock per purchase contract,
or approximately 59.8 million shares of treasury stock. Approximately $656
million, which represents the excess of the Company's cost of the treasury stock
($1,662 million) over the contract price of the stock issued to the purchase
contract holders ($1,006 million), was recorded as a direct reduction to
retained earnings.
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, which expires in 2005, for approximately $1.25
billion that it shares with Metropolitan Life and MetLife Funding, Inc.
("MetLife Funding"). 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
September 30, 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 October of 2003, the Holding Company declared an annual
dividend for 2003 of $0.23 per share. The 2003 dividend will represent an
increase of $0.02 per share from the 2002 annual dividend of $0.21 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 nine months ended
September 30, 2003, the Holding Company contributed an aggregate of $127 million
to various subsidiaries. There were no contributions from the Holding Company to
its subsidiaries during the nine months ended September 30, 2002.
- 64 -
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 nine months ended September 30, 2003. The Holding Company acquired
15,244,492 shares of common stock for $471 million during the nine months ended
September 30, 2002. At September 30, 2003, the Holding Company had approximately
$806 million remaining on its existing share repurchase authorization. Any
repurchases during the remainder of 2003 will be 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.
On November 6, 2003, RGA announced that it would sell 10,500,000 shares
of its common stock at $36.65 per share. MetLife, Inc. has indicated that it and
certain of its affiliates are interested in purchasing 3,000,000 shares of the
common stock being offered by RGA at $36.65 per share, for a total purchase
price of approximately $110 million. Assuming the underwriters of the offering
do not exercise their over-allotment option to purchase an additional 1,575,000
shares, immediately after the completion of the offering, MetLife will own
approximately 53.4% of RGA's outstanding 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 September 30, 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-based amount calculated at December 31, 2002.
The Holding Company has agreed to make capital contributions, in any
event not to exceed $120 million, to 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 its 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
Codification of Statutory Accounting Principles ("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 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 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 Codification on the
statutory capital and surplus of Metropolitan Life and the Holding Company's
other insurance subsidiaries.
- 65 -
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 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 and marketable equity and fixed maturity
securities. Liquid assets exclude assets relating to securities lending and
dollar roll activity. At September 30, 2003 and December 31, 2002, the Company
had $121 billion and $108 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 September 30, 2003 and December 31, 2002, the Company had $2,935
million and $1,161 million in short-term debt outstanding, respectively, and
$5,703 million and $4,425 million in long-term debt outstanding, respectively.
See "-- The Holding Company -- Global Funding Sources." On November 1, 2003, the
Company redeemed all the outstanding $300 million 7.45% Surplus Notes scheduled
to mature on November 1, 2023 at a redemption price of $311 million.
MetLife Funding serves as a centralized finance unit for Metropolitan
Life. Pursuant to a support agreement, Metropolitan Life has agreed to cause
MetLife Funding to have a tangible net worth of at least one dollar. At
September 30, 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 September 30, 2003 and December 31, 2002, MetLife Funding had
total outstanding liabilities, including accrued interest payable, of $940
million and $400 million, respectively, consisting primarily of commercial
paper.
Credit Facilities. The Company maintains committed and unsecured credit
facilities aggregating $2.5 billion ($1 billion expiring in 2004, $1.3 billion
expiring in 2005 and $175 million expiring in 2006). In April 2003, the Company
replaced an expiring $1 billion five-year credit facility with a $1 billion
364-day credit facility. In May 2003, the Company replaced an expiring $140
million three-year credit facility with a $175 million three-year credit
facility, which expires in 2006. If these facilities were drawn upon, they would
bear interest at varying rates in accordance with the respective 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 September 30, 2003,
the Company had drawn approximately $45 million under two of the three
facilities expiring in 2005 at interest rates ranging from 4.08% to 5.38% and
another approximately $50 million under a facility expiring in 2006 at an
interest rate of 1.69%.
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.
- 66 -
The following table summarizes the Company's major contractual
obligations (other than those arising from its ordinary product and investment
purchase activities) as of September 30, 2003:
CONTRACTUAL OBLIGATIONS TOTAL 2003 2004 2005 2006 2007 THEREAFTER
----------------------- ------- ------- ------- ------- ------- ------- ----------
(DOLLARS IN MILLIONS)
Long-term debt (1) $ 5,717 $ 406 $ 134 $ 1,418 $ 663 $ 39 $ 3,057
Partnership investments (2) 1,511 1,511 - - - - -
Operating leases 1,541 53 193 176 156 135 828
Mortgage commitments 1,116 987 129 - - - -
Shares subject to mandatory redemption (1) 350 - - - - - 350
------- ------- ------- ------- ------- ------- -------
Total $10,235 $ 2,957 $ 456 $ 1,594 $ 819 $ 174 $ 4,235
======= ======= ======= ======= ======= ======= =======
- --------------------
(1) Amounts differ from the balances presented on the consolidated balance
sheets. The amounts above do not include related premiums and
discounts.
(2) The Company anticipates that these amounts could be invested in these
partnerships any time over next five years, but are presented in the
current period, as the timing of the fulfillment of the obligation
cannot be predicted.
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 $15 million at September 30, 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 September 30, 2003 and December 31, 2002, the
Company had outstanding approximately $751 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 ("NELICO") at the time Metropolitan Life merged
with NELICO. Under the agreement, Metropolitan Life agreed without limitation as
to the amount to cause NELICO 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. At September 30,
2003, the capital and surplus of NELICO was in excess of the minimum capital and
surplus amount referenced above, and its total adjusted capital was in excess of
the most recent referenced RBC-based amount 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 September 30, 2003,
the capital and surplus of General American was in excess of the minimum capital
and surplus amount referenced above, and its total adjusted capital was in
excess of the most recent referenced RBC-based amount 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.
General American has agreed to guarantee the obligations of its
subsidiary, Paragon Life Insurance Company, and certain obligations of its
former subsidiaries, 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
- 67 -
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
September 30, 2003, the capital and surplus of MetLife Investors was in excess
of the minimum capital and surplus amount referenced above, and its total
adjusted capital was in excess of the most recent referenced RBC-based amount
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 its 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.
Consolidated cash flows. Net cash provided by operating activities was
$5,043 million and $2,427 million for the nine months ended September 30, 2003
and 2002, respectively. The $2,616 million increase in net cash provided by
operating activities in 2003 over the comparable 2002 period is primarily
attributable to sales growth in the group life, dental, disability and long-term
care businesses, as well as higher sales in retirement and savings' structured
settlement products. In addition, growth in MetLife Bank's customer deposits,
accelerated prepayments of mortgage-backed securities that have previously
been purchased at a premium, an increase in funds withheld related to
reinsurance activity and a decrease in the funding of COLI policies contributed
to the increase in operating cash flows.
Net cash used in investing activities was $12,277 million and $9,909
million for the nine months ended September 30, 2003 and 2002, respectively. The
$2,368 million increase in net cash used in investing activities in 2003 over
the comparable 2002 period is primarily attributable to an increase in the
purchase of fixed maturities and commercial mortgage loan origination as well as
an increase in the amount of securities lending cash collateral invested, which
resulted from an expansion of the program. In addition, the 2002 period included
the proceeds from a significant sale of a block of equity securities. These
items were partially offset by the June 2002 acquisition of Hidalgo.
Net cash provided by financing activities was $10,283 million and
$3,656 million for the nine months ended September 30, 2003 and 2002,
respectively. The $6,627 million increase in net cash provided by financing
activities in 2003 over the comparable 2002 period is due to a $3,527 million
net increase in policyholder account balances primarily from sales of annuity
products and the issuance of $1,251 million in short-term debt related to dollar
roll activity. In 2003, the Company received $1,006 million on the settlement of
common stock purchase contracts, as compared to stock repurchases of $471
million in the comparable 2002 period.
- 68 -
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.
- 69 -
ACCOUNTING STANDARDS
In July 2003, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 03-1, Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate
Accounts ("SOP 03-1"). SOP 03-1 provides guidance on separate account
presentation and valuation, the accounting for sales inducements and the
classification and valuation of long-duration contract liabilities. SOP 03-1 is
effective for fiscal years beginning after December 15, 2003. The Company is in
the process of quantifying the impact of SOP 03-1 on its unaudited interim
condensed consolidated financial statements.
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity ("SFAS 150"). SFAS 150 clarifies the accounting for certain financial
instruments with characteristics of both liabilities and equity and requires
that those instruments be classified as a liability or, in certain
circumstances, an asset. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003 and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of SFAS
150, as of July 1, 2003, required the Company to reclassify $277 million of
company-obligated mandatorily redeemable securities of subsidiary trusts from
mezzanine equity to liabilities, as reflected in its unaudited interim condensed
consolidated financial statements.
In April 2003, the 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 (i) a company's funds withheld payable
and/or receivable under certain reinsurance arrangements, and (ii) a debt
instrument that incorporates credit risk exposures that are unrelated or only
partially related to the creditworthiness of the obligor 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 was
effective October 1, 2003. The Company believes that the impact of the adoption
of Issue B36 will be insignificant. However, management continues to validate
its models and refine its assumptions. Additionally, industry standards and
practices continue to evolve related to valuing these types of embedded
derivative features.
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's adoption of SFAS 149 on July 1, 2003 did not
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. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others; (ii) SFAS No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure; (iii) SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities; and (iv) 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.
Effective February 1, 2003, the Company adopted FIN No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51
("FIN 46"), as amended. Effective October 9, 2003, FASB Staff Position No. 46-6,
"Effective Date of FASB Interpretation No. 46, Consolidation of Variable
Interest Entities" deferred the effective date of FIN 46 for variable interests
held by a public entity in a variable interest entity ("VIE") that was created
before February 1, 2003 to the end of the first interim or annual period ending
after December 15, 2003. Certain of the Company's asset-backed securitizations,
collateralized debt obligations, structured investment transactions, and
investments in real estate joint ventures and other limited partnership
interests meet the definition of a VIE under FIN 46. FIN 46 defines a VIE as (i)
any entity in which the equity investors at risk in such entity do not have the
characteristics of a controlling financial interest, or (ii) any entity that
does not have sufficient equity at risk to finance its activities without
additional subordinated financial support from other parties. It requires the
consolidation of the VIE by the primary beneficiary. The adoption of FIN 46
requires the Company to include disclosures for VIEs created or acquired on or
after February 1, 2003 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 VIEs. See "Investments - Variable
Interest Entities." The Company is in the process of assessing the impact of the
provisions of FIN 46 on its consolidated financial statements for the year
ending December 31, 2003 for VIEs created or acquired prior to February 1, 2003.
- 70 -
INVESTMENTS
The Company had total cash and invested assets at September 30, 2003
and December 31, 2002 of $216.3 billion and $190.7 billion, respectively. In
addition, the Company had $70.0 billion and $59.7 billion held in its separate
accounts, for which the Company generally does not bear investment risk, as of
September 30, 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:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
---------------------- ----------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ------ -------- ------
(DOLLARS IN MILLIONS)
Fixed maturities available-for-sale, at fair value $159,940 73.9% $140,288 73.6%
Mortgage loans on real estate 25,535 11.8 25,086 13.2
Policy loans 8,668 4.0 8,580 4.5
Cash and cash equivalents 5,372 2.5 2,323 1.2
Real estate and real estate joint ventures held-for-investment 4,724 2.2 3,926 2.1
Other invested assets 4,617 2.1 3,727 1.9
Equity securities and other limited partnership interests 4,109 1.9 4,008 2.1
Short-term investments 2,718 1.3 1,921 1.0
Real estate held-for-sale 640 0.3 799 0.4
-------- ----- -------- -----
Total cash and invested assets $216,323 100.0% $190,658 100.0%
======== ===== ======== =====
- 71 -
VARIABLE INTEREST ENTITIES
Effective February 1, 2003, FIN 46 established new accounting guidance
relating to the consolidation of VIEs. Certain of the Company's asset-backed
securitizations, collateralized debt obligations, structured investment
transactions, and investments in real estate joint ventures and other limited
partnership interests meet the definition of a VIE under FIN 46. The Company
currently consolidates VIEs created or acquired on or after February 1, 2003 for
which it is the primary beneficiary. At December 31, 2003, the Company will
consolidate those entities created before February 1, 2003 for which it is the
primary beneficiary.
The following table presents the total assets of and maximum exposure
to loss relating to VIEs of which the Company has concluded that it is the
primary beneficiary and which will be consolidated in the Company's financial
statements beginning December 31, 2003:
SEPTEMBER 30, 2003
--------------------------------
TOTAL MAXIMUM EXPOSURE
ASSETS (1) TO LOSS (2)
---------- ----------------
(DOLLARS IN MILLIONS)
Real estate joint ventures (3) $571 $237
Other limited partnerships (4) 27 27
---- ----
Total $598 $264
==== ====
- ------------
(1) The assets of the real estate joint ventures and other limited partnerships
are reflected at the carrying amounts at which such assets would have been
reflected on the Company's balance sheet had the Company consolidated the
VIE from the date of its initial investment in the entity.
(2) The maximum exposure to loss relating to real estate joint ventures and
other limited partnerships is equal to the carrying amounts plus any
unfunded commitments, reduced by amounts guaranteed by other partners.
(3) Real estate joint ventures include partnerships and other ventures, which
engage in the acquisition, development, management and disposal of real
estate investments.
(4) Other limited partnerships include partnerships established for the purpose
of investing in public and private debt and equity securities, as well as
limited partnerships established for the purpose of investing in low-income
housing that qualifies for Federal tax credits.
- 72 -
Had the Company consolidated these VIEs at September 30, 2003, the
transition adjustments would have been $4 million, net of income tax. The
following table presents the total assets of and the maximum exposure to loss
relating to VIEs in which the Company holds a significant variable interest but
is not the primary beneficiary:
SEPTEMBER 30, 2003
----------------------------------
TOTAL MAXIMUM EXPOSURE
ASSETS TO LOSS (1)
----------- ----------------
(DOLLARS IN MILLIONS)
Asset-backed securitizations and collateralized debt obligations (2) $ 101 $ 14
Other limited partnerships (3) 420 10
Real estate joint ventures (3) 57 50
----------- -----------
Total $ 578 $ 74
=========== ===========
- -------------
(1) The maximum exposure to loss of the asset-backed securitizations and
collateralized debt obligations is equal to the carrying amounts of
retained interests. The maximum exposure to loss relating to the other
limited partnerships and real estate joint ventures is equal to the
carrying amounts plus any unfunded commitments reduced by amounts
guaranteed by other partners.
(2) The assets of the asset-backed securitizations and collateralized debt
obligations are reflected at fair value as of September 30, 2003.
(3) The assets of the real estate joint ventures and other limited partnerships
are reflected at the carrying amounts at which such assets would have been
reflected on the Company's balance sheet had the Company consolidated the
VIE from the date of its initial investment in the entity.
Due to the complexity of the judgments and interpretations required in
the application of FIN 46 to the Company's collateralized debt obligations, the
Company is continuing to evaluate certain entities for consolidation and/or
disclosure under FIN 46. At September 30, 2003, the fair value of the assets of
the entities still under evaluation is approximately $1.3 billion. The Company's
maximum exposure to loss related to these entities at September 30, 2003 is
approximately $5 million.
- 73 -
INVESTMENT RESULTS
Net investment income, including net investment income from
discontinued operations, on general account cash and invested assets totaled
$2,914 million and $2,839 million for the three months ended September 30, 2003
and 2002, respectively, and $8,702 million and $8,489 million for the nine
months ended September 30, 2003 and 2002, respectively. 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
6.47% and 7.13% for the three months ended September 30, 2003 and 2002,
respectively, and 6.66% and 7.18% for the nine months ended September 30, 2003
and 2002, respectively.
The following table illustrates the net investment income and
annualized yields on average assets for each of the components of the Company's
investment portfolio for the three months and nine months ended September 30,
2003 and 2002:
AT OR FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
2003 2002
---------------------- --------------------
YIELD(1) AMOUNT YIELD(1) AMOUNT
-------- --------- -------- ---------
(DOLLARS IN MILLIONS)
FIXED MATURITIES:(2)
Investment income 6.83% $ 2,140 7.45% $ 2,032
Net investment gains (losses) (23) (323)
-------- --------
Total $ 2,117 $ 1,709
-------- --------
Ending assets $159,940 $132,906
-------- --------
MORTGAGE LOANS ON REAL ESTATE:(3)
Investment income 7.37% $ 468 7.68% $ 457
Net investment gains (losses) (36) -
-------- --------
Total $ 432 $ 457
-------- --------
Ending assets $ 25,535 $ 23,885
-------- --------
REAL ESTATE AND REAL ESTATE JOINT
VENTURES:(4)
Investment income, net of expenses 10.17% $ 127 10.99% $ 160
Net investment gains (losses) 10 (10)
-------- --------
Total $ 137 $ 150
-------- --------
Ending assets $ 5,364 $ 5,663
-------- --------
POLICY LOANS:
Investment income 6.54% $ 141 6.66% $ 139
-------- --------
Ending assets $ 8,668 $ 8,366
-------- --------
EQUITY SECURITIES AND OTHER LIMITED
PARTNERSHIP INTERESTS:(5)
Investment income (1.42%) $ (14) 2.05% $ 19
Net investment gains (losses) (6) 4
-------- --------
Total $ (20) $ 23
-------- --------
Ending assets $ 4,109 $ 3,959
-------- --------
CASH, CASH EQUIVALENTS AND SHORT-TERM
INVESTMENTS:
Investment income 1.95% $ 35 3.68% $ 49
Net investment gains (losses) - -
-------- --------
Total $ 35 $ 49
-------- --------
Ending assets $ 8,090 $ 6,305
-------- --------
OTHER INVESTED ASSETS:(6)
Investment income 7.59% $ 84 5.44% $ 44
Net investment gains (losses) (96) 43
-------- --------
Total $ (12) $ 87
-------- --------
Ending assets $ 4,617 $ 3,214
-------- --------
TOTAL INVESTMENTS:
Investment income before expenses and fees 6.62% $ 2,981 7.28% $ 2,900
Investment expenses and fees (0.15%) (67) (0.15%) (61)
----- -------- ----- --------
Net investment income 6.47% $ 2,914 7.13% $ 2,839
Net investment gains (losses) (151) (286)
Adjustments to investment gains (losses)(7) 39 16
-------- --------
Total $ 2,802 $ 2,569
======== ========
- 74 -
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
2003 2002
-------------------- ---------------------
YIELD(1) AMOUNT YIELD(1) AMOUNT
-------- -------- -------- ---------
(DOLLARS IN MILLIONS)
FIXED MATURITIES:(2)
Investment income 6.89% $ 6,257 7.51% $ 5,984
Net investment gains (losses) (215) (698)
-------- --------
Total $ 6,042 $ 5,286
-------- --------
Ending assets $159,940 $132,906
-------- --------
MORTGAGE LOANS ON REAL ESTATE:(3)
Investment income 7.45% $ 1,410 7.82% $ 1,391
Net investment gains (losses) (58) (22)
-------- --------
Total $ 1,352 $ 1,369
-------- --------
Ending assets $ 25,535 $ 23,885
-------- --------
REAL ESTATE AND REAL ESTATE JOINT
VENTURES:(4)
Investment income, net of expenses 10.51% $ 379 11.13% $ 484
Net investment gains (losses) 96 (26)
-------- --------
Total $ 475 $ 458
-------- --------
Ending assets $ 5,364 $ 5,663
-------- --------
POLICY LOANS:
Investment income 6.49% $ 419 6.52% $ 407
-------- --------
Ending assets $ 8,668 $ 8,366
-------- --------
EQUITY SECURITIES AND OTHER LIMITED
PARTNERSHIP INTERESTS:(5)
Investment income 2.43% $ 72 2.60% $ 78
Net investment gains (losses) (76) 246
-------- --------
Total $ (4) $ 324
-------- --------
Ending assets $ 4,109 $ 3,959
-------- --------
CASH, CASH EQUIVALENTS AND SHORT-TERM
INVESTMENTS:
Investment income 2.93% $ 141 3.75% $ 170
Net investment gains (losses) (4) 1
-------- --------
Total $ 137 $ 171
-------- --------
Ending assets $ 8,090 $ 6,305
-------- --------
OTHER INVESTED ASSETS:(6)
Investment income 6.95% $ 216 5.87% $ 146
Net investment gains (losses) (118) (158)
-------- --------
Total $ 98 $ (12)
-------- --------
Ending assets $ 4,617 $ 3,214
-------- --------
TOTAL INVESTMENTS:
Investment income before expenses and fees 6.81% $ 8,894 7.33% $ 8,660
Investment expenses and fees (0.15%) (192) (0.15%) (171)
----- -------- ----- --------
Net investment income 6.66% $ 8,702 7.18% $ 8,489
Net investment gains (losses) (375) (657)
Adjustments to investment gains (losses)(7) 77 102
-------- --------
Total $ 8,404 $ 7,934
======== ========
- ----------
(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 $893 million and
$793 million at September 30, 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 $48 million and $52 million for the three months ended
September 30, 2003 and 2002, respectively, and $136 million and $166
million for the nine months ended September 30, 2003 and 2002,
respectively. Real estate and real estate joint venture income includes
amounts classified as discontinued operations of $15 million and $42
million for the three months ended September 30, 2003 and 2002,
respectively, and $42 million and $126 million for the nine months ended
September 30, 2003 and 2002, respectively. These amounts are net of
depreciation of $4 million and $15 million for the three months ended
September 30, 2003 and 2002, respectively, and $15 million and $58 million
for the nine months ended September 30, 2003 and 2002, respectively. Net
investment gains (losses) include $8 million and $99 million of gains
classified as discontinued operations for the three months and nine months
ended September 30, 2003, respectively. Net investment gains (losses)
includes ($1) million and ($9) million of losses classified as
discontinued operations for the three months and nine months ended
September 30, 2002, respectively.
(5) Investment loss on equity securities and other limited partnership
interests for the three months ended September 30, 2003 is attributable to
a decline in the valuation and lower realizations on certain corporate
joint ventures.
(6) Investment income from other invested assets includes settlement payments
on derivative instruments that do not qualify for hedge accounting under
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), of $35 million and $19 million for the three months ended
September 30, 2003 and 2002, respectively, and $55 million and $22 million
for the nine months ended September 30, 2003 and 2002, respectively. These
amounts are excluded from net investment gains (losses) from other
invested assets.
(7) Adjustments to investment gains and losses include amortization of DAC,
charges and credits to participating contracts and adjustments to the
policyholder dividend obligation resulting from investment gains and
losses.
FIXED MATURITIES
Fixed maturities consist principally of publicly traded and privately
placed debt securities, and represented 73.9% and 73.6% of total cash and
invested assets at September 30, 2003 and December 31, 2002, respectively. Based
on estimated fair value, public fixed maturities represented $139,527 million,
or 87.2%, and $121,191 million, or 86.4%, of total fixed maturities at September
30, 2003 and December 31, 2002, respectively. Based on estimated fair value,
private fixed maturities represented $20,413 million, or 12.8%, and $19,097
million, or 13.6%, of total fixed maturities at September 30, 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).
- 75 -
The following table presents the Company's total fixed maturities by
Nationally Recognized Statistical Rating Organizations designation and the
equivalent ratings of the NAIC, as well as the percentage, based on estimated
fair value, that each designation comprises at:
SEPTEMBER 30, 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 $104,147 $110,708 69.2% $ 91,250 $ 97,495 69.5%
2 Baa 33,060 35,921 22.4 29,345 31,060 22.1
3 Ba 7,509 7,963 5.0 7,413 7,304 5.2
4 B 3,605 3,701 2.3 3,463 3,227 2.3
5 Caa and lower 597 575 0.4 434 339 0.3
6 In or near default 473 567 0.4 430 416 0.3
-------- -------- ----- -------- -------- -----
Subtotal 149,391 159,435 99.7 132,335 139,841 99.7
Redeemable preferred stock 594 505 0.3 564 447 0.3
-------- -------- ----- -------- -------- -----
Total fixed maturities $149,985 $159,940 100.0% $132,899 $140,288 100.0%
======== ======== ===== ======== ======== =====
- ----------
(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 91.6% of total fixed maturities in the general account at both
September 30, 2003 and December 31, 2002.
The following table shows the amortized cost and estimated fair value of
fixed maturities, by contractual maturity dates (excluding scheduled sinking
funds) at:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
--------------------------- ---------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- --------- --------- ---------
(DOLLARS IN MILLIONS)
Due in one year or less $ 4,859 $ 5,013 $ 4,592 $ 4,662
Due after one year through five years 27,897 29,510 26,200 27,354
Due after five years through ten years 27,994 30,588 23,297 24,987
Due after ten years 37,946 42,142 35,507 38,452
-------- -------- -------- --------
Subtotal 98,696 107,253 89,596 95,455
Mortgage-backed and other asset-backed securities 50,695 52,182 42,739 44,386
-------- -------- -------- --------
Subtotal 149,391 159,435 132,335 139,841
Redeemable preferred stock 594 505 564 447
-------- -------- -------- --------
Total fixed maturities $149,985 $159,940 $132,899 $140,288
======== ======== ======== ========
Actual maturities may differ as a result of prepayments by the issuer.
- 76 -
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
comprises at:
SEPTEMBER 30, 2003
------------------------------------------------------------------------------
GROSS UNREALIZED
AMORTIZED -------------------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
--------- -------- -------- ---------- -----
(DOLLARS IN MILLIONS)
U.S. corporate securities $ 53,837 $ 4,247 $ 338 $ 57,746 36.1%
Mortgage-backed securities 31,053 909 131 31,831 19.9
Foreign corporate securities 19,919 1,971 103 21,787 13.6
U.S. treasuries/agencies 13,253 1,515 38 14,730 9.2
Asset-backed securities 10,901 216 84 11,033 6.9
Commercial mortgage-backed securities 8,741 604 27 9,318 5.8
Foreign government securities 7,998 1,047 18 9,027 5.7
State and political subdivisions 3,090 205 19 3,276 2.0
Other fixed income assets 599 230 142 687 0.5
-------- -------- -------- -------- -----
Total bonds 149,391 10,944 900 159,435 99.7
Redeemable preferred stocks 594 1 90 505 0.3
-------- -------- -------- -------- -----
Total fixed maturities $149,985 $ 10,945 $ 990 $159,940 100.0%
======== ======== ======== ======== =====
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 35.1%
Mortgage-backed securities 26,966 1,076 16 28,026 20.0
Foreign corporate securities 18,001 1,435 207 19,229 13.7
U.S. treasuries/agencies 14,373 1,565 4 15,934 11.4
Asset-backed securities 9,483 228 208 9,503 6.8
Commercial mortgage-backed securities 6,290 573 6 6,857 4.9
Foreign government securities 7,012 636 52 7,596 5.4
State and political subdivisions 2,580 182 20 2,742 1.9
Other fixed income assets 609 191 103 697 0.5
-------- -------- -------- -------- -------
Total bonds 132,335 9,079 1,573 139,841 99.7
Redeemable preferred stocks 564 - 117 447 0.3
-------- -------- -------- -------- -------
Total fixed maturities $132,899 $ 9,079 $ 1,690 $140,288 100.0%
======== ======== ======== ======== =======
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;
- 77 -
- 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.
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:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------ ------------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
Performing $159,042 99.4% $139,452 99.4%
Potential problem 424 0.3 450 0.3
Problem 441 0.3 358 0.3
Restructured 33 0.0 28 0.0
-------- ----- -------- -----
Total $159,940 100.0% $140,288 100.0%
======== ===== ======== =====
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 $38 million
- 78 -
and $501 million for the three months ended September 30, 2003 and 2002,
respectively, and $277 million and $1,026 million for the nine months ended
September 30, 2003 and 2002, respectively. The Company's three largest
writedowns totaled $23 million and $147 million for the three months ended
September 30, 2003 and 2002, respectively, and $110 million and $291 million for
the nine months ended September 30, 2003 and 2002, respectively. The
circumstances that gave rise to these impairments were either financial
restructurings or bankruptcy filings. During the three months ended September
30, 2003 and 2002, the Company sold fixed maturities with a fair value of $7,566
million and $2,096 million at a loss of $93 million and $145 million,
respectively. During the nine months ended September 30, 2003 and 2002, the
Company sold fixed maturities with a fair value of $19,556 million and $9,341
million at a loss of $233 million and $627 million, respectively.
The gross unrealized loss related to the Company's fixed maturities at
September 30, 2003 was $990 million. These fixed maturities mature as follows:
1% due in one year or less; 18% due in greater than one year to five years; 15%
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 (54%),
mortgage-backed (16%) and foreign corporates (12%); and are concentrated by
industry in mortgage-backed (16%), utilities (14%) and asset-backed (8%)
(calculated as a percentage of gross unrealized loss). Non-investment grade
securities represent 11% of the $23,696 million fair value and 23% of the $990
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:
SEPTEMBER 30, 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 $19,528 $ 329 $ 591 $ 82 1,159 43
Six months or greater but less than nine months 408 30 10 7 62 7
Nine months or greater but less than twelve months 790 23 24 7 125 5
Twelve months or greater 3,374 204 201 68 296 36
------- ------- ------- ------- ----- --
Total $24,100 $ 586 $ 826 $ 164 1,642 91
======= ======= ======= ======= ===== ==
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:
SEPTEMBER 30, 2003
-----------------------------
GROSS % OF
UNREALIZED LOSSES TOTAL
----------------- -----
(DOLLARS IN MILLIONS)
Less than 20% $ 826 83.4%
20% or more for less than six months 82 8.3
20% or more for six months or greater 82 8.3
---------- -----
Total $ 990 100.0%
========== =====
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 1,642 securities with an amortized cost of $24,100 million and a
gross unrealized loss of $826 million at September 30, 2003. These fixed
maturities mature as follows: 1% due in one year or less; 18% due in greater
than one year to five years; 14% due in greater than five years to ten years;
and 67% due in greater than ten years (calculated as a percentage of amortized
- 79 -
cost). Additionally, such securities are concentrated by security type in U.S.
corporates (54%) and mortgage-backed (18%); and are concentrated by industry in
mortgage-backed (18%), utilities (13%) and services (7%) (calculated as a
percentage of gross unrealized loss). Non-investment grade securities represent
10% of the $23,274 million fair value and 17% of the $826 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 43 securities with an amortized cost of $329
million and a gross unrealized loss of $82 million at September 30, 2003. These
fixed maturities mature as follows: 3% due in greater than one year to five
years; 29% due in greater than five years to ten years; and 68% 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 (29%); and are concentrated by industry in asset-backed (29%),
utilities (24%), and manufacturing (20%) (calculated as a percentage of gross
unrealized loss). Non-investment grade securities represent 59% of the $247
million fair value and 57% of the $82 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 48 securities with an amortized cost of $257
million and a gross unrealized loss of $82 million at September 30, 2003. These
fixed maturities mature as follows: 2% due in one year or less; 35% due in
greater than five years to ten years; and 63% 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 (51%) and asset-backed
(19%); and are concentrated by industry in transportation (37%), finance (19%)
and asset-backed (19%) (calculated as a percentage of gross unrealized loss).
Non-investment grade securities represent 57% of the $175 million fair value and
58% of the $82 million gross unrealized loss.
The Company held four fixed maturity securities each with a gross
unrealized loss at September 30, 2003 greater than $10 million. One of these
securities represents 15% of the gross unrealized loss on fixed maturities where
the estimated fair value had declined and remained below amortized cost by 20%
or more for six months or greater. The estimated fair value and gross unrealized
loss at September 30, 2003 for this security was $13 million and $12 million,
respectively. This security is concentrated in the U.S. corporate sector. The
Company analyzed this fixed maturity security as of September 30, 2003 to
determine whether this security was other-than-temporarily impaired. The Company
believes that the estimated fair value of this security, which is in the
transportation industry, was depressed as a result of generally poor economic
and market conditions. The Company believes that the analysis of the security
indicated that the financial strength, liquidity, leverage, future outlook
and/or recent management actions supports the view that the security was not
other-than-temporarily impaired as of September 30, 2003.
Corporate Fixed Maturities. The table below shows the major industry
types that comprise the corporate bond holdings at:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------------ -------------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
------------ ----- ------------ -----
(DOLLARS IN MILLIONS)
Industrial $ 32,398 40.8% $ 29,077 42.5%
Utility 9,959 12.5 7,219 10.5
Finance 14,194 17.8 12,596 18.4
Yankee/Foreign (1) 21,787 27.4 19,229 28.1
Other 1,195 1.5 365 0.5
------------ ----- ------------ -----
Total $ 79,533 100.0% $ 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
the total invested assets of the portfolio. At September 30, 2003, the Company's
combined holdings in the ten issuers to which it had the greatest exposure
totaled $4,842 million, which was less than 3% of the Company's total invested
assets at such date. The exposure to the largest single issuer of corporate
bonds the Company held at September 30, 2003 was $602 million.
At September 30, 2003 and December 31, 2002, investments of $15,962
million and $14,778 million, respectively, or 73.3% and 76.9%, respectively, of
the Yankee/Foreign sector, represented exposure to traditional Yankee bonds. The
balance of this exposure
- 80 -
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 has hedged all of its 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.
Mortgage-Backed Securities. The following table shows the types of
mortgage-backed securities the Company held at:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
--------------------- ---------------------
ESTIMATED % OF ESTIMATED % OF
FAIR VALUE TOTAL FAIR VALUE TOTAL
---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
Pass-through securities $14,913 36.2% $12,515 35.9%
Collateralized mortgage obligations 16,918 41.2 15,511 44.5
------- ----- ------- -----
Total mortgage-backed securities 31,831 77.4 28,026 80.4
Commercial mortgage-backed securities 9,318 22.6 6,857 19.6
------- ----- ------- -----
Total $41,149 100.0% $34,883 100.0%
======= ===== ======= =====
At September 30, 2003 and December 31, 2002, pass-through and
collateralized mortgage obligations totaled $31,831 million and $28,026 million,
respectively, or 77.4% 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 September 30,
2003 and December 31, 2002, approximately $5,324 million and $3,598 million,
respectively, or 57.1% and 52.5%, respectively, of the commercial
mortgage-backed securities, and $31,731 million and $27,590 million,
respectively, or 99.7% 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 $6,798 million and $4,912 million,
or 61.6% and 51.7%, of total asset-backed securities were rated Aaa/AAA by
Moody's or S&P at September 30, 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.
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
(commonly referred to as collateralized debt obligations). 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. Such gains or losses are 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
- 81 -
method in accordance with EITF Issue No. 99-20, Recognition of Interest Income
and Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets. 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. See "--Variable Interest
Entities."
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. See "--Variable Interest
Entities." 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 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 11.8% and 13.2% of the Company's total cash and invested assets
at September 30, 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:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
-------------------- --------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
Commercial $19,945 78.1% $19,552 78.0%
Agricultural 5,131 20.1 5,146 20.5
Residential 459 1.8 388 1.5
------- ----- ------- -----
Total $25,535 100.0% $25,086 100.0%
======= ===== ======= =====
- 82 -
Commercial Mortgage Loans. The Company diversifies its commercial
mortgage loans by both geographic region and property type, and manages these
investments through a network of regional offices overseen by its investment
department. The following table presents the distribution across geographic
regions and property types for commercial mortgage loans at:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
-------------------- ----------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
REGION
South Atlantic $ 5,027 25.2% $ 5,076 26.0%
Pacific 4,587 23.0 4,180 21.4
Middle Atlantic 3,522 17.6 3,441 17.6
East North Central 1,808 9.1 2,147 11.0
West South Central 1,352 6.8 1,097 5.6
New England 1,269 6.4 1,323 6.8
International 811 4.1 632 3.2
Mountain 798 4.0 833 4.2
West North Central 582 2.9 645 3.3
East South Central 189 0.9 178 0.9
------- ----- ------- -----
Total $19,945 100.0% $19,552 100.0%
======= ===== ======= =====
PROPERTY TYPE
Office $ 8,919 44.7% $ 9,340 47.8%
Retail 4,825 24.2 4,320 22.1
Apartments 2,932 14.7 2,793 14.3
Industrial 1,940 9.7 1,910 9.7
Hotel 1,038 5.2 942 4.8
Other 291 1.5 247 1.3
------- ----- ------- -----
Total $19,945 100.0% $19,552 100.0%
======= ===== ======= =====
The following table presents the scheduled maturities for the Company's
commercial mortgage loans at:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
-------------------- --------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
Due in one year or less $ 908 4.6% $ 713 3.6%
Due after one year through two years 889 4.5 1,204 6.2
Due after two years through three years 2,318 11.6 1,939 9.9
Due after three years through four years 1,724 8.6 2,048 10.5
Due after four years through five years 3,007 15.1 2,443 12.5
Due after five years 11,099 55.6 11,205 57.3
------- ----- ------- -----
Total $19,945 100.0% $19,552 100.0%
======= ===== ======= =====
- 83 -
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.
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's
valuation allowance is established both on a loan specific basis for those loans
where a property or market specific risk has been identified that could likely
result in a future default, as well as for pools of loans with similar high risk
characteristics where a property specific or market risk has not been
identified. Loans that are individually reviewed are evaluated based on the
definition of impaired loans consistent with SFAS No. 114, Accounting by
Creditors for Impairments of a Loan ("SFAS 114"), as loans on 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 allowance for loan loss for pools
of other loans with similar characteristics is established in accordance with
SFAS No. 5, Accounting for Contingencies ("SFAS 5"), when a loss contingency
exists. A loss contingency exists when the likelihood that a future event will
occur is probable based on past events. SFAS 5 works in conjunction with, but
does not overlap with, SFAS 114. The Company applies SFAS 5 to groups of loans
with similar characteristics based on property types and loan to value risk
factors. The Company records loan loss reserves as investment losses.
- 84 -
The following table presents the amortized cost and valuation allowance
for commercial mortgage loans distributed by loan classification at:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------------------------ --------------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST (1) TOTAL ALLOWANCE COST (1) COST TOTAL ALLOWANCE COST
--------- ------ --------- --------- --------- ----- --------- ---------
(DOLLARS IN MILLIONS)
Performing $19,923 99.2% $ 91 0.5% $19,343 98.3% $ 60 0.3%
Restructured 80 0.4 25 31.3% 246 1.3 49 19.9%
Delinquent or under
foreclosure 51 0.3 8 15.7% 14 0.1 - 0.0%
Potentially delinquent 21 0.1 6 28.6% 68 0.3 10 14.7%
------- ----- ----- ------- ----- ------
Total $20,075 100.0% $ 130 0.6% $19,671 100.0% $ 119 0.6%
======= ===== ===== ======= ===== ======
- ----------
(1) Amortized cost is equal to carrying value before valuation allowances.
The following table presents the changes in valuation allowances for
commercial mortgage loans for the:
NINE MONTHS ENDED
SEPTEMBER 30, 2003
---------------------
(DOLLARS IN MILLIONS)
Balance, beginning of period $ 119
Net additions 45
Deductions for dispositions, foreclosures and writedowns (34)
--------
Balance, end of period $ 130
========
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 66.2% of the $5,131 million of agricultural mortgage
loans outstanding at September 30, 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:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------------------------ --------------------------------------------
% OF % OF
AMORTIZED % OF VALUATION AMORTIZED AMORTIZED % OF VALUATION AMORTIZED
COST (1) TOTAL ALLOWANCE COST (1) COST TOTAL ALLOWANCE COST
--------- ------ --------- --------- --------- ----- --------- ---------
(DOLLARS IN MILLIONS)
Performing $ 4,917 95.4% $ - 0.0% $ 4,980 96.7% $ - 0.0%
Restructured 109 2.1 8 7.3% 140 2.7 5 3.6%
Delinquent or under
foreclosure 112 2.2 11 9.8% 14 0.3 - 0.0%
Potentially delinquent 14 0.3 2 14.3% 18 0.3 1 5.6%
------- ----- ----- -------- ----- -----
Total $ 5,152 100.0% $ 21 0.4% $ 5,152 100.0% $ 6 0.1%
======= ===== ===== ======== ===== =====
- --------------------
(1) Amortized cost is equal to carrying value before valuation allowances.
- 85 -
The following table presents the changes in valuation allowances for
agricultural mortgage loans for the:
NINE MONTHS ENDED
SEPTEMBER 30, 2003
---------------------
(DOLLARS IN MILLIONS)
Balance, beginning of period $ 6
Net additions 15
--------
Balance, end of period $ 21
========
The principal risks in holding agricultural mortgage loans are property
specific, supply and demand, financial and capital market risks. Property
specific risks include the geographic location of the property, soil types,
weather conditions and the other factors that may impact the borrower's
guaranty. Supply and demand risks include the supply and demand for the
commodities produced on the specific property and the related price for those
commodities. Financial risks include the overall level of debt on the property
and the amount of principal repaid during the loan term. Capital market risks
include the general level of interest rates, the liquidity for these securities
in the marketplace and the capital available for loan refinancing.
REAL ESTATE AND REAL ESTATE JOINT VENTURES
The Company's real estate and real estate joint venture investments
consist of commercial, residential 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 September 30, 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 $5,364 million and
$4,725 million, respectively, or 2.5% of total cash and invested assets for both
periods. The carrying value of real estate is stated at depreciated cost net of
impairments and valuation allowances. The carrying value of real estate joint
ventures is stated at the Company's equity in the real estate joint ventures net
of impairments and valuation allowances. 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:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
--------------------- ---------------------
CARRYING % OF CARRYING % OF
TYPE VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
(DOLLARS IN MILLIONS)
Real estate held-for-investment $4,291 80.0% $3,546 75.0%
Real estate joint ventures held-for-investment 431 8.0 377 8.0
Foreclosed real estate held-for-investment 2 0.0 3 0.1
------ ----- ------ -----
4,724 88.0 3,926 83.1
------ ----- ------ -----
Real estate held-for-sale 636 11.9 792 16.8
Foreclosed real estate held-for-sale 4 0.1 7 0.1
------ ----- ------ -----
640 12.0 799 16.9
------ ----- ------ -----
Total real estate, real estate joint ventures
and real estate held-for-sale $5,364 100.0% $4,725 100.0%
====== ===== ====== =====
Office properties represent 61% and 58% of the Company's equity real
estate portfolio at September 30, 2003 and December 31, 2002, respectively. The
average occupancy level of office properties was 89% and 92% at September 30,
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.
- 86 -
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.
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 $640 million and $799 million at September 30, 2003 and
December 31, 2002, respectively, are net of impairments of $0 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.
Certain of the Company's investments in real estate joint ventures meet
the definition of a VIE under FIN 46. See "--Variable Interest Entities."
On August 28 2003, the Company (through one of its subsidiaries)
acquired the Sears Tower building through the acquisition of a controlling
interest in a partnership holding title to the building. The consideration paid
included a cash purchase price of approximately $9 million and the assumption of
approximately $691 million of mortgage debt, accrued interest and other
liabilities (including approximately $582 million of mortgage debt and accrued
interest held by the Company) associated with the property. This acquisition was
accounted for in accordance with SFAS No. 141, Business Combinations.
EQUITY SECURITIES AND OTHER LIMITED PARTNERSHIP INTERESTS
The Company's carrying value of equity securities, which primarily
consist of investments in common and preferred stocks and mutual fund interests,
was $1,659 million and $1,613 million at September 30, 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 $2,450 million and $2,395 million at September 30, 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 0.8% of cash and invested assets at both
September 30, 2003 and December 31, 2002.
Equity securities include private equity securities with an estimated
fair value of $408 million and $443 million at September 30, 2003 and December
31, 2002, respectively. 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 $1,511
million and $1,667 million at September 30, 2003 and December 31, 2002,
respectively. The Company anticipates that these amounts could be invested in
these partnerships any time over the next five years.
- 87 -
Some of the Company's investments in other limited partnership
interests meet the definition of a VIE under FIN 46. See "--Variable Interest
Entities."
The following tables set forth the cost, gross unrealized gain or loss
and estimated fair value of the Company's equity securities, as well as the
percentage of the total equity securities at:
SEPTEMBER 30, 2003
--------------------------------------------------------------
GROSS UNREALIZED
------------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
------ ------ ------ ---------- ------
(DOLLARS IN MILLIONS)
Equity Securities:
Common stocks $ 827 $ 234 $ 2 $1,059 63.8%
Nonredeemable preferred stocks 563 40 3 600 36.2
------ ------ ------ ------ -----
Total equity securities $1,390 $ 274 $ 5 $1,659 100.0%
====== ====== ====== ====== =====
DECEMBER 31, 2002
--------------------------------------------------------------
GROSS UNREALIZED
------------------- ESTIMATED % OF
COST GAIN LOSS FAIR VALUE TOTAL
------ ------ ------ ---------- ------
(DOLLARS IN MILLIONS)
Equity Securities:
Common stocks $ 877 $ 115 $ 79 $ 913 56.6%
Nonredeemable preferred stocks 679 25 4 700 43.4
------ ------ ------ ------ -----
Total equity securities $1,556 $ 140 $ 83 $1,613 100.0%
====== ====== ====== ====== =====
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.
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;
- 88 -
- 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 $12 million and $51 million for the
three months ended September 30, 2003 and 2002, respectively, and $101 million
and $111 million for the nine months ended September 30, 2003 and 2002,
respectively. During the three months ended September 30, 2003 and 2002, the
Company sold equity securities with an estimated fair value of $2 million for
both periods, at a loss of $6 million and $2 million, respectively. During the
nine months ended September 30, 2003 and 2002, the Company sold equity
securities with an estimated fair value of $44 million and $77 million,
respectively, at a loss of $12 million and $43 million, respectively.
The gross unrealized loss related to the Company's equity securities at
September 30, 2003 was $5 million. Such securities are concentrated by security
type in common stock (65%) and preferred stock (19%); and are concentrated by
industry in financial (53%) and domestic broad market mutual funds (17%)
(calculated as a percentage of gross unrealized loss).
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:
SEPTEMBER 30, 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 $45 $ - $ 4 $ - 30 5
Six months or greater but less than nine months - 1 - - 4 1
Nine months or greater but less than twelve months 7 - - - 12 -
Twelve months or greater 44 - 1 - 20 -
--- --- --- ------- ---- ---
Total $96 $ 1 $ 5 $ - 66 6
=== === === ======= ==== ===
The Company's review of its equity security exposure includes the
analysis of 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. 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.
- 89 -
The following table presents the total gross unrealized losses for
equity securities at September 30, 2003 where the estimated fair value had
declined and remained below cost by:
SEPTEMBER 30, 2003
---------------------------
GROSS % OF
UNREALIZED LOSSES TOTAL
----------------- -----
(DOLLARS IN MILLIONS)
Less than 20% $ 5 100.0%
20% or more for less than six months - -
20% or more for six months or greater - -
------- -----
Total $ 5 100.0%
======= =====
The category of equity securities where the estimated fair value has
declined and remained below cost by less than 20% is comprised of 66 equity
securities with a cost of $96 million and a gross unrealized loss of $5 million.
These securities are concentrated by security type in common stock (63%) and
preferred stock (19%); and concentrated by industry in financial (55%) and
domestic broad market mutual funds (18%) (calculated as a percentage of gross
unrealized loss). The significant factors considered at September 30, 2003 in
the review of equity securities for other-than-temporary impairment were
generally poor economic and market conditions.
The Company did not hold any equity securities with a gross unrealized
loss at September 30, 2003 greater than $5 million.
OTHER INVESTED ASSETS
The Company's other invested assets consist principally of leveraged
leases and funds withheld at interest of $3.5 billion and $3.1 billion at
September 30, 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 industry, asset type and geographic area.
The Company regularly reviews residual values and writes down residuals to
expected values as needed. Funds withheld represent amounts contractually
withheld by ceding companies in accordance with reinsurance agreements. For
agreements written on a modified coinsurance basis and certain agreements
written on a coinsurance basis, assets supporting the reinsured policies equal
to the net statutory reserves are withheld and continue to be legally owned by
the ceding company. Interest accrues to these funds withheld at rates defined by
the treaty terms and may be contractually specified or directly related to the
investment portfolio. The Company's other invested assets represented 2.1% and
1.9% of cash and invested assets at September 30, 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: the hedging of (i) 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 ("RSAT") 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.
- 90 -
The table below provides a summary of the notional amount and fair
value of derivative financial instruments held at:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------------------- -------------------------------------
FAIR VALUE FAIR VALUE
NOTIONAL ----------------------- NOTIONAL ------------------------
AMOUNT ASSETS LIABILITIES AMOUNT ASSETS LIABILITIES
-------- ------- ----------- -------- -------- -----------
Financial futures $ 547 $ 12 $ 22 $ 4 $ - $ -
Interest rate swaps 6,868 220 45 3,866 196 126
Floors 325 7 - 325 9 -
Caps 9,040 1 - 8,040 - -
Financial forwards 1,440 - 25 1,945 - 12
Foreign currency swaps 3,896 15 490 2,371 92 181
Options 6,200 8 - 6,472 9 -
Foreign currency forwards 137 - 11 54 - 1
Written covered calls 1,178 - 32 - - -
Credit default swaps 516 2 1 376 2 -
------- ------- ------- ------- ------- -------
Total contractual commitments $30,147 $ 265 $ 626 $23,453 $ 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 $23,001 million and
$16,196 million and an estimated fair value of $24,532 million and $17,625
million were on loan under the program at September 30, 2003 and December 31,
2002, respectively. The Company was liable for cash collateral under its control
of $24,666 million and $17,862 million at September 30, 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.
- 91 -
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
September 30, 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
Based on their evaluation as of September 30, 2003, 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-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were
effective.
There were no changes in the Company's internal control over financial
reporting that occurred during the quarter ended September 30, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
- 92 -
PART II - OTHER INFORMATION
ITEM I. LEGAL PROCEEDINGS
The following should be read in conjunction with Note 8 to unaudited
interim condensed consolidated financial statements in Part I of this Report.
SALES PRACTICES CLAIMS
As previously disclosed, over the past several years, Metropolitan
Life, New England Mutual Life Insurance Company ("New England Mutual") and
General American 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 practice 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 September 30,
2003, there are approximately 383 sales practices lawsuits pending against
Metropolitan Life, approximately 60 sales practices lawsuits pending against New
England Mutual and approximately 25 sales practices lawsuits pending against
General American.
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. In October 2003, the First
Circuit Court of Appeals affirmed the district court ruling in favor of New
England Mutual.
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 nine months of 2003 and 2002,
Metropolitan Life received approximately 53,200 and 45,200 asbestos-related
claims, respectively. Of the approximately 53,200 claims received in the first
nine months of 2003, approximately 23,000 were received in April 2003. In 2003,
Metropolitan Life also has been named as a defendant in a small number of
silicosis, welding and mixed dust cases, as previously reported. The cases are
pending in Mississippi, Texas, Ohio, Pennsylvania, West Virginia, Louisiana,
Kentucky, Georgia and Arkansas. The Company intends to defend itself vigorously
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 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.
A bill reforming asbestos litigation may be voted on by the Senate in
2003. 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
- 93 -
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. A
settlement was reached in the Georgia class action and has been implemented.
DEMUTUALIZATION ACTIONS
In July 2002, a lawsuit was filed in the United States District Court
for the Eastern District of Texas on behalf of a proposed class comprised of the
settlement class in the Metropolitan Life sales practices class action
settlement approved in December 1999 by the United States District Court for the
Western District of Pennsylvania. After the defendants' motion to transfer the
lawsuit to the Western District of Pennsylvania was granted, plaintiffs filed an
amended complaint alleging that the treatment of the cost of the sales practices
settlement in connection with the demutualization of Metropolitan Life breached
the terms of the settlement. Plaintiffs sought compensatory and punitive
damages, as well as attorneys' fees and costs. In October 2003, the court
granted defendants' motion to dismiss the action.
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. 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. On April 28, 2003,
the United States District Court approved a class action settlement of the
consolidated actions. Several persons have filed notices of appeal from the
order approving the settlement, but subsequently the appeals were dismissed.
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.
During the three months and nine months ended September 30, 2003, the Company
reduced its reserve by $28 million, net of income tax, and $92 million, net of
income tax, respectively. The Company believes the remaining portion of the
previously recorded charge is adequate to cover the costs associated with the
resolution of these matters.
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. In August 2003, the court granted
preliminary approval to a settlement of the lawsuit. At the fairness hearing
held on November 6, 2003, the court approved the settlement of the lawsuit.
Implementation of the settlement will commence in 2004.
As previously reported, the SEC is conducting a formal investigation of
New England Securities Corporation ("NES"), an indirect subsidiary of New
England Life Insurance Company ("NELICO"), in response to NES informing the SEC
that certain systems and controls relating to one NES advisory program were not
operating effectively. NES is cooperating fully with the SEC and is continuing
to research the effect, if any, of this issue upon approximately 6,500 active
and closed accounts.
Prior to filing the Company's June 30, 2003 Form 10-Q, MetLife
announced a $31 million after-tax charge related to an affiliate, New England
Financial. MetLife notified the SEC about the nature of this charge prior to its
announcement. The SEC is pursuing a formal investigation of the matter and
MetLife is fully cooperating with the investigation.
- 94 -
A purported class action in which a policyholder seeks to represent a class of
owners of participating life insurance policies is pending in state court in New
York. Plaintiff asserts that Metropolitan Life breached her policy in the manner
in which it allocated investment income across lines of business during a period
ending with the 2000 demutualization. In August 2003, an appellate court
affirmed the dismissal of fraud claims in this action.
Various litigation, claims and assessments against the Company, in
addition to those discussed above and those otherwise provided for in the
Company's consolidated financial statements, have arisen in the course of the
Company's business, including, but not limited to, in connection with its
activities as an insurer, employer, investor, investment advisor and taxpayer.
Further, state insurance regulatory authorities and other federal and state
authorities regularly make inquiries and conduct investigations concerning the
Company's compliance with applicable insurance and other laws and regulations.
Regulatory bodies have contacted the Company and have requested information
relating to market timing and late trading of mutual funds and variable
insurance products. The Company is in the process of responding and is fully
cooperating with regard to these information requests. At the present time, the
Company is not aware of any systemic problems with respect to such matters that
may have a material adverse effect on the Company's consolidated financial
position.
SUMMARY
It is not feasible to predict or determine the ultimate outcome of all
pending investigations and legal proceedings or provide reasonable ranges of
potential losses, except as noted above in connection with specific matters. In
some of the matters referred to above, very large and/or indeterminate amounts,
including punitive and treble damages, are sought. Although in light of these
considerations it is possible that an adverse outcome in certain cases could
have a material adverse effect upon the Company's consolidated financial
position, based on information currently known by the Company's management, in
its opinion, the outcomes of such pending investigations and legal proceedings
are not likely to have such an effect. However, given the large and/or
indeterminate amounts sought in certain of these matters and the inherent
unpredictability of litigation, it is possible that an adverse outcome in
certain matters could, from time to time, have a material adverse effect on the
Company's consolidated net income or cash flows in particular quarterly or
annual periods.
- 95 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Form of Employment Continuation Agreement with Messrs. Launer and Lipscomb*
10.2 Amendment to the Metropolitan Life Auxiliary Savings and Investment Plan, effective January 1, 2003*
10.3 Amendment to the Metropolitan Life Supplemental Auxiliary Savings and Investment Plan, effective
January 1, 2003*
10.4 MetLife Deferred Compensation Plan for Outside Directors, as amended September 2003*
10.5 MetLife Deferred Compensation Plan for Officers, as amended and restated effective November 1, 2003*
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 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 September 30, 2003, there were no current
reports filed on Form 8-K.
- -----------
* Indicates management contracts or compensatory plans or arrangements.
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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/ Timothy L. Journy
---------------------
Timothy L. Journy
Vice-President and Controller
(Authorized signatory and principal accounting officer)
Date: November 7, 2003
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EXHIBIT INDEX
Exhibit Page
Number Exhibit Name Number
10.1 Form of Employment Continuation Agreement with Messrs. Launer and Lipscomb*
10.2 Amendment to the Metropolitan Life Auxiliary Savings and Investment Plan, effective January 1, 2003*
10.3 Amendment to the Metropolitan Life Supplemental Auxiliary Savings and Investment Plan, effective
January 1, 2003*
10.4 MetLife Deferred Compensation Plan for Outside Directors, as amended September 2003*
10.5 MetLife Deferred Compensation Plan for Officers, as amended and restated effective November 1, 2003*
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- ----------------
* Indicates management contracts or compensatory plans or arrangements.
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